The table below provides an analysis of the maturity of reserves for insurance contracts net of reinsurance based on expected cashflows without considering the surrender values as of December 31, 2007 and 2006. Reserves for unit-linked contracts amounting to USD 70,075 million and USD 66,008 million at December 31, 2007 and 2006, respectively, are not included in the table below, as policyholder can generally surrender their contracts at any time, at which point the underlying unit-linked assets would be liquidated. Risks from the liquidation of unit-linked assets are borne by the policyholders of unit-linked contracts.
Maturity schedule in USD millions, as of of reserves for December 31, 2007 insurance contracts
The table below provides an analysis of the maturity of liabilities for investment contracts based on expected cash-flows as of December 31, 2007 and 2006. 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.
Liabilities Liabilities related related to Liabilities to investment related to unit-linked contracts investment investment (amortised contracts contracts cost) with DPF Total
Refer to notes 15 and 20, respectively, for information on the maturities of collateralized loans and total debt issued. The majority of the Group’s other financial liabilities, listed in note 18, are due within 12 months, with the exception of USD 1,284 million and USD 667 million, with a maturity of more than 12 months, at December
The ranges for the liabilities for investment contracts and future policyholder benefit reserves represent the weighted average of the minimum and maximum effective interest rate across the Group’s Life business.
Insurance enterprises in EU member countries 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 50 million) of premiums being at 18 percent and the first tranche (EUR 35 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 enterprises operating in Switzerland. In certain European countries further requirements may apply.
In 2007 the European Commission proposed a new directive on Solvency II which will include a new solvency regime and reflects the latest developments in prudential supervision, actuarial methods and risk management. Solvency II will introduce economic risk-based solvency requirements which will be more risk-sensitive and more sophisticated and a new regime where all risks and their interactions are considered. As part of the risk management system, all insurance and reinsurance undertakings will be required to have, as an integral part of their business strategy, a regular process for assessing their overall solvency needs with reference to their specific risk profile. The Commission aims to have the new system in operation in 2012.
Private Insurance (FOPI). In order to comply with future SST requirements, Zurich has continued to build on its existing internal risk based capital model (RBC) and shared it with FOPI. In 2007, Zurich conducted a field test for each Swiss legal entity as required.
The Group continues to be subject to Solvency I requirements based on the Swiss Insurance Supervisory Law. The Group’s Solvency I as at December 31, 2007 and 2006 was as follows: Table 27
1 Under guidelines issued by FOPI during 2007, only 25% of all subordinated debt issuances are admissible, except for the issuance by Zurich Finance (UK) p.l.c., of which 50% is admissible.
From the Group’s perspective, local regulatory requirement for business operations are added to the requirement for insurance businesses. For some of the Group’s holding companies, which do not have local regulatory requirements, the Group uses 8% of assets as a capital requirement.
As of December 31, 2007, the Group and all its subsidiaries were substantially in compliance with applicable regulatory capital adequacy requirements.
In conjunction with the considerations set out above, the Group seeks to maintain the balance between higher returns on equity, which may be possible with higher levels of borrowing, and the advantages and security provided by a sound capital position.
An important influence on the capital levels is the payment of dividends and share buy-backs. On February 14, 2007 the Board of Zurich Financial Services AG authorized a share buy-back program. 3,432,500 fully paid shares, with a nominal value CHF 0.10, were bought back during 2007 at an average price of CHF 364 per share, with a total cost of USD 1 billion. A proposal to cancel these repurchased shares will be submitted to the shareholders at the Annual General Meeting in 2008.
Other than by operation of the restrictions mentioned above, the ability of the Group’s subsidiaries to pay dividends may be restricted or, while dividend payments as such may be legally permitted, may be indirectly influenced by minimum capital and solvency requirements imposed by insurance, bank and other regulators in the countries in which the subsidiaries operate as well as by other limitations existing in some countries such as foreign exchange control restrictions.
In the US, restrictions on the payment of dividends that apply to insurance companies may be imposed by the insurance laws or regulations of an insurer’s state of domicile. For general insurance subsidiaries, dividends are generally limited over a 12-month period to 10 percent of the previous year’s policyholders’ surplus or previous year’s net income. For life, accident and health insurance subsidiaries, dividends are generally limited over a 12-month period to 10 percent of the previous year’s policyholders’ surplus or the previous year’s net gain from operations. Dividends paid in excess of statutory limitations require prior approval from the Insurance Commissioner of the insurer’s state of domicile.
No provision for non-repayment has been required in 2007 and 2006 for the loans or guarantees made to members of the Group Executive Committee.
Information required by art. 663bbis and art. 663c paragraph 3 of the Swiss Code of Obligation is disclosed in the Finanical Statements of the Holding Company.
Conditions governing payment of interest and repayment of principal are outlined in the surplus note and certificates of contribution. Generally, repayment of principal may be made only when the issuer has an appropriate amount of surplus, and then only after approval is granted by the issuer’s governing board and the appropriate state insurance regulatory department in the US. In addition, payment of interest may generally be made only when the issuer has an appropriate amount of surplus and then only after approval is granted by the appropriate state insurance regulatory department in the US.
b) Quota share reinsurance treaties with the Farmers Exchanges The Farmers Exchanges cede risk through quota share reinsurance treaties to Farmers Reinsurance Company (Farmers Re), a wholly owned subsidiary of FGI, and, to Zurich Insurance Company (ZIC).
Effective December 31, 2004, Farmers Re and ZIC entered into a 12.0 percent All Lines Quota Share reinsurance treaty under which they each assume a percentage of all lines of business written by the Farmers Exchanges, prospectively. Under this treaty, which amended the 10.0 percent All Lines Quota Share reinsurance treaty in effect since December 31, 2002, Farmers Re and ZIC assume a 2.4 percent and 9.6 percent respective quota share of the premiums written and the ultimate net losses sustained in all lines of business written by the Farmers Exchanges after the APD reinsurance agreement has been applied. Underwriting results assumed are subject to a maximum combined ratio of 112.5 percent and a minimum combined ratio of 93.5 percent. In addition, under this treaty the Farmers Exchanges’ catastrophe losses are subject to a maximum of
USD 800 million. Farmers Re and ZIC assumed USD 19 million and USD 77 million, respectively, of maximum annual catastrophe losses. This reinsurance agreement, which can be terminated after 60 days notice by any of the parties, also provides for the Farmers Exchanges to receive a provisional ceding commission of 22.0 percent of premiums for acquisition expenses, 8.8 percent of premiums for unallocated loss adjustment expenses and 5.3 percent of premiums for other expenses with additional experience commissions potentially payable depending on loss experience.
Net change in reserves for unearned premiums (574) (218) (5) (5)
Farmers management fees and other related revenues – – – –
Losses and loss adjustment expenses, net of reinsurance 20,916 19,867 90 88
Underwriting and policy acquisition costs, net of reinsurance 5,358 4,927 1,640 1,448
Amortization and impairments of intangible assets 96 88 143 114 1 The Group’s life operations in the UK entered into a reinsurance agreement to transfer the risk associated with a significant annuities portfolio as of January 1, 2007. The initial impact of this transaction was an increase of USD 7.3 billion in premiums ceded to reinsurers and an increase of USD 7.0 billion in ceded insurance benefits and losses in the Global Life business.
Policyholders’ contract deposits and other funds, gross 1,024 930 14,173 14,117
Gross written in USD millions premiums and policy fees, total revenues and total assets by geographical segment
Gross written premiums and policy fees for Total revenues for the years the years Total assets ended December 31 ended December 31 as of December 31
Significant subsidiaries as of December 31, 2007 Nominal value of common stock (in Voting Ownership local currency
Zurich Financial Services Australia Limited Sydney General Insurance 100 100 AUD 22.8
B G Investments Ltd. Hamilton Corporate Functions 100 100 USD 0.3
Centre Group Holdings Limited Hamilton Other Businesses 100 100 USD 0.3
ZCM Holdings (Bermuda) Limited Hamilton Other Businesses 100 100 USD 137
ZG Investments III Ltd. Hamilton Corporate Functions 100 100 USD 0.01
ZG Investments IV Ltd. Hamilton Corporate Functions 100 100 USD 0.01
Zurich International (Bermuda) Ltd. Hamilton Other Businesses 100 100 USD 9.9
Zurich Versicherung Aktiengesellschaft (Deutschland) Frankfurt / Main General Insurance 95.17 95.17 EUR 142.2 1 The segments are defined in the notes to the consolidated financial statements, note 1, basis of presentation. 2 Dalegate Ltd. holds 66% of Zurich Retail Insurance Company Ltd. in Russia (formerly OOO Nasta Insurance Company). The Group has agreed to a path to acquire the remaining 34% ownership. 3 In addition buy out options exist which allow the minority shareholders to sell another 17.17 percent of the shares of Deutscher Herold Aktiengesellschaft to the Group.
as of December 31, 2007 Nominal value of common stock (in Voting Ownership local currency
Zurich Insurance Ireland Ltd. Dublin General Insurance 100 100 EUR 4.6
Zurich Life Insurance Company Ltd Zurich Corporate Functions 100 100 CHF 60
“Zurich” Investment Management AG Zurich Corporate Functions 100 100 CHF 10
Allied Dunbar Assurance p.l.c. Swindon, England Life Insurance 100 100 GBP 0.05
Allied Zurich Limited Swindon, England Corporate Functions 100 100 GBP 378.1
Eagle Star Holdings Limited Swindon, England Corporate Functions 100 100 GBP 0.05
Zurich Employment Services Limited Swindon, England Life Insurance 100 100 GBP 9 4 Listed on the Johannesburg Stock Exchange. On December 31, 2007, the company had a market capitalization of ZAR 411.5 m (ISIN Number 000006243).
as of 31 December 2007 Nominal value of common stock (in Voting Ownership local currency
Zurich International (UK) Limited Fareham, England General Insurance 100 100 GBP 40
Zurich International Life Limited Douglas, Isle of Man Life Insurance 100 100 GBP 55.6
Farmers New World Life Insurance Company Mercer Island, WA Life Insurance 97.91 100 USD 6.6
Farmers Reinsurance Company Los Angeles, CA Other Businesses 97.91 100 USD 5
Kemper Investors Life Insurance Company Bellevue, WA Other Businesses 100 100 USD 2.5
ZFS Finance (USA) LLC V 5 Wilmington, DE Corporate Functions 100 100 USD –
ZFUS Services, LLC 5 Wilmington, DE Services 100 100 USD –
Zurich American Insurance Company (and subsidiaries) New York, NY General Insurance 100 100 USD 5
Zurich Finance (USA), Inc. Wilmington, DE Corporate Functions 100 100 USD 0.000001
The adoption of the European Embedded Value Principles does not affect the basis of reporting the local statutory results, the regulatory capital position or the dividend paying capacity of the Group. EV is derived from the local statutory, regulatory and IFRS financial statements of the Group’s Global Life entities and is presented net of minority interests. However new business value is shown before deduction of minorities.
From 2007, new business value has been calculated separately for each quarter using assumptions, both operating and economic, as of the start of the relevant quarter. In consequence, the new business strain has also been calculated on a quarterly discrete basis. The comparative new business results for 2006 have not been restated to this basis.
Embedded Value in USD millions, as of December 31 2007 20061
Shareholders’ net assets are based on local statutory accounting. The EV is adjusted to reflect shareholders’ interest in the market value of net assets after the exclusion of goodwill and other necessary actuarial adjustments.
Value of business in-force is the present value of future projected profits from covered business, and can be defined as the certainty equivalent value of business in-force less frictional costs, time value of options and guarantees, and cost of non market risk. Further details of the methodology used in the calculation of these items are given in section 4.
Value of business in-force 8,953 7,868 1 Comparative 2006 figures for Switzerland have been restated. More details can be found in section 2g.
Frictional costs are applied to the total capital held by the covered business. As of December 31, 2007 total capital is the sum of: • USD 3.7 billion of minimum solvency margin required by regulation; • USD 1.1 billion of any additional solvency margin that life business units consider is in practice required; and, • USD 2.2 billion of free surplus.
The sum of the first two items above is referred to as “required capital” elsewhere in this document.
Frictional costs are applied to the minimum solvency margin required to be held in respect of new business.
New business in USD millions, for the years ended December 31 volumes, gross of minorities
New business in USD millions, for the years ended December 31 margin, gross of minorities after tax before tax 1 after tax before tax 1
New business in USD millions, for the years ended December 31 value, after tax gross of minorities
The new business value after tax, the annual premium equivalent and present value of new business premiums net of minority holdings are shown in the following table: Table 2.6
Financial Report 2007 d) Analysis of movement in Embedded Value The following table provides an analysis of the movement in the EV for the covered business from December 31, 2006 (opening EV) to December 31, 2007 (closing EV). The analysis is shown separately for shareholders’ net assets and the value of business in-force, and includes amounts transferred between these components.
Analysis of in USD millions, for the year ended December 31, 2007 movement in Embedded Value
Expected return on in-force business and shareholders’ net assets, after tax 274 615 889
The following table provides an analysis of the components which comprise the value of business in-force.
Analysis of in USD millions, for the year ended December 31, 2007 movement in Value of business in-force
Expected transfer from value of business in-force to shareholders’ net assets, after tax (1,109) 38 0 0 (1,070)
Expected return on in-force business and shareholders’ net assets, after tax 537 (6) 68 17 615
Total operating profit after tax consists of the following: • Expected transfer from value of business in-force to shareholders’ net assets, after tax shows the profits expected to emerge during the period in respect of business that was in-force at the beginning of the
Financial Report 2007 period. The net effect is zero, as the reduction in value of business in-force is offset by the increase in shareholders’ net assets. The expected profits do not include changes in solvency margin over the period.
Foreign currency translation effects represent the impact of currency movements to end-of-period exchange rates.
e) Reconciliation of IFRS net assets to Embedded Value for covered life business
100 basis points decrease in risk free yield curve 190 10 10% fall in equity and property market values (676) n/a 100 basis points increase in risk discount rate (902) (131)
10% increase in implied volatilities for equities and properties (189) (26)
10% increase in implied volatilities for risk free yields (372) 74
Operating sensitivities 10% decrease in voluntary discontinuance rates 420 88 10% decrease in maintenance expenses 319 37 10% decrease in initial expenses and commissions n/a 112 5% improvement in mortality and morbidity for assurances 218 25 5% improvement in mortality for annuities (76) (1)
Operating sensitivities • 10% decrease in voluntary discontinuance rates (e.g. a base assumption of 5% p.a. would decrease to 4.5% p.a.); • 10% decrease in maintenance expenses (e.g. a base assumption of USD 30 p.a. would decrease to USD 27 p.a.); • 10% decrease in initial expenses and commissions (new business values only); • 5% improvement in mortality and morbidity assumptions for assurances (e.g. if the base mortality assumption for assurances was 90% of a particular table this would decrease to 85.5%); • 5% improvement in mortality assumptions for annuities (e.g. if the base mortality assumption for annuities was 90% of a particular table this would decrease to 85.5%); • Frictional costs applied to 150% of minimum solvency margin, rather than to total capital for in-force business or minimum solvency margin for new business.
The 100 bps increase in risk free yield curve reduces the value of some products, such as term assurance, with fixed cash flows which are discounted at higher rates. This reduction is partially offset by the increase in the value of other products, such as those with profit sharing, due to the higher assumed investment returns on investment of net cash flows. The former effect is particularly apparent in the US where this sensitivity leads to a decrease in value. This is only partially offset by positive effects particularly in Germany.
The sensitivity to a 1% p.a. increase in discount rates represents an increase in the discount rates used to discount projected shareholder profits, with no change to the assumed investment returns. This moves away from market consistent methodology and hence is not strictly pertinent under a market consistent approach. For stochastic modeling, the increase in discount rates applies to each year in each projected simulation.
Embedded Value in USD millions 2006 as previously 2006 reported restated
Value of Shareholders’ business net assets 1 in-force 1 Total 1 Comparative 2006 figures for Switzerland have been restated. More details can be found in section 2g.
InterUnited United Switzer- Rest of national States Kingdom Germany land 1 Europe Businesses Total 1
Certainty equivalent value of business in-force 2,031 3,120 690 1,638 1,638 563 9,681
Cost of non market risk (116) (248) (30) (48) (84) (63) (589)
Value of business in-force 1,675 2,597 336 1,445 1,391 424 7,868 1 Comparative 2006 figures for Switzerland have been restated. More details can be found in section 2g.
• In Rest of Europe, the increase due to currency translation effects is partly offset by lower implied volatilities for the Euro interest rates and an increase in the risk free rates. Most of the countries in Rest of Europe have profit sharing rules with guarantees on maturity and surrender similar to those in Germany, or in the case of Ireland, similar to those in the UK.
• In the UK, the significant reduction is due to the removal of the longevity risk associated with the closed book of annuity business as a result of the reassurance of the major part.
• In Germany, higher interest rates have reduced shareholder exposure to risks such as longevity experience due to higher profit sharing.
New business in USD millions, for the years value, after tax ended December 31
New business 1 in USD millions, for the years ended December 31 value, before tax
1 In certain countries particularly the UK, where life insurance companies pay tax in respect of both policyholders and shareholders, the results shown in the above table are before shareholders’ tax and after allowing for policyholders’ tax.
Geographical in USD millions, for the year analysis of ended December 31, 2007 new business value, after tax
Operating profit expected from in-force business and shareholders’ net assets, after tax 159 315 59 135 165 55
Total operating profit, after tax 286 461 283 354 404 106
Embedded Value profit, after tax 237 289 378 349 395 163
• In Rest of Europe, principally Zurich International Solutions and Ireland, operating profits include a significant contribution from new business value. The operating profit was also increased by a refinement in the recognition of the clawback of initial commission payments and the level of commission in advance assets held in Zurich International Solutions, and improved mortality experience and the revision of the mortality assumptions in line with the improved experience in Spain. This was partly offset by a revision of the persistency assumptions in Zurich International Solutions and Spain. Operating profits were also partly reduced due to increased expense projection assumptions in Spain. Economic variance reflects a reduction in the market value of fixed interest assets following the increase in interest rates in the Euro zone. This was however partly offset by the growth of unit-linked funds in Zurich International Solutions and Italy, as well as a reduction of taxation in Italy.
• In International Businesses, operating profit includes a significant contribution from new business value in particular from Hong Kong and Chile. The revision of the persistency assumptions for Hong Kong in line with experience and an increase in the expense assumption for Australia however decreased operating profits. Economic variance reflects the increase in the risk free yield curve, particularly in Chile, during 2007.
Geographical in USD millions, for the year analysis of ended December 31, 2007 return on opening EV – annualized
In Germany the adjustments for foreign currency translation effects and dividends line reflects a change in shareholder structure of the service companies, which has increased EV at the beginning of the year.
EV represents the shareholders’ interests in the entities included in Global Life as set out in the Group’s consolidated IFRS Financial Statements. EV excludes any value from future new business. The Group has adopted the methodology for its EV based on the European Embedded Value Principles issued by the CFO Forum in May 2004, selecting a “bottom-up” market consistent approach. The following sets out the principles adopted and definitions used in that approach.
b) Calculation of Embedded Value EV presented in this document is derived through calculations which are performed separately for each business unit. Enhanced models to produce market consistent valuations have been developed by each of the Group’s life businesses.
c) Reporting of Embedded Value In line with the European Embedded Value Principles, the EV is broken down into the following components: • shareholders’ net assets, including free surplus and required capital; and,
The results are disclosed in a format that the Group considers to be appropriate for the market consistent methodology adopted.
e) Value of business in-force The value of business in-force is the present value of future projected profits from the covered business, and it is defined as the certainty equivalent value of business in-force less frictional costs, time value of options and guarantees, and cost of non market risk. These components are explained below.
The application of frictional costs to the total capital of each life business is in line with the Group’s holistic approach to the EV. The tax and costs in respect of total capital will in practice have to be met, and it is appropriate therefore that this is allowed for in the EV. For the purpose of these calculations, required capital is assumed to run down in line with existing business. Free surplus is also assumed to run down in line with existing business except where there are specific plans for the earlier distribution of the free surplus.
The allowance for frictional costs is included both in the value of business in-force, and in the new business value. For new business, frictional costs are applied to the minimum solvency margin required to be held in respect of that business.
The Group’s approach to the cost of non market risk is based on a valuation of the potential impacts on shareholder value of variance in certain best estimate assumptions to allow explicitly, at product level, for insurance (mortality, longevity and morbidity), business and operational risk.
The mortality, morbidity, persistency and expense assumptions used to calculate the value of business in-force and new business value are best estimates based on recent past experience. To the extent that the impact on shareholder value of variations in experience around the best estimate is symmetrical (for example, where the loss on a 10% increase in expenses is equal and opposite to the profit on a 10% reduction), and not correlated with investment markets, no further allowance for non market risk would be required. In such circumstances, the risk is considered to be diversifiable, and financial markets do not charge a risk premium for diversifiable risks.
Currently, no consensus exists in the market as to the best way to allow for non market risk, and this issue will be kept under review as best practice emerges. In the meantime, the allowance made in the EV represents Management’s view of an appropriate adjustment for the costs of non market risk taking into account the different risk profiles in its life businesses.
The value generated by new business written during the period is the present value of the projected stream of after tax distributable profits from that business.
h) Asset and liability data used For 2007, the Group has adopted a combination of approaches for obtaining the asset and liability data and for performing the EV calculations.
• Spain has used asset and liability data as of November 30 with adjustments made to asset data to reflect the change in swap curves between November 30 and December 31. New business value allows for all business written to December 31.
i) Market consistent discounting The Group has adopted a “bottom-up” market consistent approach for the projection and discounting of future cash flows in the calculation of the EV. As a result, the risks inherent in the cash flows are allowed for in a way that is consistent with the way the market is expected to allow for such risks.
In principle, this method values each cash flow using a discount rate consistent with that applied to such a cash flow in the capital markets. For example, an equity cash flow is valued using an equity risk discount rate, and a bond cash flow is valued using a bond discount rate. If a higher return is assumed for equities, the equity cash flow is discounted at this higher rate.
j) Economic scenario generator For 2007, all operations have used actual yield curves observable as of December 31 for the calculation of the certainty equivalent value of business in-force.
The calculations of the time value of options and guarantees are based on stochastic simulations using an Economic Scenario Generator (“ESG”) provided by Barrie & Hibbert. The outputs (“simulations”) have been calibrated to conform to the economic parameters specified by the Group. The approaches used to prepare these simulations are described below.
• For all business except Spain, the simulations used for calculation of time value of options and guarantees reflect the actual yield curves observable as of December 31, 2007 and implied volatilities quoted by a number of investment banks as of December 31.
• For Spain the simulations used for calculation of time value of options and guarantees reflect the yield curves observable as of November 30 and implied volatilities quoted by a number of investment banks as of November 30.
k) Corporate Center costs Corporate Center costs that relate to covered business have been allocated to the relevant companies and included in the projected expenses.
l) Holding companies Holding companies that belong to Global Life have been consolidated in the EV at their local statutory net asset value. Related expenses are small and so have been excluded from the projection assumptions. Holding companies outside Global Life are not included in the EV of the covered business.
m) Consolidation adjustments Where a reassurance arrangement exists between two life companies in Global Life, the value of the reassurance is shown in the EV of the ceding company. This has no material impact on the reported results.
o) “Look through” principle – Service companies There are some companies within Global Life that provide administration and distribution services. These are valued on a “look through” basis. The results do not include any Group service companies outside Global Life.
In the UK, a multi-tie distribution company (Openwork) has replaced the former tied distribution network. This is included in the EV on a “look through” basis. After allowance for certain one-off expenses, profits and losses are attributed to new business value. Certain future revenue streams, mainly renewal commissions on business sold, are discounted and contribute to the new business value and to the value of business in-force.
p) Employee pension schemes For 2007 reporting, the Group adopted the Statement of Recognized Income and Expense (SoRIE) option under IAS 19 Employee Benefits to recognize actuarial gains and losses arising from defined benefit pension and other defined benefit post-retirement plans as a liability. The adjustment to the EV for the IAS 19 Employee Benefits
Financial Report 2007 deficits is noted in section 2.b. The actuarial and economic assumptions used for this adjustment are consistent with that used for the equivalent allowance made in the Group’s Consolidated IFRS Financial Statements.
q) Employee share options The costs of share options granted to employees are not included in the EV, other than to the extent that they are allowed for in the local statutory accounts upon which the shareholders’ net assets are based. Further information on the costs of share options is given in the Group’s IFRS financial statements.
s) Conversion to Group presentation currency To align embedded value reporting with the Group’s consolidated IFRS Financial Statements, relevant results have been converted to Group presentation currency, US dollar, using average exchange rates for the period. This applies to new business value, new business volumes (APE and PVNBP) and comparative figures for 2006. This approach has also been applied to the analysis of movement. Previously these results were converted to Group presentation currency, US dollar, using start of year exchange rates. Valuations continue to be converted at end-of-period exchange rates.
Expected asset returns in excess of the risk free rate have no bearing on the calculated EV other than the expected return for the analysis of movement.
Choice of “risk free yield curve” The risk free yield curve is derived from mid-market swap rates applicable to each economy as of December 31, 2007. This curve was used to extract forward reinvestment yields that are used for all asset classes.
The risk free yield curves as of September 31, 2007 were derived using a similar procedure. The assumptions as of September 31, 2007 are required to determine the new business value for policies written during the fourth quarter of 2007.
Risk free yield as of December 31, 2007 curves – Annualized spot rates 1 Year 2 Year 5 Year 10 Year 20 Year 40 Year
At-the-moneyas of December 31, 2007 forward equity implied volatility (capital index)
Interest volatility can be described by the implied volatility of interest rate swaptions. Swaption implied volatilities vary both by the term of the option and also the term of the underlying swap contract. The following tables show swaption implied volatilities, based on the simulations used for the EV calculation: Table 5.5
Implied volatility as of September 30, 2007 of at-the-moneyforward interest rate swaptions 1 year 2 year 5 year 10 year 20 year 40 year option option option option option option
The model also makes assumptions regarding the volatility of property investments, estimated from relevant historic return data. Based on the actual simulations used, the following implied volatilities arise: Table 5.7
The following table shows price inflation assumptions for the stochastically modeled economies, derived from the simulations used in the EV: Table 5.9
For stochastic modeling, the risk discount rates are simulation specific and also vary by calendar year consistently with the projected risk free yields in each simulation.
“Expected return” for the analysis of movement – Investment return assumptions The expected return for the analysis of movement is based on a projection from beginning of period to end-ofperiod. This requires assumptions regarding the investment returns expected to be achieved over the period on different asset classes. The investment return assumptions (for this purpose only) are based on the “real world” returns expected by the Group. The use of real world investment assumptions gives a more realistic basis for the expected return calculation and allows for the risk underlying each asset. Any under or over performance will be reported through economic variance.
As investment conditions change, where a business unit’s investment policy indicates that management would expect to alter the investment portfolio (e.g. the mix between equities and fixed interest for profit sharing subfunds ), this expected action has been included in the stochastic models.
The Board of Directors of Zurich Financial Services is responsible for the Embedded Value Information, including the methodology and the assumptions. Our responsibility is to provide conclusions on the subject matter based on our work.
Our engagement was carried out in accordance with International Standard on Assurance Engagements (ISAE) 3000.This standard requires that we comply with ethical requirements and plan and perform the engagement to obtain limited assurance on the subject matter of the review. In the engagement, we performed analytical procedures to assess whether the methodology and assumptions utilized are in accordance with the European Embedded Value (“EEV”) principles. In addition we undertook procedures to assess the consistent application of the methodologies. We did not carry out an audit or review of the Embedded Value Information or of the models or of the underlying data.
New business premiums including deposits, of which: 194 186 6,221 5,921
Closing Embedded Value after foreign currency translation effects, of which: 2,432 2,326 4,880 5,133
On February 14, 2007 the Board of Zurich Financial Services authorized a share buyback of up to CHF 1.25 billion over the course of 2007. As of June 30, 2007, 3,432,500 fully paid shares, with nominal value CHF 0.10, have been bought back at an average price of CHF 364.00 per share. A proposal to cancel all repurchased shares will be submitted to shareholders at the Annual General Meeting on April 3, 2008.
Income statements in CHF thousands, for the years ended December 31 Notes 2007 2006
Assets in CHF thousands, as of December 31 Notes 2007 2006
Total liabilities and shareholders’ equity 18,798,291 16,807,019 1 Dividends paid in the year, proposed in association with the 2006 result 2 Dividends paid in the year, proposed in association with the 2005 result
4. Other financial expense Other financial expense includes a CHF 109 million write-down in the value of own shares to market value.
5. Taxes The tax expense consists of income, capital and other taxes.
Furthermore, Zurich Financial Services has entered into various support agreements and a guarantee for the benefit of certain of its subsidiaries. These contingencies amounted to CHF 5,501 million as of December 31, 2007 (CHF 4,061 million as of December 31, 2006).
The shareholders at the Annual General Meeting of April 3, 2007 approved the increase of the contingent share capital for the issuance of new registered shares to employees of the Group from CHF 75,755.60 by CHF 324,244.40 to a new maximum of CHF 400,000 by issuing up to 4,000,000 registered shares payable in full with a nominal value of CHF 0.10 each. During the year 2007, a total of 797,421 shares have been issued to employees. As a result, 145,546,820 fully paid shares with a nominal value of CHF 0.10 were issued as of December 31, 2007, amounting to a share capital of CHF 14,554,682.00.
In the previous year, the Board of Directors approved on February 15, 2006, the issuance of a maximum of 1,000,000 out of the 1,500,000 dividend-paying shares from the contingent share capital to employees. At the Annual General Meeting on April 20, 2006, shareholders approved a share capital reduction in the form of a nominal value reduction of each share from CHF 2.50 to CHF 0.10. At the effective date of the nominal value reduction on July 3, 2006, Zurich Financial Services had 144,565,255 issued and fully paid shares, including 558,300 shares issued out of the contingent capital. As a result of this reduction, the share capital was reduced by CHF 346,956,612 from CHF 361,413,137.50 to a new total of CHF 14,456,525.50. As of December 31, 2006 a total of 742,444 shares were issued to employees from contingent share capital. As a consequence, 144,749,399 fully paid shares with a nominal value of CHF 0.10 were issued as of December 31, 2006, amounting to a share capital of CHF 14,474,939.90.
Average selling price, in CHF 367 281 1 in CHF thousands 10. Shareholders The shares registered in the share ledger as of December 31, 2007, were owned by 107,660 shareholders of which 102,074 were private individuals holding 18.7% of the shares (or 11.7% of all outstanding shares), 2,124 were foundations and pension funds holding 7.1% of the shares (or 4.4% of all outstanding shares), and 3,462 were other legal entities holding 74.2% of the shares (or 46.3% of all outstanding shares).
According to the information available to us on December 31, 2007, no shareholder of Zurich Financial Services held more than 5% of the voting rights of the issued share capital.
Information required by art. 663c paragraph 3 of the Swiss Code of Obligation on the share and option holdings of the members of the Board of Directors and the members of the Group Executive Committee are disclosed in note 12.
Financial Report 2007 11. Remuneration of the Board of Directors and the Group Executive Committee for 2007 This note sets out details of the compensation of the Board of Directors and of the members of the Group Executive Committee (GEC) in accordance with the information required by art. 663bbis of the Swiss Code of Obligations, effective for the first time for the business year 2007. This information should be read in connection with the unaudited Remuneration Report, set out on pages 54 to 67, in which additional details of the remuneration principles and plans can be found.
US Of which Of which Basic Committee Residence Total paid allocated 7, in CHF 1 Fee Fee 3 Chair Fee 4 Fee 5 Fee in Cash 6 in Shares 8 1 The total fees (including the portion allocated in shares) provided to Directors in 2007 by Zurich Financial Services amounted to CHF 3,745,570, calculated on the basis of the exchange rates at the dates of payment. This amount is reflected in the income statement of the holding company. As the fees of the Directors are actually defined in US dollars and the total of fees in US dollars amounts to USD 3,089,167, the average exchange rate for the year is USD/CHF 1.2125. All figures shown in Swiss francs in the above table have been translated from US dollars using this average exchange rate.
The Committees on which the members serve and the chairs are set out in the unaudited Corporate Governance Report, on page 35. 5 Directors who reside in the United States receive a fee of USD 10,000 (CHF 12,125) per annum. 6 The cash fees are defined in US dollars, but paid in the actual currencies where the members reside, based on the relevant exchange rate at the dates of payment.
7 Mr Gentz was allocated 617 shares and the other members 218 shares as per June 30, 2007. The share price (CHF 389.50) and the exchange rate (USD/CHF
10Mrs Gilmore and Mr Mead retired from the Board of Directors on April 3, 2007 and received pro rata fees for their Board work up to that date. 11In addition to the remuneration set out in the table, the company paid contributions for Mrs Gilmore into a group health insurance plan in the UK until her retirement in April 2007 at a cost of USD 631 (CHF 765).
12Mr Sankey became Chairman of the Remuneration Committee on April 3, 2007 following the retirement of Mr Mead. He received a pro rata fee for being
Chair. 13In line with applicable laws, Zurich paid the company related portion of contributions to social security systems, which amounted to USD 68,439 (CHF
82,981) in 2007. Any personal contributions of the Directors to social security systems are included in the amounts shown in the table above.
During 2007, two Directors gave up their function. No termination payments were made.
No benefits (or waiver of claims) have been provided to former members of the Board during the year 2007. Neither had any former member of the Board outstanding loans, advances or credits as of December 31, 2007.
Highest paid Executive All GEC members James J. Schiro in CHF million 1 (incl. the highest paid) 3 Chief Executive Officer
Value of the target performance share and restricted share grants 6 13.0 2.7
Total in USD as shown in the Remuneration Report 57.6 10.3 1 The figures have been translated from US dollars into Swiss francs using the relevant exchange rates throughout the year. 2 The remuneration shown in the table does not include any business related expenses incurred in the performance of the members’ services. 3 On the basis of 12 GEC members of whom ten served during the whole year 2007.
4 The amounts reflect the total value of the pension benefits accruing to members of the GEC during 2007, calculated on the basis of the Service Costs for the company as assessed under IAS 19 accounting principles. Service Costs value the amount of the pension benefits accruing during the year and for defined contribution plans takes the amount of the company contribution paid during the year. Service Costs do not include the interest cost on accrued benefits, adjustments for actuarial gains and losses, nor the expected return on any assets held.
7 In line with applicable laws where the executives are employed, Zurich paid the company related portion of contributions to social security systems, which amounted to USD 2.6 million (CHF 3.1 million) in 2007. 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.
Financial Report 2007 12. Shareholdings of the Board of Directors and the Group Executive Committee as of December 31, 2007 This note sets out the share and share option holdings of the Directors and of the members of the Group Executive Committee (GEC), who held office at December 31, 2007, in accordance with the information required by art. 663c paragraph 3 of the Swiss Code of Obligations. This information is also included in the unaudited Remuneration Report, set out on pages 54 to 67, in which additional details can be found.
All interests are beneficial, include sales-restricted shares allocated to the members as part of their fee and shares held by related parties to the Directors.
None of the Directors, nor any related party to a Director, hold any share options or conversion rights over Zurich Financial Services shares as of December 31, 2007.
Share and share option holdings of the Group Executive Committee members The following table sets out the actual share and share option holdings of the GEC members as of December 31, 2007. In addition to any shares acquired in the market, the numbers include vested shares, whether sales-restricted or not, and vested share options received under the Group’s Long-Term Incentive Plan. However, the table does not include the share interests of the members of the GEC through their participation in the currently unvested performance shares, unvested restricted shares or unvested performance share options.
All interests are beneficial and include Zurich Financial Services shares or share options held by related parties to the GEC members. One vested option gives the right to one share with normal voting and dividend rights. Further details on the overall number of share options allocated under the Group’s Long-Term Incentive Plan and the terms of the options are set out in the table “Summary of outstanding options”.
Ownership options Number of shares and share options as of December 31, 2007 1 of shares over shares 2
D. Wemmer, Chief Financial Officer 5,565 19,549 1 None of the GEC members together with related parties to them held more than 0.5% of the voting rights as at December 31, 2007, either directly or through share options.
Number of vested share options as of December 31, 2007 2006 2005 2004 2003 2002 2001 Total
1 These figures are based on the issued and outstanding share capital on April 9, 2007. The proposed dividend published in the Annual Report 2006 was CHF 1,592,243 thousand resulting in a balance carried forward of CHF 373,970 thousand. The difference is due to the purchase of treasury shares and the share buyback program and a resolution of the Board of Directors on February 14, 2007, according to which, contingent capital share for employees has been issued (as described in note 8). Treasury shares and shares held for cancellation by Zurich Financial Services are not entitled to dividends.
In our opinion, the accounting records and financial statements and the proposed appropriation of available earnings on page 255 comply with Swiss law and the Company’s articles of incorporation.
Shareholder Information 260 Share Data 260 Financial Calendar 262 Contact Information 262 Glossary 263
Price period low 296.00 251.75 1 Proposed gross dividend, subject to approval by shareholders at the Annual General Meeting 2008; expected payment date is on April 8, 2008.
Zurich Financial Services has completed the share buyback program of CHF 1.25 billion announced on February 15, 2007. Between February 22, 2007 and July 2, 2007, Zurich Financial Services bought back 3,432,500 of its registered shares via a second trading line of virt-x and at an average price of CHF 364 (rounded) per share. The number of repurchased shares reflects 2.36 percent of the share capital issued at the end of June 2007. Zurich Financial Services will submit a proposal to its shareholders at the Annual General Meeting 2008 to reduce the share capital in the amount of the repurchased shares and to cancel the shares.
Zurich Financial Services shareholders registered in the share ledger 19% Private individuals 7% Foundations and pension funds 74% Other legal entities
The shares registered in the share ledger as of December 31, 2007 were owned by 107,660 shareholders, of whom 102,074 were private individuals holding 18.7 percent of the registered shares (or 11.7 percent of all outstanding shares), 2,124 were foundations and pension funds holding 7.1 percent of the registered shares (or 4.4 percent of all outstanding shares), and 3,462 were other legal entities holding 74.2 percent of the registered shares (or 46.3 percent of all outstanding shares).
Zurich offers its shareholders the opportunity to deposit a range of Zurich Financial Services securities free of charge at S A G SIS Aktienregister AG in Switzerland. The securities deposit regulations as well as the application form for a securities custody account can be downloaded from S A G’s Web site: www.sag.ch.
Zurich Financial Services, Custody Accounts c/o S A G SIS Aktienregister AG P.O. Box, 4601 Olten, Switzerland
The Business Review contains information about Zurich’s products, services and business performance, including a short summary of financial information. It is available in German, French and English.
American Depositary Receipt (ADR) Also called AD shares. They are US dollar denominated certificates representing shares of non-US companies created primarily for use by American investors as a way to invest in foreign companies using American currency.
Annual Premium Equivalent New annual premiums plus 10 percent of single premiums. APE is an industry standard measure of life insurance new business volume.
Embedded Value Method of measuring profitability commonly used by life insurance companies. It is equal to the net asset value of the company, plus the present value of the projected stream of future after-tax profits on in-force insurance contracts. In July 2006 Zurich announced the adoption of the European Embedded Value principles, using a “bottom-up” market consistent approach to allow explicitly for market risk.
Gross Written Premiums and Policy Fees (GWP) The total premium we charge our customers for insurance, including certain fees.
Shareholders’ Equity A measure of balance-sheet strength. Also known as net worth, it is a company’s total assets minus its total liabilities and minority interests. It consists of common and preferred securities deducted by treasury shares (issued shares that have been reacquired by the company), additional paid-in capital, retained earnings (accumulated earnings of the company since its inception, less dividends) and valuation differences not reflected in the income statement.