• The Zurich Way operational improvement target of USD 700 million surpassed, setting the foundation for deeper transformation
• Profitable growth achieved in target markets through customer, product and distribution strategies
• Standard & Poor’s raises credit rating to AA- • Seven acquisitions enlarge capabilities in emerging markets,
General Insurance – in %, for the years ended December 31 combined ratio
Global Life – 1 new business margin, after tax (as % of APE)
We are pleased to report that excellent operating performances across a broad portfolio of general and life insurance risks resulted in both record business operating profit and net income in 2007. The results were driven by our ability to achieve growth in profitable market segments, implement meaningful operational improvements and rigorously deploy sophisticated capital, investment and risk management techniques, notwithstanding challenging financial and market conditions.
These are precisely the core competencies Zurich has developed over the past several years, and our success in embedding those traits into the Zurich culture is what accounts for the Group’s solid balance sheet, steadily increasing profitability, and successful execution of its strategy.
We are confident that our strategy will serve us well no matter what financial weather or market conditions exist. That is the strength of our strategy, and it is why Zurich is well on its way to becoming one of the leading insurers in the world.
We also continue to pursue operational transformation, building off of The Zurich Way to further increase our customer orientation, achieve higher efficiency in our operating models, and continuously improve our use of technology, talent and other critical resources.
Finally, in recognition that our strong balance sheet is a tremendous asset in these challenging times, we are also maintaining our focus on all dimensions of capital management, deploying sophisticated risk and investment management strategies to use existing capital in a prudent manner, while streamlining our corporate structures to maximize return on capital.
Looking forward, Zurich will maintain its disciplined approach to the key levers of profitability, while refining our customer orientation, expanding our value propositions and enabling the growth and capabilities of our people.
Clearly, today’s market environment poses particular challenges for the financial services sector. But Zurich’s operational and strategic focus, built on a foundation of financial and underwriting discipline, delivered significant shareholder value in 2007, and we are convinced that this positions the Group for continued success in 2008 and beyond.
This level of continued success demands a lot from our people, and for this reason we thank the entire Zurich team for its commitment and hard work throughout
Our aim is to help customers manage their risks so that they can protect the present and plan for the future.
General Insurance provides property and casualty products and services for individual and commercial customers through four businesses. Europe General Insurance offers personal and commercial products in its key markets of Germany, Italy, Spain, Switzerland and the United Kingdom, with a significant presence in Austria, Ireland and Portugal, and operations in Israel, Morocco, Russia and Turkey. North America Commercial serves small and mid-sized businesses with standard and specialty lines of business in the United States and Canada. Global Corporate offers risk management services to large corporations and multinational companies. International Businesses embraces five regions – Latin America, Southern Africa, Australia, Japan, and Greater China/Southeast Asia – which position it well to act as a growth engine in the future.
Our global reach extends across all lines of business, and our customers benefit from our ability to provide service on many fronts. The diversity of our portfolio, both geographically and by line of business, is key to our strategy. It ensures a less volatile risk profile and acts as a bulwark against market cycles.
Global spread Our international network and execution capabilities give us a significant advantage, backed by global operating platforms that enable us to transfer knowledge and best practice.
Capital management We allocate risk-based capital across our businesses and markets in a disciplined and dynamic way that adapts to changing market conditions.
Against a background of increased market volatility and uncertainty, Zurich remains steadfastly committed to following a path of sustainable and profitable growth.
With a general insurance branch in Beijing, a significant share in a major life company, and a recently acquired stake in a national personal lines agency, our greater China operations are well-positioned to take full advantage of growth opportunities, particularly as we draw on the awardwinning experience of our operations in Hong Kong and Taiwan to share knowledge throughout the region.
And as globalization encourages mass migration in many regions, our international life business enjoys particular success in Southeast Asia in the international investor and global expatriate business.
As we increase our presence in these markets, we are leveraging our Group-wide assets, capabilities and operating models. We also draw on the invaluable local knowledge and expertise in our business divisions as we evaluate opportunities. Further selected acquisitions may help us in our objectives, provided they meet our rigorous standards.
Systemic financial risk is seen as the most immediate and, from the point of view of economic cost, the most severe. With so many potential consequences of the 2007 liquidity crunch unresolved, the outlook for the future is more uncertain at the beginning of 2008 than it was a year ago.
Food security, at the center of a number of issues from energy security to climate change and water scarcity, may be emerging as one of the major risks of the 21st century. Long- and short-term drivers – population growth, changing lifestyles, climate change and the growing use of food crops for bio fuels – may be shifting the world into a period of more volatile and sustained high prices. The consequences, particularly for the most vulnerable communities, may be harsh.
Extended supply chains, which have allowed global economic integration to flourish in the last two decades, may be concealing increased vulnerability of the global system to disruptive risks. Geographic concentrations of risk in economically efficient zones of production may have improved global welfare, but the question remains whether businesses and governments are prepared for the consequences of a risk event in these areas. Building a culture of supply chain risk management across public and private sectors may be a first step to broader global risk mitigation.
Energy and its long-term future also raise alarms, particularly perceived risks to energy security and risks from global climate change. Energy is a key input to the global economy, but a safe, secure and sustainable supply is increasingly problematic. It is why Zurich has taken action on the climate issue, and why we are committed to working closely with all customer segments to explore the role risk management can play in addressing these important issues.
Our strategic aspiration is to become the leading global insurance group in our chosen general and life insurance markets, consistently delivering top tier results to our shareholders.
Our profitable growth will be driven by achieving customer, product and distribution excellence. These efforts will be supplemented by selective mergers and acquisitions.
Operational transformation embraces our Group’s holistic view toward operational development by incorporating The Zurich Way initiatives, efficiency projects, efforts to improve our customer centricity and risk insights, and the development of an optimal Target Operating Model.
We are committed to maximizing shareholder value through top-tier financial performance and profitable growth. Our financial results over the past five years demonstrate the strength of our strategy and our ability to execute on it across a diversified portfolio of risks in turbulent financial and market conditions. We continue to optimize our balance sheets and further increase capital efficiency.
Across our general and life insurance businesses, we target growth where opportunities exist or margin enhancement where market conditions are more restrictive. This approach maximizes the value of our diverse portfolio, generating sustained shareholder value and superior financial results.
Profitable growth is a key objective and is reflected in the decision to appoint a member of our Group Executive Committee as Chief Growth Officer to drive our Group’s growth agenda. The Chief Growth Officer also has responsibility for the five regions of International Businesses, including many emerging markets and which will play a major role in identifying and pursuing opportunities for growth. By investing time and resources, we will consolidate our presence in these areas, and will also share our knowledge and expertise.
We are also developing our intellectual capital systematically to support further growth. We seek to be a leader, known for innovative thinking and for developing products and services relevant to a rapidly changing world. As well as concentrating on selected target markets (including emerging markets), we are increasing the number of tied and independent agents, expanding and strengthening our business partnerships, and fostering a culture of cross-selling between our business divisions and segments.
In General Insurance, our business model allows us to respond to the cyclicality of the insurance industry through four factors: • Global underwriting discipline, globallybased risk pricing models, and focus on micro-segments
• Diversity of markets with varying cycles • Improved efficiency through
The Zurich Way • Sophisticated internal measures and advanced portfolio management
Global Life’s growth momentum has accelerated, driven by product launches, proposition improvements and campaigns.
Processes have been designed and rolled out Group-wide for core business activities such as underwriting, claims, sales, distribution, proposition management and reinsurance. These have been complemented by the implementation of a Zurich Way of Finance, of Human Resources, and of Compliance. Benefits captured from the initiatives are monitored and assessed monthly. The Zurich Way of Growth will use this same approach and discipline to focus on profitable growth around customer, product and distribution excellence.
We take similar stringent care in managing all our capital and assets. In the past few years, we have streamlined our structure to make capital available for deployment in areas of the Group that offer a higher return. At the same time, we retain the flexibility to pursue interesting and innovative ideas, such as new distribution channels, new products, or new business opportunities.
In Europe, for example, we are moving from almost 80 capital-consuming legal entities to 34, replacing a complex structure with a much simpler one that allows us to manage our business better and optimize the service to customers. This takes full advantage of the European Union’s Freedom of Services and Freedom of Establishment Principles, providing us with much higher flexibility, improved cash management and a single balance sheet.
In Group Finance, we have moved from a collection of local units to a global operation with better performance and more effective core processes. Several Treasury Services have been consolidated in Dublin. We have restructured accounting processes from six business units in Europe and the US to one multilingual outsourced shared service platform in Krakow, Poland.
We are also improving efficiency by sharing services in various parts of the organization. In Europe, we aim to make full use of common best practices and common platforms and infrastructure in eight areas: legal, compliance, procurement, communications, risk management, human resources, marketing communications, and corporate real estate and facilities management.
In North America, we reached a new level of cooperation between Zurich and Farmers in 2007 by introducing shared services for IT, accounting, finance, human resources, communications, procurement, real estate and audit. The resulting economies of scale from the combined size, knowledge and technologies are expected to save USD 93 million by 2010. The change will also enhance operational excellence for Farmers and North America Commercial, and help them achieve their business goals in increasingly competitive markets.
Equally, we seek to identify the opportunities that inevitably accompany risk, and to help our customers understand and take advantage of them. Not only is risk sharing important for the functioning of today’s interlinked businesses and economies, but at a personal level, too, people feel more comfortable and secure when they can manage continual changes to their lives, their businesses and the world around them.
Today’s risks may be global or local, geopolitical or economic, financial or commercial. Some are known, some will appear as distant “blips” on the radar screen, others may lie hidden, largely unpredictable, at least through today’s eyes. Our challenge is to help foster a better understanding of the issues and interdependencies that evolve into tomorrow’s risks.
Zurich Global Corporate has been developing a new insurance product to cover the business impact of a failure in a customer’s supply chain. The product will offer cover against loss of revenue and/or increased costs incurred. An innovative claims settlement formula approach will also provide a greater certainty over the amount that can be claimed and reduce the investigation time taken after a loss, thus ensuring a speedier payment.
In the US, the integration of Bristol West and its 10,400 agents with Farmers is already showing tangible benefits. Rollout of its products throughout Farmers’ distribution platform has been completed in 20 of the 29 tied-agent states. This latest acquisition also mirrors the highly successful integration of specialities line insurer Foremost Insurance Company, which Farmers acquired in 2000 and doubled in premium within three years.
Manfred Gentz Chairman of the Board, chairman of the Governance and Nominations Committee, member of the Remuneration Committee
Philippe O. Pidoux Vice Chairman of the Board, member of the Governance and Nominations Committee, member of the Remuneration Committee
Don Nicolaisen Director, chairman of the Risk Committee, member of the Audit Committee
Armin Meyer Director, member of the Governance and Nominations Committee, member of the Risk Committee
Gerhard H. Schulmeyer Director, chairman of the Audit Committee, member of the Risk Committee
Martin Senn Chief Investment Officer 2 As of January 1, 2008
Effectively managing risks affecting Zurich is essential to our ability to help our customers manage theirs. While risk management has long been the core discipline of insurers, it has become even more critical for us and for our customers as the risk landscape evolves and becomes more complex.
• Strategic – the unintended risks that can result as a byproduct of planning or executing the strategy
• Market – risk associated with the Group’s balance sheet positions where the value depends on investments in financial markets
regularly monitor our risks through various analyses and reports, as well as through relevant risk modeling. We assess risks systematically and strategically through our proprietary Total Risk Profiling® process, which allows us to identify and then evaluate the probability of a risk scenario occurring, and the severity of the consequences should it occur. We then develop, monitor and implement appropriate improvement actions. The risk profiling process is integral to how we deal with change, and is particularly suited to evaluating strategic risks and risks to our reputation.
Rating agencies are increasingly interested in risk management as a factor in evaluating companies. Standard & Poor’s is the only rating agency with a separate rating for enterprise risk management. Standard & Poor’s upgraded our rating for enterprise risk management from “adequate” in 2006 to “strong” in 2007. Only 13 percent of European insurers were rated “strong.”
We also seek external expertise to better understand and assess our risks, particularly regarding areas of complex change. For discussion of our International Advisory Council, Natural Catastrophe Advisory Council and Climate Change Advisory Council, please see the Business Review. In addition, the Investment Management Advisory Council provides feedback to our management on achieving superior risk-adjusted returns versus liabilities for the Group’s invested assets.
The Board of Directors establishes the Group’s corporate risk management framework. The Risk Committee of the Board serves as a focal point for oversight regarding risk management. It reviews the Group’s enterprisewide risk governance framework including risk management methodologies, policies, models and reporting and risk strategy. This committee met six times in 2007. To facilitate information exchange between the Audit Committee of the Board and the Risk Committee of the Board, the chairperson of the Audit Committee is a member of the Risk Committee and vice-versa.
The Group also benefits from the cooperation of its network of risk management and functional specialists within each business as well as at Corporate Center, where we have dedicated managers for various types of risk.
Group-wide risk management policies specify risk limits and authorities, reporting requirements and procedures for referring risk issues to senior management. We
For more information about our capital management and solvency, please see the Consolidated Financial Statements, note 27 Capital Management.
The chart summarizes the RBC consumption of our business compared to the Available Financial Resources (AFR). Zurich’s AFR calculation translates the IFRS balance sheet into an economic view consistent with the RBC methodology. AFR reflects financial resources protecting policyholders in a worst case loss event. It is derived by adjusting the IFRS shareholders’ equity to remove intangible assets and liabilities and to deduct proposed dividends/buybacks. It adds back the value of future profits from in-force business, senior and subordinated debt with a maturity greater than one year and makes adjustments related to the scope of RBC (e.g. minority holdings) to determine the financial resources available to protect policyholders during the observation period. The numbers in the chart show the AFR at the beginning of the respective year (based on the IFRS balance sheet at December 31 of the prior year) to cover the risks with potential to appear during the year indicated.
Financial Report 2007 such as catastrophe bonds, to protect Zurich against extreme single events and increased frequency of events falling within our retention. Our Corporate Reinsurance Security Committee manages the credit quality of our cessions and reinsurance assets. Due to our improved underwriting processes, and the flexibility afforded by our increased shareholders’ equity position, we have been able to restructure and realign our reinsurance programs to achieve a better risk/reward ratio.
For discussion of our Emerging Risks Group, please see the Business Review 2007. Management of emerging risks affects both Life and General Insurance.
Another foundation is appropriate reinsurance, which mitigates insurance risk. Our primary objectives for purchasing reinsurance are to provide market-leading capacity for our customers while protecting the balance sheet and optimizing the Group’s capital efficiency. We maintain a centralized purchasing strategy for General Insurance – and as of September 2007, Life Insurance also – and continue to bundle programs where appropriate to benefit from diversification and economies of scale. We continue to review and use traditional reinsurance markets and other alternatives,
Our Group-wide catastrophe modeling is annual, and quarterly for significantly exposed regions
As we develop an integrated operational risk management framework, we continue to focus on high priority operational matters such as outsourcing, information technology and managing business continuity. A key task is keeping our business continuity plans up-to-date, with an emphasis on recovery from unexpected events such as natural catastrophes and the possibility of a pandemic. In 2007, we continued our pandemic preparedness and focused on crisis management training.
It is our belief that a responsible company is one which takes measures to create value for both the company and society by proactively addressing material social, environmental and governance issues.
To further improve our corporate responsibility performance, we will continue to better integrate pertinent issues and related stakeholder expectations into Zurich’s core business and to leverage best practices throughout the Group.
Oversight of corporate responsibility activities and performance, as well as advice on the formulation of strategy and priorities, will be provided by the Corporate Responsibility Council, which includes top management and key functions.
We will prioritize issues based on the potential impact on the business, level of societal concern and our ability to make a difference. Focus areas for 2008 include: improved performance in the DJSI and FTSE4Good; microinsurance; climate change; corporate giving and employee engagement.
Zurich has continuously met its ongoing corporate responsibility objective of inclusion in the Dow Jones Sustainability Indexes (DJSI) and FTSE4Good Index Series since their inception in 1999 and 2001, respectively. Not only have the DJSI and FTSE4Good become influential benchmarks for the growing number of investors considering good corporate responsibility performance essential to the long-term success of their investments, but they are an indicator of our success in managing significant environmental, social and governance issues.
Zurich continues to demonstrate year on year improvements in overall performance, and scores remain above average in the social, environmental and economic dimensions of the DJSI. Room for improvement exists, however, in the social and environmental dimensions, particularly with respect to social reporting, addressing environmental risks and opportunities, and stakeholder engagement. We take the results and lessons learned from such ratings into account in the development of Group activities, and we will continue to use them to build on our strengths and overcome our weaknesses.
For hundreds of millions of low-income families, insurance and other financial services are too often unknown, not appropriate or beyond reach.
In February 2007, Zurich signed a Public Private Partnership with the Swiss Agency for Development and Cooperation and the International Labour Organization. This arrangement directly provided technical assistance to ongoing projects in Bolivia, South Africa and Venezuela, as well as strategic planning support for other business units exploring opportunities to develop microinsurance. Noteworthy projects include product development and distribution projects in the Royal Bafokeng Nation in South Africa, demand research in South Africa and Venezuela, and a review of key learnings in Bolivia.
In business units in Latin America, Africa and Greater China, the business of growing microinsurance continued in 2007. New coverage and distribution experiments were launched: property & casualty, health as well as life insurance covers, distribution through remittances as well as sold directly. Some of these were incremental innovations and others were bolder. Zurich recognizes that constant improvement and learning are fundamental elements of this initiative and that through these disciplines, the chances to make quantum leaps improve.
For a full description of Zurich’s microinsurance initiative, please see the Business Review 2007.
Although our businesses around the world have already been addressing customer needs and expectations in the area of climate-related risk, the new initiative enables us to take a consistent and more focused approach. It has three elements: • An internal Climate Office that will energize our 60,000 employees and will help to develop risk products and solutions. It will be embedded in our underwriting infrastructure
This fresh impetus builds on initiatives already established in our organization. Europe, the US and Australia all have products that address elements of climate-related risk. Canada, the US and Europe have linked with experts on these issues. Individual business units, including Switzerland, have taken it upon themselves to develop and implement carbon management strategies. Farmers in the US offers discounts to drivers of hybrid vehicles.
As an example of our employees’ engagement in the climate change issue at a practical and personal level, six of them visited Sri Lanka in 2007 to help restore mangrove forests destroyed in the disastrous tsunami of December 2004. More than 100 people from 16 countries applied to join the project, organized by Earthwatch Institute of Europe. The successful six came from Australia, Canada, Spain, Switzerland, the United Kingdom and the United States. More volunteers have been sought for 2008, and on returning to their home countries, each of them will become a champion for corporate responsibility.
For a full description of Zurich’s climate change initiative, please see the Business Review 2007.
We take great pride in giving back and in making an effort to equip people with the knowledge and resources to better manage change and risk in their lives and in the world around them. Zurich makes significant financial and in-kind contributions to the communities in which it operates around the globe. In response to local needs and priorities, our commitments cover a wide range of activities.
Zurich Financial Services is committed to effective governance for the benefit of its shareholders, customers, employees and other stakeholders based on the principles of fairness, transparency and accountability. Structures, rules and processes are designed to provide for proper organization and conduct of the business within the Group and to define the powers and responsibilities of its corporate bodies and employees.
The principles of corporate governance and the standards described above have been incorporated and are reflected in a number of documents, in particular in the Articles of Incorporation, the Organizational Rules and the Charters and Rules of the Board Committees. The Board’s Governance and Nominations Committee, which oversees the Group’s governance, regularly measures the governance against best practice standards and ensures compliance with corporate governance requirements.
An effective structure is in place providing for cooperation between the Board of Directors, Management and internal control functions. This structure establishes checks and balances and is designed to provide for institutional independence of the Board of Directors from the Group Chief Executive Officer (CEO) and the Group Executive Committee (GEC), responsible for managing the Group on a day-to-day basis. The Board of Directors of Zurich Financial Services is composed entirely of non-executive members. The roles of Chairman of the Board of Directors and CEO are separated, thus providing for separation of powers between the functions and ensuring the autonomy of the Board.
The Group is managed on a matrix basis, reflecting both lines of business and geography, and this is mirrored in the areas of responsibilities assigned to the members of the GEC. The GEC is headed by the CEO and includes the Chief Financial Officer, the Chief Investment Officer, the Chief Growth Officer, the Group Chief Risk Officer, the heads of the business segments – General Insurance, Global Life and Farmers Management Services – and the heads of the business divisions North America Commercial, Global Corporate and Europe General Insurance. For further information on the GEC please refer to pages 41 to 47.
• Other Businesses includes Farmers Re which provides reinsurance to the Farmers Exchanges, Centre and capital markets and banking activities. This segment also includes certain businesses which are centrally managed and are not considered to be core businesses.
The Group’s secondary format for segment information continued to be geographic in 2007 and is as follows: North America, Europe, International Businesses and Central Region.
A detailed review of the respective business segment and division results during 2007 can be found in the Financial Review starting on page 70. Furthermore, an overview of the Group’s business strength and activities is contained in the Business Review, available on Zurich’s Web site www.zurich.com
Zurich Financial Services is listed on the SWX Swiss Exchange. Certain Group companies have listed debt issues under the Euro Medium Term Note Programme and other financial instruments.
As of December 1, 2007 the rules regarding disclosure of significant shareholdings in Swiss companies listed in Switzerland have been amended. As of that date, disclosure has to be made at a threshold of 3%, rather than at 5% as was previously the case. Furthermore, since July 1, 2007, call options and other financial instruments are to be added to any position in shares, even if they allow for cash settlement only. Under the new regime, disclosure must be made separately for purchase positions (including shares, long call options and short put options) and sale positions (including long put options and short call options). The percentage thresholds are calculated on the basis of the total amount of voting rights according to the entry in the commercial register.
As of December 31, 2007, the Board of Directors of Zurich Financial Services has authority to increase the share capital by CHF 600,000, representing 6,000,000 registered shares with a nominal value of CHF 0.10 each by no later than June 1, 2008. Zurich Financial Services also has a contingent share capital of CHF 548,182.80 representing 5,481,828 registered shares with a nominal value of CHF 0.10 each to increase its share capital by exercising conversion and/or option rights which are granted in connection with the issuance of bonds or similar debt instruments by Zurich Financial Services or one of its Group companies in national or international capital markets; and/or option rights which are granted to the shareholders. Moreover, there is an additional contingent share capital of CHF 320,257.90, representing 3,202,579 registered shares with a nominal value of CHF 0.10 each, which may be issued to employees of the Group.
On February 15, 2006, the Board of Directors approved the issuance of a maximum of 1,000,000 out of the 1,500,000 dividend-paying shares from the contingent share capital to employees and subsequently has submitted an application to list 1,000,000 registered shares out of the contingent capital to the SWX Swiss Exchange.
At the Annual General Meeting on April 20, 2006, shareholders approved a share capital reduction in the form of a nominal value reduction of each share from CHF 2.50 to CHF 0.10. At the effective date of the nominal value reduction on July 3, 2006, Zurich Financial Services had 144,565,255 issued and fully paid shares, including 558,300 shares issued out of the contingent capital. As a result of this reduction, the share capital was reduced by CHF 346,956,612 from CHF 361,413,137.50 to a new total of CHF 14,456,525.50. The authorized share capital was reduced to CHF 600,000, and the contingent share capital was reduced to CHF 548,182.80 and CHF 94,170, respectively.
As of December 31, 2006, in total 742,444 shares out of the contingent share capital had been issued to employees. As a result the share capital amounted to CHF 14,474,939.90 and the contingent share capital amounted to CHF 548,182.80 and CHF 75,755.60, respectively, on December 31, 2006.
Based on a proposal of the Board of Directors of Zurich Financial Services dated February 14, 2007, the shareholders at the Annual General Meeting of April 3, 2007 approved the increase of the contingent share capital for the issuance of new registered shares to employees of the Group from CHF 75,755.60 by CHF 324,244.40 to a new maximum of CHF 400,000 by issuing up to 4,000,000 registered shares payable in full with a nominal value of CHF 0.10 each. On March 5 and May 7, 2007, 500,000 and 3,242,444 new registered shares with a nominal value of CHF 0.10 each out of the contingent share capital were listed on the SWX Swiss Exchange. The shares were allocated to be issued over time to meet the Group’s obligations on the various employee share and option plans as they arise.
CREST holds the shares in trust and issued dematerialized depository interests representing entitlements to Zurich
States. Under the program, The Bank of New York Mellon issues the ADSs. Each ADS represents the right to receive onetenth of one Zurich Financial Services share. Each ADS also represents securities, cash or other property deposited with
Services and are not able to directly enforce or exercise shareholder rights. Only the Bank of New York Mellon as depositary may exercise voting rights with respect to instructions received from beneficial owners of ADRs.
Zurich Financial Services shares are registered shares with a nominal value of CHF 0.10 each. The shares are fully paid. Pursuant to Article 14 of the Articles of Incorporation, each share carries one vote at shareholders’ meetings and entitles the registered holder to exercise all other membership rights in respect of that share, provided registration in the share register has been effected.
The Articles of Incorporation do not provide for any limitations on transferability except for formalities for the transfer of undocumented shares.
Registration as a shareholder requires a declaration that the shareholder has acquired the shares in his or her own name and for his or her own account. Nominees holding Zurich Financial Services’ shares may for the benefit of, or as nominee for, another person be registered for up to 200,000 shares with voting rights notwithstanding that the nominee does not disclose the identity of the beneficial owner. A nominee is, however, entitled to be registered as shareholder with voting rights of more than 200,000 shares if the nominee undertakes to disclose the identity of each beneficial owner and to inform the beneficial owners about corporate actions, to consult as to the exercise of voting rights and pre-emptive rights, to transfer dividends and to act in the interests and in accordance with the instructions of the beneficial owner.
There are special provisions relating to the registration of, and exercise of rights attaching to, shares by CREST International Nominees Ltd. on behalf of CDI holders and by the Bank of New York Mellon in connection with the Zurich Financial Services’ ADR program. After the de-listing of its shares from the London Stock Exchange (LSE), effective October 2, 2006, Zurich Financial Services withdrew its sponsorship of its Corporate Nominee Service administered by Lloyds TSB Registrars as of the end of 2007.
Manfred Gentz German 65 Member of the Remuneration Committee 2005 2008
Philippe Pidoux Swiss 64 Member of the Remuneration Committee 1997 1 2009
Thomas Escher Swiss 58 Member of the Audit Committee 2004 2009
Gerhard Schulmeyer American 69 Member of the Risk Committee 1998 1 2008
Rolf Watter Swiss 49 Member of the Audit Committee 2002 2010 1 Mr.Pidoux has served on the board of Zurich Insurance Company since 1997. In 1998, after the merger between B.A.T. Financial Services and Zurich Insurance Company (the “Merger”), he assumed office as a member of one or more boards of the then Group holding structure consisting of Zurich Group Holding (then called Zurich Financial Services), Allied Zurich p.l.c. and Zurich Allied AG. The Group structure was reorganized in October 2000 (“Unification”). Mr. Sankey and Mr. Schulmeyer were also members of one or several boards of the Group holding structure that was established with the Merger. Since Unification they have all served on the Board of Zurich Financial Services.
Agrippina Versicherung AG and from 1996 to 2005 he was a member of the board of supervisors of Zürich Beteiligungs-Aktiengesellschaft (Deutschland). From 1985 to 2005 Mr Gentz was on the board of supervisors of Hannoversche Lebensversicherung AG (from 1990 as its proxy chairman). From May 2005 until March 2006, he was chairman of the supervisory board of Eurohypo AG. In addition to serving on the board of supervisors of adidas AG, the German Stock Exchange (Deutsche Börse AG) and DWS Investment GmbH, he is chairman of ICC (International Chamber of Commerce), Germany. He is active in a number of scientific and cultural institutions, among others, he chairs the curatorship of the Technische Universität Berlin.
Philippe Olivier Pidoux graduated from the University of Lausanne, Switzerland, with a doctorate in law and also holds a master’s degree in comparative jurisprudence from the University of Texas. He is a partner in the law firm BMP Associés in Lausanne, Switzerland. Mr. Pidoux was a member of the Government of the Canton of Vaud from 1986 until 1994 and a member of the Swiss Parliament between 1983 and 1999. From 1991 until 2003, he was a member of the board and as of 1999 vice chairman of the Swiss National Bank. He is also chairman of Publigroupe AG.
Don Nicolaisen graduated from the University of Wisconsin-Whitewater with a BBA degree and joined Price Waterhouse (which subsequently became PricewaterhouseCoopers), where he was admitted to partnership in 1978. He served in various capacities, including as auditor and as chairman of PricewaterhouseCoopers’ financial services practice. He led that company’s national office for accounting and Securities and Exchange Commission services from 1988 to 1994 and served on both the US and global boards from 1994 to 2001. From September 2003 to November 2005, he was chief accountant of the US Securities and Exchange Commission and was principal adviser to the Commission on accounting and auditing matters. He is a member of the board of directors of Verizon Communications Inc., Morgan Stanley and MGIC Investment Corporation. In addition, he is on the board of advisors for the University of Southern California Leventhal School of Accounting.
Tom de Swaan graduated from the University of Amsterdam with a master’s degree in economics. He joined De Nederlandsche Bank N.V. in 1972, and from 1986 until 1998 was a member of the governing board there. In January 1999, he became a member of the managing board and chief financial officer of ABN AMRO Bank. He retired from ABN AMRO on May 1, 2006, but continued as an advisor to the managing board until June 2007. Mr de Swaan is a non-executive member of the board of GlaxoSmithKline Plc and chairman of its audit committee. He is a member of the supervisory board of Royal DSM, a Netherlands-based chemical group, and Corporate Express, a Netherlands-based distributor of office products. Since May 3, 2007, he has been vice-chairman of the supervisory board of Royal Ahold, a global retail chain, and since May 10, 2007, vice-chairman of the supervisory board of Van Lanschot NV, the holding company of F. van Lanschot Bankiers, an independent Dutch bank. From 1987 to 1988, he was chairman of the Amsterdam Financial Center, and from 1995 to 1997 chairman of the banking supervisory sub-committee of the European Monetary Institute. He was also a member of the Basel Committee on Banking Supervision from 1991 to 1996, its chairman from 1997 to 1998, and a non-executive director on the board of the UK’s Financial Services Authority from January 2001 until the end of 2006. Mr de Swaan is also a director of a number of non-profit organizations. Among others he is treasurer of the board of the Royal Concertgebouw Orchestra, the Netherlands Cancer Institute and the International Franz Liszt Piano Competition. Moreover, he chairs the advisory board of the Rotterdam School of Management.
Rolf Urs Watter graduated from the University of Zurich with a doctorate in law and holds a master of laws degree from Georgetown University in the US. He is admitted to the bar of the Canton of Zurich. Since 1994, he has been a partner in the law firm Bär & Karrer in Zurich and became a member of its executive board in 2000 and an executive director upon the incorporation of Bär & Karrer AG in 2007. Since 2004 he has been a non-executive chairman of Cablecom Holding AG and since April 2007 a non-executive director of Nobel Biocare Holding AG. He is further a member of the boards of directors of Syngenta AG (since 2000), UBS Alternative Portfolio AG (since 2000) and A.W. Faber-Castell (Holding) AG (since 1997). He formerly was a director of Centerpulse AG (2002 – 2003), of Forbo Holding AG (1999 – 2005) and of Feldschlösschen Getränke AG (2001 – 2004). He is a part-time professor at the Law School of the University of Zurich. In addition, he is a member of the SWX Admission Board and of its Disclosure Commission of Experts. He also serves as chairman of two charity institutions.
The Articles of Incorporation require that the Board shall consist of not fewer than seven and not more than 13 members. The ordinary term of office is three years. On the expiration of their terms of office, Directors may be re-elected immediately. The Articles of Incorporation require elections to be organized in such a way as to ensure that no more than four Directors complete their term of office at any one general shareholders’ meeting. The election of a member of the Board is effected on an individual basis. Directors are elected by a majority of the votes cast. Zurich Financial Services’ Organizational Rules provide that no individual of 70 years of age or older shall be nominated as a Director, though exceptions may be made under special circumstances.
At the Annual General Meeting to be held on April 3, 2008, the terms of office of Messrs. Gentz, Kindle, Schulmeyer and de Swaan will expire. While Mr. Schulmeyer will retire from the Board, Messrs. Gentz, Kindle and de Swaan have been proposed for re-election by the Board. They will stand for re-election for a term of three years each.
Susan Bies and Victor Chu have been nominated as additional members of the Board of Directors of Zurich Financial Services for a term of two years each.
Susan Bies, 60, American, graduated with a BS degree from the State University College at Buffalo, New York, and with a MA degree from Northwestern University, Evanston, where she later gained a PhD. She began her career in 1970 as regional and banking structure economist with the Federal Reserve Bank of St. Louis, Missouri, and two years later became assistant professor of economics at Wayne State University, Detroit, Michigan. In 1977 she moved to Rhodes College, Memphis, Tennessee in a similar role, and in 1979 joined First Tennessee National Corporation in Memphis, where she remained until 2001. During the early years, her areas of responsibility included tactical planning and corporate development. In 1984 she became chief financial officer and chairman of the asset/liability committee. In 1995, she became executive vice president of risk management, and auditor and chairman of the executive risk management committee, as well as continuing her duties with the asset/liability committee. From 2001 until 2007, she was a member of the Board of Governors of the Federal Reserve System. Between 1996 and 2001, Ms Bies was a member of the Emerging Issues Task Force of the Financial Accounting Standards Board. She is currently a member of the Securities and Exchange Commission’s advisory committee on improving financial reporting, and chairman of its substantive complexity sub-committee.
The Board is chaired by the Chairman, or in his absence the Vice Chairman. It has a program of topics that is presented at its meetings throughout the year. It is regularly informed of developments regarding the Group and is provided with timely information in a form and of a quality appropriate for it to discharge its duties in accordance with the standards of care set out in Article 717 of the Swiss Code of Obligations.
The Board is required to meet at least six times each year; during 2007 it held 11 meetings (of which four were partly attended by phone and two were held over two days). On the occasion of two of the 11 meetings the Board conducted separate visits to businesses in the US and Spain; one meeting was fully dedicated to the discussion of strategic topics. Five meetings lasted between five and nine hours per day, and the remaining six meetings took about two hours. In addition, the Board unanimously approved three circular resolutions.
The Board may appoint committees for specific areas from among its members and establish terms of reference and rules with respect to delegated authority and to reporting to the Board. The committees assist the Board in performing its duties. To the extent that the committees are not authorized to take resolutions, they discuss and propose matters to the Board for taking the appropriate actions and passing resolutions before such matters are brought to the Board. The Board has the following standing committees, which regularly report to the Board and submit proposals for resolutions to the Board. On average, committee meetings lasted between two and three hours.
The Governance and Nominations Committee is composed of four Board members. It oversees the Group’s governance and measures it against best practice with a view to ensure that the rights of the shareholders are fully protected. It also develops and proposes to the Board corporate governance guidelines and reviews them from time to time. The Governance and Nominations Committee is further entrusted with succession planning with respect to the Board, the CEO and the members of the GEC and Group Management Board (GMB). In this regard, it proposes the principles for the nomination and ongoing qualification of members of the Board and makes proposals to the Board on the composition of the Board, as well as the appointment of the Chairman, the Vice Chairman, the CEO and the other members of the GEC and GMB. The Committee reviews the system for management development and supervises progress made in respect to succession planning. Final decisions for nominations and appointments are made by the Board, subject to shareholder approval, where so required. During 2007, the Governance and Nominations Committee met five times (of which one was a joint meeting with the Remuneration Committee) and particularly addressed the nomination and ongoing qualifications of the members of the Board of Directors and the succession planning for members of senior management. On average attendance at meetings of the Governance and Nominations Committee was 90%.
The Remuneration Committee comprises four members of the Board. The Remuneration Committee evaluates and proposes to the Board the principles for remuneration for the Group and the Board It also proposes the directors’ remuneration to the Board for approval. Based on the remuneration principles, it negotiates the terms and conditions of employment of the CEO and reviews those of the members of the GEC – as negotiated by the CEO – before submitting them to the Board for approval. The Remuneration Committee approves the employment arrangements for additional members of the GMB as negotiated by the CEO and liaises with him on other important employment, salary and benefit matters. It also reviews the
The Audit Committee has four members, all of whom meet relevant requirements with respect to independence and qualification. The Audit Committee charter provides that the Audit Committee as a whole should have (i) an understanding of IFRS and financial statements, (ii) the ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves, (iii) experience in preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to those of Zurich Financial Services and the Group or experience in actively supervising one or more persons engaged in these activities, (iv) an understanding of internal controls and procedures for financial reporting, and (v) an understanding of audit committee functions. The Audit Committee met seven times in 2007. Average attendance at meetings
The Risk Committee has four members. In 2007 it met six times; attendance on average was 83%. The Risk Committee oversees the Group’s risk management, in particular the Group’s risk capacity, including agreed limits by category of risk which the Board regards as acceptable for Zurich to bear, the aggregation of agreed limits across the Group, the measurement of adherence to agreed risk capacities, and the Group’s risk capacity in relation to anticipated capital levels. It further oversees the enterprise-wide risk governance framework, including risk management, risk policies and their implementation as well as the risk strategy, and the monitoring of operational risks. The Risk Committee also reviews the methodologies for risk measurement and the Group’s adherence to its risk profile and reviews the performance of the Group’s risk management function. It further reviews, with Management and the Group risk management function, the Group’s general policies and procedures, and satisfies itself that effective systems of risk management are established and maintained. The Group Chief Risk Officer reports on a semi-annual basis on the Group’s risk profile and mitigation actions.
To ensure an on-going exchange of information between the Risk Committee and the Audit Committee and to avoid potential communication gaps that could impact the Group’s financial results and risk management, the Chairman of the Audit Committee is a member of the Risk Committee and the Chairman of the Risk Committee is a member of the Audit Committee.
In addition to determining the overall strategy of the Group and the supervision of senior management, the Board addresses key matters in the area of strategy, finance, structure and organization and business development. The Board approves the Group strategic plan and the annual financial plans developed by Management and reviews and approves the annual, half-year and quarterly financial statements of Zurich Financial Services and the Group. It establishes guidelines for overall business policies and capital allocation and approves major changes in the Group’s business activities, including major lending and borrowing transactions and major business developments, such as acquisitions or disposals of businesses or assets, investments or new businesses, mergers, joint ventures and cooperations. The Board also considers other matters of strategic importance to the Group.
The Board supervises Management and monitors its performance through reporting and controlling processes. Regular reporting by the CEO and other executives to the Board comprises appropriate information and updates, including key data for the core businesses, financial information, existing and upcoming risks and updates on developments in important markets and with regard to major competitors as well as other significant events. The Chairman of the Board regularly meets with the CEO. He and other members of the Board also meet with the Chief Financial Officer and other executives outside regular Board meetings. In 2007, the Chairman attended Zurich’s leadership meeting, which focused on numerous growth strategies and projects and their alignment within the Group.
The process and the results of this approach are further described on page 51 under the Internal Control Statement.
To the extent not reserved to the Board, management is delegated to the CEO. The CEO, and under his supervision the GEC, are responsible for dealing with strategic, financial and business policy issues of Groupwide relevance, including consolidated performance, capital allocation and mergers and acquisitions.
A standing committee of the GEC is the Group Balance Sheet Committee, chaired by the CEO. This committee reviews key financial matters resulting from implementation of strategy, developments in the financial environment and the financial condition of the Group. It deals with capital management and allocation and considers specific transactions or business changes not reflected in the Group financial plan that impact the Group’s balance sheet under delegation approved by the Board of Directors. Furthermore, it monitors the risk appetite of the Group and discusses topics that may have an impact on the Group’s balance sheet. A further GEC committee is the Group Finance and Risk Committee (formerly Group Finance Committee) chaired by the Chief Financial Officer. The Group Finance and Risk Committee monitors the implementation of finance-related matters decided by the Board, the CEO and/or the GEC and gives recommendations for future courses of action with respect to potential M&A transactions and topics relating to finance, risk management and reinsurance.
In addition, to enhance its understanding and assessment of the challenges and risks Zurich may face, the Group increasingly seeks external expertise and perspective. As of the end of 2007 the Group had three panels of leading academics, business and industry experts to provide feedback and insights. They are not corporate bodies of the Group and have no decision making powers. They provide expertise and advice to the management or certain functions of the Group. In particular, the International Advisory Council is mandated to provide an external perspective and expertise to the CEO and to members of the GEC and GMB on the Group’s growth and public policy strategies. The Investment Management Advisory Council offers feedback on Zurich’s investment results and strategy and on achieving superior risk-adjusted returns relative to the liabilities for the Group’s invested assets. The Natural Catastrophe Advisory Council provides insight into the patterns of occurrence, predictability and destructiveness of catastrophes, and feedback about Zurich’s approach to such catastrophes in order to help improve the effectiveness of its underwriting and reinsurance purchasing.
With the exception of Annette Court and Mario Greco, who joined the GEC on March 1, 2007 and October 1, 2007, respectively, all current members of the GEC served throughout the year 2007.
John J. Amore graduated with a degree in management from Embry-Riddle Aeronautical University, Daytona Beach (US), and with an MBA in finance from New York University. Before joining Zurich, he was vice chairman of the Commerce and Industry Insurance Company, a member company of American International Group (AIG). He later became Chief Executive Officer of the Zurich US Specialties business unit and was appointed Chief Executive Officer of Zurich US in December 2000. He was CEO of Zurich’s North America Corporate business division until end of August 2004. In April 2004 he was appointed CEO of the General Insurance business segment, and since September 2004 he has been concentrating on this global leadership role. Mr. Amore is the immediate past chairman of the American Insurance Association and has served on its board since 2001. He serves as director on the board of overseers for the School of Risk Management, Insurance and Actuarial Science at St. John’s University in New York. He is an elected partner for the Partnership for New York City, an organization dedicated to maintaining the city’s position as a global center of commerce and innovation and serves on the U.S. Chamber of Commerce’s board of directors.
Patrick H. O’Sullivan graduated from Trinity College, Dublin, with a degree in business studies. He qualified with Arthur Andersen as a chartered accountant, followed by a masters of science degree in accounting and finance from the London School of Economics. After qualifying, he joined the Bank of America, working in London, Miami, Los Angeles and Frankfurt. In 1988 he joined Goldman Sachs as financial controller for Europe, and in 1990 moved to Financial Guaranty Insurance Company (FGIC), a wholly-owned subsidiary of GE Capital. He was appointed to the FGIC board in 1993. The following year, he joined Barclays/BZW as head of International Banking & Structured Finance, and in September 1996 he became BZW’s chief operating officer. In 1997, he joined Eagle Star Insurance Company as chief executive, and, the following year, was appointed Chief Executive Officer of Zurich’s general insurance business in the United Kingdom. In December 2002, he became Group Finance Director of Zurich Financial Services and a member of the GEC. In March 2007, he was appointed to his current position as Vice Chairman of the Group Management Board and Chief Growth Officer. He is responsible, in addition, for the Group’s International and Centrally Managed Businesses as well as Banking.
Martin Senn received his commercial and banking diploma from the Business School in Basel, Switzerland and graduated from the International Executive Program at INSEAD in Fontainebleau and the Advanced Management Program at Harvard Business School. He is a trained banker and worked at the former Swiss Bank Corporation from 1976 to 1994 where his international career steps included treasurer in Hong Kong and regional treasurer for Asia and the Pacific region in Singapore before ultimately managing the company’s Tokyo office. In 1994 he joined Credit Suisse where his executive roles included that of treasurer for the Head Office and Europe, chairman and turnaround manager of Credit Suisse Group Japan with a mandate to restructure and reposition all legal entities of the Group in Japan. In 2001, he became a member of the Credit Suisse executive board and was appointed head of its Trading and Investment Services Division. From 2003 until 2006 he served as a member of the corporate executive board and as chief investment officer of the Swiss Life Group. Mr. Senn joined Zurich on April 1, 2006 as Chief Investment Officer and became a member of the Group Executive Committee as per the same date. He is a member of the Technopark Zurich Foundation. Since January 2007 he is also a member of the governing board of Avenir Suisse and since April 2007 treasurer of the Zurich Association of Economics. In addition he serves as Honorary Consul of the Republic of Korea in Zurich. He previously was a member of the board of directors of various banks and financial services institutions.
Paul van de Geijn graduated in business law from Leiden University in the Netherlands in 1971 and joined one of the predecessors of AEGON. He started as legal counsel and then worked in the non-life sector before moving to a senior management position in 1978. After the merger which created AEGON in 1983, he was appointed a member of the management board of AEGON the Netherlands, becoming its chairman in 1991. The following year, he joined the executive board of AEGON N.V., with responsibilities for the Dutch and later Spanish and Hungarian operations. In 2002, he handed over responsibility for the Dutch operations and assumed responsibilities for AEGON USA and the AEGON corporate responsibility program. From 2000 to 2002 he was chairman of the Dutch Association of Insurers. In November 2003 he joined Zurich as CEO Global Life and became a member of the GEC. He held positions in a public/private partnership in the business community and on the executive committee of the Dutch Employers’ Association.
As from January 1, 2008, Axel Lehmann assumed the role of Chief Risk Officer, a role which has been elevated to Group Executive Committee status as of the same date, reflecting the enhanced importance of Risk Management within the Group. He also assumed responsibility for Group IT. In his new role as Chief Risk Officer Axel Lehmann remains a member of the GEC. As from the same date, Mike Foley took over as CEO of Zurich’s North America Commercial business division, and became a member of the GEC.
Mike Foley, 45, American, graduated in math and economics from Fairfield University, Connecticut. He joined the financial management training program of Armtek Corporation, Connecticut, in 1984, and later gained an MBA in marketing/finance from the JL Kellogg Graduate School of Management at Northwestern University in Evanston, Illinois. In 1989 he joined the Deepath Group investment banking firm in Lake Forest, Illinois, as an associate and became vice president responsible for managing the portfolio of equity investments in various acquired businesses. In 1993 he joined Electrocal, Inc in Connecticut as president, and three years later moved to McKinsey & Company in Chicago as a principal, becoming leader of its North American property/casualty insurance practice. He joined Zurich in 2006 as Chief Operating Officer of its North America Commercial business division, and in January 2008 was appointed CEO of that division and a member of the Group Executive Committee.
As from January 1, 2008, Inga Beale joined the Group as Head of Mergers & Acquisitions and Organizational Transformation Management. In her new position Inga Beale became a member of the GMB as of the same date. Mr Wipfli will retire in May 2008.
Zurich Financial Services has not transferred key parts of management by contract to other companies (or individuals) not belonging to (or employed by) the Group.
Each share entered into the share register provides for one vote. There are no voting right restrictions.
A shareholder with voting rights can attend shareholders’ meetings of Zurich Financial Services in person. He or she may also authorize, in writing, another shareholder with voting rights or any person permitted under the Articles of Incorporation and a more detailed directive of the Board to represent him or her at the shareholders’ meeting. Based on the Articles of Incorporation, minors or wards may be represented by their legal representatives, married persons by their spouses and a legal entity may be represented by a person authorized to bind it by his or her signature, even if such persons are not shareholders. Furthermore, authority of representation may be given to the Independent Representative of Shareholders, to a statutory representative or to representatives of bank accounts who do not need to be shareholders themselves. Zurich Financial Services may under certain circumstances authorize the beneficial owners of the shares that are held by professional persons as nominees (such as a trust company, bank, professional asset manager, clearing organization, investment fund or other entity recognized by Zurich Financial Services) to attend the shareholders’ meetings and exercise votes as proxy of the relevant nominee. For further details, see page 34.
Pursuant to the Articles of Incorporation, the general meeting constitutes a quorum irrespective of the number of shareholders present and shares represented. Resolutions and elections generally require the approval of a simple majority of the votes cast, excluding abstentions, blank and invalid votes, unless respective provisions in the Articles of Incorporation (of which there are none) or mandatory legal provisions stipulate otherwise. Article 704 of the Swiss Code of Obligations provides for a two-thirds majority of votes cast representing an absolute majority of nominal values of shares represented for certain important matters, such as the change of the company purpose and domicile, the dissolution of the company, and matters relating to capital increases. In the event of the votes being equally divided, the decision rests with the Chairman.
General meetings of shareholders are convened by the Board of Directors or, if necessary, by the auditors and other bodies in accordance with the provisions set out in Articles 699 and 700 of the Swiss Code of Obligations. Shareholders with voting rights representing at least 10% of the share capital may call a shareholders’ meeting, indicating the matters to be discussed and the corresponding proposals. The convocation period consists of at least 20 calendar days, whereby Zurich Financial Services usually posts the invitation to shareholders at least 20 working days before the meeting and publishes the invitation in the Swiss Official Gazette of Commerce and in several newspapers.
The Board of Directors is responsible for developing the agenda and sending it to the shareholders. Shareholders with voting rights who together represent shares with a nominal value of at least CHF 10,000 may request in writing, no later than 45 days before the day of the meeting, that specific proposals be included on the agenda.
The Articles of Incorporation of Zurich Financial Services do not provide for an opting out or opting up in the meaning of Articles 22 and 32 of the Federal Act on Stock Exchanges and Securities Trading. Therefore, mandatory offers have to be submitted when a shareholder or a group of shareholders acting in concert exceed 33 1/3% of the issued and outstanding share capital.
For the CEO, termination benefits are linked to the term of his employment contract, which will expire on December 31, 2009. As at December 31, 2007, the period of severance for the CEO was therefore two years (including the notice period). The period of severance will reduce linearly over time. In the case of a termination of his employment following a change of control, an additional payment of up to two times his annual base salary and annual target cash incentive, depending on the remaining length of employment, will be paid. Further, the CEO will be entitled to an additional gross-up payment if the total termination benefits paid following a change of control become subject to US Excise Tax.
The Group’s share-based compensation programs include regulations regarding the impact of a change of control. These regulations provide that in the case of a change of control, the Plan Administrator has the right to have the existing share obligations rolled over into new share rights or to provide consideration for such obligations that are not rolled over. Participants who lose their employment as a result of a change of control have an automatic right to the vesting of share obligations. No other benefits are provided to the members of the Group’s senior management in case of a change of control.
PricewaterhouseCoopers AG, Birchstrasse 160, in 8050 Zurich (PwC), is Zurich Financial Services’ external statutory auditor and Group auditor of its consolidated accounts. PwC assumes all auditing functions, which are required by law and by the Articles of Incorporation of Zurich Financial Services. They are elected by the shareholders of Zurich Financial Services on an annual basis. At the Annual General Meeting of shareholders on April 3, 2007, PwC was re-elected by the shareholders of Zurich Financial Services. The Board of Directors proposes that PwC be re-elected at the upcoming Annual General Meeting as statutory auditors and Group auditors for the business year 2008. PwC fulfills all necessary requirements under the new Swiss Federal Act on the Admission and Oversight of Auditors and has been admitted as a registered auditing company by the Federal Audit Oversight Authority under this Act.
PwC and its predecessor organizations, Coopers & Lybrand and Schweizerische Treuhandgesellschaft AG, have served as external auditors of Zurich Financial Services and its predecessor organizations since May 11, 1983. As in 2000, the Group in 2007 again conducted a tender process, inviting all major auditing firms to submit their work programs and tender offers for 2008 and subsequent years. After a thorough review, the Group came to the conclusion that PwC’s work program and offer prevailed and as a result the Board proposes PwC for re-election for the next business year.
Total auditing fees (including expenses and value added taxes) charged by the Group auditors in the year 2007 amounted to USD 45.1 million (USD 42.9 million in 2006).
The Audit Committee oversees the work of the external auditor. It reviews, at least annually, the qualification, performance and independence of the external auditors and reviews any matters that may impair their objectivity and independence based on a written report by the external auditors describing the firm’s internal quality-control procedures, any material issues raised and all relationships between the external auditors and the Group and/or its employees that could be considered to bear on the external auditors’ independence. The Audit Committee evaluates the cooperation received by the external auditors during their audit examination. It elicits the comments of management regarding the performance and responsiveness of the external auditors to the needs of Zurich Financial Services and the Group. The Audit Committee reviews, prior to the commencement of the annual audit, the scope and general extent of the external audit and suggests areas requiring special emphasis.
The internal audit function of the Group (“Group Audit”) is tasked with providing independent and objective assurance to the Board, Audit Committee, the CEO and management. It does this by developing an annual audit plan, using a risk-based methodology, which is updated quarterly to reflect changes in risk and priority. The plan is based on the full spectrum of business risks. Group Audit executes the plan by bringing a systematic and disciplined approach to evaluate, comment upon and improve risk management, control and governance processes. It assesses the suitability, reliability and functioning of the business organization with regard to technical and personnel matters and reviews the efficiency and effectiveness of the Group’s control systems. In addition, the internal audit function reviews the financial reporting processes and regulations and reviews compliance with the Group’s business and statutory requirements and regulations. Key issues raised by Group Audit are communicated to the responsible management function, the CEO and the Audit Committee using a suite of reporting tools.
The Audit Committee annually approves the Group Audit Plan and quarterly reviews reports from the function on its activities as well as significant risk, control and governance issues. The head of Group Audit reports to both the Chairman of the Audit Committee and the CEO.
The Group’s core values are founded on the principle that it acts lawfully and seeks to do what is right, reflecting its belief that without sound compliance in everything the company does, Zurich’s reputation and the achievement of the Group’s ambitious goals are jeopardized. Compliance teams support management in building awareness and understanding of compliance risks and offer training programs. A group wide policy provides dedicated processes for employees to raise concerns or report breaches with regards to the company’s financial reporting, its internal compliance rules and legal or other obligations.
The Compliance function reviews laws, regulations and other requirements at all levels of the organization and reviews whether the Group is managing its compliance risks appropriately. It issues policies to ensure compliance with these requirements, supports and advises the businesses on how they apply to Zurich and monitors Zurich’s compliance with them.
Key issues raised by the Compliance function across the organization and agreed remediation actions are communicated to the responsible management function, as well as to the corresponding oversight committees.
At the management level management committees are established to continuously review risk and control matters. The management committees are consisting of such business and functional members to ensure independence of the business in review. The results of such reviews performed by these management committees are reported into the Board committees as appropriate.
The internal control system focuses on key financial, operational and compliance controls. The system encompasses the policies, processes and activities that contribute to the reliability of financial reporting, the effectiveness and efficiency of operations and the compliance with laws and regulations. In 2007, continuing progress was made to further develop and improve the Group’s control framework whilst maintaining the focus on the effectiveness of the overall control environment.
Processes and controls in the organization are subject to risk-based reviews by Management, the Group’s internal audit function (“Group Audit”) and Group Risk Management. Management reviews include the effective implementation of claims, underwriting, actuarial, accounting and reporting policies and procedures, as well as control activities for significant locations and Group information technology systems. The Board, through the Audit and Risk Committees, receives regular and if needed special reports from the Group Chief Risk Officer, Head of Group Audit and financial and business senior management on the adequacy of the control structure in place. In addition, the external auditors regularly report their conclusions, observations and recommendations arising from their independent audit process. The reports relate to matters such as a) significant changes in risks, the business and the external environment; b) management’s monitoring and control systems; c) significant control issues, if any; and d) the effectiveness of the Group’s external reporting process.
Zurich Financial Services has approximately 108,000 shareholders registered in its share register, ranging from private individuals to large institutional investors. Each registered shareholder receives an invitation to the Annual General Meeting together with the Letter to the Shareholders that provides an overview of the Group’s activities during the year and outlines its financial performance. The more comprehensive Annual Report consisting of the Financial Report and the Business Review, is available on Zurich’s Web site ( Similar reports regarding half-year and quarterly results are available for all shareholders on Zurich’s Web site. Shareholders may opt to receive printed versions of one or all of the aforementioned reports.
This Remuneration Report provides all the information that is outlined in chapter five of the Directive on Information Relating to Corporate Governance of the SWX Swiss Exchange and the Swiss Code of Best Practice, as amended with effect from January 1, 2007 and October 15, 2007 respectively. Included is also all information required by articles 663bbis and 663c paragraph 3 of the Swiss Code of Obligations that are applicable for the first time for the business year 2007. The structure of this year’s Remuneration Report has been revised to improve alignment with the new requirements of the Swiss Code of Obligations and the changes made to the above mentioned SWX Directive and Swiss Code of Best Practice. The first part of the Report describes the general principles and the governance framework, and the second part provides details of each of the remuneration elements.
Because the members of the Board of Directors of Zurich Financial Services are all non-executives, the information has been presented with the complete remuneration details of the Board of Directors contained in one section and that of the Group Executive Committee shown in a separate section.
All information required by articles 663bbis and 663c paragraph 3 of the Swiss Code of Obligations is also included in the notes to the financial statements of Zurich Financial Services Holding Company.
With effect from January 1, 2007, the fees paid to members of the Board of Directors of Zurich Financial Services incorporated the fee that was previously paid for the additional membership of the Board of Zurich Insurance Company. Therefore all Directors received in 2007 only one overall fee for their membership of the Boards of Zurich Financial Services and Zurich Insurance Company. Furthermore, with effect from January 1, 2007, a fixed portion of the overall fee was paid in Zurich Financial Services shares to increase alignment with shareholder interests. The shares are sales-restricted for three years.
The fees paid to Directors (including the portion allocated as shares) are not subject to the achievement of any specific performance conditions.
For the members of the Group Executive Committee (GEC) and all other employees throughout the Group, a compensation philosophy has been implemented as part of The Zurich Way initiatives.
Zurich is committed to providing competitive total compensation opportunities that attract, retain, motivate and reward employees to deliver outstanding performance in the eyes of customers and shareholders. The compensation philosophy is an integral part of the overall offering to employees. Zurich has a clearly defined performance management process which supports the achievement of the overall business strategy and operating plans and links individual pay with business and personal performance. This is delivered through the compensation framework overseen by the Group Executive Committee, the Remuneration Committee of the Board and the Board itself.
The guiding principles are as follows: • Promote a high performance culture by differentiating total compensation based on the relative performance of businesses and individuals.
• Link variable compensation awards to relevant performance factors which can include the performance of the Zurich Group, business areas, e.g., segments, divisions, functions, units, and individual achievements.
Base salary is the fixed pay for the role performed determined by the scope and complexity of the role and is reviewed annually. Overall base salary structures are positioned to manage salaries around the relevant market medians. At an individual level, base salary is generally paid within an 80%-120% range of the appropriate market median. Key factors are the individual’s overall experience and performance.
• Long-term incentives are for a defined group of executives and senior managers, whose specific roles focus on the performance drivers of long-term shareholder value. The instruments used are primarily performance share and performance based share options. The performance share and share option grants only vest if certain performance conditions are met. One third of the target grant is assessed for vesting in each of the three years following the grant date based on the Group’s performance achievements in terms of the Group’s return on common shareholders’ equity (ROE) and the position of Zurich’s total shareholder return (TSR) compared with an international peer group of 28 insurance companies that are included in the Dow Jones Titan Insurance Index. Based on the actual ROE and TSR achievements, the vesting percentage can vary between 0% and 200% of the target grants. For the grants made in 2007, these are assessed for vesting on the basis of considering three years of TSR and ROE performance, previous grants are assessed on the basis of performance during the calendar year prior to vesting. Further details on the plans are set out in the section covering the actual remuneration of GEC members.
Remuneration and shareholdings of the members of the Board of Directors and the Group Executive Committee
To simplify the fee structure and to increase alignment with shareholders’ interests, the fee structure for Directors of Zurich Financial Services and Directors of Zurich Insurance Company was amended in January 2007.
All Directors now receive only one fee, which is paid partly in cash and allocated partly in three-year salesrestricted Zurich Financial Services shares, for their memberships of the Boards of Zurich Financial Services and Zurich Insurance Company. The shares are provided as part of the overall fee which is not subject to the achievement of any defined performance targets. Other than these changes, there were no other changes in the structure or in the amounts in 2007 compared to 2006.
Based on this structure, the total aggregate fees allocated to the Directors of Zurich Financial Services and Zurich Insurance Company for the year ended December 31, 2007, amounted to USD 3,089,167. This was paid USD 2,279,167 in cash and a value at the grant date of USD 810,000 in three-year sales-restricted shares. The share price at the grant date was CHF 389.50.
Basic Fee Fee 2 Chair Fee 3 Fee 4 Fee in Cash 5 in Shares 7 1 The remuneration shown in the table does not include any business related expenses incurred in the performance of the members’ services. 2 Committee members receive a cash fee of USD 40,000 for all Committees on which they serve, irrespective of the number. The Committees on which the members serve are set out in the Corporate Governance Report on page 35.
3 Committee chairs receive an annual fee of USD 20,000 and the chair of the Audit Committee receives an additional USD 10,000. The Committees on which the members serve and the chairs are set out in the Corporate Governance Report on page 35.
1.2422) as of June 15, 2007, 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 amount shown in the table above reflects the fixed amount in USD of the portion of the fee to be allocated in shares.
7 The shares allocated to the Directors are sales-restricted for three years. 8 Neither the Chairman nor the Vice Chairman receive any additional fees for their Committee work.
11 Mr Sankey became Chairman of the Remuneration Committee on April 3, 2007 following the retirement of Mr Mead. He received a pro rata fee for being
Chair. 12 In line with applicable laws, Zurich paid the company related portion of contributions to social security systems, which amounted to USD 68,439 in 2007.
Termination arrangements for members of the Board of Directors who gave up their functions during the year
At the Annual General Meeting in 2007, R.E.J. Gilmore and D.G. Mead gave up their Directorships and retired from the Boards. No termination payments were paid to them during the year.
The shareholdings of the Directors, who held office at the end of the year, in the shares of Zurich Financial Services are shown below. All interests shown are beneficial, including sales-restricted shares allocated to the members as part of their fee and shares held by related parties to the Directors.
The members of the Boards of Directors of Zurich Financial Services and Zurich Insurance Company do not participate in any share option plan for executive management. Hence, no share options have been allotted in the year under review or in earlier years. None of the Directors, nor any related parties to them, hold any share options or conversion rights over Zurich Financial Services shares as of December 31, 2007.
None of the Directors received any other compensation or benefits-in-kind from the Group or from any of the Group’s companies other than that set out above.
No benefits (or waiver of claims) have been provided to related parties of Directors or related parties to former members of the Board during the year 2007. Neither had any related party to Directors or to former members of the Board outstanding loans, advances or credits as of December 31, 2007.
The total amount of base salary and annual cash incentive awards earned under the Short-Term Incentive Plan for 2007 was USD 31.4 million. This comprised USD 11.3 million in base salaries and USD 20.1 million in annual cash incentive awards, which reflect the amounts to be paid in 2008 for 2007 performance. The annual cash incentive awards are determined individually and are performance based. Overall funding for the incentives is based on overall profit performance in 2007 and funds are allocated to individuals based on a combination of factors, including the results of the business that the GEC member is responsible for, the accomplishment of growth initiatives and their individual contribution to the accomplishment of strategic objectives during the year. For members of the GEC the target levels under the Short-Term Incentive Plan for 2007 were set at 100% of the base salary.
The total number of target share option grants made to members of the GEC during 2007 was 142,690. This compares with an equivalent figure of 125,584 for 2006.
The number of share option awards that vested to members of the GEC in 2007 from the share option grants made in 2004, 2005 and 2006 was 191,642. This represented a basic vesting level of 150% of target given the actual ROE and TSR performance achievements.
By reference to the above figures, the total remuneration of the GEC members, comprising cash compensation, pensions, the value of other remuneration and the value of target equity grants for 2007 was USD 57.6 million, divided as follows: All GEC members 1 in USD million
Value of target performance option grants 5 8.0 1 On the basis of 12 GEC members of whom ten served during the whole year 2007.
2 The remuneration shown in the table does not include any business related expenses incurred in the performance of the members’ services. 3 This amount reflects the total value of pension benefits accruing to members of the GEC during 2007, calculated on the basis of the Service Costs for the company as assessed under IAS 19 accounting principles. Service Costs value the amount of the pension benefits accruing during the year and for defined contribution plans takes the amount of the company contribution paid during the year. Service Costs do not include the interest cost on accrued benefits, adjustments for actuarial gains and losses, nor the expected return on any assets held.
4 Includes employee benefits, expatriate allowances, perquisites, benefits-in-kind and any other payments due under employment contract. Benefits-in-kind have been valued using market rates.
The value of total compensation for all members comprises 33% in fixed compensation elements (comprising base compensation, Service Costs for pension benefits and other remuneration) and 67% in performance related components (comprising the cash incentive awards under the Short-Term Incentive Plan together with the value of the target performance share grants, restricted share grants and share option grants).
The following table specifies the total remuneration paid to the highest paid GEC member
Total 10.30 1 The remuneration shown in the table does not include any business related expenses incurred in the performance of the CEO’s services. 2 The amount reflects the total value of pension benefits, calculated on the basis of the Service Costs for the company as assessed under IAS 19 accounting principles. Service Costs value the amount of the pension benefits accruing during the year and for defined contribution plans takes the amount of the company contribution paid during the year. Service Costs do not include the interest cost on accrued benefits, adjustments for actuarial gains and losses, nor the expected return on any assets held.
4 The share and share option grants will vest in the future according to achievement of defined performance conditions. The value of the share and share options assumes that the grant will vest in the future at 100% of the target level with the valuation of the options based on the Black Scholes methodology as set out in note 23 to the consolidated financial statements, the valuation of the target performance share grants based on the share price at the day prior to the grants (CHF 355.75) and the valuation of the restricted share grants based on the share price at the date of the grants.
During 2007, one of the GEC members gave up his function. No termination payments were made during the year.
No benefits (or waiver of claims) have been provided to former members of the GEC during the year 2007.
The total number of target performance share grants outstanding as of December 31, 2007 under the Group’s Long-Term Incentive Plan was 56,399 (55,937 as of December 31, 2006). A summary of the outstanding grants is set out in the table below: Summary of outstanding share grants
In addition to the above performance share grants, there were 13,543 restricted shares outstanding for members of the GEC as of December 31, 2007. This total reflects grants of 7,280 restricted shares in 2007 and the vesting of 8,311 restricted shares during 2007. There were 14,574 restricted shares outstanding at the end of 2006. These restricted shares vest over the next three years and will be forfeited if the holders of such shares leave voluntarily before the vesting date and the employment relationship terminates.
The following table sets out the actual share and share option holdings of the GEC members as of December 31, 2007. 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.
Ownership of vested Number of vested shares and vested share options as of December 31, 2007 1 Ownership of shares options over shares 2
A. Court, Chief Executive Officer Europe General Insurance 4 – –
M. Greco, Designated Chief Executive Officer Global Life 5 – –
To facilitate the sale of shares and the exercise of options for the members of the GEC, the Board has approved the implementation of Trading Plans. These plans allow members to sell shares and/or exercise share options under a pre-defined transaction program. Trading Plans can only be established at a time when the GEC member does not possess unpublished price-sensitive information with regard to Zurich Group. Further, the first transaction under a Trading Plan can only occur three months following the date it is established. The terms and conditions of the transactions have to be defined and they cannot be changed. All Trading Plans of GEC members require the approval of the Chairman of the Board. Once established, transactions take place on a monthly basis including during close periods. All transactions made under a Trading Plan are reported to the SWX according to the rules on disclosure of management transactions and recorded as such as being carried out as part of a Trading Plan.
As of December 31, 2007, the total of loans, advances or credits outstanding for GEC members was USD 910’000. These loans represent mortgage loans in Swiss francs, the terms of which are similar to those available to all employees in Switzerland. Mortgage loans are issued with a reduced interest rate of up to one percentage point less than the prevailing market interest rates on mortgage balances, up to a maximum of USD 1,250,000. As at December 31, 2007, the highest mortgage loan was held by Mr. Lehmann (currently Group Chief Risk Officer), in the amount of USD 660,000 which had an overall interest rate of 2.3%.
No benefits (or waiver of claims) have been provided to related parties to GEC members or related parties to former members of the GEC during the year 2007. Neither had any related party to GEC members or to former members of the GEC outstanding loans, advances or credits as of December 31, 2007.
The information contained within the Financial Review is unaudited. This document should be read in conjunction with the Zurich Financial
option under IAS 19 Employee Benefits. Comparatives are as of or for the year ended December 31, 2006, unless otherwise specified.
Farmers Management Services management fees and other related revenues 2,266 2,133 6%
• General Insurance business operating profit increased by USD 220 million, or 6 percent, to USD 4.0 billion. This reflects the strength of our diversified portfolio to absorb the adverse impacts of Winter storm Kyrill (USD 183 million) and the UK floods in June and July (USD 567 million).
Net income attributable to shareholders increased by USD 1.0 billion, or 22 percent, to USD 5.6 billion, with the prior year affected by regulatory settlements in the US. The shareholders’ effective tax rate was 24.7 percent compared with 26.9 percent for the year ended December 31, 2006. The decrease of 2.2 percentage points is a result of the continuous optimization of the tax efficiency of our operating model.
• Farmers Management Services management fees and other related revenues increased by 6 percent, reflecting the underlying increase in the gross earned premiums of 6 percent in the Farmers Exchanges, which we manage but do not own, as a result of organic and inorganic growth initiatives.
Diluted earnings per share increased by CHF 6.85, or 17 percent, to CHF 46.37 for the year ended December 31, 2007, compared with CHF 39.52 for the same period in 2006.
The net underwriting result decreased by USD 94 million to USD 184 million, leading to a 1.7 percentage point increase in the combined ratio. Positive impacts were attritional loss experience across a number of lines of business, a reduced incidence of large property losses and an improved result emerging from reserves established in prior years. These positive developments mitigated the impact of rate reductions and the USD 73 million of catastrophe losses associated with Winter storm Kyrill and the UK floods in June and July. Overall, there was an improvement in the loss ratio of 0.1 percentage points to 76.9 percent. An increase in premium refunds on loss-sensitive business was the primary driver of the 1.9 percentage point increase in the expense ratio to 19.2 percent.
Business operating profit increased by USD 337 million, or 30 percent, to USD 1.5 billion for the year ended December 31, 2007, primarily driven by an increase of USD 106 million in the net underwriting result and by a USD 131 million increase in net investment income.
The net underwriting result increased by USD 106 million to USD 521 million, driven by a 2.5 percentage point decrease in the loss ratio. The 1.3 percentage point increase in the expense ratio to 27.5 percent arose primarily from an increase in net commission expenses, which was predominantly attributable to certain portfolio segments that delivered improved profitability.
International Businesses in USD millions, for the years ended December 31 2007 2006 Change
Gross written premiums and policy fees increased by 11 percent in US dollar terms, and by 3 percent on a local currency basis with growth in competitive market conditions, supported by contributions from acquisitions and a stable level of customer renewals. Pressure on rates in commercial lines continued, and rate changes on new business written varied by country, with decreases in Italy, Ireland and the UK and improvements in other countries.
The net underwriting result decreased by USD 553 million to USD 440 million, primarily due to the impact of Winter storm Kyrill (USD 165 million) and the UK floods in June and July (USD 512 million), which had a combined impact of 5.2 percentage points on the loss ratio. Excluding the impact of these catastrophes, the loss ratio improved by 1.4 percentage points to 67.5 percent, driven by favorable development emerging from reserves established in prior years, primarily in the UK, Switzerland, Ireland and Spain. The expense ratio increased by 1.3 percentage points to 23.9 percent as a result of investments in our Pan-European platform, Zurich Connect and other growth and operational transformation-related activities.
Underwriting and policy acquisition costs, net of reinsurance (1,640) (1,448) (13%)
New business margin, after tax (as % of APE) 24.7% 21.6% 3.1 pts
New business margin, after tax (as % of PVNBP) 3.1% 2.6% 0.5 pts
1 The Group’s life operations in the UK entered into a reinsurance agreement to transfer the risk associated with a significant annuities portfolio as of January 1, 2007. The initial impact of the transaction was an increase of USD 7.0 billion in ceded insurance benefits and losses.
New business annual premium equivalent (APE) increased by USD 447 million, or 18 percent in US dollar terms, and by 11 percent on a local currency basis. Growth accelerated in each quarter of 2007, reaching 17 percent on a local currency basis for the fourth quarter. The increase was driven by Ireland, the emerging markets served by Zurich International Solutions (ZIS) and in Southeast Asia, and by the UK in the latter half of the year. Innovative new propositions resulted in higher APE volumes in the US and Switzerland despite challenging conditions in both markets.
Business operating profit increased by USD 243 million, or 20 percent, to USD 1.4 billion for the year ended December 31, 2007. Increases in the US, UK and Germany compensated for the new business strain from the strong growth in ZIS and Southeast Asia.
Insurance deposits increased by 12 percent, while gross written premiums and policy fees decreased by 6 percent. The sustained attractiveness of our unit-linked products, giving customers choices based upon need and risk attitudes, resulted in increases in deposits, while traditional premiums decreased as we continued to focus on unit-linked products. Gross written premiums and policy fees decreased primarily due to the transfer of a further block of traditional group life business to independent pension foundations in Switzerland, to which we provide services but do not control.
Unit-linked 1 Individual protection Other 2 Total of which: International of which: 1 Unit-linked includes insurance and investment contracts. 2 Other includes individual savings, deferred and immediate annuities and group and collective business.
Unit-linked APE increased by 25 percent (16 percent on a local currency basis) and represented 59 percent of total APE compared with 56 percent in 2006. Protection APE increased by 7 percent (2 percent on a local currency basis). Other products increased 9 percent (1 percent on a local currency basis), driven mainly by new group pension schemes in the UK and Ireland.
APE in the emerging markets served by ZIS, and in Southeast Asia and Latin America increased by 49 percent in US dollar terms. ZIS produced strong growth through bank partners and international broker networks and the maturing of branches that were opened in prior years. This growth reflected increased valueadded propositions for our key distributors from improved segmentation and adaptation to the different customer and distributor needs. In Southeast Asia, the driver was strong unit-linked APE through the tied-agent channel, and in Latin America growth arose in Chile, Mexico and Argentina.
Farmers Management Services highlights in USD millions, for the years ended December 31 2007 2006 Change
Business operating profit increased by USD 46 million, or 4 percent, to USD 1.3 billion for the year ended December 31, 2007, as a result of the initiatives described above together with an increase in net investment income and in net other income, which was driven by one-time gains from the sale of properties vacated as a result of the concentration of customer service activities into two ServicePoints.
Gross written premiums at the Farmers Exchanges, which we manage but do not own, increased by 5 percent, which includes premiums written by Bristol West. This led to a 6 percent increase in gross earned premiums, with all major lines of business contributing to the increase.
Corporate Functions highlights in USD millions, for the years ended December 31 2007 2006 Change
Business operating loss increased by USD 38 million to USD 810 million for the year ended December 31, 2007. Interest expense on debt increased by USD 155 million due to the one-time costs of USD 52 million associated with the early redemption of subordinated debt, which was replaced with lower cost hybrid debt, and due to interest expense on higher net intercompany funding levels. The increase in interest expense was partially offset by an increase of USD 85 million in net investment income.
Headquarter expenses decreased by USD 21 million as a result of higher allocations to the operating businesses.
Trading equity portfolios in capital markets and banking activities 1,606 2,260 – –
Group investments have decreased by USD 2.1 billion to USD 193.6 billion since December 31, 2006. After excluding the effect of foreign currency translation, Group investments decreased by 6 percent, primarily driven by a decrease in debt securities following the USD 7.3 billion sale of investments relating to our UK Life annuity business, which was reinsured in June 2007.
Performance of in USD millions, for the years ended December 31
Movements in net unrealized gains/(losses) on investments included in total equity (2,654) (1,555) 71%
Total return (net of investment expenses) was 3.9 percent on average Group investments, driven by other investments and equity securities, for which the total return was 5.9 percent and 5.5 percent respectively. Debt securities, which are invested to match our liability profiles, returned 3.1 percent.
Total net investment income was USD 8.6 billion, with a return of 4.5 percent, an increase of 22 basis points compared with 2006. This increase arose mainly from debt securities, with a return of 4.6 percent compared with 4.4 percent in 2006. Rising interest rates in the euro and Swiss franc markets and higher dividend income drove the USD 692 million increase, mainly contributed by General Insurance.
1 After deducting investment expenses of USD 528 million and USD 461 million for the years ended December 31, 2007 and 2006, respectively.
Net losses and loss adjustment expenses incurred: Current year 23,374 21,448
The majority of the Group’s reserves for life insurance contracts and liabilities for investment contracts are attributable to Global Life. Life insurance reserves for other segments relate predominately to companies that are in run-off or are centrally managed, and are only included in this first table.
More details on the development of the Group’s total life reserves and liabilities can be found in notes 8 and 9 in the consolidated financial statements. In the following section we provide further detail on the development and composition of Global Life business on a stand-alone basis.
Unit-linked and Other life insurance Total reserves and investment contracts 1 liabilities 2 liabilites
As of December 31 1 Includes reserves for unit-linked contracts and liabilities for investment contracts, the net amounts of which were USD 54.3 billion and USD 50.4 billion, and USD 54.7 billion and USD 51.0 billion as of December 31, 2007 and 2006, respectively.
2 Includes reserves for future life policyholders’ benefits and policyholders’ contract deposits and other funds, the net amounts of which were USD 68.0 billion and USD 72.2 billion, and USD 14.0 billion and USD 14.0 billion as of December 31, 2007 and 2006, respectively.
Unit-linked and Other life insurance Total reserves and investment contracts liabilities liabilites of which: of which: Unit-linked insurance and investment contracts, net of reinsurance, increased by 8 percent, and by 4 percent after excluding the impact of currency translation, compared with December 31, 2006. The increase reflects inflows from new and renewal premiums and the benefit to policyholders from equity market appreciation (reported as interest and bonuses credited to policyholders), offset by claims and related charges. The excess of claims over premiums of USD 2.0 billion is driven by the overall maturity of the UK pension portfolio, accelerated by the 2006 pension rule changes, which made it easier for pension plan holders in the UK to consolidate small plans or retire early.
Other life insurance liabilities, net of reinsurance, decreased by 5 percent, and by 13 percent after excluding the impact of currency translation, compared with December 31, 2006. The decrease was mainly due to the initial impact of the reinsurance of USD 7.1 billion of UK annuity liabilities that removed the related longevity risk and reduced economic capital requirements. Additionally, in 2007 there was a reduction of USD 2.5 billion of liabilities relating to traditional group life contracts in Switzerland, of which USD 1.8 billion was transferred to independent pension foundations, to which we provide services but do not control.
Indebtedness and capitalization in USD millions, as of December 31 2007 2006 Change
Total equity increased to USD 29.2 billion as of December 31, 2007, a 12 percent increase driven by net income after taxes, which more than offset the impact from treasury share transactions and dividends paid to shareholders.
Adjustment arising from change in accounting policy related to IAS 19 (944) (8) (952)
As of December 31, 2007, the number of treasury shares deducted from equity was 5,839,154, which included 3,432,500 shares repurchased through the share buyback program completed as of July 3, 2007. The balance is held to meet potential future obligations under employee share and option plans. A proposal to cancel the shares repurchased through the share buyback program will be submitted to shareholders at the Annual General Meeting in 2008. As of December 31, 2007, the number of common shares issued, including those held as treasury shares, was 145,546,820 corresponding to share capital of CHF 14.6 million.
Change in cash received as collateral for securities lending (1,943) (751)
Cash and cash equivalents as of December 31, including cash received as collateral for securities lending 16,936 23,122
We operate worldwide in multiple currencies and seek to match our foreign exchange exposures on an economic basis. As we have chosen the US dollar as our presentation currency, differences arise when functional currencies are translated into our presentation currency. The table below shows the effect of foreign currency rates on the translation of selected line items.
Policyholder dividends and participation in profits, net of reinsurance 11 8,543 12,906
Underwriting and policy acquisition costs, net of reinsurance 11 7,589 6,980
Consolidated statements of total recognized income and expenses in USD millions, for years ended December 31 2007 2006
Net unrealized gains/(losses) on available for sale investments 1 (623) (319)
Change in net unrealized gains/(losses) (excluding currency translation adjustments) (509) (451)
Net realized gains/(losses) and impairment charges reclassified to the income statement (189) 37
Change in fair value of cash flow hedges 1 (103) –
Total recognized income and expense attributable to minority interests 90 117
in USD millions, for the years ended December 31 2007 2006
Cash and cash equivalents as of January 1, excluding cash received as collateral for securities lending 19,302 18,911
The notes to the consolidated financial statements are an integral part of these consolidated financial statements.
Distributions to shareholders: Nominal value reduction of share capital 1 (177) –
Balance as of December 31, 2006, as previously reported 10 10,448
Total adjustments due to implementation of IAS 19 SoRIE option – –
Balance as of December 31, 2007 10 10,289 1 As approved by the Annual General Meeting on April 20, 2006, the share capital was reduced by a nominal value reduction of CHF 2.40 per share from CHF 2.50 to CHF 0.10 in respect of each registered share. The distribution to shareholders relates to this nominal value reduction. The nominal value reduction of share capital in USD is adjusted for cumulative translation adjustments.
As of December 31, 2007 the number of treasury shares deducted from equity was 5,839,154, which comprises shares repurchased under the buy-back program and 2,406,654 shares held to cover employee share and option plans mainly purchased in November and December 2007.
Net unrealized Net other gains/(losses) Cumulative recognized Common on translation income and Cash flow Retained shareholders’ Preferred Shareholders’ Minority Total investments adjustment expense hedges earnings equity securities equity interests equity
Zurich Financial Services and its subsidiaries (collectively the “Group”) are an insurance-based financial services provider with a global network. The Group also distributes non-insurance products, such as mutual funds, mortgages and other financial services products, from selected third-party providers. The Group operates mainly in Europe, the USA and Asia Pacific through subsidiaries and branch offices.
Zurich Financial Services, a Swiss corporation, is the holding company of the Group with a listing on the SWX Swiss Exchange. Zurich Financial Services was incorporated on April 26, 2000, in Zurich, Switzerland. It is recorded in the Commercial Register of the canton of Zurich under its registered address at Mythenquai 2, 8002 Zurich.
On February 13, 2008 the Board of Directors of Zurich Financial Services authorized these consolidated financial statements for issue. These financial statements will be submitted for approval to the Annual General Meeting of Shareholders to be held on April 3, 2008.
Certain amounts recorded in the consolidated financial statements reflect estimates and assumptions made by management about insurance liability reserves, investment valuations, interest rates and other factors. Critical accounting judgments and estimates are discussed in note 4. Actual results may differ from the estimates made.
The following balances are generally considered to be non-current: equity securities, investments in associates, investments held by investment companies, real estate held for investment, deferred policy acquisition costs on life insurance contracts, deferred tax assets, goodwill, other intangible assets, property and equipment, and deferred tax liabilities.
The following balances are of a mixed nature (including both current and non-current portions): debt securities, mortgage loans, other loans, other investments – other, reinsurers’ share of reserves for insurance contracts, deposits made under assumed reinsurance contracts, deferred front-end fees, deferred origination costs, other assets, mortgage loans given as collateral, reserves for unit-linked contracts, liabilities for investment contracts, deposits received under ceded reinsurance contracts, reserves for losses and loss adjustment expenses, reserves for unearned premiums, future life policyholders’ benefits, policyholders’ contract deposits and other funds, other liabilities, collateralized loans, debt related to capital markets and banking activities, and senior and subordinated debt.
Maturity tables have been provided for the following balances: reserves for insurance contracts (table 26.16 and 26.17), liabilities for investment contracts (table 26.18 and 26.19), debt securities (table 6.4), derivative assets and derivative liabilities (tables 7.1 to 7.3), collateralized loans (table 15) and outstanding debt (table 20.3).
All amounts in the consolidated financial statements are shown in USD millions, rounded to the nearest million unless otherwise stated with the consequence that the rounded amounts may not add to the rounded total in all cases.
Transfer of UK annuity business In the second quarter 2007, the Group’s life operations in the UK entered into a reinsurance agreement to transfer the risk associated with a significant annuities portfolio as of January 1, 2007. This agreement is a first step in a transaction by which, subject to local regulatory and court approvals, the policies will be commuted to the reinsurer, who will then directly assume all rights and obligations under the policies. As at the date of the transaction, premiums ceded to reinsurers and ceded insurance benefits and losses increased by USD 7.3 billion and USD 7.0 billion, respectively. The transaction resulted in a net loss after tax of USD 59 million. In the consolidated balance sheets, total investments and associated other assets decreased by USD 7.4 billion and reinsurers’ share of reserves for insurance contracts increased by USD 7.1 billion.
Segment information The Group is managed on a matrix basis, reflecting both line of business and geography. Accordingly, segment information is presented in two formats. The primary format is based on the operating businesses of the Group and how they are strategically managed to offer different products and services to specific customer groups. The Group’s primary business 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.
To be consistent with the Group’s management structure, the following transfers between primary segments have been made for 2007 financial reporting: • Universal Underwriters Life Insurance Company from General Insurance to Other Businesses
The 2006 segmental results have been restated to reflect these changes.
To be consistent with the Group’s geographic structure, the following transfers between secondary segments have been made for 2007 financial reporting: • Universal Underwriters Life Insurance Company from North America to Central Region
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Group accounts for inter-segment revenues and transfers as if the transactions were with third parties at current market prices, with the exception of dividends and realized capital gains, which are eliminated against equity.
Financial Report 2007 2. Implementation of new accounting standards and amendments to published accounting standards effective in 2007
In July 2007, IFRIC 14 “IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction” was issued. IFRIC 14 is mandatory for reporting periods beginning on or after January 1, 2008. The interpretation provides general guidance on how to assess the limit in IAS 19 Employee Benefits on the amount of the surplus that can be recognised as an asset. It also explains how the pension assets or liabilities may be affected when there is a statutory or contractual minimum funding requirement.
The principal accounting policies applied in the presentation of these consolidated financial statements are set out below. These policies have been consistently applied to all years presented unless otherwise stated.
Financial Report 2007 a) Consolidation principles The Group’s consolidated financial statements include the assets, liabilities, equity, revenues, expenses and cash flows of Zurich Financial Services and its subsidiaries. A subsidiary is an entity in which Zurich Financial Services owns, directly or indirectly, more than 50 percent of the outstanding voting rights, or which it otherwise has the power to control and is accounted for using the purchase method. The results of subsidiaries acquired are included in the consolidated financial statements from the date of acquisition. The results of subsidiaries that have been divested during the year are included up to the date control ceased. All significant intercompany balances, profits and transactions are eliminated in full.
When control over a subsidiary is acquired, a put option may be granted to minority shareholders. In such cases, the recognition of the puttable instrument as a liability depends on the contractual obligations. Where the contract involves an unconditional commitment exercisable at any time by the option holder, it is recognized as a liability. Such liability is subsequently remeasured at the present value of the option price, unless the minority interest can exercise the option at any time in which case the liability will not be discounted.
In the event of a buy out of minority interests, the existing ownership in an entity is revalued to the new valuation basis established at the time of acquisition. The increase in value is recorded directly in equity as a revaluation reserve.
b) Insurance contracts and investment contracts with discretionary participating features (DPF) The Group developed its accounting policies for insurance contracts before the adoption of IFRS 4 and in the absence of a specific standard for insurance contracts. Management, at that time, used its judgment in developing a set of accounting policies for the recognition and measurement of rights and obligations arising from insurance contracts issued and reinsurance contracts held that provide the most useful information to users of the Group’s financial statements. In making this judgment, Management primarily considered the pronouncements of the Financial Accounting Standards Board (US GAAP) on insurance and reinsurance contracts.
Classification Insurance contracts are those contracts that transfer significant insurance risk. These contracts may also transfer financial risk. Significant insurance risk is defined as the possibility of paying significantly more in a scenario where the insured event occurs than in a scenario where the insured event does not occur. Scenarios considered include those which have commercial substance.
A number of insurance and investment contracts contain DPF which entitle the contract holder to receive, as a supplement to guaranteed benefits, additional benefits or bonuses: • that are likely to be a significant portion of the total contractual benefits; • whose amount or timing is contractually at the discretion of the Group; and
• the profit or loss of the company, fund or other entity that issues the contract.
Premiums Premiums from the sale of general insurance products are recorded when written and normally are accreted to earnings on a pro-rata basis over the term of the related policy coverage. However, for those contracts for which the period of risk differs significantly from the contract period, premiums are recognized over the period of risk in proportion to the amount of insurance protection provided. The unearned premium reserve represents the portion of the premiums written relating to the unexpired terms of coverage.
Premiums from traditional life insurance contracts, including participating contracts and annuity policies with life contingencies, are recognized as revenue when due from the policyholder. Benefits and expenses are provided against such revenue to recognize profits over the estimated life of the policies. Moreover, for single premium and limited pay contracts, premiums are recognized in income when due with any excess profit deferred and recognized in income in a constant relationship to the insurance in-force or, for annuities, the amount of expected benefit payments.
Amounts collected as premiums from investment type contracts such as universal life, unit-linked and unitized with-profits contracts are reported as deposits. Revenue from these contracts consists of policy fees for the cost of insurance, administration and surrenders during the period. Front-end fees are recognized over the estimated life of the contracts. Policy benefits and claims that are charged to expenses include benefit claims incurred in the period in excess of related policyholder contract deposits and interest credited to policyholder deposits.
Deferred policy acquisition costs (DAC) The costs of acquiring new business, including commissions, underwriting and policy issue expenses, which vary with and are directly related to the production of new business, are deferred. Future investment income is taken into account in assessing recoverability.
DAC for participating traditional life insurance contracts is amortized over the expected life of the contracts as a constant percentage of estimated gross margins. Estimated gross margins include anticipated premiums and investment results less benefits and administration expenses, changes in the net level premium reserve and expected policyholder dividends, as appropriate. Estimated gross margins are re-estimated regularly with the impact of deviations of actual result from estimated experience on the amortization of deferred acquisition costs reflected in earnings.
Unamortized DAC associated with internally replaced contracts that are, in substance, contract modifications, continue to be deferred and amortized. Costs associated with internally replaced contracts that are, in substance, new contracts, are written down.
Liability adequacy tests Liability adequacy testing is performed by portfolio of contracts, in accordance with the Group’s manner of acquiring, servicing and measuring the profitability of its insurance contracts. Net unearned premiums are tested to determine whether they are sufficient to cover related expected claims, loss adjustment expenses, policyholder dividends, commission, amortization and maintenance expenses. If there is a premium deficiency, the DAC asset is written down by the amount of the deficiency. If, after writing down the DAC asset to nil (for the specified portfolio of contracts), a premium deficiency still exists, then a premium deficiency reserve is recorded to provide for the deficiency in excess of the DAC asset written down.
For life contracts, the net premium reserve, calculated on a locked-in basis and reduced by the unamortized balance of DAC or present value of profits of acquired insurance contracts (PVFP) is compared to the gross premium reserve, calculated on a best-estimate basis as of the valuation date. If there is a deficiency, the DAC or PVFP is written down to the extent of the deficiency. If, after writing down the DAC or PVFP to nil (for the specified portfolio of contracts), a deficiency still exists, the net liability is increased by the amount of the remaining deficiency.
Reserves for losses and loss adjustment expenses Losses and loss adjustment expenses are charged to income as incurred. Reserves for losses and loss adjustment expenses represent the accumulation of estimates for ultimate losses and include provisions for losses incurred but not yet reported (IBNR). The reserves represent estimates of future payments of reported and unreported claims for losses and related expenses with respect to insured events that have occurred. Reserving is a complex process dealing with uncertainty, requiring the use of informed estimates and judgments. The Group does not discount its loss reserves, other than for settled claims with fixed payment terms. Any changes in estimates are reflected in the results of operations in the period in which estimates are changed.
The policyholders’ share of unrealized gains or losses, which may be paid in the future, in respect of assets, is included in future life policyholders’ benefits.
Reserves for unit-linked contracts are recorded equal to the consideration received plus accumulated investment yield less any fees charged or dividends paid to the policyholder.
For products containing guarantees in respect of minimum death benefits (GMDB), retirement income benefits (GRIB) and/or annuitization options (GAO), any additional liabilities are recorded in proportion to the receipt of the contracted revenues.
Investment contracts without fixed terms are financial liabilities where the fair value of the contract is determined with reference to the fair value of the underlying financial assets, derivatives and/or investment property (unit-linked) and are designated at inception as at fair value through profit or loss.
If the investment contract is subject to a put or surrender option, the fair value of the financial liability is never recorded at less than the amount payable on surrender, discounted for the required notice period, where applicable.
The effective interest rate method applies an interest rate (the effective interest rate) that exactly discounts the estimated future cash payments or receipts to the net carrying amount of the financial liability, through the expected life of the financial instrument or, when appropriate, a shorter period if the holder has the option to redeem the instrument before maturity.
The Group charges its customers for asset management and other related services using the following different approaches: • Front-end fees charged to the customer at inception are used particularly for single premium contracts. The consideration received is deferred as a liability and recognized over the life of the contract on a straight-line basis.
• Regular fees charged to the customer periodically (monthly, quarterly or annually) either directly or by making a deduction from invested funds are billed in advance and recognized on a straight-line basis over the period in which the service is rendered. Fees charged at the end of the period are accrued as a receivable and are offset against the financial liability when charged to the customer.
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market other than those that the Group intends to sell in the short term or that it has designated at fair value through profit or loss or is holding as available-for-sale. Loans and receivables include loans where money is provided directly to the borrower, such as mortgage loans, policyholder loans and other loans.
General The Group recognizes regular way purchases and sales of financial assets on the trade date, which is the date on which the Group commits to purchase or sell the asset.
Financial assets are initially recognized at fair value plus, in the case of all financial assets not carried at fair value through profit or loss, transaction costs that are directly attributable to their acquisition. After initial recognition, financial assets are measured either at fair value or at amortized cost.
Held-to-maturity financial assets Held-to-maturity financial assets are subsequently carried at amortized cost using the effective interest rate method, less any provision for impairment. The amortization of premium and accretion of discount on held-tomaturity investments recognized in the current period is included in investment income.
Financial assets carried at fair value through profit or loss Financial assets carried at fair value through profit or loss are subsequently measured at fair value. Realized and unrealized gains and losses arising from changes in the fair value are recognized in income within net capital gains/losses on investments and impairments in the period in which they arise.
Available-for-sale financial assets Available-for-sale financial assets are subsequently carried at fair value, with changes in fair values recognized in shareholders’ equity until the securities are either sold or impaired. The cumulative unrealized gains or losses recorded in shareholders’ equity are net of cumulative deferred income taxes, certain life policyholder liabilities, deferred acquisition costs and minority interests. Realized gains or losses on sale are based on the difference between the proceeds received and the carrying value of the investment plus any unrealized gains or losses on the investment recorded in shareholders’ equity using the specific identification method. When available-for-sale financial assets are sold, impaired or otherwise disposed of, the cumulative gains and losses previously recognized in shareholders’ equity are included in current period income. The amortization of premium and accretion of discount on available-for-sale debt securities is computed using the effective interest method and is recognized in current period income.
Dividends on available-for-sale equity instruments are recognized in income when the Group’s right to receive payments is established. Dividends are included in the investment income line.
The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active, the Group establishes fair value by using valuation techniques. These include the use of recent armslength transactions, reference to other instruments that are substantially the same, discounted cash flow analysis and option pricing models making maximum use of market inputs and relying as little as possible on entityspecific inputs.
Financial assets carried at amortized cost For held-to-maturity financial assets and loans and receivables the impairment is considered to have taken place if it is probable that the Group will not be able to collect principal and/or interest due according to the contractual terms of the instrument. When impairment is determined to have occurred, the carrying amount of the held-to-maturity financial assets, policyholders’ loan or other loans is decreased through a charge to income. The carrying amount of mortgage loans or receivables is reduced through the use of an allowance account, and the amount of any allowance is recognized as an impairment loss in income. The allowance is determined using an analytical method based on knowledge of each loan group or receivable. The method is usually based on historical statistics, adjusted for known or anticipated trends in the group of financial assets or individual accounts.
Financial assets carried at fair value When a decline in the fair value of an available-for-sale asset has been recognized directly in shareholders’ equity and there is objective evidence that the asset is impaired, the cumulative loss already recognized directly in shareholders’ equity is recognized in current period income. This arises when the fair value of the security has been significantly below the weighted-average cost, usually considered to be more than 50 percent for any period of time. Additionally, the Group considers an available-for-sale equity for impairment when the fair value has been below the weighted-average cost by more than 20 percent for more than 12 months. The amount of the cumulative loss that is removed from shareholders’ equity and recognized in current period income is the difference between acquisition cost (net of any principal repayment and amortization) and current fair value, less any impairment loss on that asset previously recognized in income.
If the fair value of a debt instrument classified as available-for-sale increases in a subsequent period, and the increase can be objectively related to an event occurring after the impairment loss was recognized in income, the impairment loss is reversed through income. Impairment losses recognized in income on equity instruments classified as available-for-sale are not reversed through income.
g) Derivative financial instruments Derivative financial instruments include interest rate, currency and total return swaps, futures, forwards and option contracts, all of which derive their value mainly from changes in underlying interest rates, foreign exchange rates, commodity values or equity instruments. A derivative contract may be traded on an exchange or over-the-counter (OTC). Exchange-traded derivatives are standardized and include futures and certain option contracts. OTC derivative contracts are individually negotiated between contracting parties and include forwards, caps, floors and swaps. Derivative financial instruments are subject to various risks similar to those related to the underlying financial instruments, including market, credit and liquidity risk.
In addition to the derivative financial instruments described above, the Group enters into contracts that are not considered derivative financial instruments in their entirety but which include embedded derivative features. Such embedded derivatives are assessed at inception of the contract and, depending on their characteristics, are accounted for as separate derivative financial instruments.
Hedges of net investment in a foreign operations Changes in the fair value of hedges of a net investment in a foreign operation are recorded in shareholders’ equity, to the extent the hedge is effective. The change in fair value representing hedge ineffectiveness is recorded in net realized capital gains/(losses) on investments and impairments. On disposal of a foreign operation the accumulated gains and losses on the related hedging instruments previously recognized in shareholders’ equity in relation to the effective portion of the hedge, are transferred to income.
Discontinued hedges Where hedge accounting is applied, the Group formally documents all relationships between hedging instruments and hedged items, including the risk management objectives and strategy for undertaking hedge transactions. At inception of a hedge and on an ongoing basis, the hedge relationship is formally assessed in order to determine whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items attributable to the hedged risk. The Group discontinues hedge accounting prospectively in the following circumstances: • it is determined that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item (including forecast transactions); • the derivative expires or is sold, terminated, or exercised; • the derivative is no longer designated as a hedging instrument because it is unlikely that the forecast transaction will occur; or
When hedge accounting is discontinued on a cash flow hedge, the net gain or loss will remain in other recognized income and expenses within shareholders’ equity and be reclassified to income in the same period or periods during which the formerly hedged transaction is reported in income. When the Group discontinues hedge accounting because the forecast transaction is no longer expected to occur the derivative will continue to be carried on the consolidated balance sheet at its fair value, and any related accumulated gains and losses that were previously recorded in other recognized income and expenses from the period when the hedge was effective are recognized in income. The forecast transaction may still be expected to occur, but may no longer
Financial liabilities are derecognized when they are extinguished, that is when the obligation is discharged, cancelled or expired.
For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use of that group of assets (the ‘cash generating unit’), and are largely independent of the cash inflows of other assets or groups of assets. The Group’s cash generating units, on which impairment losses are assessed, represent the lowest level at which goodwill is monitored for internal management purposes.
The test for goodwill impairment is performed annually or whenever there is an indication that the cash generating unit may be impaired. Goodwill is carried at cost less accumulated impairment losses which are recorded in income if the recoverable amount is less than the carrying amount of the cash generating unit, including goodwill. Gains and losses on the divestment of an entity are calculated including the carrying amount of any goodwill relating to the entity sold.
The useful lives of brand names, customer relationships and contracts and affinity partnerships are estimated based on the period of time over which they are expected to provide economic benefit. The useful lives of computer software licenses and capitalized software development costs generally does not exceed 5 years. Capitalized software costs are depreciated on a straight-line basis, taking into account the effects of obsolescence, technology, competition and other economic factors.
Any impairment loss is recorded in income if the carrying value of the asset exceeds its recoverable amount. The recoverable amount is the higher of the fair value less selling costs of an asset and its value in use.
Present value of future profits from acquired insurance contracts (PVFP) On the acquisition of life insurance businesses a customer contract intangible asset representing the present value of future profits from the acquired contracts or PVFP is determined. This asset is amortized over the expected life of the policies acquired, based on a constant percentage of the present value of estimated gross profits (margins) expected to be realized, or over the premium recognition period, as appropriate. PVFP is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recovered.
Financial Report 2007 o) Income taxes The Group provides current tax expense according to the tax laws of each jurisdiction in which it operates. Deferred income taxes are recognized using the asset and liability method. Deferred income taxes are recorded for temporary differences, which are based on the difference between financial statement carrying amounts and income tax bases of assets and liabilities using enacted income tax rates and laws. Losses for tax purposes are treated as deferred tax assets to the extent it is probable that the losses can offset future taxable income and is allowed by the applicable local tax laws and regulations.
Taxes payable by either the company or its subsidiaries on expected distribution to the holding company of the profits of subsidiaries are not recognized as deferred income taxes unless a distribution of those profits is intended in the foreseeable future.
Actuarial gains and losses are recognized in full in the period in which they occur and are presented on a separate line in the statement of total recognized income and expenses (SORIE). Actuarial gains and losses result from experience adjustments (the effects of differences between the previous actuarial assumptions and what has actually occurred during the accounting period), changes in actuarial assumptions since the previous balance sheet date, and differences between the expected and actual returns on plan assets. Unrecognized prior service costs represent non-vested benefits on the date of a change in the amount of benefits following an amendment to the plan and are amortized on a straight-line basis over the average vesting period.
The total amount to be expensed over the vesting period is determined by reference to the fair value of the shares and/or options granted. Non-market vesting conditions (for example, profitability and premium income growth targets) are included in assumptions about the number of shares and/or options that are expected to be issued or become exercisable. At each balance sheet date, the Group revises its estimates of the number of shares and/or options that are expected to be issued or become exercisable. It recognizes the impact of the revision to original estimates, if any, in income with a corresponding adjustment to equity. However, no subsequent adjustment to total equity is made after the vesting date.
Under the Group’s cash-settled, share based payment compensation plan, the Group allows participants to take their option award in the form of Share Appreciation Rights (SAR). Hence, the Group incurres a liability which is measured at the fair value of the SAR using the Black-Scholes model. The liability is measured at initial recognition and at each balance sheet date until settled thereby taking into account the terms and conditions on which the share appreciation rights were granted, and the extent to which the participants have rendered service to date. The fair value of the participants’ services received in exchange for the SAR is recognized as an expense in income over the vesting period and measured by reference to the fair value of the liability.
The table below summarizes the principal exchange rates that have been used for translation purposes. Net gains and (losses) on foreign currency transactions included in the consolidated income statements were USD 131 million and USD (115) million for the years ended December 31, 2007 and 2006, respectively. Foreign currency exchange forward and swap gains and (losses) included in the amounts above were USD (249) million and USD 154 million for the years ended December 31, 2007 and 2006, respectively.
Income statements Balance sheets and cash flows 4. Critical accounting judgments and estimates
Critical accounting estimates are those which involve the most complex or subjective judgments or assessments, and relate to general insurance and life insurance reserves, the determination of fair value for financial assets and liabilities, impairment charges, the determination of fair values of assets and liabilities attributable to business combinations, deferred policy acquisition costs, deferred taxes, retirement and other defined benefit post-employment plans and share-based compensation and cash incentive plans. In each case, the determination of these items requires management to make informed judgments based on information and financial data that may change in future periods. Because of the uncertainties involved in such judgments, actual outcomes and results may differ from assumptions and estimates made by management.
The Group establishes IBNR reserves, generally on an undiscounted basis, to recognize the estimated cost of losses for events which have already occurred but which have not yet been notified. These reserves are established to recognize the estimated costs required to bring claims for these not yet reported losses to final settlement. As these losses have not yet been reported, the Group relies upon historical information and statistical models, based on product line, type and extent of coverage, to estimate its IBNR liability. The Group also uses reported claim trends, claim severities, exposure growth, and other factors in estimating its IBNR reserves. The Group revises these reserves as additional information becomes available and as claims are actually reported.
Financial Report 2007 b) Future life policyholders’ benefits and policyholders’ contract deposits The future life policyholders’ benefits and policyholders’ contract deposits liabilities contain a number of assumptions regarding mortality (or longevity), lapses, surrenders, expenses and investment returns. These assumptions are determined with reference to past experience adjusted for new trends, current market conditions and future expectations. As such the liabilities for future life policyholders’ benefits and policyholders’ contract deposits may not represent the ultimate amounts paid out to policyholders. For example: • The estimated number of deaths determines the value of the benefit payments. The main source of uncertainty arises because of the potential for pandemics and wide-ranging lifestyle changes, such as changes in eating, smoking and exercise habits, which could result in earlier deaths for age groups in which the Group has significant exposure to mortality risk.
Refer to notes 8 and 11 for further information on future life policyholders’ benefits and policyholders’ contract deposits and other funds.
The Group issues a number of investment contracts that are recorded at fair value through profit or loss. These financial instruments are not quoted in active markets, and their fair values are determined by using valuation techniques. A variety of factors are considered in the Group’s valuation techniques, including credit risk (both own and counterparty), embedded derivatives (such as unit-linking features), volatility factors (including contract holder behavior), servicing costs and surrenders of similar instruments. Changes in assumptions for any of these factors could affect the reported fair value of these financial instruments. Increased surrender volumes may not be fully recognized in the valuation of investment contract liabilities owing to the requirement to maintain the fair value of financial liabilities above the amount payable on demand.
Refer to notes 6, 7 and 25 for further information on the fair value of financial assets and liabilities.
To determine the fair value of intangible assets, including goodwill and intangibles with indefinite life, the discounted cash flow method is normally used. As judgement is involved in the process of evaluating the impairment of such assets, actual outcomes could vary significantly from the forecasted future cash flows.
e) Fair values of assets and liabilities attributable to business combinations Acquired businesses are accounted for using the purchase method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. Fair values are determined using certain valuation techniques. The judgments made in determining the estimated fair value of assets acquired and liabilities assumed may differ from actual results due to changes in economic conditions.
Refer to note 12 for further information on deferred policy acquisition costs.
h) Employee benefits The Group has defined benefit pension plans and other post-employment plans. In assessing the Group’s liability for these plans, critical judgments include estimates of mortality rates, rates of employment turnover, disability, early retirement, discount rates, expected long-term rates of return on plan assets, future salary increases, future pension increases and increases in long-term healthcare costs. These assumptions may differ from actual results due to changing economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. These differences may result in variability of pension income or expense recorded in future years.
Financial Report 2007 i) Share-based compensation and cash incentive plans The Group has adopted various share-based compensation and cash incentive plans to attract, retain and motivate executives and employees. Share-based compensation plans include plans under which shares and options to purchase shares, based on the performance of the businesses, are awarded. The fair value of options granted are estimated using the Black-Scholes option pricing model. The key factors involve, but are not limited to, the expected share price volatility, expected change in dividend rate and contracted option life. These assumptions may differ from actual results due to changes in economic conditions.
On March 5, 2007, the Group purchased 100 percent of the surety writer ACC Seguros y Reaseguros de Daños, S.A in Spain. Total acquisition costs amounted to USD 41 million with residual goodwill generated of USD 9 million.
On April 4, 2007 the Group purchased 66 percent of the insurance company OOO “NASTA” in Russia with an agreed path to 100 percent ownership by 2010. The total consideration for the acquisition of 100 percent interest in Nasta is composed of an initial cash payment of USD 260 million plus a deferred payment estimated to amount to a present value of USD 178 million at the initial acquisition date. Residual goodwill arising from the initial accounting of this acquisition amounted to USD 370 million, representing the expected growth opportunities for the Group in the Russian market. Identifiable intangible assets have been valued at USD 28 million, mainly representing the Nasta distribution network. Nasta has been consolidated one quarter in arrears (IAS 27, paragraph 27 provision) while the infrastructure is brought up to Zurich standards.
On September 5, 2007, the Group acquired 100 percent of Wrightway Underwriting Limited, an underwriting agency in Ireland, for a consideration of USD 27 million plus deferred payments depending on the acquired company’s performance. Total acquisition costs amounted to USD 29 million and identifiable intangible assets, net of deferred tax, amounted to USD 12 million. The residual goodwill of USD 15 million represents expected growth opportunities and synergies.
On November 29, 2007, the Group acquired 100 percent of Real Garant Versicherung AG, a car warranty insurer based in Germany. Total acquisition costs amounted to USD 43 million, tangible assets acquired to USD 23 million and intangible assets net of deferred tax were identified in the amount of USD 4 million. The residual goodwill of USD 16 million primarily represents expected growth opportunities and synergies.
Fair value of net tangible assets acquired (32) 48 (19) (3)
Divestments During the year ended December 31, 2007, the Group completed divestments of several businesses and recognized a post-completion adjustment on a divestment effected previously.
On February 1, 2007, the Group divested all of its shares in Truckwriters, Inc. in the United States, a specialist insurer for the trucking industry. In Australia, the Group sold Finium Trustee Limited and the Zurich Master Super Fund on May 31 and June 30, 2007 respectively, both companies being part of the Group’s Australian superannuation business. On October 1, 2007, the Group sold all of its shares in Valiant Insurance Company in the United States. On November 14, 2007, the Group sold its interest in two financial service businesses in Australia. As part of the sale proceeds, the Group received shares in DKN corresponding to an interest of approximately 31 percent, which is carried as an investment in associate. On November 30, 2007 the Group divested all of its shares in Risk Enterprise Management Limited, a property and casualty claims and risk management services provider in the United States.
Transactions in 2006 The Group recorded an estimated loss of USD 66 million (pre-tax) on the envisaged disposal of certain run-off portfolios in four European countries. The loss was partially offset by a USD 23 million (pre-tax) gain resulting from a reorganization of our legal entity structure in Germany changing the minority interest share of the Group’s net assets.
Transactions and events after the balance sheet date On January 24, 2008, the Group announced that it had signed an agreement to acquire 100 percent of the outstanding share capital of TEB Sigorta A.S., a general insurer based in Turkey. The closing of the transaction is subject to regulatory and antitrust approval and is expected to take place in the first quarter of 2008.
Investment result in USD millions, for the years ended December 31 for total investments
Investments held by investment companies 1 5 475 283 477 288 1 Including net capital losses on derivative financial instruments of USD 147 million and USD 65 million for the years ended December 31, 2007 and 2006, respectively, of which net capital losses on derivatives attributable to cash flow hedges ineffectiveness amounted to USD 9 million for the year ended
Real estate held for investment 438 410 101 220 539 629
Investment expenses for Group investments (247) (265) – – (247) (265)
Investment in USD millions, for the years ended December 31 result for unit-linked products
Real estate held for investment 489 427 (520) 910 (31) 1,337
Investment expenses for unit-linked contracts (528) (461) – – (528) (461)
Impairment charges on Group investments included in net capital losses amounted to USD 136 million and USD 26 million for the years ended December 31, 2007 and 2006, respectively, of which impairments charges on mortgage loans and other loans comprised USD 9 million and USD 5 million for the years ended
Rental operating expense for real estate held for investment included in investment expenses (total investments) amounted to USD 170 million and USD 163 million for the years ended December 31, 2007 and 2006, respectively.
Capital gains and losses and impairments on equity and debt securities included in total investments for the years ended December 31, 2007 and 2006 comprised the following: Table 6.2
Details of the investment balances as of December 31, 2007 and 2006 by category are given in the tables below: Table 6.3a
Equity securities: Fair value through profit or loss 104,220 33.0 95,049 30.7 of which: trading equity portfolios in capital markets
Debt securities: Fair value through profit or loss 18,499 5.9 17,572 5.7
Other investments: Investments held by investment companies 1,827 0.6 1,862 0.6
Cash and investments with a carrying value of USD 4,617 million and USD 4,469 million were deposited on behalf of regulatory authorities as of December 31, 2007 and 2006, respectively.
Short-term investments primarily consist of available-for-sale securities with original maturities between three months and one year.
Investments held by investment companies primarily consist of investments in hedge and private equity funds.
Debt securities: Mortgage and asset-backed securities: The breakdowns are 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.
The carrying value of real estate held for total investments developed as follows: Table 6.8
DKN Financial Group Limited 63 – – – 31.55% 1 This entity is not consolidated as it is not controlled by the Group.
Net unrealized in USD millions, as of December 31 gains/(losses) on investments included in shareholders’ equity
The Group uses derivative financial instruments mostly for economic hedging purposes in order to mitigate the risks posed to the Group as a consequence of changes in foreign exchanges rates, interest rates, equity prices and credit quality from its assets and liabilities and its commitments to third parties. In certain circumstances these instruments may meet the definition of an effective hedge for accounting purposes. Where this is the case, hedge accounting is applied. Details for the accounting of these instruments is set out in note 3; tables 7.1 and 7.2 below set out those instruments which are not hedges for accounting purposes, while table 7.3 sets out those where hedge accounting has been applied. The notional principal amounts indicate the volume of transactions outstanding at the balance sheet date and are used to express the extent of the Group’s involvement in derivative transactions. These do not represent amounts at risk.
Derivative assets are included in “Other assets“ and derivative liabilities are included in “Other liabilities” of the consolidated balance sheets as of December 31, 2007 and 2006.
Futures/forwards of which: financial assets 607 713 financial liabilities (203) (340)
Financial Report 2007 b) Derivative financial instruments that qualify for hedge accounting The following table sets out details of the fair value and cash flow hedges: Table 7.3
Options on interest rate swaps – 587 2,589 3,176 – 58 –
Total cash flow hedges – 587 3,757 4,344 – 211 –
The fair value hedges consist of cross currency interest rate swaps used to protect the Group against changes in foreign currency exposure and interest rate exposure of euro denominated debt held by the Group. Changes in the fair value of the derivatives designated as fair value hedges and changes in the fair value of the hedged item in relation to the risk being hedged are recognized in income.
The Group uses options on interest rate swaps in cash flow hedges to protect against variability in future cash flows due to changes in interest rates associated with forecast purchase of debt investments related to life insurance policies (during the years ended December 31, 2011, 2016, 2021 and 2026). Gains and losses on such derivatives are initially recognized directly in equity, and are transferred to the income statement when the underlying financial asset is recognized and affects profit and loss through the recognition of interest income between the year ended December 31, 2011 and the year ended December 31, 2036. The gains and losses on the ineffective portion of such derivatives are recognized immediately in income within net capital gains/(losses) on investments and impairments.
For the year ended December 31, 2007 the net loss deferred in shareholder’s equity on derivatives designated as cash flow hedges was USD 144 million before tax. During 2007, the amount removed from shareholders’ equity and included in the income statement was not material.
During the year ended December 31, 2007, a net loss of USD 9 million was recognized due to hedge ineffectiveness within net capital gains/(losses) on investments and impairments.
Reserves for in USD millions, as of December 31 insurance contracts
Total reserves for insurance contracts, net 225,745 220,790 1 The Group’s life operations in the UK entered into a reinsurance agreement to transfer the risk associated with a significant annuities portfolio as of January 1, 2007. The initial impact of this transaction was an increase of USD 7.1 billion in reinsurers’ share of reserves for insurance contracts in the Global Life business.
The Group establishes loss reserves, which are estimates of future payments of reported and unreported claims for losses and related expenses, with respect to insured events that have occurred. Reserving is a complex process dealing with uncertainty, requiring the use of informed estimates and judgments. Any changes in estimates or judgements are reflected in the results of operations in the period in which estimates and judgements are changed.
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 statement year and prior. 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 down 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, 2007. 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 our 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 may not be derived from the information presented in the table below.
Management has considered asbestos, environmental and latent injury claims and claims expenses in establishing the reserves for losses and loss adjustment expenses. The Group continues to be advised of claims asserting injuries from toxic waste, hazardous materials and other environmental pollutants and alleged damages to cover the clean-up costs of hazardous waste dump sites relating to policies written in prior years and indemnity claims asserting injuries from asbestos. Coverage and claim settlement issues, such as determination that coverage exists and the definition of an occurrence, together with increased medical diagnostic capabilities and awareness have often caused actual loss development to exhibit more variation than in other lines. Such claims require specialized reserving techniques and the uncertainty of the ultimate cost of these types of claims has tended to be greater than the uncertainty relating to standard lines of business.
Uncertainties also arise out of changes or potential changes in various laws or the interpretation of laws. While the Group believes that it has made adequate provision for these claims, it is possible that future adverse development could have a material effect on the Group’s results of operations, cash flows and financial position. The net reserve amounts related to the above mentioned claims were USD 3,564 million and USD 3,508 million as of December 31, 2007 and 2006, respectively. The development of these reserves is shown below.
Interest and bonuses credited to policyholders 3,047 3,040 (160) (67) 2,887 2,973
The impact of changes in assumptions relating to net future life policyholders’ benefits was USD 313 million after reinsurance (USD 293 million in 2006). In particular, the 2007 net changes include the following significant movements: • USD 446 million related to changes in interest rate assumptions; • USD -39 million related to changes in expense assumptions; • USD -62 million related to changes in longevity assumptions; and
In 2006 net changes included the following significant movements: • USD 150 million related to changes in interest rate assumptions; and
Policyholders’ in USD millions, as of December 31 contract deposits and other funds gross
Development of in USD millions policyholders’ contract deposits and other funds
Long-duration contract liabilities included in future life policyholders’ benefits result primarily from traditional participating and non-participating life insurance products. Short-duration contract liabilities are primarily accident and health insurance products.
The amount of policyholder dividends to be paid is determined annually by each life insurance company. Policyholder dividends include life policyholders’ share of net income and unrealized appreciation of investments that are required to be allocated by the insurance contract or by local insurance regulations. Experience adjustments relating to future policyholders’ 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.
Guarantees arising from minimum death benefits (GMDB) and retirement income benefits (GRIB) Certain products for which policyholders bear in full the credit and market risks associated with the underlying invested funds selected by them contains guarantees for which liabilities have been recorded for additional benefits and minimum guarantees. These arise primarily in the subsidiary Kemper Investors Life Insurance Company which has written variable annuity contracts that provide annuitants with certain guarantees related to minimum death and income benefits. The determination of these liabilities is based on models that involve a
Financial Report 2007 range of scenarios and assumptions, including those regarding expected market rates of return and volatility, contract surrender rates, annuitization elections and mortality experience. The assumptions used are consistent with those used in determining estimated gross profits for the purpose of amortizing deferred policy acquisition costs.
Amount at risk from minimum death benefits (GMDB) as of December 31
The value of financial liabilities at amortized cost is based on a discounted cash flow valuation technique and is shown in table 25.1. The discount rate is determined by current market assessment of the time value of money and risk specific to the liability.
As of December 31 54,485 50,705 10. Equity component relating to contracts with DPF
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 shareholders’ equity. Mandated allocations related to unrealized gains 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.
Development of in USD millions equity component relating to contracts with DPF
Life insurance death and other benefits 11,903 10,787 (1,065) (293) 10,837 10,494
Decrease in future life policyholders’ benefits (1,840) (1,418) (7,775) (99) (9,614) (1,517)
As of December 31 1,003 815 13. Farmers management fees and other related revenues
As part of the Deutscher Herold transaction in 2002, the Group acquired various mortgage loans. Deutscher Herold had previously sold these loans to credit institutions while retaining the related credit and interest risk. Therefore the loans have not been derecognized from the balance sheet and the transaction is reflected as a collateralized borrowing. Accordingly, the loans are recorded as “Mortgage loans given as collateral” and the liability to credit institutions as “Collateralized loans”.
Net carrying value as of January 1, 2007 385 962 76 182 299 1,905
Land Buildings Furniture held for held for and Computer Other own use own use fixtures equipment equipment Total
Additions, capital improvements and transfers 5 71 19 79 109 284
The fire insurance value of the Group’s own-used property and equipment and real estate held for investment totaled USD 10,049 million and USD 8,900 million as of December 31, 2007 and 2006, respectively.
Present value of profits of acquired Other Attorneyinsurance intangible in-fact Goodwill contracts assets 1 relationships Total
Gross carrying value as of 1 Other intangible assets include internally generated capitalised software development costs as well as intangible assets at fair value on acquisitions.
Net carrying value as of 1 Other intangible assets include internally generated capitalised software development costs as well as intangible assets at fair value on acquisitions.
Goodwill is allocated to cash generating units (CGU) identified according to its business and geographical segment.
When testing for impairment of attorney-in-fact (AIF) relationships in 2007 and 2006, the recoverable amount of AIF relationship is determined on the basis of value-in-use calculations. These calculations use cash flow projections based on business plans and the surplus development in the Farmers Exchanges. Business plans are approved by management and typically cover a 5-year period and a discount rate of 6.0 percent (5.5 percent in 2006). Cash flows beyond that 5-year period are extrapolated for 20 years assuming zero growth. Management believes that any reasonably possible change in the key assumptions of the underlying Farmers Exchanges business plans, would not cause the recoverable amount of the AIF to be lower than the carrying value.
Amounts due to reinsurers, agents and other insurance companies 1,712 1,816
Expected income tax expense attributable to shareholders 30.3% 2,296 30.2% 1,950
Actual income tax expense attributable to shareholders 24.7% 1,870 26.9% 1,732
Deferred taxes – in USD millions, as of December 31 policyholder/ shareholder attribution
Deferred tax in USD millions, as of December 31 assets/(liabilities) breakdown by source
Reserves for losses and loss adjustment expenses 583 (675) 535 (495)
As of December 31, 2007 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 recognised approximated USD 16 billion. In the remote scenario in which these temporary differences reverse simultaneously, the resulting tax liabilities will be very limited due to participation exemption rules.
Tax losses carryforwards and tax credits in USD millions, as of December 31 2007 2006
Deferred tax in USD millions, as of December 31 assets/(liabilities) by taxpayer group
Management assesses the recoverability of the deferred tax assets carrying values based on future years taxable income projections and believe that the carrying values of the deferred tax assets as of December 31, 2007, are recoverable.
Zurich Capital Markets Various debt instruments payable within 1 year 800 1,050
EUB Holdings Limited Various debt instruments payable within 1 year 814 738
Debt related to capital markets and banking activities 1,663 1,889 b) Senior debt
Zurich Finance (USA), Inc. 3.50% CHF 300 bond, due July 2008 1 264 246
Zurich Capital Trust I 8.376% USD 1,000 Capital Securities – 990
Total debt 9,963 9,602 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 holders of these notes benefit from the Replacement Capital Covenant which states that if Series IV and V Fixed / Floating Trust Preferred Securities, issued by ZFS Finance (USA) Trust IV and V, are called before 2042 and 2047 respectively, the Group will issue a replacement debt instrument with terms and provisions that are as or more equity-like than the replaced notes.
4 The bond is part of a qualifying fair value hedge relationship.
On June 1, 2007 the Group through Zurich Capital Trust called USD 1 billion 8.376 percent Capital Securities at a redemption price of 104.188 percent, recognizing a pre tax loss of USD 52 million, comprising USD 42 million from call premium and USD 10 million from recognition of unamortized discount.
A fair value hedge relationship on EUR 500 million 4.5 percent subordinated bond due June 2025 was entered into at the issuance of the debt instrument in 2005 and will end on June 15, 2015.
A fair value hedge relationship on 20 percent of the EUR 1 billion 4.5 percent senior debt due 2014 and a cash flow hedge relationship on the remaining 80 percent of this debt were entered into on January 1, 2007 and will end at maturity of the underlying debt instrument in 2014.
Description 6.625% payable annually up to October 2, 2022 Redeemable in whole 6.625% GBP 450 bond, and then reset every 5 years Every five years on every five years at par undated notes to the reset rate of interest. 1 or after October 2, 2022 plus any accrued interest.
5.75% payable annually up to October 2, 2013 Redeemable in whole 5.75% EUR 500 bond, and then reset quarterly Quarterly on quarterly at par due October 2023 to 3-month EURIBOR plus 2.67%. or after October 2, 2013 plus any accrued interest.
4.5% payable annually up to June 15, 2015 Redeemable in whole 4.5% EUR 500 bond, and then reset quarterly Quarterly on quarterly at par due June 2025 to 3-month EURIBOR plus 2.20%. or after June 15, 2015 plus any accrued interest.
6.15% payable semi-annually Series I 6.15% until December 15, 2010 Redeemable in whole Fixed / Adjustable Rate and then reset quarterly or in part at par USD 600 ECAPS, to the adjustable rate Quarterly on or plus any accumulated and due December 2065 plus 1.75%. 2 after December 15, 2010 unpaid distributions.
5.875% payable semi-annually Series IV 5.875% until May 9, 2012 Redeemable in whole USD 500 Fixed / Floating and then reset quarterly or in part at par Trust Preferred Securities, to 3-month LIBOR Quarterly on plus any accumulated and due May 2062 plus 1.815%. or after May 9, 2012 unpaid distributions.
Treasury CMT Rate, subject to a maximum under (ii) and (iii) of 13.25% Series I and 13% for Series II. 3 All subordinated debt instruments are also subject to mandatory redemption as a result of various tax, default or other events.
Debt maturities shown in table 20.3 reflect original contractual dates. For call/redemption dates, refer to table 20.2. The total notional amount of debt due in each period is not materially different from the total carrying amount disclosed in table 20.3.
In addition, ZIC has access to a USD 300 million credit facility expiring in 2010 for the sole purpose of financing surplus notes issued by the Leschi Life Assurance Company (Leschi), a special purpose reinsurer owned by Farmers New World Life (FNWL) and to which FNWL cedes business subject to Regulation XXX (Triple X). As of December 31, 2007, USD 50 million had been drawn under this credit facility.
Financial debt in USD millions, as of December 31, 2007 2007 2007 2006
Debt related to capital markets and banking activities 1,663 (815) 848 1,094
Share capital number of shares, as of December 31 2007 2006
The Board of Directors is authorized, when issuing bonds or similar debt instruments connected with conversion and/or option rights, to restrict or withdraw the right of shareholders for advance subscription in cases where such bonds are issued for the financing or re-financing of a takeover of an enterprise, of parts of an enterprise, or of participations. If the right for advance subscription is withdrawn by the Board, the convertible bond or warrant issues are to be offered at market conditions (including standard dilution protection provisions in accordance with market practice) and the new shares are issued at then current convertible bond or warrant issue conditions. The conversion rights may be exercisable during a maximum of 10 years and option rights for a maximum of 7 years from the time of the respective issue. The conversion or option price or its calculation methodology shall be determined in accordance with market conditions, whereby for shares of Zurich Financial Services the quoted share price is to be used as a basis.
Employee participation Subject to shareholder approval to increase the contingent share capital for the issuance of new registered shares to employees of the Group from CHF 75,755.60 by CHF 324,244.40 to a new maximum of CHF 400,000 by issuing up to a maximum of 4,000,000 registered shares payable in full with a nominal value of CHF 0.10 each, the Board of Directors of Zurich Financial Services decided on February 14, 2007, to allow the issuance of up to 4,000,000 shares out of the contigent share capital to employees of the Group. A respective proposal for the increase of the contingent share capital was made by the Board of Directors to the shareholders and was approved at the Annual General Meeting on April 3, 2007. On December 31, 2007, 797,421 shares of this contingent share capital have been issued. Consequently, as of the same date, the remaining contingent capital, which can be issued to employees of Zurich Financial Services and Group companies, amounts to CHF 320,257.90 or 3,202,579 fully paid registered shares with a nominal value of CHF 0.10 each. The pre-emptive rights of the shareholders, as well as the right for advance subscription, are excluded. The issuance of shares or respective option rights to employees 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.
Preferred securities in USD millions, as of December 31 2007 2006
Preferred securities, USD 1,000 par value 1 700 700 1 The amount includes issuance costs of USD 29 million.
Treasury shares number of shares, as of December 31 2007 2006
As of December 31, 2007, the total number of treasury shares was 5,839,154, which comprises shares repurchased under the buy-back program and shares acquired in the market held to cover employee share and option plans.
Effect of potentially dilutive shares related to share-based compensation plans 1,572,388 (0.43) (0.51)
Effect of potentially dilutive shares related to share-based compensation plans 814,490 (0.18) (0.22)
Basic earnings per share is computed by dividing net income attributable to shareholders by the weighted average number of shares outstanding for the period, 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.
The tables below show the funded status of the Group’s plans; this being the pension plan assets at fair value less the pension plans liability based on the present value of the obligation. Plans that are wholly unfunded are shown separately from funded plans.
Pensions are long-term by nature. However, short-term variations between long-term actuarial assumptions and actual experience may be positive or negative, resulting in actuarial gains or losses, which are recognized in full in the period in which they occur, but outside of income and presented on a separate line of the statement of recognized income and expense in shareholders’ equity.
In the second quarter of 2007, the Group implemented a contractual trust arrangement to cover its defined benefit obligations in Germany. As a consequence of this transaction, the fair value of the plan assets in the funded defined benefit plans increased by USD 786 million at the time of implementation of the trust arrangement.
Components of in USD millions, for the years ended December 31 net pension expense
Fair value of assets in USD millions, as of December 31 held in funded defined benefit pension plans
Effect of business combinations and other transfers (168) (337) – –
Effect of business combinations and other transfers 97 320 – (4)
Effect of business combinations and other transfers (71) (17) – (4)
The principal financial assumptions used to calculate the Group’s major defined benefit pension and defined post-employment benefit obligations and the Group’s pension expense are as follows: Table 22.9
Assumptions used as of December 31 in determining the actuarial liabilities for major defined benefit pension plans
Assumptions used as of December 31 in determining the actuarial liabilities for other defined postemployment
Effect of a change in USD millions in the health care cost trend 1% increase 1% decrease
Effect on total service cost and interest cost – 1 – 1
1 below USD 1 million b) Defined contribution pension plans Certain of the Group’s operating companies sponsor defined contribution plans. Eligibility for participation in such plans is either based on completion of a specified period of continuous service or date of commencement of employment. The plans provide for voluntary contributions by employees and contributions by the employer which typically range from 3 percent to 15 percent of annual pensionable salary, depending on the employees’ years of service. The Group’s contributions under these plans amounted to USD 51 million and USD 34 million in 2007 and 2006, respectively.
Financial Report 2007 b) Share-based compensation plans for employees and executives The Group encourages employees to own shares of Zurich Financial Services 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.
Number of shares Weighted average under option exercise price (in CHF)
The average share price for Zurich Financial Services shares in 2007 and 2006 was CHF 350.32 and CHF 294.63, respectively.
Options granted during the period 1 702,420 706,773 68 67 1 Number of options granted is shown as the number of shares under option granted during the period.
The fair value of options granted is estimated using the Black-Scholes option pricing model, with the following assumptions.
Expected option life 7 years 7 years 1 Share price as at date of grant.
The risk-free interest rate was determined by using the seven year CHF swap rate applicable in 2007 and 2006. The implied volatility was determined based on the average of a number of several independent quotes.
The Group has provided financial guarantees and contractual commitments to external parties, associates, partnerships and joint ventures. These arrangements include commitments under certain conditions to make liquidity advances to cover delinquent principal and interest payments, make capital contributions or provide equity financing.
Quantifiable in USD millions, as of December 31 commitments and contingencies
Indemnity agreements The Group, through certain of its subsidiaries, has agreed to arrangements that cap Converium’s (Converium Holding AG, now Scor Holding (Switzerland) AG) net exposure for losses arising out of the September 11, 2001 event at USD 289 million. As of December 31, 2007, the Group has recorded in this respect provisions of USD 54 million.
Pledged assets The majority of assets pledged to secure the Group’s liabilities relates to debt securities pledged under shortterm sale and repurchase agreements. The total amount of pledged financial assets including the securities under short-term sale and repurchase agreements amounted to USD 5,251 million and USD 6,042 million as of
Terms and conditions associated with the financial assets pledged to secure Group’s liabilities are usual and standard in the markets in which the underlying agreements were executed.
On December 11, 2001, the Group divested its third party reinsurance business operated under the “Zurich Re” brand name by offering the shares of the newly established Converium to the public. As part of the formation of Converium and the subsequent public offering of its shares, the Group entered into various contracts with Converium and its subsidiaries, including certain Quota Share Retrocession Agreements. These Quota Share Retrocession Agreements, together with subsequent amendments, provide for the reinsurance premium to Converium to be retained by the Group on a funds withheld basis. Converium may call for payment in cash certain amounts of the funds withheld on pre-determined dates (cash call option). If Converium calls for such payments on July 1, 2008, the maximum amount that would be payable by the Group is estimated to be in the range of approximately USD 200 million to USD 230 million. The Group is currently renegotiating the cash call option.
In 2006, the Group settled with various US state attorneys general and state insurance regulators in connection with investigations in the US concerning certain business practices involving insurance brokers and insurance companies. In July 2006, the Group also entered into a settlement agreement to resolve consolidated classaction litigation concerning those matters. Final judgment has been entered approving the settlement, but appeals are pending. A number of individual claims not covered by the class action settlement remain pending against the Group. In addition, the Group and its subsidiaries are involved in regulatory investigations in the US, including by the Securities and Exchange Commission (SEC), regarding certain reinsurance transactions engaged in by the Group and its subsidiaries. The SEC Staff is currently formulating its recommendation for action to the SEC Commissioners. The Group continues to cooperate with all remaining regulatory investigations. Other Group subsidiaries were also involved in industry-wide legal proceedings regarding financing hedge funds engaged in mutual-fund market-timing activities. In this connection, Zurich Capital Markets, in wind-down since 2003, entered into a settlement with the SEC on May 7, 2007. Furthermore, Zurich Financial Services is a defendant in putative class-action securities lawsuits relating to its divestiture of its interest in Converium. Zurich Financial Services and the class-action plaintiffs have entered into an agreement to settle all claims against the
The Group believes that it is not a party to, nor are any of its subsidiaries the subject of, any unresolved current legal proceedings, claims, litigation and investigations that would have a material adverse effect on the Group’s consolidated financial condition. However, it is possible that the outcome of any proceedings could have a material impact on results of operations in the particular reporting period in which it is resolved.
Debt and equity securities: fair values are based on quoted market prices when available. If quoted market prices are not available, then fair values are estimated on the basis of pricing models, discounted cash flow or other recognized valuation techniques or information from external pricing sources.
Total outstanding debt: fair values are estimated using discounted cash flow calculations based upon the Group’s current incremental borrowing rates for similar types of borrowings with maturities consistent with those remaining for the debt being valued.
Fair value (FV) and in USD millions, as of December 31 carrying value of financial assets and financial liabilities
Loans: Other Investments: Investments held by investment companies 1,827 1,862 1,827 1,862
Designated at FV: Liabilities related to unit-linked investment contracts (48,187) (44,269) (48,187) (44,269)
Financial liabilities held at amortized cost: Liabilities related to investment contracts (117) (121) (117) (121)
Liabilities related to investment contracts with DPF (5,789) (6,074) (6,182) (6,315)
The Group employs Enterprise Risk Management as the structured Group-wide framework for identifying, measuring, managing, reporting and responding to risks that could affect the achievement of the Group’s strategic and financial objectives. The objectives of the Group’s Enterprise Risk Management are to: • Protect the capital base by ensuring that capital is deployed in the most efficient way and that risks are not taken beyond the Group’s risk-taking capacity; • Enhance value creation and contribute to an optimal risk-return profile; and
• Support the Group’s decision-making process by providing reliable and timely risk information.
The table below shows the Group’s concentration of risk within the General Insurance business by region and line of business based on direct written premiums before reinsurance. The Group’s exposure to general insurance risks varies significantly by geographic region and may change over time. Premiums ceded to reinsurers (including retrocessions) amounted to USD 5,345 million and USD 5,488 million for the years ended December 31, 2007 and 2006, respectively. Reinsurance programs such as catastrophe covers are managed on a global basis.
1 Parentheses around numbers represent a decrease in net income before tax and net assets.
Life insurance risk The risks associated with Life insurance include, but are not limited to: • Biometric risk, which includes adverse mortality and morbidity experience. Mortality risk can relate to either policyholders living longer than expected (longevity) or dying sooner than expected. This is because some products pay out if the person dies, other products pay regular amounts whilst the policyholder remains alive.
The table below shows the Group’s concentration of risk within the Global Life business by region and line of business based on direct written premiums and policy fees on a gross basis. The Group’s exposure to life insurance risks varies significantly by geographic region and line of business and may change over time.
Direct written for the year ended December 31, 2007 premiums and policy fees by line of business and by region
Accident Individual 2 Group and health Unit-linked 3 Total 1 Including intercompany eliminations.
• Group inludes, but is not limited to, mortality, morbidity, longevity and interest rate risks arising on commercial death, disability and annuity insurance contracts.
• Accident and Health includes, but is not limited to, mortality, morbidity and interest rate risks arising on accident and health insurance contracts.
• Unit-linked includes, but is not limited to, mortality risks. However, on unit-linked products, the interest rate or equity market risk is largely passed on to the policyholder.
In addition to the specific risks listed above, all these lines of business expose the Group to lapse, surrender and expense risks.
Refer to note 8 for additional information on reserves for insurance contracts.
Credit risk relating to debt securities The Group is exposed to credit risk from third party counterparties where the Group holds securities in those entities. The table below shows the credit risk exposure on debt securities, by credit rating.
In accordance with the Group’s investment policy, investment grade securities comprise 98.8% of the Group’s debt securities, and 63.1% are rated AAA as of December 31, 2007. As of December 31, 2006, investment grade securities comprised 99.0% of our debt securities, and 61.0% were rated AAA. US subprime mortgagebacked securities comprise USD 288 million or 0.2% of the Group investments, with the majority, 78.3%, of the positions rated AAA.
The Group typically cedes new business to authorized reinsurers with a minimum rating of BBB. The premiums ceded to reinsurers that are below investment grade or not rated relate mainly to former transactions, pools and captives.
Reinsurance assets in the table below are shown before taking into account the fair value of credit default swaps, bought by the Group to mitigate credit risks with some of its larger reinsurers, and other collaterals such as cash or letters of credit from banks rated at least ‘A’, which are easily convertible into cash and deposits received under ceded reinsurance contracts. The increase of reinsurance assets in 2007 can be attributed to the reinsurance of a portfolio of immediate pension annuities followed by a part VII transfer as disclosed in note 1. Until regulatory approval of the portfolio transfer, the corresponding assets (corporate and government bonds) are being kept in a segregated account, managed by a third-party asset manager.
Reinsurance for the years premiums ceded ended December 31 and reinsurance assets by rating of reinsurer
USD % of USD % of USD % of USD % of millions total millions total millions total millions total
Rating 1 The fair value of the collaterals received amount to USD 16,702 million at December 31, 2007 and USD 8,974 million at December 31, 2006.
Credit risk relating to other loans The credit risk arising from other loans and policyholders’ collateral is assessed and monitored together with the fixed income securities portfolio. 85.3% of the reported loans are to government or supranational institutions, of which the majority, 99.0%, are owed by the German Central Government or the German Federal States. The table below shows the composition of the loan portfolio by rating class. A total of USD 11,457 million or 88.6% of loans are secured as of December 31, 2007. As of December 31, 2006, a total of USD 10,965 million or 86.8% of loans were secured.
Credit risk relating to receivables The Group’s credit risk exposure to receivables from third party agents, brokers and other intermediaries arises where they collect premiums from customers to be paid to the Group or pay claims to customers on behalf of the Group. Receivables from ceded reinsurance form part of the reinsurance assets and are managed accordingly. The Group has policies and standards to manage and monitor credit risk from intermediaries with a focus in day-to-day monitoring of the largest positions. As part of these standards the Group requires that intermediaries maintain segregated cash accounts for policyholder money. Additionally, the Group requires intermediaries to satisfy minimum requirements in terms of their capitalization, reputation and experience as well as providing short-dated business credit terms.
To limit credit risk, derivative financial instruments are typically executed with counterparties rated A- or better by an external rating agency. In addition almost all derivative counterparties have a Credit Support Annex in place, which requires them to post collateral when the derivative position is beyond an agreed threshold.
Aging analysis of financial assets The table below provides an aging analysis of financial assets.
Mortgage Debt Mortgage loans given securities – loans – as collateral – Group Group Group Other loans Receivables 1 Total
Financial assets 1 Excluding receivables arising from ceded insurance and impairments thereon. 2 Represents allowance for impairments.
Aging of past due but not impaired financial assets: Past due but not impaired
Risk reviews include the analysis of the following aspects: • Management of the interest rate risk per major maturity bucket; • Efficiency of the asset allocation relative to the actual risk level; and
The economic effect of extreme market moves is routinely examined and considered when setting the asset allocation.
The Group uses derivative financial instruments to limit market risks arising from changes in foreign currency exchange rates, interest rates, equity prices and credit quality from its assets and liabilities and its commitments to third parties. The Group enters into derivative financial instruments mostly for economic hedging purposes and, in limited circumstances, the instruments may also meet the definition of an effective hedge for accounting purposes. Derivatives that are part of the effective accounting hedges include cross currency interest rate swaps in fair value hedges and cross currency swaps in cash flow hedges of its borrowings in order to mitigate its exposure to foreign currency and interest rate risk. Also included are interest rate swaps in cash flow hedges of the Group’s exposure in future cash flows due to changes in interest rates associated with forecast transactions such as the purchase of debt instruments related to Life Insurance policies. Derivatives are complex financial transactions; therefore, the Group addresses the risks arising from derivatives through a stringent policy that requires approval of a derivative program before transactions are initiated, and by subsequent monitoring of open positions.
For additional information on derivative financial instruments and hedge accounting refer to note 7.
Risk from equity securities and real estate The Group is exposed to various risks resulting from price fluctuations on equity securities, real estate and capital markets. Risks arising from equity securities and real estate could affect the Group’s liquidity, reported income, net assets and regulatory capital position. The exposure to real estate includes, but is not limited to, equity real estate assets, such as direct holdings in real estate, listed real estate company shares and funds, as well as exposure through non-quoted indirect real estate, and debt real estate securities such as commercial and residential mortgages, commercial mortgage-backed securities and mezzanine debt. Also, returns on unit-linked contracts, whether classified as insurance or investment contracts, may be exposed to risks from equity and real
Sensitivities analysis The table below shows the estimated impacts on Group investments and own used real estate of a one percentage point increase in yield curves and a separate 10% decline in all stock markets after consideration of hedges in place, as of December 31, 2007 and 2006, respectively. This is in line with management’s monitoring of its asset base in the markets in which the Group operates. The sensitivities of these two separate but instantaneous shocks are shown for both, net income before tax and net assets, using the Group actual income tax rate. The table excludes sensitivities on unit-linked assets, as policyholders bear the investment risk.
Group’s General Insurance business 1% increase in the interest rate yield curves
Global Life business 1% increase in the interest rate yield curves
1 Negative values indicate a decrease of the balance. Positive values indicate an increase of the balance.
Note that the positive impact on net income before tax from the equity shock on the Global Life business results from investments classified as trading. These investments include derivative positions that are held for hedging purposes. The market value of such derivative instruments can increase if equity markets fall.
On local balance sheets there is the risk that a currency mismatch may lead to fluctuations in a balance sheet’s accounting net asset value, either through income or directly through equity. The Group manages this risk by matching foreign currency positions on local balance sheets within prescribed limits. The Group does not take speculative positions on foreign currency market movements. Foreign currency is a centrally managed risk, with hedging coordinated at the Corporate Center. As a result, the monetary currency risk exposure is considered immaterial, as disclosed in note 3.
As the Group has chosen the US dollar as its presentation currency, differences arise when functional currencies are translated into the presentation currency.
Using constant exchange rates from one year to the next, the Group’s 2007 net income attributable to shareholders would have been lower by USD 199 million (applying 2006 exchange rates to the 2007 result). In 2006 the result would have been lower by USD 21 million (applying 2005 exchange rates to the 2006 results).
Sensitivities in USD millions, for the years ended December 31 to exchange rate movements
General Global Rest of the General Global Rest of the Insurance 1 Life 1 businesses 1 Insurance 1 Life 1 businesses 1
Impact on net income before tax 51 21 3 70 23 (46)
Impact on net income before tax 47 26 5 91 57 (5)
Refer to note 3 for additional information on foreign currency translation and transactions.
At Group level, similar guidelines apply and detailed liquidity forecasts based on the local businesses’ input as well as the Group’s own forecasts are regularly performed. As part of its liquidity management, the Group also maintains sufficient cash and cash equivalents to meet expected out flows. In addition, the Group maintains a liquidity buffer and committed borrowing facilities as well as access to diverse funding sources to cover contingencies. A credit downgrade could impact the Group’s commitments and guarantees, thus potentially increasing the Group’s liquidity needs. These contingencies are also included in the Group’s liquidity management. Refer to note 20 for additional information on credit facilities.
and loss contract adjustment Future life deposits and expenses, policyholders’ other funds, net benefits, net net Total
Maturity schedule in USD millions, as of December 31, 2007 of liabilities for investment contracts
The Group has entered into commitments that are disclosed in note 24. These are in addition to the liabilities shown in the table above. Parts of these commitments may be called at any time and in any amount, based on various criteria.