As of December 31, 2010 and 2009, respectively, debt securities with a carrying value of USD 3,383 million and USD 3,938 million have been sold to financial institutions under short-term sale and repurchase agreements. These securities continue to be recognized as investments in the balance sheets. Obligations to repurchase these securities comprised USD 3,330 million and USD 3,976 million as of December 31, 2010 and 2009, respectively. The Group retains the rights to the risks and rewards of ownership of loaned securities and securities under short-term sale and repurchase agreements. These risks and rewards include changes in market values and income earned.
Mortgage and asset-backed securities: < 1 year – – 575 1,288 17 69
The analysis is provided by contractual maturity. Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay certain obligations with or without call or prepayment penalties.
Other governments and supra-nationals 33,226 29,745 923 1,062 (855) (233) 33,294 30,574
The significant increase in unrealized gains on equity securities by USD 1,548 million is primarily due to the revaluation of the Group’s investment in New China Life Company Ltd. and also as a consequence of the global equity market improvements in 2010.
Table 6.6 as of December 31Fair value through profit or loss securities
As of January 1 11,686 11,601 Additions and improvements 340 431
Market value revaluation 261 (308) Transfer from/(to) assets held for own use 77 (47) Transfer (to) assets held for sale (12) – Foreign currency translation effects 193 625 As of December 31 12,355 11,686
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 specifically designed to facilitate U.S. commercial property sale and leaseback transactions.
In certain circumstances these instruments may meet the requirements of an effective hedge for accounting purposes. Where this is the case, hedge accounting may be applied. Details of the accounting for these instruments are set out in table 7.2.
Exchange traded Futures 1,203 – – 1,203 – – 1,969 – –
Credit contracts: OTC Credit Default Swaps 268 164 – 432 2 – 649 3 (8)
Total Group derivative financial instruments 20,886 7,117 8,411 36,414 1,009 (958) 30,722 608 (625) Total unit-linked derivative financial instruments 717 1,560 77 2,353 104 (3) 2,458 98 –
Table 7.1 in USD millions, as of December 31Maturity profile of notional amounts and fair values of derivative financial instruments
Equity contracts Equity contracts are entered into mostly on a portfolio level to protect equity investments against a decline in equity market prices and to manage the risk return profile of equity exposures. Most equity contracts are purchased put options. The decrease in the notional amounts of put options between December 31, 2010 and December 31, 2009 was mainly driven by matured positions. Total return swaps and exchange traded options, have been entered into as part of a dynamic hedging strategy to manage its economic exposure and reduce the volatility associated with its closed book of variable annuities products within its U.S. life business.
All positions are for hedging purposes. With respect to the short positions, call options are used in collar structures to mitigate the hedging costs and the written put positions are mostly backed by long put positions or by cash collateral.
The notional amounts of foreign exchange forwards increased by USD 1,827 million between December 31, 2009 and December 31, 2010, as a result of new entered positions and currency effects.
Premiums received from policyholders under these policies are invested in separate account portfolios. Throughout the life of the policies, policyholders are entitled, in addition to mortality cover, to tax-exempt investment returns linked to the performance of the underlying investments. The policies are long duration contracts providing charges and benefits over a policy life that can be greater than 45 years. SVOs reduce the volatility of the policyholders’ investment returns. In the event that a policy is surrendered, the policyholder would be entitled to recover the excess of the notional SVO derived value over the market value of the underlying investments. Certain policy features as well as certain regulations provide disincentives for surrender. The Group monitors the risk of surrender on an ongoing basis and considers the likelihood of surrender as an input factor to the model to determine the fair value of the SVOs. During 2010, there were five full surrenders compared with one surrender in 2009. No SVP was paid on four of the surrenders, on the fifth, USD 1 million was paid. In 2009 the net loss on surrender amounted to USD 5 million after applicable reductions. The fair value of the derivative liability recognized in respect of the SVOs, included in written put options, was USD 25 million and USD 37 million as of December 31, 2010 and 2009, respectively. The difference between the notional SVO derived value and market value of the underlying investments for BOLI/COLI policies was USD 831 million and USD 1,043 million as of December 31, 2010 and 2009, respectively, representing the total net market value loss after surrender charges in the unlikely event that all policies would have been surrendered on those dates.
Fair value hedges: Cross currency interest rate swaps – 1,540 – 1,540 258 – 858 204 –
Gains and losses arising from fair value hedges are as follows: Gains/(losses) on hedging instruments 1 (52) 62 on hedged item attributable to the hedged risk 44 (57)
1 Excluding current interest income, which is booked on the same line as an offset to interest expense on the hedged debt.
Table 7.2 in USD millions, as of December 31Maturity profile of notional amounts and fair values of derivative financial instruments
Cash flow hedges Designated cash flow hedges, such as options on interest rate swaps are used to protect the Group against variability of future cash flows 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.
The Group has also designated cash flow hedges consisting of interest rate swaps to eliminate the exposure to interest rates on Floating Rate Notes held by the Group.
The net gains deferred in other comprehensive income on derivatives designated as cash flow hedges were USD 74 million and USD 23 million before tax for the years ended December 31, 2010 and 2009, respectively.
The portion recognized in income was a loss of USD 134 million and a gain of USD 96 million before tax for the years ended December 31, 2010 and 2009, respectively, as an offset to the foreign currency revaluation on the underlying hedged debt.
Losses and loss adjustment expenses paid: Current year (11,573) (11,178) 1,049 536 (10,524) (10,642)
Table 8.2 shows the development of reserves for losses and loss adjustment expenses during the year. The increase in total net reserves during the year included USD 1,367 million favorable development emerging from reserves established in prior years. Gross of reinsurance, the favorable development was USD 1,819 million. The reinsurers’ share was USD 452 million, reflecting reduced cessions based on a re-estimation of ultimate gross losses. This favorable development was primarily attributable to the General Insurance business and breaks down into many individual movements by Business Division, country, line of business, and accident year, with the majority coming from liability lines.
In the Global Corporate division, favorable development of USD 443 million was approximately equally shared between North America and the rest of the world. In North America, favorable development arose from general liability, property, and auto liability, offset by adverse development in workers compensation. Outside North America, favorable development arose from employers liability and property in the UK, as well as many small releases in other lines of business and countries.
Table 8.2 in USD millionsDevelopment of reserves for losses and loss adjustment expenses
Europe General Insurance favorable development of USD 371 million resulted primarily from favorable experience in Switzerland, UK, Spain, and Portugal which was partially offset by adverse development of USD 155 million in Germany, in medical and professional liability. The remaining favorable development emerged from Group Reinsurance, International Markets, and the assumed business in the Farmers segment, somewhat offset by adverse development at Centre.
Initial net reserves for losses and loss adjustment expenses 24,089 30,366 37,013 43,486 46,194 50,814 54,712 52,986 55,903 55,976
Cumulative (deficiency)/ redundancy of net reserves (10,755) (8,720) (6,095) (2,196) 1,041 3,000 2,839 2,341 1,367 Cumulative (deficiency)/ redundancy as a percentage of initial net reserves (44.6%) (28.7%) (16.5%) (5.1%) 2.3% 5.9% 5.2% 4.4% 2.4%
Gross reserves re-estimated as of December 31, 2010 52,505 56,944 59,540 61,090 60,022 61,127 64,324 62,404 66,267 Cumulative (deficiency)/ redundancy of gross reserves (14,811) (11,638) (8,472) (3,325) 403 3,408 3,566 2,814 1,819 Cumulative (deficiency)/ redundancy as a percentage of initial gross reserves (39.3%) (25.7%) (16.6%) (5.8%) 0.7% 5.3% 5.3% 4.3% 2.7%
Table 8.3 presents changes in the historical non-life reserves, net of reinsurance, that the Group established in 2001 and subsequent years. Reserves are presented by financial year, not by accident year. The reserves (and the development thereon) are for all accident years in that financial year. The top line of the table shows the estimated gross reserves for unpaid losses and loss adjustment expenses as of each balance sheet date, which represents the estimated amount of future payments for losses incurred in that year and in prior years. The cumulative paid portion of the table presents the cumulative amounts paid through each subsequent year in respect of the reserves established at each year end. The net reserves re-estimated portion of the table shows the re-estimation of the initially recorded reserve as of each succeeding year end. Reserve development is shown in each column. Changes to estimates are made as more information becomes known about the actual losses for which the initial reserves were established. The cumulative deficiency or redundancy is equal to the initial net reserves less the liability re-estimated as of December 31, 2010. It is the difference between the initial net reserve estimate and the last entry of the diagonal. Conditions and trends that have affected the development of reserves for losses and loss adjustment expenses in the past may or may not necessarily occur in the future, and accordingly, conclusions about future results cannot be derived from the information presented in table 8.3.
Losses and loss adjustment expenses incurred 35 34 652 539 Losses and loss adjustment expenses paid (138) (90) (299) (281) Foreign currency translation effects (94) (79) 251 217
(Decreases)/increases recorded in other comprehensive income (8) 85 – – (8) 85 1 The 2010 net movement includes USD 2,730 million related to the transfer to other reserves categories (see note 1) and USD (1,508) million related to loss of control in Caixa Sabadell (see note 5).
The amount of policyholder dividends to be paid is determined annually by each life insurance subsidiary. Policyholder dividends include life policyholders’ share of net income and unrealized appreciation of investments that are required to be allocated by the insurance contract or by local insurance regulations. Experience adjustments relating to future policyholders’ benefits and policyholders’ contract deposits vary according to the type of contract and the country. Investment, mortality and morbidity results may be passed through by experience credits or as an adjustment to the premium mechanism, subject to local regulatory provisions.
The impact of changes in assumptions on net future life policyholders’ benefits was USD 170 million and USD (115) million for the years ended December 31, 2010 and 2009, respectively. The net changes include the following significant movements: • interest rate assumptions increased the benefits by USD 216 million in 2010 and reduced them by USD 11 million in 2009; • expense assumptions increased the benefits by USD 4 million in 2010 and reduced them by USD 2 million in 2009; • longevity assumptions increased the benefits by USD 1 million in 2010 and by USD 12 million in 2009; • morbidity assumptions reduced the benefits by USD 7 million in 2010 and by USD 23 million in 2009; • investment return assumptions reduced the benefits by USD 27 million in 2010 and increased by USD 133 million in 2009; • modeling assumptions reduced the benefits by USD 10 million in 2010 and increased them by USD 118 million in 2009; • change in accounting policy (see note 1) reduced the benefits by USD 316 million in 2009.
Universal life and other contracts 11,164 10,801 Policyholder dividends 4,973 5,297
Liabilities related to unit-linked investment contracts 44,941 40,143 Liabilities related to investment contracts (amortized cost) 592 254 Liabilities related to investment contracts with DPF 5,134 5,728
The value of financial liabilities at amortized cost is based on a discounted cash flow valuation technique. The discount rate is determined by the current market assessment of the time value of money and risk specific to the liability.
Certain investment and insurance contracts sold by the Group contain benefit features for which the amount and timing of declaration and payment are at the discretion of the Group. Where that discretion has not been exercised, the total amount of undeclared funds surplus is included in other comprehensive income. Mandated allocations related to unrealized results and earnings are included in policyholder liabilities and, upon declaration, discretionary bonuses are allocated to policyholders. The changes in the table below represent the increase or decrease in unallocated gains and retained earnings after charging discretionary bonuses to policyholder liabilities.
Table 11.2 in USD millions, for the years ended December 31Policyholder dividends and participation in profits
Table 11.4 in USD millions, for the years ended December 31Change in reserves for unearned premiums
1 Net of eliminations from inter-segment transactions. 2 The 2010 movement represents the impact of loss of control in Caixa Sabadell (see note 5).
Transfers – 28 Foreign currency translation effects (13) 71 As of December 31 866 856 13. Administrative and other operating expenses
Consolidated financial statements continued 14. Farmers management fees and other related revenues
FGI has historically charged a lower management fee than the amount allowed by contract. The range of fees has varied by line of business over time and from year to year. The gross earned premiums of the Farmers Exchanges were USD 18,311 million and USD 17,885 million for the years ended December 31, 2010 and 2009, respectively.
Financial instruments Receivables from policyholders 3,042 3,415 Receivables from insurance companies, agents, brokers and intermediaries 5,343 5,803 Receivables arising from ceded reinsurance 1,195 1,092 Other receivables 3,937 3,270 Allowance for impairments 1 (323) (436) Non-financial instruments Current tax receivables 740 638 1 Allowance for impairments includes USD 61 million and USD 181 million as of December 31, 2010, and 2009, respectively, for receivables arising from ceded reinsurance.
Table 14 in USD millions, for the years ended December 31Farmers management fees and other related revenues
Impairment charges of USD 1 million on mortgage loans given as collateral were recorded in income for the year ended December 31, 2009.
Undiscounted cash flow 2 1 Allocation to the time bands is based on the expected maturity date. 2 Allocation to the time bands is based on the earliest contractual maturity.
Table 16 in USD millions, as of December 31Maturity schedule - collateralized loans
The fire insurance value of the Group’s own-use property and equipment totaled USD 3,344 million and USD 3,473 million as of December 31, 2010 and 2009, respectively.
Amortization charged to other comprehensive income – 22 – – – – 22
Gross carrying value as of December 31, 2010 2,241 2,528 2,607 1,025 3,967 195 12,563 1 The reduction in Goodwill is the result of a revised earn-out calculation within one of the Group’s Spanish General Insurance operations and the impact of loss of control in Futuro de Bolivia S.A. Administradora de Fondos de Pensiones (see note 5). The decreases in PVFP and distribution agreements represent the impact of loss of control in Caixa Sabadell (see note 5).
As part of its annual impairment testing the Group has compared the carrying amount of its intangible assets with the recoverable amount, generally based on a value-in-use calculation. Based on management’s best estimate and after taking into consideration sensitivity analysis of the current conditions, an impairment of USD 104 million has been recorded for the goodwill of the Russian General Insurance operations.
The decision to decentralize its Direct insurance efforts in the Group’s European General Insurance operations resulted in an impairment of USD 114 million for software which will no longer be used.
Net carrying value as of January 1, 2009 1,677 1,252 3,032 1,025 1,156 166 8,310
The undiscounted amounts of the other financial assets as of December 31, 2010 and 2009 are not materially different from the carrying amounts.
Other financial liabilities: Amounts due to reinsurers, agents and other insurance companies 2,041 1,996 Amounts due to investment brokers 1,059 853 Amounts due to life policyholders 668 561 Liabilities for cash collateral received for securities lending 485 508 Derivative liabilities 1,005 660 Deposits from banking activities 1,559 2,614 Liabilities for defined benefit plans 1,779 1,891 Other liabilities for employee benefit plans 112 101 Other liabilities 6,583 6,616 Other non-financial liabilities: Current tax payables 850 983 Restructuring provisions 155 119 Premium prepayments and other advances 957 828 Other liabilities 1,141 567 Total other liabilities 18,396 18,299
Table 20.2 shows the maturity schedule of other financial liabilities as of December 31, 2010 and 2009, respectively.
Total income tax expense/(benefit) attributable to policyholders 462 387 Total income tax expense/(benefit) attributable to shareholders 893 1,167 Total income tax expense/(benefit) 1,355 1,553
Table 21.2 in USD millions, for the years ended December 31Income tax expense – policyholder/ shareholder attribution
Table 21.3 in USD millions, for the years ended December 31Expected and actual income tax expense
Current tax receivables 740 638 Current tax payables (850) (983) Net current tax payables (110) (345)
Deferred tax assets 2,067 2,421 Deferred tax liabilities (4,585) (4,445) Net deferred tax liabilities (2,518) (2,023)
As of January 1 (2,023) (108) Net change recognized in the income statement (227) (585) Net change recognized in equity (488) (1,223) Net changes due to acquisitions/(divestments) 198 11 Foreign currency translation effects 22 (118) As of December 31 (2,518) (2,023)
USD 831 million increase in deferred tax liabilities resulted primarily from the acquisitions in 2008 and the divestments in 2010, of which USD 387 million relates to non-controlling interests.
Net deferred tax assets/(liabilities) attributable to policyholders (473) (74) Net deferred tax assets/(liabilities) attributable to shareholders (2,045) (1,950) Net deferred tax liabilities (2,518) (2,023)
Table 21.4 in USD millions, as of December 31Current tax receivables and payables
Tax loss carryforwards 505 – 475 – Gross deferred tax assets/(liabilities) before valuation allowance 3,374 (1,241) 3,397 (973) Valuation allowance (66) – (2) – Gross deferred tax assets/(liabilities) after valuation allowance 3,308 (1,241) 3,395 (973) Deferred tax assets 2,067 2,421
The Group’s deferred tax assets and liabilities are recorded in its tax paying entities throughout the world, which may include several legal entities within each tax jurisdiction. Legal entities are grouped as a single taxpayer only when permitted by local legislation and when deemed appropriate. The first part of the table above includes single taxpayers with a net deferred tax asset position and the second part includes single taxpayers with a net deferred tax liability position.
As of December 31, 2010 the aggregate amount of temporary differences associated with investments in subsidiaries, branches and associates and interests in joint ventures, for which deferred tax liabilities have not been recognized amount to approximately USD 19 billion. In the remote scenario in which these temporary differences were to reverse simultaneously, the resulting tax liabilities would be very limited due to participation exemption rules.
For which deferred tax assets have not been recognized, expiring 5 to 20 years 180 178 > 20 years or with no time limitation 436 219
Table 21.9 in USD millions, as of December 31Tax losses carryforwards and tax credits
Debt related to capital markets Zurich Capital Markets Various debt instruments payable within 1 year 400 25 Debt related to capital markets 400 25 Senior debt Zurich Finance (USA), Inc. 3.50% CHF 300 bond, due November 2011 1, 6 322 291
ZFS Finance (USA) Trust IV Series IV 5.875% USD 500 Trust Preferred Securities, due May 2062 250 249
Other Various debt instruments payable in more than 1 year 44 22 Subordinated debt 5,004 5,167 Total senior and subordinated debt 11,057 11,444 Total debt 11,457 11,469 1 The bond is economically hedged, but hedge accounting treatment has not been applied. 2 The bond is part of a qualifying cash flow hedge (80% of the total) and fair value hedge (20% of the total). 3 The bond is part of a qualifying cash flow hedge.
None of the debt instruments listed above were in default as of December 31, 2010 and 2009.
ii) Subordinated debt Subordinated debt securities are obligations of the Group which, in case of liquidation, rank junior to all present and future senior indebtedness and certain other obligations of the Group.
Subordinated debt decreased from USD 5.2 billion as of December 31, 2009 to USD 5.0 billion as of December 31, 2010, mainly as a result of the strengthening of the U.S. dollar against the euro and British pound, as the redemption of Enhanced Capital Advantaged Preferred Securities (“ECAPS”) was almost offset by the issuance of subordinated notes under the EMTN Programme.
On December 15, 2010, ZFS Finance (USA) Trust I and ZFS Finance (USA) Trust III have exercised their option to early redeem at par together with accrued interest USD 600 million of Series I Fixed/Adjustable Rate ECAPS and USD 400 million of Series III Floating Rate ECAPS, which were issued in December 2005. As a result of previous buy back activities USD 32 million of Series I Fixed/Adjustable Rate ECAPS and USD 200 million of Series III Floating Rate ECAPS issued in December 2005 were already held by the Group, resulting in a net repayment of USD 768 million.
Description 12.00% EUR 143 bond, undated notes 12.00% payable annually up to July 15, 2014 and then reset quarterly to 3-month EURIBOR plus 10.33%.
7.5% EUR 425 bond, due July 2039 7.5% payable annually up to July 24, 2019 and then reset quarterly to 3-month EURIBOR plus 5.85%.
6.625% GBP 450 bond, undated notes 6.625% payable annually up to October 2, 2022 and then reset every 5 years to the reset rate of interest. 1
4.5% EUR 500 bond, due June 2025 4.5% payable annually up to June 15, 2015 and then reset quarterly to 3-month EURIBOR plus 2.20%.
Series IV 5.875% USD 500 Fixed / Floating Trust Preferred Securities, due May 2062 5.875% payable semi-annually until May 9, 2012 and then reset quarterly to 3-month LIBOR plus 1.815%.
Series V 6.5% USD 1,000 Fixed / Floating Trust Preferred Securities, due May 2067 6.5% payable semi-annually until May 9, 2017 and then reset quarterly to 3-month LIBOR plus 2.285%.
Rate, subject to a maximum under (ii) and (iii) of 13.25% Series I and 13% for Series II.
Debt maturities reflect original contractual dates without taking early redemption options into account. For call/ redemption dates, refer to table 22.2. The total notional amount of debt due in each period is not materially different from the total carrying amount disclosed in table 22.3. Undiscounted cash flows include interest and principal cash flows on debt outstanding as of December 31, 2010 and December 31, 2009, respectively. All debt is assumed to mature within 20 years of the balance sheet date the latest without refinancing. Floating interest rates are assumed to remain constant as of December 31, 2010 and December 31, 2009, respectively. The aggregated cash flows are translated into USD at end-of-period rates.
Debt related to capital markets 6 35 Senior debt 248 215 Subordinated debt 302 305
In addition, Zurich Insurance Company Ltd has access to revolving credit facilities totaling USD 441 million, which will expire in June and July 2013. As of December 31, 2010 no borrowings have been drawn under these facilities.
Dunbar Bank and Zurich Bank have access to various committed credit facilities totaling GBP 105 million and GBP 165 million, respectively. As of December 31, 2010 no borrowings were outstanding under these facilities (GBP 50 million had been drawn as of December 31, 2009).
Table 22.3 in USD millions, as ofMaturity schedule of outstanding debt
Table 22.4 in USD millions, for the years ended December 31Interest expense on debt
At the Annual General Meeting on April 2, 2009, the shareholders approved an increase in both authorized and contingent share capital to a new maximum of CHF 1,000,000 each, allowing for enhanced financial flexibility of the company for future capital management. On April 17, 2009, Zurich Financial Services Ltd placed 4,800,000 new shares issued under its authorized share capital and 1,914,096 existing treasury shares, bought back under the share buy-back program authorized in 2008, with institutional investors via an accelerated bookbuild. This capital increase reduced the authorized capital to CHF 520,000. The proceeds from the accelerated bookbuild were used in connection with the funding of the 21st Century acquisition completed on July 1, 2009. During the year 2009, a total of 550,448 shares were issued to employees from contingent capital.
The Board may issue such new shares by means of a firm underwriting by a banking institution or syndicate with a subsequent offer of those shares to current shareholders. The Board may allow the expiry of pre-emptive rights which have not been exercised, or it may place these rights as well as shares, the pre-emptive rights of which have not been exercised, at market conditions.
The Board of Directors is authorized, when issuing bonds or similar debt instruments connected with conversion and/or option rights, to restrict or withdraw the right of shareholders for advance subscription in cases where such bonds are issued for the financing or re-financing of a takeover of an enterprise, of parts of an enterprise, or of participations. If the right for advance subscription is withdrawn by the Board, the convertible bond or warrant issues are to be offered at market conditions (including standard dilution protection provisions in accordance with market practice) and the new shares are issued at the then current convertible bond or warrant issue conditions. The conversion rights are exercisable during a maximum period of ten years and option rights for a maximum period of seven years from the time of the respective issue. The conversion or option price or its calculation methodology shall be determined in accordance with market conditions, whereby for shares of Zurich Financial Services Ltd the quoted share price is to be used as a basis.
Employee participation On January 1, 2009, the contingent share capital, to be issued to employees of Zurich Financial Services Ltd and Group companies, amounted to CHF 319,428 or 3,194,279 fully paid registered shares with a nominal value of CHF 0.10 each. On January 1, 2010, the contingent share capital, to be issued to employees of Zurich Financial Services Ltd and Group companies, amounted to CHF 264,383 or 2,643,831 fully paid registered shares with a nominal value of CHF 0.10 each. At the Annual General Meeting on March 30, 2010, the shareholders approved the proposed increase of the contingent share capital for the issuance of new shares for employees of the Group to a new maximum of CHF 500,000. This increase was approved and registered with the Commercial Register on April 1, 2010.
During 2010 and 2009, 950,232 and 550,448 shares, respectively, were issued to employees from contingent share capital under the program described above. Of the total 950,232 registered shares issued to employees during the year 2010, 658,595 shares were issued in the period from January 1, 2010 to March 31, 2010 and 291,637 registered shares were issued as from April 1, 2010 to December 31, 2010. As a result, on December 31, 2010 and 2009, respectively, the remaining contingent share capital, which can be issued to employees of Zurich Financial Services Ltd and its subsidiaries, amounted to CHF 470,836 and CHF 264,383 or 4,708,363 and 2,643,831 fully paid registered shares, respectively, with a nominal value of CHF 0.10 each. Pre-emptive rights of the shareholders, as well as the right for advance subscription, are excluded. The issuance of shares or respective option rights to employees is subject to one or more regulations to be issued by the Board of Directors and take into account performance, functions, levels of responsibility and criteria of profitability. Shares or option rights may be issued to the employees at a price lower than that quoted on the stock exchange.
Consolidated financial statements course of 2010, the Group repurchased but not retired securities of the Series V in the total amount of USD 46.5 million and of the Series VI in the total amount of USD 52.89 million. The Group has the option to call all outstanding securities in 2011.
On April 17, 2009, Zurich Financial Services Ltd placed 1,914,096 treasury shares, bought back in 2008 under the share buy-back program, with institutional investors with the proceeds applied to the 21st Century transaction completed on July 1, 2009.
At the Annual General Meeting of March 30, 2010, the shareholders approved the destruction of the remaining 1,836,404 shares from the 2008 share buy-back program. Since their re-dedication in March 2009, these shares were held as treasury shares for use in connection with the funding of potential acquisitions in the future or for employee share-based compensation plans. The destruction of the remaining 1,836,404 shares was effective June 15, 2010.
Effect of potentially dilutive shares related to share-based compensation plans 1,142,920 (0.18) (0.19) Diluted earnings per share 3,422 145,987,835 23.44 24.38
Effect of potentially dilutive shares related to share-based compensation plans 1,023,350 (0.20) (0.22) Diluted earnings per share 3,943 142,966,726 27.58 29.88 1 Excludes the net income attributable to preferred shareholders of USD 11 million and USD 19 million for the year ended December 31, 2010 and 2009, respectively. 2 The translation from USD to CHF is shown for information purposes only and has been calculated at the Group’s average exchange rates for the years ended December 31, 2010 and 2009, respectively.
Basic earnings per share is computed by dividing net income attributable to shareholders by the weighted average number of shares outstanding for the year, excluding the weighted average number of shares held as treasury shares and preferred securities. Diluted earnings per share reflects the effect of potentially dilutive shares.
To ensure appropriate governance of the Group’s pension and post-employment benefit plans, the Group Pension Committee provides oversight of the Group’s benefits policy.
a) Defined benefit plans Defined benefit pension plans Employees of the Group’s companies are covered by various pension plans, the largest of which are in the UK, United States, Germany and Switzerland. Certain companies provide defined benefit plans, some of which provide benefits related to employees’ service periods and pensionable earnings. Others provide cash balance plans where the participants receive the benefit of the accumulated employer and employee contributions together with additional cash credits in line with the rules of the plan. Eligibility for participation in the various plans is either based on completion of a specified period of continuous service or from the date of commencement of employment.
Present value of funded obligations (14,978) (13,966) (12,680) (13,653) (12,190) – (70) (93) (66) (70) Fair value of plan assets 13,791 12,622 10,879 13,285 11,071 – – – 5 10
Table 24.2 in USD millions, as of December 31Status of unfunded defined benefit plans
Pension expense is recognized in other employee benefits, which are included in administrative and other operating expense.
Effects of business combinations and other transfers – (53) – (12) Foreign currency translation effects (81) (771) (7) (7) Benefit obligation as of December 31 (15,238) (14,196) (296) (275)
Table 24.5 in USD millions, as of December 31Fair value of assets held in funded defined benefit plans
Effect of curtailments or settlements (56) (13) – – Effects of business combinations and other transfers – 61 – – Foreign currency translation effects 79 713 – – Fair value of plan assets as of December 31 13,791 12,622 – –
Current average life expectancy for a 65 year old male 19.9 22.7 19.4 18.3 19.8 22.3 19.4 18.1
The expected long-term rate of return on assets is derived separately for each of the Group’s funded benefit plans. Each major asset class is assigned an expected long-term rate of return, net of investment expenses, appropriate for the environment in which that plan is invested. The overall expected long-term rate of return on assets for a plan is calculated as the weighted average of the expected return for each asset class, weighted by the plan’s target allocation to each asset class.
The mortality assumptions in each country have been based on mortality tables in accordance with the general use in that market. Where appropriate these tables make allowance for projected future improvements in life expectancy.
Table 24.11 as of December 31Assumptions used in determining the actuarial liabilities for other defined post- employment benefit plans
a) Cash incentive plans Various businesses throughout the Group operate short-term incentive programs for executives, management and, in some cases, for employees of that business unit. Awards are made in cash, based on the accomplishment of both organizational and individual performance objectives. The expense recognized for these cash incentive plans amounted to USD 422 million and USD 401 million for the years ended December 31, 2010 and 2009, respectively.
b) Share-based compensation plans for employees and executives The Group encourages employees to own shares in Zurich Financial Services Ltd and has set up a framework based on the implementation of either share options and/or performance share programs. Actual plans are tailored to meet local market requirements.
Share Incentive Plans for employees in Switzerland Under this plan, employees have the option to acquire sales-restricted shares at a 30 percent discount to the market value. The maximum permitted investment in shares is CHF 3,500 per employee. During 2010, 5,448 employees participated in the Employee Incentive Plan compared with 6,053 in 2009. For the year ended December 31, 2010, 1,372 employees received shares under the 2009 employee performance share plan. For the year ended December 31, 2009, 1,579 employees received shares under the 2008 employee performance share plan.
Senior Executive long-term incentive plans Each year, Senior Executives are granted performance shares and performance options, which vest on an annual basis over the subsequent three year period. The actual level of vesting, which can be between 0 percent and 175 percent, with an additional discretion to increase vesting to a maximum of 200 percent, of the original number of shares and/or
Executive long-term performance share plans Each year, selected executives are granted performance shares which vest on an annual basis over the subsequent three year period. The actual level of vesting, which can be between 0 percent and 175 percent, with an additional discretion to increase vesting to a maximum of 200 percent, of the original number of shares granted, depends on the performance of the Group during the previous calendar year. For 2010 and future grants the Group is looking back to a three year performance period. The current performance metrics are the Group’s ROE and the position of its total annual relative shareholder return measured against an international peer group of insurance companies. Grants under the plan are made annually each April. The actual number of performance shares granted is determined such that the economic value is a defined percentage of the annual salary in the year of allocation. Actual awards under these plans are made fully in shares of Zurich Financial Services Ltd. One half of the shares that actually vest are sales-restricted for a further period of three years. There were a total of 947 and 900 participants in this plan as of December 31, 2010 and 2009, respectively.
Shares granted during the period 407,940 543,698 260 198 Options granted during the period 1 1,698,817 1,175,774 29 62 1 Number of options granted is shown as the number of shares under option granted during the period.
The shares and options granted during the year are the target allocations made under the performance option and performance share plans together with any restricted share awards granted during the year. Whether these grants become vested or not will depend on whether the performance achievements are met. If the performance achievements deviate from the initial assumptions, the expense is being adjusted.
Share price, in CHF 1 260 198 Exercise price, in CHF 260 198 Assumed volatility 25.55% 42.95% Risk-free interest rate 2.00% 2.21% Expected dividend yield 6.10% 4.07% Contracted option life 7 years 7 years 1 Share price as at date of grant.
Table 25.4 in CHF, as of December 31Range of exercise prices of options outstanding
Commitments under investment agreements 4,100 4,165 Less funded commitments (3,513) (3,386) Remaining commitments under investment agreements 587 779 Guarantees and letters of credit 1 9,544 9,911 Future rent commitments 1,016 1,154 Undrawn loan commitments 149 405 Other commitments and contingent liabilities 88 84 1 Guarantee features embedded in life insurance products are not included. For such guarantee features see note 8 on insurance reserves.
Commitments under lease agreements The Group has entered into various operating leases as lessee for office space and certain computer and other equipment. Lease expenses totaled USD 187 million and USD 200 million for the years ended December 31, 2010 and 2009, respectively.
Table 26.1 in USD millions, as of December 31Quantifiable commitments and contingencies
Indemnity agreements The Group, through certain of its subsidiaries, has agreed to arrangements that cap Converium’s (now Scor Holding (Switzerland) AG) and its successor companies’ net exposure for losses arising out of the September 11, 2001 event at USD 289 million. As of December 31, 2010 the Group has recorded in this respect provisions of USD 44 million.
Pledged assets The majority of assets pledged to secure the Group’s liabilities relates to debt securities pledged under short-term sale and repurchase agreements. The total amount of pledged financial assets including the securities under short-term sale and repurchase agreements amounted to USD 9,611 million and USD 9,288 million as of December 31, 2010 and 2009, respectively.
Legal proceedings and regulatory investigations The Group and its subsidiaries are continuously involved in legal proceedings, claims and litigation regulatory investigations arising, for the most part, in the ordinary course of their business operations. The Group’s business is subject to extensive supervision, and companies in the Group are in regular contact with various regulatory authorities. In addition, certain companies within the Group are engaged in the following legal proceedings and regulatory investigations.
In Switzerland, ten suits have been brought since 2000 in various Swiss courts by the Swiss Guaranty Fund for Occupational Retirement Schemes (the “Guaranty Fund”) and the Vera Pension and Vera Investment Funds against Zurich Life Insurance Company (“Zurich Life”) and Geneva Life Insurance Company (“Geneva Life”), wholly owned indirect subsidiaries of Zurich Insurance Company Ltd. Zurich Life and Geneva Life provided insurance to certain pension funds and granted loans on policy reserves. The proceeds were invested, together with additional bank loans, in various real estate projects by the investment funds. Successful throughout the 1970s and 1980s, the funds were facing increasing financial difficulties during the downturn of the real estate activity in the early 1990s, until they collapsed in 1996. Both Geneva Life and Zurich Life set off the loans against the policy reserves. The Guaranty Fund and the liquidators of the pension and investment funds alleged, inter alia, that the loans were illegal and the corporate defendants were de facto members of the management of the funds. They also alleged that the life insurance companies and other parties involved were jointly responsible for consolidated damages. Whereas two suits remain pending, the remaining suits have either been withdrawn or dismissed. The Group maintains that these suits are without merit and intends to continue to defend itself vigorously.
An action entitled Fuller-Austin Asbestos Settlement Trust, et al. v. Zurich American Insurance Company, et al., was filed in May 2004 in the Superior Court for San Francisco County, California. Three other similar actions were filed in 2004 and 2005 and have been coordinated with the Fuller-Austin action. In addition to Zurich American Insurance Company (“ZAIC”) and three of its insurance company subsidiaries, Zurich Insurance Company Ltd (“ZIC”) and Orange Stone Reinsurance Dublin (“Orange Stone”) are named as defendants. Plaintiffs, who are historical policyholders of the Home Insurance Company (“Home”), plead claims for fraudulent transfer, alter ego liability and unfair business practices relating to the recapitalization of Home, which occurred in 1995 following regulatory review and approval. Plaintiffs allege that pursuant to the recapitalization and subsequent transactions, various Zurich entities took assets of Home without giving adequate consideration in return, and contend that this forced Home into liquidation. Plaintiffs further allege that the defendants should be held responsible for Home’s alleged obligations under their Home policies. The trial judge designated plaintiffs’ claims for constructive fraudulent transfer for adjudication before all other claims; he subsequently ordered an initial bench trial on certain threshold elements of those fraudulent transfer claims and on certain of defendants’ affirmative defenses. The trial commenced on November 1, 2010, with 12 days of trial in 2010. The trial is currently scheduled to resume in April 2011.
Zurich Financial Services (now Zurich Financial Services Ltd) was a defendant in putative class-action securities lawsuits relating to its divestiture of its interest in Converium (now Scor Holding (Switzerland) AG). On July 25, 2008, Zurich Financial Services Ltd and the class-action plaintiffs entered into an amended stipulation of settlement that called for a payment of USD 28 million to settle the case in two parts on behalf of all persons and entities who had purchased Converium securities between January 7, 2002 and September 2, 2004: one settlement in the U.S. court, covering all U.S. persons and entities, and all other persons who had purchased Converium securities on U.S. markets, and another settlement in the Amsterdam Court of Appeal, in the Netherlands, covering all non U.S. persons and entities who had purchased Converium securities on non-U.S. markets. The U.S. and Dutch settlements are both subject to court approval and are independent of each other. The U.S. court approved the U.S. settlement on December 12, 2008, and the ruling became final in June 2009. The Dutch settlement papers were filed with the Dutch court on July 9, 2010.
Zurich Financial Services Ltd. is a defendant in a putative class action pending in California state court captioned Benjamin Fogel v. Farmers Group, Inc (“Fogel Case”). The case, originally filed in August 2003, is brought on behalf of a putative class of all policyholders of the Farmers Exchanges from 1999 to the present. The plaintiff alleges that Farmers Group, Inc. and certain of its affiliates (“Farmers”), which acted as the attorneys-in-fact for policyholders of the Farmers Exchanges, collected excessive and unreasonable management fees. The complaint seeks, amongst other things, disgorgement, as well as damages and injunctive relief. In February 2005, the trial court granted Farmers’ motion for summary judgment, and plaintiff appealed. In 2008, a California appellate court reversed the trial court’s ruling and reinstated the litigation. On September 9, 2009, plaintiff filed a motion seeking to certify a nationwide class of all policyholders of the Farmers Exchanges since August 1, 1999. On October 7, 2010, the Group announced that it had agreed in principle to a proposed nationwide settlement of the Fogel Case. Under the terms of the settlement, a sum of USD 455 million will be made available to approximately 15-20 million policyholders who may qualify for a distribution under the settlement, with any residual amount going to the Farmers Exchanges. The Group will also pay attorneys’ fees to class action counsel of up to USD 90 million, as well as the costs of administering the settlement. On December 12, 2010, the parties executed the settlement agreement and they filed a motion on January 12, 2011 seeking preliminary approval of the settlement. On February 3, 2011, the court granted a motion to intervene by a class member who objects to parts of the settlement, and scheduled the hearing on the motion for preliminary approval for March 2, 2011. All terms of the settlement are subject to the court’s approval.
While the Group believes that it is not a party to, nor are any of its subsidiaries the subject of, any unresolved current legal proceedings, claims, litigation and investigations that will have a material adverse effect on the Group’s consolidated financial condition, proceedings are inherently unpredictable, and it is possible that the outcome of any proceedings could have a material impact on results of operations in the particular reporting period in which it is resolved.
Total available-for-sale securities 138,055 131,459 138,055 131,459 Securities at FV through profit or loss Trading
Held-to-maturity debt securities 5,280 5,408 5,129 5,143 Equity method accounted investments 186 217 188 232 Loans and receivables
Deposits made under assumed reinsurance contracts 2,812 3,854 2,832 3,861 Mortgage loans given as collateral 739 1,130 743 1,102
Liabilities related to investment contracts (592) (254) (592) (254) Liabilities related to investment contracts with DPF (4,875) (5,306) (5,134) (5,728)
Total investments at FV through profit or loss 96,703 89,429 96,703 89,429
The methods and assumptions used by the Group in determining fair values of financial assets and liabilities are set out in note 4. Depending on the valuation techniques used and whether the underlying assumptions are based on observable market data, financial instruments carried at fair value are classified under the following three levels (the “Fair Value Hierarchy”).
Total available-for-sale securities 49,477 78,040 3,942 131,459 Securities at FV through profit or loss Trading
Table 27.2b in USD millions, as of December 31, 2009Fair Value Hierarchy – prior period
Net transfers into Level 3 394 2 – 12 – – –
1 Presented under ”Net capital gains/(losses) and impairments on Group investments” in the Consolidated income statements.
Securities at FV through profit or loss Available-for-sale securities Trading Designated at FV
Realized gains/(losses) recognized in income 1 (43) 1 (8) 1 42 – (5) Unrealized gains/(losses) recognized in income 1 (303) (134) 64 13 150 (50) (15) Unrealized gains/(losses) recognized in other comprehensive income 511 (183) – – – – –
Table 27.3b in USD millionsRoll forward analysis for financial instruments classified under Level 3 – prior period
Sensitivity of fair values reported for Level 3 instruments to changes in key assumptions As of December 31, 2010 and 2009, the Group classified under Level 3 asset-backed securities (ABSs) amounting to USD 3.6 billion and USD 3.2 billion, respectively. These ABSs include non-agency backed securities for which the limited market activity observed at year end required the Group’s pricing providers to make certain internal valuation assumptions. To determine the fair value of these investments, pricing providers use valuation models that are based on an expected present value technique.
The key assumptions driving the valuation of these investments include discount margins and prepayment, recovery and default rates. The effect on reported fair values of using reasonably possible alternative values for each of these assumptions, while the other key assumptions remain unchanged, is disclosed in table 27.4. While the table 27.4 illustrates the overall effect of changing the values of the unobservable inputs by a set percentage, the significance of the impact and the range of reasonably possible alternative assumptions, may differ significantly between investments, given their different terms and circumstances.
Key assumptions Discount margins +20% (171) –20% 183 Prepayment rates –20% (39) +20% 33 Recovery rates –20% (37) +20% 27 Default rates +20% (18) –20% 12
Table 27.4b as of December 31, 2009Sensitivity analysis of Level 3 ABSs to changes in key assumptions – prior period
Total investments at FV through profit or loss 52,065 39,845 4,793 96,703
Financial liabilities at FV through profit or loss Designated at FV
Realized gains/(losses) recognized in income 1 4 27 Unrealized gains/(losses) recognized in income 1 23 124
Realized gains/(losses) recognized in income 1 6 18 Unrealized gains/(losses) recognized in income 1 1 48
Table 27.6a in USD millionsRoll forward analysis for financial assets classified under Level 3 - current period
Table 27.6b in USD millionsRoll forward analysis for financial assets classified under Level 3 – prior period
Consolidated income statements for the years ended December 31 Net earned premiums and policy fees 12 10 Net investment income (104) (105) Net investment expense (1) (1) Other income/(expense) (37) – Losses and loss adjustment expenses (6) (11) Administrative and other operating expenses (4) (6)
Policyholders’ collateral and other loans 9 12 Reserves for losses and loss adjustment expenses (11) (12)
Table 28.1 in USD millionsRelated party transactions included in the Consolidated financial statements
Table 28.2 summarizes related party transactions with key personnel reflected in the Consolidated financial statements. Key personnel includes Directors of Zurich Financial Services Ltd and Zurich Insurance Company Ltd and Members of the Group Executive Committee.
As of December 31, 2010 there were no loans, advances or credits outstanding from Members of the Group Executive Committee, while loans and guarantees granted to Members of the Group Executive Committee amounted to USD 1 million for the year ended December 31, 2009. Outstanding loans and guarantees granted to Members of the Board of Directors amounted to USD 2 million for the years ended December 31, 2010 and 2009. The terms “Members of the Board of Directors” and “Members of the Group Executive Committee” in this context include the individual as well as members of their respective households. The above figures include the fees paid to Members of the Board of Directors of Zurich Financial Services Ltd and Zurich Insurance Company Ltd, which were USD 3 million, for both the years ended December 31, 2010 and 2009.
No provision for non-repayment has been required in 2010 and 2009 for the loans or guarantees made to Members of the Group Executive Committee.
Table 28.2 in USD millions, for the years ended December 31Related party transactions – key personnel
Farmers Group, Inc. (FGI) and its subsidiaries provide certain non-claims related management services to the Farmers Exchanges, which are managed but not owned by Farmers Group, Inc. a wholly owned subsidiary of the Group. In addition, the Group has the following relationships with the Farmers Exchanges.
Conditions governing payment of interest and repayment of principal are outlined in the surplus note and certificates of contribution. Generally, repayment of principal may be made only when the issuer has an appropriate amount of surplus, and then only after approval is granted by the issuer’s governing board and the appropriate state insurance regulatory department in the U.S. In addition, payment of interest may generally be made only when the issuer has an appropriate amount of surplus and then only after approval is granted by the appropriate state insurance regulatory department in the U.S.
Farmers Exchanges’ share of ceded premiums amounted to USD 1 billion for both the years ended December 31, 2010 and 2009. Ceded incurred losses and loss adjustment expenses totaled USD 648 million and USD 667 million for the years ended December 31, 2010 and 2009, respectively. Farmers Exchanges’ share of the total experience commission income was USD 315 million and USD 299 million for the years ended December 31, 2010 and 2009, respectively.
Effective June 30, 2009, the All Lines agreement was cancelled subsequent to which Farmers Re Co and ZIC entered into a new 37.5 percent All Lines agreement under which each assumes a percentage of all lines of business written by the Farmers Exchanges, prospectively. Under the All Lines agreement, Farmers Re Co and ZIC assume a 7.5 percent and 30.0 percent respective quota share of the premiums written and the ultimate net losses sustained in all lines of business written by the Farmers Exchanges after the APD agreement has been applied. In addition, under the All Lines agreement, the Farmers Exchanges catastrophe losses are subject to a maximum of USD 1 billion. As a result, Farmers Re Co and ZIC are subject to a maximum annual catastrophe loss of USD 75 million and USD 300 million, respectively. The All Lines agreement, which can be terminated after 90 days notice by any of the parties, also provides for the Farmers Exchanges to receive a provisional ceding commission of 25.0 percent of premiums for acquisition expenses, 8.8 percent of premiums for unallocated loss adjustment expense and 5.3 percent of premiums for other expenses. Unearned premiums totaling USD 970 million were transferred from the Farmers Exchanges to Farmers Re Co and ZIC as a result of their increased participation in the All Lines agreement through September 30, 2009. In addition, Farmers Re and ZIC remitted USD 242 million of reinsurance commissions to the Farmers Exchanges for acquisition expenses due to the increased participation in the All Lines agreement.
Effective June 30, 2010, the All Lines agreement was cancelled subsequent to which Farmers Re Co and ZIC entered into a new 25.0 percent All Lines agreement under which each assumes a percentage of all lines of business written by the Farmers Exchanges, prospectively. Under this new All Lines agreement, Farmers Re Co and ZIC assume a 5.0 percent and 20.0 percent respective quota share of the premiums written and the ultimate net losses sustained in all lines of business written by the Farmers Exchanges after the APD agreement has been applied. In addition, under the All Lines agreement, the Farmers Exchanges catastrophe losses are subject to a maximum of USD 1 billion. As a result, Farmers Re Co and ZIC are subject to a maximum annual catastrophe loss of USD 50 million and USD 200 million, respectively. The All Lines agreement, which can be terminated after 90 days notice by any of the parties, also provides for the Farmers Exchanges to receive a provisional ceding commission of 25.7 percent of premiums for acquisition expenses, 9.0 percent of premiums for unallocated loss adjustment expense and 5.3 percent of premiums for other expenses. Unearned premiums totaling USD 614 million were transferred from Farmers Re Co and ZIC to the Farmers Exchanges as a result of their decreased participation in the All Lines agreement through June 30, 2010. In addition, the Farmers Exchanges remitted USD 158 million of reinsurance commissions to Farmers Re Co and ZIC for acquisition expenses due to the decreased participation in the All Lines agreement.
The Group pursues a customer-centric strategy and is managed on a matrix basis, reflecting both businesses and geography. The Group’s operating segments have been identified on the basis of the businesses operated by the Group and how these are strategically managed to offer different products and services to specific customer groups. Segment information is presented accordingly. The Group’s reportable segments are as follows: General Insurance serves the property-casualty insurance needs of a wide range of customers, from individuals to small and medium-size businesses, commercial enterprises and major multinational corporations.
For the purpose of discussing our financial performance we consider General Insurance, Global Life and Farmers to be our core operating segments.
The Group’s new management structure effective July 1, 2010, reconfirmed the three core operating segments.
The segment information includes the Groups’ internal performance measure, business operating profit (BOP). This measure is the basis on which business units are managed. It indicates the underlying performance of the business units by eliminating the impact of financial market volatility and other non-operational variables. BOP reflects adjustments for shareholders’ taxes, net capital gains and losses on investments and impairments (except for the capital markets and banking operations included in Non-Core Businesses and investments in hedge funds and certain securities held for specific economic hedging purposes), policyholders’ share of investment results for the life businesses, nonoperational foreign exchange movements, and signifi cant items arising from special circumstances, including restructuring charges, charges for litigation outside the ordinary course of business and gains and losses on divestments of businesses.
Net written premiums and policy fees 27,966 28,935 11,539 11,672 4,194 6,615 84 90 499 661 – – 44,282 47,973 Net change in reserves for unearned premiums (129) 136 (26) 6 1,380 (893) – – 2 5 (1) – 1,227 (746)
Net investment income on Group investments 2,867 3,070 3,892 4,081 156 174 525 461 509 598 (857) (880) 7,092 7,505 Net capital gains/(losses) and impairments on Group investments 46 110 498 (49) – – – – (131) (265) – – 413 (204)
Business operating profit before non-controlling interests 2,695 3,460 1,516 1,492 1,686 1,554 (802) (611) (157) (290) – – 4,939 5,605
Revenues Direct written premiums and policy fees 1 30,906 32,516 12,172 12,343 – – – – 389 566 – (11) 43,467 45,414
Supplementary information Additions and capital improvements to property, equipment and intangible assets 299 474 96 405 236 917 91 81 24 (1) – – 747 1,875 1 The Global Life segment includes approximately USD 1,514 million and USD 2,698 million of gross written premiums and future life policyholders‘ benefits for certain universal life-type contracts in our Spanish operations for the years ended December 31, 2010 and 2009, respectively (see note 3).
Net income before income taxes 2,674 2,614 1,845 1,318 1,074 1,470 (622) (592) (104) 727 4,868 5,537 Income tax expense (attributable to policyholders and shareholders) (1,355) (1,553)
Net income after taxes 3,513 3,983 1 Business operating profit (BOP) has not been restated for the change in the current value of certain insurance liabilities and assets amounting to USD 1,006 million in order to ensure a fair reflection of sustainable operating profit and comparability (see note 1).
Table 30.2 in USD millions, for the years ended December 31Reconciliation of BOP to net income after income taxes
Reinsurers’ share of reserves for insurance contracts 13,314 12,957 1,997 2,160 212 211 – (95) 4,328 4,812 (1,041) (1,293) 18,809 18,751 Deposits made under assumed reinsurance contracts 116 66 11 3 2,201 3,158 – – 530 664 (26) (29) 2,832 3,861
Total assets (after cons. of investments in subsidiaries) 119,693 119,597 223,476 215,494 10,581 12,224 23,097 19,893 32,575 34,521 (33,759) (32,527) 375,661 369,202 Liabilities Liabilities for investment contracts – – 50,912 46,374 – – – – – – (246) (250) 50,667 46,124
Real estate held for investment 2,940 3,004 4,893 4,408 135 149 45 46 261 181 – – 8,274 7,789
Reserves for losses and loss adjustment expenses 63,826 63,476 58 35 1,938 1,793 46 49 2,953 3,531 (752) (799) 68,069 68,086
Policyholders’ contract deposits and other funds 1,192 1,135 13,397 14,691 – – – – 2,839 3,030 2 1 17,430 18,857 Reserves for unit-linked contracts – – 49,978 46,468 – – – – 11,807 11,736 – – 61,786 58,204
Net capital gains/(losses) and impairments on investments 11 35 35 52 1 23 – – – – – – 46 110 Net non-technical result (excl. items not included in BOP) (41) (79) (230) (216) (481) (236) 3 (51) (41) (75) (6) 7 (796) (650) Business operating profit before non-controlling interests 742 787 1,118 1,243 818 1,111 66 175 (49) 144 – – 2,695 3,460
Americas United States 8,976 9,189 Rest of North America 554 469 Latin America 1,374 1,353
Asia-Pacific & Middle East Asia-Pacific Mature Markets 1,292 1,070 China & South East Asia 254 229
Table 30.5 in USD millions, for the years ended December 31General Insurance – Revenues by region
Net investment income on Group investments 462 437 291 342 1,628 1,733 624 606 89 87 385 476 43 34 371 366 – – 3,892 4,081 Net capital gains/(losses) and impairments on Group investments 4 10 224 3 221 (125) 17 43 12 (39) (1) 8 28 45 (6) 4 – – 498 (49)
Supplementary information Gross written premiums and policy fees from external customers 1,442 1,257 1,519 1,089 3,695 3,379 1,542 1,606 513 385 2,264 3,523 289 221 948 909 – – 12,212 12,369 Property, equipment and intangible assets 270 297 410 446 911 1,020 157 198 5 5 1,991 2,859 7 11 160 163 – – 3,912 4,998 1 The Global Life segment includes approximately USD 1,514 million and USD 2,698 million of gross written premiums and future life policyholders‘ benefits for certain universal life-type contracts in our Spanish operations for the years ended December 31, 2010 and 2009, respectively (see note 3).
Gross written premiums and policy fees 1,442 1,257 1,525 1,096 3,749 3,431 1,543 1,607 513 385 2,264 3,523 345 255 963 924 (53) (36) 12,292 12,440 Net earned premiums and policy fees 1,155 982 1,345 923 3,651 3,323 1,537 1,600 418 287 2,221 3,495 307 215 880 852 – – 11,513 11,677
Net investment result on Group investments 466 446 515 346 1,849 1,608 641 649 101 49 384 484 71 79 365 370 – – 4,390 4,032 Net investment income on unit-linked investments (22) (15) 1,371 1,500 106 107 8 2 193 171 109 75 8 8 89 71 – – 1,862 1,920 Net capital gains/(losses) and impairments on unit-linked investments 109 161 5,180 5,118 787 1,582 (8) 52 592 967 (50) 249 1,003 1,034 166 615 – – 7,777 9,777
Farmers Management Services Management fees and other related revenues 2,778 2,690 Management and other related expenses 1,440 1,399 Gross management result 1,338 1,291 Other net income (excl. items not included in BOP) 27 35 Business operating profit before non-controlling interest 1,365 1,326 Business operating profit 1,365 1,326 Farmers Re
Supplementary information Property, equipment and intangible assets 1 2,468 2,541 1 As of December 31, 2010 and 2009, respectively.
Table 30.8 in USD millions, for the years ended December 31Farmers – Overview
Gross written premiums and policy fees – – 129 134 8 8 – – 137 142 Net earned premiums and policy fees – – 76 83 8 8 – – 84 90
Insurance benefits and losses, incl. PH dividends, net – – 69 81 3 5 – – 72 86 Underwriting and policy acquisition costs, net – – 5 12 – – – – 6 12 Administrative and other operating expense (excl. depreciation / amortization) 71 27 112 (129) 927 1,145 (130) (82) 980 962 Other expenses (excl. items not included in BOP) (50) – 67 82 (3) – – – 14 82 Depreciation, amortization and impairments of property, equipment and intangible assets – – – – 84 72 – – 84 73
Business operating profit before non-controlling interests (25) (32) (638) (438) (138) (141) – – (802) (611) Non-controlling interests (1) – – – – – – – (1) –
Gross written premiums and policy fees 531 700 Net earned premiums and policy fees 502 666 Insurance benefits and losses, net 769 (103) Policyholder dividends and participation in profits, net 496 826 Total net technical expenses 57 (12) Net underwriting result (821) (44) Net investment income 208 316 Net capital gains/(losses) and impairments on investments 624 795 Net non-technical result (excl. items not included in BOP) (168) (1,356) Business operating profit before non-controlling interests (157) (290) Non-controlling interests 1 1 Business operating profit (157) (290) 1 1 Business operating profit (BOP) has not been restated for the change in the current value of certain insurance liabilities and assets amounting to USD 1,006 million in order to ensure a fair reflection of sustainable operating profit and comparability (see note 1).
As statutory auditor, we have audited the consolidated financial statements of Zurich Financial Services Ltd, which comprise the consolidated income statement, consolidated statement of comprehensive income, consolidated balance sheet, consolidated statement of cash flows, consolidated statement of changes in equity, and notes (pages 96 to 129 and 135 to 253), for the year ended December 31, 2010.
Zurich International (Bermuda) Ltd. Hamilton Non-Core Businesses 100 100 USD 9.9 Brazil Zurich Minas Brasil Seguros S.A. Belo Horizonte General Insurance 100 100 BRL 359.7 Chile Chilena Consolidada Seguros Generales S.A. Santiago General Insurance 89.87 89.87 CLP 10,267.0 Chilena Consolidada Seguros de Vida S.A. Santiago Global Life 98.98 98.98 CLP 24,484.0 Cyprus Zurich Insurance Holding (Cyprus) Ltd 2 Nicosia General Insurance 100 100 RUB 2.7 Germany Deutscher Herold Aktiengesellschaft 3 Bonn Global Life 79.83 79.83 EUR 18.4 Zürich Beteiligungs-Aktiengesellschaft (Deutschland) Frankfurt / Main General Insurance 100 100 EUR 152.9 Zurich Deutscher Herold Lebensversicherung Aktiengesellschaft Bonn Global Life 86.37 86.37 EUR 68.5 Ireland Zurich Life Assurance plc Dublin Global Life 100 100 EUR 17.5 Zurich Financial Services EUB Holdings Limited Dublin Non-Core Businesses 100 100 GBP 0.001
Zurich Group Funding Luxembourg S.A. Howald Other Operating Businesses 100 100 EUR 5.03
South Africa Zurich Insurance Company South Africa Limited 4 Johannesburg General Insurance 58.95 58.95 ZAR 3.0 Spain Bansabadell Pensiones, E.G.F.P, S.A. Barcelona Global Life 50 50 EUR 7.8 Bansabadell Seguros Generales, S.A. de Seguros y Reaseguros Barcelona General Insurance 50 50 EUR 10.0 Bansabadell Vida S.A. de Seguros y Reaseguros Barcelona Global Life 50 50 EUR 43.9 Zurich Vida, Compañía de Seguros y Reaseguros, S.A. – Sociedad Unipersonal Madrid Global Life 100 100 EUR 50.4 Switzerland Genevoise Real Estate Company Ltd Geneva Global Life 100 100 CHF 17.0
Zurich Insurance Company Ltd 5 Zurich Other Operating Businesses 100 100 CHF 825.0
Sterling ISA Managers Limited Swindon, England Global Life 100 100 GBP 92.9
Zurich International Life Limited Douglas, Isle of Man Global Life 100 100 GBP 105.6
Zurich Specialties London Limited Fareham, England Non-Core Businesses 100 100 GBP 150.0 4 Listed on the Johannesburg Stock Exchange. On December 31, 2010, the company had a market capitalization of ZAR 2.2 billion (ISIN Number 000094496). 5 The result of the operative activities is included in the General Insurance segment, whereas the headquarter’s activities are part of Other Operating Businesses. 6 The result of the operative activities is included in the Global Life segment, whereas the headquarter’s activities are part of Other Operating Businesses.
Embedded value report 1. Analysis of embedded value earnings 261 2. New business 265 3. Expected contribution and transfer to free surplus 268 4. Operating, non-operating and economic variance 269 6. Reconciliation of IFRS equity to embedded value 272 8. Non-core life business 274 9. Group MCEV 275 10. Embedded value methodology 276 11. Embedded value assumptions 282 Appendix: Embedded value tables 286
Key results in USD millions, for the year ended December 31
of which new business value 817 782 35 Embedded value earnings 1,005 3,088 (2,083) Return on opening embedded value 6.2% 24.0%
Global Life generated USD 1.6 billion of embedded value operating earnings during the year comprising USD 817 million of new business value, USD 622 million of expected contributions from the in-force, and USD 135 million in operating variances. Changes in economic conditions negatively impacted value by USD 846 million partially offset by non-operating variances of USD 277 million largely from the sale of Caixa Sabadell. The appreciation of the U.S. dollar reduced value by USD 182 million as a result of the effects of currency translation. In total the embedded value has decreased by USD 611 million after allowing for the impact of non-controlling interests and significant capital management initiatives.
New business value increased by USD 35 million or 4 percent to USD 817 million in U.S. dollar terms and by 7 percent on a local currency basis compared with 2009. The major improvements were the increase in domestic and cross-border IFA/Broker sales in Ireland, higher corporate pension’s sales volumes in the UK and Latin America and growth in private banking sales in the UK. Overall, the new business margin was 22.1 percent, an increase of 0.8 percentage points compared with the prior year.
Economic variance was negative USD 846 million as a result of lower swap rates negatively impacting the value of spread business. This was exacerbated by the increase in credit spreads in certain European countries. This negative impact was partially offset by the increase in value of protection business that occurs when interest rates are lower.
Dividends & capital movements start of period (18) (284) (303) (124) (427) New business value Global Life 1 (86) (743) (829) 1,646 817
Embedded value by territory in USD millions, for the year ended December 31
Movement in embedded value, after tax in USD millions, for the year ended December 31, 2010
The UK achieved a significant recovery in sales from the depressed levels emerging in particular in the early part of 2009. The main drivers being the Private Banking Client Solutions and Corporate Life & Pensions business. The overall increase in sales and a focus on managing overhead expenses has contributed to a solid improvement in the new business margin.
In Switzerland, sales were negatively impacted by the reduction in the technical interest rate that applied from 1 January 2010 which was anticipated in 2009 by customers and distributors resulting in lower sales opportunities in the early months of 2010. The current low interest rate environment has diminished the appeal of low return guaranteed products, and this coupled with the level of fixed expenses and falling risk-free returns has led to a significant decrease in new business value and margin.
Sales in Spain decreased significantly compared with the prior year due to the Group’s unwillingness to compete with domestic savings products priced on uneconomic terms. Despite the lower single premium sales, new business value was down only marginally as a result of higher sales of protection business which generate higher new business margins.
In Hong Kong sales of unit-linked policies have declined resulting in lower gross margins which, coupled with relatively fixed expenses, has resulted in a significant reduction in new business value and margin.
The expected contribution in excess of reference rate is the additional value expected to be created if “real world” expected investment returns emerge.
Embedded value Split of other operating variances (in USD millions, for the year ended December 31)
Other operating variances increased the embedded value by USD 54 million. Improvements were made in a number of countries to improve the accuracy of the results, resulting in an increase of USD 217 million in embedded value. Global development expenses, in particular in the UK and Ireland, were incurred to fund the Global Life growth strategy. One-off expenses include investments in the corporate savings platform and other domestic investments in the UK, and a one-off contribution to the staff pension scheme in Ireland.
Economic variances Economic variances are the difference between the actual experience during the year and that implied by the economic assumptions at the start of the period and also includes the impact of changes in assumptions in respect of future economic experience at the end of the period.
Other non-operating variances Other non-operating variances included the impact of legal, tax and regulatory changes in the year as well as other significant one-off items. The impact of the sale of the Group’s interest in Caixa Sabadell for a price in excess of embedded value has generated a net of tax economic gain of USD 257 million. In Latin America the acquisition of the life insurance interests of Minas Brasil Vida e Previdencia for a price in excess of embedded value generated an economic loss of USD 50 million. The remaining non-operating variances relate to various items including currency effects which stem from offshore sales by ZIS.
Dividend and capital movements that occurred in the first six months of the year are shown as “start of period” movements whilst the rest are shown as “end of period”.
Further dividends include USD 254 million from Germany, USD 120 million from the U.S. and USD 47 million from Switzerland.
In Latin America a capital injection of USD 62 million was made to reflect the acquisition of Minas Brazil Vida e Previdencia.
Note that changes in value for Global Life caused by dividend and capital movements are offset by equal and opposite value changes in the non-covered segment of the Group and therefore have no impact on Group MCEV as shown in Section 9.
IFRS shareholders’ net assets 1 14.8 Less non-controlling interests 2 (1.0) IFRS shareholders’ equity net of joint ventures and non-controlling interests 13.8 Plus pension scheme liabilities 3 0.3 Less intangible assets 4 (6.4)
Deferred acquisition costs and deferred origination costs (13.4) Deferred front end fees 5.6 Present value of profits of acquired insurance contracts (0.8) Policyholder share of actuarial intangibles net of tax 1.7 Tax on shareholder share of actuarial intangibles 2.1 Goodwill (0.4) Other intangibles (1.3)
in USD billions, as of December 31Reconciliation of Global Life IFRS shareholders’ equity to embedded value
The Group has written life business in Zurich Americas Life Insurance Company and in its Centre operations, some of which is not managed by Global Life. The main products that have been written by these businesses outside Global Life were: • variable annuity contracts that provide annuitants with guarantees related to minimum death and income benefits; • disability business; and
The Group has estimated the embedded value of these businesses based on the same principles as for the Global Life business, including deductions for the time value of financial options and guarantees, frictional costs and the cost of residual non-hedgeable risk, but using more approximate models. The results are set out in the following table.
Value of business in force (0.3) (0.1) Embedded value 0.7 0.9
in USD billions, as of December 31Estimated embedded value of life businesses in Non-Core Businesses
Non-operating MCEV earnings (0.6) 0.0 (0.6) Total MCEV Earnings 1.0 2.3 3.3
Closing Group MCEV 16.1 18.2 34.3 1 Opening adjustments refer to the opening balance restatement of December 31, 2009 in respect of a U.S. closed book of variable annuity products (see note 1 of the consolidated financial statements).
a) Covered business Covered business includes all business written by companies that are included in the Global Life segment, in particular: • life and critical illness insurance; • savings business (with profit, non-profit and unit-linked); • pensions and annuity business; and
For certain smaller companies, no embedded value has been calculated but these companies have been included in the embedded value at their shareholders’ net asset value, as calculated in accordance with the Group’s IFRS accounting policies. The contribution from these companies to the embedded value is approximately 1.0 percent.
b) Reporting of embedded value In line with the Market Consistent Embedded Value Principles, the embedded value is broken down into the following components: • shareholders’ net assets, including free surplus and required capital; and,
Embedded value report c) Shareholders’ net assets Shareholders’ net assets represent the market value of net assets held in respect of the covered business, and consists of the required capital and free surplus. The level of required capital reflects the amount of capital considered by the local Directors to be appropriate to manage the business. This would be set at least at the level equal to the regulatory required capital, at which the regulator would intervene to request a capital injection and in addition, for the main territories, an adequate buffer to cover short term volatilities in solvency due to financial and non-financial risks or to achieve the capital required to maintain the desired credit rating.
For products with significant guarantees, the time value has been calculated on a market consistent basis by deducting the average present value of shareholder cash flows using at least 1,000 stochastic economic simulations from the certainty equivalent value (both for the value of business in force and separately for new business value).
For most products, the average value has been calculated using Monte Carlo simulations. For a small number of products, the time value of financial options and guarantees has been derived using closed form solutions.
The Cost of Residual Non-Hedgeable Risk (CRNHR) is an explicit deduction for non hedgeable financial risks (non-hedgeable asset/liability management risks, reinsurance credit risk), and non-financial risks (mortality, persistency, expenses and operational risk). The certainty equivalent value allows for best estimate shareholder cashflows. The CRNHR is largely an allowance for uncertainty in shareholder cashflows, and for risks which are not already considered in the certainty equivalent value or time value of financial options and guarantees, such as operational risk. Most residual non-hedgeable risks have a symmetric impact on embedded value apart from operational risk.
A 2.5 percent cost of capital charge has been applied to the diversified present value of non-hedgeable risk based capital for 2010 and 2009. This represents the risk premium that would be demanded by investors on capital exposed to non-hedgeable risks. It has been determined according to research performed by the CRO Forum which indicated that a suitable charge is in the range 2.5-4.5 percent. From the beginning of the year 2011, the Group will apply a cost capital charge of 4 percent.
e) New business New business covers new contracts sold during the reporting period and includes recurring single premiums; new premiums written during the period on existing contracts; and variations to premiums on existing contracts where these premiums and variations have not previously been assumed as part of business in-force. Where recurring single premiums are projected over time to derive the corresponding new business value, they are treated as annual premium for the volume definition. Group Life business which is valued with a renewal assumption of the contracts is treated as annual premium.
The new business is valued at the point of sale. Explicit allowance is made for frictional costs, time value of financial options and guarantees, and CRNHR. New business value is valued using actual new business volumes.
In certain profit sharing funds, the new business written can affect the time value of financial options and guarantees for business written in prior years. This effect is taken into account in the new business value by valuing on a marginal approach, the difference between embedded value with and without new business. This captures the effect of cross-subsidies between in-force and new business due to, for example, different interest rate guarantees operating in a shared common pool of assets.
Simulations are produced for the economies in the U.S., the UK, Switzerland and the eurozone. In each economic area, risk free nominal interest rates are modeled using a LIBOR market model. The excess return on other asset classes relative to the total returns on risk free assets are then modeled using a multi-factor lognormal model. Hong Kong uses U.S. dollar simulations as their principal liabilities are U.S. dollar-denominated. Chile uses closed form solutions rather than simulations. The other operations not mentioned above have no significant options and guarantees. Further details are set out under “Economic assumptions” in Section 11.
l) Debt Where a loan exists between a company in Global Life and a Group company outside Global Life, the loan is valued for embedded value purposes as if contracted with an external party.
p) Change in legislation or solvency regime The impacts of changes in legislation or solvency regimes are included in economic variance for the analysis of movement.
Embedded value report r) Sensitivities The key assumption changes represented by each of the sensitivities in Section 7 are as follows: Operating sensitivities
A 10 percent decrease in maintenance expenses means that, for example, a base assumption of USD 30 p.a. would decrease to USD 27 p.a.
A liquidity premium applied to the base yield curve applicable to units reporting in U.S. dollar, Euro, British pound or Swiss franc.
The liquidity premium is applied to the following lines of business: • 100 percent for annuities; • 75 percent for contracts with participating features, universal life contracts and fixed interest annuities in the U.S; • 0 percent for all other lines of business.
b) Operating assumptions Demographic assumptions The assumed future mortality, morbidity and lapse rates have been derived from recent operating experience and relevant industry statistics. Where operating experience or industry statistics are limited, the assumptions are derived from a best estimate of future developments and are subject to regular review as more experience emerges. Where appropriate, surrender and option take-up rate assumptions that vary according to the investment simulation under consideration have been used, based on our assessment of likely policyholder behavior.
No allowance has been made for future productivity improvements in the expense assumptions.
The restart of business in Luxembourg is treated as a start-up operation with acquisition and maintenance expenses set at expected medium term levels. Any actual expenses incurred in excess of policy allowances is treated as an expense overrun and shown as an expense experience variation. The expense overrun is expected to be eliminated by 2012.
c) Dynamic decisions To reflect more realistically the outcome of stochastic simulations, the assumptions for each simulation make allowance for the behaviors of policyholders and management actions in response to the investment conditions modeled.
New business information: Annual premiums 240 215 393 296 460 501 56 73 124 152 93 124 444 484 163 148 1,973 1,993
in USD millions, for the year ended December 31Embedded value results Global Life
Present value of new business premiums (PVNBP) 1,936 1,794 8,730 6,913 6,909 4,955 823 1,102 3,121 2,374 4,502 6,510 2,177 2,554 3,200 3,313 31,399 29,515
New business value Global Life 68 100 52 36 120 136 112 112 4 16 – – 117 128 27 30 47 46 74 75
– – New business information: – – Annual premiums 90 91 150 124 240 215 383 410 61 74 – – 444 484 83 81 80 67 163 148
Present value of new business premiums (PVNBP) 941 1,013 994 781 1,936 1,794 1,929 2,263 248 290 – – 2,177 2,554 1,558 1,476 1,642 1,837 3,200 3,313
We have audited the Embedded Value Report (“EV Report”) of Zurich Financial Services Ltd included in pages 260 to 290 of the Annual Report 2010, for the year ended December 31, 2010. The embedded value information included in the EV Report has been prepared in accordance with the Market Consistent Embedded Value (“MCEV”) Principles and Guidance issued by the CFO Forum, as described on pages 276 to 281.
Ray Kunz Patrick Shouvlin Audit expert Global relationship partner Auditor in charge
Net income for the year was CHF 70 million compared with CHF 4,082 million in the prior year. The decrease is mainly driven by lower dividend income from subsidiary companies and lower other financial income. In 2009 other financial income included a net gain of CHF 2,642 million resulting from the restructuring of the legal structure. During this restructuring Zurich Group Holding was merged with Zurich Financial Services Ltd. To enable this transaction, Allied Zurich Limited, a 100% owned subsidiary of Zurich Financial Services Ltd, sold its 42.3% share in Zurich Group Holding to Zurich Financial Services Ltd.
Total expenses (311,889) (372,298) Net income 69,718 4,082,406 in CHF thousands, for the years ended December 31
Non-current assets Investments in subsidiaries 7 11,851,474 11,678,292 Subordinated loans to subsidiaries 8 8,013,379 10,293,539 Total non-current assets 19,864,853 21,971,831 Current assets Cash and cash equivalents 17,372 11,341 Loans to subsidiaries 612,471 691,320 Own shares – 415,945 Receivables from third parties 3,390 5 Accrued income from subsidiaries 3,227 6,482 Derivatives with subsidiaries 4,706 400 Total current assets 641,166 1,125,493 Total assets 20,506,018 23,097,324
b) Investments in subsidiaries Investments in subsidiaries are equity interests, held on a long-term basis for the purpose of the holding company’s business activities. They are carried at a value no higher than their cost price less adjustments for impairment.
4. Administrative expense Administrative expense includes directors’ fees of CHF 3.5 million for 2010 and CHF 3.6 million for 2009 (see note 15) and overhead expenses of CHF 10 million for 2010 and 2009.
5. Other financial expense Other financial expense includes CHF 80 million write-down of investments in subsidiaries for 2010 and CHF 75 million net losses on own shares for 2009.
Zurich Insurance Company Ltd 11,087,485 100.00 11,087,485 100.00 Zurich Financial Services EUB Holding Ltd 727,936 99.90 554,754 99.90
Zurich Financial Services Ltd injected GBP 160 million (CHF 253 million) into the reserves of Zurich Financial Services EUB Holdings Limited in 2010. Furthermore the investment was impaired by CHF 80 million.
8. Subordinated loans to subsidiaries Subordinated loans include loans with Zurich Insurance Company Ltd of CHF 7,832 million as of December 31, 2010 compared with CHF 10,132 million as of December 31, 2009.
9. Commitments and contingencies Zurich Financial Services Ltd has provided unlimited guarantees in support of various entities belonging to the Zurich Capital Markets group of companies. Zurich Financial Services Ltd has entered into various support agreements and guarantees for the benefit of certain of its subsidiaries and their directors. These contingencies amounted to CHF 11,842 million as of December 31, 2010 and CHF 15,851 million as of December 31, 2009. CHF 8,150 million of CHF 11,842 million relate to guarantees in the aggregate of GBP 5,595 million provided to a fully owned subsidiary and some of its directors in connection with the rationalization of the Group’s top legal holding structure which resulted in the merger of Zurich Group Holding into Zurich Financial Services Ltd in December 2009. Furthermore, Zurich Financial Services Ltd has issued an unlimited guarantee in favor of the Institute of London Underwriters in relation to business transferred to Zurich Insurance plc, from a group company which no longer has insurance licenses.
c) Contingent share capital Capital market instruments and option rights to shareholders The share capital of Zurich Financial Services Ltd may be increased by an amount not exceeding CHF 1,000,000 by the issuance of up to 10,000,000 fully paid registered shares with a nominal value of CHF 0.10 each (i) by exercising of conversion and/or option rights which are granted in connection with the issuance of bonds or similar debt instruments by Zurich Financial Services Ltd or one of its Group companies in national or international capital markets; and/or (ii) by exercising option rights which are granted to current shareholders. When issuing bonds or similar debt instruments connected with conversion and/or option rights, the pre-emptive rights of the shareholders will be excluded. The current owners of conversion and/or option rights shall be entitled to subscribe for the new shares. The conversion and/or option conditions are to be determined by the Board.
During 2010 and 2009, 950,232 and 550,448 shares, respectively, were issued to employees out of the contingent share capital under the program described above. Of the total 950,232 registered shares issued to employees during the year 2010, 685,595 shares were issued in the period from January 1, 2010 to March 31, 2010 and 291,637 registered shares were issued as from April 1, 2010 to December 31, 2010. As a result, as of December 31, 2010 and 2009, the remaining contingent share capital, which can be issued to employees of Zurich Financial Services Ltd and its subsidiaries, amounted to CHF 470,836 and CHF 264,383 or 4,708,363 and 2,643,831 fully paid registered shares, respectively, with a nominal value of CHF 0.10 each. The pre-emptive rights of the shareholders, as well as the right for advance subscription, are excluded. The issuance of shares or respective option rights to employees is subject to one or more regulations to be issued by the Board of Directors and take into account performance, functions, levels of responsibility and criteria of profitability. Shares or option rights may be issued to the employees at a price lower than that quoted on the stock exchange.
Movements due to shares issued through contingent capital 224,637 – – Reclassification of reserve for treasury shares to free reserve – 546,766 1 – Reduction of free reserve through destruction of own shares – (415,762) – Transfer of general legal reserve to capital contribution reserve (10,776,161) – 10,776,161 Transfer of free reserve to capital contribution reserve – (3,223,839) 3,223,839 1 Due to sales and cancellation of treasury shares during 2010, CHF 546,766 thousand was reclassified from reserve for treasury shares into free reserve.
At the Annual General Meeting 2010 the shareholders approved the destruction of the remaining 1,836,404 shares from the share buyback program authorized by the Board of Directors on February 13, 2008. The destruction was effective June 15, 2010.
According to the information available on December 31, 2010, no shareholder of Zurich Financial Services Ltd held more than 5% of the voting rights of the issued share capital.
in CHF thousandsTransfer of general legal and free reserve to capital contribution reserve
The compensation paid to the Directors for their Board membership of Zurich Financial Services Ltd, the holding company of the Group, and Zurich Insurance Company Ltd is paid entirely by Zurich Financial Services Ltd. The fees for Mr de Swaan’s additional Board membership in Zurich Insurance plc and for the additional Board memberships of Mrs Bies and Mr Nicolaisen in Zurich Holding Company of America (ZHCA) are paid by the respective companies. Compensation paid to the members of the GEC is not paid by Zurich Financial Services Ltd, but by the Group entities where they are employed. The compensation shown below includes the compensation that the members of the Board and the GEC received for all their functions in the Group. As the financial statements of the holding company are presented in Swiss francs, all figures are shown in Swiss francs, despite the fact that the fees paid by Zurich Financial Services Ltd to the Directors are defined in U.S. dollars. To be consistent with the figures in the unaudited Remuneration report the totals of the remuneration paid to the members of the Board and the GEC are also presented in U.S. dollars, as set out in that report. Year-on-year comparison in Swiss francs is affected by the actual exchange rates during the year.
Remuneration of Directors The following tables set out the total fees paid to Directors of Zurich Financial Services Ltd. All the Directors are also Directors of Zurich Insurance Company Ltd. The Directors receive a combined fee for their work in connection with Zurich Financial Services Ltd and Zurich Insurance Company Ltd. In addition, Mr. de Swaan is a member of the Board of Zurich Insurance plc in Ireland and during 2009 Mrs Bies and Mr Nicolaisen were elected members of the Board in Zurich Holding Company of America (ZHCA). There were no changes in the fee structure in 2010 compared with 2009. A fixed portion of the fee was allocated towards the provision of sales-restricted Zurich Financial Services Ltd shares. As in 2009 the portion for the Chairman was set at USD 233,500 (CHF 248,584 for 2010 and CHF 254,824 for 2009), and the portion for the other members of the Board of Directors at USD 68,500 (CHF 72,925 for 2010 and CHF 74,756 for 2009). The overall fees are set out in the following tables: Basic fee
Of which allocated in shares 7, 8 in CHF 1Directors’ fees 2010
Of which allocated in shares 7, 13 1 The total fees (including the portion allocated in shares) provided to Directors by Zurich Financial Services Ltd amounted to CHF 3,678,194 for 2010 and to CHF 3,705,042 for 2009, calculated on the basis of the exchange rates on the dates of payment. These amounts, except for the fees earned by Mr de Swaan for his Board membership in Zurich Insurance plc and for the additional Board memberships of Mrs Bies and Mr Nicolaisen in Zurich Holding Company of America (ZHCA), are reflected in the income statement of the holding company. As the fees of the Directors are actually defined in U.S. dollars and the total of fees in U.S. dollars amounted to USD 3,455,000 for 2010 and to USD 3,395,000 for 2009, the average exchange rates were USD / CHF 1.0646 for 2010 and USD / CHF 1.0913 for 2009. All figures shown in Swiss francs in the above table have been translated from U.S. dollars using the relevant average exchange rate.
2 The remuneration shown in the tables does not include any business-related expenses incurred in the performance of Board members’ services. 3 Committee members receive a cash fee of USD 40,000 for all Committees on which they serve, irrespective of the number. The Committees on which the Board members serve are set out in the Corporate Governance Report on page 30.
4 Committee chairs receive an annual fee of USD 20,000 and the chair of the Audit Committee receives an additional USD 10,000. The Committees on which the Board members serve and the chairs are set out in the Corporate Governance Report on page 30.
5 Directors who reside in the U.S. receive a fee of USD 10,000 per annum. 6 The cash fees are defined in U.S. dollars, but paid in the actual currencies where the Board members reside, based on the relevant exchange rate at the dates of the payment. 7 The shares allocated to the Directors are sales-restricted for three years. 8 As of June 30, 2010, Mr Gentz was allocated 1,071 shares and the other Board members were allocated 314 shares based on a full year’s membership. The share price
(CHF 246.50) and the exchange rate (USD / CHF 1.131) as of June 15, 2010, were adopted to calculate the number of shares based on the fixed portion of the fee allocated in shares for the respective members. Where the value of the allocated shares did not equal the value of the portion of the fee to be allocated in shares, the difference was paid in cash. The amounts shown in the table above reflect the fixed amount in U.S. dollars (translated into Swiss francs) of the portion of the fee to be allocated in shares.
12 In line with applicable laws, Zurich Financial Services Ltd paid the company-related portion of contributions to social security systems, which amounted to USD 85,136 (CHF 88,527) in 2010. The corresponding contributions amounted to USD 80,670 (CHF 87,371) in 2009. Any personal contributions of the Directors to social security systems are included in the amounts shown in the table above.
Mr Philippe Pidoux retired from the Board at the Annual General Meeting during 2010. No termination payments were made to him during the year.
No benefits (or waiver of claims) have been provided to related parties of the Directors or related parties of former members of the Board during the year 2010, nor during the year 2009. Neither had any related party of the Directors or of former members of the Board outstanding loans, advances or credits as of December 31, 2010 or 2009.
Remuneration of Group Executive Committee The total remuneration of the members of the GEC for 2010 comprised the value of cash compensation, pensions, other remuneration and the value of the target equity grants made under the Group’s Long-Term Incentive Plan in 2010 and is calculated on the same basis as in 2009. Overall compensation of the GEC members in total and the overall compensation of the highest paid executive are set out in the following tables: Base compensation 11.90 12.00 Cash incentive awards earned for the year 13.10 15.50 Service Costs for pension benefits 5 3.20 3.90 Value of other remuneration 6 3.80 2.30 Value of target performance share and restricted share grants 7 7.60 9.10 Value of target performance option grants 7 7.60 9.10 Total in CHF million 8 47.20 51.90 Total in USD million as shown in the Remuneration report 45.80 47.80 1 The figures have been translated from U.S. dollars into Swiss francs using the relevant exchange rates throughout the year. 2 The remuneration shown in the table does not include any business related expenses incurred in the performance of the GEC members’ services. 3 On the basis of 13 GEC members of whom 8 served during the full year 2010.
4 Includes employee benefits, expatriate allowances, perquisites, benefits-in-kind and any other payments due under the employment contract. Benefits-in-kind have been valued using market rates.
During 2010, one member left the Group. A termination agreement with the departing member provided remuneration in accordance with an existing employment contract which included a twelve month notice period. Subject to the individual’s compliance with post-employment obligations, the total value of the payments made in connection with the agreement during both 2010 and 2011 will amount to CHF 2.2 million. Following his long service with the Group, another member retired on December 31, 2010. The retiring member will be retained as a consultant and receive payments in 2011 and 2012 recognizing contractual obligations and subject to compliance with post-employment obligations and the provision of services. Details will be disclosed in the years services are provided and payments are made. 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 in 2009.
No benefits (or waiver of claims) have been provided to related parties of GEC members or related parties of former members of the GEC during the year 2010 or 2009. Neither had any related party of GEC members or of former members of the GEC outstanding loans, advances or credits as of December 31, 2010 or 2009.
in CHF millions1, 2, for the years ended December 31Highest paid Executive, Chief Executive Officer, Martin Senn in 2010 James J. Schiro in 2009
Holding company 16. Shareholdings of the Board of Directors and the Group Executive Committee Share and share option holdings of the Directors and of the members of the Group Executive Committee (GEC), who held office at December 31, 2010 and 2009, are set out below in accordance with the information required by article 663c paragraph 3 of the Swiss Code of Obligations. This information is also included in the unaudited Remuneration report, set out on pages 46 to 65 of the Annual Report in which additional details can be found.
None of the Directors, nor any related party of a Director, hold any share options or conversion rights over Zurich Financial Services Ltd shares as of December 31, 2010 or 2009.
Number of Zurich Financial Services Ltd shares 1, as of December 31Directors’ shareholdings
Share and share option holdings of the GEC members The following table sets out the actual share and share option holdings of GEC members as of December 31, 2010 and 2009. In addition to any shares acquired in the market, the numbers include vested shares, whether sales-restricted or not, and vested share options received under the Group’s Long-Term Incentive Plan. However, the table does not include the share interests of the members of the GEC through their participation in the currently unvested performance shares, unvested restricted shares or unvested performance share options.
2 The distribution of the vested options according to the grants identified in the tables “Summary of outstanding options” is shown in the table below. 3 Mr Schiro retired from the GEC and his function as Chief Executive Officer on December 31, 2009. The share amount includes an amount of 3,800 shares as of December 31, 2009 for Mr Schiro, which are held by family run charitable foundations. 4 Mr Amore retired on December 31, 2010. 5 Ms Court left the function on June 30, 2010.
6 Mr Hogan took on the function on July 1, 2010. 7 Mr Orator took on the function on September 1, 2010.
The following tables show how the totals of vested share options owned by GEC members as of December 31, 2010 and 2009, are distributed according to the grants identified in the tables “Summary of outstanding options.”
Year of grant Total 1 Mr Schiro retired from the GEC and his function as Chief Executive Officer on December 31, 2009. 2 Ms Court left the function on June 30, 2010
The following tables set out additional details of the options outstanding for members of the GEC as at December 31, 2010 and 2009, respectively. Further details can be found in the unaudited Remuneration report, pages 46 to 65.
Appropriation of available earnings as proposed by the Board of Directors Net income 69,718 4,082,406 Balance brought forward 3,184,567 1,420,180 Retained earnings 3,254,285 5,502,586
2 The Board of Directors proposes to transfer CHF 1,275,702 thousand from retained earnings to capital contribution reserve. Due to this transfer the capital contribution reserve reaches CHF 15,275,702 thousand which includes the approved capital contribution by the Federal Tax Administration (see note 11) and the capital contribution from shareholders through contingent capital from October 1, 2010 to December 31, 2010 of CHF 20,590 thousand.
Appropriation of capital contribution reserve Balance at January 1, 2011 14,000,000 Transfer from retained earnings to capital contribution reserve 1,275,702 1
Balance carried forward 12,783,725 2 1 The amount of CHF 1,275,702 thousand includes additionally to the approved amount by the Federal Tax Administration (see note 11) CHF 20,590 thousand capital contribution from shareholders through issued contingent shares from October 1, 2010 to December 31, 2010.
If this proposal is approved, a payment of CHF 17 per share exempt from Swiss withholding tax is expected to be paid starting from April 7, 2011.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers the internal control system relevant to the entity’s preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control system. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion In our opinion, the financial statements for the year ended December 31, 2010 comply with Swiss law and the company’s articles of incorporation.
In our opinion the issuance of total 950,232 registered shares of a nominal value of CHF 0.10 per share and total amount of CHF 95,023.20 was in accordance with the provisions of the Swiss law and the articles of association of Zurich Financial Services Ltd. Of the total 950,232 registered shares, 658,595 registered shares were issued in the period from January 1, 2010 to and including March 31, 2010 and 291,637 registered shares in the period from April 1, 2010 to and including December 31, 2010.
Basic earnings per share 24.57 30.09 Diluted earnings per share 24.38 29.88 Book value per share, as of December 31 202.69 206.58 Nominal value per share 0.10 0.10 Price at end of period 242.20 226.50 Price period high 271.20 260.00 Price period low 223.30 127.80 1 Proposed dividend, subject to approval by shareholders at the Annual General Meeting 2011; expected payment date as from April 7, 2011. As the dividend payment will be paid from the capital contribution reserve, it will be exempt from Swiss withholding tax.
Zurich Financial Services Ltd Swiss Market Index DJ Stoxx 600 Insurance Index
Zurich offers its shareholders the opportunity to deposit Zurich Financial Services Ltd registered shares free of charge at SIX SAG Ltd in Switzerland. The securities deposit regulations as well as the application form for a securities custody account can be downloaded from our Web site: www.zurich.com
www.zurich.com Downloadable pdfs of both reports are available on www.zurich.com, as well as practical information on managing risk in our Insight section: www.zurich.com/insight.
Investor Relations Zurich Financial Services Ltd, Switzerland Telephone: +41 (0)44 625 22 99 E-mail: investor.relations@zurich.com
Share Register Services Zurich Financial Services Ltd, Switzerland Telephone: +41 (0)44 625 22 55 E-mail: shareholder.services@zurich.com
American Depositary Receipts Zurich Financial Services Ltd has an American Depositary Receipt program with The Bank of New York Mellon (BNY). For information relating to an ADR account, please call BNY Mellon’s Shareowner Services in the USA on +1-888-BNY-ADRs (1-888-269-2377) or outside the USA on +1-201-680-6825. General information on the company’s ADR-program can be obtained from The Bank of New York Mellon at www.adrbnymellon.com.
Book value per share This measure is calculated by dividing common shareholders’ equity by the number of shares issued less the number of treasury shares.
Investments for unit-linked products include such investments where the policyholder bears the investment risk, and are held for liabilities related to unit-linked investment contracts and reserves for unit-linked insurance contracts. They are managed in accordance with the investment objectives of each unit-linked fund. The investment result for unit-linked products is passed to policyholders through a charge to policyholder dividends and participation in profits.
Net underwriting result is calculated as the difference between earned premiums and policy fees and the sum of insurance benefits and losses and net technical expenses.
Surplus ratio (Farmers Exchanges) is a measure that indicates the amount of capital available to support the volume of insurance business written, and is calculated by dividing the end-of-period surplus balance by the net premium written in the preceding twelve month period.
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