For goodwill the recoverable amount is the higher of its fair value less costs to sell and its value in use. Fair value of CGUs is determined, considering quoted market prices, current share values in the market place for similar publicly traded entities, and recent sale transactions of similar businesses. Value in use is determined using the present value of estimated future cash fl ows expected to be generated from or used by the CGU. Cash fl ow projections are based on fi nancial budgets, which are approved by management, typically covering a fi ve-year period or if appropriate, a longer period. Cash fl ows beyond this period are extrapolated using amongst others estimated growth rates. The discount rates applied refl ect the respective risk fee interest rate adjusted for the relevant risk factors to the extent not already considered in the underlying cash fl ows.
Fair values of identifi able intangible assets are based on market-participant assumptions and applicable valuation techniques, depending on the nature of the assets valued. For customer relationship and contract intangibles, including banc-assurance agreements, the multi-period excess earnings or cash fl ow method is applied, using pre-tax future cashfl ows expected to be generated from such assets and discounting at applicable market rates. For brand intangibles the relief from royalty method is generally applied and resulting cash-fl ows are discounted at applicable market rates. For information technology intangibles the replacement cost method is generally applied.
f) Deferred policy acquisition costs Deferred policy acquisition costs generally consist of commissions, underwriting expenses and policy issuance costs. The amount of acquisition costs to be deferred is dependent on judgments as to which issuance costs are directly related to and vary with the acquisition. The related asset is amortized over the premium earning pattern for non-life and certain traditional life products. For most life products, amortization is based on the estimated profi tability of the contract throughout its life. The estimation of profi tability considers both historical and future experience as regards assumptions, such as expenses, lapse rates or investment income.
Transactions in 2008 Acquisitions During 2008, the Group completed several acquisitions that were accounted for as business combinations. The acquisitions indicated in the following table were individually signifi cant to the Group and are therefore presented separately. The other acquisitions are presented in aggregate.
Cash and cash equivalents acquired 48 172 337 64 621 1 The purchase price allocations shown in the table are provisional.
“TEB Sigorta” sets out the acquisition of 100 percent of TEB Sigorta A.Ş ., a general insurer based in Turkey, from TEB Mali Yatırımlar A.Ş . (TEB Mali), which the Group completed on March 31, 2008. Total acquisition costs amounted to USD 364 million and, based on the initial purchase price allocation, include net tangible assets acquired of USD 35 million and identifi able intangible assets, net of deferred tax, of USD 76 million (USD 94 million before tax, mainly relating to distribution arrangements with TEB Mali subsidiaries including Türk Ekonomi Bankası A.Ş . (TEB) for the distribution of general insurance products in Turkey on an exclusive basis). The residual goodwill of USD 253 million represents expected growth opportunities from the banc-assurance partnership with TEB and the expansion of other sales channels.
Financial information acquired of USD 181 million and identifi able intangible assets, net of deferred tax, of USD 1,483 million (USD 2,117 million before tax, mainly relating to the life insurance and pension distribution agreement with Banco Sabadell of USD 1,665 million and the present value of profi ts of acquired insurance contracts of USD 449 million). Total acquisition costs for BanSabadell Seguros Generales, S.A. de Seguros y Reaseguros (BSG) amounted to USD 145 million and, based on the initial purchase price allocation, include net tangible assets acquired of USD 10 million and identifi able intangible assets, net of deferred tax, of USD 280 million (USD 396 million before tax, mainly relating to the general insurance distribution agreement with Banco Sabadell). 50 percent of net tangible assets acquired and of identifi able intangible assets, net of deferred tax, refl ect non-controlling interests in BSV, BSP and BSG, amounting to USD 976 million. The Group has management control of the three jointly owned companies and fully consolidates them.
Total acquisition costs for DWS Vita amounted to USD 138 million and, based on the initial purchase price allocation, include net tangible assets acquired of USD 64 million and identifi able intangible assets, net of deferred tax, of USD 75 million (USD 110 million before tax, relating to the present value of profi ts of acquired insurance contracts of USD 69 million and a distribution agreement of USD 41 million which DWS Vita entered into with Finanza & Futuro Banca S.p.A. for the distribution of life insurance products as part of the transaction).
Table 5.1 does not include the acquisition of the remaining 34 percent of Zurich Retail Insurance Company Ltd., Russia, for USD 203 million which the Group completed on November 20, 2008. The acquisition had no material impact on the Group’s fi nancial statements and did not affect its scope of consolidation, as the present value of the estimated deferred consideration for the 34 percent was recognized in 2007.
The impact of the acquisitions on current period income statement is immaterial.
Divestments During the year ended December 31, 2008, the Group sold all of its shares in Financial Lifestyle Solutions Pty Ltd based in Australia, of Nova Scotia Company, a Canadian investment holding company, and of Zurich Insurance (Guam), Inc., recording in aggregate a pre-tax gain on disposal of USD 16 million. Total cash and net assets divested in 2008 were USD 19 million and USD 12 million, respectively. The total consideration received in 2008, net of transaction costs of USD 2 million, amounted to USD 13 million.
Transactions in 2007 Acquisitions On January 2, 2007, the Group purchased all of the remaining shares in the insurance intermediary Endsleigh Limited (Endsleigh) in the UK for a total of USD 84 million including transaction costs. Since 2002 the Group had owned 45 percent of Endsleigh. An asset revaluation surplus arose from revaluation of tangible and intangible assets of Endsleigh acquired by the Group in 2002 to the fair values of the initial accounting in 2007. Residual goodwill arose in this business combination in the amount of USD 90 million due to the expected growth opportunities and synergies within the Group. Identifi able intangibles net of deferred tax amounted to USD 63 million the major part of which related to contractual relationships.
On July 2, 2007, the Group acquired a 24.51 percent equity interest in Best Harmonious Insurance Brokers Company, Ltd., a nationally licensed Chinese insurance brokerage fi rm domiciled in Beijing for a total consideration of USD 11 million. This interest corresponds to a profi t share of 91.44 percent and gives the Group effective control. The residual goodwill related to this acquisition amounts to USD 2 million.
On November 29, 2007, the Group acquired 100 percent of Real Garant Versicherung AG, a car warranty insurer based in Germany. Total acquisition costs amounted to USD 43 million, tangible assets acquired to USD 23 million and intangible assets net of deferred tax were identifi ed in the amount of USD 4 million. The residual goodwill of USD 16 million represents, among others, expected growth opportunities and synergies.
Real estate held for investment 933 927 (1,596) (419) (664) 508 1 Including net capital gains/(losses) on derivative fi nancial instruments of USD 1,241 million and USD (147) million for the years ended December 31, 2008 and 2007, respectively, of which net capital gains/(losses) on derivatives attributable to cash fl ow hedge ineffectiveness amounted to USD 5 million and USD (9) million for the years ended December 31, 2008 and 2007, respectively.
Real estate held for investment 491 438 210 101 700 539
Impairment charges on Group investments included in net capital losses amounted to USD 2,457 million and USD 136 million for the years ended December 31, 2008 and 2007, respectively, of which impairment charges on mortgage loans and other investments comprised USD 49 million and USD 12 million for the years ended December 31, 2008 and 2007, respectively.
Real estate held for investment 442 489 (1,806) (520) (1,364) (31)
Securities at fair value through profi t or loss: (23,672) 5,835 (511) (331) (24,183) 5,504 of which: trading securities Net capital gains/(losses)
Held-to-maturity securities – – (69) (1) (69) (1) Total net capital gains/(losses) and impairments (25,444) 6,934 (1,887) (746) (27,331) 6,189
Table 6.2 in USD millions, for the years ended December 31Net capital gains, losses and impairments on equity and debt securities – total investments 6842_p170-207.indd 1716842_p170-207.indd 171 25/2/09 14:12:4425/2/09 14:12:44
Debt securities: Fair value through profi t or loss 16,319 6.3 18,954 6.0
Table 6.3a as of December 31Details of total investments by category 6842_p170-207.indd 1726842_p170-207.indd 172 25/2/09 14:12:4525/2/09 14:12:45
Debt securities: Fair value through profi t or loss 6,984 3.9 8,843 4.6
As of December 31, 2008 and 2007, respectively, debt securities with a carrying value of USD 3,608 million and USD 5,370 million have been sold to fi nancial institutions under short-term sale and repurchase agreements. These securities continue to be recognized as investments in the balance sheets. Obligations to repurchase these securities comprised USD 3,608 million and USD 5,370 million as of December 31, 2008 and 2007, respectively.
Table 6.3b as of December 31Details of Group investments by category 6842_p170-207.indd 1736842_p170-207.indd 173 25/2/09 14:12:4525/2/09 14:12:45
Table 6.6 as of December 31Fair value through profi t or loss securities
Financial instruments of interest in the current economic environment As a consequence of current market conditions, certain asset types (i.e. mortgage and other asset-backed securities, collateralized debt obligations, hedge funds and private equity funds), have received increased interest from both the Group’s management and external stakeholders.
Mortgage and other asset-backed securities The majority of mortgage and other asset-backed securities and collateralized debt obligations are valued by external pricing providers, based on market prices and models that take into account market inputs (including observed transactions, indexes and market research reports), cash fl ow projections, based on, for example, observed prepayment and default rates, and interest rate spreads that refl ect the type and risks of underlying collateral. As of December 31, 2008 and 2007, the Group had investments in mortgage and other asset-backed securities with a fair value of USD 23.2 billion and USD 27.7 billion, respectively.
German asset-backed securities 74.5% 0.8% 24.7% – – 334 Swiss asset-backed securities 100.0% – – – – 642
Private equity funds The Group has investments in private equity funds of USD 1.3 billion and USD 1.0 billion as of December 31, 2008 and 2007, respectively. These investments are managed in external funds and the majority of them are classifi ed as available-for-sale securities. These private equity investments are also widely diversifi ed. Private equity investments are carried at values determined based on the latest available fi nancial statements. These valuations are reviewed by a team of in–house investment professionals and may be adjusted based on their understanding of the circumstances relating to each specifi c private equity stake.
Real estate held for investment consists of investments in commercial, residential and mixed-use properties primarily located in Switzerland, Germany and the United Kingdom.
Carrying value Share in profi t Ownership interest 1 This entity is not consolidated as it is not controlled by the Group.
Table 6.11 in USD millions, as of December 31Investments in associates
Less: net unrealized gains/(losses) on investments attributable to: Life policyholder dividends and other policyholder liabilities 236 459 Life deferred acquisition costs 256 78 Deferred income taxes 837 (48) Non-controlling interests (18) (8)
Table 6.12 in USD millions, as of December 31Net unrealized gains/(losses) on investments included in shareholders’ equity 6842_p170-207.indd 1796842_p170-207.indd 179 25/2/09 14:12:5025/2/09 14:12:50
The Group uses derivative fi nancial instruments mostly for economic hedging purposes in order to mitigate the risks posed to the Group resulting from changes in foreign exchanges rates, interest rates, equity prices, the credit quality of its assets and liabilities and third parties from which the Group has commitments that give rise to credit risk. In certain circumstances these instruments may meet the requirements of an effective hedge for accounting purposes. Where this is the case, hedge accounting may be applied. Details of the accounting for these instruments are set out in note 3, with table 7.1 disclosing notional and maturity of derivative instruments including those qualifying for hedge accounting. Table 7.2 sets out further details for instruments where hedge accounting has been applied. The notional principal amounts indicate the volume of transactions outstanding at the balance sheet date and are used to express the extent of the Group’s involvement in derivative transactions. These do not represent amounts at risk.
The following table sets out the details of the outstanding positions of the Group: Maturity profi le
Swaps Interest rate swaps consist mostly of fi xed rate receiver swaps to manage asset liability mismatch and to hedge risks from a decrease in interest rates. The notional principal amounts of interest rate swaps decreased by USD 191 million due to exchange rate effects and matured positions.
Written put options include written equity put options, which are mostly offset by purchased equity put options. Written put options also include stable value options. Stable value options (SVO) have been provided by the Group to certain bank and corporate customers (policyholders) in the US, in respect of the investment returns which arise on investments underlying Bank Owned Life Insurance (BOLI) and Company Owned Life Insurance (COLI) policies. Premiums received from policyholders under these policies are invested in separate account portfolios. Throughout the life of the policies, policyholders are entitled, in addition to mortality cover, to tax-exempt investment returns linked to the performance of the underlying investments. The policies are long duration contracts providing charges and benefi ts over a policy life that can be greater than 45 years. SVO reduce the volatility of the policyholders’ investment returns. In the event that a policy is surrendered, the policyholder would be entitled to recover the excess of the notional SVO derived value over the market value of the underlying investments. Certain policy features as well as certain regulations provide disincentives for surrender. We monitor and manage the risk of surrender on an ongoing basis and consider the likelihood of surrender as one input factor to the model to determine the fair value of SVO. The fair value of the derivative liability recognized in respect of SVO, included in written put options, was USD 23 million and USD 5 million as of December 31, 2008 and 2007, respectively. The difference between the notional SVO derived value and market value of the underlying investments for BOLI/COLI policies was USD 929 million and USD 207 million as of December 31, 2008 and 2007, respectively, which would have been the total net market value loss after surrender charges if all policies would have been surrendered on those dates.
Futures/forwards Purchased futures/forwards and written futures/forwards mainly consist of foreign exchange forward contracts with the principal notional amounts of USD 15,613 million and USD 11,867 million as of December 31, 2008 and 2007, respectively. Foreign exchange forwards are used to economically hedge the Group’s foreign currency exposures. Due to higher hedging volumes and foreign currency translation effects, the notional principal amounts of foreign exchange forwards increased by USD 3,746 million from December 31, 2007 to December 31, 2008.
Fair value hedges: Cross currency interest rate swaps 975 975 1,022 141 118
Cash fl ow hedges: Options on interest rate swaps 3,373 3,373 3,176 209 58
Fair value hedges Designated fair value hedges consist of cross currency interest rate swaps used to protect the Group against changes in foreign currency exposure and interest rate exposure of Euro-denominated debt held by the Group. Changes in the fair value of the derivatives designated as fair value hedges and changes in the fair value of the hedged item in relation to the risk being hedged are recognized in income.
Gains and losses arising from fair value hedges are as follows: Gains/(losses) on hedging instruments 1 21 72 on hedged debt issued attributable to the hedged risk (26) (71)
Cash fl ow hedges Designated cash fl ow hedges, such as options on interest rate swaps are used to protect the Group against variability of future cash fl ows due to changes in interest rates associated with expected future purchases of debt securities (during the years 2011, 2016, 2021 and 2026) required for certain life insurance policies. The effective portion of the gains and losses on these swaps are initially recognized in comprehensive income. Subsequently the gains or losses will be recycled to income when the underlying investments are purchased and recognized on the balance sheet and affect income through the recognition of interest income between the years ended December 31, 2011 and 2036. The gains and losses relating to the ineffective portion of these hedges are recognized immediately in income within net capital gains/(losses) on investments and impairments.
Table 7.2 in USD millions, as of December 31Maturity profi le of notional principal amounts and fair values of derivative fi nancial instruments
The Group also uses currency swaps for cash fl ow hedging to protect against exposures to variability of cash fl ows due to movements in the Euro exchange rate against the USD, the presentational currency of the Group, on 80 percent of the 4.5% EUR 1 billion debt issued by Zurich Finance (USA), Inc (see note 21). The change in the fair value of the hedging instrument is recognized directly in comprehensive income. The ineffecitve portion of the change in fair value is recognized directly in income within administrative and other expense. The effective portion, related to spot rate changes in fair value of the hedging instrument, is reclassifi ed to income within administrative and other operating expense as an offset to the foreign currency revaluation on the underlying hedged debt. This hedge relationship is expected to remain in place until the maturity of the debt in September 2014.
The net loss deferred in shareholders’ equity on derivatives designated as cash fl ow hedges was USD 107 million and USD 144 million before tax for the years ended December 31, 2008 and 2007, respectively. During 2008, the portion recognized in income was a loss of USD 54 million and a gain of USD 111 million before tax for the years ended December 31, 2008 and 2007, respectively, as an offset to the foreign currency revaluation on the underlying hedged debt. A net gain of USD 2 million and net loss of USD 9 million for the years ended December 31, 2008 and 2007, respectively, was recognized due to hedge ineffectiveness.
2 Gross of allowance for uncollectible amounts of USD 89 million and USD 164 million as of December 31, 2008, and 2007, respectively.
Table 8.1 in USD millions, as of December 31Reserves for insurance contracts
Table 8.2 in USD millionsDevelopment of reserves for losses and loss adjustment expenses 6842_p170-207.indd 1846842_p170-207.indd 184 25/2/09 14:12:5325/2/09 14:12:53
The Group establishes loss reserves, which are estimates of future payments of reported and unreported claims for losses and related expenses, with respect to insured events that have occurred. Reserving is a complex process dealing with uncertainty, requiring the use of informed estimates and judgments. Any changes in estimates or judgements are refl ected in the results of operations in the period in which estimates and judgements are changed.
Cumulative paid as of: One year later (7,976) (8,923) (9,930) (9,464) (11,423) (11,237) (12,551) Two years later (12,855) (14,472) (15,550) (16,273) (18,044) (18,362) Three years later (16,698) (18,001) (20,407) (21,234) (23,077) Four years later (19,255) (21,390) (23,941) (24,945) Five years later (21,634) (23,814) (26,616) Six years later (23,471) (25,799) Seven years later (24,849)
Net reserves re-estimated as of: One year later 26,908 32,239 38,977 43,627 45,976 49,594 53,441 Two years later 28,471 34,471 40,413 45,006 45,827 48,642 Three years later 30,636 36,118 42,004 45,325 45,297 Four years later 31,784 37,691 42,254 45,294 Five years later 33,326 37,880 42,470 Six years later 33,799 38,282 Seven years later 34,004
Gross reserves re-estimated as of December 31, 2008 51,569 56,223 59,056 60,916 60,509 62,430 66,536 Cumulative (defi ciency) /
Uncertainties also arise from changes or potential changes in various laws or the interpretation of laws. While the Group believes that it has made adequate provision for these claims, it is possible that future adverse development
Table 8.3 in USD millions, as ofDevelopment of insurance losses, net
Financial information could have a material effect on the Group’s results of operations, cash fl ows and fi nancial position. The net reserve amounts related to such claims were USD 2,800 million and USD 3,564 million as of December 31, 2008 and 2007, respectively. The development of these reserves is shown below.
Interest and bonuses credited to policyholders 2,983 2,915 (252) (161) 2,730 2,754
(Decrease)/increase recorded in shareholders’ equity (11) (526) – 5 (11) (520)
The amount of policyholder dividends to be paid is determined annually by each life insurance company. 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.
Table 8.4 in USD millionsDevelopment of reserves for losses and loss adjustment expenses for asbestos and environmental claims
Table 8.5 in USD millionsDevelopment of future life policyholders’ benefi ts
Interest and bonuses credited/(charged) to policyholders (12,223) 4,275 – – (12,223) 4,275 Acquisitions / transfers 833 – – – 833 – Foreign currency translation effects (9,486) 1,506 – – (9,486) 1,506
Table 8.7 in USD millionsDevelopment of policyholders’ contract deposits and other funds
Table 8.8 in USD millionsDevelopment of reserves for unit-linked contracts 6842_p170-207.indd 1886842_p170-207.indd 188 25/2/09 14:12:5725/2/09 14:12:57
Amount at risk from minimum death benefi ts (GMDB) as of December 31 Gross 1,744 539
Table 9.1 in USD millions, as of December 31Liabilities for investment contracts
Total policyholder dividends and participation in profi ts (21,554) 8,540 40 (13) (21,514) 8,526
Underwriting and policy acquisition costs 9,285 8,358 (998) (799) 8,287 7,559
Table 11.4 in USD millions, for the years ended December 31Change in reserves for unearned premiums 6842_p170-207.indd 1916842_p170-207.indd 191 25/2/09 14:12:5925/2/09 14:12:59
Amortization charged/(credited) to shareholders’ equity – – 128 154 2 (5) 130 149 1 Net of eliminations from intersegment transactions.
Foreign currency translation effects (230) 19 As of December 31 770 1,003 13. Administrative and other operating expenses
Amounts written-off against receivables 68 3 Foreign currency translation effects 24 (8) As of December 31 (457) (554)
Table 15.2 in USD millionsDevelopment of allowance for impairments (deducted from receivables)
Net carrying value as of January 1, 2008 392 1,006 78 204 292 1,972
Foreign currency translation effects (206) (97) (244) – (548) Net carrying value as of December 31, 2008 1,846 1,252 4,186 1 1,025 8,310 Plus: accumulated
Gross carrying value as of December 31, 2008 1,884 2,617 6,066 1,025 11,593 1 Other intangible assets include software of USD 1’156 million as well as intangible assets at fair value on acquisitions.
Net carrying value as of 1 Other intangible assets include software of USD 1’156 million as well as intangible assets at fair value on acquisitions.
Table 18.2 in USD millions, as of December 31, 2008Intangible assets by segment – current period
Foreign currency translation effects 79 35 34 – 148 Net carrying value as of December 31, 2007 1,730 780 1,100 1 1,025 4,636 Plus: accumulated
Net carrying value as of 1 Other intangible assets include software of USD 907 million as well as intangible assets at fair value on acquisitions.
Other fi nancial liabilities Amounts due to reinsurers, agents and other insurance companies 1,778 1,712 Amounts due to life policyholders 559 722 Liabilities for cash collateral received for securities lending 182 1,889 Derivative liabilities 1,388 276 Liabilities for defi ned benefi t plans 2,294 908 Other liabilities for employee benefi t plans 105 110 Other liabilities 8,233 11,449 Other non-fi nancial liabilities Current tax payables 1,025 1,643 Restructuring provisions 88 162 Other liabilities 1,291 1,387 Total other liabilities 16,944 20,257
As of January 1 162 128 Provisions made during the period 141 110 Provisions used during the period (200) (81) Provisions reversed during the period (2) (4) Foreign currency translation effects (10) 9 Other changes (2) – As of December 31 88 162
The Group’s North America Commercial business division also entered into an operational transformation program. The impact is predominantly headcount related, with costs approximating USD 24 million. A further USD 32 million restructuring charge was recorded, to cover costs associated with the sale of Zurich American Insurance Company’s Commercial Small Business Solutions book of business to Truck Insurance Exchange, one of the Farmers Exchanges. The costs are mainly related to IT infrastructure but also include severance payments.
During the year ended December 31, 2007, a total of USD 110 million restructuring charges were recorded. USD 92 million related to a restructuring program in the Group’s German operations, across both Life and General Insurance, of which USD 80 million was paid during 2008. The program involved an organisational restructure to facilitate strengthened customer focus as well as a more effective integrated distribution channel. The provision is expected to be fully utilised during 2009.
Total income tax expense attributable to policyholders (1,184) (83) Total income tax expense attributable to shareholders 732 1,874 Total income tax expense (452) 1,791
The table above sets out the factors that cause the actual income tax expense to differ from the expected expense. In 2007, the expected to actual tax expense reconciliation was performed using the expected weighted average statutory income tax rate derived from the weighted average of the tax rates of the various jurisdictions in which the Group operates. In 2008 the Swiss Statutory tax rate of 22 percent was used instead. This is the rate applicable in the juristiction where the ultimate parent company is resident. This presentation is considered to be more relevant for the Group as it will produce greater comparability of the components of the income tax expenses in the future. Comparatives have been amended accordingly. The change had no impact on the actual tax rate applied in 2007.
Table 20.3 in USD millions, for the years ended December 31Expected and actual income tax expense 6842_p170-207.indd 1996842_p170-207.indd 199 25/2/09 14:13:0525/2/09 14:13:05
Current tax receivables 621 743 Current tax payables (1,025) (1,643) Net current tax payables (404) (900)
Deferred tax assets 2,901 1,682 Deferred tax liabilities (3,485) (4,057) Net deferred tax liabilities (583) (2,375)
Net deferred tax assets/(liabilities) attributable to policyholders 544 (566) Net deferred tax assets/(liabilities) attributable to shareholders (1,128) (1,809) Net deferred tax liabilities (583) (2,375)
Tax loss carryforwards 691 – 568 – Gross deferred tax assets/(liabilities)
Tax loss carryforwards 183 – 20 – Gross deferred tax assets/(liabilities)
approximated USD 17 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 and < 20 years 203 1,226
The recoverability of the deferred tax asset for each taxpayer is based on its ability to utilize the deferred tax asset over a reasonable period of time. This analysis considers the projected taxable income to be generated by the taxpayer, as well as its ability to offset deferred tax assets with deferred tax liabilities.
ZFS Finance (USA) Trust I Series I 6.15% USD 600 ECAPS, due December 2065 569 595 ZFS Finance (USA) Trust II Series II 6.45% USD 700 ECAPS, due December 2065 672 690
ZFS Finance (USA) Trust V Series V 6.5% USD 1,000 Trust Preferred Securities, due May 2067 994 994
Other Various debt instruments payable in more than 1 year 21 29 Subordinated debt 5,096 5,471 Total senior and subordinated debt 8,455 8,300 Total debt 10,981 9,963 1 The bond is economically hedged, but hedge accounting treatment has not been applied. 2 The bond is part of a qualifying cash fl ow hedge (80% of the total) and fair value hedge (20% of the total). (see note 7) 3 The holders of these notes benefi t from the Replacement Capital Covenant which states that if Series IV and V Fixed / Floating Trust Preferred Securities, issued by
ZFS Finance (USA) Trusts IV and V, are called before 2042 and 2047 respectively, the Group will issue a replacement debt instrument with terms and provisions that are as or more equity-like than the replaced notes.
Table 21.1 in USD millions, as of December 31Debt 6842_p170-207.indd 2036842_p170-207.indd 203 28/2/09 10:59:5628/2/09 10:59:56
b) Senior debt The Group’s Euro Medium Term Note Programme (EMTN Programme) allows for the issuance of senior and subordinated notes up to a maximum of USD 10 billion. All issuances are guaranteed by Zurich Insurance Company. Zurich Finance (USA), Inc., Zurich Finance (UK) p.l.c. and Zurich Insurance Company, are issuing entities under the EMTN Programme and all entities have debt outstanding as of December 31, 2008.
On March 27, 2008, Zurich Holding Company of America (ZHCA), a subsidiary of the Group, purchased USD 80.5 million of Series III Floating Rate ECAPS. This purchase resulted in the Group recognizing a pre-tax gain of USD 18 million. On December 18, 2008 ZHCA purchased USD 28 million of Series I 6.15 percent ECAPS and USD 20 million of Series II 6.45 percent ECAPS. This purchase resulted in the Group recognizing a pre-tax gain of USD 23 million.
Redeemable in whole every fi ve years at par plus any accrued interest.
Redeemable in whole or in part at par plus any accumulated and unpaid distributions.
Series III Floating Rate USD 400 ECAPS, due December 2065 3-month LIBOR plus 1.15% reset quarterly until December 15, 2010 and then 3-month LIBOR plus 2.15%.
1 Reset rate of interest is equal to the gross redemption yield on the benchmark fi ve-year Gilt as determined by the Calculation bank, plus 2.85% per annum. 2 Adjustable rate is equal to the greatest of (i) the 3-month LIBOR rate; (ii) the 10-year Treasury CMT (Constant Maturity Treasury) Rate; and (iii) the 30-year Treasury CMT Rate, subject to a maximum under (ii) and (iii) of 13.25% Series I and 13% for Series II. 3 All subordinated debt instruments are also subject to mandatory redemption as a result of various tax, default or other events.
Table 21.2 in USD millionsDescription and features of signifi cant subordinated debt
Table 21.2 in USD millionsDescription and features of signifi cant subordinated debt 6842_p170-207.indd 2056842_p170-207.indd 205 25/2/09 14:13:0825/2/09 14:13:08
Interest expense on debt Interest expense on debt decreased from USD 685 million to USD 599 million. This was predominantly due to prior year interest expense on subordinated debt including a one-off charge of USD 55 million related to the early redemption of USD 1 billion of Capital Trust Securities in May 2007 and related refi nancing at lower interest rates.
Credit facilities The Group has access to a syndicated revolving credit facility of USD 3 billion that terminates in 2012. Zurich Group Holding, together with Zurich Insurance Company 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, 2008.
Financial debt Financial debt consists of all debt items that are included in fi nancial leverage calculations of rating agencies. As of December 31, 2008 and December 31, 2007 fi nancial debt consisted of the following components.
Issued share capital As of December 31, 2006 14,474,940 144,749,399 0.10 New shares issued from contingent capital in 2007 79,742 797,421 0.10
New shares issued from contingent capital in 2008 830 8,300 0.10
Authorized, contingent and issued share capital As of December 31, 2007 16,023,123 160,231,227 0.10 a) Issued share capital As of December 31, 2008, Zurich Financial Services had 142,122,620 issued and fully paid registered shares of CHF 0.10 par value, amounting to total issued share capital of CHF 14,212,262.00. As of December 31, 2007, the share capital amounted to CHF 14,554,682.00, divided into 145,546,820 fully paid registered shares of CHF 0.10 par value.
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 have been issued to employees out of the contingent capital.
In 2007, the shareholders at the Annual General Meeting on April 3, 2007 approved an increase of the contingent share capital for the issuance of new registered shares to employees of the Group from CHF 75,755.60 by CHF 324,244.40 to a new maximum of CHF 400,000 by issuing up to 4,000,000 registered shares payable in full with a nominal value of CHF 0.10 each. During the year 2007, a total of 797,421 shares were issued to employees.
Financial information c) Contingent share capital Capital market instruments and option rights to shareholders The share capital of Zurich Financial Services may be increased by an amount not exceeding CHF 548,182.80 by the issuance of up to 5,481,828 fully paid registered shares with a nominal value of CHF 0.10 each (i) by exercising of conversion and/or option rights which are granted in connection with the issuance of bonds or similar debt instruments by Zurich Financial Services or one of its Group companies in national or international capital markets; and/or (ii) by exercising option rights which are granted to current shareholders. When issuing bonds or similar debt instruments connected with conversion and/or option rights, the pre-emptive rights of the shareholders will be excluded. The current owners of conversion and/or option rights shall be entitled to subscribe for the new shares. The conversion and/or option conditions are to be determined by the Board.
Redeemed securities – – 1,000 1 The amount excludes issuance costs of USD 14 million and USD 29 million as of December 31, 2008 and 2007, respectively.
Treasury shares comprise shares repurchased under the share buy-back program and shares acquired in the market held to cover employee share and option plans. The number of treasury shares amounted to 5,219,803 and 5,839,154 as of December 31, 2008 and 2007, respectively.
On February 14, 2007 the Board of Zurich Financial Services authorized a share buy-back program. 3,432,500 fully paid shares, with a nominal value CHF 0.10, have been bought back at an average price of CHF 364 per share, at a total cost of CHF 1.2 billion. The shareholders at the Annual General Meeting of April 3, 2008 approved a share capital reduction by CHF 343,250.00 from CHF 14,554,682.00 to CHF 14,211,432.00 by cancelling these 3,432,500 registered shares. The effective date of the capital reduction was June 27, 2008.
Effect of potentially dilutive shares related to share-based compensation plans 1,049,425 (0.16) (0.18) Diluted earnings per share 3,007 138,992,643 21.63 23.35
The Group operates a number of retirement benefi t arrangements for employees, the majority of whom belong to defi ned benefi t plans. Other employees participate in defi ned contribution plans, which provide benefi ts equal to amounts contributed by both the employer and the employee plus investment returns.
Table 22.4 for the twelve months ended December 31Earnings per share 6843_p208-233.indd 2116843_p208-233.indd 211 25/2/09 14:09:3225/2/09 14:09:32
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 451 million for 2009 compared with USD 470 million estimated in the previous year for 2008. The actual amount may differ.
Other defi ned post-employment benefi ts Certain of the Group’s operating companies provide post-employment benefi t programs covering medical care and/or life insurance. Eligibility in the various plans is generally based on completion of a specifi ed period of eligible service and reaching a specifi ed age. The programs typically pay a stated percentage of medical expenses subject to deductibles and other factors. The cost of post-employment benefi ts is accrued during the employees’ service periods. The method of accounting and the frequency of valuations are similar to those for defi ned benefi t pension plans.
Present value of funded obligations (12,680) (13,653) (12,190) (93) (66) (70) Fair value of plan assets 10,879 13,285 11,071 – 5 10
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 comprehensive income.
Table 23.1 in USD millions, as of December 31Status of funded defi ned benefi t plans
Real estate 671 793 – – Other investments 83 43 – –
Benefi t obligation as of January 1 (13,860) (13,175) (274) (266)
Effects of business combinations and other transfers (42) (156) (15) 2 Foreign currency translation effects 1,894 (419) 13 (8) Benefi t obligation as of December 31 (12,886) (13,860) (280) (274)
Table 23.3 in USD millions, as of December 31Expense recognized in income
Table 23.4 in USD millions, as of December 31Fair value of assets held in funded defi ned benefi t pension plans
Table 23.5 in USD millionsMovement in funded and unfunded defi ned benefi t pension plan obligation 6843_p208-233.indd 2136843_p208-233.indd 213 25/2/09 14:09:3425/2/09 14:09:34
Fair value of plan assets as of January 1 13,286 11,071 5 10 Expected return on plan assets 727 704 – – Actuarial gain/(loss) included in other comprehensive income (1,485) 188 – –
Effects of business combinations and other transfers 52 90 – – Foreign currency translation effects (1,763) 394 – – Fair value of plan assets as of December 31 10,879 13,286 – 5
The actual returns on defi ned benefi t pension plan assets for the years ended December 31, 2008 and 2007 were losses of USD 758 million and gains of USD 892 million, respectively.
The summary of the balance sheet changes in relation to defi ned benefi t plans and other defi ned post-employment benefi ts is given below.
Table 23.6 in USD millionsMovement in fair value of plan assets – funded plans
Table 23.7 in USD millionsMovement in liability for funded and unfunded plans
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: Switzerland UK US Germany
Expected long-term rate of return on assets 4.1% 5.9% 6.8% 5.0% 4.1% 5.4% 7.3% 5.0%
The mortality assumptions in each country have been based on the most up to date mortality tables in accordance with the general use in that market. Where appropriate these tables make allowance for projected future improvements in life expectancy.
Discount rate 6.0% 6.2% Expected long-term rate of return on assets 0.0% 1 3.1% Expected increase in long-term health cost 7.2% 8.5%
1 Assets expected to be reduced to zero in January 2009.
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 rate would have the effects on amounts recognized in 2008 as set out in table 23.11: 1% increase 1% decrease
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 285 million and USD 365 million for the years ended December 31, 2008 and 2007, respectively.
Total option-based expenses 35 49 Total share-based expenses 139 121 Total expenses 174 170
Table 24.1 in USD millions, as of December 31Expenses recognized in income
Table 24.1 in USD millions, as of December 31Expenses recognized in income 6843_p208-233.indd 2166843_p208-233.indd 216 25/2/09 14:09:3625/2/09 14:09:36
Employee share plans Share Incentive Plan for employees in the UK The Group established an Inland Revenue approved Share Incentive Plan and launched the partnership shares element of this plan in 2003. This plan enables participating employees to make monthly purchases of Zurich Financial Services shares at the prevailing market price out of their gross earnings. There were 420 and 439 participants in the partnership element of the plan as of December 31, 2008 and 2007, respectively. The Group also operates the profi t-sharing element of the Share Incentive Plan (reward shares) which was launched in 2004 with annual share allocations being made in May each year subject to business performance. The awards are based on the performance of the participating employee’s business unit for the year, subject to a maximum award of 5 percent of participant’s base salary (before any fl exible benefi t adjustments) or GBP 3,000. The total number of participating employees in the reward share element of the plans as of December 31, 2008 and 2007 was 6,269 and 6,952 respectively.
Share-based compensation plans for executives The Group operates long-term incentive plans for selected executives. These plans comprise the allocation of a target number of share grants and/or share option grants with the vesting of these share and option grants being subject to the achievement of specifi c fi nancial performance goals. The Group can also make restricted share grants to selected employees, which provide share awards if the individual remains employed with the Group on selected dates in the future.
Executive long-term performance share plans Each year, selected executives are granted performance shares which vest on an annual basis over the subsequent three year period. The actual level of vesting, which can be between 0 percent and 175 percent, with an additional discretion to increase vesting to a maximum of 200 percent, of the original number of shares granted, depends on the performance of the Group during the previous calendar year. For 2007 and future grants we are looking back to a three year performance period. The current performance metrics are the Group’s return on equity (ROE) and the position of its total annual relative shareholder return measured against an international peer group of insurance companies. The actual number of performance shares granted at the beginning of the performance period is determined such that the economic value is a defi ned percentage of the annual salary in the year of allocation. Actual awards under these plans are made fully in shares of Zurich Financial Services. One half of the shares that actually vest are sales-restricted for a further period of three years. There were a total of 833 and 746 participants in this plan as of December 31, 2008 and 2007, respectively.
The average share price for Zurich Financial Services shares in 2008 and 2007 was CHF 280.49 and CHF 350.32, respectively.
Table 24.4 in CHFRange of exercise prices of options outstanding as of
Shares granted during the period 271,374 270,367 337 356 Options granted during the period 1 855,214 702,420 67 68 1 Number of options granted is shown as the number of shares under option granted during the period.
The fair value of options granted is estimated using the Black-Scholes option pricing model, with the assumptions shown in table 24.6.
The risk-free interest rate was determined by using the seven year CHF swap rate applicable in 2008 and 2007. The implied volatility was determined based on the average of a number of several independent quotes.
The Group has provided contractual commitments and fi nancial guarantees to external parties, associates, partnerships and joint ventures. 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 4,205 4,082 Less funded commitments (3,423) (3,300) Remaining commitments under investment agreements 782 782 Guarantees and letters of credit 1 915 939 Future rent commitments 1,261 1,613 Undrawn loan commitments (capital markets and banking activities) 646 926 Other commitments and contingent liabilities 47 40 1 Guarantee features embedded in life insurance products are not included. For such guarantee features refer to note 8 on insurance reserves.
Table 25.1 in USD millions, as of December 31Quantifi able commitments and contingencies
Table 25.1 in USD millions, as of December 31Quantifi able commitments and contingencies 6843_p208-233.indd 2196843_p208-233.indd 219 25/2/09 14:09:3825/2/09 14:09:38
Indemnity agreements The Group, through certain of its subsidiaries, has agreed to arrangements that cap Converium’s (now Scor Holding (Switzerland) AG) and its successor companies’ net exposure for losses arising out of the September 11, 2001 event at USD 289 million. As of December 31, 2008, and 2007 respectively, the Group has recorded in this respect provisions of USD 54 million.
Pledged assets The majority of assets pledged to secure the Group’s liabilities relates to debt securities pledged under short-term sale and repurchase agreements. The total amount of pledged fi nancial assets including the securities under short-term sale and repurchase agreements amounted to USD 3,469 million and USD 5,251 million as of December 31, 2008 and 2007, respectively.
Other contingent liabilities The Group has received notices from various tax authorities asserting defi ciencies in taxes for various years. The Group is of the view that the ultimate outcome of these reviews would not materially affect the Group’s consolidated fi nancial position.
In common with other groups writing life assurance business in the UK, the Group remains exposed to a number of Conduct of Business issues. While provisions are maintained which refl ect management’s best evolving estimate of the probable costs and expenses of resolving these matters, signifi cant uncertainty regarding the ultimate cost remains. The main area of uncertainty concerns sales advice related complaints. The key assumptions used to derive the complaint provision are the volume of complaints, both those already recorded and an assumption as to the level of future complaints, the percentage of complaints which will be successful (the uphold rate), the average redress payable per complaint and the expenses of reviewing each case or complaint. The assumptions used to set the provision have been based on actual experience over the past three years weighted towards more recent experience.
On December 11, 2001, the Group divested its third party reinsurance business operated under the “Zurich Re” brand name by offering the shares of the newly established Converium to the public. As part of the formation of Converium and the subsequent public offering of its shares, the Group entered into various contracts with Converium and its subsidiaries, including certain Quota Share Retrocession Agreements. These Quota Share Retrocession Agreements, together with subsequent amendments, provide for the reinsurance premium to Converium to be retained by the Group on a funds withheld basis. The Quota Share Retrocession Agreements were amended at the end of February 2008. According to the amendment Converium no longer has the right to call for payments in cash for certain amounts of the funds withheld on pre-determined dates, as it was the case prior to the amendment.
In 2006, the Group settled with various US state attorneys general and state insurance regulators in connection with investigations in the US 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, but appeals are pending. A number of individual claims not covered by the class action settlement remain pending against the Group.
Furthermore, Zurich Financial Services is a defendant in putative class-action securities lawsuits relating to its divestiture of its interest in Converium. On July 25, 2008, Zurich Financial Services and the class-action plaintiffs entered into an amended stipulation of settlement that calls for a payment of USD 28 million to settle the case in two parts on behalf of all persons and entities who purchased Converium securities between January 7, 2002 and September 2, 2004: one settlement in the US court, covering all US persons and entities, and all other persons who purchased Converium securities on US markets, and another settlement in the Amsterdam Court of Appeals, in the Netherlands, covering all non-US persons and entities who purchased Converium securities on the SWX Swiss Exchange (now SIX Swiss Exchange). The proposed US and Dutch settlements are both subject to court approval and are independent of each other. The US court approved the US settlement on December 12, 2008. A notice of appeal was fi led on January 9, 2009 from various rulings by the US court. The statement of issues does not challenge or object to the settlement’s terms, but rather, focuses on the court’s dismissal of the plaintiff’s Securities Act claims as untimely and the court’s denial of plaintiff’s motion to amend the complaint. The proposed Dutch settlement has not yet been presented to the Dutch court.
The Group believes that it is not a party to, nor are any of its subsidiaries the subject of, any unresolved current legal proceedings, claims, litigation and investigations that would have a material adverse effect on the Group’s consolidated fi nancial condition. However, it is possible that the outcome of any proceedings could have a material impact on results of operations in the particular reporting period in which it is resolved.
Cash and cash equivalents 16,397 16,936 16,397 16,936 Available-for-sale: Debt securities 105,875 109,278 105,875 109,278
Total loans and receivables 42,956 41,703 42,225 42,122 Other Investments: Total fi nancial assets 265,517 317,268 264,549 317,589 Financial liabilities af FV through profi t or loss: Trading: Obligation to repurchase securities (3,608) (5,370) (3,608) (5,370) Designated at FV: Liabilities related to unit-linked investment contracts (30,397) (48,187) (30,397) (48,187)
In the normal course of business, the Group enters into various transactions with related companies, including various reinsurance and cost-sharing arrangements. These transactions are not considered material to the Group, either individually or in aggregate. Parties are considered to be related if one party has the ability to control or exercise signifi cant infl uence over the other party in making fi nancial or operational decisions.
Table 27.2 summarizes related party transactions with key personnel refl ected in the consolidated fi nancial statements. Key personnel includes Directors of Zurich Financial Services and Zurich Insurance Company and the Members of the Group Executive Committee.
Outstanding loans and guarantees granted to Members of the Group Executive Committee amounted to USD 1 million for both the years ended December 31, 2008 and 2007. Outstanding loans and guarantees granted to Members of the Board of Directors amounted to USD 2 million and nil for the years ended December 31, 2008 and 2007, respectively. The terms “Directors” and “Members of the Group Executive Committee” in this context include the individual as well as members of their respective households. The above fi gures include the fees paid to members of the Board of Directors of Zurich Financial Services and Zurich Insurance Company, which were USD 3.3 million and USD 3.1 million, in 2008 and 2007 respectively.
No provision for non-repayment has been required in 2008 and 2007 for the loans or guarantees made to Members of the Group Executive Committee.
Information required by art. 663bbis and art. 663c paragraph 3 of the Swiss Code of Obligation is disclosed in the Financial Statements of the holding company.
The cash compensation, current benefi ts and fees are short term in nature.
Table 27.2 in USD millions, for the years ended December 31Related party transactions – key personnel
a) Surplus note and certificates of contribution issued by the Farmers Exchanges As of December 31, 2008 and 2007, 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.
Conditions governing payment of interest and repayment of principal are outlined in the surplus note and certifi cates of contribution. Generally, repayment of principal may be made only when the issuer has an appropriate amount of surplus, and then only after approval is granted by the issuer’s governing board and the appropriate state insurance regulatory department in the US. In addition, payment of interest may generally be made only when the issuer has an appropriate amount of surplus and then only after approval is granted by the appropriate state insurance regulatory department in the US.
Effective January 1, 2006, the Farmers Exchanges modifi ed the terms of the APD agreement with Farmers Re and ZIC. The new agreement provides for annual ceded premiums of USD 1 billion of gross written premiums with 20.0 percent assumed by Farmers Re and 80.0 percent assumed by ZIC, a 25.8 percent ceding commission for acquisition expenses, and an 8.2 percent ceding commission for unallocated loss adjustment expense. The agreement also includes provisions for additional experience commissions that will depend on loss experience and recoveries below a 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 agreement, which can be cancelled after 90 days notice by any of the parties, has a termination date of December 31, 2008.
Table 28 in USD millions, as of December 31Surplus Notes 6843_p208-233.indd 2256843_p208-233.indd 225 25/2/09 14:09:4125/2/09 14:09:41
Effective December 31, 2005, the 12.0 percent All Lines agreement was amended and the quota share participation ratio was reduced to 6 percent. As a result, Farmers Re and ZIC assume a 1.2 percent and 4.8 percent respective quota share of the premiums written and the ultimate net losses sustained in all lines of business written by the Farmers Exchanges after the APD reinsurance agreement has been applied. In addition, under this treaty the Farmers Exchanges’ catastrophe losses are subject to a maximum of USD 800 million. Farmers Re and ZIC may assume USD 10 million and USD 38 million, respectively, of the maximum Farmers Exchanges’ catastrophe losses subject to under this treaty.
Revenues Direct written premiums and policy fees 35,357 34,199 10,684 9,506
Gross written premiums and policy fees 37,151 35,650 10,784 9,623 Less premiums ceded to reinsurers 1 (5,646) (5,345) (739) (8,002) Net written premiums and policy fees 31,505 30,305 10,046 1,622 Net change in reserves for unearned premiums (583) (574) (16) (5) Net earned premiums and policy fees 30,922 29,731 10,030 1,617 Farmers management fees and other related revenues – – – – Net investment result on Group investments 2,452 3,913 3,258 4,741
Benefi ts, losses and expenses Losses and loss adjustment expenses, net of reinsurance 22,388 20,916 33 90 Life insurance death and other benefi ts, net of reinsurance 53 50 9,867 10,385 (Decrease)/increase in future life policyholders’ benefi ts, net of reinsurance – – (689) (9,781) Insurance benefi ts and losses, net of reinsurance 1 22,441 20,966 9,211 694 Policyholder dividends and participation in profi ts,
Reinsurers’ share of reserves for insurance contracts 1 12,749 13,149 1,999 9,555 Deposits made under assumed reinsurance contracts 68 68 – – Deferred policy acquisition costs 3,247 3,306 10,752 11,547 Deferred origination costs – – 770 1,003
Supplementary segment information Reserves for losses and loss adjustment expenses, net 50,530 51,935 8 6 Reserves for unearned premiums, net 12,996 13,721 204 154 Future life policyholders’ benefi ts, net 95 97 70,837 68,019 Policyholders’ contract deposits and other funds, net 1,072 1,006 12,481 14,026 Reserves for unit-linked contracts, net – – 35,069 54,337 Reserves for insurance contracts, net 64,693 66,759 118,599 136,542 1 In 2007, for the Global Life segment, reinsurers’ share of reserves for insurance contracts included USD 7.1 billion related to the reinsurance of a UK annuity portfolio. Subsequent to the approval from the UK High Court, effective on June 30, 2008, the underlying contracts have been transferred to the reinsurer, resulting in a reduction of both the reinsurers’ share of reserves for insurance contracts and gross reserves for insurance contracts.
Table 29.2 in USD millions, as of December 31Assets and liabilities by business segment
Table 29.2 in USD millions, as of December 31Assets and liabilities by business segment 6843_p208-233.indd 2306843_p208-233.indd 230 25/2/09 14:09:4625/2/09 14:09:46
Table 29.4 in USD millions, for the years ended December 31Additions and capital improvement of property / equipment and intangible assets by geographical segment 6843_p208-233.indd 2326843_p208-233.indd 232 25/2/09 14:09:4825/2/09 14:09:48
As statutory auditors, we have audited the consolidated fi nancial statements of Zurich Financial Services, which comprise the consolidated income statement, consolidated statement of comprehensive income, consolidated balance sheet, consolidated statement of cash fl ows, consolidated statement of changes in equity and related notes (pages 129 to 232 and 90 to 123), for the year ended December 31, 2008.
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.
Opinion In our opinion, the consolidated fi nancial statements for the year ended December 31, 2008 give a true and fair view of the fi nancial position, the results of operations and the cash fl ows in accordance with the International Financial Reporting Standards (IFRS) and comply with Swiss law.
We recommend that the consolidated fi nancial statements submitted to you be approved.
as of December 31, 2008Signifi cant subsidiaries as of December 31, 2008Signifi cant subsidiaries 6845_p236-239.indd 2366845_p236-239.indd 236 25/2/09 14:05:5325/2/09 14:05:53
Zurich Holdings (UK) Limited Fareham, England Corporate Functions 100 100 GBP 87.1
Zurich International (UK) Limited Fareham, England General Insurance 100 100 GBP 40.0
Zurich International Life Limited Douglas, Isle of Man Life Insurance 100 100 GBP 105.6
Zurich Specialties London Limited Fareham, England Other Businesses 100 100 GBP 150.0
Farmers Reinsurance Company Los Angeles, CA Other Businesses 98.28 100 USD 5.0 Kemper Corporation Schaumburg, IL Other Businesses 100 100 USD 220.0 Kemper Investors Life Insurance Company Bellevue, WA Life Insurance 100 100 USD 2.5 ZFS Finance (USA) LLC V 7 Wilmington, DE Corporate Functions 100 100 USD – ZFUS Services, LLC 7 Wilmington, DE Corporate Functions 100 100 USD – Zurich American Insurance Company (and subsidiaries) New York, NY General Insurance 100 100 USD 5.0 Zurich Finance (USA), Inc. Wilmington, DE Corporate Functions 100 100 USD 0.000001 Zurich Holding Company of America, Inc. Dover, DE Corporate Functions 100 100 USD 0.6 6 As from January 2009 renamed Genevoise Real Estate Company Ltd.
7 This entity is a LLC that has no share capital.
Embedded value New business value EV operating profit Embedded value profit
This report describes the development in 2008 of the embedded value (EV) of the Global Life division of the Zurich Financial Services Group.
EV operating profi t increased by 5 percent. Operating variance proved resilient, and pressures on expenses and persistency were more than offset by mortality profi ts and tax effi ciencies.
in USD millions, as of December 31Embedded value key results in USD millions, as of December 31Embedded value key results 6846_p240-271.indd 2406846_p240-271.indd 240 25/2/09 14:01:0925/2/09 14:01:09
Expected transfer to shareholders’ net assets 1,179 (1,179) (1,196) 18 – – – –
1 TVFOG is the time value of fi nancial options and guarantees 2 CNMR is the cost of non-market risk c) Expected transfer The expected transfer to shareholders’ net assets shows the profi ts expected to emerge during the period in respect of business that was in force at the beginning of the period. The net effect is zero, as the reduction in value of business inforce is offset by the increase in shareholders’ net assets. The expected profi ts do not include changes in the solvency margin over the period.
Movement in embedded value, after tax 6846_p240-271.indd 2426846_p240-271.indd 242 25/2/09 14:01:1025/2/09 14:01:10
1 In certain countries, particularly in the UK, where life insurance companies pay tax in respect of both policyholders and shareholders, the results shown in the above table are before shareholders’ tax but after allowing for policyholders’ tax.
New business value refl ects the value added by new business written during the period. This item is calculated at the point of sale, using the methodology described in Section 3. The reduction in shareholders’ net assets shown in respect of new business (i.e. new business strain) excludes the solvency margin set up in respect of new business. Including the solvency margin, new business strain in 2008 is USD 0.9 billion.
Table 1.6 in USD millions, for the years ended December 31New business value, after tax net of minority interests
New business by line of business 6846_p240-271.indd 2446846_p240-271.indd 244 27/2/09 23:12:2327/2/09 23:12:23
Table 1.8 in USD millions, for the year ended December 31, 2008Operating variance, after tax 6846_p240-271.indd 2456846_p240-271.indd 245 25/2/09 14:01:1225/2/09 14:01:12
g) Global development costs Where signifi cant development work is performed in one country that is intended to have wider application across Global Life, that cost is shown under Global development costs.
Intangible net assets 1 6.1 3.5 Tangible net assets 5.1 7.8 Global Life IFRS net assets 11.8 11.9 Adjustments to Global Life IFRS net assets for embedded value
Certainty equivalent value of business in-force 9.3 10.8 Frictional costs (0.6) (0.8) Time value of fi nancial options and guarantees (0.8) (0.5) Cost of non market risk (0.6) (0.5) Embedded value 12.8 15.9 1 Intangible assets are defi ned as deferred policy acquisition costs, deferred origination costs and other related intangible assets less deferred front-end fees.
Financial information l) Sensitivities A number of sensitivities have been produced to indicate the sensitivity of the EV and the new business value to changes in certain assumptions. These are in line with the CFO Forum’s Additional Guidance on European Embedded Value Disclosures issued in October 2005.
Operating sensitivities 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 10 percent decrease in initial expenses and commissions was considered for new business values only.
A 5 percent improvement in mortality assumptions for annuities means that, for example if the base mortality assumption for annuities was 90 percent of a particular table this would decrease to 85.5 percent); Frictional costs applied to 150 percent of minimum solvency margin, rather than to total capital for in-force business or minimum solvency margin for new business.
A 100 basis points increase in the discount rates means that for example a discount rate of 6 percent p.a. would increase to 7 percent p.a.
A 10 percent increase in implied equity and property volatilities means that for example 15 percent p.a. would increase to 25 percent p.a.
In each sensitivity calculation, all other assumptions remain unchanged except where they are directly affected by the revised conditions. The results include any impact of the assumption changes on the time value of options and guarantees.
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 which are discounted at higher rates. This reduction is more than 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.
Financial information m) Life business included in Other Businesses 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 beeen written by these businesses outside Global Life are: Variable annuity contracts that provide annuitants with guarantees related to minimum death and income benefi ts; Disability business; and
Table 1.11 in USD millions, for the years ended December 31Estimated embedded value of life businesses in Other Businesses 6846_p240-271.indd 2496846_p240-271.indd 249 25/2/09 14:01:1525/2/09 14:01:15
EV results for December 31, 2008 and December 31, 2007 are translated from local currency using different exchange rates. The comments in this section relate to business issues only and not to movements in exchange rates.
Frictional costs TVFOG 1 CNMR 2 Total 1 TVFOG is the time value of fi nancial options and guarantees. 2 CNMR is the cost of non-market risk.
Table 2.1 in USD millions, for the year ended December 31, 2008
Frictional costs Frictional costs have decreased in 2008, broadly in line with shareholders’ net assets.
Time value of fi nancial options and guarantees (TVFOG) In the United Kingdom and Germany, the increased cost was due to higher swaption implied volatilities and generally lower interest rates, which increased the time value of fi nancial options and guarantees for products with interest rate guarantees.
In the United States and Spain, the TVFOG became less expensive. This is due to the fact that in these two countries, interest rate guarantees are deeply in the money. This means the cost of guarantees is mostly captured by the certainty equivalent value. The TVFOG measures the remaining cost of these interest rate guarantees arising due to their asymmetry, which is highest when the options are right at the money.
In 2008, there have been two diverging effects on the movement in embedded value. Zurich showed clearly its capability to run an effi cient business with the generation of a high EV operating profi t. On the other hand, it was also affected by a very diffi cult economic situation, with a strong downturn in equity markets, falling interest rates and record high volatilties, both for equities and interest rate instruments. Credit spreads have increased as well, which caused corporate bonds to depreciate, and some markets showed a downturn in property prices.
On the currency side, sterling depreciated against Zurich’s group currency, the U.S. dollar, with a signifi cant decrease in the embedded value of United Kingdom when measured against the U.S. dollar.
Table 2.3 in USD millions, for the year ended December 31, 2008
Movement in embedded value, after tax 6846_p240-271.indd 2526846_p240-271.indd 252 27/2/09 23:13:0327/2/09 23:13:03
United States United Kingdom Germany Switzerland Ireland Spain Emerging Markets Rest of the World
United States United Kingdom Germany Switzerland Ireland Spain Emerging Markets Rest of the World 6846_p240-271.indd 2536846_p240-271.indd 253 27/2/09 23:26:0527/2/09 23:26:05
2 ZIS results include USD 7 million of development costs that were incurred centrally.
Annual premiums Single premiums APE 1 PVNBP 2 1 New business annual premium equivalent (APE) is taken as new annual premiums plus 10% of single premiums. 2 Present value of new business premiums (PVNBP) is equal to new single premiums plus the present value of annual premiums.
Table 2.4 in USD millions, for the years ended December 31New business value, after tax
In the United States, the new business value decreased due to the lower volume of new business and lower margins as acquisition costs did not decrease as much as the volume of new business.
In Switzerland, the new business value is overall at prior year level, with a change in business mix towards corporate pensions business.
New business value by component, after tax in 2007 6846_p240-271.indd 2556846_p240-271.indd 255 25/2/09 14:01:2025/2/09 14:01:20
In Emerging Markets, the new business value fell mostly due to adverse market conditions in Hong Kong, which made it more diffi cult to sell investment products.
Expected return is based on a risk free rate assumption plus an asset specifi c risk premium.
Embedded value return is the sum of operating return and the impact of the economic variance.
Overall, Global Life achieved a positive operating return, but a negative economic variance resulting from the turmoil in fi nancial markets led to an overall negative embedded value return.
Table 2.8 in USD millions, for the year ended December 31, 2008Return on opening EV, after tax 6846_p240-271.indd 2566846_p240-271.indd 256 27/2/09 23:23:3527/2/09 23:23:35
Zurich Financial Services Group (the Group) has applied the European Embedded Value Principles issued by the CFO Forum in May 2004, for its Embedded Value (EV) Report for the companies and business in its Global Life segment (the covered business) for the fi nancial year 2008 and for the comparative period. Certain other life businesses are included in the Other Businesses segment and have been excluded from the EV. This report primarily relates to Global Life, but information relating to the Other Businesses is given in section 1.m . The EV methodology adopted by the Group is based on a “bottom-up” market consistent approach to allow explicitly for market risk. In particular: Asset and liability cash fl ows are valued using risk discount rates consistent with those applied to similar cash fl ows in the capital markets; and
For certain smaller companies, no EV has been calculated but these companies have been included in the EV at their shareholders’ equity value, as calculated in accordance with IFRS. The contribution from these companies to the EV is approximately 2 percent.
This EV Report refl ects recent acquisitions by the Group. The values reported include the contribution from the insurance operations acquired in Italy and Spain.
b) Calculation of embedded value EV presented in this document is derived through calculations which are performed separately for each business unit.
In Germany, a revision of the the German supervisory law (VAG) mandated changes for policyholder participation. The EV model has been updated accordingly and results from previous quarters of 2008 have been restated, increasing new business value after tax by USD 12 million.
e) Value of business in-force The value of business in-force is the present value of future projected profi ts from the covered business, and it is defi ned as the certainty equivalent value of business in-force less frictional costs, time value of fi nancial options and guarantees, and cost of non market risk. These components are explained below.
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 available capital plus investment management costs. In Germany, they also include the policyholders’ share of investment income on the capital.
The application of frictional costs to the total capital of each life business is in line with the Group’s holistic approach to the EV. The tax and costs in respect of total capital will in practice have to be met, and it is appropriate therefore that this is allowed for in the EV. For the purpose of these calculations, required capital is assumed to run down in line with existing business. Free surplus is also assumed to run down in line with existing business except where there are specifi c plans for the earlier distribution of the free surplus.
For products with signifi cant guarantees, the time value has been calculated on a market consistent basis by deducting the average present value of shareholder cash fl ows using at least 1,000 stochastic economic simulations from the certainty equivalent value (both for the value of business in-force and for new business value). 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.
f) New business New business covers new contracts sold during the reporting period and includes recurring single premiums; new premiums written during the period on existing contracts; and variations to premiums on existing contracts where these premiums and variations have not previously been assumed as part of business in-force. Where recurring single premiums are projected over time to derive the corresponding new business value, they are treated as annual premium for the volume defi nition. Group Life business which is valued with a renewal assumption of the contracts is treated as annual premium.
The new business is valued as at point of sale. Explicit allowance is made for frictional costs, time value of fi nancial options and guarantees, and cost of non market risk. New business value is valued consistently with new business volumes.
Spain has used asset and liability data as of November 30 with adjustments made to asset data to refl ect the change in swap curves between November 30 and December 31. New business value takes into account the most important lines of business written to December 31.
h) Market consistent discounting The Group has adopted a “bottom-up” market consistent approach for the projection and discounting of future cash fl ows in the calculation of the EV. As a result, the risks inherent in the cash fl ows are allowed for in a way that is consistent with the way the market is expected to allow for such risks.
The simulations used for calculation of time value of fi nancial options and guarantees refl ect the actual yield curves observable as of December 31, 2008 and implied volatilities averaged over the year 2008.
Financial information 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 5.
j) Corporate Center costs Corporate Center costs that relate to covered business have been allocated to the relevant companies and included in the projected expenses.
k) Holding companies Holding companies that belong to Global Life have been consolidated in EV 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 EV of the covered business.
EV is shown net of minority interests. Where the Group has a majority interest in a subsidiary company, the new business value and the premium information are shown gross of minority interests. The minorities’ share of new business value is eliminated through “operating variance, after tax”.
m) Debt Where a loan exists between a company in Global Life and a Group company not within Global Life, the loan is valued for EV purposes consistently with the value shown in the Group’s IFRS fi nancial statements.
p) Employee share options The costs of share options granted to employees are not included in the EV, other than to the extent that they are allowed for in the local statutory accounts upon which the shareholders’ net assets are based. Further information on the costs of share options is given in the Group’s IFRS fi nancial statements.
Projections of future shareholder cash fl ows expected to emerge from covered 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.
For equity and property assets, the investment return assumptions are based on the 10 year swap rate at the beginning of period plus a margin to refl ect the additional risk associated with investment in these asset classes.
Rates of future bonus or crediting rates have been set at levels consistent with the risk neutral investment return assumptions and current bonus plans. In the United Kingdom, bonus rates have been set so as to exhaust any remaining assets in the relevant long-term funds. In other European life businesses and in the United States, bonuses have been set to be consistent with the investment return assumptions and with the book value approach used by these life businesses in practice.
Exchange rates EV for December 31, 2008 and December 31, 2007 have been converted to Group presentation currency, US dollar, using the respective balance sheet exchange rates. The rates can be found in the Financial Supplement. The analysis of movements, including new business, has been translated at average exchange rates over the period.
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.
Where service companies have been valued on a look through basis, the value of profi ts or losses arising from these services have been included in the EV and new business value.
The stochastic models allow, where appropriate, for management actions to change investment strategy in response to market conditions.
New business annual premium equivalent (APE) 101 119 878 926 Present value of new business premiums (PVNBP) 947 1,053 7,272 8,087
New business annual premium equivalent (APE) 449 453 77 135 Present value of new business premiums (PVNBP) 2,220 2,861 359 601 – – – –
Operating return on opening EV 13.2% 23.2% 0.5% 14.0% Embedded value return on opening EV 37.6% 21.3% (21.6%) 18.0% Expected return on opening EV 4.7% 6.0% 5.6% 5.6%
1 ZIS results include USD 7 million of development costs that were incurred centrally.
in USD millions, for the years ended December 31Embedded value results, after tax – Emerging Markets and Rest of the World in USD millions, for the years ended December 31Embedded value results, after tax – Emerging Markets and Rest of the World
We have audited the Embedded value report (“EV Report”) for the companies and business reported in Zurich Financial Services’ Global Life segment included in pages 240 to 269 of the Financial Report 2008 for the year ended December 31, 2008. The embedded value information included in the EV Report has been prepared in accordance with the European Embedded Value Principles issued in May 2004 by the European Insurance CFO Forum as supplemented by the Additional Guidance on European Embedded Value Disclosures issued in October 2005 (together the “EEV basis”) as described on pages 257 to 262 .
This report has been prepared solely for the Board of Directors of Zurich Financial Services 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.
Auditor’s report on Embedded value 6846_p240-271.indd 2716846_p240-271.indd 271 25/2/09 14:01:3025/2/09 14:01:30
Revenues Interest income 244,463 217,530 Dividend income 2,708,654 1,911,973 Other fi nancial income 46,162 20,380 Total revenues 2,999,279 2,149,883 Expenses Administrative expense 3 (12,301) (12,497) Other fi nancial expense 4 (306,534) (141,757)
Short-term liabilities Loans from subsidiaries 1,653,549 1,408,167 Other liabilities to subsidiaries – 8,618 Other liabilities to third parties 14,828 22,281 Other liabilities to shareholders 199 167 Accrued liabilities 730 6,767 Total short-term liabilities 1,669,306 1,446,000 Shareholders’ equity (before appropriation of available earnings) Share capital 8 14,212 14,555 Legal reserves: General legal reserve 9,525,071 9,523,631 Reserve for treasury stock 9 1,575,468 2,028,863
Free reserve 2,738,258 3,424,968 Retained earnings: Beginning of the year 2,360,275 1,966,213
Beginning of the year, adjusted for appropriations 272,144 386,842 Net income 2,658,037 1,973,433 Retained earnings, end of year 2,930,181 2,360,275 Total shareholders’ equity (before appropriation of available earnings) 16,783,191 17,352,292 Total liabilities and shareholders’ equity 18,452,497 18,798,291 1 Dividends paid in the year, proposed in association with the 2007 result 2 Dividends paid in the year, proposed in association with the 2006 result in CHF thousands, as of December 31Assets in CHF thousands, as of December 31Assets
Zurich Financial Services knows of no event that would require it to satisfy the guarantees or to take action under a support agreement.
8. Shareholders’ equity a) Issued share capital As of December 31, 2008, Zurich Financial Services had 142,122,620 issued and fully paid registered shares of CHF 0.10 par value, amounting to total issued share capital of CHF 14,212,262.00. As of December 31, 2007, the share capital amounted to CHF 14,554,682.00, divided into 145,546,820 fully paid registered shares of CHF 0.10 par value.
In 2007, the shareholders at the Annual General Meeting on April 3, 2007 approved an increase of the contingent share capital for the issuance of new registered shares to employees of the Group from CHF 75,755.60 by CHF 324,244.40 to a new maximum of CHF 400,000 by issuing up to 4,000,000 registered shares payable in full with a nominal value of CHF 0.10 each. During the year 2007, a total of 797,421 shares have been issued to employees. As a result, 145,546,820 fully paid shares with a nominal value of CHF 0.10 were issued as of December 31, 2007, amounting to a share capital of CHF 14,554,682.00.
c) Contingent share capital Capital market instruments and option rights to shareholders: The share capital of Zurich Financial Services may be increased by an amount not exceeding CHF 548,182.80 by the issuance of up to 5,481,828 fully paid registered shares with a nominal value of CHF 0.10 each (i) by exercising of conversion and/or option rights which are granted in connection with the issuance of bonds or similar debt instruments by Zurich Financial Services or one of its Group companies in national or international capital markets; and/or (ii) by exercising option rights which are granted to current shareholders. When issuing bonds or similar debt instruments connected with conversion and/or option rights, the pre-emptive rights of the shareholders will be excluded. The current owners of conversion and/or option rights shall be entitled to subscribe for the new shares. The conversion and/or option conditions are to be determined by the Board.
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 10 years and option rights for a maximum of 7 years from the time of the respective issue.
The conversion or option price or its calculation methodology shall be determined in accordance with market conditions, whereby for shares of Zurich Financial Services the quoted share price is to be used as a basis.
Employee participation: On February 14, 2007, the Board of Directors of Zurich Financial Services 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 December 31, 2007, the contingent share capital, to be issued to employees of Zurich Financial Services 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 2008, 8,300 shares were issued to employees out of the contingent share capital under the program described above. As a result, on December 31, 2008 the remaining contingent share capital, which can be issued to employees of Zurich Services and Group companies, amounts to CHF 319,427.90 or 3,194,279 fully paid registered shares with a nominal value of CHF 0.10 each. The pre-emptive rights of the shareholders, as well as the right for advance subscription, are excluded. The issuance of shares or respective option rights to employees 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.
Additions during the year 3,750,700 1,100,609 5,907,200 2,057,251 Sales during the year (937,551) (304,107) (229,497) (71,186) Decrease due to share cancellations (3,432,500) (1,249,897) – –
Information required by art. 663c paragraph 3 of the Swiss Code of Obligations on the share and option holdings of the members of the Board of Directors and the members of the Group Executive Committee are disclosed in note 13.
12. 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 44 to 61, 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. All the Directors are also Directors of Zurich Insurance Company. The Directors receive a combined fee for their work in connection with Zurich Financial Services and Zurich Insurance Company. In addition, during 2008 Mr. de Swaan has been elected a member of the Board of Zurich Insurance plc in Ireland. There were no changes in the fee structure in 2008 compared with 2007 apart from the increase in the annual basic fee for the Chairman which was increased from USD 580,000 to USD 700,000 with effect from January 1, 2008. A fi xed portion of the fee was allocated towards the provision of salesrestricted Zurich Financial Services shares. The portion for the Chairman was set at USD 233,500 (CHF 250,849) for 2008 and at USD 193,500 (CHF 234,616) for 2007. As in 2007 the portion for the other members was set at USD 68,500 (CHF 73,590 for 2008 and CHF 83,055 for 2007). The overall fees are set out in the following tables: 6847_p272-289.indd 2786847_p272-289.indd 278 28/2/09 13:05:3328/2/09 13:05:33
Of which allocated in Shares 7, 15 1 The total fees (including the portion allocated in shares) provided to Directors by Zurich Financial Services amounted to CHF 3,536,465 for 2008 and to CHF 3,745,570 for 2007, calculated on the basis of the exchange rates at the dates of payment. These amounts, except for the fees earned by Mr de Swaan for his Board membership in Zurich Insurance plc, are refl ected in the income statement of the holding company. As the fees of the Directors are actually defi ned in US dollars and the total of fees in US dollars amounts to USD 3,291,875 for 2008 and to USD 3,089,167 for 2007, the average exchange rates were USD / CHF 1.0743 for 2008 and USD / CHF 1.2125 for 2007. All fi gures shown in Swiss francs in the above table have been translated from US dollars using the relevant average exchange rate.
4 Committee chairs receive an annual fee of USD 20,000 and the chair of the Audit Committee receives an additional USD 10,000. The Committees on which the Board members serve and the chairs are set out in the Corporate governance report on page 25.
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 US dollars, but paid in the actual currencies where the Board members reside, based on the relevant exchange rate at the dates of the payment. 7 The shares allocated to the Directors are sales-restricted for three years. 8 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 amount shown in the table above refl ects the fi xed amount in CHF 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.
in CHF 1Directors’ fees 2008 in CHF 1Directors’ fees 2008 in CHF 1Directors’ fees 2007 in CHF 1Directors’ fees 2007 6847_p272-289.indd 2796847_p272-289.indd 279 25/2/09 13:51:4525/2/09 13:51:45
10 The following membership movements occurred in 2008: – Ms. Bies and Mr. Chu joined the Board on April 3, 2008 and received pro rata fees in cash and in shares for their Board work from that date. – Mr. Schulmeyer retired from the Board on April 3, 2008 and received a pro rata fee in cash for his Board work up to that date.
11 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.
14 In line with applicable laws, Zurich paid the company related portion of contributions to social security systems, which amounted to USD 69,305 (CHF 74,454) in 2008. Any personal contributions of the Directors to social security systems are included in the amounts shown in the table above. The corresponding contributions in 2007 amounted to USD 68,439 (CHF 82,981).
18 Mr. Sankey became Chairman of the Remuneration Committee on April 3, 2007 following the retirement of Mr. Mead. He received a pro rata fee for being Chair.
At the Annual General Meeting in 2008, Gerhard Schulmeyer retired from the Board. No termination payments were made to him during the year.
Except for Mr. Watter none of the Directors had outstanding loans, advances or credits as of December 31, 2008. Unrelated to his Board membership and on terms and conditions available to other customers, Mr. Watter received a collateralized policy loan in the amount of CHF 2.5 million during 2008. The annual interest rate charged on the loan is 4%. None of the Directors had outstanding loans, advances or credits as of December 31, 2007.
Remuneration of Group Executive Committee The total remuneration of the members of the GEC for 2008 comprised the value of cash compensation, pensions, other remuneration and the value of the target equity grants made under the Group’s Long-Term Incentive Plan in 2008 and is calculated on the same basis as in 2007. Overall compensation of the GEC members in total and the overall compensation of the highest paid executive are set out in the following tables: Base compensation 14.5 13.5 Cash incentive awards earned for the year 14.4 24.1 Service Costs for pension benefi ts 5 4.8 4.7 Value of other remuneration 6 3.1 4.4 Value of target performance share and restricted share grants 7 9.9 13.0 Value of target performance option grants 7 9.9 9.7 Total in CHF 8 56.6 69.4 Total in USD as shown in the Remuneration report 53.9 57.6 1 The fi gures have been translated from U.S. dollars into Swiss francs using the relevant exchange rates throughout the year. 2 The remuneration shown in the table does not include any business related expenses incurred in the performance of the members’ services. 3 On the basis of 12 GEC members all of whom served during the full year 2008.
4 On the basis of 12 GEC members of whom ten served during the full year 2007. 5 The amounts refl ect the total value of pension benefi ts accruing to members of the GEC during 2008 and 2007, respectively, calculated on the basis of the Service Costs for the company as assessed under IAS 19 accounting principles. Service Costs value the amount of the pension benefi ts accruing during the year and for defi ned contribution plans takes the amount of the company contribution paid during the year. Service Costs do not include the interest cost on accrued benefi ts, adjustments for actuarial gains and losses, nor the expected return on any assets held.
6 Includes employee benefi ts, expatriate allowances, perquisites, benefi ts-in-kind and any other payments due under employment contract. Benefi ts-in-kind have been valued using market rates.
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 3.4 million (CHF 3.7 million) in 2008 and to USD 2.6 million (CHF 3.1 million) in 2007. 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.
4 Includes employee benefi ts, expatriate allowances, perquisites, benefi ts-in-kind and any other payments due under the employment contract. Benefi ts-in-kind have been valued using market rates.
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 24 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 336.50 for 2008 and CHF 355.75 for 2007) and the valuation of the restricted share grants based on the share price on the date of the grants.
One of the GEC members retired at the end of 2008. No termination payments were made.
No benefi ts (or waiver of claims) have been provided to former members of the GEC during the year 2008, nor during the year 2007. Former members of the GEC are eligible to continue their mortgage loans following retirement on similar terms as when they were employed, in line with the terms available to employees in Switzerland as stated above. In this respect, one former member, Mr Eckert, held an outstanding mortgage loan of CHF 3,000,000 as at December 31, 2008 and 2007, with a reduced interest rate of 2.5% (2.25% in 2007) applying on the fi rst CHF 1,500,000. Apart from this, no former members of the GEC had any outstanding loans, advances or credits as of December 31, 2008, and 2007.
Number of Zurich Financial Services shares 1Directors’ shareholdings as of December 31
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, 2008 and of 2,000 shares as of December 31, 2007 for Mr. Schiro which are held by family run charitable foundations.
The following tables show how the totals of vested share options owned by the GEC members as at December 31, 2008 and 2007, are distributed according to the grants identifi ed in the tables “Summary of outstanding options.”
The following tables set out additional details of the options outstanding for members of the GEC as at December 31, 2008 and 2007, respectively. Further details can be found in the unaudited Remuneration report, pages 44 to 61.
2 These fi gures are based on the issued share capital as of December 31, 2008. They may change following a resolution of the Board of Directors dated February 14, 2007, according to which the remaining contingent capital shares for employees may be issued (as described in note 8). Treasury shares are not entitled to dividends.
The Board of Directors proposes a dividend of CHF 11.00 per share to the Annual General Meeting on April 2, 2009.
Manfred Gentz as of December 31 as of December 31 in CHF thousands in CHF thousands 6847_p272-289.indd 2876847_p272-289.indd 287 25/2/09 13:51:5025/2/09 13:51:50
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.
Opinion In our opinion, the fi nancial statements for the year ended December 31, 2008 comply with Swiss law and the company’s articles of incorporation.
We further confi rm that the proposed appropriation of available earnings (page 287) complies with Swiss law and the company’s articles of incorporation. We recommend that the fi nancial statements submitted to you be approved.
Basic earnings per share 23.53 47.63 Diluted earnings per share 23.35 47.11 Book value per share, as of December 31 167.92 229.39 Nominal value per share 0.10 0.10 Price at end of period 227.00 332.50 Price period high 336.50 393.25 Price period low 175.80 296.00 1 Proposed gross dividend, subject to approval by shareholders at the Annual General Meeting 2009; expected payment date as from April 7, 2009.
Zurich Financial Services shares are listed on the SIX Swiss Exchange and traded on the “EU-regulated” segment of SWX Europe; ticker symbol: ZURN; the Swiss security number (Valorennummer) is 1107539. Trading in Zurich Financial Services shares on SWX Europe is conducted in Swiss francs.
On February 14, 2007 the Board of Zurich Financial Services authorized a share buy-back program. 3,432,500 fully paid shares, with a nominal value CHF 0.10, were bought back at an average price of CHF 364 per share, at a total cost of CHF 1.2 billion. The shareholders at the Annual General Meeting on April 3, 2008 approved a share capital reduction by CHF 343,250 from CHF 14,554,682 to CHF 14,211,432 by cancelling these 3,432,500 registered shares. The effective date of the capital reduction was June 27, 2008.
The shares registered in the share ledger as of December 31, 2008, were owned by 111,852 shareholders of whom 106,150 were private individuals holding 20% of the registered shares (12% of all issued shares), 2,071 were foundations and pension funds holding 7% of the registered shares (or 5% of all issued shares), and 3’631 were other legal entities holding 73% of the registered shares (or 45% of all issued shares).
Zurich offers its shareholders the opportunity to deposit a range of Zurich Financial Services securities free of charge at SIX SAG AG 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 6848_p290-296.indd 2936848_p290-296.indd 293 25/2/09 13:53:5725/2/09 13:53:57
Business Review 2008 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 German, French and English.
Financial Report 2008 The Financial Report contains detailed information about Zurich’s fi nancial performance, its structure, executive bodies, risk management, corporate governance and remuneration. It is available in German, French and English, with the fi nancials in English only.
Business operating profit is a measure that is the basis on which we manage all our business units. It indicates the underlying performance of our business units by eliminating the impact of financial market volatility and other non-operational variables. Business operating profit reflects adjustments for shareholders’ taxes, net capital gains on investments and impairments (except for the capital markets and banking operations included in Other Businesses and investments in hedge funds and certain securities held for specific economic hedging purposes), policyholders’ share of investment results for the life businesses, non-operational foreign exchange movements, and significant items arising from special circumstances, including gains and losses on divestments of businesses. Adjusted business operating profit is adjusted for notional investment income on the difference between the average actual International Financial Reporting Standards (IFRS) equity and the average allocated IFRS equity using one global swap rate. Allocated IFRS equity is equal to a segment’s pro rata share of the Group’s risk-based capital at the respective period end. These measures are not a substitute for net income as determined in accordance with IFRS.
Combined ratio is a performance measure that indicates the level of claims and net technical expenses during the period relative to earned premiums and policy fees. It is calculated as earned premiums and policy fees minus the net underwriting result, divided by net earned premiums and policy fees.
Embedded value (EV) principles is a methodology using a “bottom-up” market consistent approach, which explicitly allows for market risk. In particular, asset and liability cash flows are valued using risk discount rates consistent with those applied to similar cash flows in the capital markets, and options and guarantees are valued using market consistent models calibrated to observable market prices.
Insurance deposits are deposits, similar to customer account balances, not recorded as revenues. However, the fees charged on insurance deposits are recorded as revenue within the gross written premiums and policy fees line item. These deposits arise from investment contracts and insurance contracts that are accounted for under deposit accounting. They represent the pure savings part, which is invested.
New business annual premium equivalent (APE) is calculated as new business annual premiums plus 10 percent of single premiums. Present value of new business premiums (PVNBP) is calculated as the value of new business premiums discounted at the risk-free rate.
Gross management result is a performance measure calculated as management fees and other related revenues minus management and other related expenses, which include amortization and impairments of intangible assets.
The Financial Report is published in English, German and French. In the case of inconsistencies in the German and French translations, the English original version shall prevail.
This report is printed on Hello Silk paper. This paper is made from 100% virgin wood fi ber from well-managed forests independently certifi ed according to the rules of the Forest Stewardship Council (FSC). It is manufactured at a mill that is certifi ed to ISO14001 and EMAS environmental standards. The mill uses pulps that are totally chlorine free (TCF), and some pulp is bleached using an elemental chlorine free (ECF) process. The inks used in printing this report are all vegetable-based.
Printed end of February 2009 by St Ives Westerham Press Ltd., England, ISO14001, FSC certifi ed and CarbonNeutral®.