Group performance review Operating and financial review 76 Risk review 103
Financial information Consolidated financial statements 152 Significant subsidiaries 275 Report of the statutory auditor 280 Embedded value report 282 Holding company 318 Report of the statutory auditor 334 Shareholder information 340 Financial calendar 342 Contact information 343 Glossary 344
Zurich is one of the world’s leading insurance groups, and one of the few to operate on a global basis. Our mission is to help our customers understand and protect themselves from risk.
With about 60,000 employees serving customers in more than 170 countries, we aspire to become the best global insurer as measured by our shareholders, customers and employees.
• Long-term joint venture agreed with Banco Santander in key Latin American markets
Business operating profit 4,261 4,870 (12%) Net income attributable to shareholders 3,766 3,428 10%
Average Group investments 195,141 195,532 3 – Net investment result on Group investments 9,367 7,990 17% Net investment return on Group investments 4.8% 4.1% 0.7 pts Total return on Group investments 5.4% 5.4% –
1 Parentheses around numbers represent an adverse variance. 2 Changes to the basis of calculation of embedded value, including new business, are set out in the Embedded value report and in the Global Life section of the Operating and financial review. 3 Excluding average cash received as collateral for securities lending of USD 246 million in the year ended December 31, 2010
Performance overview in USD millions, for the years ended December 31, unless otherwise stated
Asia-Pacific, Middle East and Africa We enlarged our presence in Southeast Asia, where young professionals and high net worth customers make up a fast-growing life segment.
We take a global approach to our core businesses of general and life insurance. Individual, commercial and corporate customers benefit from our strong presence in the world’s most attractive insurance markets.
Business: property and casualty insurance and services Market segments: individual, commercial and corporate customers Distribution channels: agents, banks, brokers, direct Geography: global
One team, one purpose Zurich is a global insurer with superior financial strength, a talented workforce and a highly valued brand. We apply these strengths to help our individual, commercial and corporate customers understand and protect themselves from risk.
Business: life insurance, savings, investment and pension solutions Market segments: individual, commercial and corporate customers Distribution channels: agents, banks, brokers, employee benefit consultants, direct Geography: global
Business: management services related to property and casualty insurance Market segments: individual and commercial customers Distribution channels: agents, direct Geography: United States
• University of Farmers is rated the #1 Corporate University (Training) and its leader is rated the Learning Professional of the Year (Skillsoft)
• Zurich Japan is #1 in customer satisfaction in the Japanese general insurance sector (Japanese Customer Satisfaction Index 2011 Survey)
Selective growth in mature markets with expanding presence in high-growth markets Robust underwriting discipline combined with a sustained focus on profitability produced strong improvements in the underlying loss ratio of General Insurance. In Global Life, increased fee income supported investments to enhance global capabilities and mitigated the impact of the low interest rate environment. Through the acquisition of 51 percent of Banco Santander’s Latin American insurance operations as well as the acquisition of composite insurer Malaysian Assurance Alliance Berhad, both General Insurance and Global Life enhanced their footprint in emerging markets where the outlook for economic growth remains positive. Gross written premiums increased in nearly all active lines of business in the Farmers Exchanges, which are managed but not owned by Farmers Group Inc., a wholly owned subsidiary of Zurich, reflecting the accelerating underlying growth momentum during the latter part of the year.
We are pleased to present to you a good result for 2011, which we achieved despite the devastating earthquakes and the exceptional frequency of weather-related events that made this one of the most expensive years for catastrophe-related insured losses. In challenging economic and financial market conditions, our Group maintained its focus on the execution of its underwriting strategies and further improved its customer orientation while protecting its strong capital position. We closed significant acquisitions in Latin America and Malaysia, enhancing our footprint in target high-growth markets.
We are pleased to present a good result for 2011, a year characterized by natural catastrophes and challenging conditions.
In Global Life, business operating profit was USD 1.4 billion, 8 percent lower in U.S. dollar terms and 14 percent lower on a local currency basis. Volume increases in strategic growth markets in Latin America and Asia-Pacific and Middle East were offset by lower volumes in Ireland, Spain and Germany as difficult market conditions persisted in those countries, together with the impact of the divestment of the jointly owned insurance operations with Caixa Sabadell in Spain. New business value after tax reached USD 980 million, an increase of 14 percent in U.S. dollar terms and 7 percent on a local currency basis, following a methodology refinement for the calculation of new business value for the corporate protection business, which is more reflective of the underlying economics. Excluding this refinement, new business value after tax was flat in U.S. dollar terms and reduced by 5 percent in local currency. Volume growth was more than offset by a reduction in new business margin of 1.2 percentage points in local currency. Overall new business margin for the year remains at a strong level of 21.6 percent excluding the methodology change, and 24.5 percent including the change.
Management fees and other related revenues from Farmers Management Services remained flat despite the effect of the planned run-off of the 21st Century agency auto book of business in the Farmers Exchanges. This effect was largely offset by continued increases in gross earned premiums in the Farmers Exchanges, particularly in 21st Century direct as well as business and specialty insurance. The managed gross earned premium margin at Farmers Management Services remained flat at 7.3 percent compared with the prior year. Gross written premiums in the Farmers Exchanges increased by USD 166 million to USD 18.3 billion. In Farmers Re, gross written premiums and policy fees decreased by 16 percent to USD 3.5 billion due to the change in the participation level of the All Lines Quota Share reinsurance agreement, which in combination with a significant increase in weather-related losses resulted in a decreased business operating profit of USD 116 million. Overall, Farmers reported a business operating profit of USD 1.5 billion.
Our strategy is based on key principles of execution, financial and underwriting discipline, and above all, focusing on our core business of insurance.
Well positioned to outperform in a challenging environment The continued demanding conditions of 2011 have challenged – and confirmed – the strength of our strategy. Our strategy is based on key principles of execution, financial and underwriting discipline, and above all, focusing on our core business of insurance. In light of this, the Board of Directors is proposing to the Annual General Meeting on March 29, 2012, to change our name from Zurich Financial Services Ltd to Zurich Insurance Group Ltd.
Nonetheless the currents of change are interacting to create a complex picture; one that is surely menacing to some, but undoubtedly rich in opportunities. Five megatrends in particular catch our attention. They will reshape our economies and our societies, and will be decisive to the performance of global insurers over the long term.
Global perspectives a commoditized market in insurance services. On the other hand, interconnected data networks can create new business models that join insurers and customers more tightly. In this scenario, data and sensory networks could allow insurers and their customers to create and share value by actively collaborating on risk control and mitigation with premiums responding quickly.
For the insurance industry overall, these evolving technological processes reduce barriers to entry and create new grounds for competition among incumbents. Mastery of the processes underlying online migration – for both efficient operation and for reaching and delighting customers – will be critical to success.
No matter which corner of the financial community is being addressed, it is critical that public and private forces work together to determine optimal regulatory models for financial services on a global basis. This applies equally to insurance as well as to banking, and to adjacent industries such as pensions, hedge funds and others. Global insurers will need to watch carefully how shifting regulatory conditions (tax regimes, capital requirements, etc.) affect their competitive positions and product offerings.
Five trends will reshape our economies and our societies. They will be decisive to the performance of global insurers over the long term.
The stabilizing influence of insurance In addition to the direct help that we provide to businesses and individuals in managing risk, Zurich – with the rest of the insurance sector – plays an important role in the financial system. We allocate investment assets to closely match our liabilities. Insurers who follow this policy are stable, long-term investors. Our sector is pre-funded by a stable flow of premiums from customers, which drastically reduces the possibility of liquidity crises. The liabilities that insurers face are caused by risks that are not correlated; no plausible string of events could create a ‘run’ on the insurance sector. Insurance has a stabilizing influence on financial markets, even during crises, and no pure insurer could be a source of systemic risk. A strong, well-regulated insurance sector is in everybody’s interest.
The changing nature of work The third megatrend is the long-term rebalancing of labor markets in mature economies. Opportunities for low-skilled workers are becoming scarcer, a trend which is reinforced by technological changes mentioned above. For highly skilled workers the picture is nearly the opposite. This trend points out that it is critical to attract and retain top talent, as corporations find themselves increasingly in competition with other global corporations – and not just within their sector. At Zurich we continuously upgrade our human resources infrastructure and processes, then build on those to create a differentiated talent management strategy. We also help companies attract and retain their talent with our employee benefit programs.
An unsustainable future? The final trend is in a sense one that contains the others and concerns us all. A constellation of forces seems to be moving us toward a potentially unsustainable future. This year the world’s population passed the seven billion mark. Increased population increases the risk of global pandemics. Competition for natural resources, especially energy and water, is intensifying. The logic of an aging population is straining government budgets in the rich world, while the frustrations of a young one have contributed to the unrest of the ‘Arab Spring.’ Income inequality in rich economies is forcing many to question whether the economic system really works for them, while increasing wealth in emerging economies can throw fuel onto longstanding conflicts. Thoughtful and constructive policy will be more essential than ever to avoid a doubtful future.
Sustainability This year the world’s population passed the seven billion mark. Increased population increases the risk of global pandemics. Competition for natural resources, especially energy and water, is intensifying.
That strategy keeps our focus on our mission – helping our customers understand and protect themselves from risk – and moves us toward our aspiration of becoming the best global insurer as measured by our shareholders, customers and employees.
Teaming up for success The acquisition of Malaysia Assurance Alliance Berhad (MAA) gives us a strong life insurance agency sales force and general insurance distribution network. This is a key milestone in the emerging market strategy, as well as a building-block for expansion in the Asia-Pacific region. Combined with Zurich’s global expertise and the foundation MAA has built in the Malaysian insurance market over the last 40 years, this transaction will enable us to build a strong Zurich talent pool and deliver
Looking to the future In terms of acquisitions our stance is selective and patient; and proactive when suitable opportunities arise. Any market expansions require case-by-case assessment of the value we can add. We are prepared to seize opportunities from the current market turmoil and from the insurance cycle, but only where doing so makes economic sense.
Performance measures are in place to provide a guiding support to all employees and their managers so that everyone can track their progress along a clear career path, and to indicate where they could use support. This approach to building a talent pipeline will help us to meet our goal of filling leadership roles with internal candidates wherever possible. We are working to make sure our approach to talent management and acquisition is globally consistent, with rewards that recognize business results and that attract, retain and motivate talent.
Building capabilities Core capabilities are being rolled out across the Group through The Zurich Way (TZW). In addition we are developing a unique Zurich Curriculum, a ‘way of life’ that begins from an employee’s first day, teaching core skills consistently throughout the organization.
The foundation of our commitment to corporate responsibility is Zurich Basics, which sets out our values and our code of conduct. The commitments made in Zurich Basics were reinforced when we became a signatory of the UN Global Compact in 2011. By signing the UN Global Compact, Zurich has committed to embrace, support and enact, within our sphere of influence, a set of core values in the areas of human rights, labor standards, the environment and anticorruption. These principles are wholly consistent with the values and code of conduct enshrined in Zurich Basics, which you can read on our website at www. zurich.com/basics.
To ensure that we live up to our corporate responsibility commitments, the Group Executive Committee (GEC) established a Corporate Responsibility (CR) Working Group at the start of 2011. The CR working group advises the GEC on strategy, priorities and objectives and tracks the Group’s CR performance. Our three business segments, Group Operations, Investment Management and other key functions are represented in the working group to ensure that corporate responsibility is embedded in the way we do business.
For more information on our Corporate Responsibility activities in 2011, please refer to the Annual Review.
Sticking to our principles Zurich is one of the few companies in our industry that has not reported a loss in any quarter since the global economic downturn began in 2008. This has only been possible because we have stuck with our fundamental principles in executing our strategy. We focus on our core business, applying financial discipline and operational excellence in everything we do. We will continue with this approach going forward.
Measuring our performance In addition to our Group strategic aspirations we have set targets for each of our three segments.
• Reduce expenses (excluding commissions) by 7% or at least USD 350m on a run-rate basis by 2013 (included in the USD 500m Group target)
Farmers • Top quartile growth performance of the Farmers Exchanges among the 12 largest U.S. personal lines companies
• Improve retention in the Farmers Exchanges by 3 points to close the gap relative to top-tier U.S. personal lines competitors
Strategic target of 16% Business Operating Profit (after tax) Return on Equity (BOPAT-ROE)
• Should the current environment persist, achieving a return of around 2 percentage points below our strategic target is more realistic.
• Zurich has clearly outperformed the benchmark Global Insurance Titans index in TSR terms since 2007 by approximately 35 percent in Swiss franc terms, or about 60 percent in U.S. dollar or euro terms.
• Continued underwriting discipline and portfolio reshaping actions drove consistent and strong improvement in the underlying loss ratio.
• Growth in Latin America came from the individual protection and Corporate Life & Pensions business, while in APME growth was driven by the corporate savings business and the International/Expats pillar.
• Growth in gross written premium in the Farmers Exchanges was driven by premium growth in nearly all active lines of business.
A challenging environment 2011 was one of the most expensive years on record for catastrophe-related insured losses, characterized by devastating earthquakes and exceptionally frequent weather-related events. Challenging economic and market conditions also prevailed over the year, with subdued economic activity in mature markets and significant volatility in financial markets globally. Nevertheless our Group performed well and delivered robust cash flows. We executed on our strategy and built a platform for future growth through operational transformation and transactions like our joint venture with Banco Santander in Latin America, the acquisition of Malaysian Allied Assurance Berhad and our renewed distribution agreement with Deutsche Bank in Germany and Italy.
to Aa3 from A1 and also upgraded its debt ratings. These stable results and strong balance sheet have enabled the Board of Directors to propose a dividend of CHF 17.00 per share, demonstrating the Group’s ongoing commitment to sustained shareholder value.
For our Group overall, business operating profit decreased by USD 608 million to USD 4.3 billion, or by 12 percent in U.S. dollar terms and 14 percent on a local currency basis. Our business operating profit after tax return on equity was 10.2 percent.
General Insurance Business operating profit generated by General Insurance decreased by USD 402 million to USD 2.3 billion, or by 15 percent in U.S. dollar terms and 19 percent on a local currency basis. Robust and sustained underwriting discipline produced strong improvements in the underlying loss ratio, partially compensating for losses from catastrophes and weather-related events. Major catastrophe losses in 2011 of USD 1.0 billion arose from floods and earthquakes in the Asia-Pacific region and a hurricane in the U.S. before the Group’s aggregate catastrophe reinsurance recovery. By comparison, major catastrophe losses in 2010 were USD 275 million due to the earthquake in Chile and floods in Australia.
These strong results point to our continued emphasis on understanding catastrophe risk. Our activities in this area range from helping customers assess and mitigate catastrophe risks before they strike, to rebuilding and implementing higher safety and sustainability standards in their aftermath. Our Catastrophe Management team established a dedicated function this year to help corporate customers estimate their exposure to catastrophe risk, assess potential losses, and identify where they have risk accumulations by regions and/or perils. Such reviews encourage catastrophe risk awareness and preparedness, spur improvements to risk management practices and insurance structure (including captive cover), and help flesh out business continuity plans and mitigate losses when catastrophes strike.
Global Life Global Life business operating profit decreased by USD 121 million to USD 1.4 billion, or by 8 percent in U.S. dollar terms and 14 percent on a local currency basis. Increased fee income from higher average assets under management plus higher margins from protection business were more than offset by higher costs related to investments in the global operations strategy, lower investment margin due to the continuing low interest rate environment, and accelerated deferred acquisition cost amortization resulting from lower European equity markets and interest rates compared with December 31, 2010.
Global Life gross written premiums, policy fees and insurance deposits remained flat at USD 27.7 billion in
Discipline Robust and sustained underwriting discipline produced strong improvements in the underlying loss ratio at General Insurance, partially compensating for losses from catastrophes and weather-related events.
U.S. dollar terms but decreased by 5 percent on a local currency basis. Volume increases were achieved in the UK as well as in strategic growth markets of Latin America and Asia-Pacific and Middle East, driven by sales of single premium policies in Corporate Life & Pensions and Private Banking Client Solutions. This was offset by lower sales of single premium policies in Ireland, Spain and Germany as difficult market conditions persisted in those countries and by the impact of the divestment of the jointly owned insurance operations of Caixa Sabadell in Spain in 2010.
Despite the effect of the run-off of the 21st Century agency auto book of business, gross written premiums in the Exchanges increased by USD 166 million to USD 18.3 billion. This was driven by premium growth in nearly all active lines of business, reflecting the acceleration of the underlying growth momentum during the latter part of 2011. Such steady progress reflects our success in repositioning Farmers for an environment that is increasingly driven by competition on the basis of price, service, ease of doing business, brand awareness, and web sales capabilities.
Repositioning Farmers is prepared to compete in an environment that is increasingly driven by competition on the basis of price, service, ease of doing business, brand awareness, and web sales capabilities.
Our strategic direction confirmed Our performance in 2011, combined with our strong capital position and cash flow generation, has reconfirmed our Group strategy. We remain focused on achieving a business operating profit after-tax return on equity of 16 percent, though in the current environment achieving a return of around two percentage points below our strategic target is more realistic. We also remain committed to an attractive and sustainable dividend.
Clear principles will continue to underpin the execution of that strategy: we focus on our core business of insurance, a commitment which we intend to reflect in our proposed name change to Zurich Insurance Group, Ltd. We continue to take an economic, risk-based decision-making approach. We manage our business on a solid AA basis, and we invest in people and processes, to ensure that we have the talent in-house to rise to any challenges. By these means we aim to advance steadily toward our aspiration of becoming the best global insurer as measured by our customers, our employees and our shareholders.
Leveraging our strengths These strong results point to our continued emphasis on understanding catastrophe risk. Our activities in this area range from helping customers assess and mitigate catastrophe risks before they strike, to rebuilding and implementing higher safety and sustainability standards in their aftermath.
The Corporate governance report describes the structures, rules and processes that we have put into place to provide for effective governance by Zurich’s Board of Directors and Management. It also reports on the work of the Board of Directors and its committees.
The principles of corporate governance and the standards described above have been incorporated into and are reflected in a number of corporate 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 reviews the Group’s governance measures against best practice standards and ensures compliance with corporate governance requirements.
This report basically follows the recommended structure outlined in the Directive on Information Relating to Corporate Governance of the SIX Swiss Exchange. The chapter on compensation, shareholdings and loans to Directors and the members of the GEC is dealt with in a separate report, the Remuneration Report (see pages 48 to 73), which complements this Corporate Governance Report and also includes the information as required by the Circular 2010/1 on remuneration schemes (minimum standards for remuneration schemes of financial institutions) issued by the Swiss Financial Market Supervisory Authority (FINMA) on October 21, 2009.
The Group pursues a customer-centric strategy and is managed on a matrix basis, reflecting both lines of business and geography, which is mirrored in the areas of responsibilities assigned to the members of the GEC. The GEC is headed by the Group CEO. The business segments General Insurance, Global Life, and Farmers as well as the Chief Financial Officer, the Chief Investment Officer, the Chief Risk Officer, the Chief Administrative Officer and the Group Head of Operations are represented on the GEC. The geographic regions of Europe , Americas and Asia-Pacific & Middle East including Africa are represented by Regional Chairmen who focus on stakeholder management and business development in their regions. For further information on the GEC see pages 29, and 37 to 41.
• Other Operating Businesses predominantly consist of the Group’s headquarter and holding and financing activities. In addition, certain alternative investment positions not allocated to business operating segments are included within Holding and Financing.
• Non-Core Businesses include insurance businesses that the Group does not consider core to its operations and that are therefore mostly managed to achieve a beneficial run-off. Non-Core Businesses also include the Group’s banking activities. Non-core businesses are mainly situated in the U.S., Bermuda, the United Kingdom and Ireland.
A list of the Group’s significant subsidiaries including additional information on significant subsidiaries that are listed can be found in this Annual Report on pages 275 to 277. For further information on the share listing of Zurich Financial Services Ltd, see the Shareholder Information on pages 338 to 342.
Significant shareholders According to the rules regarding the disclosure of significant shareholdings of Swiss companies listed in Switzerland, disclosure has to be made if certain thresholds starting at three percent are reached or subsequently fall below the threshold. Call options and other financial instruments are added to any position in shares, even if they allow for cash settlement only. Under this 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.
Capital structure Share capital As of December 31, 2011, the ordinary share capital of Zurich Financial Services Ltd amounted to CHF 14,738,582.20 divided into 147,385,822 fully paid registered shares with a nominal value of CHF 0.10 each. The Board of Directors will propose to the shareholders at the Annual General Meeting on March 29, 2012, a dividend of CHF 17 per share. As the dividend payment is planned from capital contribution reserve, it will be exempt from Swiss withholding tax.
Changes of share capital during 2011 During 2011, a total of 798,926 shares were issued to employees out of contingent capital. As a result, on December 31, 2011, share capital amounted to CHF 14,738,582.20 (147,385,822 shares) and both the authorized capital and the contingent share capital (as specified in Article 5bis(1) and in Article 5ter(1a) of the Articles of Incorporation, respectively) amounted to CHF 1,000,000 (10,000,000 shares) and the other contingent share capital (as specified in Article 5ter(2a) of the Articles of Incorporation) amounted to CHF 390,943.70 (3,909,437 shares).
For information on changes of share capital during 2009, see the Annual Report 2010 of Zurich Financial Services Ltd, pages 26 to 27, pages 142 to 143, and pages 207 to 208.
Convertible bonds and options Zurich Financial Services Ltd had no public convertibles or options outstanding as of December 31, 2011. For information on employee share option plans, see the Consolidated financial statements, note 24 on pages 236 to 238.
1 Zurich Financial Services Ltd has established an American Depositary Share, or ADS, level 1 program in the United States. Under the program, The Bank of New York Mellon issues the ADSs. Each ADS represents the right to receive one-tenth of one Zurich Financial Services Ltd’s share. Each ADS also represents securities, cash or other property deposited with The Bank of New York Mellon but not distributed to ADS holders. Zurich’s ADSs are traded over the counter (OTC) and are evidenced by American Depositary Receipts, or ADRs. Since 1st July 2010, Zurich’s ADRs are traded on “OTCQX”, an electronic platform operated by OTC Markets Group Inc. (formerly “Pink OTC Markets Inc.”) under the symbol ZFSVY. ADS holders are not treated as shareholders of Zurich Financial Services Ltd and are not able to directly enforce or exercise shareholder rights. Only The Bank of New York Mellon as Depositary of the level 1 program may exercise voting rights with respect to instructions received from beneficial owners of ADRs.
Relations between our Board and our Management are structured to support both bodies in fulfilling their commitments to deliver. This structure establishes checks and balances and is designed to provide for institutional independence of the Board of Directors from the Chief Executive Officer (CEO) and the Group Executive Committee (GEC).
Chief Executive Officer North America Commercial, Regional Chairman of the Americas 3 Mario Greco Chief Executive Officer General Insurance 4 Kevin Hogan Chief Executive Officer Global Life 5 Axel P. Lehmann 2
Chief Financial Officer 1 Assumed role of Regional Chairman of the Americas on July 1, 2011.
3 Assumed role of Chief Financial Officer on October 1, 2011.
Victor Chu British 1957 Director Member of the Governance and Nominations Committee
All of the current Directors have served on the Board throughout 2011. All Directors of Zurich Financial Services Ltd are also members of the board of directors of Zurich Insurance Company Ltd. Mr. Gentz also serves as chairman of that board. In addition, Mr. de Swaan is a member of the board of directors of Zurich Insurance plc. Mr. Nicolaisen and Mrs. Bies are members of the board of directors of Zurich Holding Company of America, Inc. (ZHCA). With the exception of Mrs. Bies, Mr. Nicolaisen and Mr. de Swaan, the Directors have no further board memberships within the Group.
Members of the Board of Directors, as of December 31, 2011
Mr. Chu’s other civic associations include service on the advisory bodies of the International Crisis Group, Chatham House, the Beijing Music Festival Foundation and the Atlantic Council of the USA.
Thomas Konrad Escher, born 1949, graduated in electrical engineering and in business administration from the Swiss Federal Institute of Technology (ETH) and joined IBM in 1974. In subsequent years, his career led him through various managerial line functions with responsibilities for markets and client relationships overseas, in different European countries and in Switzerland. In 1996, Mr. Escher joined Swiss Bank Corporation and was – as a member of the executive board – CEO for the major market region in Switzerland and for the information technology organization. Following the merger of Swiss Bank Corporation and Union Bank of Switzerland to form UBS AG in 1998, he headed the IT business area of the wealth management and business banking division through mid-2005 as a member of the group managing board. As of July 1, 2005, Mr. Escher assumed the function of vice chairman in the Business Group Global Wealth Management & Swiss Bank of UBS AG. In addition, Mr. Escher is a member of the board of the Greater Zurich Area Foundation. This organization engages in the active marketing of the City of Zurich and its relevant environment as domicile to foreign business.
Don Nicolaisen, born 1944, 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 an 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 U.S. and global boards from 1994 to 2001. From September 2003 to November 2005, he was chief accountant of the U.S. 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 of the University of Southern California Leventhal School of Accounting.
Tom de Swaan, born 1946, 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. 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. Since May 3, 2007, he has also been the vice chairman of the supervisory board of Royal Ahold, a global retail chain, and since May 10, 2008, he has been chairman of the supervisory board of Van Lanschot NV, the holding company of F. van Lanschot Bankiers, an independent Dutch bank. Since October 1, 2010, he has been a member of the public interest committee of KPMG ELLP. 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 other positions, he is chairman of the board of the Netherlands Cancer Institute, a member of the board of the International Franz Liszt Piano Competition, and chairman of the advisory board of the Rotterdam School of Management.
At the Annual General Meeting on March 31, 2011, Mr. Gentz was re-elected to the Board of Directors for a term of one year. Messrs. de Swann and Kindle were re-elected to the Board for a term of three years. At the Annual General Meeting to be held on March 29, 2012, the terms of office of Messrs. Gentz, Ackermann, Escher, Nicolaisen and Sankey will expire. Messrs. Ackermann, Escher and Nicolaisen have been proposed for re-election by the Board for a term of 3 years each. Mr. Gentz and Mr. Sankey will not stand for re-election for the Board of Directors.
Alison Carnwath and Rafael del Pino have been nominated for election at the general meeting of shareholders on March 29, 2012, as additional members to the Board of Directors of Zurich Financial Services Ltd for a term of 2 years.
Alison Carnwath, born 1953, graduated in Economics and German from the University of Reading in 1975. She began her career with Peat Marwick Mitchell, now KPMG, where from 1975 to 1980 she trained, qualified and practiced as a chartered accountant. From 1980 to 1982 she worked as a corporate financier for Lloyds Bank International. From 1982 to 1993 she was Assistant Director, then Director at J. Henry Schroder Wagg & Co in London and New York. From 1993 to 1997 Ms. Carnwath was a Senior Partner at the financial advisory firm Phoenix Partnership. The firm was taken over by Donaldson Lufkin Jenrette (DLJ) in late 1997; Ms. Carnwath continued working for DLJ until 2000. Ms. Carnwath has held several board offices. From 2000 to 2005 she was the Chairman of the board of Vitec Group plc, from 2001 to 2006 a director of Welsh Water, from 2004 to 2007 of Friends Provident plc,
The CEO attends the Board meetings ex officio. Members of the GEC are regularly invited by the Board to attend Board meetings. Other executives attend these meetings from time to time upon invitation by the Board. Most Board meetings include private sessions of the Board without the participation of Management.
Corporate governance report as the appointment of the Chairman, the Vice Chairman, the CEO and other members of the GEC. The Committee reviews the system for management development and supervises progress made in respect of succession planning. Final decisions for nominations and appointments are made by the Board, subject to shareholder approval, where so required. During 2011, the Governance and Nominations Committee met four times 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. Average attendance at meetings of the Governance and Nominations Committee was 94 percent.
Corporate governance report continued the Group risk management function, the Group’s general policies and procedures, and ensures that effective systems of risk management are established and maintained. The Risk Committee receives periodic reports from Group Risk management and assesses whether significant issues of a risk management and control nature are being appropriately addressed by Management in a timely manner. For further information on risk governance see the Risk Review on pages 103 to 149. In 2011, the Risk Committee met seven times (once jointly with the Remuneration Committee to review the remuneration architecture particularly in the light of the FINMA Circular on Remuneration Scheme). Average attendance at meetings of the Risk Committee was 93 percent.
Information and control instruments vis-à-vis the Group Executive Committee 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 also meets from time to time with all other GEC members and executives outside regular Board meetings. The other members of the Board do so as well, especially with the Chief Financial Officer and the Chief Risk Officer.
Furthermore, the Group has adopted and implemented a coordinated, formalized and consistent approach to risk management and control. Information concerning the Group’s risk management processes is included in the Risk Review starting on page 103. In addition, the Risk Management & Internal Control Statement describes on pages 46 and 47 the Group’s approach with regard to risk management and internal control according to the Turnbull Guidance.
Group Management Group Executive Committee To the extent not reserved by 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 Group-wide relevance, including consolidated performance, capital allocation and mergers and acquisitions.
The GEC is headed by the Group CEO. As of December 31, 2011, members of the GEC included the Chief Financial Officer, the Chief Investment Officer, the Chief Risk Officer, the Chief Administrative Officer and the Group Head of Operations; in order to reflect both, lines of business and geography, the business segments General Insurance, Global Life, and Farmers, as well as the CEO of North America Commercial and the Regional Chairmen of Europe, Americas, and Asia-Pacific & Middle East were represented on the GEC.
More technical committees include the Asset/Liability Management Investment Committee, chaired by the Chief Investment Officer, the Group Reinsurance Committee, chaired by the Global Head of Group Reinsurance, the Global Underwriting Committee, chaired by the Global Chief Underwriting Officer and the Group Pension Committee, chaired by the CEO Global Life.
In addition, to enhance its understanding and assessment of the challenges and risks Zurich may face, the Group continues to seek external expertise and perspective. As of the end of 2011, the Group had four panels of leading academics, business and industry experts to provide feedback and insight. They are not corporate bodies of the Group and have no decision-making powers. These panels provide expertise and advice to senior management or certain functions of the Group. In particular, the International Advisory Council is mandated to provide an external perspective and expertise to the CEO and to members of the GEC on the Group’s growth and public policy strategies. The Investment Management Advisory Council offers feedback on Zurich’s investment results and strategy and on achieving superior risk-adjusted returns relative to the liabilities for the Group’s invested assets. The Natural Catastrophe Advisory Council provides insight into the patterns of occurrence, predictability and destructiveness of catastrophes, and feedback about Zurich’s approach to such catastrophes in order to help improve the effectiveness of its underwriting and reinsurance purchasing. The Group’s Climate Change Advisory Council provides insight and advice on issues associated with climate change.
Mike Foley, born 1962, 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, where he became a principal and later led 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 GEC. In July 2011, he assumed the additional role of Regional Chairman of the Americas. Mr Foley is Chairman of the Board of Zurich Holding Company of America, Inc. (ZHCA).
Kevin Hogan, born 1962, graduated from Dartmouth College in Hanover, New Hampshire. He started his professional career in 1984 at AIG with American International Underwriters (AIU) in New York and subsequently held underwriting management positions in Chicago, Tokyo, Hong Kong and Singapore. In 1998, he was appointed president of AIG’s Accident & Health Division in New York and was elected an AIG vice president in 2001. In 2002, he also became chief operating officer at AIU. Mr. Hogan moved to Beijing as senior executive of AIG’s partnership with the People’s Insurance Company of China in 2003. In 2005 he became AIG’s senior life division executive for China and Taiwan, where he was responsible for AIA China and Nan-Shan. In 2008, he returned to New York as AIG’s Chief Distribution Officer, Foreign Life and Retirement Services. He joined Zurich in December 2008 as CEO Global Life Americas. In this role he led Zurich’s Life insurance business in North and South America with accountability for Farmers Life, Zurich American Life Insurance Company (formerly KILICO) and Zurich’s Latin America Life Operations. He became CEO Global Life and member of the GEC in July 2010.
Christian Orator, born 1963, holds a PhD and master’s degree in law from the University of Vienna as well as a master’s degree in comparative law from Dickinson School of Law, Pennsylvania. He joined Zurich as sales agent in Austria in 1989. One year later he became product manager for Zurich Kosmos AG. From 1993 until 2005 he held various executive and operational positions in Austria, the U.S. and Germany in Underwriting, Distribution and Market Management within the Zurich Group. From January 2005 until July 2007 he was Head of Special Projects in the office of the Chief Administrative Officer based in Zurich. From August 2007 until August 2010 he was Global Chief Claims Officer in General Insurance. With effect from September 2010 he assumed his current position as Chief Administrative Officer and member of the GEC.
Kristof Terryn, born 1967, holds a law degree and a degree in economics from the University of Leuven, Belgium, as well as an MBA from the University of Michigan. He started his professional career in 1993 in the banking industry at Dexia in Luxembourg where he worked in the Capital Markets department and in Strategic Planning. In 1997, he joined McKinsey & Company Inc. where he held various positions within the financial services practice in Brussels and the Chicago office. He joined Zurich in 2004 as Head of Planning and Performance Management. In 2007, he became Chief Operating Officer for the Global Corporate business division and in January 2009 took over the position of Chief Operating Officer for General Insurance. He assumed his current role as Group Head of Operations and member of the GEC as of July 2010.
Group Management Board The Group Management Board (GMB) included the heads of certain business units and Group functions. As the Group continued working on further clarifying accountability, focusing responsibility, reducing complexity and further simplifying its top-level management structure, the GMB was dissolved in 2011 and the members became part of a broader leadership team.
Statutory quora 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 a change of the company purpose and domicile, a 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 of the Board.
Registrations in the share register With a view to ensure an orderly process, shortly before the shareholders’ meeting the Board determines the date at which a shareholder needs to be registered in the share register in order to exercise his or her participation rights by attending the shareholders’ meeting. Such date is published, together with the invitation to the shareholders’ meeting, in the Swiss Official Gazette of Commerce and in several newspapers.
Information Policy As of December 31, 2011 Zurich Financial Services Ltd has approximately 125,000 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. The Letter to Shareholders that provides a quarterly overview of the Group’s activities during the year and outlines its financial performance, the more comprehensive Annual Review, the Annual Report and half-year reports are available on Zurich’s website www.zurich.com ( and are also available in printed form. Shareholders may opt to receive printed versions of those documents. Further documents regarding the results reporting (on a quarterly basis) are also available for all shareholders on Zurich’s website.
Zurich Financial Services Ltd will hold its Annual General Meeting on March 29, 2012. The meeting will be conducted in the Hallenstadion in Zurich-Oerlikon. An invitation setting out the agenda for this meeting and an explanation of the proposed resolutions will be issued to shareholders by Zurich Financial Services Ltd at least 20 days before the meeting.
Changes of control and defense measures Duty to make an offer The Articles of Incorporation of Zurich Financial Services Ltd do not provide for an opting out or opting up in the meaning of Articles 22 and 32 of the Federal Act on Stock Exchanges and Securities Trading. Therefore, mandatory offers have to be submitted when a shareholder or a group of shareholders acting in concert exceed 331/3 percent of the issued and outstanding share capital.
Clauses on changes of control Employment agreements have been entered into with the members of the GEC, setting out the terms and conditions on which they are employed. The longest notice period for members of the GEC is 12 months, and no other benefits are provided in the case of a change of control.
External Auditors Duration of the mandate and term of office of the auditor-in-charge PricewaterhouseCoopers AG, Birchstrasse 160, in 8050 Zurich (PwC), is Zurich Financial Services Ltd’s external auditor.
OBT AG has been elected as a special auditor to perform special audits for increases in share capital required under Articles 652f, 653f and 653i of the Swiss Code of Obligations. At the Annual General Meeting of shareholders on April 3, 2008, OBT was re-elected by the shareholders for a three-year term. OBT AG originally assumed this mandate in October 2000. Following the amendment to the Swiss Code of Obligations (CO) the election of a special audit company in connection with capital increases as mentioned above is no longer required. The Board of Directors therefore proposed at the Annual General Meeting of shareholders on March 31, 2011 to delete the respective provision of the Articles of Incorporation (article 25 para 2) which the shareholders approved. A re-election of OBT AG was therefore not necessary and PwC assumed this role as of the business year 2011.
Audit fees Total auditing fees (including expenses and value added taxes) charged by PwC in the year 2011 amounted to USD 38.0 million (USD 33.6 million in 2010).
Non-audit fees Total fees (including expenses and value added taxes) in the year 2011 for additional services (e.g., tax and legal services, transaction consulting services or special audits required by local law or regulatory bodies) performed by PwC and parties associated with them for Zurich Financial Services Ltd or a Group company amounted to USD 4.6 million (USD 5.8 million in 2010). The single components of the non-audit fees are set forth in the table below.
Supervision and control over the external audit process The Audit Committee regularly meets with the external auditors, at least four times a year. During 2011, the Audit Committee met with the external auditors nine times. The external auditors regularly have private sessions with the Audit Committee without Management present. Based on written reports, the Audit Committee discusses with the external auditors the quality of the Group’s financial and accounting function and any recommendations that the external auditors may have. Topics considered during such discussions include strengthening of internal financial controls, applicable accounting principles and management reporting systems. In connection with the audit, the Audit Committee obtains from the external auditors a timely report relating to the audited financial statements of Zurich Financial Services Ltd and the Group.
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 of the external auditors during their audit examination. It elicits the comments of management regarding the auditors’ performance (based on criteria such as their understanding of Zurich’s business, technical knowledge and expertise, etc.) and the quality of the working relationship (responsiveness of the external auditors to the needs of Zurich Financial Services Ltd and the Group, and the clarity of communication). 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 Audit Committee has approved a written policy on the use of external auditors for non-audit services, which sets forth the rules for providing such services and related matters (including a list of prohibited services). Allowable non-audit services may include tax advice and services, comfort and consent letters, certifications and attestations, due diligence and audit support in proposed transactions, to the extent that such work complies with applicable legal and regulatory requirements and does not compromise their independence or objectivity as external auditors. In order to avoid conflicts of interest, all allowable non-audit services need pre-approval from the Audit Committee (Chairman), the Chief Financial Officer or the local CFO, depending on the level of expected fee. They further require, among other things, an engagement letter specifying the services to be provided and making reference to the external auditors’ obligation to comply with this policy.
Group Audit The internal audit function of the Group (“Group Audit”) is tasked with providing independent and objective assurance to the Board, the Audit Committee, the CEO and Management, as well as to the subsidiaries’ Boards and Audit Committees. It does this by developing an annual audit plan, using a risk-based methodology, which is updated on a rolling basis 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 compliance with the Group’s business regulations. Key issues raised by Group Audit are communicated to the responsible management function, the CEO and the Audit Committee using a suite of reporting tools.
The Board Audit Committee assesses the independence of Group Audit, and reviews its activities, plans, organization and quality as well as its mutual cooperation with the external auditors. In 2011, the Group commissioned an independent party to perform a review of Group Audit’s effectiveness. The results confirmed Group Audit’s practices
Corporate governance report conform with all Institute of Internal Audit (IIA) Standards and FINMA requirements, and Group Audit was assessed as a very mature internal audit function. Notwithstanding this positive result, Group Audit is continuing to constantly challenge its operation to further increase its effectiveness, efficiency and value contribution.
The compliance function provides policies and guidance, business advice and training, and further coordinates with Group Audit, Group Risk Management and the business quality assurance groups to ensure proper internal oversight of business and governance functions within the mandate of the Group compliance function. This includes ongoing reviews of laws, regulations and other requirements at all levels of the organization. The compliance team supports Zurich’s management in maintaining and promoting a culture of compliance and ethics consistent with Zurich Basics, the Group’s code of conduct. This robust compliance framework relies on an ongoing global compliance risk assessment to support a solid monitoring regime. The results of this assessment underpin the compliance function’s strategic planning which is conducted in consultation with business partners. Subsequently, the compliance plan is ratified by Management.
The Group’s compliance function, with compliance professionals around the world, is overseen by the Group Compliance Officer who reports to the Group General Counsel and regularly to the Board Audit Committee. He also meets regularly with the Chairman of the Board.
Risk Management and Internal Control Statement The Board is responsible for overseeing the Group’s risk management and internal control systems, which Management is responsible for implementing. The systems are designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable, and not absolute, assurance against material financial misstatement or loss. There are two committees at the Board level that have primary risk management and internal control oversight responsibilities
• the Risk Committee – with oversight over risk management and
The Group has adopted a coordinated and formalized approach to risk management and internal control. The Group‘s core risk management and internal control systems and policies are established at the Group level with Group- wide implementation. This approach focuses on major risks that might impact the achievement of the Group‘s business objectives and on the activities to control and monitor these risks, which contributes to control effectiveness. A risk-aware and control-conscious environment is fostered in the Group and reinforced by communication and training.
Effectively managing risks is core to managing the business. Management is responsible for the identification, evaluation and management of significant risks. The Group manages risks throughout the organization, under direction of the senior management. Zurich has Group-wide risk management policies, as well as common methods and tools for assessing and modeling risks. The Group risk assessment processes are aligned with the Group planning process and are reviewed by the GEC and the Risk Committee of the Board. Significant risks, the results of the assessment and modeling processes and the relevant actions arising are reported regularly to the Risk Committee of the Board. Periodic group and local risk assessments are conducted using among others Zurich’s Total Risk Profiling™ tool and business units are required, at least quarterly, to review key risks and implement action plans to mitigate them. Additional details are provided in the Risk Review in the annual report.
Processes and controls in the organization are subject to risk-based reviews by Management, Group Audit, Group Compliance and Group Risk Management. Management reviews include the effective implementation of policies and procedures including claims, investment, underwriting, actuarial practice, treasury, accounting and reporting, as well as effectiveness of control for significant operations and information technology systems. The Board, the Audit and Risk Committees receive regular and, as needed, special reports from the Chief Risk Officer, Group General Counsel, Head of Group Compliance, Chief Financial Officer and Group Controller, 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 Risk Committee has reviewed the effectiveness of the Group’s risk management system, including the Group’s risk tolerance and the enterprise-wide risk governance framework, and the Audit Committee has reviewed the effectiveness of the system of internal control operated by the Group related to the calendar year 2011 up to the date of the annual report and both of them have reported to the Board accordingly. The Board is satisfied that the reviews were conducted in accordance with the UK Turnbull Guidance (as revised in October 2005). The assessment included the consideration of the effectiveness of the Group’s ongoing process for identifying, evaluating, controlling and managing the risks of the business, including the scope and frequency of reports on both risk management and internal control that were received and reviewed during the year by the Risk and Audit Committees and the Board, important risk and control matters discussed and associated actions taken by Management. Issues identified have been communicated to the Board and either have been or are being addressed by the Group.
Remuneration report 2011 Remuneration summary This year a two page summary has been introduced into the report in order to provide readers with an overview of the most important aspects of Zurich’s remuneration in 2011.
Remuneration governance and philosophy The Board of Directors is responsible for the design, implementation and monitoring of the Group’s remuneration architecture, and it has established a Remuneration Committee. Amongst other duties, the Remuneration Committee is responsible for proposing to the Board on an annual basis the remuneration payable to the Directors, to the Chief Executive Officer (CEO) and to the other members of the Group Executive Committee (GEC). It also assesses performance as it relates to incentive compensation and proposes the overall expenditure on variable pay.
Other remuneration Pension cost 1 At target, as a percentage of total remuneration 2 Including the Chief Executive Officer 2011 Remuneration For 2011 remuneration decisions, an appropriate balance was made between all relevant factors including business performance, market considerations, regulatory requirements, the long-term overall focus as well as risk considerations. The fees for members of the Board were reviewed and updated for 2011, as outlined in last year’s report, with a key change being that fees are designated in Swiss francs instead of US dollars. Remuneration changes for members of the GEC, where applicable, were focused on increasing the long-term part of variable compensation, to achieve having at least 60 percent of variable remuneration deferred and subject to long-term performance provisions. Balancing the overall structure of remuneration with company performance, market, risk and regulatory considerations was also key for broader employee remuneration decisions.
For 2011, the remuneration highlights were as follows: Base salary / Fees
1 Consists of USD 50,200 gross written premiums and policy fees as well as USD 2,767 Farmers management fees and other related revenues.
To further align their interests with those of shareholders, the Board of Directors and the GEC build their ownership position in the Company. As at December 31, 2011, Directors held 46,886 shares and GEC members held 95,426 shares and 386,740 options.
• The Remuneration Report 2011 has been further improved to include this summary, building on and continuing the Group’s commitment to effective corporate governance and transparent disclosure.
• There was no change in the membership of the Remuneration Committee in 2011.
Remuneration report 2011 Remuneration report Report structure This Remuneration report provides all the information that is outlined in chapter five of the Directive on Information Relating to Corporate Governance of the SIX Swiss Exchange (SIX Directive) and the Swiss Code of Best Practice, as amended with effect from July 1, 2009 and October 15, 2007, respectively. Included is also all the information required by articles 663bbis and 663c paragraph 3 of the Swiss Code of Obligations and the Circular 2010/1 on minimum standards for remuneration schemes of financial institutions, issued on October 21, 2009 and further guidance issued on January 19, 2011 by the Swiss Financial Market Supervisory Authority FINMA (FINMA Circular on Remuneration Schemes).
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 Ltd are all independent non-executives, the information has been presented with the complete remuneration details of the Board of Directors contained in one section, that of the GEC shown in the next section, and this is followed by a section including the information requested by the FINMA Circular on Remuneration Schemes for all employees.
• Further steps were taken to structure the remuneration of the control functions to avoid conflicts of interest, by ensuring that the incentives for all employees in control functions are determined by reference to Group profitability rather than by the profitability of the business controlled by such functions.
As part of a remuneration review in 2010, a number of management positions that are considered key risk takers for the Group were identified (key risk takers). These positions cover the three business segments of General Insurance, Global Life and Farmers, Group Operations and all other principle functions. In 2011, the process and criteria of identifying key risk takers has been further clarified and documented, in order to facilitate the annual reassessment. The criteria are based on factors that materially affect risk-taking within the Group, such as overall governance, capital consumption for each risk type as determined by the internal model, strategy and reputation. The criteria are then applied to those who take as well as to those who control the specific risks at the level of the Group where the risks are most material.
The remuneration arrangements for key risk takers include both short- and long-term incentive plans with a greater emphasis towards long-term and therefore deferred remuneration.
Approval process for remuneration In accordance with the Remuneration Rules, the Remuneration Committee is responsible for proposing to the Board on an annual basis the remuneration payable to the Directors, to the CEO and to the other members of the GEC. For the other members of the GEC, these recommendations are based on proposals made by the CEO. The remuneration proposals have to be approved by the Board of Directors.
In the meetings of the Remuneration Committee and the Board of Directors where decisions are made on the remuneration of the Chairman, the Chairman is not present. In making decisions on the remuneration of the CEO, the CEO is not present. Where decisions are made on the remuneration of other members of the GEC, those members are also not present at the meetings. The Remuneration Committee does not include members with interlinked company mandates. See page 30 in the Corporate Governance report for further details of its responsibilities.
In addition to the above, and in line with the requirements of the FINMA Circular on Remuneration Schemes, the Board of Directors also approves the aggregate amount of variable remuneration for the performance year for the entire Group (“Total Variable Remuneration Pool”) taking into account the long-term economic performance of the Group. For further details on the calculation of the Total Variable Remuneration Pool see pages 70 and 71.
The results of the benchmarking studies are taken into account in setting fee levels for Directors and the remuneration structures and levels for the CEO and the other members of the GEC. In analyzing the results of the benchmarking studies market practices in the various countries and the internal relativities between positions are taken into account. Overall positioning of the remuneration packages is towards the median levels.
In reviewing remuneration structures and practices on a regular basis, the Remuneration Committee and the Board of Directors receive independent advice from the executive compensation practice at Meridian Compensation Partners LLC (Meridian) as well as at Aon Hewitt, part of Aon Corporation (Aon Hewitt). These advisors were appointed by the Remuneration Committee and are accountable to it. Both, Meridian and Aon Hewitt provide advice to the Board of Directors, whereby the lead consultant is employed by Meridian. Meridian does not provide any other services to the Group. Although certain practices within Aon Hewitt – a large, international brokerage and human resources firm – undertake work for the Group from time to time, the Remuneration Committee does not consider the independence and integrity of the advice it receives from Aon Hewitt to be compromised by these separate assignments.
Involvement of shareholders As last year, Zurich will provide shareholders with an opportunity to express their views on the remuneration architecture through an advisory vote at the Annual General Meeting to be held on March 29, 2012. As the ultimate decision on remuneration is within the powers of the Board of Directors, such a vote is non-binding in nature.
• The Group promotes a high performance culture by differentiating total remuneration based on the relative performance of businesses and individuals.
• The Group’s short- and long-term incentive plans used for variable remuneration are linked to appropriate absolute and relative performance measures and the overall expenditure on variable pay is considered in connection with the Group’s long-term economic performance.
Half of vested share awards are sales restricted for three years
Variable pay Incentive plans are designed to provide a range of award opportunities linked to levels of performance. Business and individual performance may result in superior remuneration levels above target for superior performance, and reduced levels below target for performance below expectations. Variable pay opportunities are provided, in markets where this is the norm, to motivate employees to achieve key short- and long-term business goals to increase shareholder value. Variable pay opportunities may include both short-term and long-term incentives: Elements of total remuneration
Long-term (3 year) incentives support the achievement of the Group’s longer term financial goals and are utilized for a defined group of executives and senior managers, whose specific roles focus on the performance drivers of long-term shareholder value. This group contains the individuals with the highest levels of total remuneration, as well as those individuals considered to be key risk takers. In alignment with the Group’s risk profile and business strategy, long-term incentives are provided with a deferral element taking into account material risks and the time horizon thereof. Such deferred remuneration is structured in a way to promote the risk awareness of the participants and to encourage the participants to operate the business in a sustainable manner.
• moreover, for those share awards that vest, one half of these share awards are sales restricted for a period of three years from the date of vesting.
The following table shows how the tranches under the various annual grants vest throughout consecutive calendar years. As a result there are always three tranches of different years’ grants that are assessed for vesting in each calendar year.
• The right to modify awards to reflect individual circumstances is reserved for the CEO except for modifications regarding members of the GEC where such right is reserved for the Remuneration Committee and the Board of Directors. An adjustment of +/-25 percent to the regular vesting level may be applied before distribution. However, if performance under exceptional or unusual circumstances so warrants it, exceptions to the +/- 25 percent adjustment may be made. In this respect the company reserves the right to adjust and even set the vesting percentage to zero for an individual to reflect specific circumstances (e.g. in connection with a breach of internal or external rules) during the period prior to vesting, but any such adjustment is reserved exclusively for the Remuneration Committee and the Board of Directors.
Directors Directors’ fees All Directors receive a fee, which is paid partly in cash and allocated partly in three-year sales restricted Zurich Financial Services Ltd shares, for their memberships of the Boards of Zurich Financial Services Ltd and Zurich Insurance Company Ltd. The shares are provided as part of the overall fee which is not subject to the achievement of any defined performance targets.
As outlined in the 2010 remuneration report, the fee structure for the Directors, which had been in place since 2007/2008, was reviewed against relevant market levels including the payments being made for the insurance companies in the Dow Jones Titan Index and the larger companies in the Swiss SMI Index. These comparisons indicated that the (previous) fee structure had fallen behind prevailing market levels, with one important reason being the fact of fees being established in US dollars which had depreciated significantly against the Swiss Franc in recent years. So, as was set out in the 2010 Annual Report, published in 2011, the Board agreed to make amendments to the fee structure, including that all fees are determined in Swiss francs and the structure updated for 2011 as outlined below. There are no changes planned for 2012.
Except for the Chairman and Vice Chairman, Directors are remunerated with an annual basic fee of CHF 240,000 in 2011 (USD 205,000 in 2010). One-third of this annual basic fee, i.e. CHF 80,000 in 2011 (USD 68,500 in 2010), is allocated to sales restricted Zurich Financial Services Ltd shares. The fee is pro-rated for members leaving or joining during the year. Committee members receive an additional cash fee of CHF 50,000 in 2011 (USD 40,000 in 2010) for all committees on which they serve, irrespective of the number of committees. In addition, the chair of each committee receives an annual fee of CHF 30,000 for 2011 (USD 20,000 in 2010) and the chair of the Audit Committee receives an additional CHF 10,000 in 2011 (USD 10,000 in 2010). For 2011, we have discontinued the previous practice where Directors who reside in the United States received an additional fee of USD 10,000 per annum. The committees on which the Directors serve are set out in the Corporate Governance Report on page 30.
The following tables set out the fees paid to the Directors for 2011 and 2010 (including a comparison of amounts in Swiss francs and in US dollars for 2011, to facilitate the year-on-year comparison with 2010).
4 Directors who reside in the US received an additional fee of USD 10,000 per annum in 2010, this is discontinued in 2011. 5 The cash fees were previously defined in US dollars, but paid in the actual currencies where the Board members reside, based on the relevant exchange rate at the dates of the payment. From 2011 onwards, the fees are designated in Swiss francs.
8 Neither the Chairman nor the Vice Chairman receive any additional fees for their Committee work. 9 In addition to the fees received as Directors of Zurich Financial Services Ltd and Zurich Insurance Company Ltd, Mrs Bies, Mr Nicolaisen and Mr de Swaan earned fees for their board memberships of the following Zurich Financial Services Group companies: – In 2011, Mrs Bies and Mr Nicolaisen earned CHF 50,000 for their membership of the board of Zurich Holding Company of America (ZHCA). In 2010, both received an annual fee of USD 40,000 as well as a US Residence Fee of USD 10,000. – In 2011, Mr de Swaan earned CHF 50,000 p.a. for the first 6 months and CHF 75,000 p.a. for the second 6 months (each pro-rated) for his membership of the board of in CHFDirectors’ fees 2011 in USDDirectors’ fees 2010
Shareholdings of Directors The shareholdings of the Directors, who held office at the end of the year, in shares of Zurich Financial Services Ltd are shown in the following table. 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.
Share options held by Directors The members of the Boards of Directors of Zurich Financial Services Ltd and Zurich Insurance Company Ltd do not participate in any share option plan for executive management. Hence, no share options have been allotted in the year under review or in earlier years. None of the Directors, nor any related parties to them, held any share options or conversion rights over Zurich Financial Services Ltd shares as of December 31, 2011 or 2010.
Additional honoraria and remuneration for Directors None of the Directors received any remuneration or benefits-in-kind from the Group or from any of the Group’s companies other than that set out above.
Personal loans for Directors Unrelated to his Board membership and on terms and conditions available to other customers, Mr Watter had a collateralized policy loan in the amount of CHF 2.5 million outstanding as of December 31, 2011 and 2010. The annual interest rate charged on the loan is 4 percent. Other than the loan for Mr Watter, none of the Directors had outstanding loans, advances or credits as of December 31, 2011 or 2010.
Related parties to the Directors or to former members of the Board No benefits (or waiver of claims) have been provided to related parties of the Directors or related parties of former members of the Boards during the years 2011 and 2010, respectively. Neither had any related party of the Directors or of former members of the Boards outstanding loans, advances or credits as of December 31, 2011 and 2010.
Group Executive Committee Remuneration of the Group Executive Committee The total remuneration of the members of the GEC for 2011 comprised the value of cash remuneration (including short-term cash incentive), pensions, other remuneration and the target equity grants made under the Group’s Long-Term Incentive Plan in 2011.
The distribution of the total remuneration in 2011 between the individual remuneration elements is set out in the following chart. This is on the basis of the target values for the performance related remuneration.
The total value for 2011 comprises the following elements (the comparative figures for 2010 are shown in the table on total remuneration for all GEC members):
Base salaries and annual cash incentives paid for 2011 The total amount of base salaries and annual cash incentive awards earned under the Short-Term Incentive Plan for 2011 was USD 26.7 million. This comprised USD 12.7 million in base salaries and USD 14.0 million in annual cash incentive awards, which reflect the amounts to be paid in 2012 for 2011 performance. As set out on page 57 the annual cash incentive awards are determined individually and are performance based.
Restricted share grants Restricted share grants supplement the regular long-term incentive grants and are used only in extraordinary circumstances mainly for new hires to compensate for the loss of their equity rights with their previous employer. These restricted share grants typically vest over three to five years following the date of grant and are forfeited if the holder of such share grants voluntarily leaves the company before the vesting date and the employment relationship terminates.
No restricted share grants were made to members of the GEC during 2011 and 2010.
Summary of total remuneration for the Group Executive Committee 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 2011 was USD 50.3 million, for 2010 it was USD 45.8 million, divided as follows: Base salaries 12.7 11.4 Cash incentive awards earned for the year 14.0 13.6 Service Costs for pension benefits 4 3.4 3.0 Value of other remuneration 5 3.4 3.6 Value of target performance share and restricted share grants 6 16.8 7.1 Value of target performance option grants 6, 7 – 7.1 Total in USD 8 50.3 45.8 Total in CHF 45.4 47.2 1 The remuneration shown in the table is gross, based on the accrual principle and does not include any business related expenses incurred in the performance of the members’ services.
2 On the basis of 12 GEC members, of whom 9 served for the full year 2011. 3 On the basis of 13 GEC members, of whom 8 served during the full year 2010. 4 The amounts reflect the total value of pension benefits accruing to members of the GEC during 2011 and 2010, respectively, calculated on the basis of the service costs for the company as assessed under IAS 19 accounting principles. Service costs value the amount of the pension 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 costs on accrued benefits, adjustments for actuarial gains and losses, nor the expected return on any assets held.
USD 2.2 million (CHF 2.0 million) in 2011 and USD 2.1 million (CHF 2.1 million) in 2010. Since the contributions are based on full earnings, whereas benefits are capped, there is not a direct correlation between the costs paid to the social security system and the benefits received by the executives.
in USD million, for the year ended December 31All GEC members (incl. the highest paid)1
The following table specifies the total remuneration paid to the highest paid GEC member: Base salary 1.60 1.60 Cash incentive awards earned for the year 2.40 2.40 Service costs for pension benefits 2 0.20 0.20 Value of other remuneration 3 0.10 0.10 Value of target performance share and restricted share grants 4 3.60 1.40 Value of target performance option grants 4, 5 – 1.40 Total in CHF 7.90 7.10 Total in USD 6 8.60 7.00 1 The remuneration shown in the table is gross, based on the accrual principle and does not include any business related expenses incurred in the performance of the CEO’s services.
5 From 2011 onwards, options are no longer granted. 6 Mr Senn’s remuneration is paid in Swiss francs. The amounts have been translated from Swiss francs to US dollars at the relevant exchange rates throughout the year and the cash incentive to be paid in 2012 has been translated at the year-end rate in 2011. The increase in US dollars is entirely due to fluctuations in exchange rates.
Summary of total outstanding share commitments for Group Executive Committee members under the Group’s Long-Term Incentive Plans Share grants Performance share grants The total number of target performance share grants outstanding as of December 31, 2011 for members of the GEC as of December 31, 2011 under the Group’s Long-Term Incentive Plan was 77,273 (56,453 as of December 31, 2010). A summary of the outstanding grants as of December 31, 2011 is set out in the table below: in CHF millions, for the year ended December 31Highest paid executive, Chief Executive Officer, Martin Senn in 2011 and 20101
Restricted share grants There were 494 restricted shares outstanding as of December 31, 2011 for members of the GEC (987 restricted shares were outstanding at the end of 2010).
The first share option grant was made in 1999 and regular annual grants have been made since then. Prior to 2003, option grants were typically made on the basis of a seven-year option term, a three-year vesting period and an exercise price set at a 10 percent premium to the market rate during the month prior to the grant date. Under the rules of the plan, other parameters are allowed for option grants made under the share option program. In connection with the re-design of the Long-Term Incentive Program in 2003, the exercise price for the options granted since then has been set at the market price on the day prior to the date of grant. The performance based option grants are considered for vesting in one-third installments during the three years after the grant. The actual level of vesting is determined by the Long-Term Incentive Plan vesting matrix as described on page 59. Option grants were made each year on the third working day in April.
Summary of outstanding performance share grants as of December 31, 2011Summary of outstanding options, 2011
All options mentioned above entitle the holder to purchase one share of Zurich Financial Services Ltd at the exercise price stated with normal voting and dividend rights.
Share and share option holdings of the Group Executive Committee The following table sets out the actual share and share option holdings of GEC members as of December 31, 2011 and 2010. In addition to any shares acquired in the market, the numbers include vested shares, whether sales restricted or not, and vested share options received under the Group’s Long-Term Incentive Plan. However, the table does not include the share interests of the members of the GEC through their participation in the currently unvested performance shares, unvested restricted shares or unvested performance share options.
All interests are beneficial and include shares or share options held by related parties to the GEC members.
2 The distribution of the vested options according to the grants identified in the tables “Summary of outstanding options” is shown in the table below. 3 Mr Amore retired on December 31, 2010.
Number of vested shares and vested share options, as of December 31Share and vested share option holdings of the GEC members1
The following tables show how the totals of the vested share options owned by the GEC members are distributed according to the grants identified in the tables “Summary of outstanding options” as of December 31, 2011 and 2010, respectively.
Trading plans To facilitate the sale of shares and the exercise of options for the members of the GEC, the Board of Directors approved the implementation of trading plans effective as of 2008. These plans allow members to sell shares and/or exercise share options under a pre-defined transaction program. Trading plans can only be established at a time when the individual does not possess unpublished price-sensitive information with regard to the 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 members require the approval of the Chairman of the Board. Once established, transactions take place on a monthly basis including during close periods. The establishment of a trading plan by a GEC member is reported to the SIX Swiss Exchange according to the rules on disclosure of management transactions.
Additional honoraria and remuneration for members of the Group Executive Committee None of the members of the GEC received any remuneration from the Group or from any of the Group’s companies in 2011 and 2010 other than as set out above.
As of December 31, 2011 and as of as of December 31, 2010 no former member of the GEC had any outstanding loans, advances or credits.
Related parties of Group Executive Committee members or of former members of the Group Executive Committee No benefits (or waiver of claims have been provided to related parties of GEC members or related parties of former members of the GEC during the year 2011 and 2010. Neither had any related party of GEC members or of former members of the GEC outstanding loans, advances or credits as of December 31, 2011 and 2010.
Base salaries 4,025 3,746 Value of other remuneration1 578 577 Service Costs for pension benefits2 451 386 Total fixed remuneration 5,054 4,709 1 Includes employee benefits like health and dental insurance and other fringe benefits etc. 2 This represents the increase in the present value of the defined benefit pensions arising from employee service over the accounting period. The amount shown is calculated using actuarial factors and can vary year on year as economic conditions change.
• The total amount of severance payments made in the performance year. These payments were made to people whose termination date was in 2011.
As a principle, the Group does not grant sign-on or severance payments. However, if circumstances in the Group’s interest warrant such payments, clear approval processes are followed.
The figures do not include any charges or credits that originate from remuneration paid out during the financial year 2011 that derive from previous financial years.
Commission payments made to employed sales agents are not included in the calculation of the Total Variable Remuneration Pool. The sales commission plans of employed agents are not considered part of the profitability based incentive plans. Sales commissions, like the commissions paid to a broker or other external distributors represent a distribution cost. The employed sales agents do not generate financial risks as they are not involved in establishing the price levels for the products they sell. With regard to operational and reputation risks, in particular due to potential mis-selling, the control of these risks is addressed by the mandatory and Group-wide adherence to the Zurich Risk Policy and Zurich Basics, the Group’s code of conduct.
In determining the amount of the Total Variable Remuneration Pool, the Board of Directors considers the long-term economic performance of the Group as well as other relevant factors. In particular the Board of Directors verifies that the amount of the Total Variable Remuneration Pool is lower than the average economic profit earned over a three year period. The average economic profit is calculated by subtracting the required return on capital, based on the weighted average cost of capital, from the adjusted Business Operating Profit after Tax. For 2011, the average economic profit generated over the previous three years was higher than the value of the Total Variable Remuneration Pool which is set out below, as was the case in 2010.
in USD million, for the year ended December 31Value of outstanding deferred remuneration
Sign-on and severance payments for Key Risk Takers As mentioned above, the Group as a principle does not grant sign-on or severance payments. However, if circumstances in the Group’s interest warrant such payments, these can be approved through a clear governance process. With regard to the disclosure of sign-on and severance payments for the individuals considered to be key risk takers for the Group, the following sign-on and severance payments were made to this group of individuals in 2011 and in 2010: # of beneficiaries 2010
Financial highlights 77 Performance overview 78 General Insurance 80 Global Life 85 Farmers 88 Other Operating Businesses 90 Non-Core Businesses 90 Investment position and performance 91 Insurance and investment contract liabilities 94 Indebtedness 98 Capitalization 99 Cash flows 100 Currency translation impact 101
The Operating and financial review is a management analysis of the performance of the Group’s business for 2011 compared with 2010 and explains key aspects of the Group’s financial position at the end of 2011.
The information contained within the Operating and financial review is unaudited and presents the consolidated results of the Zurich Financial Services Group for the years ended December 31, 2011 and 2010, respectively. This document should be read in conjunction with the Annual Report 2011 and with its audited Consolidated financial statements as of December 31, 2011. All amounts are shown in U.S. dollars, 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. All ratios and variances are calculated using the underlying amount rather than the rounded amount. In addition to the figures stated according to the International Financial Reporting Standards (IFRS), Zurich Financial Services Group uses business operating profit (BOP) measures and other performance indicators to enhance the understanding of its results. These additional measures should be viewed as complementary to, and not a substitute for, the figures determined according to the IFRS. For a reconciliation of BOP to net income after income taxes see note 29 of the audited Consolidated financial statements. Certain comparative figures have been restated, as set out in note 1 of the audited Consolidated financial statements.
General Insurance business operating profit 2,265 2,667 (15%) General Insurance combined ratio 98.8% 97.9% (0.9 pts)
Global Life business operating profit 1,353 1,474 (8%) Global Life new business annual premium equivalent (APE) 3,992 3,699 8% Global Life new business margin, after tax (as % of APE) 2 24.5% 23.3% 1.2 pts Global Life new business value, after tax 2 980 862 14%
Diluted earnings per share (in CHF) 22.62 24.33 (7%) Book value per share (in CHF) 203.15 202.18 –
Zurich Financial Services Ltd and its subsidiaries, collectively “the Group,” delivered a good result for its shareholders despite the devastating earthquakes and exceptionally frequent weather-related events which made 2011 one of the costliest years for catastrophe-related insured losses. In challenging economic and market conditions, the Group maintained its focus on the execution of its underwriting strategies and further improved its customer orientation while protecting its strong capital position. Significant acquisitions have been closed in Latin America and Malaysia providing the Group with substantial further presence and size in target emerging markets where the outlook for economic growth remains more positive than in most mature markets.
The Group’s capital position remains strong with shareholders’ equity of USD 31.6 billion at broadly the same level as December 31, 2010 after recording the total cost of USD 2.7 billion for dividends, despite volatile financial markets, currency fluctuations and financial market impacts on pension liabilities. In March 2011, Moody’s Investors Service upgraded the insurance financial strength rating of Zurich Insurance Company Ltd to Aa3 from A1 and also upgraded its debt ratings. The Group’s good results and strong balance sheet have enabled the Board of Directors to propose a dividend of CHF 17.00 per share, demonstrating the Group’s ongoing commitment to shareholder value.
Business operating profit decreased by USD 608 million to USD 4.3 billion, or by 12 percent in U.S. dollar terms and 14 percent on a local currency basis.
• Global Life business operating profit decreased by USD 121 million to USD 1.4 billion, or by 8 percent in U.S. dollar terms and 14 percent on a local currency basis. Increased fee income from higher average assets under management plus higher margins from protection business partly offset the higher costs related to investments in the global operations strategy, lower investment margin due to the continuing low interest rate environment, and accelerated deferred acquisition cost amortization resulting from lower European equity markets and interest rates compared with December 31, 2010.
• Farmers business operating profit decreased by USD 200 million to USD 1.5 billion, or by 12 percent. Farmers Management Services business operating profit increased by USD 5 million to USD 1.4 billion, mainly due to a reduction of 21st Century integration expenses in 2011. These savings were partially offset by lower revenues resulting from the planned run-off of the 21st Century agency auto book of business in the Farmers Exchanges, which are managed but not owned by Farmers Group, Inc., a wholly owned subsidiary of the Group. Farmers Re business operating profit decreased by USD 205 million to USD 116 million, or by 64 percent, reflecting the net reduction in the All Lines Quota Share reinsurance agreement (All Lines agreement) with the Farmers Exchanges, as well as high weather-related losses in the U.S. in 2011, higher loss trends, and reduced investment income.
Business volumes for the core business segments, comprising gross written premiums, policy fees, insurance deposits and management fees, increased by USD 867 million to USD 68.6 billion, or by 1 percent in U.S. dollar terms, but decreased 3 percent on a local currency basis. Volumes developed as follows: • General Insurance gross written premiums and policy fees increased by USD 1.5 billion to USD 34.6 billion, or by 5 percent in U.S. dollar terms, but remained flat on a local currency basis. The focus on achieving selective growth and increased profit margins through disciplined underwriting remained unchanged. Average rate increases of more than 3 percent were achieved despite the slow economic recovery in the U.S. and depressed economic activity in many European countries. Growth in local currency continued to be driven by International Markets, primarily in Latin America and Asia-Pacific, as well as by selected industry segments in North America and Europe. Customer retention levels improved slightly compared with 2010 mainly in International Markets and Europe.
• Global Life gross written premiums, policy fees and insurance deposits remained flat at USD 27.7 billion in U.S. dollar terms but decreased by 5 percent on a local currency basis. Volume increases were achieved in the strategic growth markets of Latin America and Asia-Pacific and Middle East with volumes in the UK also increasing driven by sales of single premium policies in Corporate Life & Pensions and Private Banking Client Solutions. This was offset by lower sales of single premium policies in Spain, Germany and Ireland as difficult market conditions persisted in those countries and by the impact of a divestment in Spain in 2010.
• Farmers Management Services management fees and other related revenues decreased by USD 11 million to USD 2.8 billion, which was in line with the decrease in gross earned premiums in the Farmers Exchanges. This decrease was primarily driven by the planned run-off of the 21st Century agency auto book of business, partially offset by the fee income from the continued increase of gross earned premiums in the Farmers Exchanges from 21st Century direct, and from business and specialty insurance. The 16 percent decrease to USD 3.5 billion in gross written premiums of Farmers Re reflects various participation changes to the All Lines agreement and consequent portfolio transfers.
Gross written premiums and policy fees 34,572 33,066 5% Net earned premiums and policy fees 29,076 27,844 4% Insurance benefits and losses, net of reinsurance (20,914) (19,795) (6%) Net underwriting result 342 572 (40%) Net investment income 2,799 2,867 (2%) Net non-technical result (excl. items not included in BOP) (885) (796) (11%) Business operating profit 2,265 2,667 (15%) Loss ratio 71.9% 71.1% (0.8 pts) Expense ratio 26.9% 26.9% – Combined ratio 98.8% 97.9% (0.9 pts)
Business operating profit decreased by USD 402 million to USD 2.3 billion, or by 15 percent in U.S. dollar terms and 19 percent on a local currency basis. The sustained focus on protecting margins has continued to improve the underlying result, but these improvements were more than offset by the exceptional frequency and overall severity of natural catastrophes and significant weather-related events throughout 2011. Investment income declined by 2 percent in U.S. dollar terms, mainly due to lower yields in Europe and the U.S.
Gross written premiums and policy fees increased by USD 1.5 billion to USD 34.6 billion, or by 5 percent in U.S. dollar terms, but remained flat on a local currency basis. As a result of the strategy to maintain margins, average rates increased by over 3 percent, an improvement of 1.0 percentage points compared with 2010. Despite these rate increases, customer retention levels improved slightly compared with 2010. Premiums increased on a local currency basis in International Markets with growth of 21 percent in Latin America and 5 percent in Asia-Pacific. Rates have improved in the North American market, with growth in targeted customer segments such as energy casualty and construction. European volumes continued to decline on a local currency basis, mainly due to underwriting actions implemented to improve profitability, particularly in the personal lines motor business, but also due to depressed levels of economic activity in certain European markets.
Gross written premiums and policy fees 7,949 7,624 4% Net underwriting result (301) 205 nm Business operating profit 169 741 (77%) Loss ratio 85.3% 74.7% (10.6 pts) Expense ratio 20.3% 21.1% 0.8 pts Combined ratio 105.6% 95.8% (9.8 pts)
Gross written premiums and policy fees 9,777 9,728 1% Net underwriting result 315 217 45% Business operating profit 1,048 1,118 (6%) Loss ratio 67.0% 67.3% 0.3 pts Expense ratio 28.8% 29.8% 1.0 pts Combined ratio 95.9% 97.1% 1.3 pts
Gross written premiums and policy fees increased by USD 49 million to USD 9.8 billion, or by 1 percent, reflecting average rate increases of 3 percent in the highly competitive U.S. market, with significant rate increases in all lines of business. Strong competition and the effects of rigorous re-underwriting and tiering strategies reduced volumes and resulted in the non-renewal of certain unprofitable accounts. Retention of profitable business through risk selection and segmentation strategies continued to be the focus. Nevertheless, overall retention levels and new business improved towards the end of 2011 compared with 2010. The improvement in new business has been achieved in specific targeted segments such as energy casualty, mid-market commercial and construction services.
The net underwriting result improved by USD 98 million to USD 315 million, or by 45 percent, reflected in the 1.3 percentage points improvement in the combined ratio to 95.9 percent. The underwriting result was favorably impacted by an improvement in the underlying loss ratio, reflecting the Group’s disciplined underwriting, and higher levels of favorable development of reserves established in prior years. These improvements more than offset the higher weather-related losses primarily due to a series of tornadoes which hit the Midwest and Southeast regions of the U.S. in April and May and by Hurricane Irene which struck the eastern seaboard of the U.S. in August. The expense ratio improved by 1.0 percentage points driven primarily by a 0.8 percentage points reduction in the commission ratio relating to certain one-off impacts including profit commissions on crop business paid in 2010 and changes in business mix. Lower operating expenses contributed to an improvement of 0.2 percentage points in other underwriting expenses.
Business operating profit increased by USD 190 million to USD 964 million, or by 25 percent in U.S. dollar terms and 12 percent on a local currency basis. The performance was driven by an improvement in the underwriting result and lower non-technical expenses. Though in U.S. dollar terms investment income increased slightly, on a local currency basis it decreased mainly due to lower yields and capital repatriation to the Group reducing the asset base. The significant improvement in non-technical expenses arose from a reduction in regional costs in 2011 as a result of a simplified management structure, while 2010 was unfavorably impacted by an impairment in Russia.
Gross written premiums and policy fees increased by USD 505 million to USD 12.9 billion, or by 4 percent in U.S. dollar terms, but decreased 3 percent on a local currency basis. The overall market and economic environment in many European countries continued to remain challenging with depressed economic activity and higher unemployment. Actions taken to improve profitability particularly in the personal motor portfolio have resulted in lower volumes. Overall rate increases of 4 percent were achieved in 2011, with the highest increases in the UK, Italy and Spain. Despite these increases, customer retention levels improved slightly compared with 2010.
Gross written premiums and policy fees 4,425 3,854 15% Net underwriting result (265) (68) nm Business operating profit (156) 84 nm Loss ratio 72.9% 67.3% (5.6 pts) Expense ratio 34.9% 35.0% 0.1 pts Combined ratio 107.8% 102.3% (5.5 pts)
Business operating loss of USD 156 million deteriorated by USD 240 million from a profit of USD 84 million in 2010, driven by the decrease in the underwriting result. Higher yields as well as a higher asset base driven by portfolio growth led to an increase in investment income. Non-technical expenses reverted to normal levels following favorable currency revaluations in Latin America in 2010.
Gross written premiums and policy fees increased by USD 571 million to USD 4.4 billion, or by 15 percent in U.S. dollar terms and 10 percent on a local currency basis. Growth in Latin America was 21 percent on a local currency basis, mainly driven by growth in motor and specialties business in Brazil as well as growth in motor business in Argentina. Asia-Pacific achieved growth of 5 percent on a local currency basis driven by rate increases in Australia and strong growth in Japan and Southeast Asian countries. Premiums in Middle East and Africa increased by 1 percent due to the acquisition of Compagnie Libanaise D’Assurances in Lebanon, partly offset by re-underwriting actions in South Africa.
Gross written premiums and policy fees 11,583 12,292 (6%) Net investment income on Group investments 4,146 3,892 7% Insurance benefits and losses, net of reinsurance (9,503) (10,140) 6% Business operating profit 1,353 1,474 (8%)
4 A refinement in methodology for calculating new business value for corporate protection business was introduced in 2011 contributing USD 119 million to new business value, after tax, of which USD 116 million relates to international group protection business included in Other businesses, and 3.0 percent to new business margin, after tax. The refinement results from the inclusion of the value expected to be generated over the entire life of the contract in corporate protection business rather than the value expected to be generated up to the next review date in those contracts.
Business operating profit decreased by USD 121 million to USD 1.4 billion, or 8 percent in U.S. dollar terms and 14 percent on a local currency basis. Higher average stock market levels and assets under management during the first half of the year increased fee income compared with 2010. Margins from protection business also increased as a result of higher volumes and disciplined underwriting although these improvements were more than offset by market and expense impacts. Lower European equity market levels and interest rates at December 31, 2011, reduced investment margin and accelerated deferred acquisition cost amortization while expenses increased mainly due to higher investments in the global operations strategy.
Gross written premiums and policy fees decreased by USD 0.7 billion to USD 11.6 billion, or by 6 percent in U.S. dollar terms and 12 percent on a local currency basis. This decrease was driven by lower single premium volumes in Spain and Germany as well as by the divestment of the Group’s jointly owned insurance operations with Caixa Sabadell in Spain in September 2010.
Net reserves decreased by USD 2.6 billion or by 1 percent in U.S. dollar terms and remained flat on a local currency basis compared with December 31, 2010. Assets under management during 2011 were at a higher average level compared with 2010. However, as of December 31, 2011, assets under management at USD 219.7 billion had decreased by USD 2.6 billion, or by 1 percent in U.S. dollar terms, but had increased 1 percent on a local currency basis. Net policyholder flows remained positive at USD 2.8 billion despite the lower deposit and premium volumes in Germany, Ireland and Spain.
International/Expats increased new business value by USD 12 million to USD 83 million, or by 17 percent in U.S. dollar terms and 13 percent on a local currency basis. This was predominantly driven by volume growth in Asia-Pacific and Middle East, leveraging existing distribution capacity, together with an improvement of 1.5 percentage points in the overall new business margin to 29.3 percent.
Private Banking Client Solutions increased new business value by USD 9 million to USD 20 million, or by 75 percent in U.S. dollar terms and 68 percent on a local currency basis. The growth in new business value was driven by the continued placements of tranches of investment bonds through bank partners in the UK.
Direct and Central Initiatives new business value remained level in U.S. dollar terms and decreased by 5 percent on a local currency basis. Growth in protection business in the affinity channel in Latin America was more than offset by reductions due to market disruption in Japan and low interest rates in Switzerland.
in USD millions, for the years ended December 31NBV and APE by pillar
Management fees and other related revenues 2,767 2,778 – Management and other related expenses (1,434) (1,440) – Gross management result 1,333 1,338 –
Other net income 36 27 35% Business operating profit 1,370 1,365 – Managed gross earned premium margin 7.3% 7.3% nm
Business operating profit of USD 1.4 billion increased by USD 5 million mainly driven by a reduction in operating expenses and 21st Century integration expenses in 2011 offset in part by lower revenue due to the planned run-off of the 21st Century agency auto book of business.
Management fees and other related revenues of USD 2.8 billion decreased by USD 11 million driven by the effect of the planned run-off of the 21st Century agency auto book of business. This was partially offset by the fee income from the continued increase of gross earned premiums in the Farmers Exchanges from 21st Century direct, and from business and specialty insurance. Farmers Exchanges are managed but not owned by Farmers Group, Inc., a wholly owned subsidiary of the Group. Management and other related expenses of USD 1.4 billion reduced slightly compared with the level of expenses in 2010.
Consequently, while the gross management result decreased by USD 5 million to USD 1.3 billion, the managed gross earned premium margin remained constant.
Gross written premiums and policy fees decreased by USD 665 million, or by 16 percent to USD 3.5 billion as a result of the changes in the All Lines agreement. These changes were a reduction from 35 percent to 25 percent effective June 30, 2010, a further decrease to 12 percent effective December 31, 2010, and an increase to 20 percent effective December 31, 2011. The net underwriting result deteriorated by USD 157 million to a loss of USD 23 million primarily due to higher losses assumed from the Farmers Exchanges during 2011, reduced partially by the lower participation in the All Lines agreement.
Gross written premiums 18,297 18,131 1% Gross earned premiums 18,149 18,311 (1%)
Gross written premiums in the Farmers Exchanges, which are managed but not owned by Farmers Group, Inc., a wholly owned subsidiary of the Group, increased by USD 166 million to USD 18.3 billion. This increase was driven by premium growth in nearly all active lines of business, reflecting the acceleration of the underlying growth momentum during the later part of 2011, partially offset by the planned run-off of the 21st Century agency auto book of business. Excluding this effect, gross written premiums grew by 2 percent compared with 2010.
1 Holding and financing contains business operating losses of USD 20 million and 25 million for the years ended December 31, 2011 and December 31, 2010 respectively, that were previously presented in a separate row, “Alternative investments.”
Other run-off, which largely comprises U.S. life insurance and annuity portfolios, reported a business operating profit of USD 3 million. The profit of USD 58 million in 2010 was primarily driven by reserve releases.
Group investments decreased by USD 1.5 billion or 1 percent in U.S. dollar terms since December 31, 2010, mainly due to currency translation. On a local currency basis, total Group investments increased by USD 1.4 billion or 1 percent, driven mainly by the effects of falling interest rates on the value of debt securities but partially offset by lower equity markets.
Net investment result 9,367 7,990 17% Net investment return on Group investments 4.8% 4.1% 0.7 pts Movements in net unrealized gains/(losses) on investments included in total equity 1,090 2,511 (57%) Total investment result, net of investment expenses 1 10,458 10,501 – Average group investments 2 195,141 195,532 – Total return on Group investments 5.4% 5.4% –
Total net capital gains on investments and impairments were USD 2.2 billion, compared with gains of USD 898 million in 2010. This includes USD 1.5 billion of positive asset revaluations and USD 1.1 billion of net capital gains realized from active management, partially offset by impairments of USD 458 million.
Positive asset revaluations on securities booked at fair value through profit and loss were driven by gains on other investments of USD 925 million, largely from derivatives, gains on debt securities at fair value of USD 541 million, and gains on equity securities at fair value of USD 33 million. The gains on derivatives arose, as financial markets have fallen, on instruments held as economic hedges, where an underlying business or investment loss has largely been offset or where balance sheet risk has been mitigated.
The net capital gains from active management of equity securities were USD 549 million including USD 441 million from the sale of shares in NCI, that took place in June 2011. Net capital gains from active realizations of debt securities were USD 436 million, and net capital gains from the sale of other investments were USD 155 million.
Impairments of USD 270 million were attributable to equity securities, USD 133 million to mortgages and other investments and USD 55 million to debt securities.
Net investment return on Group investments increased to 4.8 percent compared with 4.1 percent in 2010 due to higher investment income and net capital gains, while average Group investments remained largely unchanged.
Net unrealized gains/losses on investments included in total equity have increased by USD 1.1 billion since December 31, 2010, mainly driven by higher net unrealized gains on debt securities of USD 1.7 billion as interest rates have continued to fall. Though yields on government bonds fell in both periods, credit spreads widened significantly compared with 2010 and partially offset the positive impact of falling yields. Net unrealized gains on equity securities decreased by USD 808 million since December 31, 2010. This reduction was driven by the realization of gains on the sale of shares in NCI and by deteriorating equity markets mainly in the last six months of the year. Net unrealized gains on other investments increased by USD 219 million since December 31, 2010.
Net investment income 1,757 1,561 13% Net capital (losses)/gains on investments and impairments (5,302) 8,533 nm Net investment result, net of investment expenses 1 (3,544) 10,093 nm
1 After deducting investment expenses of USD 610 million and USD 532 million for the years ended December 31, 2011 and 2010, respectively.
Total return on unit-linked investments was a negative 3.3 percent compared with a positive 9.7 percent in 2010. The movement in the total return was due to net capital losses in 2011 compared with gains during 2010, mostly driven by lower equity markets. Net investment income increased by USD 196 million or by 13 percent in U.S. dollar terms and 7 percent on a local currency basis.
Net losses and loss adjustment expenses incurred 22,439 23,620 20,894 19,773
This table represents the loss ratio development for individual accident years for the Group, with General Insurance being the primary driver. Individual accident years are affected by the level of large catastrophe losses which had the following impact on the loss ratios. The 2004 hurricanes (Charley, Frances, Jeanne and Ivan) which struck Florida impacted the loss ratio by 2.8 percentage points; in 2005, hurricanes (Katrina, Rita and Wilma) and floods impacted the loss ratio by 4.6 percentage points; the winter storm Kyrill and the floods in the UK in 2007 impacted the loss ratio by 2.5 percentage points; in 2008, the impact of Hurricane Gustav and Hurricane Ike was 1.8 percentage points; in 2010 the impact of the earthquake in Chile and the floods in Australia was 0.8 percentage points; in 2011, the impact of the floods in Australia, earthquakes in New Zealand, the earthquake and subsequent tsunami in Japan, Hurricane Irene in the U.S. and the floods in Thailand was 3.2 percentage points, before the Group’s aggregate catastrophe reinsurance recovery. The development of 2003 and subsequent years demonstrates the Group’s philosophy of taking a prudent initial view on reserving with the expectation of favorable development over time.
Net reserves as of January 1 187,196 180,145 17,331 17,655 204,527 197,800
Fee income and other expenses (1,866) (1,875) (2,277) (1,995) (4,143) (3,870) Interest and bonuses credited to policyholders (3,105) 9,911 3,176 3,418 71 13,329
(Decreases)/increases recorded in other comprehensive income (6) (35) 730 (193) 724 (228)
in USD millionsGroup reserves for life insurance contracts, net of reinsurance, and liabilities for investment contracts in USD millionsGlobal Life – development of reserves and liabilities
Unit-linked insurance and investment contracts, net of reinsurance, decreased by USD 2.6 billion compared with December 31, 2010, or by 3 percent in U.S. dollar terms and 1 percent on a local currency basis. This is largely the result of the effect on fund values from weakening financial markets.
Other life insurance liabilities, net of reinsurance, remained constant with December 31 2010, in U.S. dollar terms and increased 2 percent on local currency basis as a result of the acquisition of MAA in Malaysia.
2 Operational senior debt includes USD 750 million in senior debt issued under the EMTN Programme by Zurich Finance (Luxembourg) S.A. in September 2009, which was loaned directly to the Group’s banking activities. This issue has been recognized as operational debt by Moody’s but not by Standard & Poor’s. In addition, operational senior debt includes an adjustment of USD 100 million for non-recourse debt.
3 Financial senior debt contains USD 400 million that was previously presented in a separate column, "Capital markets."
In March 2011, Moody’s Investor Service upgraded Zurich Insurance Company Ltd’s financial strength rating by one notch to Aa3 from A1. Debt ratings were also upgraded by one notch, resulting in its senior debt ratings moving to A1, subordinated to A2(hyb) and preferred to A3(hyb).
As of December 31, 2010, as previously reported 31,984 1,337 33,321 Adjustment arising from the change in accounting policy 1 (79) (1) (80) As of December 31, 2010, as restated 31,905 1,336 33,241 Proceeds from issuance of share capital 211 – 211 Proceeds from treasury share transactions 7 – 7
Net income after taxes 3,766 25 3,792 Net other recognized income and expenses (1,883) (100) (1,983)
Net changes in capitalization and non-controlling interests – 1,141 1,141 1 See note 1 of the audited Consolidated financial statements.
Total equity increased by USD 776 million to USD 34.0 billion, or by 2 percent. This growth in total equity was after the deduction of USD 2.7 billion for the dividend of CHF 17.00 per share, which was approved at the Annual General Meeting on March 31, 2011, and which was paid from the newly created capital contribution reserve. Of the USD 2.7 billion, USD 1.9 billion has been shown as a dividend and USD 795 million has been included in the cumulative foreign currency translation adjustments. The early redemption of preferred securities decreased equity by USD 476 million and was funded mainly by the issuance of the subordinated loan note of CHF 500 million under the EMTN Programme in March 2011. Net income after tax of USD 3.8 billion fully offset the dividend and capital redemption. Net other recognized expenses of USD 1.9 billion included cumulative foreign currency translation adjustments of USD 1.5 billion reflecting changes in exchange rates during the year, as well as net actuarial losses on pension plans of USD 933 million offset by net unrealized gains on investments and cash flow hedges. The increase of USD 1.1 billion in non-controlling interests arose mainly from the 49.0 percent retention by Santander of its former insurance entities in Latin America.
Change in cash and cash equivalents excluding change in cash received as collateral for securities lending 322 (1,023)
Change in cash received as collateral for securities lending – (493)
Cash and cash equivalents as of January 1 2 9,726 11,242 Cash and cash equivalents as of December 31 2 10,048 9,726 1 Excluding cash received as collateral for securities lending 2 Including cash received as collateral for securities lending
Net cash provided by operating activities, which included cash movements in and out of, as well as within total investments, was USD 3.9 billion for the year ended December 31, 2011. Net cash used in investing activities of USD 1.2 billion was primarily related to the acquisition of a 51.0 percent participation in a holding company, which owned some and has since acquired other insurance operations of Santander in Latin America and the acquisition of MAA in Malaysia. Net cash outflows from financing activities of USD 2.4 billion were primarily related to the USD 2.8 billion payment of dividends and the early redemption of preferred securities amounting to USD 476 million, partially offset by the net issuance of senior and subordinated debt of USD 782 million.
Gross written premiums and policy fees 2,074 4% Insurance benefits and losses, gross of reinsurance (1,807) (5%) Net income attributable to shareholders 78 2% Business operating profit 81 2%
The income statements are translated at average exchange rates. Throughout 2011, the U.S. dollar has on average been weaker against the euro and British pound, and significantly weaker against the Swiss franc, compared with 2010. The net result has been an increase, in U.S. dollar terms, in gross written premiums and policy fees which was partially offset by an increase in U.S. dollar terms in insurance benefits and losses.
Total investments (4,151) (1%) Reserves for insurance contracts, gross (3,558) (1%) Cumulative translation adjustment in shareholders’ equity (1,512) (5%)
The balance sheets are translated at end-of-period rates. The U.S. dollar has strengthened against the euro, but remained relatively stable against the British pound and Swiss franc as of December 31, 2011, compared with December 31, 2010, resulting in a decrease, in U.S. dollar terms, in most balance sheet items. The decrease in the cumulative translation adjustment in shareholders’ equity includes USD 795 million relating to the dividend and underlying currency translation losses of USD 717 million.
Analysis by risk type Risk type description 109 Strategic risk 109 Insurance risk 110 Market risk 119 Credit risk 127 Liquidity risk 135 Operational risk 138 Risks to the Group’s reputation 139
The Group’s major risk management objectives are to: • Protect the capital base by monitoring that risks are not taken beyond the Group’s risk tolerance • Enhance value creation and contribute to an optimal risk-return profile by providing the basis for an efficient capital deployment • Support the Group’s decision-making processes by providing consistent, reliable and timely risk information • Protect Zurich’s reputation and brand by promoting a sound culture of risk awareness and disciplined and informed risk taking
At the heart of the risk management framework is a governance process with clear responsibilities for taking, managing, monitoring and reporting risks. The Group articulates the roles and responsibilities for risk management throughout the organization, from the Board of Directors and the Chief Executive Officer to its businesses and functional areas, thus embedding risk management in the business (see the “Risk Governance and Risk Management Organization” section in the Risk Review).
Regulatory regimes, such as the Swiss Solvency Test in Switzerland and Solvency II in the European Union, emphasize a risk-based and economic approach, based on comprehensive quantitative and qualitative assessments and reports.
The Group also seeks external expertise from its International Advisory Council, Natural Catastrophe Advisory Council and Climate Change Advisory Council to better understand and assess risks, particularly regarding areas of complex change. For discussion of these councils, see the “Corporate Governance Report (unaudited).” In addition, the Investment Management Advisory Council provides feedback to Investment Management on achieving superior risk-adjusted returns versus liabilities for the Group’s invested assets.
The Risk Committee of the Board serves as a focal point for oversight regarding the Group’s risk management, in particular the Group’s risk tolerance, including agreed limits that the Board regards as acceptable for Zurich to bear, the aggregation of these limits across the Group, the measurement of adherence to risk limits, and the Group’s risk tolerance in relation to anticipated capital levels. The Risk Committee further oversees the Group-wide risk governance framework, including risk management and control, risk policies and their implementation, as well as risk strategy and the monitoring of operational risks. The Risk Committee also reviews the methodologies for risk measurement and the Group’s adherence to risk limits. The Risk Committee further reviews, with business management and the Group
Group Executive level The Chief Executive Officer (CEO), together with the Group Executive Committee (GEC), oversees the Group’s performance with regard to risk management and control, strategic, financial and business policy issues of Group-wide relevance. This includes monitoring adherence to and further development of the Group’s risk management policies and procedures. The Group Balance Sheet Committee and the Group Finance and Risk Committee regularly review and make recommendations on the Group’s risk profile and significant risk-related issues.
The Chief Risk Officer is a member of the GEC and reports directly to the CEO and the Risk Committee of the Board. He is a member of each of the management committees listed below, in order to provide a common and integrated approach to risk management, to allow for appropriate quantification and, where necessary, mitigation of risks identified in these committees.
In addition to the risk management network, the Group has audit and oversight committees at the major business and regional levels. The committees are responsible for providing oversight of the risk management and control functions. This includes monitoring adherence to policies and periodic risk reporting. In 2011, the Group revised its subsidiary governance to make local risk and control committees optional. However, senior executives at the local level are required to meet at least quarterly with the local heads of governance functions to agree on the significant risks, control and compliance exposures and to decide on necessary actions.
A fundamental component of managing insurance risk is underwriting discipline. The Group sets limits on underwriting capacity, and cascades authority to individuals based on their specific expertise. Through The Zurich Way, the Group sets appropriate pricing guidelines with a focus on consistent technical pricing across the organization. As part of these guidelines, the Group requires the setting of a technical price according to common standards. The technical price is set in a way that allows producing a return on risk-based capital in line with the Group’s target. The ratio of actual premium to technical price is a key performance metric, which is monitored regularly. Technical reviews confirm whether underwriters perform within authorities and adhere to underwriting philosophies and policies. The Group’s global line of business networks share best practices across the globe, providing additional guidance and governance. The Group has governance procedures to review and approve potential new products to evaluate whether the risks are well understood and justified by the potential rewards.
In most instances these actuarial analyses are made throughout the year according to locally developed and agreed timetables. Analyses are performed by product line, type and extent of coverage and year of occurrence. The Group total loss and loss adjustment expense reserves are the consolidation of the locally calculated reserves which are then discussed and approved by Corporate Center actuaries and Group management. As with any projection there is an inherent uncertainty in the estimation of claim reserves due to the fact that the ultimate liability for claims will be impacted by trends as yet unknown including future changes in the likelihood of claimants bringing suit, the size of court awards, and the attitudes of claimants toward settlement of their claims.
Table 1.a in USD millions, for the year ended December 31, 2011
Table 1.b in USD millions, for the year ended December 31, 2010
Table 2.a in USD millions, for the year ended December 31, 2011
Insurance risk sensitivity for the General Insurance business – prior period
Zurich continues its efforts to extend assessments by evaluating potential correlations between property and other lines of business such as engineering or marine for major peril regions.
The Group reviews and aggregates worker injury and property exposures to identify areas of significant concentration. The Group also assesses other lines of business, such as liability and auto, although the potential exposure is not as significant. The resulting data allows underwriters to evaluate how insuring a particular customer’s risk might affect Zurich’s overall exposure. In North America, Zurich uses a vendor-provided catastrophe model to evaluate potential exposures in every major U.S. city. The Group undertakes more detailed and frequent analytics for cities in which Zurich has greater exposure. In 2011, Zurich continued to use a multi-disciplinary team to examine the vendor tool and make adjustments based on its own experience, expertise and view of the potential risks.
A more diversified portfolio of risks is less likely to be affected across the board by a change in any subset of the risks. As a result, the offsetting effects between unit-linked and traditional business reduce some of the risk associated with the Global Life business.
The Group has local product development committees and a Group-level product approval committee, under the leadership of the Global Life Chief Risk Officer, for potential new life products that could significantly increase or change the nature of its risks. Such reviews allow Zurich to manage new risks inherent in its new business propositions. The Group regularly reviews the continued suitability and the potential risks of existing products.
The Group’s use of market-consistent embedded value reporting principles allows Zurich to further understand and report on the risk profile of its life products and how risks would change in differing market conditions. Embedded value is the measure that markets use to value life businesses and is considered industry best practice. For more information, see the “Embedded Value Report.”
Certain life insurance contracts contain guarantees for which liabilities have been recorded for additional benefits and minimum guarantees. These arise primarily in the subsidiary Zurich American Life Insurance Company (ZALICO) (formerly known as KILICO) which in the past wrote variable annuity contracts that provide policyholders with certain guarantees related to minimum death and income benefits. After 2001, ZALICO no longer issued new policies with such features. Since 2011, the Group has implemented a dynamic hedging strategy to manage its economic exposure and reduce the volatility associated with its closed book of variable annuities products within its U.S. life business. New Life products developed with financial guarantees are subject to review and approval by the Group-level product approval committee.
Sensitivities analysis for life insurance risk The Group reports sensitivities for the Global Life business on Embedded Value and New Business Value to changes in economic and operating risk factors. The operating factors include discontinuance rates, expenses, mortality and morbidity. The embedded value methodology adopted by the Group is based on a market-consistent approach to allow explicitly for market risks. See the “Embedded Value Report” for more information on the sensitivities for the Global Life business to economic and operating risk factors.
Events in 2011 illustrate how reinsurance protects Zurich’s balance sheet. The year will be remembered for its numerous earthquakes and other weather-related catastrophe events. All these events together led to record insured losses for the industry, higher than in 2005, the year of Hurricane Katrina. The losses sustained by Zurich will be mitigated by more than USD 720 million in recoveries via the Group’s reinsurance programs for natural catastrophes.
All natural catastrophe losses in excess of the franchise deductible of USD 25 million occurring in a single calendar year are aggregated
Variable retention between USD 800 million and USD 1,000 million, depending on the details of the catastrophe events i.e. which peril regions are hit and with what frequency
The Group has policies and limits to manage market risk. The Group aligns its strategic asset allocation to its risk-taking capacity. The Group centralizes management of certain asset classes to control aggregation of risk, and provides a consistent approach to constructing portfolios and selecting external asset managers. The Group also diversifies portfolios, investments and asset managers. The Group regularly measures and manages market risk exposure. The Group has established limits on concentration in investments by single issuers and certain asset classes as well as deviations of asset interest rate sensitivities from liability interest rate sensitivities, and the Group limits investments that are illiquid.
Risk assessment reviews include the analysis of the management of interest rate risk for each major maturity bucket and adherence to the aggregated positions with risk limits.
For more information on the Group’s investment result, including impairments and the treatment of selected financial instruments, see note 6 of the Consolidated financial statements. For more information on derivative financial instruments and hedge accounting, see note 7 of the Consolidated financial statements.
Risk review continued residential mortgage-backed securities and mezzanine debt. Returns on unit-linked contracts, whether classified as insurance or investment contracts, may be exposed to risks from equity and real estate, but these risks are borne by policyholders. However, the Group is indirectly exposed to market movements from unit-linked contracts both with respect to earnings and with respect to economic capital. Market movements impact the amount of fee income earned when the fee income level is dependent on the valuation of the asset base. Also, the value of in-force business for unit-linked business can be negatively impacted by adverse movements in equity and real estate markets.
The Group manages its risks from equity securities and real estate as part of the overall investment risk management process, and applies limits as expressed in policies and guidelines. Specifically, Zurich has established limits for holdings in equities, real estate and alternative investments.
Returns on unit-linked contracts, whether classified as insurance or investment contracts, are at the risk of the policyholder; however, the Group is exposed to fluctuations in interest rates in so far as they impact the amount of fee income earned if the fee income level is dependent on the valuation of the asset base.
In 2011, specific actions were implemented to manage the Group’s market risk exposure, in light of the financial market turbulence in Europe. In particular in Global Life, exposure to interest rate risks of the German business was reviewed in detail, while the Group continued to buy receiver swaptions to reduce the exposure to a decline in interest rates. These actions led to a decrease in the net duration and convexity compared to the end of 2010, which partially offset the drop in interest rates. Exposure to European sovereign risk was mitigated through a reduction in investment of new inflows into Greece, Ireland, Italy, Portugal and Spain government bonds, and the rebalancing of part of the Italian bond portfolio into German bonds. In addition, the Group reduced its exposure to corporate credit and implemented a macro hedge to protect the balance sheet against a deterioration in European equities. This macro hedge was terminated at the end of 2011. Finally, in 2011, the Group revised its internal risk limits in order to provide more comprehensive measurement and control of interest rate risk, taking into account convexity and cross-currency curve risk.
Analysis of market risk sensitivities Basis of presentation – General Insurance and rest of the businesses The basis of the presentation below is an economic valuation represented by the fair value for Group investments, IFRS insurance liabilities discounted at risk-free market rates (the Group describes risk-free market rates as swap rates) to reflect the present value of insurance liability cash flows and other liabilities, for example own debt. Own debt does not include subordinated debt, which Zurich considers available to protect policyholders in a worst-case situation.
The following tables show the estimated economic market risk sensitivities of Group investments, including real estate for own use, liabilities, including insurance and financial liabilities, and the net impact for General Insurance and the rest of the business. Positive values represent an increase of the balance, whereas values in parentheses represent a decrease of the balance. Increases in the value of liabilities and decreases in the value of assets represent an economic risk for the Group. The net impact is the difference between the impact on Group investments and liabilities. The net impact represents the economic risk the Group faces related to changes in market risk factors. This is in line with management’s monitoring of the Group’s investment and liabilities base. As mentioned above, Zurich has established limits on holdings in real assets and deviations of asset interest rate sensitivities from liability interest rate sensitivities, in order to limit the economic impact of interest rate, equity and real estate risk.
Limitations of the analysis: • The sensitivity analysis does not take into account actions that might be taken to mitigate losses, as Zurich uses an active strategy to manage these risks. This strategy may involve changing the asset allocation, for example through selling and buying assets.
• The equity market scenarios assume a concurrent movement of all stock markets. • The sensitivities do not indicate a probability of such events occurring in the future. They do not necessarily represent the Group’s view of expected future market changes. In addition to the sensitivities, management uses stress scenarios to assess the impact of more severe market movements on the Group’s financial condition.
100 basis points decrease in the interest rate yield curves Group investments 877 449 266 195 149 1,936
Other currencies Total 100 basis points increase in the interest rate yield curves Group investments (1,293) (530) (307) (260) (175) (2,564)
100 basis points decrease in the interest rate yield curves Group investments 1,176 560 325 246 172 2,479
Table 4.a in USD millions, as of December 31, 2011Economic interest rate sensitivities for the General Insurance business – current period
100 basis points decrease in the interest rate yield curves Total impact on Embedded Value 185 (886) 86 (77) 94 (598)
100 basis points decrease in the interest rate yield curves Group investments 896 106 22 6 1 1,031
100 basis points decrease in the interest rate yield curves Group investments 813 107 26 7 1 954
Table 5.b in USD millions, as of December 31, 2010Economic interest rate sensitivities for the Global Life business – prior period
Table 6.b in USD millions, as of December 31, 2010Economic interest rate sensitivities for the rest of the businesses – prior period
Analysis of economic sensitivities for equity risk The table below shows the estimated impacts from a 10 percent decline in stock markets, after consideration of hedges in place, as of December 31, 2011 and 2010, respectively.
10% decline in stock markets Total impact on Embedded Value (298) (261)
Analysis of economic sensitivities for credit spread risk The following table shows the estimated impacts from a 100 basis points increase in corporate credit spreads, as of December 31, 2011 and 2010, respectively. Credit spread risk is modeled on Group investments only, and does not impact the liabilities. The Group uses a risk-free rate for the valuation of its liabilities.
Table 10.a in USD millions, as of December 31, 2011Economic credit spread sensitivities for the General Insurance business – current period
Other currencies Total 100 basis points increase in credit spreads Total Impact on Embeedded Value (191) (612) (113) (224) (88) (1,229)
Other currencies Total 100 basis points increase in credit spreads Total impact on Embedded Value (187) (534) (100) (155) (99) (1,074)
Table 10.b in USD millions, as of December 31, 2010Economic credit spread sensitivities for the General Insurance business – prior period
Table 11.a in USD millions, as of December 31, 2011Economic credit spread sensitivities for the Global Life business – current period
Table 12.a in USD millions, as of December 31, 2011Economic credit spread sensitivities for the rest of the businesses – current period
Because the Group has chosen the U.S. dollar as its presentation currency, differences arise when functional currencies are translated into the presentation currency. The Group does not hedge movements of the currency translation adjustment, or take speculative positions on foreign currency market movements. Using constant exchange rates from one year to the next, the Group’s 2011 net income attributable to shareholders would have been lower by USD 77 million (applying 2010 exchange rates to the 2011 result). In 2010 the result would have been higher by USD 51 million (applying 2009 exchange rates to the 2010 results).
The table below shows the sensitivity of the total IFRS equity to changes in exchange rates for the main functional currencies to which the Group is exposed. Positive values represent an increase in the value of the Group’s total equity. The sensitivity analysis does not take into account management actions that might be taken to mitigate such changes. The sensitivities show the effects of a change of the exchange rates only, while other assumptions remain unchanged. The sensitivities do not indicate a probability of such events occurring in the future. They do not necessarily represent Zurich’s view of expected future market changes. While the table below shows the effect of a 10 percent increase in currency exchange rates, a decrease of 10 percent would have the converse effect.
Although the Group actively uses collateral to mitigate credit risks, the principle is nevertheless to manage the underlying credit risks independently from the collateral. The Group has limits and quality criteria to identify acceptable letter of credit providers. Letters of credit enable Zurich to limit the risk embedded in reinsurance captives, deductibles, trade credit and surety.
Macro review of the credit risk environment 2011 saw the progressive deterioration of sovereign credit quality in developed markets, including Standard & Poor’s downgrade of Japan by one notch in January, the U.S. in August, and nine European nations in January 2012. Bond and credit default swap (CDS) spreads widened for G-10 nations in 2011 (average G-10 sovereign CDS spreads increased by 75 percent), and generally drove those nations’ funding costs up. Trailing default rates were lower than in prior years; however, forecasts indicate higher default rates in 2012, particularly if losses from a Greek default or restructuring spread from banks to the broader economy.
Credit risk related to debt securities The Group is exposed to credit risk from third party counterparties where the Group holds securities issued by those entities. The table below shows the credit risk exposure on debt securities, by issuer credit rating.
Table 14 as of December 31Debt securities by rating of issuer
The second largest concentration in the Group’s debt securities portfolio is to financial institutions (including banks), at 21.6 percent, of which 45.2 percent is secured. In response to the European sovereign debt crisis, the Group identified and selectively reduced unsecured and subordinated credit exposure issued by banks with weak credit profiles, and credit exposure to banks supported by weaker sovereigns.
The Group’s Corporate Reinsurance Security Committee manages the credit quality of cessions and reinsurance assets. The Group typically cedes new business to authorized reinsurers with a minimum rating of “A-.” 57 percent and 54 percent of the business ceded to reinsurers that fall below “A-” or are not rated are collateralized, as of December 31, 2011 and 2010, respectively. Of these percentages, 52 percent and 42 percent are ceded to captive insurance companies, in 2011 and 2010, respectively.
Reinsurance assets include reinsurance recoverables of USD 19.5 billion and USD 18.9 billion as of December 31, 2011 and 2010, respectively, which are the reinsurers’ share of reserves for insurance contracts, and receivables arising from ceded reinsurance, gross of allowance for impairment, of USD 1.2 billion and USD 1.2 billion as of December 31, 2011 and 2010, respectively. Reserves for potentially uncollectible amounts of reinsurance assets amount to USD 206 million and USD 234 million as of December 31, 2011 and 2010, respectively. The Group’s policy on impairment charges takes into account both specific charges for known situations (e.g. financial distress or litigation) and a general, prudent provision for unanticipated impairments.
Reinsurance assets in the table on the following page are shown before taking into account the fair value of credit default swaps, bought by the Group to mitigate credit risks of the reinsurance exposure, and other collateral such as cash or letters of credit from banks rated at least “A”, which can be converted into cash and deposits received under ceded reinsurance contracts.
The risk-weighted average credit quality of reinsurance assets (including receivables, but after deduction of collateral) was “A” as of December 31, 2011 and 2010. Credit factors to determine the risk-weighted average credit quality of reinsurance assets are based on historical insurance impairment statistics, consistent with the prior year. For credit risk assessment purposes, collateral has been taken into account at nominal value as an approximation for fair value. For collateral, the Group applies minimum requirements, such as a minimum rating for the issuers of letters of credit and guarantees, and for pledged assets a minimum coverage ratio of 100 percent.
millions total 1 The increase in ceded premiums is primarily due to the Part VII transfer of a run-off portfolio, pending regulatory approval. 2 The value of the collateral received amounts to USD 8.2 billion and USD 8.0 billion as of December 31, 2011 and 2010, respectively.
Risk review continued reduces the carrying balance of net loans outstanding. Property valuations at Zurich Bank are reviewed regularly as part of the continual assessment of the appropriateness of provisioning on a portfolio that is largely impaired. For more details, see table 18.a and 18.b in the Risk Review.
Table 17 as of December 31Other loans by rating of issuer
Neither past due nor impaired financial assets 142,400 9,867 215 11,842 13,586 177,910 Past due but not impaired financial assets. Past due by: 1 to 90 days – 242 4 1 1,071 1,317
Past due but not impaired financial assets – 543 7 1 1,799 2,350
Less: impairment allowance Impairment allowances on individually assessed financial assets – 618 – – 117 735 Impairment allowances on collectively assessed financial assets – 27 – – 203 230 1 Available-for-sale debt securities are included net of USD 55 million of impairment charges recognized during the year. 2 USD 399 million past-due-but-not-impaired and USD 1.3 billion impaired mortgage loans relate to the run-off property loans at Zurich Bank.
Neither past due nor impaired financial assets 139,504 10,431 737 13,419 14,163 178,254 Past due but not impaired financial assets. Past due by: 1 to 90 days – 238 – 1 1,376 1,615
Less: impairment allowance Impairment allowances on individually assessed financial assets – 548 – 1 123 673 Impairment allowances on collectively assessed financial assets – 42 – 1 199 242 1 Available-for-sale debt securities are included net of USD 137 million of impairment charges recognized during 2010. 2 USD 711 million past-due-but-not-impaired and USD 1.2 billion impaired mortgage loans relate to the run-off property loans at Zurich Bank.
The Group limits the percentage of the investment portfolio that is not readily realizable, and regularly monitors exposures to take action if necessary to maintain an appropriate level of asset liquidity. During 2011, the Group was within its limits for asset liquidity. The fair value hierarchy tables in note 26 to the Consolidated financial statements segregate financial assets into three levels to reflect the basis of the determination of fair value. These tables indicate the high liquidity of the Group’s investments.
See note 21 of the Consolidated financial statements for additional information on debt obligation maturities and on credit facilities and note 25 of the Consolidated financial statements for information on commitments and guarantees.
The Group’s regular liquidity monitoring includes monthly reporting to the executive management and quarterly reporting to the Risk Committee of the Board, covering aspects such as the Group’s actual and forecasted liquidity, possible adverse scenarios that could affect the Group’s liquidity and possible liquidity needs from the Group’s main subsidiaries, including under stressed conditions.
The following table provides an analysis of the maturity of liabilities for investment contracts based on expected cash flows as of December 31, 2011 and 2010. The undiscounted contractual cash flows for liabilities for investment contracts are USD 51.0 billion and USD 50.8 billion as of December 31, 2011 and December 31, 2010, respectively. Liabilities for unit-linked investment contracts amount to USD 44.2 billion and USD 44.9 billion as at December 31, 2011 and 2010, respectively. The policyholders of unit-linked investment contracts can generally surrender their contracts at any time at which point the underlying unit-linked assets would be liquidated. Risks from the liquidation of unit-linked assets are borne by the policyholders of unit-linked investment contracts. Certain non-unit-linked contracts also allow for surrender of the contract by the policyholder at any time. Liabilities for such contracts amounted to USD 950 million and USD 1.0 billion as of December 31, 2011 and 2010 respectively. The Group has established active management of the Global Life in-force business to improve persistency and retention.
See notes 15 and 21 of the Consolidated financial statements for information on the maturities of collateralized loans and total debt issued, respectively. For more information on the Group’s other financial liabilities, see note 19 of the Consolidated financial statements.
The Group has committed to contribute to third parties that engage in investment in direct private equity and private equity funds. Commitments may be called by the counterparty over the term of the investment (generally three to five years) and must be funded by the Group on a timely basis. See note 25 of the Consolidated financial statements.
A key task is keeping the Group’s business continuity plans up-to-date, with an emphasis on recovery from events such as natural catastrophes and the possibility of a pandemic. In 2011, the Group continued to develop its existing business continuity capability by implementing a more globally consistent approach to business continuity and crisis management.
Addressing the risk of claims and non-claims fraud continues to be of importance. In 2011, the Group continued its global anti-fraud initiative to further improve the Group’s ability to prevent, detect and respond to fraud. While claims fraud is calculated as part of insurance risk and non-claims fraud is calculated as part of operational risk for risk-based capital, both are part of the common framework for assessing and managing operational risks.
The Group manages capital and solvency through an integrated and comprehensive framework of principles and governance structures as well as methodology, monitoring and reporting processes. At a Group executive level, the Group Balance Sheet Committee defines the capital management strategy and sets the principles, standards and policies for the execution of the strategy. Group Treasury and Capital Management is responsible for the execution of the capital management strategy within the mandate set by the Group Balance Sheet Committee.
The Group seeks to maintain the balance between higher returns for shareholders on equity held, which may be possible with higher levels of borrowing, and the security provided by a sound capital position. The payment of dividends, share buy-backs, and issuances and redemption of debt have an important influence on capital levels. In 2011, the Group paid a dividend out of the capital contribution reserve, repaid outstanding preferred securities and refinanced with subordinated debt securities, and replaced maturing senior debt with new senior debt.
In European countries, insurance entities are required to maintain minimum solvency margins according to the existing Solvency I legislation. Solvency I capital is calculated as a fixed percentage of premiums, claims, reserves and/or net amounts at risk. The required minimum solvency margin for general insurers is the greater of 16 percent of premiums written for the year or 23 percent of a three-year average of claims incurred, subject to the first tranche (EUR 61 million) of premiums at 18 percent and the first tranche (EUR 43 million) of claims at 26 percent. In these calculations, premiums and claims for certain liability lines are increased by 50 percent. A reduction is given for reinsurance based on reinsurance claims recoveries over three years as a percentage of gross claims in those years, limited to a maximum of 50 percent. Life insurance companies are required to maintain a minimum solvency margin generally of 4 percent of insurance reserves, but reduced to 1 percent of insurance reserves for life insurance where the credit and market risks are carried by policyholders, plus 0.3 percent of the amount at risk under insurance policies. The same minimum capital requirements are applicable for insurance entities operating in Switzerland. In certain European countries, both EU and non-EU, further requirements have been imposed by regulators.
Eligible equity Total equity 34,017 33,241 Net of intangibles and other assets (8,243) 1 (6,998) Free reserves for policyholder dividends 3,032 2,736
From the Group’s perspective, local regulatory requirements for banking operations are aggregated with the requirement for insurance businesses. For some of the Group’s holding companies, which do not have local regulatory requirements, the Group uses 8 percent of assets as a capital requirement.
Table 22 in USD millions, as of December 31The Group’s Solvency I composition
The following chart shows the composition of the AFR for the SST as of July 1, 2011. Available Financial Resources for the SST are calculated by revaluing all balance sheet items in a market-consistent way.
1 Economic net assets represent the excess of assets over liabilities on the market-consistent balance sheet. In accordance with the SST principles, the market value margin is not treated as part of technical provisions but as part of the SST Target Capital.
Analysis of the composition of the Group’s Available Financial Resources for the Swiss Solvency Test (in USD billions rounded, as of July 1, 2011)
The chart below shows the split of the SST Target Capital as of July 1, 2011 and as of January 1, 2011. The largest proportion of the SST Target Capital as of July 1, 2011, arises from Market/ALM risk, which comprises 39 percent of the total. Premium & Reserve risk is the second largest, comprising 29 percent. Note that under the SST requirements, no capital has to be set aside for operational risk. Premium & Reserve risk decreased over the first half of 2011 due to increased reinsurance on a run-off portfolio and the annual reparametrization of the risk factors.
The following chart shows the estimated impact on the Group’s SST ratio of a one percentage point increase/decrease in yield curves, a separate 25 percent rise/decline in all stock markets, after consideration of hedges in place and a separate one percentage point change in credit spreads, as of July 1, 2011. The sensitivities are considered three separate but instantaneous scenarios.
Risk review continued 1 The impact of scenarios on changes to the SST Target Capital is not included in the sensitivities for the SST ratio as the impact is expected to be small and positive. Scenario 1 and Scenario 2 do not take into account the buffering effect of policyholder participation.
probability of non-exceedance). 4 The second assumption under the lapse risk scenario, “increase in base lapse rates of 50% for all future years”, is applied in a similar manner as the Embedded Value sensitivity, “10% increase in voluntary discontinuance rates”; however the former is pre-tax while the latter is post-tax (for more details, see the “Embedded Value Report”). Also, combining the assumptions in the lapse risk scenario introduces potential non-linear effects, which makes it difficult to directly compare the scenario with the Embedded Value sensitivity.
Impact on the Group’s SST ratio due to market and credit risk-specific scenarios: Impact on the Group’s SST ratio due to general insurance risk-specific scenarios3: Impact on the Group’s SST ratio due to a life insurance risk-specific scenario:
Internal model capital adequacy Internally the Group uses its Risk-Based Capital (RBC) model, which forms also the basis of the SST model. The RBC model targets a total capital level that is calibrated to an “AA” financial strength. Zurich defines RBC as being the capital required to protect the Group’s policyholders in order to meet all of their claims with a confidence level of 99.95 percent over a one-year time horizon.
• Scope – Operational and business risk for General Insurance are reflected in RBC, but not required in SST. • Market/ALM risk – The extreme scenario for Market/ALM risk in RBC is directly attributed to Market/ALM risk; whereas, extreme scenarios in SST are aggregated to the combination of all risk types. This treatment of the extreme scenario in the RBC model leads to a more conservative result than in the SST model.
• Available Financial Resources (AFR) – Senior debt is included in AFR for RBC purposes, but not included in AFR for SST calculation.
At the Group level, Zurich compares RBC to the Group’s AFR to derive an Economic Solvency Ratio. AFR reflects financial resources available to cover policyholder liabilities in excess of their expected value. It is derived by adjusting the IFRS shareholders’ equity to reflect the full economic capital base available to absorb any unexpected volatility in the Group’s business activities.
The chart below shows a split of the RBC allocated to the segments for the year 2011 and 2010 respectively. The largest proportion of RBC is allocated to General Insurance, which comprises 56 percent of the total, followed by Global Life with 26 percent of the total.
The Group’s Risk-Based Capital allocated by segment (%, as of January 1)
I 1. Consolidated income statements 153 2. Consolidated statements of comprehensive income 154 3. Consolidated balance sheets 156 4. Consolidated statements of cash flows 158 5. Consolidated statements of changes in equity 160
II 1. Basis of presentation 162 2. New accounting standards and amendments to published accounting standards 167 3. Summary of significant accounting policies 168 4. Critical accounting judgments and estimates 183 5. Acquisitions and divestments 188 7. Derivative financial instruments and hedge accounting 198 8. Reserves for insurance contracts and reinsurers’ share of reserves for insurance contracts 203 9. Liabilities for investment contracts with and without discretionary participation features (DPF) 209 10. Equity component relating to contracts with DPF 209 11. Gross and ceded insurance revenues and expenses 210 12. Deferred policy acquisition costs and deferred origination costs 211 13. Administrative and other operating expenses 211 14. Farmers management fees and other related revenues 212 15. Mortgage loans given as collateral and collateralized loans 212 16. Property and equipment 213 17. Goodwill and other intangible assets 214 18. Receivables and other assets 217 19. Other liabilities 217 20. Income taxes 219 21. Senior and subordinated debt 223 22. Shareholders’ equity 227 23. Employee benefits 230 24. Share-based compensation and cash incentive plans 236 25. Contingent liabilities, contractual commitments and financial guarantees 239 26. Fair value of financial assets and financial liabilities 242 27. Related party transactions 249 28. Farmers Exchanges 251 29. Segment information 253 30. Significant subsidiaries 275 31. Events after the balance sheet date 278
Revenues Gross written premiums 47,748 47,559 Policy fees 2,452 2,406 Gross written premiums and policy fees 50,200 49,965 Less premiums ceded to reinsurers (6,550) (5,683) Net written premiums and policy fees 43,650 44,282 Net change in reserves for unearned premiums 11 (751) 1,234 Net earned premiums and policy fees 42,899 45,516 Farmers management fees and other related revenues 14 2,767 2,778 Net investment result on Group investments 6 9,367 7,990
Net investment income on Group investments 7,185 7,092 Net capital gains/(losses) and impairments on Group investments 2,182 898
Net income after taxes 3,792 3,507 attributable to non-controlling interests 25 79 attributable to shareholders 3,766 3,428 in USD
Basic earnings per share 22 25.81 23.59 Diluted earnings per share 22 25.61 23.40 in CHF
Basic earnings per share 22 22.79 24.53 Diluted earnings per share 22 22.62 24.33 in USD millions, for the years ended December 31
Change (before reclassification, tax and foreign currency translation effects and after allocation to policyholders) 866 207 (1,469) 73 (1,328) (1,651) Reclassification to income statement (before tax and foreign currency translation effects and after allocation to policyholders) (644) 53 (43) – – (633) Deferred income tax (before foreign currency translation effects) 113 (71) – (19) 352 376 Foreign currency translation effects (4) (13) – – 44 26
Liabilities Reserve for premium refunds 554 518 649 Liabilities for investment contracts 9 50,661 50,667 46,124 Deposits received under ceded reinsurance contracts 1,543 1,362 1,558 Deferred front-end fees 5,720 5,626 5,543 Reserves for insurance contracts 8 240,811 242,719 242,172 Obligations to repurchase securities 1,794 3,330 3,976
Total liabilities and equity 385,869 375,623 369,168 1 See note 5.
Proceeds from sale and repurchase agreements (1,572) (502) Movements in receivables and payables 494 1,379 Net changes in other operational assets and liabilities (573) (999) Deferred income tax, net (133) 258 Net cash provided by/(used in) operating activities 3,888 1,543 in USD millions, for the years ended December 31
Other interest income received 7,270 6,868 Dividend income received 1,778 1,667 Other interest expense paid (1,106) (1,182) Income tax (paid) (1,229) (1,363)
As of December 31, 2011 and 2010, cash and cash equivalents held to meet local regulatory requirements were USD 1,600 million and USD 923 million, respectively.
Share-based payment transactions – 28 – – – – – 28 – 28 – 28
Change of ownership with no loss of control – – – – – – 4 4 – 4 – 4 Total comprehensive income for the period, net of tax – – 2,081 65 (724) 28 3,255 4,704 11 4,716 (13) 4,703
3 Zurich RegCaPS Funding Trusts II, V and VI redeemed USD 575 million of Trust Capital Securities II, V and VI on March 30, 2011 (Series II), on April 4, 2011 (Series V) and on April 25, 2011 (Series VI) respectively.
Net income – – – – – – 3,763 3,763 4 3,766 Net unrealized gains/(losses) on available-for-sale investments – – 332 – – – – 332 – 332 Cash flow hedges – – – 176 – – – 176 – 176 Cumulative foreign currency translation adjustment – – – – (1,512) – – (1,512) – (1,512) Revaluation reserve – – – – – 54 – 54 – 54 Net actuarial gains/(losses) on pension plans – – – – – – (933) (933) – (933)
General information The Consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) and comply with Swiss law. Where IFRS does not contain clear guidance governing the accounting treatment of certain transactions including those that are specific to insurance and reinsurance products, IFRS permits reference to another comprehensive body of accounting principles that uses a similar conceptual framework. The Group’s accounting policies for insurance and reinsurance contracts are therefore based on those developed by the Group before the adoption of IFRS 4 in areas where IFRS 4 did not include specific requirements. Before the time of adoption, the Group typically considered U.S. GAAP pronouncements issued by the Financial Accounting Standards Board (FASB) on insurance and reinsurance contracts. Any subsequent changes to such pronouncements are not reflected in the Group’s accounting policies. In case of business combinations, the Group may decide to maintain the local statutory treatment if this does not distort a fair presentation of the financial position of the Group. If significant, the impact of such cases is described elsewhere in the notes to these Consolidated financial statements.
Disclosures under IFRS 4 “Insurance Contracts” and IFRS 7 “Financial Instruments: Disclosures” relating to the nature and extent of risks, and capital disclosures under IAS 1 “Presentation of Financial Statements” have been included in the Risk Review on pages 104 to 149, and they form an integral part of the Consolidated financial statements.
• Some assets related to non-risk transfer reinsurance deposits reported under receivables and other assets amounting to USD 4 million as of December 31, 2010, are now presented under deposits made under assumed reinsurance contracts in order to ensure consistency with the treatment of other related items.
The Group’s balance sheet is not presented using a current/non-current classification. The following balances are generally considered to be current: cash and cash equivalents, deferred policy acquisition costs on general insurance contracts, accrued investment income, receivables, reserve for premium refunds, obligations to repurchase securities and accrued liabilities.
Revenues Gross written premiums 47,559 – 47,559 Policy fees 2,406 – 2,406 Gross written premiums and policy fees 49,965 – 49,965 Less premiums ceded to reinsurers (5,683) – (5,683) Net written premiums and policy fees 44,282 – 44,282 Net change in reserves for unearned premiums 1,227 7 1,234 Net earned premiums and policy fees 45,509 7 45,516 Farmers management fees and other related revenues 2,778 – 2,778 Net investment result on Group investments 7,990 – 7,990
Net investment income on Group investments 7,092 – 7,092 Net capital gains/(losses) and impairments on Group investments 898 – 898
attributable to policyholders (462) – (462) attributable to shareholders (893) – (894)
Net income after taxes 3,513 (6) 3,507 attributable to non-controlling interests 79 – 79 attributable to shareholders 3,434 (6) 3,428 in USD
Basic earnings per share 24.57 (0.04) 24.53 Diluted earnings per share 24.38 (0.05) 24.33
Consolidated financial statements 2. New accounting standards and amendments to published accounting standards
In June 2010, the IASB issued amendments to IAS 1 “Financial Statement Presentation”. The amendments address the presentation of components of other comprehensive income (OCI) and will be effective for annual reporting periods beginning on or after July 1, 2012.
In May 2011, IFRS 13 “Fair Value Measurement” was issued by the IASB. IFRS 13 provides guidance on the measurement of fair value and requires disclosures about fair value measurements to increase the transparency. It does not require any new measurements of assets or liabilities at fair value, any changes in what is measured or how to present changes in fair value. IFRS 13 applies when other standards require or permit fair value measurements and will be effective for annual reporting periods beginning on or after January 1, 2013, with earlier adoption permitted.
In June 2011, the IASB issued amendments to IAS 19 “Employee Benefits”. The amendments primarily comprise clarification of the recognition, presentation and disclosure requirements for defined benefit plans. The amendments will be effective for annual reporting periods beginning on or after January 1, 2013, with earlier adoption permitted. The Group expects that the adoption of the amendments will result in an increase of pension expense as the income from plan assets will be calculated using a high quality corporate bond rate rather than an expected return on assets rate.
In December 2011, the IASB issued amendment to IAS 32 “Financial Instruments: Presentation”. The amendments address inconsistencies by clarifying the requirements for offsetting financial instruments. The amendments will be effective for annual periods beginning on or after January 1, 2014.
Investments in associates and partnerships where the Group has the ability to exercise significant influence but not control, as well as joint ventures where there is joint control, are accounted for using the equity method. Significant influence is presumed to exist when the Group owns, directly or indirectly, between 20 percent and 50 percent of the voting rights. Under the equity method of accounting, investments in associates, partnerships or joint ventures are initially recognized at cost, including attributable goodwill, and adjusted thereafter for post-acquisition changes in the Group’s share of the net assets of the investment.
Foreign currency transactions and balances Foreign currency transactions are translated into the functional currency using the spot exchange rate at the date of the transaction or, for practical reasons, a weighted average rate, if exchange rates do not fluctuate significantly. Foreign currency monetary items and foreign currency non-monetary items, which are carried at fair value, are translated at end-of-period exchange rates. Foreign currency non-monetary items which are carried at historical cost are translated at historical exchange rates. The resulting foreign currency differences are recorded in income, except for the following: • when gains or losses on non-monetary items measured at fair value, such as available-for-sale equity securities, are recognized directly in OCI, any foreign currency component included in the gains or losses is also recognized directly in OCI; • when changes in the fair value of monetary items denominated in foreign currency, such as debt securities, that are classified as available-for-sale, are analyzed between foreign currency translation differences resulting from changes in the amortized cost of the security and other fair value changes in the security. Foreign currency translation differences related to changes in amortized cost are recognized in income, and those related to other changes in fair value are recognized in OCI; and
• the net income of the company, fund or other entity that issues the contract.
The Group applies the same accounting policies for the recognition and measurement of obligations arising from insurance contracts and from investment contracts with DPF. These recognition and measurement criteria apply to obligations arising from the contract, deferred acquisition costs and other related intangibles.
Consolidated financial statements continued an investment product to a product that meets the definition of an insurance contract, the previously held reserve and the related deferred origination costs are also reclassified and are accounted for in accordance with the accounting policy to be applied to the new product on a prospective basis. As a consequence, no gain or loss is recognized as a result of the reclassification of a contract from investment to insurance.
Cash flows from certain universal life-type contracts in the Group‘s Spanish operations are recognized as gross written premiums and insurance benefits and losses and not as deposits.
For traditional life insurance policies, interest rate assumptions can vary by country, year of issuance and product. The mortality rate assumptions are based on published mortality tables and are adjusted for actual experience by geographic area and modified to allow for variations in policy terms. The surrender assumptions are based on actual experience by geographic area and modified to allow for variations in policy terms. Future life policyholders’ benefits include the value of accumulated declared bonuses or dividends that have vested to policyholders.
Life insurance DAC for traditional participating life insurance contracts is amortized over the life of the contracts based on estimated gross margins expected to be realized over the life of the contract. Estimated gross margins are updated for actual and anticipated future experience using the latest revised interest rate for the remaining benefit period. Resultant deviations are reflected in income.
Premiums paid under retroactive contracts are included in reinsurance recoverables in the balance sheet. If the amount of gross liabilities reinsured is higher than the premium paid, reinsurance recoverables are increased by the difference and the resulting gain is deferred and amortized over the expected settlement period. If the amount of gross liabilities reinsured is lower than the premium paid, reinsurance recoverables are reduced by the difference and the resulting loss is recognized in income immediately.
The costs of acquiring new investment contracts without investment management services are included in the calculation of the effective interest rate used to measure the amortized cost of the related liabilities.
e) Investments excluding derivative financial instruments Investments include financial assets (excluding derivative financial instruments), cash and cash equivalents and real estate held for investment.
Categories and measurement of investments (excluding derivative financial instruments) Financial assets are classified as available for sale, financial assets at fair value through profit or loss, held-to-maturity investments or loans and receivables. Management determines the classification of these investments at initial recognition, depending on the purpose for which the investments were acquired.
All financial assets are initially recognized at fair value plus, in the case of financial assets not carried at fair value through profit or loss, incremental transaction costs that are directly attributable to their acquisition.
Available-for-sale financial assets Available-for-sale financial assets are financial assets that are either designated as such or are not classified in any of the other categories.
Other items Cash and cash equivalents comprise cash in hand, deposits held at call with banks and other short-term highly liquid investments that are readily convertible into cash and are subject to an insignificant risk of change in fair value, for example, short-term investments with maturities of three months or less from the date of acquisition. Cash and cash equivalents also includes cash received as collateral for securities lending. Cash and cash equivalents are stated at face value.
Real estate held for investment is initially recorded at cost (including transaction costs) and is subsequently measured at fair value with changes in fair value recognized in income. Fair value is based on active market prices, adjusted if necessary for differences in the nature, location or condition of the property. If active market prices are not available, alternative valuation methods are used, for example discounted cash flow projections. Valuations are performed annually by internal valuation specialists and generally at least once every three years by external valuers. The gain or loss on disposal of real estate held for investment is the difference between the net proceeds received and the carrying amount of the investment and is recognized in the consolidated income statement when the disposal is completed.
Consolidated financial statements b) a breach of contract, such as a default or delinquency in payments; c) it becomes probable that the issuer or debtor will enter bankruptcy or other financial reorganization; d) the disappearance of an active market for that financial asset because of financial difficulties; or e) observable data indicating a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in that group, including: • adverse changes in the payment status of issuers or debtors in that group; or
Available-for-sale financial assets When there is objective evidence that an available-for-sale debt security is impaired, the cumulative loss that had been recognized directly in OCI is recognized in income as an impairment loss. The impairment loss is the difference between the acquisition cost (net of any principal repayment and amortization) and the current fair value, less any impairment loss on that security previously recognized in income. If the fair value of a debt security 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, up to the amount of the previously recognized impairment loss, as adjusted for any amortization already recognized in income. Any further gains are recognized directly in OCI. Any subsequent losses, to the extent that they do not represent further impairment losses, are also recognized in OCI.
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 measured and presented as separate derivative financial instruments.
Consolidated financial statements g) Borrowings Borrowings (debt issued) are recognized initially at fair value of the consideration received, net of transaction costs incurred. Borrowings are subsequently carried at amortized cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognized in income over the period of the borrowing using the effective interest rate method.
When fair value hedge accounting is applied to borrowings, the carrying values of the borrowings are adjusted for changes in fair values related to the hedged exposure.
Consolidated financial statements continued j) Property and equipment Own use property is defined as property held by the Group for use in the supply of services or for administrative purposes. Buildings held for own use and equipment are carried at cost less accumulated depreciation and any accumulated impairment loss. These assets are depreciated usually on a straight-line basis to income over the following estimated useful lives: • buildings 25 to 50 years; • furniture and fixtures five to ten years; and
Assets that have an indefinite useful life, for example land, are not subject to amortization and are tested regularly for impairment. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the carrying value of the asset exceeds its expected recoverable amount. The recoverable amount is the higher of fair value less costs to sell and value-in-use. Assets are grouped on a cash generating unit (CGU) level if the recoverable amount cannot be separately determined.
The useful lives of customer relationships and contracts, affinity partnerships extend up to 30 years and are estimated based on the period of time over which they are expected to provide economic benefits after taking into account all relevant economic and legal factors such as usage of the assets, typical product life cycles, potential obsolescence, stability of the industry, competitive position and the period of control over the assets.
An impairment loss is recorded in income when 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.
Consolidated financial statements on a General Insurance segment level. Within the segments Global Life and Farmers cash generating units are identified at either business unit level or individual reporting entity level.
Attorney-in-fact relationships (AIF) The AIF reflects the ability of the Group to generate future revenues based on the Group’s relationship with the Farmers Exchanges, which are managed but not owned by Farmers Group Inc. (FGI), a wholly owned subsidiary of the Group. In determining that these relationships have an indefinite useful life, the Group considered the organizational structure of inter-insurance exchanges, under which subscribers exchange contracts with each other and appoint an attorney- in-fact to provide non-claims management services, and the historical AIF between FGI and the Farmers Exchanges.
Software Costs incurred during the development phase of computer software are capitalized when the following recognition criteria are met: • it is technically feasible to complete the software product so that it will be available for use; • management intends to complete and there is an ability to use or sell the software product; • the software is expected to generate future economic benefits; • sufficient resources are available to complete the development of the software; and
Consolidated financial statements continued l) Provisions, contingent liabilities, commitments and financial guarantees Provisions, contingent liabilities, commitments and financial guarantees are recognized when the Group has a present obligation (legal or constructive) as a result of a past event, it is more likely than not that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of such an obligation. Provisions are discounted when the effect of the time value of money is considered material.
n) Other revenue recognition Farmers management fees Fees for non-claims related management services provided by FGI to the Farmers Exchanges are calculated primarily as a percentage of gross premiums earned by the Farmers Exchanges. FGI provides non-claims related management services to the Farmers Exchanges, including risk selection, preparation and mailing of policy forms and invoices, premium collection, management of the investment portfolios and certain other administrative and managerial functions. The Farmers Exchanges are directly responsible for their own claims functions, including the settlement and payment of claims and claims adjustment expenses, as well as for the payment of agent commissions and bonuses and the payment of premium and income taxes.
o) Net investment income Net investment income includes investment income earned and investment expenses incurred.
p) Employee benefits Share-based compensation and cash incentive plans The Group operates long-term incentive plans which comprise the allocation of a target number of shares and/or share options. With effect from 2011, share option grants were discontinued.
The total amount to be expensed over the period before the vesting date is determined by reference to the fair value of the shares and/ or previously options granted. Non-market vesting conditions (for example, profitability and revenue growth targets) are included in assumptions to determine the number of shares and/or previously 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 additional paid-in capital. However, no subsequent adjustment to total additional paid-in capital is made after the vesting date.
The proceeds received when the shares are delivered or options are exercised are credited, net of any directly attributable transaction costs, to share capital (nominal value) and additional paid-in capital.
q) Leases The Group enters into lease contracts, predominantly of property and equipment, as a lessor and a lessee. The terms and conditions of these contracts are assessed and the leases are classified as operating leases or finance leases according to their economic substance. Agreements which transfer to counterparties substantially all the risks and rewards incidental to the ownership of assets, but not necessarily legal title, are classified as finance leases. Leases in which a significant portion of the risks and rewards of ownership of the underlying asset are retained by the lessor are classified as operating leases.
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, employee benefits 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.
a) Reserves for losses and loss adjustment expenses The Group is required to establish reserves for payment of losses and loss adjustment expenses that arise from the Group’s general insurance products and the run-off of its former third party reinsurance operations. These reserves represent the expected ultimate cost to settle claims occurring prior to, but still outstanding as of, the balance sheet date. The Group establishes its reserves by product line, type and extent of coverage and year of occurrence. There are two categories of loss reserve: reserves for reported losses and reserves for IBNR losses. Additionally, reserves are held for loss adjustment expenses, which contain the estimated legal and other expenses expected to be incurred to finalize the settlement of the losses.
Group’s businesses throughout the world. Management considers the results of these reviews and adjusts its reserves for losses and loss adjustment expenses, where necessary.
See note 8 for further information on reserves for losses and loss adjustment expenses and to the Insurance risk section of the Risk Review for sensitivities on Insurance risk.
See note 8 for further information on future life policyholders’ benefits and policyholders’ contract deposits and other funds and to the Insurance risk section of the Risk Review.
The determination of fair value for financial assets and liabilities is generally based on quoted market prices or broker/ dealer quotations. If quoted prices are not readily available, then fair values are derived from valuation models (for example, discounted cash flow models) that estimate the amounts for which the respective financial instruments could be transferred under current market conditions.
Discounted cash flow models are used for mortgage and other loans and long term receivables. The discount rates used in these models are either current interest rates charged by the Group on these instruments or a calculated rate that reflects the return a market participant would expect to receive on instruments with similar remaining maturity, cash flow pattern, currency, credit risk, collateral and interest rates.
Fair values of debt instruments issued by the Group are estimated using discounted cash flow models based on the Group’s current incremental borrowing rates for similar types of borrowings, with maturities consistent with those remaining for the debt instruments being valued.
In determining the fair values of investments, the Group makes extensive use of third party pricing providers and only in rare cases places reliance on prices that are derived from internal models. One of the objectives of the Group’s control environment and the process of selection of pricing providers is to ensure that fair values of investments are sourced only from independent, reliable and reputable third party pricing providers.
The Group employs third party asset managers who manage a significant percentage of assets on behalf of the Group, but are not responsible for determining the fair values reported in the consolidated financial statements. Investment accounting and operations functions, are completely independent from those responsible for buying and selling the assets, and are responsible for receiving, challenging and verifying values provided by third party pricing providers to ensure that fair values are reliable and comply with applicable accounting and valuation policies. The quality control procedures used depend on the nature and complexity of the invested assets and include regular reviews of valuation techniques and inputs used by pricing providers (for example, default rates of collateral for asset backed securities), variance and stale price analysis and comparisons with fair values of similar instruments and with alternative values obtained from asset managers and brokers.
For held-to-maturity investments and loans and receivables, the recoverable amount is determined by reference to the present value of the estimated future cash flows. The carrying amount of mortgage loans and receivables is reduced through an impairment allowance determined using an analytical method based on knowledge of each loan group or receivable. The method is normally based on historical statistics, adjusted for known or anticipated trends in the group of financial assets or individual accounts. As judgment is inherent in such impairment reviews, actual outcomes could vary significantly from the forecast future cash flows.
The recoverable amount for General Insurance intangible assets reflecting distribution agreements is determined on the basis of value-in-use calculations. These calculations use cash flow projections in line with the terms and conditions of the underlying distribution agreements. For Global Life business distribution agreements, the recoverable amount is determined based on projected cash flows and discount rates consistent with the data used for actuarial valuations and embedded value calculations.
The discount rates used in the recoverable amount calculations consider the base rates, comprise of the U.S. Dollar, Euro and British pound swap rates for the respective mature markets. These base rates are further adjusted for equity risk premium and appropriate beta to derive the discount rates. Emerging market discount rates are based on the U.S. Dollar discount rate taking into account inflation differential expectations. Input factors to the discount rates are based on observable market data.
In addition to the range of discount rates the table below sets out the perpetual nominal growth rates beyond the planning period which are dependent on country specific growth rate and inflation expectations.
Sensitivity tests were performed where deemed appropriate and typically comprised of an analysis for a decrease in cash flows of up to 25 percent, a decrease in the perpetual growth rate of up to 1.5 percentage points and an increase in the discount rate subject to the specific country risk premium. No impairments were identified on this basis.
g) Deferred taxes Deferred tax assets are recognized if sufficient future taxable income, including income from the reversal of existing taxable temporary differences and available tax planning strategies, is available for realization. The utilization of deferred tax assets arising from temporary differences depends on the generation of sufficient taxable profits in the period in which the underlying asset or liability is recovered or settled. The utilization of deferred tax assets arising from unused tax losses or tax credits depends on the generation of sufficient taxable profits before the unused tax losses or tax credits expire. As of each balance sheet date, management evaluates the recoverability of deferred tax assets and if it is considered probable, that all or a portion of the deferred tax asset will not be utilized, then a valuation allowance is recognized.
h) Employee benefits The Group provides defined benefit 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. The discount rate for significant plans is based on a yield curve approach. The Group sets the discount rate by creating a hypothetical portfolio of high quality corporate bonds for which the timing and amount of cash outflows approximate the estimated payouts of the defined benefit plan. 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.
Transactions in 2011 Acquisitions On October 5, 2011 the Group completed the acquisition of a 51.0 percent participation in a holding company, which owned the life insurance, pension and general insurance operations of Banco Santander S.A. (Santander) in Brazil and Argentina. Between November 2, 2011 and November 4, 2011 the holding company completed the acquisition of a 100 percent participation in the life insurance, pension and general insurance operations of Santander in Chile, Mexico and Uruguay with the Group ultimate ownership of 51.0 percent. The Group obtained control over the acquired entities through its majority of voting rights in the holding company’s board of directors and as shareholder, which allows the Group to direct the relevant activities of the insurance operations. As part of the transaction, the Group entered into long-term strategic distribution arrangements with Santander in Latin America. This transaction is in line with the Group’s emerging market strategy in both Global Life and General Insurance, and significantly expands the Group’s presence in Latin America.
Given the size and the timing of the transaction the Group is still in the process of completing the initial purchase accounting. As of December 31, 2011 total assets of the acquired insurance operations amount to USD 15.6 billion and total liabilities amount to USD 13.2 billion. The 49.0 percent interest owned by Santander of USD 1.1 billion is recorded as non-controlling interests. These preliminary numbers will be allocated to individual balance sheet line items in a subsequent period. The assets and liabilities of the acquired holding company are already included in the respective line items. The financial result for the period since acquisition is not included in the Group’s consolidated income statement for the year ended December 31, 2011.
Based on a preliminary assessment the table below shows key financial information for the companies acquired.