Our customers are at the heart of all we do. Zurich HelpPoint captures this customer focus, and our commitment to deliver when it matters.
This document is printed on Hello Silk paper. The paper is made from 100% virgin wood fiber from well-managed forests independently certified according to the rules of the Forest Stewardship Council (FSC). It is manufactured at a mill that is certified 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.
Consolidated Financial Statements 139 Report of the Statutory Auditor 264 Signifi cant Subsidiaries 266 Embedded Value Report 270 Holding Company 304 Report of the Statutory Auditor 322 Shareholder Information 326 Financial Calendar 330 Contact Information 330 Glossary 331
Continued transformation of operating platforms to bolster • the effectiveness and effi ciency of our business
Group investments average invested assets 2 187,579 185,558 1% Group investments result, net 6,082 5,805 5% Group investments return (as % of average invested assets) 3.2% 3.1% 0.1 pts
Financial Highlights2 Zurich Financial Services Group Annual Report 2009Financial Report 2009 02_Financial_Highlights_8211_Eng.indd 202_Financial_Highlights_8211_Eng.indd 2 25/2/10 13:48:5525/2/10 13:48:55
Key Performance IndicatorsFinancial Report 2009Zurich Financial Services Group Annual Report 2009 3 02_Financial_Highlights_8211_Eng.indd 302_Financial_Highlights_8211_Eng.indd 3 24/2/10 19:48:0824/2/10 19:48:08
1 Dividend includes gross dividend and payout of nominal value reduction per registed share. 2 Restated.
1 Business Operating Profit (after tax) return on common shareholders’ equity. 2 Restated.
The Zurich Way Target of USD 2.7 billion for 2009 to 2011
RBC by segment Other Operating Businesses and Non-Core Businesses Farmers Global Life General Insurance
RBC by risk type Operational and business risk Market and credit risk Insurance risk (General Insurance & Life Insurance)
#1 largest employer liability insurer in the UK based on gross written premiums 2008
#2 largest commercial auto insurer in the U.S. based on direct written premiums 2008
We are an insurance-based fi nancial services provider with a global network of subsidiaries and offi ces in North America and Europe as well as in Asia-Pacifi c, Latin America and other markets. Founded in 1872, our Group is headquartered in Zurich, Switzerland. We employ approximately 60,000 people serving customers in more than 170 customers.
Activities Offers a broad range of life insurance, investments, savings and pension solutions to individuals and companies.
#1 largest life insurer in Spain based on gross written premiums 2009
Activities Farmers includes Farmers Re and Farmers Management Services, through which our Group manages the Farmers Exchanges, as well as Foremost, Bristol West and 21st Century products in the United States.
#3 largest personal lines homeowner carrier in the U.S. based on market share report 2008 Source: A.M. Best
Financial Report 2009Zurich Financial Services Group Annual Report 2009 9Message from the Chairman and CEO
We are proud to present to you a strong set of 2009 operating results. Our business operating profi t improved by 8 percent to USD 5.6 billion, and our net income increased by 6 percent to USD 3.2 billion. Furthermore, we ended 2009 with one of our strongest balance sheets ever, and a 17.2 percent business operating profi t after tax return on equity that exceeds our target.
Global Life achieved outstanding results, growing at a rapid pace while maintaining strong profi tability. Annual premium equivalents increased 19 percent in local currencies to USD 3.7 billion, refl ecting successful growth strategies across many product lines and distribution channels. In addition, the new business margin exceeded 21 percent, illustrating the value of the signifi cant structural change we are making in our life business.
This is the vindication of years worth of effort and planning. Since 2003 we have been strengthening our ability to compete on the basis of disciplined underwriting and reserving, and on our ability to manage risks on both sides of the balance sheet in an integrated way. Throughout the Zurich organization we have been working tirelessly to create a One Zurich approach across all these areas, and at the same time shifting responsibility for our performance steadily away from the vagaries of the market, and into our own hands.
While these measures form the pillars of our strength and stability, we also strive to make sure that our customers enjoy the benefi ts as broadly as possible. With an eye on the horizon for potential sources of operational risk, we prepared our business for the possibility of pandemic on a global level. Simultaneously those efforts informed the webinar and other outreach efforts we made to let our customers know what they could do to manage their own exposure to this same risk. In response to the fi nancial crisis and ongoing recession we have been engaging closely with policymakers to share our perspectives on regulatory reform, and have launched our own anti-fraud initiative to combat the generally observed increase in claims and non-claims fraud that tend to occur in recessionary periods. Such measures refl ect an organizational commitment to deal proactively with a changing risk landscape; they also aim to protect our customers against any unnecessary increase in the cost of insurance.
Although we received precious little certainty in 2009, one lesson will surely endure: fi nancial institutions must measure up to the scrutiny of their customers, and society, as never before. Trust and transparency will be the sine qua non for doing business in the post-crisis era. And while we make no assumptions about when that era may begin, we can state with confi dence that our sound business practices and solid Zurich brand have positioned us for market leadership now and in the future.
Going forward we are committed to becoming ever more transparent. Transparent in the profi ts we generate (see Financial Review, page 70), the risks we underwrite (see Insurance Risk, page 104), the management of our capital and investments (see Capital Management, page 130, and Investments, page 86), and in our management of the risks in our business (see Operational Risk, page 128). We are mindful as ever of the requirements of being a truly sustainable insurer, and aim to meet each of them on behalf of our customers, our shareholders, and society as a whole.
Our sound business practices and solid Zurich brand have positioned us for market leadership now and in the future.
All parts of the organization are engaged in identifying, measuring, managing, reporting on and monitoring the risks that could affect the achievement of our objectives. Guided by the rules and procedures codifi ed in the Zurich Risk Policy, the overarching aim of risk management at Zurich is to enable sound decision-making based on a holistic understanding of the relationship between risk and performance across our organization.
Engagement with external parties is another key element of risk management, and one that helps keep our risk perspective fresh. These parties include rating agencies, industry groups, mixed public-private forums, and our dedicated advisory councils, which bring together topic specialists from around the world.
Our fundamental method of controlling insurance risk is through underwriting discipline, instilled on a Group-wide level through The Zurich Way. We supplement those practices by refi ning the models and procedures we use to manage natural catastrophe risk. As a global insurer we were able to balance our exposures geographically, and use a combination of per-event and annual-catastrophe covers (a form of reinsurance). This helps reduce the risks posed by both the frequency and the severity of natural catastrophes.
In line with our strategic asset allocation, we reduced our equity holdings in favor of fi xed income securities. We continue to diligently apply processes to manage market risk, we test extreme scenarios and analyze market hotspots, and risk mitigation actions have been taken to manage the effects of market fl uctuations on our asset/liability position and Risk-Based Capital. More generally, we maintain our overall commitment to investing only in risks we understand, a position that has served us well over the long term.
With regard to capital, our policy is to manage our capital position by allocating capital to businesses earning the highest risk-adjusted returns and pooling risks and capital as much as possible to operationalize our global risk diversifi cation, subject to local and Group regulatory solvency requirements and ratings agency capital adequacy constraints. As of December 31 we had an excess of USD 12.7 billion in eligible equity or a Solvency I ratio of 198 percent. We also use an internal Risk-Based Capital (RBC) model, according to which available fi nancial resources exceeded RBC by USD 11 billion.
Through these and many other ways we strive to stay ahead of potential problems, thereby protecting our foundation of stability and strength so that we can continue to help our customers.
Zurich is locked on course to seek out and exploit opportunities for profi table growth. Such opportunities arise when we bring product, customer and distribution excellence to our target markets, through our existing businesses and through the acquisition of new ones. Putting the strengths of all our businesses together, we can achieve a growth outcome that is greater than the sum of our parts.
Profi table growth is also achieved organically, as when we are successful in delivering on our proven strategies. At Global Life, we’re achieving excellent results by sticking to our six-pillar strategy of meeting the needs of three global customer groups – private banking customers, international and expatriate customers, and corporate life & pensions customers – through three global distribution channels – agents, independent fi nancial advisers and brokers, and banks. The approach is working: despite turbulent markets, Global Life increased new business APE by USD 406 million to USD 3.7 billion in 2009 and by 19 percent on a local currency basis.
Notable successes from 2009 came from Global Life, from North America Commercial (NAC), and from the collaboration between Europe General Insurance (EGI) and Global Corporate in Europe.
Our North America Commercial division has led in implementing Zurich Lean, especially in underwriting. The Lean philosophy is key to eliminating waste, simplifying business processes and speeding up product and service delivery, and gives shape to the division’s dedication to continuous improvement and operational excellence.
And in one of the single greatest achievements in operational transformation in 2009, EGI has combined with Global Corporate in Europe to create one single European Claims Organization. This new center for claims will not only ensure that our customers’ claims experience meets one high Zurich standard, but will further the claims experience as one that instills loyalty, rather than depletes it.
Through our entire organization, and over the next fi ve years, ongoing transformation activities are taking The Zurich Way to the next level of operational excellence. Altogether, these transformative efforts are the key to building a one Zurich global organization that is committed to delivering when it matters.
We also managed to anticipate risks and communicate mitigation strategies with commercial customers on such topics as pandemic fl u, Directors & Offi cers liability, supply chain risk, and many more. Our customers are at the heart of all we do.
We run a people business. The strong relationships we enjoy with our customers form its foundation. We depend on our customers’ willingness to grant us their fi duciary trust, and we honor that trust by putting those relationships at the heart of all we do.
As illustrated throughout this report, we are dedicated to forging a deep understanding of our customers’ needs, treating them like individuals, and making sure they feel comfortable talking with us and confi dent that we will listen.
We also depend on continued strong relations with the people who work alongside us in the market. Brokers, agents, fi nancial advisors and other distribution partners are vital to our business. Only by maintaining strong relationships with them, and inspiring them with our customer focus, can we be sure that the connection to customers is open so that we can follow through on delivering the right solutions when it really matters. And since our business is growing, both organically and inorganically, we strive to reap the rewards of diversity, drawing from the range of perspectives and cultures represented throughout our Group. After all, synthesizing different views is the principal means by which we will expand and improve.
Today we have global succession planning structures in place, a global approach to leadership development, global performance management, and global systems for professional development through our global learning management system. We invest in measuring employee motivation and engagement across the Group, and monitor our ability to retain our talented teams, especially high performers. To our customers, these systems underlie our ability to provide an experience that meets one high Zurich standard, no matter how they have come to us, and they link us to each other, forming inter-connections that allow us to exploit our global reach as effi ciently as possible.
Perhaps the greatest evidence of the effi cacy of these systems comes from our top offi ce, to which we have welcomed our new CEO, Martin Senn. Like many of us who have committed to a career with Zurich, Mr. Senn has been promoted from within to take on greater responsibility for upholding the Zurich legacy, and making it even stronger. With Zurich’s longstanding commitment to putting people fi rst, we know that his is far from an isolated example.
We are committed to continually validating all elements of our strategy against the broader aim of being a responsible and sustainable company. At Zurich, we believe being a responsible, sustainable company is an element of good management and a core component of how we do business. In our core business practices, our propositions and services, and in our engagements with the communities in which we live and work, we proactively address social, environmental and governance issues of rightful concern to our stakeholders. We recognize that our needs are inextricably linked and work hard to contribute to sustainable development and shape a better future for our Group, our people and society.
Our Corporate Responsibility Strategy Group, which is formed by functional and business leaders, oversees our corporate responsibility performance and activities at the Group level; implementation responsibilities and actions lie within the core business. In addition, several of Zurich’s business units have established comprehensive corporate responsibility programs of their own. Close cooperation with our business units is integral to the implementation of the overall Group corporate responsibility strategy and to leverage the best practices being pioneered throughout our Group.
To deliver when it matters to all our stakeholders in a responsible, sustainable manner is at the core of how we do business and what Zurich stands for. To see concrete examples of what we have achieved in advancing on our goal of becoming an ever more responsible and sustainable company this year, from supporting local cultural activities to changing core business processes, please see the 2009 Business Review, or visit our Web site: www.zurich.com/ corporateresponsibility.
Chief Executive Offi cer 2 John Amore Chief Executive Offi cer General Insurance 3 Annette Court Chief Executive Offi cer Europe General Insurance 4 Mario Greco Chief Executive Offi cer Global Life 5 Mike Foley Chief Executive Offi cer North America Commercial 6 Paul N. Hopkins Chairman of the Board of Farmers Group, Inc. and Chief Executive Offi cer Americas 7 Axel P. Lehmann Group Chief Risk Offi cer 8 Geoff Riddell Chairman of Global Corporate and Chief Executive Offi cer Asia-Pacifi c and Middle East 9 Martin Senn 2
This report describes the Group’s approach to corporate governance and illustrates the main elements of corporate governance within the Group. It includes the information required by the Directive on Information Relating to Corporate Governance of the SIX Swiss Exchange (effective January 1, 2007, as amended on July 1, 2009). It also explains how, in 2009, the Group complied with the Swiss Code of Best Practice for Corporate Governance, issued in 2002 by economiesuisse, as amended in October 2007. Furthermore, the Group continues to publish a Risk management and internal control statement (see pages 48 to 49) in accordance with the UK Turnbull Guidance.
The principles of corporate governance and the standards described above have been incorporated and are refl ected in a number of documents, in particular in the Articles of Incorporation, the Organizational Rules and the Charters and Rules of the Board Committees. The Board’s Governance and Nominations Committee, which oversees the Group’s governance, regularly measures that governance against best practice standards and ensures compliance with corporate governance requirements.
The Group pursues a customer-centric strategy and is managed on a matrix basis, refl ecting both lines of business and geography, which is mirrored in the areas of responsibilities assigned to the members of the GEC. The GEC is headed by the CEO and includes the Chief Financial Offi cer, the Chief Investment Offi cer and the Group Chief Risk Offi cer. In addition, the business segments General Insurance, Global Life and Farmers and the business divisions North America Commercial, Global Corporate and Europe General Insurance are represented in the GEC. For further information on the GEC please refer to pages 37 to 41.
This management structure leads to the reporting of the Group based on the following primary business segments: General Insurance serves the property-casualty insurance needs of a wide range of customers, from individuals to • small and medium-sized businesses, commercial enterprises and major multinational corporations.
1 Due to a change in the Swiss Code of Obligations Zurich Financial Services was renamed “Zurich Financial Services Ltd” effective April 2, 2009. Throughout this document the new name Zurich Financial Services Ltd is used consistently even if reference is made to facts that occurred prior to the renaming of the company.
Global Life pursues a strategy with market-leading propositions in unit-linked and protection products through global • distribution and proposition pillars to develop leadership positions in its chosen segments.
Other Operating Businesses predominantly consist of the Group’s Headquarter and Holding & Finance activities. • In addition, certain alternative investment positions not allocated to core operating segments are carried in this segment.
Non-Core Businesses include insurance businesses that the Group does not consider core to its operations and that • are therefore mostly managed to achieve a benefi cial run-off. In addition, as from September 30, 2009, Non-Core Businesses also include the Group’s banking activities that, following a strategic review, are no longer seen to support the core insurance business, but as a useful adjunct to it.
Zurich Financial Services Ltd is listed on the SIX Swiss Exchange. Certain Group companies have listed debt issues under the Euro Medium Term Note Programme and other fi nancial instruments.
A list of the Group’s signifi cant subsidiaries including additional information on signifi cant subsidiaries that are listed can be found in this Financial Report on pages 266 to 268. For further information on the share listing of Zurich Financial Services Ltd, please refer to the Shareholder information on pages 326 to 330.
Zurich Financial Services Ltd is also not aware of any person or institution which, as of December 31, 2009, directly or indirectly, alone or with others, exercised or was a party to any arrangements to exercise control over Zurich Financial Services Ltd.
Capital structure Share capital As of December 31, 2009, the ordinary share capital of Zurich Financial Services Ltd amounted to CHF 14,747,306.80 divided into 147,473,068 fully paid registered shares with a nominal value of CHF 0.10 each. The Board of Directors will propose to the shareholders at the Annual General Meeting on March 30, 2010 a regular dividend of CHF 16.00 per share before tax.
Authorized and contingent share capital As of December 31, 2009, the Board of Directors of Zurich Financial Services Ltd is authorized to increase the share capital by CHF 520,000.00, representing 5,200,000 fully paid registered shares with a nominal value of CHF 0.10 each by no later than April 3, 2011. The contingent share capital of Zurich Financial Services Ltd may be increased by an amount not exceeding CHF 1,000,000.00 by issuing up to 10,000,000 fully paid registered shares with a nominal value of CHF 0.10 each by exercising conversion and/or option rights which are granted in connection with the issuance of bonds or similar debt instruments by Zurich Financial Services Ltd or one of its Group companies in national or international capital markets; and/or option rights which are granted to the shareholders. Moreover, there is an additional contingent share capital of CHF 264,383.10, representing 2,643,831 fully paid registered shares with a nominal value of CHF 0.10 each, which may be issued to employees of the Group. For further information on the capital structure and the authorized and contingent share capital, please refer to the Consolidated fi nancial statements, note 23 on pages 219 to 222.
Changes of share capital during 2008 At the Annual General Meeting on April 3, 2008, shareholders approved a share capital reduction by CHF 343,250.00 from CHF 14,554,682.00 to CHF 14,211,432.00 by canceling 3,432,500 registered shares that were bought back by Zurich Financial Services Ltd under the share buy back program announced on February 15, 2007. The effective date of the capital reduction was June 27, 2008.
As of December 31, 2008, the authorized share capital amounted to CHF 600,000.00, representing 6,000,000 registered shares with a nominal value of CHF 0.10 each. During the year 2008, 8,300 shares were issued to employees out of contingent share capital. As a result, on December 31, 2008 the share capital amounted to CHF 14,212,262.00 (142,122,620 shares) and the contingent capital as specifi ed in Article 5ter(1a) of the Articles of Incorporation amounted to CHF 548,182.80 (5,481,828 shares) and the other contingent share capital as specifi ed in Article 5ter (2a) of the Articles of Incorporation amounted to CHF 319,427.90 (3,194,279 shares).
Changes of share capital during 2009 As of December 31, 2008, Zurich Financial Services Ltd had bought back 3,750,500 of its registered shares over a second trading line within its buy back program authorized by the Board of Directors on February 13, 2008. In March 2009, the Board of Directors decided not to propose the destruction of these shares to the Annual General Meeting of shareholders but to keep the shares as treasury shares for use in connection with the funding of potential acquisitions in the future or for employee share-based compensation. This rededication of the shares has been approved by the Swiss Takeover Board.
At the Annual General Meeting on April 2, 2009, the shareholders approved an increase in both authorized and contingent share capital to a new maximum of CHF 1,000,000.00 each, allowing for enhanced fi nancial fl exibility of the company for future capital management. On April 17, 2009, Zurich Financial Services Ltd placed 4,800,000 new shares issued under its authorized share capital and 1,914,096 rededicated treasury shares, bought back under the share buy back program authorized in 2008, with institutional investors via an Accelerated Bookbuild. This capital increase reduced the authorized capital to CHF 520,000.00. The proceeds from the capital increase executed on April 17, 2009 and the rededicated treasury shares were used in connection with the funding of the acquisition of 21st Century completed on July 1, 2009.
Capital reduction by canceling shares that have been bought back under the share buyback program announced on February 15, 2007 343,250.00 3,432,500 0.10 Newly issued shares from contingent capital 830.00 8,300 0.10
Shares and participation certificates Zurich Financial Services Ltd’s shares are registered shares with a nominal value of CHF 0.10 each. The shares are fully paid. Pursuant to Article 14 of the Articles of Incorporation, each share carries one vote at shareholders’ meetings and entitles the registered holder to exercise all other membership rights in respect of that share, provided registration in the share register has been effected.
Some interests in shares are held by investors in the form of CREST Depository Interests (CDIs)1 or American Depositary Receipts (ADRs)2. As of December 31, 2009, investors held 215,267 CDIs (representing 215,267 Zurich Financial Services Ltd’s shares) and 26,468,060 ADRs (representing 2,646,806 Zurich Financial Services Ltd’s shares).
Profit sharing certificates Zurich Financial Services Ltd has not issued profi t sharing certifi cates.
Registration as a shareholder requires a declaration that the shareholder has acquired the shares in his or her own name and for his or her own account. Nominees holding Zurich Financial Services Ltd’s shares may for the benefi t of, or as nominee for, another person be registered for up to 200,000 shares with voting rights notwithstanding that the nominee does not disclose the identity of the benefi cial owner. A nominee, however, is entitled to be registered as shareholder with voting rights of more than 200,000 shares if the nominee undertakes to disclose the identity of each benefi cial owner and to inform the benefi cial owners about corporate actions, to consult as to the exercise of voting rights and pre-emptive rights, to transfer dividends and to act in the interests and in accordance with the instructions of the benefi cial owner.
Convertible bonds and options Zurich Financial Services Ltd had no public convertibles or options outstanding as of December 31, 2009. For information on employee share option plans, please refer to the Consolidated fi nancial statements, note 25 on pages 228 to 231.
Vice Chairman of the Board Member of the Governance and Nominations Committee Member of the Remuneration Committee 19971 2010
Susan Bies American 62 Director Member of the Risk Committee 2008 2010
Victor Chu British 52 Director Member of the Governance and Nominations Committee 2008 2010
Thomas Escher Swiss 60 Director Member of the Remuneration Committee 2004 2012
Fred Kindle Swiss 50 Director Member of the Audit Committee 2006 2011
Vernon Sankey British 60 Director Chairman of the Remuneration Committee 19981 2012
Rolf Watter Swiss 51 Director Member of the Audit Committee 2002 2010 1 Mr Pidoux has served on the board of Zurich Insurance Company Ltd since 1997. In 1998, after the merger between B.A.T. Financial Services and Zurich Insurance Company (the “Merger”), he assumed offi ce as member of one or more boards of the then Group holding structure consisting of Zurich Group Holding (then called Zurich Financial Services), Allied Zurich p.l.c. and Zurich Allied AG. The Group structure was reorganized in October 2000 (“Unifi cation”). Mr Sankey was also a member of several boards of the Group holding structure that was established with the Merger. Since Unifi cation both have served on the Board of Zurich Financial Services Ltd.
Members of the Board of Directors, as of 04_Corporate_Governance_7412_Eng.indd 2904_Corporate_Governance_7412_Eng.indd 29 24/2/10 20:03:0724/2/10 20:03:07
Victor L.L. Chu graduated with a LL.B from the University College London in 1979. He is admitted to practice law in England and Hong Kong. Since 1982 he has practiced in the fi eld of corporate, commercial and securities laws, with special emphasis on China and regional investment transactions. From 1995 to 2000, Mr. Chu was deputy secretarygeneral of the International Bar Association. Since 1988 he has served as chairman of First Eastern Investment Group, a leading direct investment fi rm focusing on China. He is also chairman of First Eastern Investment Bank Limited and FE Securities Limited. Over the past 20 years he has served at various times as director and council member of the Hong Kong Stock Exchange, a member of the Hong Kong Takeovers and Mergers Panel, a member of the Hong Kong Securities and Futures Commission’s advisory committee and a part-time member of the Hong Kong Government’s Central Policy Unit. He is currently a foundation board member of the World Economic Forum and co-chairs the Forum’s International Business Council. He is also chairman of the International Chamber of Commerce’s Commission on Financial Services and Insurance and vice chairman of Asia House in London. Mr. Chu is a trustee of the Londonbased International Business Leaders Forum and the WWF in Hong Kong. He also serves as a member of the dean’s council of the Kennedy School at Harvard and a member of the Mayor of London’s International Business Advisory Council. Mr. Chu’s other civic associations include service on the advisory bodies of the International Crisis Group, Chatham House, the Beijing Music Festival Foundation and the Atlantic Council of the USA.
Armin Meyer graduated with a PhD in electrical engineering from the Swiss Federal Institute of Technology (ETH) and joined BBC Brown Boveri Ltd. in 1976 as a development engineer. In 1980, he became head of research and development for industrial motors, and in 1984, he took over as head of the international business unit for electrical power generators. In 1988, Mr. Meyer became president of ABB Drives Ltd. and in 1992, president of ABB Power Generation Ltd. From 1995 until 2000, he was executive vice president of ABB Ltd. and a member of that group’s executive committee. In 1997, he became a member of the board of directors of Ciba Specialty Chemicals at the time of its spin-off from Novartis. He became chairman of the board of Ciba Specialty Chemicals in autumn 2000 and served in that role until April 2009. From January 1, 2001 until December 31, 2007, in addition, he acted as chief executive offi cer. Mr. Meyer is a member of the executive committee and the foundation board of the international Institute for Management Development, IMD, in Lausanne, Switzerland. From 2001 to 2008, he was a member of the European Chemical Industry Council (Cefi c) in Brussels, Belgium.
Internal organizational structure The Board is chaired by the Chairman, or in his absence the Vice Chairman. It has a program of topics that is presented at its meetings throughout the year. It is regularly informed of developments regarding the Group and is provided with timely information in a form and of a quality appropriate for it to discharge its duties in accordance with the standards of care set out in Article 717 of the Swiss Code of Obligations.
The Board consists entirely of Directors who are non-executive, independent from the Management, and who have never held an executive position in the Group. The Governance and Nominations Committee annually reviews the independence of the Board members and reports its fi ndings to the Board for fi nal determination. Board members are also subject to rules and regulations to avoid confl icts of interest and the use of inside information. A self-assessment of the full Board is carried out once a year. In 2009, the Board’s self-assessment was carried out with the support of an external consultant who conducted personal interviews with each Board and GEC member. A detailed report was produced for and considered by the Board.
The CEO attends the Board meetings ex offi cio. By invitation, Board meetings are attended by the members of the GEC on a regular basis. Other executives attend these meetings from time to time. The majority of Board meetings includes private sessions of the Board, without the participation of Management.
The Remuneration Committee comprises four members of the Board. The Remuneration Committee evaluates and proposes to the Board the principles for remuneration for the Group and the Board. It also proposes the Directors’ remuneration to the Board for approval. Based on the remuneration principles, it negotiates the terms and conditions of employment of the CEO and reviews those of the members of the GEC – as negotiated by the CEO – before submitting them to the Board for approval. The Remuneration Committee approves the employment arrangements for additional members of the GMB as negotiated by the CEO and liaises with him on other important employment, salary and benefi t matters. It also reviews the performance relating to the senior management’s short-term and long-term incentive plans. To assist in the review of the compensation structures and practices, the Remuneration Committee has retained its own independent advisor, Hewitt Associates. The Remuneration Committee met fi ve times (once together with the Governance and Nominations Committee) in 2009, with attendance of 100 percent. Details of the Group’s remuneration principles are given in the Remuneration report on pages 50 to 67.
The Risk Committee has four members. In 2009, it met six times; attendance on average was 92 percent. The Risk Committee oversees the Group’s risk management, in particular the Group’s risk tolerance, including agreed limits that the Board regards as acceptable for Zurich to bear, the aggregation of agreed limits across the Group, the measurement of adherence to agreed risk limits, and the Group’s risk tolerance in relation to anticipated capital levels. It further oversees the Group-wide risk governance framework, including risk management and control, risk policies and their implementation as well as the risk strategy, and the monitoring of operational risks. The Risk Committee also reviews the methodologies for risk measurement and the Group’s adherence to its risk limits and reviews the performance of the Risk Management function. It further reviews, with business management and the Group risk management function, the Group’s general policies and procedures, and satisfi es itself that effective systems of risk management are established and maintained. The Risk Committee receives periodic reports from Group Risk Management and assesses whether signifi cant issues of a risk management and control nature are being appropriately addressed by Management in a timely manner. For further information on risk governance please refer to the Risk Review on pages 101 to 103.
To facilitate an on-going exchange of information between the Risk Committee and the Audit Committee, the Chairman of the Audit Committee is a member of the Risk Committee and the Chairman of the Risk Committee is a member of the Audit Committee. The Chairman of the Board regularly participates in Audit and Risk Committee meetings as a guest.
Areas of responsibility of the Board and Management In addition to determining the overall strategy of the Group and the supervision of senior management, the Board addresses key matters in the area of strategy, fi nance, structure and organization and business development. The Board approves the Group strategic plan and the annual fi nancial plans developed by Management and reviews and approves the annual, half-year and quarterly fi nancial statements of Zurich Financial Services Ltd and the Group. It establishes guidelines for overall business policies and capital allocation and approves major changes in the Group’s business activities, including major lending and borrowing transactions and major business developments, such as acquisitions or disposals of businesses or assets, investments or new businesses, mergers, joint ventures and cooperations. The Board also considers other matters of strategic importance to the Group.
Furthermore, the Group has adopted and implemented a coordinated, formalized and consistent approach to risk management and control. Information concerning the Group’s risk management processes is included in the Risk Review starting on page 97.
The internal audit function and the external auditors as well as the compliance function also assist the Board in exercising its controlling and supervisory duties. Information on major areas of activities of these functions is set out on pages 45 to 47.
In addition, to enhance its understanding and assessment of the challenges and risks Zurich may face, the Group increasingly seeks external expertise and perspective. As of the end of 2009, the Group had four panels of leading academics, business and industry experts to provide feedback and insight. They are not corporate bodies of the Group and have no decision-making powers. They provide expertise and advice to senior management or certain functions of the Group. In particular, the International Advisory Council is mandated to provide an external perspective and expertise to the CEO and to members of the GEC and GMB on the Group’s growth and public policy strategies. The Investment Management Advisory Council offers feedback on Zurich’s investment results and strategy and on achieving superior risk-adjusted returns relative to the liabilities for the Group’s invested assets. The Natural Catastrophe Advisory Council provides insight into the patterns of occurrence, predictability and destructiveness of catastrophes, and feedback about Zurich’s approach to such catastrophes in order to help improve the effectiveness of its underwriting and reinsurance purchasing. The Group’s Climate Change Advisory Council provides insight and advice on issues associated with climate change.
James J. Schiro American 63 Chief Executive Offi cer John Amore American 61 Chief Executive Offi cer General Insurance Annette Court British 47 Chief Executive Offi cer Europe General Insurance Mike Foley American 47 Chief Executive Offi cer North America Commercial Mario Greco Italian 50 Chief Executive Offi cer Global Life Paul Hopkins American 53 Chairman of the Board of Farmers Group, Inc. & Chief Executive Offi cer Americas Axel Lehmann Swiss 50 Group Chief Risk Offi cer Geoff Riddell British 53 Chairman of Global Corporate & Chief Executive Offi cer Asia-Pacifi c & Middle East Martin Senn Swiss 52 Chief Investment Offi cer Dieter Wemmer German 52 Chief Financial Offi cer
For information on contractual termination benefi ts, please see page 45.
Biographies James J. Schiro graduated from St. John’s University, New York, with a bachelor’s degree in business administration. He holds an honorary Doctor of Commercial Science degree from the same university. He joined Price Waterhouse in 1967 and held various management positions before becoming chairman and senior partner of the U.S. fi rm in 1994. After the merger of Price Waterhouse and Coopers & Lybrand in 1998, he became global chief executive offi cer of PricewaterhouseCoopers. He joined Zurich in March 2002 as Chief Operating Offi cer – Group Finance and was appointed Chief Executive Offi cer of the Group two months later. He is a member of the board of directors of PepsiCo. and the supervisory board of Royal Philips Electronics. He also serves on various not for profi t boards and is a trustee for St. John’s University in New York, the Institute of Advanced Study in Princeton, New Jersey, vice chairman of the American Friends of the Lucerne Festival and sits on the advisory board of the Tsinghua School of Economics and Management in Beijing, China.
Paul N. Hopkins holds a Bachelor of Science degree in business from the Eastern Illinois University and completed the Advanced Executive Education program of the Wharton Business School. He joined the Farmers organization in 1978 as an agent and subsequently became a Farmers employee, where he held positions of increasing responsibility in the sales and marketing area. In 1992 he transferred to the Los Angeles Regional Offi ce as Assistant Vice President, Regional Operations. He became Vice President Agencies in 1995, and Senior Vice President Agencies two years later. In 1998, he was made Senior Vice President and Chief Marketing Offi cer, a position he held until January 1, 2000, when he was appointed Senior Vice President of State Operations. His next assignment, as Senior Vice President of Strategic Alliances, became effective in April 2001. In August 2002 he was promoted to Executive Vice President, Market Management, and two years later became President of Farmers Group, Inc. Mr. Hopkins was appointed a member of Zurich’s Group Management Board in December 2004. From April 2005 until December 2008, he was chief executive offi cer of Farmers Group, Inc. and a member of Zurich’s Group Executive Committee. In 2006, Mr. Hopkins was named chairman of the board of ZFUS Services, LLC, Zurich’s North American shared services platform. As of January 1, 2009 he was appointed CEO Americas and chairman of the board of Farmers Group, Inc. Mr. Hopkins further serves as a member of the board of trustees for the American Institute for Chartered Property Casualty Underwriters, as well as a member of the board of the Insurance Information Institute.
Richard Kearns American 59 Chief Administrative Offi cer Michael Paravicini Swiss 48 Chief Information Technology Offi cer Yannick Hausmann Swiss 42 Group General Counsel Mario Vitale American 54 Chief Executive Offi cer Global Corporate Robert Woudstra American 64 Chief Executive Offi cer Farmers Group, Inc.
As of January 1, 2009, Markus Hongler assumed the function of CEO of Zurich Insurance plc, Mario Vitale became CEO Global Corporate and Robert Woudstra was appointed CEO Farmers Group, Inc. and became member of the Group Management Board. Inga Beale assumed the new position of Global Chief Underwriting Offi cer as from June 1, 2009. Besides her new role, she remains Head of Organizational Transformation, and oversees the Internal Consulting function. Reto Schiltknecht left the organization during 2009 and Yannick Hausmann was appointed to replace him as Group General Counsel.
Management contracts Zurich Financial Services Ltd has not transferred key parts of management by contract to other companies (or individuals) not belonging to (or employed by) the Group.
A shareholder with voting rights can attend shareholders’ meetings of Zurich Financial Services Ltd in person. He or she may also authorize, in writing, another shareholder with voting rights or any person permitted under the Articles of Incorporation and a more detailed directive of the Board to represent him or her at the shareholders’ meeting. Based on the Articles of Incorporation, minors or wards may be represented by their legal representatives, married persons by their spouses and a legal entity may be represented by a person authorized to bind it by his or her signature, even if such persons are not shareholders. Furthermore, authority of representation may be given to the Independent Representative of Shareholders, to a statutory representative or to representatives of bank accounts who do not need to be shareholders themselves. Zurich Financial Services Ltd may under certain circumstances authorize the benefi cial owners of the shares that are held by professional persons as nominees (such as a trust company, bank, professional asset manager, clearing organization, investment fund or other entity recognized by Zurich Financial Services Ltd) to attend the shareholders’ meetings and exercise votes as proxy of the relevant nominee. For further details, see page 28.
Governance on Zurich’s Web site www.zurich.com ( nancialreports/ introduction.htm). Similar documents regarding half-year and quarterly results reportings are also available for all shareholders on Zurich’s Web site. Shareholders may opt to receive printed versions of one or all of the aforementioned documents.
Zurich Financial Services Ltd will hold its Annual General Meeting on March 30, 2010. As part of the agenda, the Chairman, the Chief Executive Offi cer and the Chief Financial Offi cer will present a review of the business of the Group for the year 2009. The meeting will be conducted in the Hallenstadion in Zurich-Oerlikon. An invitation setting out the agenda for this meeting and an explanation of the proposed resolutions will be issued to shareholders by Zurich Financial Services Ltd at least 20 days before the meeting.
For addresses and further upcoming important dates, please refer to the Shareholder information starting on page 326 (Financial calendar on page 330).
Changes of control and defense measures Duty to make an offer The Articles of Incorporation of Zurich Financial Services Ltd do not provide for an opting out or opting up in the meaning of Articles 22 and 32 of the Federal Act on Stock Exchanges and Securities Trading. Therefore, mandatory offers have to be submitted when a shareholder or a group of shareholders acting in concert exceed 33 1/3 percent of the issued and outstanding share capital.
Clauses on changes of control Employment agreements have been entered into with the members of the GEC, setting out the terms and conditions on which they are employed. With regard to termination benefi ts, the longest period of severance for members of the GEC is two years, including the notice period, and no additional severance benefi ts are provided in the case of a change of control.
The Group’s share-based compensation programs include regulations regarding the impact of a change of control. These regulations provide that in the case of a change of control, the Plan Administrator (the Remuneration Committee or the CEO, as applicable) has the right to have the existing share obligations rolled over into new share rights or to provide consideration for such obligations that are not rolled over. Participants who lose their employment as a result of a change of control have an automatic right to the vesting of share obligations. No other benefi ts are provided to the members of the Group’s senior management in case of a change of control.
PwC and its predecessor organizations, Coopers & Lybrand and Schweizerische Treuhandgesellschaft AG, have served as external auditors of Zurich Financial Services Ltd and its predecessor organizations since May 11, 1983. As in 2000, the Group conducted in 2007 a tender process, inviting all major auditing fi rms to submit their work programs and tender offers for 2008 and subsequent years. After a thorough review, the Group came to the conclusion that PwC’s work program and offer prevailed.
Additional fees Total fees (including expenses and value added taxes) in the year 2009 for additional services (e.g., tax services or special audits required by local law or regulatory bodies) performed by PwC and parties associated with them for Zurich Financial Services Ltd or one of the Group’s companies amounted to USD 4.2 million (USD 2.8 million in 2008).
Group Audit The internal audit function of the Group (“Group Audit”) is tasked with providing independent and objective assurance to the Board, the Audit Committee, the CEO and Management. It does this by developing an annual audit plan, using a risk-based methodology, which is updated quarterly to refl ect changes in risk and priority. The plan is based on the full spectrum of business risks. Group Audit executes the plan by bringing a systematic and disciplined approach to evaluate, comment upon and improve risk management, control and governance processes. It assesses the suitability, reliability and functioning of the business organization with regard to technical and personnel matters and reviews the effi ciency and effectiveness of the Group’s control systems. In addition, the internal audit function reviews the fi nancial reporting processes and compliance with the Group’s business regulations. Key issues raised by Group Audit are communicated to the responsible management function, the CEO and the Audit Committee using a suite of reporting tools.
The Group has adopted an integrated assurance strategy in its overall assessment of the risk and control environment. Through an increased focus on information exchange and coordination, the effectiveness and effi ciency of assurance delivery, chiefl y between the Group’s risk, compliance and internal audit functions, and external audit, has been improved.
the Audit Committee – with oversight over internal control matters. •
The internal control system focuses on key fi nancial, operational and compliance controls. The system encompasses the policies, processes and activities that contribute to the reliability of fi nancial reporting, the effectiveness and effi ciency of operations and the compliance with laws and regulations. In 2009, continuing progress was made to further develop and improve the Group’s control system while maintaining the focus on the effectiveness of the overall internal control environment.
Processes and controls in the organization are subject to risk-based reviews by Management, the Group’s internal audit function (“Group Audit”) and Group Risk Management. Management reviews include the effective implementation of policies and procedures including claims, investment, underwriting, actuarial, treasury, accounting and reporting, as well as effectiveness of control for signifi cant locations and information technology systems. The Board, the Audit and Risk Committees receive regular and, as needed, special reports from the Group Chief Risk Offi cer, Group General Counsel, Head of Group Compliance, Chief Financial Offi cer and Group Controller, Head of Group Audit and fi nancial and business senior management on the adequacy of the control structure in place. In addition, the external auditors regularly report their conclusions, observations and recommendations arising from their independent audit process. The reports relate to matters such as a) signifi cant changes in risks, the business and the external environment; 04_Corporate_Governance_7412_Eng.indd 4804_Corporate_Governance_7412_Eng.indd 48 25/2/10 12:54:5625/2/10 12:54:56
b) manage-ment’s monitoring and control systems; c) signifi cant control issues, if any; and d) the effectiveness of the Group’s external reporting process.
This Remuneration Report provides all the information that is outlined in chapter fi ve of the Directive on Information Relating to Corporate Governance of the SIX Swiss Exchange and the Swiss Code of Best Practice, as amended with effect from July 1, 2009 and October 15, 2007, respectively. Included is also all the information required by articles 663bbis and 663c paragraph 3 of the Swiss Code of Obligations. The structure of the Remuneration report is in alignment with the requirements of the Swiss Code of Obligations and the above mentioned SIX Directive and the Swiss Code of Best Practice. The fi rst part of the report describes the general principles and the governance framework, and the second part provides details of each of the remuneration elements.
Remuneration principles Directors Recognizing that Zurich is a global insurance-based fi nancial services organization, the level of Directors’ fees has been established to ensure the Group’s ability to attract and retain high caliber individuals.
The fees paid to members of the Board of Directors of Zurich Financial Services Ltd comprise a fi xed cash element and an award in Zurich Financial Services Ltd shares. The shares awarded are sales-restricted for three years.
The fees paid to Directors (including the portion allocated as shares) are not subject to the achievement of any specifi c performance conditions.
Zurich is committed to providing competitive total compensation opportunities that attract, retain, motivate and reward employees to deliver outstanding performance as viewed by customers and shareholders. The compensation philosophy is an integral part of the overall offering to employees. Zurich has a clearly defi ned performance management process which supports the achievement of the overall business strategy and operating plans and links individual pay with business and personal performance. This is delivered through the compensation framework overseen by the Group Executive Committee, the Remuneration Committee of the Board and the Board of Directors itself.
Total compensation Total compensation is infl uenced by a number of factors such as scope and complexity of the role, business performance and affordability, individual performance, internal equity, and legal requirements. Target opportunities are benchmarked to median levels in clearly defi ned markets and take into account internal equity considerations. The compensation mix between base salary and variable pay is also aligned with local market practices and internal relativities. Zurich is transparent in the communication of how the reward structure is defi ned and the processes used for decision making. Total compensation includes the following elements: Element Type Description
Generally paid within an 80 – 120% range of relevant market median
Vesting determined from three year performance measurement based on TSR and ROE achievements
Benefi ts positioned towards median 05_Remuneration_Report_7416_Eng.indd 5105_Remuneration_Report_7416_Eng.indd 51 25/2/10 17:22:5225/2/10 17:22:52
Base salary Base salary is the fi xed pay for the role performed determined by the scope and complexity of the role and is reviewed annually. Overall base salary structures are positioned to manage salaries around the relevant market medians. At an individual level, base salary is generally paid within an 80 percent – 120 percent range of the appropriate market median. Key factors are the individual’s overall experience and performance.
The Group’s variable pay plans are reviewed annually both as to their content and participants. The plans can be terminated, modifi ed, changed or revised at any time.
Remuneration of CEO Remuneration Committee Board of Directors Remuneration of Members of GEC (excluding CEO)
To assist decision making on both Board and Group Executive Committee remuneration, benchmarking studies are carried out regularly. To assess market practices and market compensation levels, the compensation structures and practices of the companies in the Dow Jones Titan Insurance Index are analyzed. This Index comprises the largest insurance companies based in both Europe and in the United States. This analysis is supplemented by additional benchmarking studies as appropriate, e.g. by looking at practices within the large Swiss Market Index (SMI) companies in Switzerland or at similar companies in other countries.
In reviewing compensation structures and practices on a regular basis, the Remuneration Committee receives independent advice from the executive compensation practice at Hewitt Associates Ltd. This adviser was appointed by the Committee and is accountable to it. Hewitt Associates is a large, international human resources fi rm and, as such, other practices within Hewitt undertake work with the Group from time to time. The Committee does not consider the independence and integrity of the advice it receives from Hewitt to be compromised by these separate assignments. For their activities, management is supported by a variety of fi rms operating in the fi eld of international executive compensation.
Directors Directors’ fees All Directors receive a fee, which is paid partly in cash and allocated partly in three-year sales-restricted Zurich Financial Services Ltd shares, for their memberships of the Boards of Zurich Financial Services Ltd and Zurich Insurance Company Ltd. The shares are provided as part of the overall fee which is not subject to the achievement of any defi ned performance targets. There were no changes in the fee structure in 2009 compared with 2008.
The current annual basic fee for the Vice Chairman is USD 330,000, of which an amount of USD 68,500 is allocated to sales-restricted Zurich Financial Services Ltd shares. The annual basic fee for the Chairman of the Board of Zurich Financial Services Ltd and Zurich Insurance Company Ltd during 2009 was USD 700,000 and one-third of the total amount, i.e. USD 233,500 is allocated to sales-restricted Zurich Financial Services Ltd shares. Neither the Chairman nor the Vice Chairman receive any additional fees for their Committee work.
The following tables set out the fees paid to the Directors in 2009 and 2008: Basic Fee
Of which allocated in Shares 6,11 1 The remuneration shown in the tables does not include any business-related expenses incurred in the performance of the Board members’ services. 2 Committee members receive a cash fee of USD 40,000 for all Committees on which they serve, irrespective of the number. The Committees on which the Board members serve are set out in the Corporate Governance Report on page 29.
3 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 29. 4 Directors who reside in the United States receive a fee of USD 10,000 per annum. 5 The cash fees are defi ned in U.S. dollars, but paid in the actual currencies where the Board members reside, based on the relevant exchange rate at the dates of the payment. 6 The shares allocated to the Directors are sales-restricted for three years. 7 As of June 30, 2009, Mr Gentz was allocated 1,296 shares and the other Board members were allocated 380 shares based on a full year’s membership. The share price
Governance 9 In addition to the fees received as Directors of Zurich Financial Services Ltd and Zurich Insurance Company Ltd, Mrs Bies, Mr Nicolaisen and Mr de Swaan earned fees for their board memberships of the following Zurich Financial Services Group companies: – Mrs Bies, Mr Nicolaisen a pro rata fee of USD 10,000 for their membership of the board of Zurich Holding Company of America (ZHCA) from October 19, 2009 (based on an annual fee of USD 40,000). The amounts shown in the table also include a U.S. Residence Fee of USD 10,000.
10 In line with applicable laws, Zurich paid the company-related portion of contributions to social security systems, which amounted to USD 80,670 in 2009. The corresponding contributions amounted to USD 69,305 in 2008. Any personal contributions of the Directors to social security systems are included in the amounts shown in the table above. 11 As of June 30, 2008, Mr Gentz was allocated 861 shares and the other Board members were allocated 252 shares based on a full year’s membership. The share price
12 The following Board membership changes occurred in 2008: – Mrs Bies and Mr Chu joined the Board on April 3, 2008 and received pro rata fees in cash and 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.
Termination arrangements for members of the Board of Directors who gave up their functions No Director gave up his or her function during 2009. At the Annual General Meeting in 2008, Gerhard Schulmeyer retired from the Boards. No termination payments were paid to him.
Compensation for former Directors No benefi ts (or waiver of claims) have been provided to former members of the Boards during the year 2009, nor were any provided during the year 2008.
Share plans for Directors The members of the Board of Directors of Zurich Financial Services Ltd and Zurich Insurance Company Ltd do not participate in any of the share-based incentive plans established for executive management. However, as mentioned above, part of the fees of the Directors of Zurich Financial Services Ltd are allocated to three-year sales-restricted shares. As mentioned above, the shares provided to Directors are part of the overall fee and are not subject to the achievement of any defi ned performance targets.
Number of Zurich Financial Services Ltd shares1, as of December 31Directors’ shareholdings 05_Remuneration_Report_7416_Eng.indd 5605_Remuneration_Report_7416_Eng.indd 56 24/2/10 20:06:2724/2/10 20:06:27
Share options held by Directors The members of the Boards of Directors of Zurich Financial Services Ltd and Zurich Insurance Company Ltd do not participate in any share option plan for executive management. Hence, no share options have been allotted in the year under review or in earlier years. None of the Directors, nor any related parties to them, held any share options or conversion rights over Zurich Financial Services Ltd shares as of December 31, 2009 or as of December 31, 2008.
Group Executive Committee Remuneration of the Group Executive Committee The total remuneration of the members of the Group Executive Committee for 2009 comprised the value of cash compensation (including short-term cash incentive), pensions, other remuneration and the target equity grants made under the Group’s Long-Term Incentive Plan in 2009.
The distribution of the total remuneration in 2009 between the individual compensation elements is set out in the following charts. This is on the basis of the target values for the performance related compensation.
Value of other remuneration paid in 2009 Members of the Group Executive Committee received other remuneration in 2009 in relation to employee benefi ts, expatriate allowances, perquisites, benefi ts-in-kind and any other payments due under each member’s employment contract. The total value of the other remuneration elements in 2009 was USD 2.1 million. Benefi ts-in-kind have been valued using market rates.
The level of vesting will be determined on the basis of the following matrix: Level of vesting for Share and Share Option Targets
If the actual performance is below the minimum levels, there will be no vesting and the awards will be lost. However, if the Group’s ROE achievements are above the minimum level and the relative TSR is below the second quartile, the Board, based on a recommendation of the Remuneration Committee, will determine whether, due to exceptional circumstances, a partial vesting of the shares and/or options is appropriate. The Board, based on a recommendation of the Remuneration Committee, can further increase or decrease the calculated vesting level for specifi c members to refl ect individual circumstances.
The following equity grants were made in 2009: Performance share grants The total number of target performance share grants made to members of the Group Executive Committee during 2009 was 46,001. This compares with an equivalent fi gure of 29,491 made for 2008. The value of the target performance share grants made on April 3, 2009 to members of the Group Executive Committee in 2009 was USD 8.0 million at the date of grant based on the assumption of 100 percent vesting and a share price of CHF 198.10 on the day prior to the grant.
in %Long-Term Incentive Plan vesting matrix 05_Remuneration_Report_7416_Eng.indd 6005_Remuneration_Report_7416_Eng.indd 60 25/2/10 19:34:4625/2/10 19:34:46
Restricted share grants Restricted share grants supplement the regular long-term incentive grants and are used in extraordinary circumstances mainly for new hires to compensate for the loss of their equity rights with their previous employer. This restricted share grants vest typically over three to fi ve years following the date of grant and will be forfeited if the holder of such share grants voluntarily leaves the company before the vesting date and the employment relationship terminates.
No restricted share grants were made to members of the Group Executive Committee during 2009 and 2008.
Share option grants The total number of target share option grants made to members of the Group Executive Committee during 2009 was 146,867. This compares with an equivalent fi gure of 148,154 for 2008. The value of the target share option grants made on April 3, 2009 was USD 8.0 million at the date of grant, based on the assumption of 100 percent vesting and the Black-Scholes valuation of the options at the date of grant.
The number of share option awards that vested in 2009 to members of the Group Executive Committee serving in 2009 from the share option grants made in 2006, 2007 and 2008 was 210,569. This represented a basic vesting level of 170 percent of target for the 2007 and 2008 grants and 126 percent of target for the 2006 grant given the actual ROE and TSR performance achievements.
4 The amounts refl ect the total value of pension benefi ts accruing to members of the GEC during 2009 and 2008, 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.
5 Includes employee benefi ts, expatriate allowances, perquisites, benefi ts-in-kind and any other payments due under employment contracts. Benefi ts-in-kind have been valued using market rates.
6 The share and share option grants will vest in the future according to achievement of defi ned performance conditions. The value of the share and share options assumes that the grant will vest in the future at 100% of the target level with the valuation of the options based on the Black-Scholes option pricing model as set out in Note 25 to the consolidated fi nancial statements, the valuation of the target performance share grants based on the share price on the day prior to the grants (CHF 198.10 for 2009 and CHF 336.50 for 2008) and the valuation of the restricted share grants based on the share price on the date of the grants.
Based on these fi gures, the value of the total remuneration for all members comprises 35 percent (prior year 39 percent) in fi xed compensation elements (comprising base compensation, service costs for pension benefi ts and other remuneration) and 65 percent (prior year 61 percent) in performance related components (comprising the cash incentive awards under the Short-Term Incentive Plan together with the value of the target performance share grants, restricted share grants and share option grants).
Highest total remuneration for Group Executive Committee members The highest paid remuneration for the Group Executive Committee members was USD 11.85 million for Mr. James J. Schiro, the Group’s Chief Executive Offi cer. This amount refl ects his 2009 base salary, the cash incentive earned for 2009, the value of pension benefi ts, other remuneration and the value of the target performance shares and share options granted in 2009.
Termination arrangements for members of the Group Executive Committee who gave up their functions during the year One of the Group Executive Committee members retired at the end of 2008. During 2009 one member retired at the end of April 2009 and another member retired at the end of the year. No termination payments were made.
All options mentioned above entitle the holder to subscribe for one share of Zurich Financial Services Ltd at the exercise price stated.
as of December 31, 2009Summary of outstanding options, 2009 as of December 31, 2008Summary of outstanding options, 2008 05_Remuneration_Report_7416_Eng.indd 6405_Remuneration_Report_7416_Eng.indd 64 24/2/10 20:06:3324/2/10 20:06:33
G. Riddell, Chairman of Global Corporate & Chief Executive Offi cer Asia-Pacifi c and Middle East 16,918 52,533 12,410 44,846 M. Senn, Chief Investment Offi cer 11,662 31,729 6,780 16,019 P. van de Geijn 5 n.a. n.a. 10,952 44,034 D. Wemmer, Chief Financial Offi cer 12,612 48,868 9,267 36,630 1 None of the GEC members together with parties related to them held more than 0.5% of the voting rights as at December 31, 2009 or 2008, either directly or through share options.
Trading Plans To facilitate the sale of shares and the exercise of options for the members of the Group Executive Committee, the Board has approved the implementation of trading plans effective as of 2008. These plans allow members to sell shares and/or exercise share options under a pre-defi ned transaction program. Trading plans can only be established at a time when the Group Executive Committee member does not possess unpublished price-sensitive information with regard to the Group. Further, the fi rst transaction under a trading plan can only occur three months following the date it is established. The terms and conditions of the transactions have to be defi ned and they cannot be changed. All trading plans of Group Executive Committee members require the approval of the Chairman of the Board. Once established, transactions take place on a monthly basis including during close periods. All transactions made under a trading plan are reported to the SIX Swiss Exchange according to the rules on disclosure of management transactions and recorded as such as being carried out as part of a trading plan.
Personal loans for members of the Group Executive Committee As of December 31, 2009, the total of loans, advances or credits outstanding for Group Executive Committee members was CHF 1,073,000 (prior year CHF 1,082,000). These loans represent mortgage loans in Swiss francs, the terms of which are similar to those available to all employees in Switzerland. Mortgage loans are issued with a reduced interest rate of up to one percentage point less than the prevailing market interest rates on mortgage balances, up to a maximum of CHF 1,500,000. As at December 31, 2009, and 2008 respectively, the highest mortgage loan was held by Mr. Lehmann (Group Chief Risk Offi cer), in the amount of CHF 773,000 (CHF 782,000 in 2008) which had an overall interest rate of 2.1 percent (2.6 percent in 2008).
Diluted earnings per share (in CHF) 24.21 23.35 4% Book value per share (in CHF) 209.27 167.92 25%
Return on common shareholders’ equity (ROE) 12.6% 12.1% 0.5 pts Business Operating Profi t (after tax) return on common shareholders’ equity (BOPAT ROE) 17.2% 16.8% 0.4 pts 1 Parentheses around numbers represent an adverse variance.
Farmers • business operating profi t increased by USD 198 million or 15 percent to USD 1.6 billion. Farmers Management Services business operating profi t increased by USD 124 million or 10 percent to USD 1.3 billion. This increase was primarily driven by the 21st Century acquisition, which has been integrated into Farmers in line with original targets and contributed USD 81 million, and also by disciplined expense management. Farmers Re business operating profi t increased by USD 74 million, or 48 percent compared with the prior year, to USD 228 million as investment income accumulated as a result of the increased participation in the All Lines quota share reinsurance treaty.
Non-Core Businesses, comprising the Group’s run-off businesses and the Group’s banking activities which are no longer seen to support the core insurance business but are viewed as a useful adjunct to it, reported a business operating profi t of USD 143 million for the discrete fourth quarter 2009, resulting in an overall loss for the full year 2009 of USD 290 million compared with a loss of USD 423 million in 2008. The loss for the full year primarily resulted from an increase in certain life insurance reserves predominantly addressing policyholders’ behavior and from increased loan loss provisions in the banking operations.
Performance overview for the year ended December 31, 2009 06_Financial_Review_8212_Eng.indd 7106_Financial_Review_8212_Eng.indd 71 24/2/10 20:09:4124/2/10 20:09:41
Farmers Management Services • management fees and other related revenues increased by 9 percent to USD 2.7 billion driven by an 8 percent increase in gross earned premiums in the Farmers Exchanges, which the Group manages but does not own. 21st Century contributed USD 214 million to revenues while Small Business Solutions generated an increase in revenue of USD 31 million compared with the prior year. Since September 2008, Farmers Re increased its participation in the All Lines quota share reinsurance treaty with the Farmers Exchanges in various steps from 5 percent to 37.5 percent for the second half of 2009, which resulted in an increase in assumed written premiums of USD 3.2 billion to USD 6.6 billion compared with 2008. Effective December 31, 2009 the participation was reduced to 35 percent.
As a result of the strong operating performance and lower levels of net capital losses on investments due to recovering capital markets, net income attributable to shareholders increased by USD 176 million to USD 3.2 billion for the full year, with net income attributable to shareholders for the discrete fourth quarter of 2009 increasing for the fi fth consecutive quarter since the third quarter 2008. This strong result was achieved despite charges of USD 265 million in 2009 from losses on hedges used to protect the economic solvency position included in net capital gains/(losses) on investments and impairments. The shareholders’ effective tax rate was 21.9 percent for the year ended December 31, 2009 compared with 19.0 percent for the year ended December 31, 2008. The 2008 full year shareholders’ effective tax rate was positively affected by one-off items, mainly the use of previously unrecognized net operating losses.
Gross written premiums and policy fees 34,157 37,151 (8%) Net earned premiums and policy fees 29,071 30,922 (6%) Insurance benefi ts and losses, net of reinsurance (20,622) (22,441) 8% Net underwriting result 930 594 57% Net investment income 3,070 3,711 (17%) Net non-technical result (excl. items not included in BOP) (651) (657) 1% Business operating profi t 3,463 3,535 (2%) Loss ratio 70.9% 72.6% 1.6 pts Expense ratio 25.9% 25.5% (0.4 pts) Combined ratio 96.8% 98.1% 1.3 pts
in USD millions, for the years ended December 31 in USD millions, for the years ended December 31 06_Financial_Review_8212_Eng.indd 7306_Financial_Review_8212_Eng.indd 73 24/2/10 20:09:4224/2/10 20:09:42
Gross written premiums and policy fees 7,602 7,888 (4%) Net underwriting result 231 (602) nm Business operating profi t 787 47 nm Loss ratio 74.7% 92.2% 17.5 pts Expense ratio 20.4% 20.2% (0.2 pts) Combined ratio 95.1% 112.4% 17.3 pts
Gross written premiums and policy fees decreased by USD 286 million or 4 percent to USD 7.6 billion in U.S. dollar terms and by 1 percent on a local currency basis. The Group’s focus continues to be on underwriting and pricing discipline, and as a result average rate increases of 5.3 percent were achieved on business written in 2009, following a number of years of declining rates. As the market for corporate customers remains competitive, loss of business where customers do not accept the terms required to meet the technical price continued to be experienced. However, despite the challenging conditions, signifi cant growth in a number of targeted areas has been achieved, with particularly strong performances in European fi nancial lines and in Asia-Pacifi c, while the recently launched Middle East business has also made a positive contribution.
in USD millions, for the years ended December 31 06_Financial_Review_8212_Eng.indd 7506_Financial_Review_8212_Eng.indd 75 24/2/10 20:09:4324/2/10 20:09:43
Gross written premiums and policy fees 9,864 11,215 (12%) Net underwriting result 257 243 6% Business operating profi t 1,243 1,238 – Loss ratio 68.5% 70.3% 1.7 pts Expense ratio 28.4% 27.1% (1.3 pts) Combined ratio 96.9% 97.4% 0.5 pts
Gross written premiums and policy fees decreased by USD 1.4 billion or 12 percent to USD 9.9 billion. Underwriting and pricing discipline was maintained, based on differentiated rating actions, resulting in 2.4 percent average rate increases on business written in 2009. Businesses in the construction and automotive industries suffered most from the economic environment. However, the Group was able to realize growth in its Global and National Strategic Broker relationships. The environmental business has also grown as well as certain segments in the specialties business unit and target customer segments in middle markets. Although the environment generally led to signifi cantly lower customers’ insurable exposures in chosen segments, targeted customer retention remained at comparatively high levels, and as such, the customer base was maintained.
in USD millions, for the years ended December 31 06_Financial_Review_8212_Eng.indd 7606_Financial_Review_8212_Eng.indd 76 24/2/10 20:09:4424/2/10 20:09:44
Gross written premiums and policy fees 14,556 15,946 (9%) Net underwriting result 222 788 (72%) Business operating profi t 1,120 1,864 (40%) Loss ratio 73.6% 69.9% (3.7 pts) Expense ratio 24.8% 24.7% – Combined ratio 98.4% 94.7% (3.7 pts)
The net underwriting result decreased by USD 567 million or 72 percent to USD 222 million both in U.S. dollar terms and on a local currency basis. This decrease is refl ected in a 3.7 percentage point increase in the combined ratio to 98.4 percent due to the motor personal lines underwriting results in Italy and the UK which refl ect the diffi cult local market environments. In the UK, the loss ratio deteriorated driven by an overall increase in personal injury claims, as well as the so-called credit hire practices, which drive up replacement vehicle costs. These developments are responded to through rate increases and through a dedicated claims management strategy. In Italy, mitigating actions against deteriorating loss experience in the personal motor business were continued. These mitigating actions included increased rates and improvement actions on underperforming distributors. Outside these two European markets, personal lines businesses performed well. However, the competitive market environment puts pressure on volume and generally strong margins. The commercial lines business underwriting profi t increased mainly as a result of favorable large and natural catastrophe loss experience. The overall net expense ratio was largely fl at as disciplined expense management and focus on margin enhancement compensated for strategic investments and higher commission levels.
Gross written premiums and policy fees decreased by USD 58 million or 2 percent to 2.7 billion in U.S. dollar terms while increasing by 3 percent on a local currency basis. Local currency growth was achieved in Latin America where premiums increased by 17 percent compared with the prior year. The growth in Latin America was primarily a result of the acquisition in Brazil in the fourth quarter of 2008 together with organic growth in Argentina and Venezuela. In Asia-Pacifi c underlying growth was offset by the transfer of premiums in Asia and Australia to Global Corporate, excluding the impact of these transfers, premiums in Asia-Pacifi c increased by 7 percent.
in USD millions, for the years ended December 31 06_Financial_Review_8212_Eng.indd 7806_Financial_Review_8212_Eng.indd 78 24/2/10 20:09:4424/2/10 20:09:44
of which: Amortization and impairments of intangible assets (346) (224) (55%) Depreciation and impairments of property and equipment (34) (42) 19%
1 Assets under management comprise Group and unit-linked investments that are included in the Global Life balance sheet plus assets that are managed by third parties, for which we earn fees.
Business operating profi t in USD millions, for the years ended December 31 in USD millions, for the years ended December 31 06_Financial_Review_8212_Eng.indd 7906_Financial_Review_8212_Eng.indd 79 24/2/10 20:09:4524/2/10 20:09:45
New business value, after tax, increased by USD 29 million or 4 percent in U.S. dollar terms, to USD 782 million and by 9 percent on a local currency basis, benefi ting from increased new business value in both individual and corporate protection products. By country, the new business value improved from increased volumes in Spain and Luxembourg, improved margins in the UK, higher sales volumes in Latin America, and the benefi t of lower interest rates for protection products in the U.S. and Australia. This improvement was partially offset by Germany and Switzerland with negative impacts from lower interest rates on savings products and lower sales due to the market conditions earlier in the year. Overall the new business margin after tax decreased by 1.8 percentage points to 21.3 percent compared with the prior year, primarily refl ecting the impact of lower interest rates impacting Germany new business margins.
Business operating profi t decreased by USD 13 million or 1 percent in U.S. dollar terms to USD 1.5 billion, but an increase of 5 percent on a local currency basis. In the U.S., business operating profi t included net one-off benefi ts of USD 159 million largely due to updated mortality assumptions. The underlying result of the Americas businesses overall remained strong. Improved investment results drove the increase in business operating profi t in Switzerland. Changes to actuarial assumptions benefi ted Hong Kong, contributing to the improved underlying result in Emerging Markets in Asia. In the UK, USD 48 million of the reduction of USD 168 million in business operating profi t reported in U.S. dollars resulted from currency translation effects. The UK underlying performance in local currency was impacted by fi nancial market effects, and in 2008 one-time benefi ts and favorable claims experience, partially offset in 2009 by reduced amortization of deferred acquisition costs and intangible assets as a result of assumption changes. In Germany, the result was in line with prior year on a local currency basis and in Ireland, the result decreased due to investments in the European Hub operating infrastructure. In Italy, included in the Rest of the World, and in Spain, the business operating profi t before interest, depreciation and amortization improved signifi cantly, with costs of fi nancing and amortization of intangible assets from recent acquisitions adversely impacting the overall business operating profi t.
Insurance deposits increased by USD 2.5 billion or 23 percent in U.S. dollar terms to USD 13.6 billion and by 35 percent on a local currency basis, primarily driven by the businesses acquired in Spain in the third quarter of 2008 and by the newly formed private banking client solutions business in Luxembourg.
Bank Distribution increased by USD 353 million or by 47 percent in U.S. dollar terms, to USD 1.1 billion and by 55 percent on a local currency basis. The new businesses acquired in Spain contributed USD 369 million through successful development of the business post acquisition including protection and savings campaigns. The UK business grew from the sale of newly introduced investment products.
International/Expats pillar decreased by USD 65 million or 20 percent in U.S. dollar terms, to USD 258 million and by 28 percent on a local currency basis. The lower sales, predominantly of investment products, refl ected reduced consumer confi dence caused by the market conditions earlier in the year.
Direct and Central Initiatives decreased by USD 203 million or 68 percent in U.S. dollar terms, to USD 94 million and by 64 percent on a local currency basis, mainly attributable to the effect of a major customer offer initiative in the UK in June 2008.
Farmers has moved aggressively to restructure and integrate the acquired 21st Century businesses which consequently added a substantial contribution to the Farmers Management Services and Farmers Exchanges, which the Group manages but does not own, results for the year 2009.
Management fees and other related revenues 2,690 2,458 9% Management and other related expenses (1,399) (1,317) (6%) Gross management result 1,291 1,142 13%
Other net income 35 60 (43%) Business operating profi t 1,326 1,202 10% Managed gross earned premium margin 7.2% 6.9% 0.3 pts
Business operating profi t increased by USD 124 million or 10 percent to USD 1.3 billion. This increase was driven by USD 81 million from 21st Century, which was acquired in July 2009, as well as disciplined expense management and an improvement of USD 10 million from Small Business Solutions, for which the rights to renew policies were acquired by the Farmers Exchanges, from Zurich North America in June 2008.
Management fees and other related revenues increased by 9 percent to USD 2.7 billion driven by an 8 percent increase in gross earned premiums in the Farmers Exchanges. 21st Century contributed USD 214 million of the increase in revenues while Small Business Solutions generated an increase in revenue of USD 31 million compared with the prior year.
Management and other related expenses increased by 6 percent, or USD 81 million. The additional business from 21st Century and Small Business Solutions resulted in an increase of USD 133 million which was offset by a decrease of USD 52 million compared with 2008 refl ecting the continued strict expense discipline and the benefi ts of ongoing operational transformation.
in USD millions, for the years ended December 31 06_Financial_Review_8212_Eng.indd 8306_Financial_Review_8212_Eng.indd 83 24/2/10 20:09:4724/2/10 20:09:47
Business operating profi t increased by USD 74 million, or 48 percent, to USD 228 million. The All Lines quota share reinsurance treaty with the Farmers Exchanges was increased in various steps from 5 percent to 37.5 percent for the second half of 2009 in connection with the acquisition of 21st Century. Effective December 31, 2009, the participation was reduced to 35 percent. As a result of these changes, overall gross written premiums and policy fees increased by USD 3.2 billion to USD 6.6 billion compared with the prior year. The net underwriting result remained fl at as the impact from increased cessions at a stable loss ratio was offset by an increase in the ceding commission on the All Lines quota share reinsurance treaty, as a result of changes to the underlying business mix in the Farmers Exchanges, which caused the increase of 1.5 percentage points in the expense ratio.
Business operating profi t: Holding and fi nancing (438) (656) 33%
Holding and fi nancing business operating loss improved by USD 219 million to a loss of USD 438 million. This was primarily driven by gains of USD 210 million resulting from the repurchases of subordinated debt and a favorable impact from movements in foreign currencies. Headquarters reported a business operating loss of USD 141 million compared with USD 90 million in the prior year due largely to lower revenues from reduced charges to our operating businesses.
Business operating profi t: Centre 160 (106) nm Banking activities (182) 53 nm Centrally managed businesses (279) (496) 44% Other run-off 10 126 (92%) Total business operating profi t (290) (423) 31%
Real estate held for investment 7,789 7,524 3,897 4,077 Mortgage loans 12,736 12,820 – – Policyholders’ collateral and other loans 15,077 13,988 924 2 Equity method accounted investments 232 220 – –
Group investments have increased by 9 percent or USD 16.7 billion to USD 196 billion since December 31, 2008. In local currency terms, Group investments increased by 5 percent, driven by positive revaluations on debt and equity securities refl ecting positive market developments and investments of new cash fl ows. The quality of the Group’s investment portfolio remains high. Investment grade securities comprise 98.4 percent of our debt securities. The Group’s investment policy remains conservative and it continues to selectively reduce those risks for which it is believed that no appropriate compensation is received or which incur high regulatory capital costs.
Net investment result 6,082 5,805 5% Net investment return on Group investments 3.2% 3.1% 0.1 pts Movements in net unrealized gains/(losses) on investments included in total equity 5,674 (3,902) nm Total investment result, net of investment expenses 1 11,756 1,903 nm
Total return on Group investments 6.3% 1.0% 5.2 pts 1 After deducting investment expenses of USD 243 million and USD 261 million for the years ended December 31, 2009 and 2008, respectively. 2 Excluding average cash received as collateral for securities lending of USD 335 million and USD 1.0 billion for the years ended December 31, 2009 and 2008, respectively.
Total return, net of investment expenses, on average Group investments was positive 6.3 percent, largely from the improvements in the value of debt securities. Debt securities, which are invested to match the Group’s insurance liability profi les, returned positive 7.1 percent. Equity securities returned positive 12.6 percent. Other investments, mainly real estate and mortgages, returned a positive 2.7 percent.
Total net investment income decreased by USD 1.2 billion, or 14 percent in U.S. dollar terms to USD 7.5 billion. Translating local currency income at stronger average U.S. dollar rates in 2009, contributed USD 376 million of this decrease. Net investment income yield was 4.0 percent, a decrease of 69 basis points compared with the prior year. This decrease was driven by cash balances yielding lower rates and lower income from equity securities.
Net unrealized gains have improved by USD 5.7 billion since December 31, 2008, due to a USD 1.6 billion decrease in net unrealized losses on equity securities as a result of the improvement in major global equity markets, as well as a USD 4.1 billion decrease in net unrealized losses on debt securities primarily as a result of narrowing credit spreads.
in USD millions, for the years ended December 31Performance of Group investments 06_Financial_Review_8212_Eng.indd 8706_Financial_Review_8212_Eng.indd 87 24/2/10 20:09:5024/2/10 20:09:50
in USD millions, for the years ended December 31Performance of unit-linked investments 06_Financial_Review_8212_Eng.indd 8806_Financial_Review_8212_Eng.indd 88 24/2/10 20:09:5024/2/10 20:09:50
Net losses and loss adjustment expenses incurred 24,639 24,145 20,590 22,388
Total net losses and loss adjustment expenses paid (23,689) (22,150) (20,235) (20,333)
Gross reserves for losses and loss adjustment expenses 68,086 65,218 63,476 61,396
As of December 31, 2009, the Group’s net reserves for loss and loss adjustment expenses increased by USD 2.9 billion to USD 55.9 billion compared with December 31, 2008. Of this increase, USD 1.9 billion was due to the effects of foreign currency translation. The remaining increase included the effects from the increased participation in the All Lines quota share reinsurance treaty with the Farmers Exchanges.
The increase in the total net reserves during the year included USD 1.1 billion favorable development emerging from reserves established in prior years, after allowing for asbestos charges in the third quarter of 2009 of USD 539 million. This favorable development is primarily attributable to the General Insurance business and breaks down into many individual movements by Business Division, country, line of business, and accident year. In the Global Corporate segment, favorable development of USD 257 million was approximately equally shared between North America and the rest of the world. North America Commercial favorable development of USD 146 million arose mostly from program and surety business. Europe General Insurance favorable development of USD 487 million arose from several European countries besides Italy where the Group experienced negative development of USD 100 million. The remaining favorable development came from Group Reinsurance, International Markets, and the assumed business from Farmers Re; this was somewhat offset by adverse development at Centre.
Reserves for life insurance contracts and liabilities for investment contracts The majority of the Group’s reserves for life insurance contracts and liabilities for investment contracts are attributable to Global Life. Life insurance reserves in other segments relate predominantly to companies that are in run-off or are centrally managed, and are included only in this fi rst table.
Net reserves as of January 1, 2009 154,700 17,278 171,978 Movements in net reserves 25,445 (181) 25,264 Net reserves as of December 31, 2009 180,145 17,096 197,242
Total reserves and liabilities for insurance and investment contracts, net of reinsurance, increased by USD 25.4 billion or 16 percent in U.S. dollar terms compared with December 31, 2008 and by 10 percent in local currency. The increase in local currency was primarily driven by the interest and bonuses credited to policyholders for unit-linked insurance and investment contracts as well as traditional reserves. The improvement in net premiums and claims in 2009 compared with the prior year was primarily driven by the change from net policyholder outfl ows to net policyholder infl ows in the unit-linked businesses in the UK, Spain, Germany and Luxembourg.
in USD millionsGroup reserves for life insurance contracts, net of reinsurance, and liabilities for investment contracts in USD millionsGlobal Life – Development of reserves and liabilities 06_Financial_Review_8212_Eng.indd 9106_Financial_Review_8212_Eng.indd 91 24/2/10 20:09:5224/2/10 20:09:52
Total operational and fi nancial debt 3,976 1,102 839 6,277 5,167 17,362 15,821 9.7%
Details of the debt issuances and repurchases are set out in note 22 of the audited Consolidated Financial Statements.
Proceeds from issuance of share capital 929 – 929 Proceeds from treasury share transactions 367 – 367
Share-based payment transactions 59 – 59 Total comprehensive income 7,628 85 7,714
The Board of Zurich Financial Services Ltd will propose for approval at the Annual General Meeting on March 30, 2010 a gross dividend of CHF 16.00.
Net cash provided by operating activities (2,470) 7,350 Net cash used in investing activities (581) (1,443) Net cash from (used in) fi nancing activities 2,448 (2,551) Foreign currency translation effects on cash and cash equivalents 870 (1,896)
Change in cash received as collateral for securities lending 316 (1,700)
The income statements are translated at average exchange rates. Throughout 2009, the U.S. dollar has on average been stronger against the Swiss franc and the euro and signifi cantly against the British pound compared with 2008. The result has been a reduction in U.S. dollar terms in gross written premium which was partially compensated by a favorable impact on insurance benefi ts and losses.
The Risk Review is an integral part of the Consolidated Financial Statements (except for Economic Capital Adequacy on pages 134–135).
Risk management framework At the heart of the risk management framework is a robust governance process with clear responsibilities for taking, managing, monitoring and reporting risks. We articulate the roles and responsibilities for risk management throughout the organization, from the Board of Directors and the Chief Executive Offi cer to our businesses and functional areas, thus embedding risk management in the business (see Risk Governance and Risk Management Organization on page 101).
One of the key elements of the Group’s risk management framework is to foster risk transparency by establishing risk reporting standards throughout the Group. We regularly report on our risk profi le, current risk issues, adherence to our risk policies and improvement actions both at a local and on a Group level. The Group has solid procedures in place for the timely referral of risk issues to senior management and the Board of Directors.
Various governance and control functions coordinate to help ensure that objectives are being achieved, risks are identifi ed and appropriately managed and internal controls are in place and operating effectively. This coordination is referred to as “integrated assurance.”
Various external stakeholders, among them regulators, rating agencies, investors and accounting bodies, are placing increasing emphasis on the importance of sound risk management in our industry.
New and emerging regulatory regimes, such as the Swiss Solvency Test and Solvency II in the European Union, emphasize a risk-based and economic approach, based on comprehensive quantitative and qualitative assessments and reports.
Rating agencies are increasingly interested in risk management as a factor in evaluating companies. Standard & Poor’s, a rating agency with a separate rating for Enterprise Risk Management, confi rmed our Group’s Enterprise Risk Management rating as “strong” in 2009. Reinsurance risk, credit risk and asset/liability management and market risk controls were upgraded from “strong” to “excellent.” Reserving risk, catastrophe risk and operational risk controls were upgraded from “adequate” to “strong.” Strategic and emerging risk management remain “strong.” After this latest review, Zurich is now rated either “strong” or “excellent” in all of Standard & Poor’s dimensions for Enterprise Risk Management.
We also seek external expertise from our International Advisory Council, Natural Catastrophe Advisory Council and Climate Change Advisory Council to better understand and assess our risks, particularly regarding areas of complex change. For discussion of these councils, refer to the Corporate Governance Report (unaudited). In addition, the Investment Management Advisory Council provides feedback to Investment Management on achieving superior riskadjusted returns versus liabilities for the Group’s invested assets.
We are also involved in a number of international industry organizations engaged in advancing the regulatory dialogue pertaining to insurance and fi nancial services. In 2009, Zurich senior executives contributed to the drafting of key papers issued by the CRO Forum (an organization composed of the chief risk offi cers of major European insurance companies and fi nancial conglomerates that focuses on developing and promoting industry best practices in risk management). Zurich contributed to the drafting of the paper “Insurance Risk Management Response to the Financial Crisis” (April 2009), in addition to papers on internal model admissibility and operational risk management. In 2010, Zurich’s Chief Risk Offi cer serves as vice chair of the CRO Forum. In addition, at the end of 2009, Zurich’s Chief Financial Offi cer assumed the chair of the CFO Forum (an organization composed of the chief fi nancial offi cers of major European insurance companies and fi nancial conglomerates particularly active in contributing to the development of new accounting and regulatory standards). Zurich is also a contributing partner to the annual report on global risks, a collaborative effort under the auspices of the World Economic Forum (WEF) and produced in conjunction with the WEF Global Risk Network.
(including regional / segment / division Chief Risk Offi cers and Local Risk Offi cers)
Board of Directors level The Board of Directors of Zurich Financial Services Ltd has ultimate oversight responsibility for the Group’s risk management. It establishes the guidelines for the Group’s risk management framework and key principles, particularly as articulated in the Zurich Risk Policy, and decides on changes to such guidelines and key principles, as well as transactions reaching specifi ed thresholds.
The Risk Committee of the Board serves as a focal point for oversight regarding the Group’s risk management, in particular the Group’s risk tolerance, including agreed limits that the Board regards as acceptable for Zurich to bear, the aggregation of these limits across the Group, the measurement of adherence to risk limits, and the Group’s risk tolerance in relation to anticipated capital levels. The Risk Committee further oversees the Group-wide risk governance framework, including risk management and control, risk policies and their implementation, as well as risk strategy and the monitoring of operational risks. The Risk Committee also reviews the methodologies for risk measurement and the Group’s adherence to its risk limits. The Risk Committee further reviews, with business management and the Group Risk Management function, the Group’s general policies and procedures and satisfi es itself that effective systems of risk management are established and maintained. It receives periodic reports from Group Risk Management and assesses 07_Risk_Review_7446_Eng.indd 10107_Risk_Review_7446_Eng.indd 101 24/2/10 20:10:4324/2/10 20:10:43
whether signifi cant issues of a risk management and control nature are being appropriately addressed by management in a timely manner. The Risk Committee assesses the independence and objectivity of the Group Risk Management function, approves its terms of reference, reviews the activities, plans, organization and quality of the function, and reviews key risk management principles and procedures.
To facilitate information exchange between the Audit Committee of the Board and the Risk Committee of the Board, the chairperson of the Audit Committee is a member of the Risk Committee and vice-versa. The Risk Committee met six times in 2009.
Group Executive level The Chief Executive Offi cer (CEO), together with the Group Executive Committee (GEC), oversees the Group’s performance with regard to risk management and control, strategic, fi nancial and business policy issues of Group-wide relevance. This includes monitoring adherence to and further development of the Group’s risk management policies and procedures. The Group Finance and Risk Committee and the Group Balance Sheet Committee regularly review and make recommendations on the Group’s risk profi le and signifi cant risk-related issues.
The management committees rely on output provided by technical committees, including: Asset/Liability Management and Investment Committee (ALMIC) – deals with the Group’s asset/liability exposure • and investment strategies and is chaired by the Group Chief Investment Offi cer.
At Corporate Center there are two centers of expertise: risk analytics and risk operations. The risk analytics department quantitatively assesses insurance, fi nancial market and asset/liability, credit and operational risks and is the Group’s center of excellence for risk quantifi cation and modeling. The risk operations department comprises operational risk management, the Internal Control Framework, IT risk management, Business Continuity Management and Disaster Recovery. It serves as the link between the risk management network (regions, segments, business divisions, business units and functions) and risk management at Corporate Center.
The decentralized risk management network consists of the Chief Risk Offi cers (CROs) of the Group’s regions, segments and business divisions, and the Local Risk Offi cers (LROs) of the business units and functions and their staff. While their primary focus is on operational and business-related risks, they are responsible for providing a holistic view of risk for their area. The CROs and LROs are part of the respective business’ management teams. While the LROs have a matrix reporting line to the regional, segment or business division CROs, the latter have a matrix reporting line to the Group Chief Risk Offi cer. The CROs of the Group’s major regions, segments and business divisions are members of the Group CRO’s executive leadership team.
In order to enable a consistent, systematic and disciplined approach to risk management, we categorize our main risks as follows: Strategic – the unintended risk that can result as a by-product of planning or executing a strategy• Insurance – risk associated with the inherent uncertainty regarding the occurrence, amount or timing of insurance • liabilities Market – risk associated with the Group’s balance sheet positions where the value or cash fl ow depends on • fi nancial markets Credit – risk associated with a loss or potential loss from counterparties failing to fulfi ll their fi nancial obligations• Liquidity – risk that the Group does not have suffi cient liquidity to meet its obligations when they fall due, or would • have to incur excessive costs to do so Operational – risk associated with the people, processes and systems of the Group and external events• Reputation – risk that an act or omission by the Group or any of its employees could result in damage to the Group’s • reputation or loss of trust among our stakeholders 07_Risk_Review_7446_Eng.indd 10307_Risk_Review_7446_Eng.indd 103 24/2/10 20:10:4424/2/10 20:10:44
Reinsurance for General Insurance and Life Insurance Our objectives for purchasing reinsurance are to provide market-leading capacity for our customers while protecting the balance sheet and optimizing the Group’s capital effi ciency. We follow a centralized purchasing strategy for both General Insurance and Life Insurance, and bundle programs where appropriate to benefi t from diversifi cation and economies of scale. We continue to use traditional reinsurance markets and other alternatives, such as catastrophe bonds, to protect Zurich against extreme single events and increased frequency of events. We are able to use our global reach in particular for catastrophe protection, where we have in place a combination of per event and annual aggregate covers, which protects our business both per event and by region, and also for multiple events across regions. This helps to reduce the risks posed by the frequency of catastrophes, as well as their severity.
Due to our strong balance sheet, we are able to structure and align our reinsurance programs to achieve an optimum risk/reward ratio. We are able to manage our risks so that we can retain a signifi cant and stable portion of premium, as shown in the illustration below for General Insurance.
Special lines include credit and surety, crime and fi delity, accident and health, and crop.• Worker injury includes workers compensation and employers liability.•
The Group’s underwriting strategy is to take advantage of the diversifi cation of general insurance risks across industries and geographic regions in which the Group operates. The Group seeks to optimize shareholder value by achieving its mid-term return on equity goals. Doing so necessitates a prudent, stable underwriting philosophy that aims to take advantage of our competitive strengths while avoiding risks with disruptive volatility. At the core of the Group’s underwriting is a robust governance process. Our four major processes for underwriting governance – underwriting strategy, authorities, referrals and reviews – are implemented at Group and local levels.
A fundamental component of managing our risks is underwriting discipline. We set limits on underwriting capacity, and cascade authority to individuals based on their specifi c expertise. Through The Zurich Way, we set appropriate pricing guidelines with a focus on consistent technical pricing across the organization. As part of these guidelines the Group requires the setting of a technical price according to common standards. The technical price is set in a way that allows producing a return on Risk-Based Capital in line with the Group’s target. The ratio of actual premium to technical price is a key performance metric, which is monitored continuously. Technical reviews confi rm whether underwriters perform within authorities and adhere to our underwriting philosophies and policies. Our global line of business networks share best practices across the globe, providing additional guidance and governance. We have governance procedures to review and approve potential new products to evaluate whether the risks are well understood and justifi ed by the potential rewards.
The Group closely monitors potential new emerging risk exposures. Zurich has an Emerging Risk Group, with crossfunctional expertise to identify, assess and recommend actions for such risks on a Group level. Emerging risks are phenomena whose full nature and effects are not yet known. They may affect the fi nancial results of our underwriting operations now, or in the future. Examples of such risks are the possible consequences of nanotechnology, electromagnetic fi elds, and genetically modifi ed organisms. In addition, the Group is engaged in the report on global risks with the World Economic Forum, where risks are considered from a broad macro-economic perspective. Zurich is also a standing member, and in 2010 chairs, the Emerging Risk Initiative of the CRO Forum.
+1% in net loss ratio Net income before tax (48) (93) (148) (20)
Table 1.a in USD millions, for the year ended December 31, 2009
Table 2.b in USD millions, for the year ended December 31, 2008
The models cover the major peril regions where we face potential exposure and therefore we now make incremental additions; in 2009, we added another climate-induced peril region (Mexico wind). Also, we continued our effort to extend our assessments by evaluating potential correlations between property and other lines of business such as engineering or marine for our major peril regions.
Life Insurance risk The risks associated with life insurance include: Mortality risk is the risk that actual policyholder death experience on life insurance policies is higher than expected.• Longevity risk is the risk that annuitants live longer than expected.• Morbidity risk is the risk that policyholder health-related claims are higher than expected.• Policyholder behavior risk is the risk that policyholder’s behavior in discontinuing and reducing contributions or • withdrawing benefi ts prior to the maturity of the contract is worse than expected. Poor persistency rates may lead to fewer policies remaining on the books to defray future fi xed expenses and reduce the future positive cash fl ows from the business written potentially impacting our ability to recover deferred acquisition expenses. Expense risk is the risk that expenses incurred in acquiring and administering policies are higher than expected.• Market risk is the risk associated with the Group’s balance sheet positions where the value or cash fl ow depends on • fi nancial markets, which are managed as part of market risk.
We have formal local product development committees and a Group-level product approval committee, under the leadership of the Global Life Chief Risk Offi cer, for potential new Life products that could signifi cantly increase or change the nature of our risks. Such reviews allow us to manage new risks inherent in our new business propositions. We regularly review the continued suitability and the potential risks of existing products. Global Life has a fi nancial management committee that further refi nes the identifi cation, monitoring and mitigation of risks to the balance sheets of the Life entities.
Our use of market-consistent embedded value reporting principles allows us to further understand and report on the risk profi le of our Life products and how risks would change in differing market conditions. Embedded value is the measure that markets use to value life businesses; we are using a market-consistent approach, which is considered industry best practice. For more information, refer to the Embedded Value Report.
The following table shows the Group’s concentration of risk within the Life business by region and line of business based on reserves for Life Insurance on a net basis. The Group’s exposure to life insurance risks varies signifi cantly by geographic region and line of business and may change over time.
From a risk-management perspective, unit-linked products have been designed in order to reduce much of the market and credit risk associated with traditional business for the Group. The risks inherent in these products are largely passed on to the policyholder, although a portion of our management fees are linked to the value of funds under management and hence are at risk if the fund values decrease. Unit-linked products carry mortality risk and market risk to the extent that there are guarantees in the product design. Contracts may have minimum guaranteed death benefi ts where the sum at risk depends on the fair value of the underlying investments. For certain contracts these risks are mitigated by explicit mortality and morbidity charges.
Other life insurance liabilities include traditional life insurance products, which include protection products and life annuity products. Protection products carry mortality, longevity and morbidity risk as well as market and credit risk. The most signifi cant factors that could increase the frequency of mortality claims are epidemics, such as strains of infl uenza, or lifestyle changes such as eating, drinking and exercise habits, resulting in earlier or more claims than expected. Morbidity claims experience would not only be affected by the factors mentioned above, but because disability is defi ned in terms of the ability to perform an occupation, it could also be affected by economic conditions. In order to reduce cross-subsidies in the pricing basis, premiums are differentiated for example by product, age, gender and smoker status. The policy terms and conditions and the disclosure requirements contained in insurance applications are designed to mitigate the risk arising from non-standard and unpredictable risks that may result in severe fi nancial loss.
Table 3 in USD millions, as of December 31Reserves, net of reinsurance, by region 07_Risk_Review_7446_Eng.indd 11007_Risk_Review_7446_Eng.indd 110 24/2/10 20:10:5024/2/10 20:10:50
Market risk is the risk associated with the Group’s balance sheet positions where the value or cash fl ow depends on fi nancial markets. Fluctuating risk drivers resulting in market risk include: Equity market prices• Real estate market prices• Interest rates and credit spreads• Currency exchange rates•
The Group manages the market risk of assets relative to liabilities on an economic total balance sheet basis. It strives to maximize the economic risk adjusted excess return of assets relative to the liability benchmark taking into account the Group’s risk tolerance as well as local regulatory constraints.
For more information on the Group’s investment result, including impairments and the treatment of selected fi nancial instruments, refer to note 6 of the Consolidated Financial Statements. For more information on derivative fi nancial instruments and hedge accounting, refer to note 7 of the Consolidated Financial Statements.
Risk from equity securities and real estate The Group is exposed to various risks resulting from price fl uctuations on equity securities, real estate and capital markets. Risks arising from equity securities and real estate could affect the Group’s liquidity, reported income, surplus and regulatory capital position. The exposure to equity risk includes, but is not limited to, common stocks, including equity unit trusts; common stock portfolios backing participating with-profi t policyholder contracts, and equities held for employee benefi t plans. The exposure to real estate risk includes direct holdings in real estate, listed real estate company shares and funds, as well as real estate debt securities such as commercial and residential mortgages, commercial and residential mortgage-backed securities and mezzanine debt. Returns on unit-linked contracts, whether classifi ed as insurance or investment contracts, may be exposed to risks from equity and real estate, but these risks are borne by policyholders. However, the Group is indirectly exposed to market movements from unit-linked contracts both with respect to earnings and with respect to economic capital. On the one hand they impact the amount of fee income earned when the fee income level is dependent on valuation of the asset base. On the other hand, the value of in-force business for unit-linked business can be negatively impacted by adverse movements in equity and real estate markets.
The Group manages its risks from equity securities and real estate as part of the overall investment risk management process, and applies limits as expressed in our policies and guidelines. Specifi cally, we have established limits for holdings in equities, real estate and alternative investments.
For additional information on equity securities and real estate held for investment, refer to note 6 of the Consolidated Financial Statements.
The following tables on sensitivities for the rest of the businesses include Farmers, Other Operating Businesses and Non-Core Businesses. Where Non-Core Businesses includes business with Life characteristics, the analysis is based on market-consistent embedded value market risk sensitivities. Refer to the Embedded Value Report for more details on the market risk sensitivities specifi cations.
Limitations of the analysis: The sensitivities show the effects of a change in certain risk factors, while other assumptions remain unchanged, • except where they are directly affected by the revised conditions.
In 2008, the scenario of a 10 percent stock market decline included a 10 percent fall in property market values. In • 2009, the scenarios of a 10 percent stock market decline and a 10 percent fall in property market are calculated on a stand-alone basis. For 2009, the total impact is estimated as the simple sum of both scenarios. The assumptions on policyholder behavior, such as lapses, included in the sensitivity analysis for Global Life may be • different from actual behavior. Therefore, the actual impact may deviate from the analysis.
Analysis of economic sensitivities for interest rate risk The tables below show the estimated impacts of a one percentage point increase/decrease in yield curves of the major currencies U.S. dollar (USD), Euro (EUR), British pound (GBP), Swiss franc (CHF) and ‘other currencies’ after consideration of hedges in place, as of December 31, 2009 and 2008, respectively. The impact is shown in USD.
Table 4.a in USD millions, as of December 31, 2009Economic interest rate sensitivities for the Group’s General Insurance business
Other currencies Total 100 basis points increase in the interest rate yield curves Total impact on Embedded Value (242) (234) 18 3 (69) (525)
Table 5.b in USD millions, as of December 31, 2008Economic interest rate sensitivities for the Group’s Global Life business
Table 6.a in USD millions, as of December 31, 2009Economic interest rate sensitivities for the rest of the businesses 07_Risk_Review_7446_Eng.indd 11507_Risk_Review_7446_Eng.indd 115 24/2/10 20:10:5324/2/10 20:10:53
Analysis of economic sensitivities for equity risk The table below shows the estimated impacts from a 10 percent decline in stock markets, after consideration of hedges in place, as of December 31, 2009 and 2008, respectively. For Global Life, the analysis also includes the impact from a 10 percent decline in property market values.
10% decline in stock and property market values Impact of a decline in stock market values (233) na Impact of a decline in property market values (240) na Total impact on Embedded Value (473) (630)
Currency risk Currency risk is the risk of loss resulting from changes in exchange rates. The Group operates internationally and therefore is exposed to the fi nancial impact arising from changes in the exchange rates of various currencies. The Group’s presentation currency is the U.S. dollar (USD), but its assets, liabilities, income and expenses are denominated in many currencies, with signifi cant amounts in the Euro, Swiss franc, British pound, as well as USD.
As the Group has chosen USD as its presentation currency, differences arise when functional currencies are translated into the presentation currency.
Using constant exchange rates from one year to the next, the Group’s 2009 net income attributable to shareholders would have been higher by USD 14 million (applying 2008 exchange rates to the 2009 result). In 2008 the result would have been lower by USD 26 million (applying 2007 exchange rates to the 2008 results).
On local balance sheets there is the risk that a currency mismatch may lead to fl uctuations in a balance sheet’s net asset value, either through income or directly through equity. The Group manages this risk by matching foreign currency positions on local balance sheets within prescribed limits. The Group does not take speculative positions on foreign currency market movements. Currency risk is centrally managed, with hedging coordinated by Group Treasury. As a result, the monetary currency risk exposure on local balance sheets is considered immaterial.
Refer to notes 1 and 3 of the Consolidated Financial Statements for additional information on foreign currency translation and transactions.
In 2009, further differentiation occurred between stronger and weaker credits, with fairly stable investment-grade default rates, while speculative-grades reached levels last seen in the 1991 recession. Zurich’s portfolio maintained its high average credit quality throughout 2009 and is well positioned to continue this.
The Group regularly tests and analyzes credit risk scenarios. Beginning at the end of 2008 and continuing in 2009, the Group expanded the number and the specifi city of scenarios tested, and prepared possible contingency measures, which might become necessary should the credit risk environment worsen. From the expanded set of scenarios, the Group has selected and standardized those most relevant to the Group to continue to test and regularly report about to senior management. The Group can adjust the scenarios if market conditions warrant.
Credit risk concentration The Group regularly monitors and limits credit exposures by individual counterparty and related counterparties by the aggregated exposure across the various types of credit risk for that counterparty. The Group’s exposure to counterparties’ parent companies and subsidiaries across sources of credit risk is aggregated to include reinsurance assets, investments, certain insurance products and derivatives. Best estimates, based on statistical data and own assessment, are used to assign loss-given-default percentages and loss dependency factors refl ecting, for example, double default events. The aggregated exposure information is compared with the Group’s limits. The limits vary based on the underlying rating category of the counterparty. There was no material exposure in excess of the limits at December 31, 2009. The Group Chief Risk Offi cer routinely reports the largest exposures by rating category to the Risk Committee of the Board.
The risk-weighted average issuer credit rating of the Group’s debt securities portfolio is AA- (2008: AA). Applying the previously published linear average, the average rating would be AA, one notch lower than the AA+ reported in 2008. In order to better refl ect inherent credit risks , we moved in 2009 from a linear to a risk-weighted scale, estimating the average credit quality of the debt securities portfolio calibrated to historical default statistics.
Chemicals & Pharmaceuticals Government & Supranationals & similar Financial Institutions & similar
As of December 31, 2009, investment grade securities comprise 98.4 percent of the Group’s debt securities, and 52.1 percent are rated AAA. These percentages are within the limits in the Group’s risk policy. As of December 31, 2008, investment grade securities comprised 99.2 percent of our debt securities, and 59.2 percent were rated AAA. The Group’s investment policy prohibits speculative grade investments, unless specifi cally authorized and under exceptional circumstances. The Group identifi es and implements appropriate corrective action on investments expected to be downgraded to below investment grade.
Reinsurance assets include reinsurance recoverables of USD 18,715 million and USD 18,684 million as of December 31, 2009 and 2008, respectively, which are the reinsurers’ share of reserves for insurance contracts, and receivables arising from ceded reinsurance, gross of allowance for impairments, of USD 1,092 million and USD 1,166 million as of December 31, 2009 and 2008, respectively. Reserves for potentially uncollectible amounts of reinsurance assets amount to USD 268 million and USD 296 million as of December 31, 2009 and 2008, respectively. The Group’s policy on impairment charges takes into account both specifi c charges for known situations (e.g. fi nancial distress or litigation) and a general, prudent provision for unanticipated impairments.
Table 12 as of December 31Reinsurance premiums ceded and reinsurance assets by rating of reinsurer and captive 07_Risk_Review_7446_Eng.indd 12007_Risk_Review_7446_Eng.indd 120 24/2/10 20:10:5724/2/10 20:10:57
Credit risk related to mortgage loans and mortgage loans given as collateral Mortgage loans and mortgage loans given as collateral expose the Group to credit risk. The mortgage business is dependent on local property market conditions and local legislation. Investment portfolio allocations made to mortgages consider these factors and are within the framework of the strategic asset allocation defi ned by the Group Asset/Liability Management Investment Committee and adapted and approved by local investment committees (except for the activities of Zurich Bank, which has its own policies that are aligned with the Group’s policies). Conservative lending criteria and the diversifi cation of loans across many single borrowers help reduce potential loss. Loans are secured by fi rst mortgages only and maximum mortgage loan to property value ratios are applied. Furthermore, business units are required to clearly state criteria for determining borrower and collateral quality in their local mortgage policies. The Group specifi es requirements for the local policies and sets monitoring and reporting standards. The Group closely monitors the performance of the portfolios in terms of impairments and losses.
The Group’s largest mortgage loan portfolios are in Germany (USD 7,193 million, including mortgage loans given as collateral) and in Switzerland (USD 4,000 million); these are predominantly secured against residential property. The next largest portfolio comprises loans granted by Zurich Bank (including the UK property lending activity of Dunbar Bank) of USD 2,264 million in the UK and Ireland. They concern residential and commercial property development fi nancing or investment loans, secured as either property under development or completed developments. Deteriorating economic conditions and decreases in property values in the UK and Ireland have led to a signifi cant worsening of property loan performance at Zurich Bank, where impaired mortgage loans increased by USD 549 million over the year to amount to USD 611 million as of December 31, 2009. Similarly, past due but not impaired loans at Zurich Bank also increased by USD 47 million to USD 213 million as of December 31, 2009.
Mortgage loans given as collateral concern German mortgages that are subject to repurchase agreement, but where Zurich still retains the credit risk of the underlying mortgages. See note 16 of the Consolidated Financial Statements.
Table 13 as of December 31Other loans by rating of issuer 07_Risk_Review_7446_Eng.indd 12107_Risk_Review_7446_Eng.indd 121 24/2/10 20:10:5824/2/10 20:10:58
Past due but not impaired receivables should be regarded as unsecured, but some of these receivable positions may be offset by collateral. The Group reports internally on Group past-due receivable balances and strives to keep the balance of past-due positions as low as possible, while taking into account customer satisfaction. In 2009, the Group continued efforts to reduce past-due receivables through both short- and long-term initiatives to improve our processes and systems. Longer-dated past-due receivable balances often relate to positions in dispute or subject to litigation.
To limit credit risk, derivative fi nancial instruments are typically executed with counterparties rated A- or better by an external rating agency. In addition, it is the Group standard to only transact derivatives with counterparties where we have an ISDA Master Agreement with a Credit Support Annex in place. This mitigates credit exposures from OTC transactions due to close-out netting and requires the counterparty to post collateral when the derivative position is beyond an agreed threshold. We mitigate credit exposures from derivative transactions further by using exchange- traded instruments whenever possible.
Analysis of financial assets The table below provides an analysis, for non unit-linked businesses, of the age of fi nancial assets that are past due but not impaired and of fi nancial assets that are individually determined to be impaired.
Less: impairment allowance Impairment allowances on individually assessed fi nancial assets 132 239 1 1 160 534 Impairment allowances on collectively assessed fi nancial assets – 34 – – 277 311 1 Available-for-sale debt securities are included net of USD 510 million of impairment charges recognized during the year.
Table 14.a in USD millions, as of December 31, 2009Analysis of fi nancial assets – current year 07_Risk_Review_7446_Eng.indd 12307_Risk_Review_7446_Eng.indd 123 24/2/10 20:10:5924/2/10 20:10:59
Less: impairment allowance Impairment allowances on individually assessed fi nancial assets 65 30 1 6 171 273 Impairment allowances on collectively assessed fi nancial assets – 21 – – 286 307 1 Available-for-sale debt securities are included net of USD 1,142 million of impairment charges recognized during 2008.
The table below shows how the allowances for impairments of fi nancial assets shown in tables 14a and 14b have developed over the 2008 and 2009 fi nancial years.
Table 15.a in USD millionsDevelopment of allowance for impairments – current year 07_Risk_Review_7446_Eng.indd 12407_Risk_Review_7446_Eng.indd 124 24/2/10 20:11:0024/2/10 20:11:00
Liquidity risk is the risk that the Group may not have suffi cient liquid fi nancial resources to meet its obligations when they fall due, or would have to incur excessive costs to do so. Zurich’s policy is to maintain adequate liquidity and contingent liquidity to meet its liquidity needs under both normal and stressed conditions. To achieve this, the Group assesses, monitors and manages its liquidity needs on an ongoing basis.
The Group limits the percentage of the investment portfolio that is not readily realizable, and regularly monitors exposures to take action if necessary to maintain an appropriate level of asset liquidity. During 2009, the Group was within its limits for asset liquidity. The Fair Value Hierarchy tables disclosed in note 27 to the Consolidated Financial Statements segregate fi nancial assets in three levels to refl ect how their fair value was determined. These tables indicate the high liquidity of our investments .
Refer to note 22 of the Consolidated Financial Statements for additional information on our debt obligation maturities and on credit facilities and to note 26 of the Consolidated Financial Statements for information on commitments and guarantees.
The table below provides an analysis of the maturity profi le of reserves for insurance contracts, net of reinsurance, based on expected cash fl ows without considering the surrender values as of December 31, 2009 and 2008. Reserves for unit-linked insurance contracts amounting to USD 58,204 million and USD 47,297 million as of December 31, 2009 and 2008, respectively, are not included in the table below, as policyholders can generally surrender their contracts at any time, at which point the underlying unit-linked assets would be liquidated. Risks from the liquidation of unit-linked assets are borne by the policyholders of unit-linked contracts.
For additional information on reserves for insurance contracts, refer to note 8 of the Consolidated Financial Statements.
Expected maturity profi le for reserves for insurance contracts, net of reinsurance
The table below provides an analysis of the maturity of liabilities for investment contracts based on expected cash fl ows as of December 31, 2009 and 2008. The undiscounted contractual cash fl ows for liabilities for investment contracts are USD 48,423 million and USD 38,753 million as of December 31, 2009 and December 31, 2008, respectively. Liabilities for unit-linked investment contracts amount to USD 40,143 million and USD 30,397 million as at December 31, 2009 and 2008, respectively. The policyholders of unit-linked investment contracts can generally surrender their contracts at any time at which point the underlying unit-linked assets would be liquidated. Risks from the liquidation of unit-linked assets are borne by the policyholders of unit-linked investment contracts.
The Group has committed to contribute capital to subsidiaries and third parties that engage in making investments in direct private equity and private equity funds. Commitments may be called by the counterparty over the term of the investment (generally three to fi ve years) and must be funded by the Group on a timely basis. See note 26 of the Consolidated Financial Statements.
To support a common approach to managing operational risks throughout the Group, we have established a comprehensive framework to identify, assess, quantify, mitigate, monitor and report operational risks within the Group as summarized below.
Documents and evaluates loss events above a threshold determined by the Zurich Risk Policy, in a Group-wide • database. Improvement actions are put in place to avoid recurrence of such operational loss events.
Conducts operational risk assessments through which operational risks are identifi ed for our key business areas and • are qualitatively assessed. Risks identifi ed and assessed above a certain threshold must be mitigated, and escalated in specifi c reports at the Group level. Plans for improvement actions are documented and tracked on an ongoing basis. The Group uses a scoping exercise to determine which business units and Group-wide functional areas conduct operational risk assessments. A signifi cant input to the scoping is Risk-Based Capital consumption for operational risk. In the assessments, we make use of such sources of information as Total Risk Profi ling™, internal control assessments, and audit fi ndings, as well as scenario modeling and loss event data.
Scenario-based assessments Locally assess and centrally model key, defined operational risk scenarios
Operational risk assessments These forward-looking assessments of potential operational risks take into account: • Outputs from the scenario modeling • Other assessments and findings • Data from Loss Event Management
Overview by business and type of operational risk for evaluation, mitigation, monitoring, reporting 07_Risk_Review_7446_Eng.indd 12807_Risk_Review_7446_Eng.indd 128 26/2/10 02:26:5826/2/10 02:26:58
In addition to our overall framework, we have specifi c processes and systems in place to focus continuously on high priority operational matters such as information security, managing business continuity, and combating fraud.
Risks to our reputation include the risk that an act or omission by the Group or any of its employees could result in damage to the Group’s reputation or loss of trust among our stakeholders. Every risk type has potential consequences for Zurich’s reputation, and therefore, effectively managing each type of risk helps us reduce threats to our reputation.
Within these defi ned principles, the Group manages its capital using a number of different capital models taking into account regulatory, economic and rating agency constraints. Our capital and solvency position is monitored and reported on a regular basis. Based on the results of the capital models and the defi ned standards and principles, Group Treasury and Capital Management has a set of measures and tools available to manage capital within the defi ned constraints. This tool set is referred to as the capital management program.
The Group seeks to maintain the balance between higher returns for shareholders on equity raised, which may be possible with higher levels of borrowing, and the security provided by a sound capital position. The payment of dividends, share buy-backs, and issuances and redemption of debt have an important infl uence on the capital levels.
In the fi nancial year, Farmers Group, Inc. completed an acquisition of 100 percent of AIG’s U.S. Personal Auto Group, which includes “21st Century Insurance” (comprising the former “AIG Direct” and “21st Century Insurance”), as well as AIG’s “Agency Auto.” In addition, Zurich has provided increased underwriting capacity to the Farmers Exchanges through an increase of the existing quota share reinsurance agreement from the Farmers Exchanges in various steps to 37.5%. Effective December 31, 2009 the participation was reduced to 35%. The resulting increase in Zurich’s capital requirements to support the acquisition and the additional business assumed has been fi nanced through the sale of Zurich ordinary shares in April 2009 in the equivalent amount of USD 1.1 billion, as well as the issuance of capital notes from the EMTN program in the equivalent amount of USD 0.2 billion.
Other than by operation of the restrictions mentioned above, the ability of the Group’s subsidiaries to pay dividends may be restricted or, while dividend payments as such may be legally permitted, may be indirectly infl uenced by minimum capital and solvency requirements imposed by insurance, bank and other regulators in the countries in which the subsidiaries operate as well as by other limitations existing in some countries such as foreign exchange control restrictions.
In each country in which the Group operates, the local regulator specifi es the minimum amount and type of capital that each of the regulated entities must hold in addition to their liabilities. The Group targets to hold, in addition to the minimum capital required to comply with the solvency requirements, an adequate buffer to ensure that each of its regulated subsidiaries meets the local capital requirements. The Group is subject to different capital requirements depending on the country in which it operates. The two main areas are Europe (in particular Switzerland and the European Union (EU) and European Economic Area (EEA) countries) and the U.S..
On November 25, 2009 the directive on Solvency II adopted earlier in 2009 by the European Parliament and the Ecofi n Council was published in the Offi cial Journal. Solvency II introduces a new solvency regime and refl ects the latest developments in prudential supervision, actuarial methods and risk management. It includes economic risk-based solvency requirements, which are more risk sensitive and more sophisticated than Solvency I. Solvency II capital requirements also consider all material risks and their interactions. As part of the risk management system, all EU/EEA insurance and reinsurance entities will be required to conduct their own risk and solvency assessments, including the assessment of the overall solvency needs refl ecting their specifi c risk profi les. As part of the disclosure provisions, companies will have to publicly report their solvency and fi nancial condition. The directive requires transposition of the laws, regulations and administrative provisions across the EU/EEA by October 31, 2012, at the latest.
The Group continues to be subject to Solvency I requirements based on the Swiss Insurance Supervisory Law. The following table sets out the Solvency I position as fi led with FINMA for 2008 and as drafted for fi ling with the Swiss regulator for 2009.
Throughout 2008 and 2009, the Group and all its material, regulated subsidiaries complied with the applicable regulatory minimum capital requirements.
The chart below shows the estimated impact on the Group’s solvency position of a one percentage point increase/ decrease in yield curves, a separate 10 percent decline in all stock markets, after consideration of hedges in place and a separate one percentage point change in credit spread, as of December 31, 2009 and 2008, respectively. The sensitivities are considered three separate but instantaneous scenarios.
Limitations of the analysis: The sensitivity analysis does not take into account actions that might be taken to mitigate losses. The Group uses • an active strategy to manage these risks, which may involve changing the asset allocation, for example, through selling and buying assets. The sensitivities show the effects from a change of certain risk factors, while other assumptions, such as policyholder • assumptions, remain unchanged.
Table 18 in USD millions, as of December 31The Group’s solvency as of December 31 07_Risk_Review_7446_Eng.indd 13307_Risk_Review_7446_Eng.indd 133 24/2/10 20:11:0524/2/10 20:11:05
Rating agency capital adequacy Rating agencies apply their own models to evaluate the relationship between the required risk capital for a company or Group and its available capital resources. We maintain a continuous dialogue with rating agencies regarding the assessment of our capital adequacy.
The fi nancial strength ratings of the Group’s main operating entities are an important element of our competitive position. Moreover, the Group’s credit ratings derived from the fi nancial strength ratings affect the cost of capital. As of December 31, 2009 the fi nancial strength rating of Zurich Insurance Company Ltd and other key operating legal entities of the Group was rated by Standard and Poor’s as ‘AA-,’ by A.M. Best as ‘A,’ by Fitch as ‘A+’ and by Moody’s as ‘A1.’
Sensitivities for Solvency I ratio and total IFRS equity (As of December 31, 2009)
Sensitivity of the Solvency I ratio to changes in: 07_Risk_Review_7446_Eng.indd 13407_Risk_Review_7446_Eng.indd 134 24/2/10 20:11:0624/2/10 20:11:06
The largest proportion of RBC arises from Insurance Risk. Of the 44% allocated to Insurance Risk, 1% covers Life Insurance risk (biometric risks such as mortality and morbidity risk) and 43% covers General Insurance risk including natural catastrophe risk. The next largest proportion is market and credit risk at 42%.
The RBC split by segment for 2008 and 2009 has been reclassifi ed between General Insurance and Other Operating Businesses and Non-Core Businesses, to refl ect the current management structure.
Consolidated Financial Statements 139 462 rotiduA yrotutatS eht fo tropeR 662seiraidisbuS tnacfiingiS 072 tropeR eulaV deddebmE 403ynapmoC gnidloH 223 rotiduA yrotutatS eht fo tropeR
II 1. Basis of presentation 148 2. Implementation of new accounting standards and amendments to published accounting standards 153 3. Summary of signifi cant accounting policies 155 4. Critical accounting judgements and estimates 172 5. Acquisitions and divestments 177 7. Derivative fi nancial instruments and hedge accounting 189 8. Reserves for insurance contracts and reinsurers‘ share of reserves for insurance contracts 193 9. Liabilities for investment contracts with and without discretionary participation features (DPF) 200 10. Equity component relating to contracts with DPF 200 11. Gross and ceded insurance revenues and expenses 201 12. Deferred policy acquisition costs and deferred origination costs 202 13. Administrative and other operating expenses 202 14. Farmers management fees and other related revenues 203 16. Mortgage loans given as collateral and collateralized loans 204 17. Property and equipment 205 18. Goodwill and other intangible assets 207 19. Other assets 208 20. Other liabilities 208 21. Income taxes 210 23. Shareholders‘ equity 219 24. Employee benefi ts 223 25. Share-based compensation and cash incentive plans 228 26. Contingent liabilities, contractual commitments and fi nancial guarantees 232 27. Fair value of fi nancial assets and fi nancial liabilities 235 28. Related party transactions 239 29. Farmers Exchanges 241 30. Segment information 244
Revenues Gross written premiums and policy fees 53,817 51,894 Less premiums ceded to reinsurers (5,844) (6,226) Net written premiums and policy fees 47,973 45,667 Net change in reserves for unearned premiums 11 (746) (1,560) Net earned premiums and policy fees 47,227 44,107 Farmers management fees and other related revenues 14 2,690 2,458 Net investment result on Group investments 6 6,082 5,805
Net investment income on Group investments 7,505 8,698 Net capital gains/(losses) and impairments on Group investments (1,423) (2,893)
Basic earnings per share 23 22.51 21.80 Diluted earnings per share 23 22.35 21.63 in CHF
In USD millions, for the years ended December 31 08_Financial_Statements_Part1_7442_Eng.indd 13908_Financial_Statements_Part1_7442_Eng.indd 139 24/2/10 20:16:3724/2/10 20:16:37
Comprehensive income for the period 3,215 3,292 Details of movements during the period
in USD millions, for the years ended December 31 08_Financial_Statements_Part1_7442_Eng.indd 14008_Financial_Statements_Part1_7442_Eng.indd 140 24/2/10 20:16:3824/2/10 20:16:38
in USD millions, as of December 31Assets 08_Financial_Statements_Part1_7442_Eng.indd 14208_Financial_Statements_Part1_7442_Eng.indd 142 24/2/10 20:16:3924/2/10 20:16:39
Liabilities Reserve for premium refunds 649 620 625 Liabilities for investment contracts 9 46,124 35,979 54,485 Deposits received under ceded reinsurance contracts 1,558 1,619 1,739 Deferred front-end fees 5,543 4,695 5,791
Total liabilities and equity 368,914 327,944 389,342 1 Effective June 30, 2008, the underlying contracts relating to a UK annuity portfolio ceded in 2007 for an amount of USD 7.1 billion were transferred to the reinsurer, resulting in a reduction of reserves for insurance contracts.
Net capital (gains)/losses on total investments and impairments (9,419) 27,808 Net change in trading securities 214 2,042 Sales and maturities
Cash fl ows from investing activities Sales of property and equipment 86 309 Purchase of property and equipment (359) (444) Investments in equity method accounted investments, net 6 11 Acquisitions of companies, net of cash acquired (307) (1,319) Divestments of companies, net of cash balances (10) (6) Dividends from equity method accounted investments 5 5 Net cash used in investing activities (581) (1,443) Cash fl ows from fi nancing activities Dividends paid (1,426) (2,104) Issuance of share capital 929 – Net movement in treasury shares 367 (812) Redemption of preferred securities and repayments to non-controlling interests – (124) Issuance of debt 3,475 2,420 Repayments of debt outstanding (898) (1,930) Net cash provided by/(used in) fi nancing activities 2,448 (2,551) Foreign currency translation effects on cash and cash equivalents 870 (1,896) Change in cash and cash equivalents excluding change in cash held as collateral for securities lending 1 267 1,460 Cash and cash equivalents as of January 1, excluding cash held as collateral for securities lending 16,711 15,251 Cash and cash equivalents as of December 31, excluding cash held as collateral for securities lending 16,978 16,711 Change in cash held as collateral for securities lending 316 (1,700) Cash and cash equivalents as of January 1, including cash held as collateral for securities lending 16,888 17,128 Cash and cash equivalents as of December 31, including cash held as collateral for securities lending 17,471 16,888 of which: – cash and cash equivalents – Group Investments 11,631 12,428 – cash and cash equivalents – unit linked 5,840 4,460
Issuance of share capital 1, 2 – 929 – Dividends to shareholders – – – Share-based payment transactions – 59 – Treasury share transactions 3 – 282 – Total comprehensive income for the year, net of tax – – 3,292
Zurich Financial Services Ltd, a Swiss corporation, is the holding company of the Group and is listed on the SIX Swiss Exchange. Zurich Financial Services Ltd was incorporated on April 26, 2000, in Zurich, Switzerland. It is recorded in the Commercial Register of the canton of Zurich under its registered address at Mythenquai 2, 8002 Zurich. Due to a change in the Swiss Code of Obligations Zurich Financial Services was renamed to Zurich Financial Services Ltd effective April 2, 2009. Throughout this document the new name Zurich Financial Services Ltd is used consistently even if reference is made to facts that occurred prior to the renaming of the company.
On February 3, 2010 the Board of Directors of Zurich Financial Services Ltd authorized these Consolidated Financial Statements for issue. These fi nancial statements will be submitted for approval to the Annual General Meeting of Shareholders to be held on March 30, 2010.
General information The Consolidated Financial Statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) and comply with Swiss law. Where IFRS does not contain clear guidance governing the accounting treatment of certain transactions including those that are specifi c to insurance products, IFRS permits reference to another comprehensive body of accounting principles that uses a similar conceptual framework. In these cases, the Group typically refers to accounting principles generally accepted in the United States of America (US GAAP) for guidance. In certain cases the Group may decide to maintain the local statutory treatment if this does not distort a fair presentation of the fi nancial position of the Group. If signifi cant, the impact of such cases is described elsewhere in the notes to these Consolidated Financial Statements.
The accounting policies applied by the reportable segments are the same as those applied by the Group. The Group accounts for inter-segment revenues and transfers as if the transactions were with third parties at current market prices, with the exception of dividends, realized capital gains as well as gains and losses on transfer of net assets, which are eliminated against equity. For the Consolidated Financial Statements inter-segment revenues and transfers are eliminated.
Disclosures under IFRS 4 “Insurance Contracts” and IFRS 7 “Financial Instruments: Disclosures” relating to the nature and extent of risks, and capital disclosures under IAS 1 “Presentation of Financial Statements” have been included in the “Risk Review” on pages 97 to 135, and they form an integral part of the Consolidated Financial Statements.
Signifi cant Subsidiaries included in the scope of consolidation are disclosed on pages 266 to 268.
Certain amounts recorded in the Consolidated Financial Statements refl ect estimates and assumptions made by management about insurance liability reserves, investment valuations, interest rates and other factors. Critical accounting judgments and estimates are discussed in note 4. Actual results may differ from the estimates made.
As part of our process to improve the presentation of the Group’s Consolidated Financial Statements, we have made certain changes regarding the presentation of “Other investments” in order to better refl ect their nature and measurement basis. These changes in presentation have no effect on the previously reported net income or shareholders’ equity. Comparative information has been amended to refl ect this change.
“Short-term investments”, previously reported under “Other investments” amounting to USD 2,307 million (out of which Group Investments represented USD 2,103 million) as of December 31, 2008, are now presented, depending on their nature and measurement basis, under “Cash and cash equivalents”, “Debt securities – Available-for-sale”, “Debt securities Fair value through profi t and loss”, “Debt securities – Trading” or “Other loans“. Similarly, Group investments previously presented under “Other” within “Other investments” amounting to USD 61 million as of December 31, 2008, are now presented under “Equity securities – Trading”. These changes in presentation are refl ected in the consolidated balance sheets, consolidated statements of cash fl ows and notes 6 and 30.
Interest on reinsurance deposits previously presented under "Net Investment income" amounting to USD 28 million is now presented under "Other income" for the year ended December 31, 2008. This change in presentation is reflected in the consolidated income statements.
Maturity tables have been provided for the following balances: reserves for insurance contracts (tables 16a and 16b in “Risk Review”), liabilities for investment contracts (tables 17a and 17b in “Risk Review”), debt securities (table 6.4), derivative assets and derivative liabilities (tables 7.1 and 7.2), collateralized loans (table 16), other fi nancial liabilities (table 20.2) and outstanding debt (table 22.3).
Revenues Gross written premiums and policy fees 51,894 51,894 Less premiums ceded to reinsurers (6,226) (6,226) Net written premiums and policy fees 45,667 45,667 Net change in reserves for unearned premiums (1,560) (1,560) Net earned premiums and policy fees 44,107 44,107 Farmers management fees and other related revenues 2,458 2,458 Net investment result on Group investments 5,832 (28) 5,805
Net income after taxes 3,116 3,116 attributable to non-controlling interests 77 77 attributable to shareholders 3,039 3,039
Equity method accounted investments 220 – 220 Other investments 2,165 (2,165) –
Other assets 4,095 – 4,095 Mortgage loans given as collateral 1,233 – 1,233 Deferred tax assets 2,901 – 2,901 Property and equipment 1,889 – 1,889
Liabilities Reserve for premium refunds 620 – 620 Liabilities for investment contracts 35,979 – 35,979 Deposits received under ceded reinsurance contracts 1,619 – 1,619 Deferred front-end fees 4,695 – 4,695 Reserves for insurance contracts 222,179 – 222,179 Obligations to repurchase securities 3,608 – 3,608 Accrued liabilities 2,820 – 2,820 Other liabilities 16,944 – 16,944 Collateralized loans 1,233 – 1,233 Deferred tax liabilities 3,485 – 3,485 Debt related to capital markets and banking activities 2,527 – 2,527 Senior and subordinated debt 8,455 – 8,455 Total liabilities 304,163 – 304,163
Financial Information 2. Implementation of new accounting standards and amendments to published accounting standards
In November 2006, the IASB issued IFRS 8 “Operating Segments”. IFRS 8 is effective for reporting periods beginning on or after January 1, 2009. The standard sets out the requirements for disclosure of an entity’s operating segments on the same basis as internal reporting used by management for decision making, as well as disclosures of the entity’s products and services, the geographical areas in which it operates, and its major customers. The segment disclosures refl ect the implementation of this standard. Segment information is disclosed in the manner in which the business is managed. As a result, the Group has amended its segment structure and some reporting units have been allocated to a different reportable segment. Additionally, the Group now includes its internal performance measure, Business Operating Profi t (BOP), in the segment disclosures. Comparative information has been amended accordingly. Note 30 provides detailed information on the new segmental structure.
In March 2007, the IASB issued amendments to IAS 23 “Borrowing Costs” that are effective for reporting periods beginning on or after January 1, 2009. The amendments eliminate the option to recognize all borrowing costs for eligible assets immediately as an expense.
In January 2008, the IASB issued the revised IFRS 3 “Business Combinations”. The standard is effective for reporting periods beginning on or after July 1, 2009, prospectively. The revised standard continues to apply the acquisition method to business combinations, with some signifi cant changes. For example, all payments to purchase a business are to be recorded at fair value at the acquisition date, with contingent consideration that are classifi ed as debt being subsequently re-measured at fair value through the income statement. There is a choice on an acquisition-byacquisition basis to measure the non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. All acquisition-related costs must be expensed.
In June 2009, the IASB issued amendments to IFRS 2 “Group Cash-settled Share-based Payment Transactions”. The amendments are effective for reporting periods beginning on or after January 1, 2010. The amendments clarify the scope of IFRS 2, as well as the accounting for group cash-settled share-based payment transactions in the separate (or individual) fi nancial statements of an entity receiving the goods or services when another group entity or shareholder has the obligation to settle the award.
In October 2009, the IASB issued amendments to IAS 32 “Classifi cation of Rights Issues”. The amendments are effective for reporting periods beginning on or after February 1, 2010. The amendment addresses the accounting for rights issues (rights, options or warrants) that are denominated in a currency other than the functional currency of the issuer. The amendment requires that, provided certain conditions are met, such rights issues are classifi ed as equity regardless of the currency in which the exercise price is denominated.
In November 2009, the IASB issued amendments to IAS 24 “Related Party Disclosures”. The amendments are effective for reporting periods beginning on or after January 1, 2011. The amendment provides a partial exemption from the disclosure requirements for government-related entities and clarifi es the defi nition of a related party.
Acquisition transactions with non-controlling interests are accounted for as transactions with parties external to the Group. Purchases from non-controlling interests result in goodwill, being the difference between any consideration paid and the relevant carrying value of non-controlling interest acquired.
The Consolidated Financial Statements are prepared as of December 31 based on individual company fi nancial statements at the same date. In some cases information is included with a time lag of up to three months. The effects on the Group’s Consolidated Financial Statements are not material.
b) Insurance contracts and investment contracts with discretionary participating features (DPF) IFRS does not provide specifi c guidance on all aspects of recognition and measurement of insurance and reinsurance contracts. The Group’s accounting policies for insurance and reinsurance contracts are therefore based on those developed by the Group before the adoption of IFRS 4. At the time of adoption, the Group typically considered U.S. GAAP pronouncements issued by the Financial Accounting Standards Board (FASB) on insurance and reinsurance contracts in areas where IFRS 4 did not include specifi c requirements.
the amount or timing of which is contractually at the discretion of the Group; and•
– the net income of the company, fund or other entity that issues the contract.
Premiums Premiums from the sale of general insurance products are recorded when written and normally are accreted to earnings on a pro-rata basis over the term of the related policy coverage. However, for those contracts for which the period of risk differs signifi cantly from the contract period, premiums are recognized over the period of risk in proportion to the amount of insurance protection provided. The unearned premium reserve represents the portion of the premiums written relating to the unexpired terms of coverage.
Deferred policy acquisition costs (DAC) The costs of acquiring new business, including commissions, underwriting and policy issue expenses, which vary with and are directly related to the production of new business, are deferred. Certain direct response marketing costs for efforts which solicit a direct response that is specifi c and quantifi able are also deferred, when it can be demonstrated that such marketing results in future economic benefi ts.
DAC for participating traditional life insurance contracts is amortized over the expected life of the contracts based on estimated gross margins expected to be realized over the life of the contract. Estimated gross margins are updated for historical and anticipated future experience using the latest revised interest rate for the remaining benefi t period. Resultant deviations from estimated experience are refl ected in income.
DAC for other traditional life insurance and annuity policies is amortized over the expected life of the contracts based on expected premiums. Expected premiums are estimated at the date of policy issue for application throughout the life of the contract, unless premium defi ciency occurs.
Unamortized DAC for life business accrues interest at a rate consistent with the related assumptions for reserves.
Reserves for losses and loss adjustment expenses Losses and loss adjustment expenses are charged to income as incurred. Reserves for losses and loss adjustment expenses represent the accumulation of estimates for ultimate losses and include provisions for losses incurred but not yet reported (IBNR). The reserves represent 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. The Group does not discount its loss reserves, other than for settled claims with fi xed payment terms. Any changes in estimates are refl ected in the results of operations in the period in which estimates are changed.
Future life policyholders’ benefi ts for participating traditional life insurance policies are calculated using a net level premium valuation method based on actuarial assumptions equal to guaranteed mortality and interest rates.
For traditional life insurance policies, interest rate assumptions can vary by country, year of issuance and product. The mortality rate assumptions are based on published mortality tables and are adjusted for actual experience by geographic area and modifi ed to allow for variations in policy terms. The surrender assumptions are based on actual experience by geographic area and modifi ed to allow for variations in policy terms.
For products containing discretionary participation features the amount of the discretionary participation feature is deemed to be the investment return on all related assets where the apportionment between the shareholder and the policyholder has not yet been determined. The liability includes certain elements of net unrealized gains/(losses) and portions of retained earnings attributable to the DPF, based on the mandated rates applied to these gains and earnings on the assumption that they had been realized as of the balance sheet date.
In addition to assessing whether signifi cant insurance risk has been transferred, reinsurance contracts are further assessed to ensure that underwriting risk, defi ned as the reasonable possibility of signifi cant loss, and timing risk, defi ned as the reasonable possibility of a signifi cant variation in the timing of cash fl ows, are transferred by the ceding company to the reinsurer. Those contracts that do not transfer both risks, referred to in total as insurance risk, are accounted for using the deposit method. A deposit asset or liability is recognized based on the consideration paid or received less any explicitly identifi ed premiums or fees to be retained by the ceding company. Deposits for contracts that transfer only signifi cant underwriting risk are subsequently measured based on the unexpired portion of coverage until a loss is incurred, after which the present value of expected future cash fl ows under the contract is added to the remaining unexpired portion of coverage. Changes in the deposit amount are recorded in the consolidated income statements as an incurred loss. Interest on deposits that transfer only timing risk, or no risk at all, are accounted for using the effective interest rate method. Future cash fl ows are estimated to calculate the effective yield, and revenue and expense are recorded as interest income or expense. Premiums paid under retroactive contracts are included in reinsurance recoverables in the balance sheet. If the amount of gross claims provisions reinsured is higher than the premium paid, reinsurance receivables are increased by the difference, and the gain is deferred and amortized over the period in which the underlying claims are paid.
The Group’s main valuation techniques incorporate all factors that market participants would consider and are based on observable market data. If market data is not observable, the Group uses assumptions based on its own experience. The fair value of a unit-linked fi nancial liability is determined using the current unit values that refl ect the fair values of the fi nancial assets contained within the Group’s unitized investment funds linked to the fi nancial liability, multiplied by the number of units attributed to the contract holder as of the balance sheet date.
As of each reporting date, the Group re-estimates the expected future cash fl ows and recalculates the carrying amount of the fi nancial liability by computing the present value of estimated future cash fl ows using the original effective interest rate for the fi nancial liability. Any adjustment is immediately recognized as income or expense.
Deferred origination costs (DOC) The costs of acquiring new investment contracts with investment management services, including commissions and other incremental expenses directly related to the issuance of each new contract, are capitalized and amortized in line with the revenue generated by the investment management service. DOC is tested for recoverability as of each reporting date.
The Group charges its customers for asset management and other related services using the following different approaches: Front-end fees charged to the customer at inception are used particularly for single premium contracts. The • consideration received is deferred as a liability and recognized over the life of the contract on a straight-line basis.
Rental income earned on real estate held for investment is recognized on an accrual basis.
Financial assets designated at fair value through profi t or loss at inception are mainly fi nancial assets backing unit-linked insurance and unit-linked investment contracts. Reserves relating to unit-linked insurance contracts and liabilities for unit-linked investment contracts are carried at fair value, which is determined by reference to these assets with changes in the fair value of both the asset and liability recognized in income. The designation of these assets at fair value through profi t or loss eliminates or signifi cantly reduces a measurement inconsistency that would otherwise arise from measuring assets or from recognizing the resultant gains and losses on them on a different basis to the liabilities. The fair value designation, once made, is irrevocable.
Available-for-sale fi nancial assets are non-derivative fi nancial assets that are either designated as such or are not classifi ed in any of the other categories.
Financial assets carried at fair value through profi t or loss Financial assets carried at fair value through profi t or loss are subsequently measured at fair value. Realized and unrealized gains and losses arising from changes in the fair value are recognized in income within net capital gains/ losses on investments and impairments in the period in which they arise.
Investments backing certain life insurance policies with participation features are held as at fair value through profi t or loss in order to reduce measurement inconsistencies. The change in fair value of these assets recognized in net investment result are offset by equivalent movements attributable to policyholders.
Real estate held for investment is initially recorded at cost (including transaction costs) and is subsequently measured at fair value with changes in fair value recognized in income. Fair value is based on active market prices, adjusted if necessary for differences in the nature, location or condition of the property. If active market prices are not available, alternative valuation methods are used, for example discounted cash fl ow projections. Valuations are performed annually by internal valuation specialists and generally at least once every three years by external valuers. No depreciation is recorded for real estate held for investment. The gain or loss on disposal of real estate held for investment is based on the difference between the proceeds received and the carrying value of the investment and is recognized in income when the disposal is completed.
Financial assets carried at amortized cost For held-to-maturity fi nancial assets as well as loans and receivables, impairment is considered to have occurred if it is probable that the Group will not be able to collect principal and/or interest due according to the contractual terms of the instrument. When impairment is determined to have occurred, the carrying amount of held-to-maturity fi nancial assets, loans or receivables is reduced through the use of an allowance account, and the movement in the impairment allowance is recognized as an impairment loss in income. The impairment of fi nancial assets carried at amortized cost is measured as the difference between the carrying amount of the assets and the present value of estimated future cash fl ows, using the original effective interest rate for the fi nancial assets. The impairment for mortgage loans and receivables is determined using an analytical method based on knowledge of each loan group or receivable. The method is usually based on historical statistics, adjusted for known or anticipated trends in the group of fi nancial assets or individual accounts. If the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment loss was recognized, the impairment loss is reversed through income. This reversal does not result in a carrying amount for the fi nancial asset exceeding the amortized cost would have been had the impairment not been recognized at the date the impairment is reversed.
In addition to the derivative fi nancial instruments described above, the Group enters into contracts that are not considered derivative fi nancial instruments in their entirety but which include embedded derivative features. Such embedded derivatives are assessed at inception of the contract and, depending on their characteristics, are accounted for as separate derivative fi nancial instruments.
Derivative fi nancial instruments, except those designated under a qualifying hedge relationship are classifi ed as held for trading assets or liabilities and carried at fair value on the balance sheet with changes in fair value recognized in income.
Discontinued hedges Where hedge accounting is applied, the Group formally documents all relationships between hedging instruments and hedged items, including the risk management objectives and strategy for undertaking hedge transactions. At inception of a hedge and on an ongoing basis, the hedge relationship is formally assessed in order to determine whether the hedging instruments that are used in hedging transactions are highly effective in offsetting changes in fair values or cash fl ows of hedged items attributable to the hedged risk. The Group discontinues hedge accounting prospectively in the following circumstances: it is determined that the derivative is no longer effective in offsetting changes in the fair value or cash fl ows of a • hedged item (including forecast transactions); the derivative expires or is sold, terminated, or exercised;•
the derivative is no longer designated as a hedging instrument because it is unlikely that the forecast transaction will • occur; or the Group otherwise determines that designation of the derivative as a hedging instrument is no longer appropriate.•
When hedge accounting is discontinued for a cash fl ow hedge, the net gain or loss will remain in comprehensive income within shareholders’ equity and be reclassifi ed to income in the same period or periods during which the formerly hedged transaction is reported in income. When the Group discontinues hedge accounting because the forecast transaction is no longer expected to occur the hedging instrument will continue to be carried on the consolidated balance sheet at its fair value, and any related accumulated gains and losses that were previously recorded in comprehensive income from the period when the hedge was effective are recognized in income. The forecast transaction may still be expected to occur, but may no longer be highly probable, in which case the related cumulative gains and losses on the hedging instrument remain in comprehensive income within shareholders’ equity until the forecast transaction occurs or is no longer expected to occur. At that point, the gains and losses will be treated as described above.
h) Derecognition of financial assets and liabilities Financial assets are derecognized when the right to receive cash fl ows from the assets has expired, or when the Group has transferred its contractual right to receive the cash fl ows from the fi nancial asset, and either substantially all the risks and rewards of ownership have been transferred; or•
n) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifi able assets of the acquired subsidiary/associate at the acquisition date. Goodwill on acquisition of subsidiaries is included in the balance sheet as a separate line. Goodwill on acquisition of associates is included in investments in associates and joint ventures and is tested for impairment as part of the overall measurement of the carrying amount of those investments.
For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash infl ows from continuing use of that group of assets (the ‘cash generating unit’ (CGU)), and that is largely independent of the cash infl ows of other assets or groups of assets. The Group’s CGUs, on which impairment losses are assessed, represent the lowest level at which goodwill is monitored for internal management purposes. CGUs are not larger than an operating segment.
o) Other intangible assets Intangible assets include present value of future profi ts from acquired insurance contracts (PVFP), attorney-in-fact relationships (AIF), and other intangible assets, such as customer relationships and contracts, affi nity partnerships, distribution agreements, computer software licenses and capitalized software development costs. Intangible assets acquired in a business combination are recognized separately from goodwill at the acquisition date if their fair values can be measured reliably, the assets are separable or arise from contractual or other legal rights, and they are controlled by the entity.
Costs incurred during the development phase of computer software are capitalized when the following recognition criteria are met: it is technically feasible to complete the software product so that it will be available for use;•
suffi cient sources are available to complete the development of the software; and•
Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire and bring to use the specifi c software.
Other intangible assets with fi nite lives are carried at cost less accumulated amortization and impairments. They are amortized using the straight-line method over their useful lives and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Present value of future profi ts from acquired insurance contracts (PVFP) On the acquisition of life insurance businesses a customer contract intangible asset representing the PVFP is determined. This asset has a fi nite life and is amortized over the expected life of the policies acquired, based on a constant percentage of the present value of estimated gross profi ts (margins) expected to be realized, or over the premium recognition period, as appropriate.
Attorney-in-fact relationships (AIF) The AIF refl ects the ability of the Group to generate future revenues based on the Group’s relationship with the Farmers Exchanges. In determining that these relationships have an indefi nite useful life, the Group considered the organizational structure of inter-insurance exchanges, under which subscribers exchange contracts with each other and appoint an attorney-in-fact to provide certain management services, and the historical AIF between FGI and the Farmers Exchanges.
Taxes payable by either the holding company or its subsidiaries on expected distributions to the holding company of the profi ts of subsidiaries are not recognized as deferred income taxes unless a distribution of those profi ts is intended in the foreseeable future.
Actuarial gains and losses are recognized in full in the period in which they occur and are presented on a separate line in the statement of comprehensive income. Actuarial gains and losses result from experience adjustments (the effects of differences between the previous actuarial assumptions and what has actually occurred during the accounting period), changes in actuarial assumptions since the previous balance sheet date, and differences between the expected and actual returns on plan assets. Unrecognized past service costs represent non-vested benefi ts on the date of a change in the amount of benefi ts following an amendment to the plan and are amortized on a straight-line basis over the average vesting period.
Under the Group’s cash-settled share-based payment compensation plan, the Group allows participants to take their option award in the form of Share Appreciation Rights (SAR). Hence, the Group incurs a liability which is measured at the fair value of the SAR. As the fair value of the options which the Group uses for its employee schemes cannot be compared with those in the market, the Group estimates the fair value using the Black-Scholes model. This model requires inputs such as share price, exercise price, implied volatility, risk-free interest rate, expected dividend rate and the expected life of the option. The liability is measured at initial recognition and at each balance sheet date until settled thereby taking into account the terms and conditions on which the SAR were granted, and the extent to which the participants have rendered service to date. The fair value of the participants’ services received in exchange for the SAR is recognized as an expense in income over the vesting period and measured by reference to the fair value of the liability.
s) Property and equipment Own use property is defi ned as property held by the Group for use in the supply of services or for administrative purposes. Buildings held for own use and equipment are carried at cost less accumulated depreciation and any accumulated impairment loss. These assets are depreciated usually on a straight-line basis to income over the following estimated useful lives: buildings 25 to 50 years;•
Maintenance and repair costs are charged to income as incurred. The costs of IT systems purchased from third party vendors are capitalized and amortized over expected useful lives. Gains and losses on the disposal of property and equipment are determined by comparing the proceeds with the carrying amounts and are recorded in other income or administrative and other operating expense, respectively.
w) Foreign currency translation and transactions Foreign currency translation In view of the international nature of the Group, there are many individual entities with different functional currencies. A functional currency is the currency of the primary economic environment in which an entity operates. Therefore, a common presentation currency is required. Due to the Group’s economic exposure to the U.S. dollar (USD), the presentation currency of the Group has been determined to be the USD. Assets and liabilities of Group companies with functional currencies other than USD are translated into the presentation currency at end-of-period exchange rates, while income statements are translated at average exchange rates for the period. The resulting translation differences are recorded directly in shareholders’ equity as cumulative translation adjustments.
Foreign currency monetary items and foreign currency non-monetary items, which are carried at fair value, are translated at end-of-period exchange rates. Foreign currency non-monetary items which are carried at historical cost are translated at historical exchange rates. The resulting foreign currency translation differences are recorded in income, except for the following: when the gain or loss on non-monetary items measured at fair value, such as available-for-sale equity securities, • is recognized directly in shareholders’ equity, any foreign currency component of that gain or loss is also recognized directly in shareholders’ equity; changes in the fair value of monetary items denominated in foreign currency, such as debt securities, that are • classifi ed as available-for-sale, are analyzed between foreign currency translation differences resulting from changes in the amortized cost of the security and other fair value changes of the security. Foreign currency translation differences related to changes in amortized cost are recognized in income, and those related to other changes in fair value are recognized in shareholders’ equity; and on consolidation, foreign currency translation differences arising on monetary items that form part of net investments • in foreign operations are recognized directly in shareholders’ equity.
Goodwill and any fair value adjustment to the carrying amounts of assets and liabilities on the acquisition of a foreign operation are expressed in the functional currency of the foreign operation and are translated at the end-of-period exchange rates, with any foreign currency translation differences recorded directly in shareholders’ equity.
Refer to notes 8 and 11 for further information on reserves for losses and loss adjustment expenses.
For contracts that insure the risk of longevity, such as annuity contracts, an appropriate allowance is made for people • living longer. Continuing improvements in medical care and social conditions could result in further improvements in longevity in excess of those allowed for in the estimates used to determine the liability for contracts where the Group is exposed to longevity risk.
Estimates are also made as to future investment income arising from the assets backing long-term insurance • contracts. These estimates are based on current market returns as well as expectations about future economic and fi nancial developments.
Assumptions are determined with reference to current and historical client data, as well as industry data. Interest • rate assumptions refl ect expected earnings on the assets supporting the future policyholder benefi ts. The information used by the Group’s qualifi ed actuaries in setting such assumptions includes, but is not limited to, pricing assumptions, available experience studies and profi tability analysis.
c) Fair value of financial assets and liabilities As described in note 3, all fi nancial assets and liabilities are recorded initially at fair value. Subsequently, derivative fi nancial instruments, fi nancial assets and liabilities classifi ed as held for trading, designated at fair value, available-for08_Financial_Statements_Part1_7442_Eng. indd 17308_Financial_Statements_Part1_7442_Eng.indd 173 24/2/10 20:16:5524/2/10 20:16:55
sale and fi nancial liabilities designated at fair value are carried at fair value. While all the other fi nancial instruments are carried at amortized cost, their fair values are disclosed in note 27.
For certain fi nancial instruments, the carrying amounts approximate to fair value because of the short term nature of the instruments. Such instruments include short-term investments, receivables, obligations to repurchase securities and other short term fi nancial assets and liabilities.
The Group makes extensive use of third party pricing providers in determining fair values of invested assets and only in rare cases places reliance on prices that are derived from internal models. The Group’s control environment and the process of selection of pricing providers confi rms that fair values of invested assets are sourced only from independent, reliable and reputable third party pricing providers.
The Group employs third party asset managers who manage a signifi cant percentage of assets on behalf of the Group, but are not responsible for determining the fair values used in the fi nancial statements. Investment accounting and operations functions, are completely independent from those responsible for buying and selling the assets, and are responsible for receiving, challenging and verifying values provided by third parties to ensure that fair values are reliable and comply with the applicable accounting and valuation policies. The quality control procedures used depend on the nature and complexity of the invested assets and include regular reviews of valuation techniques and inputs used by pricing providers (for example, default rates of collateral for asset backed securities), variance and stale price analysis and comparisons with fair values of similar instruments and with alternative values obtained from asset managers and brokers.
Refer to notes 6, 7 and 27 for further information on the fair value of fi nancial assets and liabilities.
The recoverable amount of the intangible assets with an infi nite live related to the Farmers segment (i.e. attorney-infact (AIF) relationships and goodwill) is determined on the basis of value-in-use calculations. These calculations use cash fl ow projections based on business plans and the surplus development in the Farmers Exchanges. Business plans are approved by management and typically cover a 5-year period. Cash fl ows beyond that fi ve-year period are extrapolated for 20 years assuming zero growth.
Refer to note 24 for further information on employee benefi ts.
Financial Information volatility, expected change in dividend rate and contracted option life. These assumptions may differ from actual results due to changes in economic conditions.
Recent developments On July 21, 2009, Caixa d‘Estalvis de Sabadell ("Caixa Sabadell"), a savings bank based in Spain with which the Group entered into bank distribution agreements for the Spanish market in 2008, announced that it was developing plans for a merger between itself and two other Spanish savings banks. On September 10, 2009, Caixa Sabadell announced that a third Spanish savings bank had joined these merger preparations on September 7, 2009. The Group is reviewing the potential impact on its distribution agreements with Caixa Sabadell and its options resulting from such a merger.
“Minas Brasil” sets out the acquisition of 100 percent of Companhia de Seguros Minas Brasil (CSMB) and of 100 percent of Minas Brasil Seguradora Vida e Previdência S.A. (MBVP), a life insurer based in Brazil. On November 28, 2008 the Group acquired 87.35 percent of CSMB and 100 percent of MBVP from Banco Mercantil do Brasil S.A. (Banco Mercantil) and two private investors. As part of this transaction, the Group entered into an exclusive distribution agreement with Banco Mercantil for both life and general insurance products. Following price adjustments in accordance with the purchase agreement, total acquisition costs for CSMB, MBVP and the distribution agreement amounted to USD 121 million and included net tangible assets acquired of USD 9 million and identifi able intangible assets, net of deferred tax, of USD 19 million, mainly relating to the distribution agreement with Banco Mercantil. The residual goodwill of USD 93 million represents expected synergies and growth opportunities from the bank distribution agreement and the expansion of other sales channels. In addition, an earn-out component of up to USD 21 million based on future performance under the distribution agreement has been agreed. During the year ended December 31, 2009 the Group acquired the remaining 12.65 percent of the outstanding shares of CSMB for a total consideration of USD 22 million, resulting in total ownership for the Group of 100 percent of the share capital of CSMB and an increase of goodwill of USD 21 million. The amounts shown in table 5.1 under total acquisition costs of USD 143 million and goodwill of USD 114 million comprise MBVP and the distribution agreement, the acquisition of the 87.35 percent of CSMB in 2008 and of the remaining 12.65 percent of CSMB in 2009, respectively. Total revenues for the year ended December 31, 2009 of both, CSMB and MBVP combined were USD 216 million and the impact of this transaction on the income was immaterial.
Cash and cash equivalents acquired 48 172 337 64 621 1 The Banco Sabadell purchase price allocation comprises the purchase price adjustment completed during 2009.
Table 5.2 in USD millionsBusiness combinations – prior period 08_Financial_Statements_Part1_7442_Eng.indd 17908_Financial_Statements_Part1_7442_Eng.indd 179 24/2/10 20:16:5724/2/10 20:16:57
“Other” sets out in aggregate the acquisition of 100 percent of the Italian life insurer DWS Vita S.p.A. (DWS Vita), completed on June 3, 2008, the acquisition of 50 percent of Can Soluciones Integrales S.A. (Can Soluciones), a general insurance company based in Spain, completed on June 20, 2008, and the acquisition of 100 percent of Baden-Badener Versicherung Aktiengesellschaft (Baden-Badener), an accident insurer based in Germany, completed on August 5, 2008. Further details of these acquisitions are given below.
Total acquisition costs for DWS Vita amounted to USD 138 million and included 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).
Total acquisition costs for Baden-Badener amounted to USD 40 million and included net tangible assets acquired of USD 25 million, identifi able intangible assets, net of deferred tax, of USD 5 million (USD 6 million before tax), and residual goodwill of USD 10 million, representing expected synergies and growth opportunities.
Table 5.2 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 had been recognized in 2007.
The acquisition of 87.35 percent of Companhia de Seguros Minas Brasil, of 100 percent of Minas Brasil Seguradora Vida e Previdência S.A. and the distribution agreement with Banco Mercantil do Brasil S.A. was completed on November 28, 2008. Initial accounting has been fi nalized during 2009 of which details are presented in section “Transactions in 2009” and in table 5.1. The initial purchase price for both companies including the consideration for the distribution agreement amounted to USD 127 million. As of December 31, 2008, the Group was still in the process of preparing the initial accounting and, therefore, the initial purchase price was recorded as an unconsolidated investment in other assets and is not included in table 5.2.
Real estate held for investment 804 933 (352) (1,596) 452 (664)
Investment result, gross for Group investments 7,748 8,959 (1,423) (2,893) 6,324 6,066 Investment expenses for Group investments (243) (261) – – (243) (261) Investment result, net for Group investments 7,505 8,698 (1,423) (2,893) 6,082 5,805 1 Including net capital gains/(losses) on derivative fi nancial instruments of USD (543) million and USD 1,352 million for the years ended December 31, 2009 and 2008, respectively, of which net capital gains/(losses) on derivatives attributable to cash fl ow hedge ineffectiveness amounted to USD 33 million and USD 5 million for the years ended December 31, 2009 and 2008, respectively.
Real estate held for investment 341 442 (483) (1,806) (142) (1,364) Other loans 7 – – – 7 –
Net capital gains/(losses) for unit-linked contracts 10,800 (22,617) 387 (351) 11,187 (22,968)
Realized capital gains on Group investments 323 556 988 458 1,312 1,013 Realized capital losses on Group investments (471) (1,130) (955) (622) (1,426) (1,752)
Total net capital gains/(losses) and impairments 10,536 (25,444) (148) (1,924) 10,388 (27,368)
Cash and cash equivalents 17,471 5.9 16,888 6.6 Equity securities: Fair value through profi t or loss 83,329 28.2 65,150 25.3 of which: trading equity portfolios in capital markets and banking activities 461 0.2 786 0.3
Debt securities: Fair value through profi t or loss 17,037 5.8 16,801 6.5
Table 6.3a as of December 31Details of total investments by category 08_Financial_Statements_Part1_7442_Eng.indd 18308_Financial_Statements_Part1_7442_Eng.indd 183 24/2/10 20:17:0124/2/10 20:17:01
Cash and cash equivalents 11,631 5.9 12,428 6.9 Equity securities: Fair value through profi t or loss 5,018 2.6 4,996 2.8 of which: trading equity portfolios in capital markets and banking activities 461 0.2 786 0.4
Securities under security lending and short-term sale and repurchase agreements As of December 31, 2009 and 2008, investments included USD 5,073 million and USD 2,917 million, respectively, of loaned securities. These loaned securities were mainly debt securities. Cash and cash equivalents included USD 493 million and USD 177 million of cash received as collateral for loaned securities as of December 31, 2009 and 2008, respectively. Liabilities for cash collateral received for securities lending comprised USD 508 million and USD 182 million as of December 31, 2009 and 2008, respectively. Non-cash collateral received for loaned securities comprised mainly equity and debt securities and amounted to USD 5,046 million and USD 3,274 million as of December 31, 2009 and 2008, respectively. The Group can sell or repledge the collateral only in the event of a default by a counterparty.
Table 6.5 in USD millions, as of December 31Available-for-sale securities 08_Financial_Statements_Part1_7442_Eng.indd 18608_Financial_Statements_Part1_7442_Eng.indd 186 24/2/10 20:17:0424/2/10 20:17:04
As of January 1 11,601 15,386 Additions and improvements 431 664
Market value revaluation (308) (1,823) Transfer from/(to) assets held for own use (47) (45) Foreign currency translation effects 625 (1,520) As of December 31 11,686 11,601
Joint ventures: MCIS Zurich Insurance Berhad 37 37 1 2 40.00% 40.00%
SPEs: 1 1 The Group has several special purpose entities (SPEs) in the U.S. which are consolidated using the equity method as a reasonable approximation, as the equity pick up is usually 99% and the investment balance approximates the value of the SPE’s assets. These entities were specifi cally designed to facilitate U.S. commercial property sale and leaseback transactions.
1 Net unrealized gains/(losses) include net losses arising on cash fl ow hedges of USD (9) million and USD (16) million as of December 31, 2009 and 2008, respectively.
Table 6.10 in USD millions, as of December 31Net unrealized gains/(losses) on Group investments included in shareholders’ equity 08_Financial_Statements_Part1_7442_Eng.indd 18808_Financial_Statements_Part1_7442_Eng.indd 188 25/2/10 17:48:0225/2/10 17:48:02
The Group uses derivatives mainly for economic hedging purposes in order to mitigate risks. Such risks result from changes in interest rates, equity prices and exchange rates. The Group may also use derivatives to protect itself against the credit risk of counterparties.
Foreign exchange contracts Foreign exchange contracts consist mainly of forward contracts which are used to hedge the Group’s foreign currency exposures and manage currency mismatches on the balance sheets.
The notional amounts of foreign exchange forwards decreased by USD 2,611 million between December 31, 2008 and December 31, 2009, mostly due to a decrease in underlying foreign exchange exposures. The Group has also entered into new swaps positions to hedge the foreign currency risk arising from certain debt issued.
Other contracts Other contracts predominantly include stable value options (SVOs), which include written equity put options. SVOs have been provided by the Group to certain bank and corporate customers (policyholders) in the U.S., in respect of the investment returns which arise on investments underlying Bank Owned Life Insurance (BOLI) and Company Owned Life Insurance (COLI) policies.
The following table sets out details of fair value and cash fl ow hedges: Maturity by notional amount Notional principal amounts
Total cash fl ow hedges 155 1,232 4,421 5,808 428 (6) 4,487 272 –
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 62 21 on hedged item attributable to the hedged risk (57) (26)
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 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.
As of December 31, 2009 the following cash fl ow hedge relationships were in place (see note 22): 80 percent of the EUR 1 billion 4.5 percent senior bond due 2014 issued by Zurich Finance (USA), Inc. entered on •
The Group has also designated cash fl ow hedges consisting of interest rate swaps to eliminate its exposure to interest rates on Floating Rate Notes held by the Group.
The portion recognized in income was a gain of USD 96 million and a loss of USD 54 million before tax for the years ended December 31, 2009 and 2008, respectively, as an offset to the foreign currency revaluation on the underlying hedged debt.
Financial Information 8. Reserves for insurance contracts and reinsurers’ share of reserves for insurance contracts