Securities under security lending and short-term sale and repurchase agreements As of December 31, 2008 and 2007, investments included USD 2,917 million and USD 12,204 million, respectively, of loaned securities. These loaned securities were mainly debt securities. Cash and cash equivalents included USD 177 million and USD 1,877 million of cash received as collateral for loaned securities as of December 31, 2008 and 2007, respectively. Liabilities for cash collateral received for securities lending comprised USD 182 million and USD 1,889 million as of December 31, 2008 and 2007, respectively. Non-cash collaterals received for loaned securities comprised USD 3,274 million and USD 10,911 million as of December 31, 2008 and 2007, respectively. Non-cash collaterals comprised mainly equity and debt securities. The Group can sell or repledge the collateral only in the event of a default by a counterparty.
The Group retains the rights to the risks and rewards of ownership of loaned securites and securities under short-term sale and repurchase agreements. These risks and rewards include changes in market values and income earned, respectively.
Mortgage and asset-backed securities: < 1 year – – 759 983 68 254
Table 6.3c as of December 31Details of investments held for unit-linked contracts
Mortgage and asset-backed securities 24,412 25,953 310 197 (2,692) (334) 22,030 25,816 Redeemable
Total debt 1 Net of impairments. For details reference is made to table 6.2.
Table 6.5 in USD millions, as of December 31Available-for-sale securities 6842_p170-207.indd 1756842_p170-207.indd 175 25/2/09 14:12:4725/2/09 14:12:47
millions of which: trading equity portfolios in capital markets and banking of which: common stock portfolios backing participating with profi t policyholder
Table 6.7 as of December 31Held-to-maturity debt securities 6842_p170-207.indd 1766842_p170-207.indd 176 25/2/09 14:12:4825/2/09 14:12:48
US mortgage-backed securities 98.5% 0.7% 0.8% – – 17,547 US other asset-backed securities 86.0% 2.5% 6.1% 5.4% – 3,088
Only a small portion of the US mortgage-backed securities were below investment grade as of December 31, 2008. USD 8.8 billion of these securities are backed by Fannie Mae and Freddie Mac, which have both received signifi cant support from the US Government.
Asset-backed securities included USD 155 million and USD 289 million as of December 31, 2008 and 2007, respectively, of exposure directly to US sub-prime mortgages. 93% (100% in 2007) of these asset-backed securities remain investment grade and only USD 12 million relates to mortgages issued in 2006, which was characterized by less stringent lending standards.
Collateralized debt obligations The Group’s exposure to collateralized debt obligations (CDOs) was USD 694 million and USD 384 million as of December 31, 2008 and 2007, respectively. These securities include no exposure to sub-prime mortgages and no signifi cant impairments were recorded on CDOs during 2008 or 2007.
Table 6.8 in USD millions, unless otherwise stated, as of December 31, 2008Exposure to asset-backed securities for Group investments by rating category
Table 6.9 in USD millions, unless otherwise stated, as of December 31, 2007Exposure to asset-backed securities for Group investments by rating category
Table 6.9 in USD millions, unless otherwise stated, as of December 31, 2007Exposure to asset-backed securities for Group investments by rating category 6842_p170-207.indd 1776842_p170-207.indd 177 25/2/09 14:12:4925/2/09 14:12:49
Hedge funds The Group has investments in external hedge funds of USD 2.3 billion and USD 3.3 billion as of December 31, 2008 and 2007, respectively. The Group does not have any in-house hedge funds. Investments in hedge funds are classifi ed as fi nancial assets at fair value through profi t or loss and gains and losses are, therefore, reported immediately in income. All the hedge fund exposure is invested with third party managers, who are subject to a thorough due diligence processes. A dedicated team of in-house investment professionals monitor closely the hedge funds’ performance and valuation. The Group actively manages the exposure to hedge funds by up-grading, de-risking and tactically redeeming portions of the hedge fund portfolio. These hedge funds are invested in funds with approximately 20 different strategies. USD (397) million and USD 231 million in 2008 and 2007 respectively of (losses)/gains were included in income.
As of January 1 15,386 15,281 Additions and improvements 664 325
Market value revaluation (1,823) (685) Transfer from/(to) assets held for own use (45) 6 Foreign currency translation effects (1,520) 671 As of December 31 11,601 15,386
1 The unrealized losses include net losses arising on cash fl ow hedges of USD 16 million and USD 103 million as of December 31, 2008 and 2007, respectively.
Table 6.12 in USD millions, as of December 31Net unrealized gains/(losses) on investments included in shareholders’ equity
Derivative assets are included in other assets and derivative liabilities are included in other liabilities in the consolidated balance sheets.
Futures / forwards Purchased futures / forwards 3,188 – – 3,188 8,159 55 30 of which: fi nancial assets – – – – – 1,724 1,055 fi nancial liabilities – – – – – (1,388) (276)
The notional principal amounts of currency swaps include cross currency interest rate swaps. Other swaps include credit default swaps with notional principal amounts of USD 557 million and USD 803 million as of December 31, 2008 and 2007, respectively, which protect certain of the Group’s assets exposed to credit risk. USD 219 million and USD 126 million, as of December 31, 2008 and 2007 respectively, are credit default swaps embedded in purchased credit linked notes.
Table 7.1 in USD millions, as of December 31Maturity profi le of notional principal amounts and fair values of derivative fi nancial instruments
Table 7.1 in USD millions, as of December 31Maturity profi le of notional principal amounts and fair values of derivative fi nancial instruments 6842_p170-207.indd 1806842_p170-207.indd 180 25/2/09 14:12:5125/2/09 14:12:51
Options Purchased call options principally include long receiver swaptions and long interest rate caps used to economically hedge interest rate related risks and purchased equity call options hedging equity risks embedded in guaranteed equity bonds issued.
Purchased put options consist of long equity put options to hedge the Group’s equity investments against a decline in equity market prices, as well as long payer swaptions to hedge risks from an increase in interest rates. The change in notional principal amounts of purchased put options between December 31, 2008 and December 31, 2007 is mainly driven by the expiration of long equity put options, which were not replaced.
Written call options relate to equity collars entered into to manage the risk return profi le of equity exposures of some with-profi t funds and to written equity call options embedded in the above mentioned guaranteed equity bond issues.
The following table sets out the details of the fair value and cash fl ow hedges: Maturity profi le
A fair value hedge relationship on 20 percent of the EUR 1 billion 4.5 percent senior debt due 2014 issued by Zurich Finance (USA), Inc. (see note 21), was entered into on January 1, 2007 and will end at maturity of the underlying debt instrument in 2014.
Table 7.3 in USD millions, as of December 31Gains/(losses) arising from fair value hedges 6842_p170-207.indd 1826842_p170-207.indd 182 25/2/09 14:12:5225/2/09 14:12:52
8. Reserves for insurance contracts and reinsurers’ share of reserves for insurance contracts
Gross Reserves for losses and loss adjustment expenses 65,218 67,890 Reserves for unearned premiums 16,399 15,941 Future life policyholders’ benefi ts 1 76,218 80,147 Policyholders’ contract deposits and other funds 17,047 18,687 Reserves for unit-linked contracts 47,297 70,075 Total reserves for insurance contracts, gross 222,179 252,740
Ceded Reserves for losses and loss adjustment expenses (12,232) (13,179) Reserves for unearned premiums (1,889) (1,720) Future life policyholders’ benefi ts 1 (1,873) (9,258) Policyholders’ contract deposits and other funds (2,690) (2,976) Reinsurers’ share of reserves for insurance contracts, gross 2 (18,684) (27,133)
Net Reserves for losses and loss adjustment expenses 52,986 54,712 Reserves for unearned premiums 14,510 14,221 Future life policyholders’ benefi ts 74,345 70,889 Policyholders’ contract deposits and other funds 14,357 15,711 Reserves for unit-linked contracts 47,297 70,075 Total reserves for insurance contracts, net 203,495 225,607 1 In 2007, ceded future life policyholders’ benefi ts include an amount of USD 7.1 billion related to the reinsurance of a UK annuity portfolio. Subsequent to the approval from the UK High Court, effective on June 30, 2008, the underlying contracts have been transferred to the reinsurer, resulting in a reduction of gross and ceded future life policyholders’ benefi ts.
Losses and loss adjustment expenses incurred: Current year 28,296 25,798 (2,879) (2,424) 25,416 23,374
Losses and loss adjustment expenses paid: Current year (10,190) (9,007) 591 388 (9,599) (8,619)
Table 8.2 shows the development of reserves for losses and loss adjustment expenses during the year. Of the decrease in the total net reserves during the year, USD 1,271 million has arisen due to favourable development emerging from reserves established in prior years. The positive development arose across a number of countries and lines of business primarily from our General Insurance business.
Table 8.3 presents changes in the historical non-life reserves, net of reinsurance, that the Group established in 2001 and subsequent years. Reserves are presented by fi nancial year, not by accident year. The reserves (and the development thereon) are for all accident years in that fi nancial statement year. The top line of the table shows the estimated gross reserves for unpaid losses and loss adjustment expenses as of each balance sheet date, which represents the estimated amount of future payments for losses incurred in that year and in prior years. The cumulative paid portion of the table presents the cumulative amounts paid through each subsequent year in respect of the reserves established at each year end. The net reserves re-estimated portion of the table shows the re-estimation of the initially recorded reserve as of each succeeding year end. Reserve development is shown in each column. Changes to estimates are made as more information becomes known about the actual losses for which the initial reserves were established. The cumulative defi ciency or redundancy is equal to the initial net reserves less the liability re-estimated as of December 31, 2008. It is the difference between the initial net reserve estimate and the last entry of the diagonal. Conditions and trends that have affected the development of our reserves for losses and loss adjustment expenses in the past may or may not necessarily occur in the future, and accordingly, conclusions about future results may not be derived from the information presented in the table below.
Initial net reserves for losses and loss adjustment expenses 24,089 30,366 37,013 43,486 46,194 50,814 54,712 52,986
Table 8.3 in USD millions, as ofDevelopment of insurance losses, net 6842_p170-207.indd 1866842_p170-207.indd 186 25/2/09 14:12:5525/2/09 14:12:55
Losses and loss adjustment expenses incurred 240 196 454 180 Losses and loss adjustment expenses paid (339) (278) (188) (109) Divestments, commutations, settlements and other – – – (18) Foreign currency translation effects (699) (632) 33 43
Losses and loss adjustment expenses incurred (11) – 22 8 Losses and loss adjustment expenses paid (57) (51) (60) (48) Foreign currency translation effects 6 2 (1) –
In 2007, ceded future life policyholders’ benefi ts included an amount of USD 7.1 billion related to the reinsurance of a UK annuity portfolio. Subsequent to the approval from the UK High Court, effective on June 30, 2008, the underlying contracts have been transferred to the reinsurer, resulting in a reduction of gross and ceded future life policyholders’ benefi ts.
Table 8.5 in USD millionsDevelopment of future life policyholders’ benefi ts 6842_p170-207.indd 1876842_p170-207.indd 187 25/2/09 14:12:5625/2/09 14:12:56
The impact of changes in assumptions on net future life policyholders’ benefi ts was USD 5 million and USD 226 million for the years ended December 31, 2008 and 2007, respectively. The net changes include the following signifi cant movements: interest rate assumptions increased the benefi ts by USD 229 million in 2008 and by USD 361 million in 2007; expense assumptions reduced the benefi ts by USD 4 million in 2008 and by USD 40 million in 2007; longevity assumptions increased the benefi ts by USD 85 million in 2008 and reduced them by USD 62 million in 2007; morbidity assumptions reduced the benefi ts by USD 192 million in 2008 and by USD 46 million in 2007; investment return assumptions reduced the benefi ts by USD 118 million in 2008 and increased them by USD 6 million in 2007.
Universal life and other contracts 10,365 10,510 Policyholder dividends 4,289 5,725
Interest and bonuses credited to policyholders (385) 1,215 (105) (120) (490) 1,095
(Decrease)/increase recorded in shareholders’ equity 188 (1,101) – 5 188 (1,095)
Guarantees arising from minimum death benefi ts (GMDB) and retirement income benefi ts (GRIB) Certain products for which policyholders bear in full the credit and market risks associated with the underlying invested funds selected by them contain guarantees for which liabilities have been recorded for additional benefi ts and minimum guarantees. These arise primarily in the subsidiary Kemper Investors Life Insurance Company which has written variable annuity contracts that provide policyholders with certain guarantees related to minimum death and income benefi ts. The determination of these liabilities is based on models that involve a range of scenarios and assumptions, including those regarding expected market rates of return and volatility, contract surrender rates, annuitization elections and mortality experience. After 2001 the Group no longer issued new policies with such features.
Account balance for products with guarantee features as of December 31 Gross 1,966 4,112
The net amount at risk is the present value of payouts exceeding the current policyholder account balance assuming the payout criteria in all policies would have been collectively triggered as of the balance sheet date. The net amount at risk is not the same as the fair value of these benefi ts, as it does not fully take the option value accruing to the policyholder into account. In determining the excess benefi t reserve, the Group follows the guidance in the US Statement of Principle 03-1 “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional LongDuration Contracts and for Separate Accounts”. Under this guidance a benefi t ratio (determined based on expected policyholder excess payouts and expected policyholder assessments) to excess payout and assessment experience to date is applied to determine the new reserve level. The liability for future life policyholder benefi ts net of reinsurance includes an excess benefi t reserve of USD 513.2 million and USD 123.7 million as of December 31, 2008 and 2007, respectively.
Table 8.9 in USD millions (except average attained age)Information on guaranteed liabilities
Table 8.9 in USD millions (except average attained age)Information on guaranteed liabilities 6842_p170-207.indd 1896842_p170-207.indd 189 25/2/09 14:12:5725/2/09 14:12:57
9. Liabilities for investment contracts with and without discretionary participation features (DPF)
Liabilities related to unit-linked investment contracts 30,397 48,187 Liabilities related to investment contracts (amortized cost) 122 117 Liabilities related to investment contracts with DPF 5,461 6,182
Unit-linked investment contracts issued by the Group are recorded at a value refl ecting the returns on investment funds which include selected equities, debt securities and derivatives. Policyholders bear the full risk of the returns on these investments.
As of January 1 54,485 50,705 Premiums and claims (838) (1,080) Interest and bonuses charged/(credited) to policyholders (8,647) 3,324 Divestments / transfers 790 (514) Increase/(decrease) recorded in shareholders’ equity 9 (31) Foreign currency translation effects (9,819) 2,081 As of December 31 35,979 54,485 10. Equity component relating to contracts with DPF
As of January 1 1,309 1,414 Net unrealized (losses)/gains on investments (371) (226) Current period profi t 230 17 Foreign currency translation effects 53 104 As of December 31 1,221 1,309
Losses and loss adjustment expenses 26,942 24,951 (2,796) (2,796) 24,145 22,155 Life insurance death and other benefi ts 11,315 11,903 (778) (1,065) 10,538 10,837 Increase/(decrease) in future life policyholders’ benefi ts (6,870) (1,931) 6,999 (7,770) 128 (9,701) Total insurance benefi ts and losses 1 31,387 34,923 3,425 (11,632) 34,811 23,291 1 In 2007, ceded insurance benefi ts and losses included USD 7.0 billion relating to the reinsurance of a UK annuity portfolio. Subsequent to the approval from the UK High Court, effective on June 30, 2008, the underlying contracts have been transferred to the reinsurer. This transaction had no impact on the income statement in 2008.
Change in reserves for unit-linked products (13,239) 4,077 – – (13,239) 4,077 Change in liabilities for investment contracts –
Change in reserves for unearned premiums 1,781 286 (220) 209 1,560 495
Acquisition costs deferred and transfers 2,918 2,594 1,736 1,567 316 35 4,970 4,197
As of January 1 1,003 815 Origination costs deferred 119 271
Wages and salaries 2,504 2,330 Other employee benefi ts 453 452 Amortization and impairments of intangible assets 437 302 Rent, leasing and maintenance 369 290 Marketing costs 372 401 IT costs 816 759
Table 13 in USD millions, for the years ended December 31Administrative and other operating expenses 6842_p170-207.indd 1926842_p170-207.indd 192 25/2/09 14:13:0025/2/09 14:13:00
FGI, through its AIF relationship with the Farmers Exchanges, which the Group manages but does not own, is contractually permitted to receive a management fee of up to 20% (25% in the case of the Fire Insurance Exchange) of the gross premiums earned by the Farmers Exchanges. To enable the Farmers Exchanges to maintain appropriate capital and surplus while offering competitive insurance rates, FGI has historically charged a lower management fee than the maximum allowed. The range of fees has varied by line of business over time and from year to year. During the past fi ve years, aggregate management fees have averaged between 12% and 13% of gross premiums earned by the Farmers Exchanges. The gross earned premiums of the Farmers Exchanges were USD 16,541 million and USD 15,547 million for the years ended December 31, 2008 and 2007, respectively.
Receivables from policyholders 3,107 2,972 Receivables from insurance companies, agents, brokers and intermediaries 6,348 5,972 Receivables arising from ceded reinsurance 1,166 1,372 Other receivables 3,066 3,084 Allowance for impairments 1 (457) (554)
1 Allowance for impairments includes USD 206 million and USD 239 million as of December 31, 2008, and 2007, respectively, for receivables arising from ceded reinsurance.
As of January 1 (554) (468) Decrease/(increase) in allowance for impairments 11 (83)
Impairment charges of USD 1 million on mortgage loans given as collateral were recorded in income for both years ended December 31, 2008 and 2007.
The table below shows the maturity schedule of collateralized loans as of December 31, 2008 and 2007, respectively.
Table 16 in USD millions, as of December 31Maturity schedule of collateralized loans
Gross carrying value as of December 31, 2008 359 1,398 438 767 735 3,697
Net carrying value as of December 31, 2007 392 1,006 78 204 292 1,972
Gross carrying value as of December 31, 2007 393 1,577 436 765 615 3,787
Table 17.2 in USD millionsProperty and equipment 6842_p170-207.indd 1956842_p170-207.indd 195 25/2/09 14:13:0225/2/09 14:13:02
Net carrying value as of January 1, 2008 1,730 780 1,100 1,025 4,636
Table 18.2 in USD millions, as of December 31, 2008Intangible assets by segment – current period 6842_p170-207.indd 1966842_p170-207.indd 196 25/2/09 14:13:0225/2/09 14:13:02
Gross carrying value as of January 1, 2007 672 2,329 2,041 1,025 6,068 Less: accumulated
Net carrying value as of January 1, 2007 660 775 626 1,025 3,086 Additions and transfers 1,015 – 733 – 1,748 Divestments and transfers (12) – (59) – (71)
Gross carrying value as of December 31, 2007 1,754 2,392 2,787 1,025 7,957 1 Other intangible assets include software of USD 907 million as well as intangible assets at fair value on acquisitions.
In 2007 impairment charges of USD 46 million were recorded in income comprising impairment of other intangible assets of USD 34 million mainly relating to software capitalized in the UK Life business and impairment of goodwill of USD 12 million as a result of updated cash fl ow assumptions in the Spanish Life operations.
Table 18.4 in USD millions, as of December 31, 2007Intangible assets by segment – prior period
The undiscounted amounts of the fi nancial liabilities as of December 31, 2008 and 2007 are not materially different from the carrying amounts. Financial liabilities other than those related to defi ned benefi t plans of USD 1,110 million and USD 1,284 million as of December 31, 2008 and 2007 respectively, had a maturity greater than one year.
Table 19.2 in USD millionsRestructuring provisions 6842_p170-207.indd 1986842_p170-207.indd 198 25/2/09 14:13:0425/2/09 14:13:04
Net income before income taxes 2,663 7,587 Less: income tax (expense)/benefi t attributable to policyholders 1,184 83 Net income before income taxes attributable to shareholders 3,847 7,671 Expected income tax expense attributable to shareholders computed at the Swiss statutory tax rate 22.0% 846 22.0% 1,688 Increase/(reduction) in taxes resulting from: Tax rate differential in foreign jurisdictions 164 231 Tax exempt and lower taxed income (10) (123) Non-deductible expenses 98 74 Tax losses previously unrecognized or no longer recognized (262) (185) Prior year adjustments and other (104) 189
Table 20.3 in USD millions, for the years ended December 31Expected and actual income tax expense
As of January 1 (2,375) (2,030) Net change recognized in the income statement 1,189 (275) Net change recognized in equity 1,380 58 Net changes due to acquisitions/(divestments) (1,029) 7 Foreign currency translation effects 253 (135) As of December 31 (583) (2,375)
The cumulative amount of deferred tax credited to shareholders’ equity, net of foreign currency translation effects, amounted to USD 1,720 million and USD 340 million for the years ended December 31, 2008 and 2007, respectively.
Table 20.4 in USD millions, as of December 31Current tax receivables and payables
Table 20.5 in USD millions, as of December 31Deferred tax assets and liabilities
Table 20.7 in USD millions, as of December 31Deferred taxes – policyholder/ shareholder attribution 6842_p170-207.indd 2006842_p170-207.indd 200 25/2/09 14:13:0525/2/09 14:13:05
Deferred acquisition and origination costs 22 (2,330) 10 (2,130) Depreciable and amortizable assets 191 (1,592) 131 (1,817) Life policyholders’ benefi ts and deposits 1 421 (816) 176 (578) Unrealized (gains)/losses on available-for-sale investments and cash fl ow hedges 710 (355) 218 (285)
Reserves for losses and loss adjustment expenses 268 (575) 5 (683) Reserves for unearned premiums 201 (53) 218 – Deferred front-end fees 629 – 669 – Pensions and other employee benefi ts 435 (21) 364 (36)
As of December 31, 2008 the aggregate amount of temporary differences associated with investments in subsidiaries, branches and associates and interests in joint ventures, for which deferred tax liabilities have not been recognized
Table 20.8 in USD millions, as of December 31Deferred tax assets/(liabilities) analysis by source 6842_p170-207.indd 2016842_p170-207.indd 201 25/2/09 14:13:0625/2/09 14:13:06
For which deferred tax assets have been recognized, expiring < 5 years 42 17 > 20 years or with no time limitation 1,715 110
The tax rates applicable to tax losses for which a deferred tax asset has not been recognized are 35 percent for both the years 2008 and 2007.
Management assesses the recoverability of the deferred tax assets carrying values based on future years taxable income projections and believes that the carrying values of the deferred tax assets as of December 31, 2008, are recoverable.
Financial information 21. Debt a) Debt related to capital markets and banking activities Zurich Capital Markets Various debt instruments payable within 1 year 2,079 800 Various debt instruments payable in more than 1 year – 48 Zurich Financial Services EUB Holdings Limited Various debt instruments payable within 1 year 447 814 Various debt instruments payable in more than 1 year 1 1 Debt related to capital markets and banking activities 2,527 1,663 b) Senior debt Zurich Finance (USA), Inc. 3.50% CHF 300 bond, due July 2008 – 264
Kemper Corporation Various debt instruments, due in 2009 23 26 Zurich Insurance Company 3.875% CHF 1,000 bond, due July 2011 938 884 3.75% CHF 500 bond, due September 2013 463 – Various debt instruments payable within 1 year 100 50 Other Various debt instruments payable within 1 year 1 54 Various debt instruments payable in more than 1 year 156 111 Senior debt 3,358 2,830 c) Subordinated debt Zurich Finance (UK) plc 6.625% GBP 450 bond, undated notes 3 648 879 Zurich Finance (USA), Inc. 5.75% EUR 500 bond, due October 2023 687 720
ZFS Finance (USA) Trust III Series III Floating Rate USD 400 ECAPS,
4 This bond is part of a qualifying fair value hedge relationship (see note 7).
None of the debt instruments listed above were in default as of December 31, 2008 and 2007.
a) Debt related to capital markets and banking activities Debt related to capital markets and banking activities increased from USD 1,663 million as of December 31, 2007 to USD 2,527 million as of December 31, 2008. This is largely due to ZCM Holdings having increased its debt by USD 1.2 billion, of which USD 700 million was lent to our banking operation and classifi ed as operational debt. This funding was used to fi nance increased banking activity and to replace corporate and interbank deposits which decreased from USD 815 million to USD 448 million.
Description 6.625% GBP 450 bond, undated notes 6.625% payable annually up to October 2, 2022 and then reset every 5 years to the reset rate of interest. 1
Series V 6.5% USD 1,000 Fixed / Floating Trust Preferred Securties, due May 2067 6.5% payable semi-annually until May 9, 2017 and then reset quarterly to 3-month LIBOR plus 2.285%.
Debt related to capital markets and banking activities 127 148 Senior debt 141 132 Subordinated debt 331 404
In addition, ZIC has access to a USD 300 million credit facility expiring in 2010 for the sole purpose of fi nancing surplus notes issued by the Leschi Life Assurance Company (Leschi), a special purpose reinsurer owned by Farmers New World Life (FNWL) and to which FNWL cedes business subject to Regulation XXX (Triple X). As of December 31, 2008, USD 100 million had been drawn under this credit facility.
Table 21.3 in USD millions, as of December 31Maturity schedule of outstanding debt
Table 21.4 in USD millions, for the years ended December 31Interest expense on debt 6842_p170-207.indd 2066842_p170-207.indd 206 25/2/09 14:13:0925/2/09 14:13:09
Debt related to capital markets and banking activities 2,527 (1,148) 1,379 848
The USD 1,148 million adjustment relates to USD 448 million of Zurich Financial Services EUB Holdings Limited notes and loans payable and USD 700 million issued by ZCM Holdings and then lent to our banking operation as described above, while the USD 200 million adjustment contains USD 100 million of non-recourse debt and USD 100 million drawn under the above mentioned Leschi credit facility.
Table 21.5 in USD millions, as of December 31Financial debt 6842_p170-207.indd 2076842_p170-207.indd 207 25/2/09 14:13:1025/2/09 14:13:10
Capital reduction by canceling shares bought back under the share buy-back pro-
b) Authorized share capital Until June 1, 2010, the Board of Zurich Financial Services is authorized to increase the share capital by an amount not exceeding CHF 600,000.00 by issuing up to 6,000,000 fully paid registered shares with a nominal value of CHF 0.10 each. An increase in partial amounts is permitted. The Board determines the date of issue of such new shares, the issue price, type of payment, conditions for exercising pre-emptive rights, and the beginning of the dividend entitlement. The Board may issue such new shares by means of a fi rm underwriting by a banking institution or syndicate with subsequent offer of those shares to current shareholders. The Board may allow the expiry of pre-emptive rights which have not been exercised, or it may place these rights as well as shares, the pre-emptive rights of which have not been exercised, at market conditions.
The Board of Directors is authorized, when issuing bonds or similar debt instruments connected with conversion and/or option rights, to restrict or withdraw the right of shareholders for advance subscription in cases where such bonds are issued for the fi nancing or re-fi nancing of a takeover of an enterprise, of parts of an enterprise, or of participations. If the right for advance subscription is withdrawn by the Board, the convertible bond or warrant issues are to be offered at market conditions (including standard dilution protection provisions in accordance with market practice) and the new shares are issued at then current convertible bond or warrant issue conditions. The conversion rights may be exercisable during a maximum of 10 years and option rights for a maximum of 7 years from the time of the respective issue. The conversion or option price or its calculation methodology shall be determined in accordance with market conditions, whereby for shares of Zurich Financial Services the quoted share price is to be used as a basis.
Employee participation On February 14, 2007, the Board of Directors of Zurich Financial Services decided to allow the issuance of up to 4,000,000 shares out of the contingent share capital to employees of the Group. A respective proposal for the increase of the contingent share capital was made by the Board of Directors to the shareholders and was approved at the Annual General Meeting on April 3, 2007. On December 31, 2007, the contingent share capital, to be issued to employees of Zurich Financial Services and Group companies, amounted to CHF 320,257.90 or 3,202,579 fully paid registered shares with a nominal value of CHF 0.10 each. During 2008, 8,300 shares were issued to employees out of the contingent share capital under the program described above. As a result, on December 31, 2008 the remaining contingent share capital, which can be issued to employees of Zurich Financial Services and its subsidiaries, amounts to CHF 319,427.90 or 3,194,279 fully paid registered shares with a nominal value of CHF 0.10 each. The pre-emptive rights of the shareholders, as well as the right for advance subscription, are excluded. The issuance of shares or respective option rights to employees is subject to one or more regulations to be issued by the Board of Directors and take into account performance, functions, levels of responsibility and criteria of profi tability. Shares or option rights may be issued to the employees at a price lower than that quoted on the stock exchange.
On February 13, 2008 the Board of Zurich Financial Services authorized a share buy-back program for the repurchase of up to CHF 2.2 billion worth of shares over the course of 2008. As of December 31, 2008 3,750,500 fully paid shares, with a nominal value of CHF 0.10, were bought back at an average price of CHF 293 per share, at a total cost of CHF 1.1 billion.
The Group had 57,609 and 58,220 employees (full-time equivalents) as of December 31, 2008 and 2007, respectively. Personnel and other related costs incurred for the year ended December 31, 2008 and 2007, were USD 5,262 million and USD 4,922 million, including wages and salaries of USD 4,344 million and USD 4,181 million, respectively.
The Group also operates post-employment plans, mainly in the US, which provide employees with certain defi ned postemployment benefi ts other than pensions.
To ensure appropriate governance and oversight of the Group’s pension and post-employment benefi t plans, the Group Pension Committee provides oversight of the Group’s benefi ts policy.
a) Defined benefit plans Defi ned benefi t pension plans Employees of the Group’s operating companies are covered under various pension plans, the largest of which are in the UK, US, Germany and Switzerland. Certain companies provide defi ned benefi t plans, some of which provide benefi ts related to employee’s service periods and fi nal pensionable earnings and others provide cash balance plans, where the participants receive the benefi t of annual contributions made by both employer and employee accumulated with credits refl ecting for example the investment return achieved on the assets. Eligibility for participation in the various plans is either based on completion of a specifi ed period of continuous service or from the date of commencement of employment.
Table 22.4 for the twelve months ended December 31Earnings per share
Most of the Group’s defi ned benefi t pension plans are funded through contributions by the Group and, in some cases, the employee to trusts or foundations independent of the Group’s fi nances. In these cases, the annual funding requirements are determined in accordance with local funding and actuarial cost methods. Where plans are not funded, a liability for the accrued pension obligations is recognized in the Group’s balance sheet.
Unrecognized past service cost (1) – 2 – – – Cumulative impact of asset ceiling (7) (62) – – – –
Present value of unfunded obligations (210) (207) (985) (183) (208) (196) Unrecognized past service cost – – – (1) (2) (1)
Table 23.2 in USD millions, as of December 31Status of unfunded defi ned benefi t plans
Pension expense is recognized in other employee benefi ts, which are included in administrative and other operating expense.
Mortgage loans 409 383 – – Cash and cash equivalents 111 126 – – Short-term investments 16 6 – 4 Equity securities 2,847 4,530 – –
Actuarial gain/(loss) included in other comprehensive income (320) 433 3 3
The movements in actuarial gains and losses due to differences between actual and expected experience on the Group’s plan assets and defi ned benefi t obligations, together with the impact of changes in actuarial assumptions to refl ect economic conditions at the year end are summarized below: Actuarial gain/(loss) as of January 1 (1,308) (1,870) (2,420) Experience adjustments on plan liabilities (147) (118) (375) Experience adjustments on plan assets (1,485) 188 447 Changes due to discount rate assumptions 223 975 – Changes due to other actuarial assumptions (392) (345) 528 Asset ceiling recognition 51 (64) – Foreign currency translation effects 152 (75) (50) Total actuarial gain/(loss) as of December 31 (2,907) (1,308) (1,870)
The actuarial gain/(loss) net of policyholder participation and taxes amounts to a loss of USD 1,933 million and USD 818 million as of December 31, 2008 and 2007, respectively.
Table 23.9 as of December 31Assumptions used in determining the actuarial liabilities for major defi ned benefi t pension plans
Table 23.10 as of December 31Assumptions used in determining the actuarial liabilities for other defi ned postemployment
b) Defined contribution pension plans Certain of the Group’s operating companies sponsor defi ned contribution pension plans. Eligibility for participation in such plans is either based on completion of a specifi ed period of continuous service or the date of commencement of employment. The plans provide for voluntary contributions by employees and contributions by the employer which typically range from 3 percent to 15 percent of annual pensionable salary, depending on a number of factors. The Group’s contributions under these plans amounted to USD 52 million and USD 51 million in 2008 and 2007, respectively.
Share Incentive Plans for employees in Switzerland The Share Incentive Plan introduced for employees in Switzerland continued to operate in 2008. Under this plan, employees have the option to acquire sales-restricted shares at a 30 percent discount to the market value. The maximum permitted investment in shares is CHF 3,500 per employee. During 2008, 6,282 employees participated in the Employee Incentive Plan compared with 6,369 in 2007. For the year ended December 31, 2008, 1,909 employees received shares under the 2007 employee performance share plan. For the year ended December 31, 2007, 1,929 employees received shares under the 2006 employee performance share plan.
Table 24.4 in CHFRange of exercise prices of options outstanding as of 6843_p208-233.indd 2186843_p208-233.indd 218 25/2/09 14:09:3725/2/09 14:09:37
Share price, in CHF 1 337 356 Exercise price, in CHF 337 356 Assumed volatility 29.50% 25.25% Risk-free interest rate 3.21% 2.87% Expected dividend rate 4.50% 3.50% Contracted option life 7 years 7 years 1 Share price as at date of grant.
Contractual commitments under investment agreements The Group has committed to contribute capital to subsidiaries and third parties that engage in making investments in direct private equity and private equity funds. Commitments may be called by the counterparty over the term of the investment (generally 3–5 years) and must be funded by the Group on a timely basis.
Contractual commitments under lease agreements The Group has entered into various operating leases as lessee for offi ce space and certain computer and other equipment. Lease expenses totaled USD 198 million and USD 203 million for the years ended December 31, 2008 and 2007, respectively.
Financial guarantees and letters of credit The Group knows of no event of default that would require it to satisfy fi nancial guarantees. Irrevocable letters of credit have been issued to secure certain reinsurance contracts.
The Group has commitments to provide collateral on certain insurance contracts in the event of a credit rating downgrade.
Table 25.2 in USD millions, as of December 31, 2008Future payments under non-cancellable operating leases with terms in excess of one year
Table 25.2 in USD millions, as of December 31, 2008Future payments under non-cancellable operating leases with terms in excess of one year 6843_p208-233.indd 2206843_p208-233.indd 220 27/2/09 23:09:2827/2/09 23:09:28
In addition, in December 2008, Zurich Financial Services entered into a settlement with the U.S. Securities and Exchange Commission (SEC) resolving the SEC’s investigation of certain reinsurance transactions engaged in by the Group and its subsidiaries. The SEC was investigating Converium’s February 28, 2006 restatement of its fi nancial results for the years 1998 through 2004. In that context, the Staff of the SEC made inquiries of Zurich Financial Services and certain of its subsidiaries related to reinsurance contracts entered into before 2001. Zurich agreed to pay a USD 25 million penalty and USD 1 in disgorgement to settle, without admitting or denying, charges that it had aided and abetted Converium’s violations of Section 10(b) of the Exchange Act and Rule 10b-5.
Financial information 26. Fair value of fi nancial assets and fi nancial liabilities
The methods and assumptions used by the Group in estimating fair value of the fi nancial assets and liabilities are set out in note 4.
Total available-for-sale 115,182 123,085 115,182 123,085 Securities at FV through profi t or loss: Trading: Designated at FV: Debt securities 16,160 18,338 16,160 18,338
Held-to-maturity debt securities 5,482 5,739 5,244 5,642 Loans and receivables: Deposits made under assumed reinsurance contracts 2,391 1,358 2,397 1,359 Mortgage loans given as collateral 1,313 2,266 1,233 2,243
Financial liabilities held at amortized cost: Liabilities related to investment contracts (122) (117) (122) (117) Liabilities related to investment contracts with DPF (5,314) (5,789) (5,461) (6,182)
Table 26.1 in USD millions, as of December 31Fair value (FV) and carrying value of fi nancial assets and fi nancial liabilities
Table 26.1 in USD millions, as of December 31Fair value (FV) and carrying value of fi nancial assets and fi nancial liabilities 6843_p208-233.indd 2236843_p208-233.indd 223 25/2/09 14:09:4025/2/09 14:09:40
The table below sets out related party transactions with investments in associates refl ected in the consolidated income statements and consolidated balance sheets.
Consolidated income statements for the years ended December 31 Net earned premiums and policy fees 10 9 Net investment income 9 16 Other income/(expense) 11 (3) Losses and loss adjustment expenses (8) (8) Consolidated balance sheets as of December 31 Policyholders’ collateral and other loans 15 15
Remuneration of key personnel of the Group Cash compensation, current benefi ts and fees 39 34 Post-employment benefi ts 4 4 Share-based compensation 34 23 Total remuneration of key personnel 77 61
Table 27.1 in USD millionsRelated party transactions included in the consolidated fi nancial statements
Table 27.2 in USD millions, for the years ended December 31Related party transactions – key personnel 6843_p208-233.indd 2246843_p208-233.indd 224 25/2/09 14:09:4125/2/09 14:09:41
6.15% surplus note, due December 2013 88 88 6.15% certifi cates of contribution, due December 2013 523 523 6.15% certifi cates of contribution, due August 2014 296 296 10.30% certifi cates of contribution, due December 2013 300 – Various other certifi cates of contribution 23 23
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.
Effective December 31, 2007, the All Lines agreement was amended and the quota share participation ratio was reduced by 16.7 percent to 5.0 percent. As a result, Farmers Re and ZIC assume a 1.0 percent and 4.0 percent respective quota share of the premiums written and the ultimate net losses sustained in all lines of business written by the Farmers Exchanges after the APD reinsurance agreement has been applied. In addition, under this treaty the Farmers Exchanges’ catastrophe losses were changed from USD 800 million to a maximum of USD 1 billion. Farmers Re and ZIC may assume USD 10 million and USD 40 million, respectively, of the maximum Farmers Exchanges’ catastrophe losses subject to under this treaty.
Effective September 30, 2008, Farmers Re and ZIC entered into a new 25.0 percent All Lines Quota Share reinsurance treaty under which each assumes a percentage of all lines of business written by the Farmers Exchanges, prospectively. Under this treaty, which amended the 5.0 percent All Lines Quota Share reinsurance treaty in effect since December 31, 2007, Farmers Re and ZIC assume a 5.0 percent and 20.0 percent respective quota share of the premiums written and the ultimate net losses sustained in all lines of business written by the Farmers Exchanges after the APD reinsurance agreement has been applied. In addition, under this treaty, the Farmers Exchanges catastrophe losses are subject to a maximum of USD 1.0 billion. As a result, Farmers Re and ZIC are subject to a maximum annual catastrophe loss of USD 50 and USD 200 million, respectively. This reinsurance agreement, which can be terminated after 90 days notice by any of the parties, also provides for the Farmers Exchanges to receive a provisional ceding commission of 25.0 percent of premiums for acquisition expenses, 8.8 percent of premiums for unallocated loss adjustment expense and 5.3 percent of premiums for other expenses with additional experience commissions that depend on loss experience. Unearned premiums totaling USD 1,079.3 billion were transferred from the Farmers Exchanges to Farmers Re and ZIC effective September 30, 2008 as a result of their increased participation in this treaty. In addition, Farmers Re and ZIC remitted USD 269.8 million of reinsurance commissions to the Farmers Exchanges for acquisition expenses due to the increased participation in the All Lines treaty.
Net investment result on unit-linked investments – – (19,039) 6,479 Net gain/(loss) on divestments of businesses 14 13 4 74
Underwriting and policy acquisition costs, net of reinsurance 5,679 5,358 1,880 1,629 Administrative and other operating expense 3,400 3,226 2,400 1,962 Interest expense on debt 235 310 45 17 Interest credited to policyholders and other interest 195 268 521 585 Total benefi ts, losses and expenses 31,967 30,138 (4,886) 12,642 Net income/(loss) before income taxes 2,156 4,162 344 1,472 Income tax benefi t/(expense) attributable to policyholders Income tax expense attributable to shareholders Net income attributable to non-controlling interests Net income/(loss) attributable to shareholders Supplementary segment information Additions and capital improvements of property / equipment and intangible assets 1,614 996 3,127 331 Depreciation and impairments of property and equipment 77 85 42 43 Amortization and impairments of intangible assets 133 96 224 143 1 In 2007, for the Global Life segment, premiums ceded to reinsurers included USD 7.3 billion and ceded insurance benefi ts and losses included USD 7.0 billion relating to the reinsurance of a UK annuity portfolio. Subsequent to the approval from the UK High Court, effective on June 30, 2008, the underlying contracts have been transferred to the reinsurer. This transaction had no impact on the income statement in 2008.
Table 29.1 in USD millions, for the years ended December 31Income statements by business segment
Table 29.1 in USD millions, for the years ended December 31Income statements by business segment 6843_p208-233.indd 2286843_p208-233.indd 228 25/2/09 14:09:4325/2/09 14:09:43
Management Services Other Businesses Corporate Functions Eliminations Total 6843_p208-233.indd 2296843_p208-233.indd 229 25/2/09 14:09:4525/2/09 14:09:45
Table 29.3 in USD millionsGross written premiums and policy fees, total revenues and total assets by geographical segment
Table 29.4 in USD millions, for the years ended December 31Additions and capital improvement of property / equipment and intangible assets by geographical segment
Auditor’s Responsibility Our responsibility is to express an opinion on these consolidated fi nancial statements based on our audit. We conducted our audit in accordance with Swiss law and Swiss Auditing Standards as well as the International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the consolidated fi nancial statements are free from material misstatement.
Australia Zurich Australia Limited Sydney Life Insurance 100 100 AUD 0.5 Zurich Australian Insurance Limited Sydney General Insurance 100 100 AUD 6.6 Austria Zürich Versicherungs-Aktiengesellschaft Vienna General Insurance 99.98 99.98 EUR 12.0 Bermuda B G Investments Ltd. Hamilton Corporate Functions 100 100 USD 0.3 Centre Group Holdings Limited Hamilton Other Businesses 100 100 USD 0.3 CMSH Limited Hamilton Other Businesses 100 100 USD 0.3 ZCM Holdings (Bermuda) Limited Hamilton Other Businesses 100 100 USD 137.0 ZG Investments Ltd. Hamilton Corporate Functions 100 100 USD 0.01 ZG Investments II Ltd. Hamilton Corporate Functions 100 100 USD 0.01 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 Finance (Bermuda) Ltd. Hamilton Corporate Functions 100 100 USD 0.01 Zurich International (Bermuda) Ltd. Hamilton Other Businesses 100 100 USD 9.9 Brazil Zurich Participações e Representações Ltda. Sao Paulo General Insurance 100 100 BRL 446.0 Zurichpar Participações Ltda. Sao Paulo Corporate Functions 100 100 BRL 447.5 Chile Chilena Consolidada Seguros de Vida S.A. Santiago Life Insurance 98.95 98.95 CLP 24,484.0 Cyprus Dalegate Ltd. 2 Nicosia General Insurance 100 100 RUB 1.3 Germany DA Deutsche Allgemeine Versicherung Aktiengesellschaft Oberursel General Insurance 100 100 EUR 24.5 Deutscher Herold Aktiengesellschaft 3 Bonn Life Insurance 78.83 78.83 EUR 18.4 Zürich Beteiligungs-Aktiengesellschaft (Deutschland) Frankfurt / Main General Insurance 100 100 EUR 152.9 Zurich Deutscher Herold Lebensversicherung Aktiengesellschaft Bonn Life Insurance 85.70 85.70 EUR 68.5 Zurich Versicherung Aktiengesellschaft (Deutschland) Frankfurt / Main General Insurance 95.39 95.39 EUR 142.2 1 The segments are defi ned in the notes to the consolidated fi nancial statements, note 1, basis of presentation. 2 Dalegate Ltd. holds 99.9% of Zurich Retail Insurance Company Ltd. in Russia which is a fully owned subsidiary of the Group. 3 In addition buy out options exist which allow the minority shareholders to sell another 16.17 percent of the shares of Deutscher Herold Aktiengesellschaft to the Group.
Ireland Eagle Star Life Assurance Company of Ireland Limited Dublin Life Insurance 100 100 EUR 17.5 Zurich Financial Services EUB Holdings Limited Dublin Other Businesses 100 100 GBP 0.001 Zurich Holding Ireland Limited Dublin Corporate Functions 100 100 EUR 0.1 Zurich Insurance Ireland Limited 4 Dublin General Insurance 100 100 EUR 4.9 Italy Zurich Investments Life S.p.A. Milan Life Insurance 100 100 EUR 54.0 Zurich Life and Pensions S.p.A. Milan Life Insurance 100 100 EUR 40.5 Zurich Life Insurance Italia S.p.A. Milan Life Insurance 100 100 EUR 25.9 Luxembourg Zurich Group Funding Luxembourg S.A. Howald Corporate Functions 100 100 EUR 0.03 Morocco ZURICH Assurances Maroc Casablanca General Insurance 98.86 98.86 MAD 90.0 Portugal Zurich – Companhia de Seguros S.A. Lisbon General Insurance 100 100 EUR 10.0 South Africa Zurich Insurance Company South Africa Limited 5 Bryanston General Insurance 73.61 73.61 ZAR 3.0 Spain Bansabadell Pensiones, E.G.F.P, S.A. Barcelona Life Insurance 50 50 EUR 7.8 Bansabadell Seguros Generales, S.A. de Seguros y Reaseguros Barcelona General Insurance 50 50 EUR 10.0 Bansabadell Vida S.A. de Seguros y Reaseguros Barcelona Life Insurance 50 50 EUR 43.9 CaixaSabadell Vida, S.A. Companyia d´Assegurances i Reassegurances Sabadell Life Insurance 50 50 EUR 39.1 CAN Soluciones Integrales SAU Pamplona General Insurance 50 50 EUR 9.0 Zurich Vida, Compañía de Seguros y Reaseguros, S.A. – Sociedad Unipersonal Madrid Life Insurance 100 100 EUR 50.4 "Zurich España, Compañía de Seguros y Reaseguros, S.A." Barcelona General Insurance 99.89 99.89 EUR 33.6 4 As from January 2009 renamed Zurich Insurance plc.
5 Listed on the Johannesburg Stock Exchange. On December 31, 2008, the company had a market capitalization of ZAR 2’216.7 m (ISIN Number 000094496).
Switzerland Genevoise, Life Insurance Company Ltd 6 Geneva Life Insurance 100 100 CHF 17.0 Zurich Group Holding Zurich Corporate Functions 100 100 CHF 1,600.0 Zurich Insurance Company Zurich Corporate Functions 100 100 CHF 825.0 Zurich Life Insurance Company Ltd Zurich Corporate Functions 100 100 CHF 60.0 "Zurich" Investment Management AG Zurich Corporate Functions 100 100 CHF 10.0 Taiwan Zurich Insurance (Taiwan) Ltd. Taipei General Insurance 99.73 99.73 TWD 2,000.0 Turkey Zurich Sigorta A.S. Fındıklı, Istanbul General Insurance 100 100 TRY 47.3 United Kingdom
Allied Zurich Holdings Limited Jersey, Channel Islands Corporate Functions 100 100 GBP 90.7
Zurich Financial Services (UKISA) Limited Swindon, England Corporate Functions 100 100 GBP 1,492.1
New business value has increased by 3 percent. Disciplined pricing has allowed the maintenance of a strong aggregate profi t margin despite increasing competitive pressures in some markets, most notably the United Kingdom.
EV profi t was USD (1,575) million. The negative economic variance came from falling bond values, lower interest rates (which predominantly affected Germany and Switzerland) and declining equity markets (mainly affecting the United Kingdom and Ireland).
The embedded value, as of December 31, 2008, was USD 12,818 million, a decrease of 20 percent. This includes a strong negative impact from foreign currency translation effects.
Contents 1. Summary of embedded value results 2. Geographical analysis 3. Embedded value methodology 4. Embedded value assumptions
Appendix: Embedded value tables 1. Embedded value results a) Embedded value
Shareholders’ net assets 5,447 6,982 Value of business in-force 7,371 8,953
Certainty equivalent value of business in-force 9,328 10,705 Frictional costs (579) (771) Time value of fi nancial options and guarantees (752) (476) Cost of non-market risk (627) (505)
Frictional costs are applied to the total capital held by Global Life. The breakdown of shareholders’ net assets as of December 31, 2008 is shown in the table below.
Table 1.1 in USD millions, for the years ended December 31Embedded value
Table 1.3 in USD millions, for the years ended December 31
Financial information d) Expected profit The expected profi t is the expected change in the EV resulting from a projection of the assets and liabilities over the period using expected “real world” returns.
New business value 1 753 729 Annual premiums 2,118 1,854 Single premiums 11,433 10,929 New business annual premium equivalent (APE) 2 3,261 2,947 Present value of new business premiums (PVNBP) 3 25,883 23,781 New business margin (as % APE) 23.1% 24.7% New business margin (as % PVNBP) 2.9% 3.1%
2 APE is taken as new annual premiums plus 10% of single premiums. 3 PVNBP is equal to new single premiums plus the present value of annual premiums.
Certainty equivalent new business value 842 856 Frictional costs (59) (54) Time value of fi nancial options and guarantees (TVFOG) 45 (2) Cost of non market risk (CNMR) (75) (71) New business value, after tax 753 729
EV is shown net of minority interests. Where the Group has a majority interest in a subsidiary company, the new business value and the premium information are shown gross of minority holdings.
In 2008, new business has reduced the overall cost of fi nancial options and guarantees in the covered business. Higher asset volatilities and changes in interest rate curves have amplifi ed this effect.
New business value, after tax 730 725 New business annual premium equivalent (APE) 3,118 2,927 Present value of new business premiums (PVNBP) 24,624 23,603
Table 1.4 in USD millions, for the years ended December 31New business volumes, after tax, gross of minority interests
Table 1.6 in USD millions, for the years ended December 31New business value, after tax net of minority interests 6846_p240-271.indd 2436846_p240-271.indd 243 25/2/09 14:01:1125/2/09 14:01:11
Table 1.7 in USD millions, for the year ended December 31, 2008
Operating variance is the difference between actual experience during the period and that expected based on the operating assumptions. It also includes the impact of changes in assumptions about future operating experience.
Table 1.8 in USD millions, for the year ended December 31, 2008Operating variance, after tax
h) Economic variance Economic variance is the difference between actual experience during the period and that expected based on the economic assumptions. It also includes the impact of changes in assumptions in respect of future economic experience and the impact of legal, tax and regulatory changes in the period.
j) Foreign currency translation effects Foreign currency translation effects represent the impact of adjusting values to end-of-period exchange rates.
Table 1.9 in USD billions, for the years ended December 31Reconciliation of Global Life IFRS net assets to embedded value
Table 1.9 in USD billions, for the years ended December 31Reconciliation of Global Life IFRS net assets to embedded value 6846_p240-271.indd 2466846_p240-271.indd 246 25/2/09 14:01:1325/2/09 14:01:13
Actual embedded value 12,818 753 Operating sensitivities 10% decrease in voluntary discontinuance rates – 479 479 78 10% decrease in initial expenses and commissions n / a n / a n / a 91 5% improvement in mortality and morbidity for assurances 3 234 236 24 5% improvement in mortality for annuities (3) (110) (113) (6) Frictional costs applied to 150% of minimum solvency margin – 151 151 13
Economic sensitivities 100 basis points increase in risk free yield curve (111) 142 31 71 100 basis points decrease in risk free yield curve (599) (634) (1,233) (262) 10% fall in equity and property market values (102) (528) (630) n / a 100 basis points increase in risk discount rate – (775) (775) (111) 10% increase in implied volatilities for equities and properties – (75) (75) (20) 10% increase in implied volatilities for risk free yields (371) (557) (928) (118)
The key assumption changes represented by each of these sensitivities are as follows.
A 10 percent decrease in maintenance expenses means that, for example a base assumption of USD 30 p.a. would decrease to USD 27 p.a.
A 5 percent improvement in mortality and morbidity assumptions for assurances means that for example if the base mortality assumption for assurances was 90 percent of a particular table this would decrease to 85.5 percent.
Table 1.10 in USD millions, for the year ended December 31, 2008Sensitivities
Table 1.10 in USD millions, for the year ended December 31, 2008Sensitivities 6846_p240-271.indd 2476846_p240-271.indd 247 25/2/09 14:01:1425/2/09 14:01:14
A 10 percent fall in equity and property market values was assessed for EV only. This is not applicable for new business.
The sensitivity to a 100 basis points increase in discount rates represents an increase in the rates used to discount projected shareholder profi ts, 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.
The Group has estimated the EV of these businesses based on the same principles as for the Global Life business, including deductions for the time value of fi nancial options and guarantees, frictional costs and the cost of non market risks, but using more approximate models. The results are set out in the following table.
Table 1.11 in USD millions, for the years ended December 31Estimated embedded value of life businesses in Other Businesses
Geographical analysis of embedded value, 6846_p240-271.indd 2506846_p240-271.indd 250 27/2/09 22:49:2027/2/09 22:49:20
Frictional costs TVFOG 1 CNMR 2 Total 1 TVFOG is the time value of fi nancial options and guarantees 2 CNMR is the cost of non-market risk
Cost of non market risk (CNMR) The CNMR increased for Germany. This was caused by a reduction in the sharing of risks with policyholders.
Geographical analysis of embedded value, 6846_p240-271.indd 2516846_p240-271.indd 251 25/2/09 14:01:1625/2/09 14:01:16
Table 2.5 in USD millions, for the years ended December 31
In the United Kingdom, the certainty equivalent value decreased due to lower sales volumes and higher costs to acquire business.
In Germany, new business increased due to sales of state funded pension products, changes in profi t sharing regulations and a higher time value of fi nancial options and guarantees for new business. The last quantity has a positive effect on the new business value, because new business with lower levels of guarantees provides a cross subsidy to business in-force.
Table 2.7 in USD millions, for the year ended December 31, 2007
While sales were nearly stable in Ireland, new business profi t margins fell in an increasingly competitive market environment. This translated into an overall reduction of new business value.
The Rest of the World increased mainly due to Italy, following the acquisition of DWS Vita S.p.A. in 2008.
The above presented return measures are based on the opening EV, after tax, adjusted for capital movements.
Operating return was particularly high for Germany and Spain, due to their strong increase in new business value. While in Germany this refl ects general business growth and a change in shareholder participation rates, Spain has increased its new business substantially through acquisitions.
The negative Embedded value return for Germany, Switzerland and Spain was caused by a particularly strong exposure to interest rate guarantees. As interest rates decreased and swaption volatilities increased, these countries were negatively affected.
The positive return of Emerging Markets was partially offset by foreign exchange rate movements.
Options and guarantees are valued using market consistent models calibrated to observable market prices. Where markets exhibit a limited capacity, the valuation is based on historical averages.
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.
a) Covered business Covered business includes all business written by companies that are included in Global Life, in particular: life and critical illness insurance; savings business (with profi t, non-profi t and unit-linked); pensions and annuity business; and, long-term health and accident insurance.
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 value of business in-force.
d) Shareholders’ net assets Shareholders’ net assets represent the market value of net assets held in respect of the covered business, and consist of the required capital and free surplus. The level of required capital refl ects the amount of capital considered by the Directors to be appropriate to manage the business. The free surplus comprises the market value of shareholders’ net assets allocated to the covered business in excess of the assets backing the required capital.
Certainty equivalent value is the value calculated using discount rates consistent with those applied to the underlying cash fl ows in the capital markets. It includes the intrinsic value but excludes the time value of fi nancial options and guarantees which is allowed for separately, as described below.
Time value of fi nancial options and guarantees represents additional costs in excess of the intrinsic value of options and guarantees which are already allowed for in the certainty equivalent value. These are based on the variability of investment returns which need to be allowed for explicitly under the European Embedded Value Principles. The time value has been calculated on a market consistent basis using stochastic modeling techniques, and making allowance for expected management and policyholder behavior.
Cost of non market risk is an explicit additional deduction from the value of in-force business, over and above the frictional costs, refl ecting an allowance for the impact on shareholder value of variability in insurance, business and operational risks.
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 percent increase in expenses is equal and opposite to the profi t on a 10 percent 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 diversifi able, and fi nancial markets do not charge a risk premium for diversifi able risks.
The value generated by new business written during the period is the present value of the projected stream of after tax distributable profi ts from that business.
In certain profi t sharing funds, the new business written can affect the time value of fi nancial options and guarantees for business written in prior years, and this effect is taken into account in the new business value.
Quarterly new business is valued on a discrete basis. New business value is calculated separately for each quarter using assumptions, both operating and economic, as of the start of the relevant quarter. New business strain is also calculated on a quarterly discrete basis, meaning that it takes account only of cash fl ows during that quarter and makes no allowance for any subsequent reduction in strain during the remainder of the period. Once calculated, the new business value will not change in local currency terms .
The majority of the Group’s EV, has been calculated using a “hard close” approach. This means that all asset as well as liability data refl ect the actual position as of the valuation date.
Germany has chosen an approach where asset and liability model points were set up in advance and then were projected to year end 2008 values using the respective forecasts as of mid December 2008. Asset data is based on November 30 fi gures and the structure of the liability data has been created for a previous run and then been scaled to match the expected balance sheet fi gures. The new business model points were set up at October 31, and scaled along the expected development of the APE.
i) Economic scenario generator All operations use actual yield curves observable as of December 31 for the calculation of the certainty equivalent value of business in-force.
Simulations are produced for the economies in the United States, United Kingdom, Switzerland and the Euro-Zone. In each economy, risk free nominal interest rates are modeled using a LIBOR market model. The excess return on other asset classes relative to the total returns on risk free assets are then modeled using a multi-factor lognormal model. Hong Kong uses US dollar simulations as their principal liabilities are US dollar denominated. Chile uses closed form
n) “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 United Kingdom, 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, profi ts 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.
In Germany, the majority of distribution and administration is provided by service companies. These are valued on a “look through” basis. These companies also provide limited services to companies outside Global Life. The value of business inforce and new business value refl ect the services provided to companies within Global Life. Net asset value consists, however, of the full statutory equity of these service companies.
In Switzerland, an investment management company provides asset management services to pension schemes written in foundations and other pension funds. The present value of the net asset management fees, after tax, is included in the EV and the new business value.
o) Employee pension schemes Since 2007, the Group adopted the Statement of Recognized Income and Expense (SoRIE) option under IAS 19 Employee Benefi ts to recognize actuarial gains and losses arising from defi ned benefi t pension and other defi ned benefi t post-retirement plans as a liability. In the consolidated fi nancial statements, an allowance is made for IAS 19 Employee Benefi ts defi cits. This adjustment has not been made in the detailed EV described in this Embedded value report. If the adjustment had been made the EV as of December 31, 2008 would have been lower by USD 393 million. Similarly the EV as of December 31, 2007 would have been lower by USD 85 million. 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.
r) Translation 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 fi gures for 2007. This approach has also been applied to the analysis of movement. Valuations are translated at end-of-period exchange rates.
Details of the economic assumptions for the major economies in which Zurich Global Life carries out business can be downloaded in a spreadsheet from the Investors section at www.zurich.com .
a) Economic assumptions Market consistent framework The Group has adopted a computational method known as “risk neutral”. With this method the key economic assumptions are: risk free rates; implied volatilities of different assets; and, correlations between different asset returns.
Expected asset returns in excess of the risk free rate have no bearing on the calculated EV other than in the expected return used for the analysis of movement.
Choice of “risk free yield curve” The risk free yield curve is derived from mid-markets swap rates applicable to each economy as of December 31, 2008. These curves were used to extract forward reinvestment yields that are used for all asset classes. The yield curves are consistent with the assumptions used by investment banks to derive their option prices and their use ensures consistency with the derivation of implied volatilities. They also have the advantage of being available for most of the markets in which the Group operates. Domestic yield curves are used by businesses in other countries, except Hong Kong and Argentina which use US dollar, as their liabilities are principally US dollar dominated.
Implied asset volatility Zurich’s EV model is based on market consistent assumptions. Zurich believes that the market in the fourth quarter of 2008 did not represent a deep and liquid market, and so it chose to base its volatility assumptions on 12 month averages. Interest volatility is derived from 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, a fact that is refl ected in the ESG data. For the interest rate instruments, for the USD, GBP and EUR economies, the average was based on end-ofmonth volatilities from 2008. For CHF interest rate volatility, and equity derivatives in all economies, the average was based on end-of-quarter data. The equity volatilities are based on at-the-money forward European options on capital indices, consistent with traded options in the market. Volatility of property investments is derived from relevant historical return data for each modelled economy.
Infl ation Infl ation assumptions have been derived from the yields on index linked bonds relative to the risk free yield curve, where index linked bonds exist. Elsewhere, a statistical approach based on past infl ation has been used. Appropriate allowance has been made for expense infl ation to exceed the assumed level of price infl ation as life company expenses include a large element of salary related expenses.
Risk discount rate Under the “risk neutral” approach, risk discount rates are based on the same risk free yield curves as those used to project the investment return.
For stochastic modeling, the risk discount rates are simulation specifi c 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-of-period. 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.
These assumptions have been set by asset class and separately for each sub-fund in each life business in order to best refl ect the actual assets held.
Expense assumptions Management expenses have been analyzed between expenses related to acquisition of new business, the maintenance of in-force business and, where appropriate, one-off project costs. Future expense assumptions allow for expected levels of maintenance expenses. In addition, Corporate Center expenses relating to covered business have been allocated to business units and are refl ected in assumed future expenses.
The maintenance expense assumptions allow for the expected cost of providing future service benefi ts in respect of the Group staff pension schemes. An adjustment to the EV is noted in section 3.o for pension scheme liabilities under IAS 19 and no allowance is made in the expense assumptions for any contributions as a result of past service benefi ts.
New business premiums including deposits, of which: 162 194 5,377 6,221
Dividends and capital movements (94) (131) (178) (613) Foreign currency translation effects – – (1,097) 71
Operating return on opening EV 13.1% 12.3% 10.0% 8.8% Embedded value return on opening EV (2.7%) 10.2% (14.6%) 5.5% Expected return on opening EV 7.6% 6.8% 5.9% 6.0%
in USD millions, for the years ended December 31Embedded value results, after tax – Global Life in USD millions, for the years ended December 31Embedded value results, after tax – Global Life
Germany Switzerland Ireland Spain Emerging Markets Rest of the World Global Life
Dividends and capital movements 142 – 71 9 Foreign currency translation effects (288) 10 2 (1)
New business margin (as % of APE) 18.7% 20.4% 21.6% 48.2% New business margin (as % of PVNBP) 3.8% 3.2% 4.6% 10.8%
The Board of Directors of Zurich Financial Services is responsible for the preparation of the EV Report. Our responsibility is to express an opinion whether the EV Report has been properly prepared in accordance with the EEV basis as described on pages 257 to 262.
We conducted our audit in accordance with Swiss Auditing Standards as well as the International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the EV Report is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the EV Report. An audit also includes assessing the principles used and signifi cant estimates made by the Board of Directors, as well as evaluating the adequacy of the overall presentation of the EV Report. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the EV Report for the companies and business reported in Zurich Financial Services’ Global Life segment for the year ended December 31, 2008 has been properly prepared in accordance with the EEV basis as described on pages 257 to 262 .
Its principal activity is the holding of subsidiaries. Revenues consist mainly of dividends and interest. The net income of Zurich Financial Services was CHF 2,658,037,367 for 2008 and CHF 1,973,433,008 for 2007.
On February 14, 2007 the Board of Zurich Financial Services authorized a share buy-back program. 3,432,500 fully paid shares, with a nominal value CHF 0.10, have been bought back at an average price of CHF 364 per share, with a total cost of CHF 1.2 billion. At the Annual General Meeting on April 3, 2008 shareholders approved a share capital reduction of CHF 343,250.00 from CHF 14,554,682.00 to CHF 14,211,432.00 by cancelling these 3,432,500 registered shares. The effective date of the capital reduction was June 27, 2008.
Total expenses (341,242) (176,450) Net income 2,658,037 1,973,433 in CHF thousands, for the years ended December 31 in CHF thousands, for the years ended December 31 6847_p272-289.indd 2736847_p272-289.indd 273 25/2/09 13:51:4225/2/09 13:51:42
Non-current assets Investments in subsidiaries 6 10,953,361 10,953,361 Subordinated loans to subsidiaries 4,000,000 4,000,000 Total non-current assets 14,953,361 14,953,361 Current assets Cash and cash equivalents 1,081 1,960,745 Loans to subsidiaries 2,546,345 640,870 Own shares 850,613 1,140,448 Accrued income from third parties – 3,526 Accrued income from subsidiaries 100,446 99,341 Derivatives 650 – Total current assets 3,499,135 3,844,930 Total assets 18,452,497 18,798,291
3. Administrative expense Administrative expense consists mainly of directors’ fees of CHF 3,504,058 for 2008 and CHF 3,745,570 for 2007, see note 12 page 278, and overhead fees of CHF 7,000,000 for 2008 and CHF 7,000,000 for 2007.
4. Other financial expense Other fi nancial expense includes a CHF 250 million write-down in the value of own shares to market value.
6. Investments in subsidiaries Investments in subsidiaries include a 57.7% interest in Zurich Group Holding with a carrying value of CHF 6,354,745,915 for 2008 and CHF 6,354,745,913 for 2007 and a 100% interest in Allied Zurich Limited, with a carrying value of CHF 4,595,865,096 for 2008 and CHF 4,595,865,096 for 2007. Allied Zurich Limited holds the remaining 42.3% interest in Zurich Group Holding. Additionally, Zurich Financial Services holds 49,000 shares of Zurich Insurance Company with a book carrying value of CHF 2,750,190 for 2008 and CHF 2,750,190 for 2007.
7. Commitments and contingencies Zurich Financial Services has provided unlimited guarantees in support of various entities belonging to the Zurich Capital Markets group of companies. In addition, Zurich Financial Services has agreed with the Superintendent of Financial Institutions, Canada, to provide additional capital in case the applicable capital adequacy tests for the Canadian business are not met and to provide assistance in case of liquidity issues.
Furthermore, Zurich Financial Services has entered into various support agreements and a guarantee for the benefi t of certain of its subsidiaries. These contingencies amounted to CHF 4,714 million as of December 31, 2008 and CHF 5,501 million as of December 31, 2007.
At the Annual General Meeting on April 3, 2008 shareholders approved a share capital reduction of CHF 343,250.00 from CHF 14,554,682.00 to CHF 14,211,432.00 by cancelling 3,432,500 registered shares that were bought back under the buy-back program announced on February 15, 2007. The effective date of the capital reduction was June 27, 2008. During the year 2008, a total of 8,300 shares have been issued to employees out of the contingent capital. As a result, 142,122,620 fully paid shares with a nominal value of CHF 0.10 were issued as of December 31, 2008, amounting to a share capital of CHF 14,212,262.00.
The Board is further authorized to restrict or withdraw the pre-emptive rights of shareholders and to allocate them to third parties if the shares are to be used for the take-over of an enterprise, or parts of an enterprise or of participations or if issuing shares for the fi nancing including re-fi nancing of such transactions; or for the purpose of expanding the scope of shareholders in connection with the quotation of shares on foreign stock exchanges.
Average purchase price of additions, in CHF 293 348 Average selling price, in CHF 264 367 1 in CHF thousands
10. Shareholders The shares registered in the share ledger as of December 31, 2008, were owned by 111,852 shareholders of which 106,150 were private individuals holding 19.6% of the shares (or 12.1% of all outstanding shares), 2,071 were foundations and pension funds holding 7.5% of the shares (or 4.6% of all outstanding shares), and 3,631 were other legal entities holding 72.9% of the shares (or 44.9% of all outstanding shares).
According to the information available to us on December 31, 2008, no shareholder of Zurich Financial Services held more than 5% of the voting rights of the issued share capital.
11. Information on the risk assessment process Refer to the disclosures in the Risk review on pages 90 to 125 of this annual report.
The compensation paid to the Directors for their Board membership of Zurich Financial Services, the holding company of the Group, and Zurich Insurance Company is paid entirely by Zurich Financial Services. The fees for Mr de Swaan’s additional Board membership in Zurich Insurance plc are paid by that company. The compensation paid to the members of the GEC is not paid by Zurich Financial Services, but by the Group entities where they are employed. The compensation shown below includes the compensation of the members of the Board and the GEC received for all their functions in the Group. As the fi nancial statements of the holding company are presented in Swiss francs, all fi gures are shown in Swiss francs, despite the fact that the fees paid by Zurich Financial Services to the Directors are defi ned in U.S. dollars. To be consistent with the fi gures in the unaudited Remuneration report the totals of the remuneration paid to the members of the Board and the GEC are also presented in U.S. dollars, as set out in that report. Year-on-year comparison in Swiss francs is affected by the actual exchange rates during the year.
2 The remuneration shown in the tables do not include any business related expenses incurred in the performance of the Board members’ services. 3 Committee members receive a cash fee of USD 40,000 for all Committees on which they serve, irrespective of the number. The Committees on which the Board members serve are set out in the Corporate governance report on page 25.
12 Mr. de Swaan became Chairman of the Risk Committee on April 3, 2008. 13 In addition to the fees he received as a Director of Zurich Financial Services and Zurich Insurance Company, Mr. de Swaan earned a pro rata fee of USD 28,111 for his membership on the Board of Zurich Insurance plc since April 17, 2008 (based on an annual fee of USD 40,000). He additionally also earned a pro rata fee of USD 2,056 for being Chair of the audit committee of Zurich Insurance plc since October 16, 2008 (based on an annual fee of USD 10,000). These fees are paid by Zurich Insurance plc.
15 Mr. Gentz was allocated 617 shares and the other Board members 218 shares as of June 30, 2007. The share price (CHF 389.50) and the exchange rate (USD / CHF 1.2422) as of June 15, 2007, were adopted to calculate the number of shares based on the fi xed portion of the fee allocated in shares for the respective members. Where the value of the allocated shares did not equal the value of the portion of the fee to be allocated in shares, the difference was paid in cash. The amount shown in the table above refl ects the fi xed amount in USD of the portion of the fee to be allocated in shares.
16 The following membership movements occurred in 2007: Ms. 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.
The Directors’ fees are not pensionable. None of the Directors received any benefi ts-in-kind or any other compensation than set out in the tables above.
No benefi ts (or waiver of claims) have been provided to former members of the Board during the year 2008, nor during the year 2007. Neither had any former member of the Board outstanding loans, advances or credits as of December 31, 2008 or 2007, respectively.
No benefi ts (or waiver of claims) have been provided to related parties of the Directors or related parties of former members of the Board during the year 2008, nor during the year 2007. Neither had any related party of the Directors or of former members of the Board outstanding loans, advances or credits as of December 31, 2008 or 2007.
7 The share and share option grants will vest in the future according to achievement of defi ned performance conditions. The value of the share and share options assumes that the grant will vest in the future at 100% of the target level with the valuation of the options based on the Black-Scholes option pricing model as set out in note 24 to the consolidated fi nancial statements, the valuation of the target performance share grants based on the share price on the day prior to the grants (CHF 336.50 for 2008 and CHF 355.75 for 2007) and the valuation of the restricted share grants based on the share price on the date of the grants.
As of December 31, 2008, and 2007, the total of loans, advances or credits outstanding from GEC members was CHF 1,082,000 and CHF 1,091,000, respectively. These loans represent mortgage loans, the terms of which are similar to those available to all employees in Switzerland. Mortgage loans are issued with a reduced interest rate of up to one percentage point less than the prevailing market interest rates on mortgage balances, up to a maximum of CHF 1,500,000. As at December 31, 2008 and 2007, the highest mortgage loan was held by Mr Lehmann (Group Chief Risk Offi cer), in the amount of CHF 782,000 (CHF 791,000 in 2007), which had an overall interest rate of 2.6 % (2.3% in 2007).
No benefi ts (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 2008, and 2007. Neither had any related party of GEC members or of former members of the GEC outstanding loans, advances or credits as of December 31, 2008 or 2007.
in CHF millions1, 2Highest paid executive James J. Schiro, Chief Executive Offi cer as of December 31 in CHF millions1, 2Highest paid executive James J. Schiro, Chief Executive Offi cer as of December 31 6847_p272-289.indd 2826847_p272-289.indd 282 28/2/09 10:58:2428/2/09 10:58:24
Financial information 13. Shareholdings of the Board of Directors and the Group Executive Committee 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 offi ce at December 31, 2008 and 2007, in accordance with the information required by article 663c paragraph 3 of the Swiss Code of Obligations. This information is also included in the unaudited Remuneration report, set out on pages 44 to 61, in which additional details can be found.
V. Chu, Member 187 n.a. Th. Escher, Member 5,470 4,218 F. Kindle, Member 10,470 2,218 A. Meyer, Member 1,794 1,542 D. Nicolaisen, Member 470 218 V.L. Sankey, Member 1,640 1,388 G. Schulmeyer, Member n.a. 2,218 T. de Swaan, Member 470 218 R. Watter, Member 3,438 3,186 1 None of the Directors together with related parties to them held more than 0.5% of the voting rights as at December 31, 2008 or 2007, respectively.
None of the Directors, nor any related party of a Director, hold any share options or conversion rights over Zurich Financial Services shares as of December 31, 2008 or 2007.
Number of Zurich Financial Services shares 1Directors’ shareholdings as of December 31 6847_p272-289.indd 2836847_p272-289.indd 283 25/2/09 13:51:4725/2/09 13:51:47
Share and share option holdings of the Group Executive Committee members The following table sets out the actual share and share option holdings of GEC members as of December 31, 2008 and 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.
4 Joined the Group on January 15, 2007. 5 Joined the GEC on January 1, 2008, but joined the Group on September 1, 2006. 6 Joined the Group on October 1, 2007.
Number of vested shares and vested share options 1Share and vested share option holdings of the GEC members as of December 31 6847_p272-289.indd 2846847_p272-289.indd 284 27/2/09 22:42:1327/2/09 22:42:13
A. Court – – – – – – – M. Greco – – – – – – –
1 The distribution of Mr. Amore’s options for 2001 comprises 9,142 under grant b and 2,450 under grant a.
Number of vested share optionsDistribution of vested share options as of December 31, 2008
Distribution of vested share options as of December 31, 2007 6847_p272-289.indd 2856847_p272-289.indd 285 25/2/09 13:51:4925/2/09 13:51:49
Summary of outstanding options as of 6847_p272-289.indd 2866847_p272-289.indd 286 25/2/09 13:51:4925/2/09 13:51:49
Appropriation of available earnings as proposed by the Board of Directors Net income 2,658,037 1,973,433 Balance brought forward 272,144 386,842 Retained earnings 2,930,181 2,360,275 1 These fi gures are based on the issued share capital on April 8, 2008. The proposed dividend published in the Annual Report 2007 was CHF 2,183,202 thousand resulting in a balance carried forward of CHF 177,073 thousand. The difference is due to the purchase of treasury shares and the share buy-back program and a resolution of the Board of Directors on February 14, 2007, according to which, contingent capital shares for employees have been issued (as described in note 8). Treasury shares are not entitled to dividends.
If this proposal is approved, a payment of CHF 7.15 per share, after deduction of 35% Swiss withholding tax, is expected to be paid starting from April 7, 2009, free of charge and in accordance with dividend payment instructions.
As statutory auditors, we have audited the fi nancial statements of Zurich Financial Services, which comprise the income statements, balance sheets and notes (pages 273 to 287), for the year ended December 31, 2008.
290 Zurich Financial Services Group Annual Report 2008Financial Report 2008Shareholder information 6848_p290-296.indd 290 25/2/09 13:53:49
Shareholder information 292 Share data 292 Financial calendar 294 Contact information 294 Glossary 295 6848_p290-296.indd 2916848_p290-296.indd 291 25/2/09 13:53:5425/2/09 13:53:54
Number of shares issued 142,122,620 145,546,820 Number of dividend-bearing shares 1 142,122,620 145,546,820 Market capitalization (in CHF millions at end of period) 32,262 48,394 Authorized capital, number of shares 6,000,000 6,000,000 Contingent capital, number of shares 8,676,107 8,684,407 1 Treasury shares are not entitled to dividends.
Dividend / nominal value reduction 2005 7.00 July 4, 2006 Nominal value reduction 2004 4.00 July 4, 2005 Nominal value reduction 2003 2.50 July 1, 2004 Nominal value reduction 2002 1.00 July 15, 2003 1 Proposed gross dividend, subject to approval by shareholders at the Annual General Meeting 2009; expected payment date as from April 7, 2009.
as of December 31Key indicators as of December 31Key indicators in CHFPer share data in CHFPer share data
Securities Custody Service Zurich Financial Services, Custody Accounts c/o SIX SAG AG P.O. Box, 4601 Olten, Switzerland
American Depositary Receipts Zurich Financial Services has an American Depositary Receipt program with The Bank of New York Mellon (BNY). For more information call BNY Mellon’s Shareowner Services in the USA at +1-888-BNY-ADRs (1-888-269-2377) or outside the USA on +1-212-815-3700. ADR holder assistance may also be obtained from The Bank of New York Mellon at www.adrbny.com.
Investments for unit-linked products include such investments where the policyholder bears the investment risk, and are held for liabilities related to unit-linked investment contracts and reserves for unitlinked insurance contracts. They are managed in accordance with the investment objectives of each unitlinked fund. The investment result for unit-linked products is passed to policyholders through a charge to policyholder dividends and participation in profits.
Expense ratio is a performance measure that indicates the level of technical expenses during the period relative to earned premiums and policy fees. It is calculated as the sum of net technical expenses and policyholder dividends and participation in profits, divided by earned premiums and policy fees.
Disclaimer & Cautionary Statement Certain statements in this document are forward-looking statements, including, but not limited to, statements that are predications of or indicate future events, trends, plans or objectives. Forward-looking statements include statements regarding our targeted profi t improvement, return on equity targets, expense reductions, pricing conditions, dividend policy and underwriting claims improvements, as well as statements regarding our understanding of general economic, fi nancial and insurance market conditions and expected developments. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties and can be affected by other factors that could cause actual results and plans and objectives of Zurich Financial Services or the Zurich Financial Services Group (the “Group”) to differ materially from those expressed or implied in the forward looking statements (or from past results). Factors such as (i) general economic conditions and competitive factors, particularly in our key markets; (ii) the risk of the global economic downturn and a downturn in the fi nancial services industries in particular (iii) performance of fi nancial markets; (iv) levels of interest rates and currency exchange rates; (v) frequency, severity and development of insured claims events; (vi) mortality and morbidity experience; (vii) policy renewal and lapse rates; and (viii) changes in laws and regulations and in the policies of regulators may have a direct bearing on the results of operations of Zurich Financial Services and its Group and on whether the targets will be achieved. Zurich Financial Services undertakes no obligation to publicly update or revise any of these forward-looking statements, whether to refl ect new information, future events or circumstances or otherwise.