With 60,000 employees able to serve customers in more than 170 countries, help is on the way.
Here to help your world Our customer stands at the center of all we do. Zurich HelpPoint captures this customer focus, and our commitment to deliver when it matters.
Operational transformation leads to more than USD 800 million in benefi ts
The following table presents the summarized consolidated results of the Group for the years ended December 31, 2008 and 2007, respectively. All amounts are shown in USD millions and rounded to the nearest million unless otherwise stated with the consequence that the rounded amounts may not add to the rounded total in all cases. All ratios and variances are calculated using the underlying amount rather than the rounded amount. This document should be read in conjunction with the Zurich Financial Services Group Annual Report 2008. Certain comparatives have been restated as a result of a change in accounting policy. Comparatives for return on common shareholders’ equity and business operating profi t (after tax) return on common shareholders´ equity have also been restated as we have changed the calculation from a compound to a linear basis.
Global Life business operating profi t 1,480 1,443 3% Global Life new business annual premium equivalent (APE) 3,261 2,947 11% Global Life new business margin, after tax (as % of APE) 23.1% 24.7% (1.7 pts) Global Life new business value, after tax 753 729 3%
Group investments average invested assets 185,558 191,790 (3%) Group investments result, net 5,832 10,094 (42%) Group investments return (as % of average invested assets) 3.1% 5.3% (2.1 pts)
in USD millions, for the years ended December 31, unless otherwise stated in USD millions, for the years ended December 31, unless otherwise stated
Global Life – new business margin, after tax (as% of APE) 1
Rest of the World 1 In %, for the years ended December 31.
Financial Report 2008Zurich Financial Services Group Annual Report 2008 3Key performance indicators 6834_p002-003.indd 36834_p002-003.indd 3 27/2/09 13:22:2027/2/09 13:22:20
Our business is insurance. We divide our business into three segments: General Insurance, Global Life, and Farmers Management Services.
Global Life is the next-biggest segment. Its main business is to offer unit-linked and protection products in three regions: Europe, the United States and emerging markets. Global Life benefi ts from strong positions in all key markets, as well as extensive distribution networks in the United Kingdom and the United States.
All segments are united by our common aspiration to become the leading insurance provider in our chosen markets.
# 1 in employer liability insurance in the UK based on gross written premiums 2006 Source: Datamonitor
Provides unit-linked and protection products, as well as equity-based savings, pension provision, postretirement and wealth accumulation for individuals.
#1 fastest growing multiline insurer in the U.S. Source: internal competitor analysis, Farmers Exchanges
#1 insurer of choice for Hispanics in the U.S. Source: internal survey, Farmers Exchanges
Today, that strategy is being tested, with the result being a signifi cantly enhanced position for Zurich’s global portfolio of businesses.
Dr. Manfred Gentz Chairman of the Board of Directors James J Schiro Chief Executive Offi cer
Thanks to these accomplishments, and in refl ection of our long-term capital management strategy, the Board has recommended an CHF 11.00 gross dividend.
As such, we have already begun taking swift and aggressive actions to execute on our expense reduction target by USD 400 million in 2009, to control those elements of success that we can infl uence.
James J. Schiro Chief Executive Offi cer 6835_p004-017.indd 76835_p004-017.indd 7 25/2/09 14:27:1425/2/09 14:27:14
Our resilience is in part a refl ection of diffi cult lessons we learned earlier this decade, when collapsing asset prices coincided with an extraordinary claims environment. That experience prompted us to look closely at our business practices, and to question whether we were doing everything in our power to earn our customers’ trust. We worked hard to restore credibility by recommitting our business to the fundamentals through a series of transformational initiatives, including a rigorous operational focus embodied by The Zurich Way.
We soon saw measurable improvement across all areas, but we have never stopped pursuing an ever-greater discipline across our Group, especially in our core functions of underwriting, claims, reserving, investment and risk management.
Institutionalized discipline Yesterday’s initiatives have become today’s institutions. The Zurich of today is bound tight by a durable culture of sophisticated risk-taking that distinguishes us among our peers. From underwriting to investment management, we have reached a position of leadership by managing risks on both sides of the balance sheet in an integrated way.
The benefi t of a discipline-fi rst culture is made clear by our investment performance. Despite very challenging market conditions we achieved a positive total return of 1.0 percent from the Group’s roughly USD 185 billion investment portfolio in 2008. We focus on managing 2008 was a watershed year for people, markets and institutions around the world – and a testimony to Zurich’s disciplined approach to underwriting, reserving, investing and risk management.
On the other side of the balance sheet, our entire Group draws strength from the common approach to underwriting we began under The Zurich Way. Today best-in-class underwriting processes are the Zurich standard. This common approach to underwriting exposes opportunities for profi table growth, since the only way to fi nd a lasting source of profi t is to know the true price of risk. In 2008, our high standard of underwriting contributed to the creation of more than two hundred new or refreshed customer propositions, and several hundred more in development. These transformational efforts, as well as hundreds of others, have combined to generate a momentum for profi table growth that served us well during the historic conditions of 2008, and will continue to drive our market actions in years to come.
As evidenced throughout this report, Zurich’s growth builds from an institutionalized commitment to excellence that can turn local impact global and global insights local.
In short, though these are extraordinary times, the bracing mix of challenges and opportunities ahead is far from unique in our 136-year history. We are prepared for continued volatility, watchful for the formation of trends, and ready to seize on singular opportunities wherever they arise, provided they fall within our risk tolerance and prudent capital strategy. Changing economic conditions will reward innovative insurers – and we are well positioned to seize those rewards. We will stay fl exible, monitor the spectrum of risk conditions, and continue to manage our own risks so that we can help our customers manage theirs.
Customer centricity means putting the customer at the heart of all we do, creating value for them and for us through a deep understanding of their needs.
Our strategy is built to attain top-tier fi nancial results under any market conditions. Guided by a deep understanding of our customers’ needs and a determined pursuit of profi table growth, our people embrace continual transformation across the organization.
We assign clear responsibilities, authorities and limits for review and approval of strategic decisions to make sure that those decisions fall within our Group’s stated risk tolerance. Within this risk tolerance we adjust our risk profi le to respond to new threats and opportunities in order to optimize returns. Further, we use an established set of risk assessment tools, including the Total Risk Profi ling® process, to minimize any unintended risks of those decisions. The Group Executive Committee regularly assesses key strategic risk scenarios for the Group as a whole, and we evaluate the risks in specifi c merger & acquisition transactions.
Zurich is locked on course to seek out and exploit opportunities for profi table growth. Our commitment to that course was confi rmed in 2006, when we created a growth offi ce to establish the common defi nitions, metrics and success factors of profi table growth.
When combined with a disciplined strategy of acquisitions – as we did successfully this year in Brazil, Russia, Spain and Turkey – this method of learning, innovation and exchange ensures that The Zurich Way remains a living practice, built from the proven best methods of our people, no matter where they are, continuing to sharpen our ability to deliver profi table growth.
Customer centricity means putting our customers at the heart of all we do. This requires understanding their personal,commercial and corporate customers’ needs, and being entirely focused on meeting them. Customers are aware of their options and wise to their choices as never before. This is why, with customer centricity as a strategic cornerstone, we introduced Zurich HelpPoint, the collective term for the many advice, service and solution offerings that all 60,000 of us are focused on delivering, capturing our commitment to putting customers fi rst. The advertising campaign launching the concept was extremely successful, raising awareness levels across our markets, and increasing the numbers of people who would consider Zurich as their chosen insurer.
Zurich HelpPoint is not just an advertising campaign, though. It is a commitment to understanding customers’ needs and delivering the guidance, services and solutions that address those needs.
Customer centricity also means reaching people personally, as individuals, face-to-face. The Farmers claims team demonstrates this exceptionally well. As wildfi res raged in Southern California, Farmers employees assembled in the mobile catastrophe bus and smaller customer care vehicles so that they could provide any visitors with food and drink, and offering customers a chance to visit with claims specialists if they needed. More than 11,000 customers were helped by the Farmers Mobile Catastrophe Claims Buses in 2008, not to mention the many others who just came for a helping hand.
There are literally millions of other examples of customer centricity at Zurich, most of which are less dramatic. Big or small, all our acts of customer centricity give customers the confi dence to know they made the right decision when choosing Zurich.
The kinds of people who can execute on our strategy successfully are always in demand. That is why we are committed to searching out and retaining the very best, keeping them challenged and motivated throughout their careers, recognizing and rewarding their performance, and offering better and more diverse careers than they could experience with any other employer. We want to be an employer of choice not just in our industry, but across industries.
Judging by results in 2008, we are meeting that challenge. Zurich has attracted top talent at all career stages. Whether through our Global Associate Program for recent graduates, or senior leaders coming over from competitors, the combination of challenge and opportunity offered at Zurich attracts the very best. We do all we can to make sure it stays that way, because we rely on our ability to consistently attract, develop, retain and deploy top talent, overcoming the continuing challenge of a market that is perennially in need of it.
We continuously strive to improve our performance, challenge our thinking, and promote innovation so that Zurich remains an employer of choice.
Group Executive Committee 1 James J. Schiro Chief Executive Offi cer 2 John Amore Chief Executive Offi cer General Insurance 3 Annette Court Chief Executive Offi cer Europe General Insurance 4 Mario Greco Chief Executive Offi cer Global Life 5 Mike Foley Chief Executive Offi cer North America Commercial 6 Paul N. Hopkins Chief Executive Offi cer 1
Chairman China Management Board 1 As of January 1, 2009 Chairman of the Board of Farmers Group, Inc. and CEO Americas 2 As of January 1, 2009 Chairman of Global Corporate and CEO Asia-Pacifi c and Middle East 3 Retired from the GEC on December 31, 2008
Our Group Executive Committee exemplifi es the Zurich commitment to deliver, managing the operations of our global organization on a day-to-day basis.
Zurich Financial Services is committed to effective governance for the benefi t of its shareholders, customers, employees and other stakeholders based on the principles of fairness, transparency and accountability. Structures, rules and processes are designed to provide for proper organization and conduct of the business within the Zurich Financial Services Group (the ‘Group’ or ‘Zurich’) and to defi ne the powers and responsibilities of its corporate bodies and employees.
This report describes the Group’s approach to corporate governance and illustrates the main elements of corporate governance within the Group. It includes the information required by the Directive on Information Relating to Corporate Governance of the SIX Swiss Exchange (effective January 1, 2007). It also explains how, in 2008, the Group complied with the Swiss Code of Best Practice for Corporate Governance, issued in 2002 by economiesuisse, as amended in October 2007. Furthermore, the Group continues to publish an Internal control statement (see page 41) in accordance with the UK Turnbull Guidance.
This report follows the recommended structure outlined by the Directive of the SIX Swiss Exchange. The chapter on compensation, shareholdings and loans of the Directors and the members of the GEC is the subject of a separate report, the Remuneration report (see pages 44 to 61), which complements this Corporate governance report.
The Group is managed on a matrix basis, refl ecting both lines of business and geography, and this is mirrored in the areas of responsibilities assigned to the members of the GEC. The GEC is headed by the CEO and includes the Chief Financial Offi cer, the Chief Investment Offi cer, the Chief Growth Offi cer, the Group Chief Risk Offi cer, the heads of the business segments – General Insurance, Global Life and Farmers Management Services – and the heads of the business divisions North America Commercial, Global Corporate and Europe General Insurance. For further information on the GEC please refer to pages 32 to 37.
This management structure leads to the reporting of the Group based on the following primary business segments: General Insurance serves the property-casualty needs of a wide range of customers, from individuals to small and medium-size businesses, commercial enterprises and major multinational corporations.
Global Life pursues a customer-focused strategy with market-leading propositions in unit-linked and protection products and multi-channel distribution to develop leadership positions in its chosen segments and superior returns for Zurich’s shareholders.
Other Businesses includes Farmers Re, which provides reinsurance to the Farmers Exchanges, Centre and capital markets and banking activities. This segment also includes certain businesses which are centrally managed and are not considered to be core businesses.
Zurich Financial Services is obliged to announce shareholdings by third parties in its shares upon a respective notifi cation by the third party that a threshold has been crossed. During 2008 the Group received several notifi cations by third parties that they have either exceeded or fallen below the threshold of 3 percent with purchase or sale positions. The respective announcements can be found on the Zurich’s Web site www.zurich.com ( media/newsreleases/2008/index.htm).
As of December 31, 2008 Zurich Financial Services is not aware of any person, other than Credit Suisse Group, who, directly or indirectly, had an interest as benefi cial owner in shares, option rights and/or conversion rights relating to shares of Zurich Financial Services representing 3 percent or more of its issued shares. Credit Suisse Group, Paradeplatz 8, P.O. Box, 8070 Zurich, along with its subsidiaries, reported as per June 11, 2008, a purchase position of 3.32 percent and a sales position of 2.66 percent of registered Zurich Financial Services shares.
Zurich Financial Services is also not aware of any persons who, as of December 31, 2008, directly or indirectly, alone or with others, exercised or were a party to any arrangements to exercise control over Zurich Financial Services.
Cross-shareholdings Zurich Financial Services has no interest in any other company exceeding 5 percent of the voting rights of that other company, where that other company has an interest in Zurich Financial Services exceeding 5 percent of the voting rights in Zurich Financial Services.
For further information on the capital structure and the authorized and contingent share capital, please refer to the consolidated fi nancial statements, note 22 on pages 208 to 211.
Changes of share capital during 2007 Based on a proposal of the Board of Directors of Zurich Financial Services dated February 14, 2007, the shareholders at the Annual General Meeting of April 3, 2007 approved the increase of the contingent share capital for the issuance of new registered shares to employees of the Group from CHF 75,755.60 by CHF 324,244.40 to a new maximum of CHF 400,000 by issuing up to 4,000,000 registered shares payable in full with a nominal value of CHF 0.10 each. On March 5 and May 7, 2007, 500,000 and 3,242,444 new registered shares with a nominal value of CHF 0.10 each out of the contingent share capital were listed on the SIX Swiss Exchange. The shares were allocated to be issued over time to meet the Group’s obligations on the various employee share and option plans as they arise.
Changes of share capital during 2008 At the Annual General Meeting of April 3, 2008, shareholders approved a share capital reduction by CHF 343,250.00 from CHF 14,554,682.00 to CHF 14,211,432.00 by canceling 3,432,500 registered shares that were bought back by Zurich Financial Services under the share buyback program announced on February 15, 2007. The effective date of the capital reduction was June 27, 2008.
For information on changes of share capital during 2006, please see the Annual Report 2007 of Zurich Financial Services, Financial Report, pages 32 to 33, pages 98 to 99, and page 245.
Shares and participation certificates Zurich Financial Services shares are registered shares with a nominal value of CHF 0.10 each. The shares are fully paid. Pursuant to Article 14 of the Articles of Incorporation, each share carries one vote at shareholders’ meetings and entitles the registered holder to exercise all other membership rights in respect of that share, provided registration in the share register has been effected.
Profit sharing certificates Zurich Financial Services has not issued profi t sharing certifi cates.
Summary of changes in the ordinary share capital over the last two years
Summary of changes in the ordinary share capital over the last two years 1 As part of the unifi cation of the holding structure in 2000, former holders of Allied Zurich p.l.c. ordinary shares received Zurich Financial Services shares, delivered in the form of CREST Depository Interests, or CDIs. CREST is the system for the paperless settlement of trades in securities and the holding of uncertifi cated securities in the United Kingdom. CREST holds the shares in trust and issued dematerialized depository interests representing entitlements to Zurich Financial Services shares known as CDIs. As CDI holders are not the legal owners of the shares represented by the CDIs, they are not able to directly enforce or exercise rights that a holder of shares can. CDI holders will, however, have a benefi cial interest in the shares represented by the CDIs and be allowed as such to give instructions to CREST Depository on the exercise of certain non-economic rights attached to the shares. Each CDI represents one Zurich Financial Services share.
Vice Chairman of the Board Member of the Governance and Nominations Committee Member of the Remuneration Committee 19971 2009
Victor Chu British 51 Director Member of the Governance and Nominations Committee 2008 2010
Thomas Escher Swiss 59 Director Member of the Remuneration Committee 2004 2009
Director Chairman of the Audit Committee Member of the Risk Committee 2006 2009
All Directors of Zurich Financial Services are also members of the Board of Directors of Zurich Insurance Company. Mr. Gentz also serves as Chairman of that Board. In addition, Mr. de Swaan is a member of the Board of Directors of Zurich Insurance Ireland Limited (since April 17, 2008), which has been renamed to Zurich Insurance plc on January 1, 2009; he also chairs the Audit Committee of that Board (since October 16, 2008). With the exception of Mr. de Swaan, the Directors have no further board memberships within the Group.
Fritz Gerber is the Honorary Chairman of Zurich Financial Services. He was chairman of Zurich Insurance Company between 1977 and 1995 and its Chief Executive Offi cer between 1977 and 1991. In recognition of his leadership and services to that company, he was appointed Honorary Chairman. Such designation does not confer Board membership or any Director duties or rights, nor does it entitle him to any Director’s fees.
Philippe Olivier Pidoux graduated from the University of Lausanne, Switzerland, with a doctorate in law and also holds a master’s degree in comparative jurisprudence from the University of Texas. He is a partner in the law fi rm BMP Associés in Lausanne, Switzerland. Mr. Pidoux was a member of the Government of the Canton of Vaud from 1986 until 1994 and a member of the Swiss Parliament between 1983 and 1999. From 1991 until 2003, he was a member of the board and as of 1999 vice chairman of the Swiss National Bank. He is also chairman of Publigroupe AG.
of the Kennedy School at Harvard, the board of the Foreign Affairs University of China, and until September 2008 the governing council of the University College, London. Mr. Chu’s other civic associations include service on the advisory bodies of the International Crisis Group, the Asia Foundation, the Beijing Music Festival Foundation, the East Asia Institute of Cambridge University and the Atlantic Council of the USA.
Fred Kindle graduated from the Swiss Federal Institute of Technology (ETH) in Zurich with a master’s degree in engineering. He joined Hilti AG in Liechtenstein in 1984 as a marketing projects manager, and two years later enrolled at Northwestern University, Evanston, Illinois, in the United States, where he earned an MBA. From 1988 until 1992 he was an associate and engagement manager with McKinsey & Company in New York and Zurich. He then joined Sulzer Chemtech AG in Switzerland as the head of the Mass Transfer Department and in 1996 became the head of the Product Division. In 1999 he was appointed CEO of Sulzer Industries, one of the two operating groups of Sulzer AG. Two years later he became CEO of Sulzer. After joining ABB Ltd. in fall 2004, Mr. Kindle was appointed CEO of ABB Group worldwide in January 2005, a position he held until February 2008. In October 2008 he became a partner of Clayton, Dubilier & Rice, a private equity fi rm based in New York and London. He also serves on the board of VZ Holding Ltd., Zurich and since June 2008 on the board of Stadler Rail AG, in Bussnang.
Vernon Louis Sankey graduated with a MA degree from Oriel College, Oxford and joined Reckitt and Colman in the UK in 1971, subsequently working in France, Denmark, the UK and the U.S. He was appointed to the board of directors in 1989 and was chief executive offi cer of that company from 1991 to 1999. From 2000 until September 2007 he was chairman of Photo-Me International plc. From 2001 until June 2007 he was a director of Cofra AG, Switzerland, and from 2004 until July 2007 of Taylor Woodrow plc. Between 2005 and 2008 he served as a director of Vividas Group 6836_p018-043.indd 276836_p018-043.indd 27 25/2/09 14:26:0825/2/09 14:26:08
Governance plc. As of January 1, 2006, he has been a member of the supervisory board of Atos Origin SA, Paris, and since October, 2006 of Firmenich SA, Geneva, where he became chairman in October 2008. He was chairman of Thomson Travel Group plc until August 2000, of Gala Group Holdings plc until February 2003 and of The Really Effective Development Company Ltd until March 2006. He also was a director of Pearson plc until April 2006 and is a former board member of the UK’s Food Standards Agency. In addition to his board roles, he is also an advisor to a number of other companies.
Rolf Urs Watter graduated from the University of Zurich with a doctorate in law and holds a master of laws degree from Georgetown University in the U.S. He is admitted to the bar of the Canton of Zurich. Since 1994, he has been a partner in the law fi rm Bär & Karrer in Zurich and became a member of its executive board in 2000 and an executive director upon the incorporation of Bär & Karrer AG in 2007. He is a non-executive director of Nobel Biocare Holding AG (since 2007), of Syngenta AG (since 2000), UBS Alternative Portfolio AG (since 2000) and A.W. Faber-Castell (Holding) AG (since 1997). He formerly was a non-executive chairman of Cablecom Holding AG (2004-2008) and non-executive director of Centerpulse AG (2002 – 2003), of Forbo Holding AG (1999 – 2005) and of Feldschlösschen Getränke AG (2001 – 2004). He is a part-time professor at the Law School of the University of Zurich. In addition, he is a member of the SIX Admission Board and of its Disclosure Commission of Experts. He also serves as chairman of two charity institutions.
In 2008, up until the Annual General Meeting held on April 3, 2008, 100 percent of the members of the Board attended Board meetings. After the Annual General Meeting the number of Board members increased from ten to eleven and average attendance at Board meetings was 94 percent. The one additional telephone conference held in January was attended by eight of ten members. The seven telephone conferences held after April 3 were attended on average by 87 percent of the members. The members of the Board spend additional time participating in Board Committee meetings and preparing for meetings in order to discharge their duties.
The Governance and Nominations Committee is composed of four Board members. It oversees the Group’s governance and measures it against best practice with a view to ensure that the rights of the shareholders are fully protected. It also develops and proposes to the Board corporate governance guidelines and reviews them from time to time. The Governance and Nominations Committee is further entrusted with succession planning with respect to the Board, the CEO and the members of the GEC and Group Management Board (GMB). In this regard, it proposes the principles for the nomination and ongoing qualifi cation of members of the Board and makes proposals to the Board on the composition of the Board, as well as the appointment of the Chairman, the Vice Chairman, the CEO and the other members of the GEC and GMB. The Committee reviews the system for management development and supervises progress made in respect to succession planning. Final decisions for nominations and appointments are made by the Board, subject to shareholder approval, where so required. During 2008, the Governance and Nominations Committee met six times (of which one was a joint meeting with the Remuneration Committee) and particularly addressed the nomination and ongoing qualifi cations of the members of the Board of Directors and the succession planning for members of senior management. On average attendance at meetings of the Governance and Nominations Committee was 88 percent.
The Audit Committee has four members, all of whom meet the relevant requirements with respect to independence and qualifi cation. The Audit Committee charter provides that the Audit Committee as a whole should have (i) an understanding of IFRS and fi nancial statements, (ii) the ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves, (iii) experience in preparing, auditing, analyzing or evaluating fi nancial statements that present a breadth and level of complexity of accounting issues that are generally comparable to those of Zurich Financial Services and the Group or experience in actively supervising one or more persons engaged in these activities, (iv) an understanding of internal controls and procedures for fi nancial reporting, and (v) an understanding of audit committee functions. The Audit Committee met seven times in 2008. Average attendance at meetings was 96 percent.
The Audit Committee serves as a focal point for communication and oversight regarding fi nancial accounting and reporting, internal control, actuarial, and compliance among the Management. It is responsible for reviewing the Group’s auditing process (including establishing the basic principles relating to and making proposals with respect to the audit of Zurich Financial Services and the Group) and reviews the internal control systems. The external auditors, the internal auditors and appropriate members of the GEC, the GMB and other executives attend its meetings in order to, among other things, discuss the auditors’ reports, to review and assess the auditing concept and the examination process and to assess the activities of internal and external auditors. For more information on the supervision and control over the external audit process, please see page 40. The Audit Committee, at least annually, reviews the standards of internal control, including the activities, plans, organization and the quality of internal audit and Group compliance.
Statements regarding internal control and the procedures in place regarding internal control according to the UK Turnbull Guidance are given on page 42.
The Risk Committee has four members. In 2008 it met six times; attendance on average was 92 percent. The Risk Committee oversees the Group’s risk management, in particular the Group’s risk capacity, including agreed limits, which the Board regards as acceptable for Zurich to bear, the aggregation of agreed limits across the Group, the measurement of adherence to agreed risk capacities, and the Group’s risk capacity in relation to anticipated capital levels. It further oversees the Group-wide risk governance framework, including risk management, risk policies and their implementation as well as the risk strategy, and the monitoring of operational risks. The Risk Committee also reviews the methodologies for risk measurement and the Group’s adherence to its risk limits and reviews the performance of the Group’s risk management function. It further reviews, with Management and the Group risk management function, the Group’s general policies and procedures, and satisfi es itself that effective systems of risk management are established and maintained. The Risk Committee receives periodic reports from Group Risk Management and assesses whether signifi cant issues of a risk management and control nature are being appropriately addressed by management in a timely manner. For further information on risk governance please refer to the Risk review on pages 90 to 125.
Information and control instruments vis-à-vis the Group Executive Committee and Group Management Board The Board supervises Management and monitors its performance through reporting and controlling processes. Regular reporting by the CEO and other executives to the Board comprises appropriate information and updates, including key data for the core businesses, fi nancial information, existing and upcoming risks and updates on developments in important markets and with regard to major competitors as well as other signifi cant events. The Chairman of the Board regularly meets with the CEO. He and other members of the Board also meet with the Chief Financial Offi cer and other executives outside regular Board meetings.
The internal audit function and the external auditors as well as the compliance function also assist the Board in exercising its controlling and supervisory duties. Information on major areas of activities of these functions is set out on pages 39 to 41.
Management Board Group Executive Committee To the extent not reserved to the Board, management is delegated to the CEO. The CEO, and under his supervision the GEC, are responsible for dealing with strategic, fi nancial and business policy issues of Group-wide relevance, including consolidated performance, capital allocation and mergers and acquisitions.
A standing committee of the GEC is the Group Balance Sheet Committee (GBSC), chaired by the CEO. This committee acts as a cross-functional body whose main function is to control the activities that materially affect the balance sheets of the Group or its subsidiaries. The GBSC is charged with setting the annual capital and balance sheet plans for the Group based on the Group strategy or fi nancial plan, as well as recommending specifi c transactions or unplanned business changes to the Group’s balance sheet. The GBSC has oversight of all main levers of the balance sheet. It assesses the Group’s capital adequacy, reinsurance, level of return, risk capacity and desired growth. The GBSC reviews and recommends the Group’s overall risk tolerance levels. A further GEC committee is the Group Finance and Risk Committee (GFRC), chaired by the Chief Financial Offi cer. The GFRC acts as a cross-functional body for fi nancial and risk management matters in the context of the strategy and the overall business activity of the Group. It oversees fi nancial implications of business decisions and the effective management of the Group’s overall risk profi le, including risks related to insurance, fi nancial market and asset/liability, credit and operational risks as well as their interactions and provides recommendations for future courses of action with respect to potential M&A transactions and topics relating to fi nance and risk management.
More technical committees include the Asset/Liability Management Investment Committee, chaired by the Chief Investment Offi cer, the Group Reinsurance Committee, chaired by the Head of Group Reinsurance, the Global Underwriting Committee, chaired by the Global Chief Underwriting Offi cer and the Group Pension Committee, chaired by the CEO Global Life.
James J. Schiro American 62 Chief Executive Offi cer John Amore American 60 Chief Executive Offi cer General Insurance Annette Court British 46 Chief Executive Offi cer Europe General Insurance Mike Foley American 46 Chief Executive Offi cer North America Commercial Mario Greco Italian 49 Chief Executive Offi cer Global Life Paul Hopkins American 52 Chief Executive Offi cer Famers Group, Inc. Axel Lehmann Swiss 49 Group Chief Risk Offi cer Patrick O’Sullivan Irish 59 Chief Growth Offi cer Geoff Riddell British 52 Chief Executive Offi cer Global Corporate Martin Senn Swiss 51 Chief Investment Offi cer Paul van de Geijn Dutch 62 Chairman of the China Management Board Dieter Wemmer German 51 Chief Financial Offi cer
Mario Greco, who joined the Group and the GEC on October 1, 2007 as Designated CEO Global Life, assumed the position of CEO Global Life as of April 1, 2008. Paul van de Geijn, the former CEO Global Life, remained a member of the GEC through his retirement date on December 31, 2008. As from April 1, 2008 he assumed the role of Chairman of the China Management Board. As from January 1, 2009, Geoff Riddell assumed the new position of Chairman of Global Corporate and Paul Hopkins became Chairman of the Board of Farmers Group, Inc. and CEO Americas.
For information on contractual termination benefi ts, please see page 39.
Members of the GEC, as of 6836_p018-043.indd 336836_p018-043.indd 33 25/2/09 14:26:1125/2/09 14:26:11
Annette Court graduated from Oxford with an honors degree in engineering science. She joined IBM UK Ltd. in 1983, working in various positions in systems engineering and client management in the banking and insurance sectors. In 1994, she joined Direct Line Group as central planning manager, and three years later became managing director of motor insurance. She was appointed managing director of Direct Line Insurance in 2000 and chief executive offi cer of Direct Line Group the following year, responsible for all retail, partnerships and international businesses. In 2003, Ms. Court became chief executive offi cer of Royal Bank of Scotland Insurance following the acquisition and successful integration of Churchill Group with Direct Line Group. She joined Zurich on January 15, 2007 and assumed the function of CEO of Europe General Insurance and member of the GEC as of March 1, 2007. She is a member of the board of the Association of British Insurers.
Mike Foley graduated in math and economics from Fairfi eld University, Connecticut. He joined the fi nancial management training program of Armtek Corporation, Connecticut, in 1984, and later gained an MBA in marketing/ fi nance from the JL Kellogg Graduate School of Management at Northwestern University in Evanston, Illinois. In 1989 he joined the Deepath Group investment banking fi rm in Lake Forest, Illinois, as an associate and became vice president responsible for managing the portfolio of equity investments in various acquired businesses. In 1993 he joined Electrocal, Inc in Connecticut as president, and three years later moved to McKinsey & Company in Chicago as a principal, becoming leader of its North American property/casualty insurance practice. He joined Zurich in 2006 as Chief Operating Offi cer of its North America Commercial business division, and in January 2008 was appointed CEO of that division and a member of the Group Executive Committee.
Paul N. Hopkins holds a Bachelor of Science degree in business from the Eastern Illinois University and completed the Advanced Executive Education program of the Wharton Business School. He joined the Farmers organization in 1978 as an agent and subsequently became a Farmers employee, where he held positions of increasing responsibility in the sales and marketing area. In 1992 he transferred to the Los Angeles Regional Offi ce as Assistant Vice President, Regional Operations. He became Vice President Agencies in 1995, and Senior Vice President Agencies two years later. In 1998, he was made Senior Vice President and Chief Marketing Offi cer, a position he held until January 1, 2000, when he was appointed Senior Vice President of State Operations. His next assignment, as Senior Vice President of Strategic Alliances, became effective in April 2001. In August 2002 he was promoted to Executive Vice President, Market Management, and two years later became President of Farmers Group, Inc. Mr. Hopkins was appointed a member of Zurich’s Group Management Board in December 2004. In April 2005, he was appointed Chief Executive Offi cer of Farmers Group, Inc. and became a member of Zurich’s Group Executive Committee. In 2006, Mr. Hopkins was named Chairman of the Board of ZFUS Services, LLC, Zurich’s North American shared services platform. As of January 1, 2009 he was appointed CEO Americas and Chairman of the Board of Farmers Group, Inc. He also serves on the Board of Farmers New World Life Insurance Company. Mr. Hopkins further serves as a member of the Board of Trustees for the American Institute for Chartered Property Casualty Underwriters, as well as a member of the Board of the Insurance Information Institute.
Patrick H. O’Sullivan graduated from Trinity College, Dublin, with a degree in business studies. He qualifi ed with Arthur Andersen as a chartered accountant, followed by a masters of science degree in accounting and fi nance from the London School of Economics. After qualifying, he joined the Bank of America, working in London, Miami, Los Angeles and Frankfurt. In 1988 he joined Goldman Sachs as fi nancial controller for Europe, and in 1990 moved to Financial Guaranty Insurance Company (FGIC), a wholly-owned subsidiary of GE Capital. He was appointed to the FGIC board in 1993. The following year, he joined Barclays/BZW as head of International Banking & Structured Finance, and in September 1996 he became BZW’s chief operating offi cer. In 1997, he joined Eagle Star Insurance Company as chief executive, and, the following year, was appointed Chief Executive Offi cer of Zurich’s general insurance business in the United Kingdom. In December 2002, he became Group Finance Director of Zurich Financial Services and a member of the GEC. In March 2007, he was appointed to his current position as Vice Chairman of the Group Management Board 6836_p018-043.indd 356836_p018-043.indd 35 25/2/09 14:26:1225/2/09 14:26:12
Governance and Chief Growth Offi cer. He is responsible, in addition, for the Group’s International and Centrally Managed Businesses as well as Banking.
Geoff Riddell holds a MA degree in natural sciences (chemistry) from Oxford University (The Queen’s College) and later qualifi ed as a chartered accountant. He started his career with Price Waterhouse in 1978 and four years later moved to AIG, where he held various roles, including country manager for Hong Kong, Belgium and France. He joined Zurich in 2000, initially as managing director of Zurich Commercial in the UK, and then became managing director of the UK Corporate and Government businesses. In November 2002, he became CEO of the General Insurance business in the UK, Ireland and South Africa. In 2004, he became CEO Global Corporate and was appointed to the Group Executive Committee. Effective January 1, 2009 he has taken on a new role as CEO of Asia-Pacifi c & Middle East (APME), responsible for both Life and General Insurance in the APME region, and will serve as Chairman of Global Corporate. Mr. Riddell is a former member of the General Insurance Council of the Association of British Insurers and for three years chaired its liability committee. From 1990 to 1995, he was a member of the Hong Kong Federation of Insurers Council. He became a director of Pool Re in February 2005 and of the Forum for Global Health Protection in 2007. He is a member of the Foundation Board of IMD, Lausanne. He is also a member of the Confederation of British Industry’s International Advisory Board and President Committee, a member of the City EU Advisory Committee and of the Lord Mayor of London’s Advisory Committee.
Martin Senn received his commercial and banking diploma from the Business School in Basel, Switzerland and graduated from the International Executive Program at INSEAD in Fontainebleau and the Advanced Management Program at Harvard Business School. He is a trained banker and worked at the former Swiss Bank Corporation from 1976 to 1994 where his international career steps included treasurer in Hong Kong and regional treasurer for Asia and the Pacifi c region in Singapore before ultimately managing the company’s Tokyo offi ce. In 1994 he joined Credit Suisse where his executive roles included that of treasurer for the Head Offi ce and Europe, chairman and turnaround manager of Credit Suisse Group Japan with a mandate to restructure and reposition all legal entities of the Group in Japan. In 2001, he became a member of the Credit Suisse executive board and was appointed head of its Trading and Investment Services Division. From 2003 until 2006 he served as a member of the corporate executive board and as chief investment offi cer of the Swiss Life Group. Mr. Senn joined Zurich on April 1, 2006 as Chief Investment Offi cer and became a member of the Group Executive Committee as per the same date. He is a member of the governing board of Avenir Suisse and treasurer of the Zurich Association of Economics. In addition he serves as Honorary Consul of the Republic of Korea in Zurich. He previously was a member of the board of directors of various banks and fi nancial services institutions.
Paul van de Geijn graduated in business law from Leiden University in the Netherlands in 1971 and joined one of the predecessors of AEGON. He started as legal counsel and then worked in the non-life sector before moving to a senior management position in 1978. After the merger which created AEGON in 1983, he was appointed a member of the management board of AEGON the Netherlands, becoming its chairman in 1991. The following year, he joined the executive board of AEGON N.V., with responsibilities for the Dutch and later Spanish and Hungarian operations. In 2002, he handed over responsibility for the Dutch operations and assumed responsibilities for AEGON USA and the AEGON corporate responsibility program. From 2000 to 2002 he was chairman of the Dutch Association of Insurers. In November 2003 he joined Zurich as CEO Global Life and became a member of the GEC. He held positions in a public/ private partnership in the business community and on the executive committee of the Dutch Employers’ Association. On March 31, 2008 Paul van de Geijn stepped down from his function as CEO Global Life and assumed the new role as Chairman of the China Management Board through his retirement dated on December 31, 2008.
Inga Beale British 45 Head of Merger & Acquisitions and Organizational Transformation Management Peter Goerke Swiss 46 Group Head Human Resources
Markus Hongler Swiss 51 Chief Executive Offi cer Zurich Switzerland and designated Chief Executive Offi cer Zurich Insurance plc.
Richard Kearns American 58 Chief Administrative Offi cer Michael Paravicini Swiss 47 Chief Information Technology Offi cer Reto Schiltknecht Swiss 48 Group General Counsel Mario Vitale American 53 Deputy Chief Executive Offi cer Global Corporate
Management contracts Zurich Financial Services has not transferred key parts of management by contract to other companies (or individuals) not belonging to (or employed by) the Group.
Shareholders’ participation rights Voting rights restrictions and representation Each share entered into the share register provides for one vote. There are no voting right restrictions.
Zurich Financial Services used electronic voting for all the resolutions taken at last year’s Annual General Meeting. In accordance with Swiss practice, Zurich Financial Services informs all shareholders at the beginning of the general meeting of the aggregate number of proxy votes received.
Statutory quorums Pursuant to the Articles of Incorporation, the general meeting constitutes a quorum irrespective of the number of shareholders present and shares represented. Resolutions and elections generally require the approval of a simple majority of the votes cast, excluding abstentions, blank and invalid votes, unless respective provisions in the Articles of Incorporation (of which there are none) or mandatory legal provisions stipulate otherwise. Article 704 of the Swiss Code of Obligations provides for a two-thirds majority of votes cast representing an absolute majority of nominal values of shares represented for certain important matters, such as the change of the company purpose and domicile, the dissolution of the company, and matters relating to capital increases. In the event of the votes being equally divided, the decision rests with the Chairman.
Convocation of the general meeting of shareholders General meetings of shareholders are convened by the Board of Directors or, if necessary, by the auditors and other bodies in accordance with the provisions set out in Articles 699 and 700 of the Swiss Code of Obligations. Shareholders with voting rights representing at least 10 percent of the share capital may call a shareholders’ meeting, indicating the matters to be discussed and the corresponding proposals. The invitation to shareholders is mailed at least 20 calendar days before the meeting is held and in addition is published in the Swiss Offi cial Gazette of Commerce and in several newspapers.
For the CEO, termination benefi ts are linked to the term of his employment contract, which will expire on December 31, 2009. As at December 31, 2008, the period of severance for the CEO was therefore one year (including the notice period). In the case of a termination of his employment following a change of control, an additional payment of one time his annual base salary and annual target cash incentive, will be paid. Further, the CEO will be entitled to an additional gross-up payment if the total termination benefi ts paid following a change of control become subject to U.S. Excise Tax.
For the members of the Board of Directors no benefi ts are provided in case of a change of control.
External Auditors Duration of the mandate and term of office of the lead auditor PricewaterhouseCoopers AG, Birchstrasse 160, in 8050 Zurich (PwC), is Zurich Financial Services’ external auditor. PwC assumes all auditing functions, which are required by law and by the Articles of Incorporation of Zurich Financial Services. They are elected by the shareholders of Zurich Financial Services on an annual basis. At the Annual General Meeting of shareholders on April 3, 2008, PwC was re-elected by the shareholders of Zurich Financial Services. The Board of Directors proposes that PwC be re-elected at the upcoming Annual General Meeting as external auditors for the business year 2009. PwC fulfi lls all necessary requirements under the new Swiss Federal Act on the Admission and Oversight of Auditors and has been admitted as a registered auditing company by the Federal Audit Oversight Authority under this Act.
Auditing fees Total auditing fees (including expenses and value added taxes) charged by PwC in the year 2008 amounted to USD 34.4 million (USD 45.1 million in 2007).
Supervision and control over the external audit process The Audit Committee regularly meets with the external auditors, at least four times a year. During 2008, the Audit Committee met with the external auditors seven times. The external auditors regularly have private sessions with the Audit Committee, without Management present. Based on written reports, the Audit Committee discusses with the external auditors the quality of the Group’s fi nancial and accounting function and any recommendations that the external auditors may have. Topics considered during such discussions include strengthening of internal fi nancial controls, applicable accounting principles and management reporting systems. In connection with the audit, the Audit Committee obtains from the external auditors a timely report relating to the audited fi nancial statements of Zurich Financial Services and the Group.
The Audit Committee oversees the work of the external auditor. It reviews, at least annually, the qualifi cation, performance and independence of the external auditors and reviews any matters that may impair their objectivity and independence based on a written report by the external auditors describing the fi rm’s internal quality-control procedures, any material issues raised and all relationships between the external auditors and the Group and/or its employees that could be considered to bear on the external auditors’ independence. The Audit Committee evaluates the cooperation received by the external auditors during their audit examination. It elicits the comments of management regarding the performance and responsiveness of the external auditors to the needs of Zurich Financial Services and the Group. The Audit Committee reviews, prior to the commencement of the annual audit, the scope and general extent of the external audit and suggests areas requiring special emphasis.
The Audit Committee has approved a written policy on the use of external auditors for non-audit services, which sets forth the rules for providing such services and related matters. Allowable non-audit services may include tax advice and services, comfort and consent letters, certifi cations and attestations, due diligence and audit support in proposed transactions, to the extent that such work complies with applicable legal and regulatory requirements and does not compromise their independence or objectivity as external auditors. All allowable non-audit services need pre-approval from the Audit Committee (Chairman), the Group Chief Financial Offi cer or the local CFO, depending on the level of expected fee. They further require, among other things, an engagement letter specifying the services to be provided and making reference to the external auditors’ obligation to comply with this policy.
The Audit Committee and the CEO are regularly informed of important fi ndings, including ineffective opinions, mitigation actions and attention provided by Management. Group Audit has unrestricted access to all accounts, records and documents and must be provided with all data and information needed in order to fulfi ll its duties. Group Audit works in close cooperation with the external auditors, sharing risk assessments, work plans, audit reports and updates on audit actions. Group Audit and the external auditors meet regularly at all levels of the organization to optimize assurance provision and effi ciency.
The Audit Committee assesses the independence of Group Audit, and reviews its activities, plans, organization and quality as well as its mutual cooperation with the external auditors. In 2007, the Group commissioned an independent party to perform a review of Group Audit’s effectiveness. The results confi rmed Group Audit’s practices meet or exceed the professional requirements of the Institute of Internal Audit (IIA), and in a high proportion of cases are consistent with global internal audit leading practices. Notwithstanding this positive result, Group Audit is continuing to constantly challenge its operation to further increase its effectiveness, effi ciency and value contribution.
Compliance The Group’s core values are founded on the principle that it acts lawfully and seeks to do what is right. Sound compliance in everything the company does helps to protect Zurich’s reputation and supports the achievement of the Group’s ambitious goals.
The Compliance function provides policies and guidance, business advice and training, and further coordinates with Group Audit and the business quality assurance groups to ensure proper internal oversight of business and governance functions. This includes ongoing reviews of laws, regulations and other requirements at all levels of the organization. The Compliance team supports Zurich’s management in maintaining and promoting a culture of compliance and ethics consistent with Zurich Basics, our company’s code of conduct. This robust Compliance framework relies on an ongoing global Compliance risk assessment and on a solid monitoring regime. The results of this assessment underpin the Compliance function’s strategic planning which is conducted in consultation with business partners. Subsequently the Compliance plan is ratifi ed by Management.
Through a comprehensive program, the Compliance function implements, embeds and enforces internal policies and guidance. As part of it, our Compliance offi cers are active in the on boarding of new employees and in the integration of newly acquired companies. To help employees understand their responsibilities under Zurich Basics and internal policies, all employees receive regular ethical and compliance training. In addition, the Compliance function spearheads internal awareness campaigns on ethical and regulatory conduct. Each year Zurich managers confi rm their understanding and compliance with Zurich Basics and internal policies. Zurich encourages its employees to speak up and report improper conduct. Zurich does not tolerate retaliation against any employee who reports such concerns in good faith.
Group’s Compliance function, with Compliance professionals around the world, is overseen by the Group Compliance Offi cer who reports to the Group General Counsel and regularly to the Board Audit Committee.
Internal control statement The Board oversees the Group‘s risk management and internal control system, which Management is responsible for implementing and which is designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable, and not absolute, assurance against material fi nancial misstatement or loss. There are two committees at the Board level that have primary risk and control oversight responsibilities: 6836_p018-043.indd 416836_p018-043.indd 41 25/2/09 14:26:1525/2/09 14:26:15
At the management level management committees are established to continuously review risk management and internal control matters. The management committees consist of such business and functional members to ensure independence of the business in review. The results of such reviews performed by these management committees are reported into the Board committees as appropriate.
The internal control system focuses on key fi nancial, operational and compliance controls. The system encompasses the policies, processes and activities that contribute to the reliability of fi nancial reporting, the effectiveness and effi ciency of operations and the compliance with laws and regulations. In 2008, continuing progress was made to further develop and improve the Group’s control system while maintaining the focus on the effectiveness of the overall internal control environment.
The Group’s annual business plan includes risk management considerations, as well as strategic and business direction, fi nancial information and key indicators. During the year, the Board and Group Management receive regular reports summarizing fi nancial condition, fi nancial and operating performance, as compared to plan, and key risk exposures.
Going concern The Directors are satisfi ed that, having reviewed the performance of the Group and forecasts for the forthcoming year, the Group has adequate resources to enable it to continue in business for the foreseeable future. For this reason, the Directors have adopted the going concern basis for the preparation of the fi nancial statements.
Employees The Group is committed to provide equal opportunities when recruiting and promoting people, whereby ability, experience, skills, knowledge and diversity are the guiding principles. The Group actively encourages employee involvement in its activities via print and online publications, team briefi ngs and regular meetings with employees’ representatives. For further information on the Group’s People Management activities, please refer to the Business Review on page 14, also available on Zurich’s Website www.zurich.com ( business_review_2008_en.pdf).
Information policy Zurich Financial Services has approximately 112,000 shareholders registered in its share register, ranging from private individuals to large institutional investors. Each registered shareholder receives an invitation to the Annual General Meeting together with the Letter to the Shareholders that provides an overview of the Group’s activities during the year and outlines its fi nancial performance. The more comprehensive Annual Report consisting of the Financial Report and the Business Review, is available on Zurich’s Web site www.zurich.com ( reports/business_review_2008_en.pdf). Similar documents regarding half-year and quarterly results reportings are also available for all shareholders on Zurich’s Web site. Shareholders may opt to receive printed versions of one or all of the aforementioned documents.
Because the members of the Board of Directors of Zurich Financial Services are all independent non-executives, the information has been presented with the complete remuneration details of the Board of Directors contained in one section and that of the Group Executive Committee shown in a separate section.
All information required by articles 663bbis and 663c paragraph 3 of the Swiss Code of Obligations is also included in the notes to the fi nancial statements of Zurich Financial Services holding company.
Link variable compensation awards to relevant performance factors which can include the performance of the Group, business areas, e.g., segments, divisions, functions, units, and individual achievements.
Total compensation Total compensation is infl uenced by a number of factors such as business performance and affordability, individual performance, internal equity, and legal requirements. Target opportunities are benchmarked to median levels in clearly defi ned markets and take into account internal equity considerations. The compensation mix between base salary and variable pay is also aligned with local market practices and internal relativities. Zurich is transparent in the communication of how the reward structure is defi ned and the processes used for decision making. Total compensation includes the following elements: Base salary Base salary is the fi xed pay for the role performed determined by the scope and complexity of the role and is reviewed annually. Overall base salary structures are positioned to manage salaries around the relevant market medians. At an individual level, base salary is generally paid within an 80 percent – 120 percent range of the appropriate market median. Key factors are the individual’s overall experience and performance.
Variable pay Incentive plans are designed to provide a range of award opportunities linked to levels of performance. Business and individual performance may result in superior awards above target for superior performance, and reduced or no awards for performance below expectations. Variable pay opportunities are provided, in markets where this is the norm, to motivate employees to achieve key short and long-term business goals to increase shareholder value. Variable pay opportunities may include both short-term and long-term incentives: Short-term (1 year) incentives are performance-driven based on relevant factors which can include the performance of the Group and the business areas as well as individual performance achievements. Key performance measures are determined annually and focus on business priorities. They typically include profi tability measures, such as Group net income after tax (NIAT) and business operating profi t (BOP).
Remuneration governance The Board of Directors defi nes the remuneration principles based on proposals of the Remuneration Committee. Based on these remuneration principles the Remuneration Committee is responsible for proposing to the Board on an annual basis the remuneration payable to the Directors, to the Chief Executive Offi cer (CEO) and to the other members of the Group Executive Committee. For the other members of the Group Executive Committee, these recommendations are based on proposals made by the CEO. The remuneration is approved by the Board of Directors. The Remuneration Committee does not include members with interlinked company mandates. For further details of its responsibilities see page 30 in the Corporate governance report.
In reviewing compensation structures and practices on a regular basis, the Remuneration Committee has appointed its own independent adviser, Hewitt Associates, and the management is supported by a variety of fi rms. As these companies operate in the fi eld of international compensation and benefi ts, they do have other mandates with the Group.
In the meetings of the Remuneration Committee and the Board of Directors where decisions are made on the compensation of the Chairman, the Chairman is not present. In making decisions on the compensation of the CEO, the CEO is not present. Where decisions are made on the compensation of other members of the GEC, those members are also not present at the meetings.
Remuneration and shareholdings of the members of the Board of Directors and the Group Executive Committee As of December 31, 2008, all of the Directors of Zurich Financial Services are non-executives, independent of management. The remuneration for Directors and for members of the Group Executive Committee, as well as their shareholdings, is therefore disclosed separately.
Directors Directors’ fees All Directors receive a fee, which is paid partly in cash and allocated partly in three-year sales-restricted Zurich Financial Services shares, for their memberships of the Boards of Zurich Financial Services and Zurich Insurance Company. The shares are provided as part of the overall fee which is not subject to the achievement of any defi ned performance targets. There were no changes in the fee structure in 2008 compared with 2007, apart from the increase in the annual basic fee for the Chairman which was increased from USD 580,000 to USD 700,000 with effect from January 1, 2008. This was already communicated in last year’s Remuneration report.
Except for the Chairman and Vice Chairman, Directors are remunerated with an annual basic fee of USD 205,000. One-third of this annual basic fee, i.e. USD 68,500, is allocated to sales-restricted Zurich Financial Services shares. The amount is pro-rated for new members joining on April 3, 2008. Committee members receive an additional cash fee of USD 40,000 for all Committees on which they serve, irrespective of the number. In addition, the chair of each Committee receives an annual fee of USD 20,000 and the chair of the Audit Committee receives an additional USD 10,000. Directors who reside in the United States receive an additional fee of USD 10,000 per annum. The Committees on which the members serve is set out in the Corporate governance report on page 25. In addition to the above, where a Director is also a member of a subsidiary board of Zurich Financial Services Group, the Director is entitled to an additional fee of USD 40,000 per annum plus USD 10,000 per annum if he or she also chairs the audit committee of such board.
The following tables set out the fees paid to the Directors in 2008 and 2007: Basic Fee
8 Neither the Chairman nor the Vice Chairman receive any additional fees for their Committee work.
in USDDirectors’ fees 2008 in USDDirectors’ fees 2008 in USDDirectors’ fees 2007 in USDDirectors’ fees 2007 6837_p044-061.indd 486837_p044-061.indd 48 25/2/09 14:23:4025/2/09 14:23:40
9 The following membership movements occurred in 2008: – Ms. Bies and Mr. Chu joined the Board on April 3, 2008 and received pro rata fees in cash and shares for their Board work from that date. – Mr. Schulmeyer retired from the Board on April 3, 2008 and received a pro rata fee in cash for his Board work up to that date.
14 Mr. Gentz was allocated 617 shares and the other 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.
15 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.
17 Mr. Sankey became Chairman of the Remuneration Committee on April 3, 2007 following the retirement of Mr. Mead. He received a pro rata fee for being Chair.
Termination arrangements for members of the Board of Directors who gave up their functions during the year At the Annual General Meeting in 2008, Gerhard Schulmeyer retired from the Boards. No termination payments were paid to him during the year.
Shareholdings of Directors The shareholdings of the Directors, who held offi ce at the end of the year, in the shares of Zurich Financial Services are shown below. All interests shown are benefi cial, including sales-restricted shares allocated to the members as part of their fee and shares held by related parties to the Directors.
M. Gentz, Chairman 2,978 2,117 Ph. Pidoux, Vice Chairman 2,470 2,218 S. Bies, Member 187 n.a.
Number of Zurich Financial Services shares 1Directors’ shareholdings as of December 31 6837_p044-061.indd 496837_p044-061.indd 49 25/2/09 14:23:4125/2/09 14:23:41
Group Executive Committee Remuneration of the Group Executive Committee The total remuneration of the members of the Group Executive Committee for 2008 comprised the value of cash compensation (including short-term cash incentive), pensions, other remuneration and the target equity grants made under the Group’s Long-Term Incentive Plan in 2008.
As can be seen from the above charts, there is a signifi cant emphasis on performance related compensation through both the Short-Term Incentive Plan and Long-Term Incentive Plan. The distribution of the target values between shortterm (annual) and long-term incentives (three years) shows an emphasis towards long-term incentives.
Value of pension benefits accruing during 2008 Members of the Group Executive Committee participate in the pension plan arrangements of the business units in which they are employed. The Group’s philosophy is to provide pension benefi ts through cash balance and/or defi ned contribution plans where funds are accumulated throughout a career to provide retirement benefi ts. The majority of Group Executive Committee members participate in such plans and, over time, all future Group Executive Committee members will participate in such plans. The other Group Executive Committee members continue to participate in defi ned benefi t plans that provide retirement benefi ts based on fi nal pensionable earnings and the number of years of service. The normal retirement ages vary from 60 to 65. The total value of pension benefi ts accruing to members of the Group Executive Committee during 2008, calculated on the basis of the Service Costs for the company as assessed under IAS 19 accounting principles, was USD 4.5 million. Service Costs value the amount of the pension benefi ts accruing during the year and for defi ned contribution plans takes the amount of the company contribution paid during the year.
Zurich’s three year relative TSR, based on 28 companies making up the Dow Jones Global Insurance Sector Titan Index
The following equity grants were made in 2008: Performance share grants The total number of target performance share grants made to members of the Group Executive Committee during 2008 was 29,491. This compares with an equivalent fi gure of 29,845 made for 2007. The value of the target performance share grants made on April 3, 2008 to members of the Group Executive Committee in 2008 was USD 9.8 million at the date of grant based on the assumption of 100 percent vesting and a share price of CHF 336.50 on the day prior to the grant.
The number of share awards that vested to members of the Group Executive Committee in April 2008 from the performance share grants made in 2005, 2006 and 2007 was 57,204. This represented a basic vesting level of 175 percent of target given the actual ROE and TSR performance achievements. One-half of the shares that vest under the plan are sales-restricted for three years from the date of vesting.
Restricted share grants Restricted share grants supplement the regular long-term incentive grants and are used in extraordinary circumstances mainly for new hires to compensate for the loss of their equity rights with their previous employer. This restricted share grants vest typically over three to fi ve years following the date of grant and will be forfeited if the holder of such share grants voluntarily leaves the company before the vesting date and the employement relationship terminates.
4 The amounts refl ect the total value of pension benefi ts accruing to members of the GEC during 2008 and 2007, respectively, calculated on the basis of the Service Costs for the company as assessed under IAS 19 accounting principles. Service Costs value the amount of the pension benefi ts accruing during the year and for defi ned contribution plans takes the amount of the company contribution paid during the year. Service Costs do not include the interest cost on accrued benefi ts, adjustments for actuarial gains and losses, nor the expected return on any assets held.
(incl. the highest paid) as of December 31 in USD millionAll GEC members 1
(incl. the highest paid) as of December 31 6837_p044-061.indd 546837_p044-061.indd 54 25/2/09 14:23:4325/2/09 14:23:43
Highest total remuneration for Group Executive Committee members The highest paid remuneration for the Group Executive Committee members was USD 9.55 million for Mr. James J. Schiro, the Group’s Chief Executive Offi cer. This amount refl ects his 2008 base salary, the cash incentive earned for 2008, the value of pension benefi ts, other remuneration and the value of the target performance shares and share options granted in 2008.
3 Includes employee benefi ts, expatriate allowances, perquisites, benefi ts-in-kind and any other payments due under the employment contract. Benefi ts-in-kind have been valued using market rates.
4 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 percent 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.
Compensation for former Group Executive Committee members No benefi ts (or waiver of claims) have been provided to former members of the Group Executive Committee during the year 2008, nor during the year 2007.
in USD millionHighest paid Executive James J. Schiro, Chief Executive Offi cer1 as of December 31 in USD millionHighest paid Executive James J. Schiro, Chief Executive Offi cer1 as of December 31 6837_p044-061.indd 556837_p044-061.indd 55 25/2/09 14:23:4425/2/09 14:23:44
Restricted share grants In addition to the above performance share grants, there were 10,495 restricted shares outstanding for members of the Group Executive Committee as of December 31, 2008 (13,543 restricted shares were outstanding at the end of 2007). These restricted shares vest over the next three years and will be forfeited if the holders of such shares leave voluntarily before the vesting date and the employment relationship terminates.
Summary of outstanding share grants 6837_p044-061.indd 566837_p044-061.indd 56 25/2/09 14:23:4425/2/09 14:23:44
Under the share option program, the total number of shares under option for the Group Executive Committee members as of December 31, 2008, and 2007, respectively, is set out in the tables below.
All options mentioned above entitle the holder to subscribe for one share of Zurich Financial Services at the exercise price stated.
Share and share option holdings of the Group Executive Committee The following table sets out the actual share and share option holdings of the Group Executive Committee members as of December 31, 2008 and December 31, 2007. In addition to any shares acquired in the market, the numbers include vested shares, whether sales-restricted or not, and vested share options received under the Group’s Long-Term Incentive Plan. However, the table does not include the share interests of the members of the Group Executive Committee through their participation in the currently unvested performance shares, unvested restricted shares or unvested performance share options.
Number of vested shares and vested share options 1Share and vested share option holdings of the GEC members as of December 31
M. Greco 3 – – – – – – – –
Distribution of vested share options 6837_p044-061.indd 596837_p044-061.indd 59 25/2/09 14:23:4625/2/09 14:23:46
Trading Plans To facilitate the sale of shares and the exercise of options for the members of the Group Executive Committee, the Board has approved the implementation of trading plans. These plans allow members to sell shares and/or exercise share options under a pre-defi ned transaction program. Trading plans can only be established at a time when the Group Executive Committee member does not possess unpublished price-sensitive information with regard to the Group. Further, the fi rst transaction under a trading plan can only occur three months following the date it is established. The terms and conditions of the transactions have to be defi ned and they cannot be changed. All trading plans of Group Executive Committee members require the approval of the Chairman of the Board. Once established, transactions take place on a monthly basis including during close periods. All transactions made under a trading plan are reported to the SIX Swiss Exchange according to the rules on disclosure of management transactions and recorded as such as being carried out as part of a trading plan.
Additional honoraria and remuneration for members of the Group Executive Committee None of the members of the Group Executive Committee received any compensation from the Group or from any of the Group’s companies in 2008 and 2007 other than as set out above.
The information contained within the Financial review is unaudited. This document should be read in conjunction with the Zurich Financial Services Group Annual Report 2008. Comparatives are for the year ended December 31, 2007. All amounts, unless otherwise stated, are shown in U.S. dollars and rounded to the nearest million with the consequence that the rounded amounts may not add to the rounded total in all cases. All ratios and variances are calculated using the underlying amount rather than the rounded amount. Certain comparatives including segment disclosures have been restated for changes in accounting policy and for reclassifi cations as set out in note 1 of the consolidated fi nancial statements to conform to the 2008 presentation. The reclassifi cations have no impact on previously reported net income. Comparatives for return on common shareholders’ equity and business operating profi t (after tax) return on common shareholders’ equity have also been restated as the calculation has been changed from a compound to a linear basis. Acquisitions and divestments are set out in note 5 of the consolidated fi nancial statements.
General Insurance business operating profi t 3,535 4,024 (12%) General Insurance combined ratio 98.1% 95.6% (2.5 pts)
Farmers Management Services gross management result 1,141 1,056 8% Farmers Management Services business operating profi t 1,202 1,271 (5%) Farmers Management Services managed gross earned premium margin 6.9% 6.8% 0.1 pts
in USD millions, for the years ended December 31, unless otherwise stated in USD millions, for the years ended December 31, unless otherwise stated 6839_p064-089.indd 646839_p064-089.indd 64 25/2/09 14:20:4125/2/09 14:20:41
Global Life business operating profi t increased by USD 37 million to USD 1.5 billion, an increase of 3 percent in U.S. dollar terms and 1 percent on a local currency basis. An improved performance, on a local currency basis, in the UK and Germany, moderated the negative impact from falling asset values that reduced asset-based fees and accelerated amortization of deferred acquisition costs and intangible assets.
Other Businesses business operating profi t decreased by USD 1.0 billion to a loss of USD 260 million primarily resulting from the impact of deteriorating equity markets and widening credit spreads on Group investments as well as the strengthening of certain insurance liabilities, together with lower levels of commutation gains and other profi table run-off transactions.
The Corporate Functions result improved by USD 38 million following lower net headquarter expenses.
Net income attributable to shareholders decreased by USD 2.7 billion, to USD 3.0 billion resulting from capital losses on investments, including impairments, after allocations to policyholders of USD 2.0 billion compared with net capital gains of USD 1.1 billion in 2007. The shareholders’ effective tax rate was 19.0 percent compared with 24.4 percent for the year ended December 31, 2007 mainly due to a combination of favorable tax settlements and the use of previously unrecognized net operating losses.
Business volumes in our core operating segments developed as follows: General Insurance gross written premiums and policy fees increased by 4 percent in U.S. dollar terms to USD 37.2 billion, while increasing by 2 percent on a local currency basis as we continued to capitalize on attractive opportunities in line with our strategy to further diversify our businesses through growth focused on personal and small business lines, as well as in key emerging markets. Excluding the growth achieved through acquisitions, gross written premiums increased by 1 percent on a local currency basis due to strong new business production in selected markets.
Global Life Insurance deposits decreased by 8 percent in U.S. dollar terms to USD 11.1 billion and by 8 percent on a local currency basis, driven by reductions in single premium savings products in the UK and Ireland, refl ecting consumer reactions to the turbulent fi nancial markets. Gross written premiums and policy fees increased by 12 percent in U.S. dollar terms to USD 10.8 billion, and by 6 percent on a local currency basis. The increase on a local currency basis primarily refl ects the impact of the newly acquired businesses in Spain. New business annual premium equivalent (APE) increased by 11 percent in U.S. dollar terms, and by 10 percent on a local currency basis, driven by increases in Spain, Germany, Latin America and Zurich International Solutions. Included in APE, but not included in gross written premiums, policy fees and deposits are new business sales of mutual funds and other assets managed by third parties, where only the fees are recognized in income.
Farmers Management Services management fees and other related revenues increased by 8 percent, refl ecting the underlying increase in the gross earned premiums of 6 percent in the Farmers Exchanges, which we manage but do not own, as a result of targeted investments in distribution capability and product enhancements.
Compared with the year ended December 31, 2007, return on common shareholders’ equity decreased 9.2 percentage points to 12.1 percent and BOPAT ROE decreased 2.1 percentage points to 16.8 percent. Both measures were affected by the lower business operating profi t, after tax, and net income attributable to shareholders as well as by the decrease in shareholders’ equity.
Diluted earnings per share decreased by CHF 23.76, or 50 percent, to CHF 23.35 for the year ended December 31, 2008, compared with CHF 47.11 for the same period in 2007, refl ecting the impact of the global fi nancial crisis and the weakening of the U.S. dollar against the Swiss franc on average over the year. The corresponding diluted earnings per share movement in U.S. dollars was a decrease of USD 17.66, or 45 percent, to USD 21.63.
For General Insurance, the rate environment clearly improved in the later stages of 2008, with an upturn in rates in the last quarter and moving into 2009 this trend is expected to continue. We remain committed to fi nding ways to grow profi tably in targeted areas. We are starting from a strong baseline with robust operating profi tability and strong growth in diffi cult market conditions. Based on the combination of our customer focus and market positioning, underwriting discipline and continuous operational improvements, we are confi dent that we can deliver market leading results.
We maintain our medium-term Group targets and are confi dent that our business is positioned well to cope with the expected conditions in 2009 subject to the risks inherent in our businesses which are laid out on pages 90 to 125 of the Risk review.
On February 13, 2008, the Board of Zurich Financial Services authorized a share buy-back program for the repurchase of CHF 2.2 billion worth of shares over the course of 2008. As of December 31, 2008, 3,750,500 shares had been repurchased, reducing total equity by USD 1.0 billion.
On April 3, 2008, the cancellation of the 3,432,500 shares with a nominal value of CHF 0.10 repurchased through our share buy-back program in 2007, was approved by the Annual General Meeting. The effective date of the capital reduction was June 27, 2008.
Shareholder distributions and share buy-backs 6839_p064-089.indd 676839_p064-089.indd 67 25/2/09 14:20:4225/2/09 14:20:42
Gross written premiums and policy fees increased by 4 percent or USD 1.5 billion in U.S. dollar terms to USD 37.2 billion and by 2 percent on a local currency basis. This growth was achieved in line with our strategy to target organic and inorganic profi table growth focusing on personal and small business lines in Europe as well as in key emerging markets. Excluding the growth achieved through acquisitions, the general insurance gross written premiums grew by 1 percent in local currency against market trends which were adverse for the most part of the year.
Group performance review offset by improvements in underlying operational effi ciency as we have continued our strategic investments in operational transformation and customer focused initiatives, such as the rollout of Zurich HelpPoint but maintained our cost discipline. Examples of this discipline were the restructuring programs executed in certain businesses. In the U.S, we streamlined our operations and reduced our staff numbers by more than 600 full time equivalents and in the UK, by more than 900.
Business operating profi t decreased by USD 691 million to USD 47 million for the year ended December 31, 2008. The decrease was attributable to a lower net underwriting result, which was partly offset by a favorable development in a variety of non-technical expense items, with foreign exchange benefi ts being the single largest contributor.
The net underwriting result decreased by USD 787 million to a net loss of USD 602 million, leading to a 16.2 percentage point increase in the combined ratio. The loss ratio increased by 15.5 percentage points to 92.2 percent. Key drivers for this development were hurricanes Gustav and Ike and a signifi cant increase in other large and weather-related losses in North America, impacting the loss ratio by 10.5 percentage points. Global Corporate was also affected by reserve developments and premium adjustments based on the profi tability of certain contracts in prior years contributing 4 percentage points to the increase in the loss ratio. The expense ratio increase of 0.7 percentage points was driven by a combination of costs associated with the establishment of Global Corporate in Asia Pacifi c and the impact of lower rates and premium adjustments based on the profi tability of certain contracts in prior years.
Gross written premiums and policy fees 11,215 11,532 (3%) Net underwriting result 243 521 (53%) Business operating profi t 1,238 1,460 (15%) Loss ratio 70.3% 67.0% (3.3 pts) Expense ratio 27.1% 27.5% 0.4 pts Combined ratio 97.4% 94.5% (2.9 pts)
The net underwriting result increased by USD 336 million to USD 776 million, primarily as a result of a 2.9 percentage point improvement in the loss ratio to 69.8 percent. In 2007, the loss ratio was impacted by winter storm Kyrill and the UK fl oods in June and July, which together accounted for USD 677 million or 5.2 percentage points on the loss ratio. While in Europe there have been no major catastrophes in 2008, a higher frequency of smaller weather-related events occurred, contributing to an increased attritional loss ratio. The expense ratio increased by 0.9 percentage points to 24.8 percent as a result of higher commissions and higher expense ratios in the recently acquired businesses in Russia and Turkey. Underlying expense improvements more than compensated for investments in our European platform, as well as other growth and operational transformation related activities.
in USD millions, for the years ended December 31 in USD millions, for the years ended December 31 6839_p064-089.indd 716839_p064-089.indd 71 25/2/09 14:20:4425/2/09 14:20:44
in USD millions, for the years ended December 31 in USD millions, for the years ended December 31 6839_p064-089.indd 726839_p064-089.indd 72 25/2/09 14:20:4525/2/09 14:20:45
Total reserves for life insurance contracts, net of reinsurance, and liabilities for investment contracts 154,617 191,117 (19%)
Embedded value – highlights New business annual premium equivalent (APE) 3,261 2,947 11% Present value of new business premiums (PVNBP) 25,883 23,781 9% New business margin, after tax (as % of APE) 23.1% 24.7% (1.7 pts) New business margin, after tax (as % of PVNBP) 2.9% 3.1% (0.2 pts) New business value, after tax 753 729 3%
New business annual premium equivalent (APE) increased by USD 314 million to USD 3.3 billion, or 11 percent in U.S. dollar terms, and by 10 percent on a local currency basis achieving for the third year in a row the targeted double-digit growth. The increase was driven by the bancassurance business in Spain, sales growth in unit-linked business in Germany, corporate life business in Emerging Markets, and mutual fund sales in the UK, which more than offset the challenging market conditions impacting single premium unit-linked products, and protection sales in the U.S. The newly acquired businesses in Spain and Italy contributed USD 236 million in 2008.
Insurance deposits decreased by 8 percent in U.S. dollar terms to USD 11.1 billion and by 8 percent on a local currency basis, primarily driven by a reduction in single premium savings products in the UK, refl ecting consumer uncertainties in the turbulent fi nancial markets. Gross written premiums and policy fees increased by 12 percent in U.S. dollar terms to USD 10.8 billion, and by 6 percent on a local currency basis. The increase on a local currency basis refl ects the impact of the newly acquired businesses in Spain. In addition, the U.S grew 4 percent over the prior year despite the adverse market conditions. Gross written premiums, policy fees and deposits do not include sales of mutual funds and other assets managed by third parties, where only the fee element is recognized in other income.
Net reserves and Assets under management decreased by 19 percent and 18 percent respectively, in U.S. dollar terms and by 7 percent after excluding the impact of foreign currency translation, compared with December 31, 2007. The decrease from foreign currency translation resulted from the strengthening of the U.S. dollar against the British pound and the euro as of December 31, 2008 compared with December 31, 2007. On a local currency basis the decrease is primarily due to the reduction in the value of policyholders’ unit-linked insurance and investment contracts as a result of equity market decreases during the year. Assets under management comprise Group and unit-linked investments that are included in the Global Life balance sheet plus assets that are managed by third parties for which we earn fees.
New business value, after tax, increased by USD 24 million to USD 753 million, primarily as a result of the increased sales of unit-linked pension products and higher margins in Germany and growth in sales volumes in Spain, partially offset by reduced margins in Emerging Markets, the UK, Ireland, and Spain, and lower sales volumes in the U.S. Margins in Germany increased as a result of changes in the business model. In Emerging Markets, the UK, Ireland and Spain, increased acquisition costs and changes in product mix, as a result of the adverse market conditions, put pressure on margins. Overall, the new business margin after tax, decreased by 1.7 percentage points to 23.1 percent.
1 Unit-linked includes insurance and investment contracts. 2 Other includes primarily group and individual savings contracts.
During 2008, a global approach to the management of new business distribution was implemented through the introduction of three global distribution pillars, Bancassurance, IFA/Brokers, and Tied Agents, and three global proposition pillars, Corporate Life, International/Expats, and Private Banking Clients. Further distribution was driven by direct and central initiatives, which include sales of new business outside the global distribution and proposition pillars and include initiatives related to our focus on the management of in-force business and improvement of persistency and retention.
Bancassurance distribution was the main growth driver increasing by USD 269 million to USD 746 million, or by 56 percent in U.S. dollar terms, and by 46 percent on a local currency basis. The new business acquired in Spain contributed USD 226 million to this growth with the remaining increase driven by higher sales of unit-linked pensions in Germany and protection sales in Emerging Markets.
APE by pillar and product in USD millions, for the years ended December 31
APE by pillar and product 6839_p064-089.indd 756839_p064-089.indd 75 25/2/09 14:20:4725/2/09 14:20:47
Corporate Life pillar increased by USD 100 million to USD 414 million, or 32 percent in U.S. dollar terms, and by 29 percent on a local currency basis during the year. Growth in Emerging Markets was driven by the international group protection business of ZIS, and in Ireland through further increases in market share in group pensions.
Private Banking Clients pillar was established in the second half of 2008 achieving USD 1 million by the year end.
Business operating profi t decreased by USD 69 million to USD 1.2 billion. An increased contribution from the underlying operations driven by the 8 percent growth in fees from the Farmers Exchanges, which we manage but do not own, was more than offset by a decrease in other net income including lower net investment income of USD 83 million as a result of the lower average invested asset base following dividends and cash transfers to the Group in November 2007 and during 2008, together with the sale of debt securities for the acquisition of Bristol West in 2007. Additionally, other net income decreased as gains of USD 47 million on the sale of property relating to the concentration of customer service activities into three ServicePoints were recognized in the prior year, but not repeated in 2008.
1 Includes USD 425 million premium portfolio transfer in June 2008 of SBS from North America Commercial.
in USD millions, for the years ended December 31 in USD millions, for the years ended December 31 in USD millions, for the years ended December 31Farmers Exchanges in USD millions, for the years ended December 31Farmers Exchanges 6839_p064-089.indd 776839_p064-089.indd 77 25/2/09 14:20:4825/2/09 14:20:48
Net investment income 528 731 (28%) Interest expense on debt (1,122) (1,317) 15%
Net headquarter expenses, after allocations to operating businesses and excluding foreign currency impacts (90) (168) 43%
Business operating loss improved by USD 38 million to a loss of USD 772 million for the year ended December 31, 2008, primarily driven by a reduction in net headquarter expenses.
Common stocks, including equity unit trusts 8,896 14,245 51,276 90,593 Unit trusts (debt securities, real estate and
Common stock portfolios backing participating with-profi t policyholder contracts 630 1,274 – – Trading equity portfolios in capital markets and banking activities 786 1,606 – –
Real estate held for investment 7,524 7,563 4,077 7,823 Mortgage loans 12,820 12,718 – – Policyholders’ collateral and other loans 12,531 12,936 2 2 Investments in associates 220 238 – –
of which: net capital (losses)/gains on investments and impairments attributable to shareholders (2,046) 1,112 (284%)
Total net investment income increased by USD 134 million, or 2 percent in U.S. dollar terms to USD 8.7 billion, but decreased by 1 percent on a local currency basis. This decrease was driven by a lower average invested asset base in Global Life due to the transfer of investments relating to our UK Life annuity business, which was reinsured in mid2007, and the continued shift in our life business to unit-linked products and the related unit-linked investments including those managed by third parties, offset by positive net cash fl ow in General Insurance. Net investment income return was 4.7 percent, an increase of 22 basis points compared with the prior year, largely due to investing positive cash fl ow in debt securities at higher rates.
in USD millions, for the years ended December 31Performance of Group investments in USD millions, for the years ended December 31Performance of Group investments 6839_p064-089.indd 806839_p064-089.indd 80 25/2/09 14:20:5025/2/09 14:20:50
1 After deducting investment expenses of USD 581 million and USD 528 million for the years ended December 31, 2008 and 2007, respectively
Total return on unit-linked investments decreased by 27.7 percentage points to a negative return of 21.7 percent due to net capital losses and impairments of USD 24.9 billion as a result of adverse global fi nancial market developments. This was partially offset by a 6 percent increase in net investment income to USD 3.2 billion.
Net reserves for losses and loss adjustment expenses 52,986 54,712 Reinsurers’ share (12,232) (13,179) Gross reserves for losses and loss adjustment expenses 65,218 67,890
As of December 31, 2008, net reserves for losses and loss adjustment expenses decreased by USD 1.7 billion, to USD 53.0 billion compared with USD 54.7 billion as of December 31, 2007. Excluding the impact of foreign currency translation effects of USD 3.8 billion the net reserves increased by USD 2.1 billion. Compared with the net reserves at the end of 2007, part of this increase was losses associated with Hurricanes Gustav and Ike still not settled as of balance sheet date. There was also a signifi cant increase in other large and weather-related losses in North America. Favorable developments emerging from reserves established in prior years arose across a number of countries and lines of business primarily from our General Insurance business.
One year later 85.7% 72.0% 66.1% 64.2% 68.1% 66.2% 71.7% Two years later 85.8% 72.3% 65.4% 63.5% 66.6% 64.8% Three years later 87.4% 74.5% 65.5% 63.7% 65.0% Four years later 88.5% 74.7% 65.7% 62.9% Five years later 90.2% 73.4% 65.0% Six years later 90.2% 74.3% Seven years later 90.3%
Development of cumulative net loss ratio 6839_p064-089.indd 826839_p064-089.indd 82 25/2/09 14:20:5125/2/09 14:20:51
Net reserves as of January 1, 2008 191,117 20,043 211,159 Movements in net reserves (36,500) (2,682) (39,181) Net reserves as of December 31, 2008 154,617 17,361 171,978
The following provides further detail on the development and composition of reserves and liabilities in our Global Life business.
in USD millionsGroup reserves for life insurance contracts, net of reinsurance, and liabilities for investment contracts in USD millionsGroup reserves for life insurance contracts, net of reinsurance, and liabilities for investment contracts in USD millionsGlobal Life – Development of reserves and liabilities in USD millionsGlobal Life – Development of reserves and liabilities 6839_p064-089.indd 836839_p064-089.indd 83 25/2/09 14:20:5225/2/09 14:20:52
In 2007 the excess of claims over premiums of USD 15.3 billion was primarily the result of the reinsurance of USD 7.1 billion of UK annuity liabilities, and a reduction of USD 2.5 billion of liabilities relating to traditional group life contracts in Switzerland of which USD 1.8 billion was transferred to independent pension foundations, to which we provide services but do not control. In the second quarter of 2008, the reinsured UK annuity liabilities were commuted resulting in a corresponding reduction in the reinsurers’ share of liabilities.
Other life insurance liabilities, net of reinsurance, increased by 2 percent, and by 6 percent after excluding the impact of currency translation, compared with December 31, 2007. The reduction of USD 3.6 billion from foreign currency translation was due to the strong appreciation of the U.S. dollar against the British pound and the euro partly offset by strengthening of the Swiss franc since December 31, 2007. The underlying increase was mainly due to the inclusion of reserves for the acquisitions in Spain and Italy, partly offset by an excess of policyholder benefi ts paid over premiums from the overall maturity of the portfolios in Germany and Switzerland and the shift in the focus for new business towards unit-linked insurance and investment contracts.
Total operational debt 6,188 8,578 (28%) Total fi nancial debt 9,633 8,999 7%
in USD millions, as of December 31 in USD millions, as of December 31 6839_p064-089.indd 856839_p064-089.indd 85 25/2/09 14:20:5325/2/09 14:20:53
As of December 31, 2007, as previously reported 28,804 374 29,177 Adjustment arising from a change in accounting policy 141 – 141 As of December 31, 2007, as restated 28,945 374 29,318 Issuance of share capital 1 – 1
Total equity decreased by 19 percent to USD 23.8 billion as of December 31, 2008. Net income after taxes of USD 3.1 billion was offset by losses in other recognized income and expenses of USD 7.0 billion, dividend payments of USD 2.1 billion and treasury share transactions of USD 812 million. The main drivers of other recognized income and expense were net realized losses on available-for-sale investments of USD 3.1 billion and currency translation adjustments of USD 2.7 billion. Non-controlling interests increased by USD 1.3 billion to USD 1.7 billion mainly as a result of the acquisitions in Spain initially accounted for in 2008.
in USD millions in USD millions 6839_p064-089.indd 866839_p064-089.indd 86 25/2/09 14:20:5425/2/09 14:20:54
Cash and cash equivalents as of January 1 1 15,059 19,302 Cash and cash equivalents as of December 31 1 16,220 15,059
Cash and cash equivalents as of January 1 2 16,936 23,122 Cash and cash equivalents as of December 31 2 16,397 16,936 1 Excluding cash received as collateral for securities lending 2 Including cash received as collateral for securities lending
Net cash provided by operating activities was USD 7.1 billion for the year ended December 31, 2008. Net cash used in investing activities was USD 1.4 billion, as a result of the acquisitions completed during the year. Net cash used in fi nancing activities was USD 2.6 billion, which was predominantly related to dividend payments and share buy-backs.
We operate worldwide in multiple currencies and seek to match our foreign exchange exposures on an economic basis.
As we have chosen the U.S. dollar as our presentation currency, differences arise when functional currencies are translated into our presentation currency. The table below shows the effect of foreign currency rates on the translation of selected line items.
Total investments (28,777) (10%) Reserves for insurance contracts, gross (17,916) (7%) Cumulative translation adjustment in shareholders’ equity (2,725) (12%)
variance over the prior period, for the years ended December 31, 2008Selected Group income statement line items variance over the prior period, for the years ended December 31, 2008Selected Group income statement line items variance over December 31, 2007, as of December 31, 2008Selected Group balance sheet line items variance over December 31, 2007, as of December 31, 2008Selected Group balance sheet line items 6839_p064-089.indd 886839_p064-089.indd 88 25/2/09 14:20:5525/2/09 14:20:55
Effectively managing risks affecting Zurich is one of our long-standing core strengths. In 2008 our industry was shaken by severe fi nancial turmoil as well as more than USD 200 billion in catastrophe losses. At Zurich we benefi ted from our robust risk management practices, which once again proved their strength – even in dealing with historic adversity.
Our major Enterprise Risk Management objectives are to: Protect the capital base by monitoring that risks are not taken beyond the Group’s risk-taking capacity Enhance value creation and contribute to an optimal risk-return profi le by providing the basis for an effi cient capital deployment Support the Group’s decision-making process by providing consistent, reliable and timely risk information Protect our reputation and brand by promoting a sound culture of risk awareness
To support this process the Group relies on documented policies and guidelines. The Zurich Risk Policy is the Group’s main risk governance document; it specifi es risk limits and authorities, reporting requirements and procedures for referring risk issues to senior management and the Board of Directors. We regularly enhance the Zurich Risk Policy to refl ect new insights and changes in our environment and to refl ect changes to Zurich’s risk tolerance as articulated by the Group Executive Committee (GEC) with respect to capital adequacy and earnings volatility.
In addition to this qualitative approach the Group regularly measures and quantifi es material risks to which it is exposed. Our risk models provide a key input into the Group’s strategic planning process as they allow an assessment as to whether the Group’s risk profi le is in line with the risk capacity of the Group and within the Group’s risk tolerance. Our risk models form the basis for optimizing the Group’s risk-return profi le by providing a consistent risk measurement across the Group.
Changes in processes, reporting and policies The content, granularity and governance process around the quarterly risk report to senior management committees and the Risk Committee of the Board were further strengthened and enhanced. At a local level, risk reporting to regional management and audit committees is now coordinated in the context of Zurich’s integrated assurance approach with other assurance, technical and business functions to provide a holistic view of risks. The Group Executive Committee improved consistency between risk management and strategic planning by further refi ning the Group-wide risk tolerance approach. The Zurich Risk Policy has been updated and strengthened for various areas including strategic risks, operational risks, general insurance risks and the use of derivatives.
In 2008, Zurich senior executives participated in the drafting of the “Final Report of the IIF Committee on Market Best Practices.” Written under the auspices of the Institute of International Finance (IIF), the Final Report comprises the fi nancial services industry’s response to the market turmoil of 2007-2008 with a set of principles of conduct and best practice recommendations.
(including Business Division Chief Risk Offi cers and Local Risk Offi cers)
The overview above highlights only key elements of the governance framework which specifi cally relate to Risk Management.
The Risk Committee of the Board serves as a focal point for oversight regarding the Group’s risk management, in particular the Group’s risk capacity, including agreed limits which the Board regards as acceptable for Zurich to bear, the aggregation of agreed limits across the Group, the measurement of adherence to agreed risk capacities, and the Group’s risk capacity in relation to anticipated capital levels. It further oversees the Group-wide risk governance framework, including risk management, risk policies and their implementation as well as the risk strategy, and the monitoring of operational risks. The Risk Committee also reviews the methodologies for risk measurement and the Group’s adherence to its risk limits and reviews the performance of the Risk Management function. It further reviews, with management and the Group Risk Management function, the Group’s general policies and procedures and satisfi es itself that effective systems of risk management are established and maintained. It receives periodic reports from Group Risk Management and assesses whether signifi cant issues of a risk management and control nature are being 6840_p090-125.indd 936840_p090-125.indd 93 25/2/09 14:17:5325/2/09 14:17:53
appropriately addressed by management in a timely manner. With regard to the Group Risk Management function, the Risk Committee assesses the independence and objectivity of this function, approves its terms of reference, reviews the activities, plans, organization and the quality of the function, and reviews key risk management principles and procedures.
To facilitate information exchange between the Audit Committee of the Board and the Risk Committee of the Board, the chairperson of the Audit Committee is a member of the Risk Committee and vice-versa. The Risk Committee met six times in 2008.
The Group Chief Risk Offi cer is a member of the Group Executive Committee and reports directly to the CEO. He is a member of each of the management committees listed below, in order to provide a common and integrated approach to risk management, to allow for appropriate quantifi cation and, where necessary, mitigation of risks identifi ed in these committees.
At a Group level the management committees dealing with risks are: Group Balance Sheet Committee (GBSC) – acts as a cross-functional body whose main function is to control the activities that materially affect the balance sheets of the Group and its subsidiaries. The GBSC is charged with setting the annual capital and balance sheet plans for the Group based on the Group’s strategy and its fi nancial plans, as well as recommending specifi c transactions or unplanned business changes to the Group’s balance sheet. The GBSC has oversight of all main levers of the balance sheet. It assesses the Group’s capital adequacy, reinsurance, level of return, risk capacity and desired growth. The GBSC reviews and recommends the Group’s overall risk tolerance levels. It is chaired by the CEO. Group Finance and Risk Committee (GFRC) – acts as a cross-functional body for fi nancial and risk management matters in the context of the strategy and the overall business activity of the Group. The GFRC oversees fi nancial implications of business decisions and the effective management of the Group’s overall risk profi le, including risks related to insurance, fi nancial markets and asset/liability, credit and operational risks as well as their interactions. The GFRC proposes remedial actions based on regular briefi ngs from Group Risk Management on the risk profi le of the Group. It reviews and formulates recommendations for future course of action with respect to potential M&A transactions, for changes to the Zurich Risk Policy and exceptions to limits as required by the Zurich Risk Policy, internal insurance programs for the Group and the overall risk tolerance. The GFRC is chaired by the Group Chief Financial Offi cer, while the Group Chief Risk Offi cer acts as deputy.
The management committees rely on output provided by technical committees, including: Asset/Liability Management and Investment Committee (ALMIC) – deals with the Group’s asset/liability exposure and investment strategies and is chaired by the Group Chief Investment Offi cer. Global Underwriting Committee (GUC) – acts as a focal point for underwriting policy and related risk controls for General Insurance and is chaired by the Global Chief Underwriting Offi cer. Group Reinsurance Committee (GRC) – oversees the purchase of reinsurance on a global basis. This committee also oversees the Group ś natural catastrophe exposure and is chaired by the Global Head of Group Reinsurance.
The Group Risk Management organization consists of central functions at Corporate Center and a decentralized risk management network at regional, business division, business unit and functional levels.
At Corporate Center there are two centers of expertise: risk analytics and risk operations. The risk analytics department quantitatively assesses insurance, fi nancial market and asset/liability, credit and operational risks and is the Group’s center of excellence for risk quantifi cation and modeling. The risk operations department comprises operational risk management, the Internal Control Framework, IT risk management, Business Continuity Management and Disaster Recovery. It serves as the link between the risk management network (regions, business divisions, business units and functions) and risk management at Corporate Center.
The decentralized risk management network consists of the Chief Risk Offi cers (CROs) of the Group’s business divisions, and the Local Risk Offi cers (LROs) of the business units and functions and their staff. While their primary focus is on operational and strategic risks they are responsible for providing a holistic view of risk for their area. The CROs and LROs are part of the respective business’ management teams. While the LROs have a matrix reporting line into the business division CRO, the latter have a matrix reporting line into the Group Chief Risk Offi cer. The CROs of the Group’s major business divisions are members of the Group Chief Risk Offi cer’s executive leadership team.
In order to enable a consistent, systematic and disciplined approach to risk management, we categorize our main risks as follows: Market – risk associated with the Group’s balance sheet positions where the value or cash fl ow depends on fi nancial markets Credit – risk associated with a loss or potential loss from counterparties failing to fulfi ll their fi nancial obligations Liquidity – risk that the Group does not have suffi cient liquidity to meet its obligations when they fall due, or would have to incur excessive costs to do so Insurance – risk transferred to us from customers through the underwriting process Operational – risk associated with the people, processes and systems of the Group and external events Reputation – risk that an act or omission by the Group or any of its employees could result in damage to the Group’s reputation or loss of trust among our stakeholders Strategic – the unintended risk that can result as a by-product of planning or executing a strategy
Market risk is the risk of an adverse effect on the market value or cash fl ows of the Group’s surplus. The Group’s surplus is the difference of the Group’s investments and liabilities. Fluctuating risk drivers resulting in market risk include: Equity market prices Interest rates Real estate market prices Currency exchange rates
The Group manages the market risk of assets relative to liabilities on an economic basis. It strives to maximize the economic risk adjusted excess return of assets relative to the liability benchmark taking into account the Group’s current risk appetite as well as local regulatory constraints.
The Group has policies and limits to manage market risk. We align our strategic asset allocation to our risk-taking capacity. We centralize management of certain asset classes to control aggregation of risk, and provide a consistent approach to constructing portfolios and selecting external asset managers. We also diversify portfolios, investments and asset managers. We regularly measure and manage market risk exposure. We have established limits on our concentration in investments by single issuers and certain asset classes as well as on asset/liability mismatches, and we limit investments that are illiquid. The Group’s Balance Sheet Committee reviews and recommends the Group’s capital allocation to market risk, while the Asset Liability Management and Investment Committee reviews and monitors the Group’s strategic asset allocation and its tactical boundaries and monitors the Group’s asset/liability exposure. The Group oversees the activities of local Asset Liability Management and Investment Committees and regularly assesses market risks both at a Group and at a local business level. Risk assessment includes quantifi cation of the contributions to fi nancial market risk from major risk drivers. The economic effect of potential extreme market moves is regularly examined and considered when setting the asset allocation.
Risk assessment reviews include the analysis of the management of interest rate risk for each major maturity bucket and compliance of the aggregated positions with risk limits.
Building on established processes we have increased the frequency of risk and solvency reporting as a basis to take corrective actions more quickly, if required. The Group has also broadened the set of market risk scenarios it tests and analyzes on a regular basis to refl ect the possibility of further adverse market movements. Possible contingency measures, which might become necessary in a further worsening market environment, are prepared accordingly.
The Group uses derivative fi nancial instruments to limit market risks arising from changes in currency exchange rates, interest rates, equity prices and credit quality from our assets and liabilities and our commitments to third parties. We enter into derivative fi nancial instruments mostly for economic hedging purposes and, in limited circumstances, the instruments may also meet the defi nition of an effective hedge for accounting purposes. Derivatives that are part of the effective accounting hedges include cross currency interest rate swaps in fair value hedges and cross currency swaps in cash fl ow hedges of our borrowings in order to mitigate our exposure to foreign currency and interest rate risk. Interest rate swaps are also included in derivatives as cash fl ow hedges of the Group’s exposure to future cash fl ows from changes in interest rates associated with forecast transactions such as the future purchase of debt instruments related to certain Life Insurance policies. Derivatives are complex fi nancial transactions; therefore, the Group addresses the risks arising from derivatives through a stringent policy that requires approval of a derivative program before transactions are initiated, and by subsequent monitoring of open positions by Group Risk Management.
For additional information on derivative fi nancial instruments and hedge accounting please refer to note 7 of the consolidated fi nancial statements.
Risk from equity securities and real estate The Group is exposed to various risks resulting from price fl uctuations on equity securities, real estate and capital markets. Risks arising from equity securities and real estate could affect the Group’s liquidity, reported income, surplus and regulatory capital position. The exposure to equity risk includes, but is not limited to, common stocks, including equity unit trusts, common stock portfolios backing participating with-profi t policyholder contracts, trading equity portfolios in capital markets and equities held for employee benefi t plans. The exposure to real estate includes real estate assets, such as direct holdings in real estate, listed real estate company shares and funds, as well as exposure through non-quoted indirect real estate, and real estate debt securities such as commercial and residential mortgages, commercial mortgage-backed securities and mezzanine debt. Returns on unit-linked contracts, whether classifi ed as insurance or investment contracts, may be exposed to risks from equity and real estate, but are borne by policyholders. However, the Group is indirectly exposed to market movements in so far as they impact the amount of fee income earned if the fee income level is dependent on the valuation of the asset base.
Returns on unit-linked contracts, whether classifi ed as insurance or investment contracts, are at the risk of the policyholder; however, the Group is exposed to fl uctuations in interest rates in so far as they impact the amount of fee income earned if the fee income level is dependent on the valuation of the asset base.
The following tables on sensitivities for the rest of the businesses include Farmers Management Services, Other Businesses and Corporate Functions. Where Other Businesses includes business with Life characteristics, the analysis is based on European Embedded Value market risk sensitivities. Please refer to the Embedded value report for more details on the market risk scenario specifi cations.
Limitations of the analysis: The sensitivity analysis does not take into account actions that might be taken to mitigate losses, as we use an active strategy to manage these risks. This strategy may involve changing the asset allocation, for example through selling and buying assets.
Other currencies Total 1% increase in the interest rate yield curves Group Investments (885) (567) (182) (278) (124) (2,038)
1% decrease in the interest rate yield curves Group Investments 802 603 189 277 125 1,996
1% decrease in the interest rate yield curves Group Investments 1,101 592 367 229 148 2,437
Other currencies Total 1% increase in the interest rate yield curves Group Investments (582) 26 (211) (1) (47) (815)
1% decrease in the interest rate yield curves Group Investments 551 161 255 1 2 970
Analysis of economic sensitivities for equity risk The table below shows the estimated impacts on Group investments and liabilities from a 10 percent decline in stock markets, after consideration of hedges in place, as of December 31, 2008 and 2007, respectively.
10% decline in stock markets Group Investments (437) (471) Liabilities – – Net impact (437) (471)
Table 2.a in USD millions, as of December 31, 2008Economic interest rate sensitivities for the rest of the business
Table 2.b in USD millions, as of December 31, 2007Economic interest rate sensitivities for the rest of the business
Table 4 in USD millions, as of December 31Economic equity price sensitivities for the rest of the business 6840_p090-125.indd 1006840_p090-125.indd 100 25/2/09 14:17:5725/2/09 14:17:57
Limitations of the analysis: The sensitivity analysis is presented on the basis of IFRS and does not take into account actions that might be taken to mitigate losses, as the Group uses an active strategy to manage these risks. This strategy may involve changing the asset allocation for example through selling and buying assets.
The major markets in which the Group invests are the U.S. and Europe. The major interest rate exposures are to USD and EUR denominated assets and liabilities. The sensitivities do not indicate a probability of such events and do not necessarily represent the Group’s view of expected future market changes. Debt securities are primarily exposed to interest rate risk while equity securities are primarily exposed to equity market risk. Debt securities can also be affected by spread-widening due to changes in credit quality. Additional impairments as a result of such changes are not considered in the following analysis.
The sensitivities provided for Global Life’s business in the following table are on Group investments and own used real estate only and thus exclude the impact on insurance liabilities, intangible assets and liabilities, unit-linked assets, liabilities, and revenues. The Embedded value report details the sensitivity of the value of the Life business to fi nancial
Table 5 in USD millions, as of December 31IFRS sensitivities for the General Insurance business 6840_p090-125.indd 1016840_p090-125.indd 101 25/2/09 14:17:5725/2/09 14:17:57
market movements. In modeling these exposures, where appropriate, allowance has been made for dynamic actions that would be taken by management or by policyholders. For contracts with fi nancial options and guarantees, such as some participating business, movements in fi nancial markets can change the nature and value of these benefi ts. The dynamics of these liabilities are captured so that this exposure is quantifi ed, monitored, managed and where appropriate, mitigated. The assumptions on policyholder behavior, such as lapses, included in the sensitivity analysis for Global Life may be different from actual behavior. Therefore, the actual impact may deviate from the analysis. Refer to the Embedded value report for more information.
Table 6 in USD millions, as of December 31IFRS sensitivities for the Global Life business
Table 7 in USD millions, as of December 31IFRS sensitivities for the rest of the businesses
Table 7 in USD millions, as of December 31IFRS sensitivities for the rest of the businesses 6840_p090-125.indd 1026840_p090-125.indd 102 25/2/09 14:17:5825/2/09 14:17:58
Currency risk Currency risk is the risk of loss resulting from changes in exchange rates. The Group operates internationally and therefore is exposed to the fi nancial impact arising from changes in the exchange rates of various currencies. The Group’s presentation currency is the U.S. dollar, but its assets, liabilities, income and expenses are denominated in many currencies, with signifi cant amounts in the euro, Swiss franc, British pound, as well as the U.S. dollar.
As the Group has chosen the U.S. dollar as its presentation currency, differences arise when functional currencies are translated into the presentation currency.
The table above shows the net income after tax before minorities (NIAT) by major functional currencies and refl ects composition of total NIAT per currency. The table therefore gives an indication of the Group’s exposure to changes in currency exchange rates with respect to their impact on the Group’s NIAT expressed in U.S. dollars.
On local balance sheets there is the risk that a currency mismatch may lead to fl uctuations in a balance sheet’s net asset value, either through income or directly through equity. The Group manages this risk by matching foreign currency positions on local balance sheets within prescribed limits. The Group does not take speculative positions on foreign currency market movements. Foreign currency is a centrally managed risk, with hedging coordinated by Group Treasury. As a result, the monetary currency risk exposure is considered immaterial, as disclosed in note 3 of the consolidated fi nancial statements.
Table 8 in USD millions, as of December 31Net income after tax before minorities by major functional currencies 6840_p090-125.indd 1036840_p090-125.indd 103 25/2/09 14:17:5925/2/09 14:17:59
Credit risk is the risk associated with a loss or potential loss from counterparties failing to fulfi ll their fi nancial obligations. The Group’s exposure to credit risk is derived from the following main areas: Debt securities Reinsurance assets Mortgage loans and mortgage loans given as collateral Other loans Receivables Derivatives
The Group manages individual exposures as well as concentrations of credit risk. Our objective in managing credit risk exposures is to maintain it within parameters that refl ect our strategic objectives and Group risk tolerance. Sources of credit risk are assessed and monitored, and the Group has policies to manage the specifi c risks within the various subcategories of credit risk. To assess counterparty credit risk, the Group uses the ratings assigned by external rating agencies, qualifi ed third parties, such as asset managers, and internal rating assessments using available public information. The Group maintains counterparty credit risk databases, recording external and internal sources of credit intelligence.
Credit risk relating to debt securities The Group is exposed to credit risk from third party counterparties where the Group holds securities issued by those entities. The table below shows the credit risk exposure on debt securities, by credit rating.
Oil & Gas Chem. & Pharm. Gov., Supranat. & Similar Fin. Institutions
The Group’s investment policy prohibits speculative grade investments, unless specifi cally authorized and under exceptional circumstances. The Group identifi es and implements appropriate corrective action on investments expected to be downgraded to below investment grade.
Credit risk relating to reinsurance assets As part of our overall risk management strategy, the Group cedes insurance risk through proportional, nonproportional and specifi c risk reinsurance treaties. While these cessions mitigate insurance risk, the recoverables from reinsurers and receivables arising from ceded reinsurance expose the Group to credit risk.
Our Corporate Reinsurance Security Committee manages the credit quality of our cessions and reinsurance assets. The Group typically cedes new business to authorized reinsurers with a minimum rating of BBB. The premiums ceded to reinsurers that fall below investment grade or are not rated are to a large extent collateralized.
Group performance review each portfolio as well as being underwritten using conservative lending criteria. Loans are secured by fi rst mortgages only and maximum mortgage loan to property value ratios (LTV) are applied. Furthermore business units are required to clearly state criteria for determining borrower and collateral quality in their local mortgage policies. The Group undertakes economic research on the three principal markets and closely monitors the performance of the portfolios in terms of impairments and losses.
Credit risk relating to receivables The Group’s credit risk exposure to receivables from third party agents, brokers and other intermediaries arises where they collect premiums from customers to be paid to the Group or pay claims to customers on behalf of the Group. Receivables from ceded reinsurance form part of the reinsurance assets and are managed accordingly. The Group has policies and standards to manage and monitor credit risk from intermediaries with a focus on day-to-day monitoring of the largest positions. As part of these standards the Group requires that intermediaries maintain segregated cash accounts for policyholder money. Additionally, the Group requires intermediaries to satisfy minimum requirements in terms of their capitalization, reputation and experience as well as providing short-dated business credit terms. Past due but not impaired receivables should be regarded as unsecured, but some of these receivable positions may be offset by collateral.
Table 11 as of December 31Other loans by rating of issuer
Analysis of financial assets The table below provides an analysis, for non-unit linked businesses, of the age of fi nancial assets that are past due but not impaired and of fi nancial assets that are individually determined to be impaired.
Less: impairment allowance Impairment allowances on individually assessed fi nancial assets 65 30 1 6 171 273 Impairment allowances on collectively assessed fi nancial assets – 21 – – 286 307 1 Available for sale debt securities are included net of USD 1,146 million of impairment charges recognized during the year.
chairman of the Board of Directors, covering aspects such as the Group’s actual and forecasted liquidity, possible adverse scenarios that could affect the Group’s liquidity and possible liquidity needs from the Group’s main subsidiaries.
The table below provides an analysis of the maturity profi le of reserves for insurance contracts, net of reinsurance, based on expected cash fl ows without considering the surrender values as of December 31, 2008 and 2007. Reserves for unit-linked contracts amounting to USD 47,297 million and USD 70,075 million as of December 31, 2008 and 2007, respectively, are not included in this table below, as policyholders can generally surrender their contracts at any time, at which point the underlying unit-linked assets would be liquidated. Risks from the liquidation of unit-linked assets are borne by the policyholders of unit-linked contracts.
For additional information on reserves for insurance contracts, please refer to note 8 of the consolidated fi nancial statements.
Expected maturity profi le for reserves for insurance contracts 6840_p090-125.indd 1106840_p090-125.indd 110 25/2/09 14:18:0325/2/09 14:18:03
The table below provides an analysis of the maturity of liabilities for investment contracts based on expected cash-fl ows as of December 31, 2008 and 2007.
The undiscounted contractual cash fl ows for liabilities for investment contracts are USD 38,753 million and USD 57,177 million as of December 31, 2008 and December 31, 2007, respectively. Liabilities for unit-linked contracts amount to USD 30,397 million and USD 48,187 million as at December 31, 2008 and 2007, respectively. The policyholders of unit-linked investment contracts can generally surrender their contracts at any time at which point the underlying unit-linked assets would be liquidated. Risks from the liquidation of unit-linked assets are borne by the policyholders of unit-linked investment contracts.
Certain non-unit-linked contracts also provide for surrender of the contract by the policyholder at any time. Liabilities for such contracts amounting to USD 2,417 million and USD 3,197 million as of December 31, 2008 and 2007 respectively. The Group has established active management of the Global Life in-force business to improve persistency and retention.
Ceded premium – trend (% of General Insurance premium ceded to reinsurers)
Life insurance risk We have established formal local product development committees and a Group level product approval committee for potential new products that could signifi cantly increase or change our risks. Such reviews allow us to manage new risks inherent in our new business propositions. We regularly review the continued suitability and the potential risks of existing products.
Our use of the European embedded value reporting principles allows us to further understand and report on the risk profi le of our Life products and how risks would change in differing market conditions. Embedded value is the measure markets use to value life businesses; we are using a market-consistent approach, which is considered industry best practice. For more information, please refer to the Embedded value report. For more information on own employee benefi t plans please refer to note 23 of the consolidated fi nancial statements.
Longevity risk is the risk that annuitants live longer than expected. Morbidity risk is the risk that policyholder health related claims are higher than expected.
Policyholder behavior risk is the risk that policyholder’s behavior in discontinuing and reducing contributions or withdrawing benefi ts prior to the maturity of the contract is worse than expected. Poor persistency rates may lead to fewer policies remaining on the books to defray future fi xed expenses and reduce the future positive cash fl ows from the business written potentially impacting our ability to recover deferred acquisition expenses. Expense risk is the risk that expenses incurred in administering policies are higher than expected.
Market risk is the risk of adverse fi nancial impact due to changes in fair values or future cash fl ows from fi nancial instruments arising from fl uctuations in equity prices, interest rates, equity and interest rate volatilities and foreign currency exchange rates, which are managed as part of market risk.
The main insurance risks in each line of business are as follows: Unit-linked products have been designed in order to reduce much of the risk associated with traditional business. The risks inherent in these products are largely passed on to the policyholder, although a portion of our management fees are linked to the value of funds under management and hence are at risk if the amounts outstanding decrease. Unitlinked products carry mortality risk and market risk to the extent that there are guarantees in the product design. Contracts may have minimum guaranteed death benefi ts where the sum at risk depends on the fair value of the underlying investments. For certain contracts these risks are mitigated by explicit mortality and morbidity charges.
In the Life annuity business, the most signifi cant insurance risk is continued medical advances and improvement in social conditions that will lead to increases in longevity. Annuitant mortality assumptions include allowance for future mortality improvements.
Other Businesses includes certain life insurance contracts, which 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. After 2001 the Group no longer issued new policies with such features. For the determination of these liabilities refer to note 8 of the consolidated fi nancial statements.
In addition to the product approval committee referred to above, at the end of 2008 a new Financial Management Committee was initiated within Global Life to further refi ne the identifi cation, monitoring and mitigation of risks to the balance sheets of the life entities.
Please refer to note 8 of the consolidated fi nancial statements for additional information on reserves for insurance contracts.
A fundamental component of managing our risks is underwriting discipline. We set limits on underwriting capacity, and cascade authority to individuals based on their specifi c expertise. Through The Zurich Way, we set appropriate pricing guidelines with a focus on consistent technical pricing across the organization. Technical reviews confi rm whether underwriters perform within authorities and adhere to our underwriting philosophies and policies. Our global line of business networks share best practices across the globe, providing additional guidance and governance. As with life insurance products, we have governance procedures to review potential new products to evaluate whether the risks are well understood and justifi ed by the rewards.
General Insurance – Direct written premiums and policy fees by line of business and by region
General Insurance – Direct written premiums and policy fees by line of business and by region 6840_p090-125.indd 1166840_p090-125.indd 116 27/2/09 22:56:1327/2/09 22:56:13
+1% in net loss ratio Net income before tax (48) (96) (130) (24)
In 2008, for example, we made particular effort to extend our assessments by evaluating potential correlations between property and other lines of business such as engeneering or marine for our major peril regions. The models cover the major peril regions where we face potential exposure and therefore we can now make incremental additions; in 2008 we added two climate-induced peril regions.
Georisks (earthquake) Climate-induced (includes one or more of windstorm, river flood, tornado/hail) Georisks and climate induced
Our Group-wide catastrophe modeling is annual, and quarterly for significantly exposed regions.
In addition to the operational risk assessments, loss events above a threshold determined by policy are documented and evaluated in a Group-wide database. Where necessary, improvement actions are put in place to avoid recurrence of such operational loss events.
For information regarding issuances and redemptions of debt during the year, please see note 21 of the consolidated fi nancial statements.
The regulatory, ratings agency and economic capital adequacy are major elements of our capital management framework.
In each country in which the Group operates, the local regulator specifi es the minimum amount and type of capital that each of the regulated entities must hold in addition to their liabilities. The Group targets to hold, in addition to the minimum capital required to comply with the solvency requirements, an adequate buffer to ensure that each of its regulated subsidiaries meets the local capital requirements. The Group is subject to different capital requirements depending on the country in which it operates. The two main areas are Europe (both European Union (EU) and non-EU countries) and the U.S.
50 percent. Life insurance companies are required to maintain a minimum solvency margin generally of 4 percent of insurance reserves, but reduced to 1 percent of insurance reserves for life insurance where the credit and market risks are carried by policyholders, plus 0.3 percent of the amount at risk under insurance policies. The same minimum capital requirements are applicable for insurance entities operating in Switzerland. In certain European countries, both EU and non-EU, further requirements have been imposed by regulators.
In 2007, the European Commission proposed a directive on Solvency II which will include a new solvency regime and refl ects the latest developments in prudential supervision, actuarial methods and risk management. Solvency II will introduce economic risk-based solvency requirements which will be more risk sensitive and more sophisticated and where all material risks and their interactions are considered. As part of the risk management system, all insurance and reinsurance entities will be required to have, as an integral part of their business strategy, a regular process for assessing their overall solvency needs with reference to their specifi c risk profi le. The Commission’s current timetable is to introduce the new solvency regime in 2012.
Some countries have already introduced, or are in the process of introducing, a requirement for an economic risk-based capital assessment. In the UK, this is known as Pillar 2. In Switzerland, the Insurance Supervisory Law which came into effect on January 1, 2006 includes the Swiss Solvency Test (SST). Under SST, risk-bearing and target capital have to be calculated based on a risk-based capital model for groups, conglomerates, reinsurers and ‘solo’ companies. Groups, conglomerates and reinsurers are required to use company-specifi c internal models, which must be approved by the Swiss Financial Market Supervisory Authority (FINMA), which has replaced the Federal Offi ce of Private Insurance (FOPI) as per January 1, 2009. In 2008 Zurich has continued to further enhance and refi ne its internal RBC model, initiated the approval process with FOPI and fi led SST results as required.
In the U.S., required capital is determined to be the ‘company action level risk-based capital’ and it is based on the riskbased capital model of the National Association of Insurance Commissioners. This is a method of measuring the minimum amount of capital approriate for an insurance company to support its overall business operations by taking into consideration its size and risk profi le. The calculation is based on applying factors to various asset, premium, claim, expense and reserve items, with higher factors for those items with greater underlying risk and lower factors for items with reduced underlying risk.
The Group’s banking operations, based in Europe, adopted Basel II as of January 1, 2008. Under Basel II, required capital is calculated on a risk-based approach.
At a Group level, we endeavor to pool risk and capital as much as possible and, in so doing, benefi t in regimes where diversifi cation benefi ts are recognized (e.g. U.S., UK and Switzerland).
Eligible equity Total equity 23,781 29,318 Net of intangibles, other assets and free reserves for policyholder dividends (3,966) (2,915)
2 Amount for dividend refl ects the proposed dividend for the respective fi nancial year, not yet approved by the Annual General Meeting. 3 Adjusting the 2007 fi led solvency position for refi nements in principle accepted by FINMA for 2008 (inclusion of free reserves for policyholder dividends) the solvency ratio would have been 211 percent.
Ratings agency capital adequacy Ratings agencies apply their own models to evaluate the relationship between the required risk capital for a company or Group and its available capital resources. We maintain a continuous dialogue with ratings agencies regarding the assessment of our capital adequacy.
Economic capital adequacy (unaudited) The Group uses an additional capital management tool, its internal Risk-Based Capital model (RBC) which is calibrated to an “AA” fi nancial strength target level.
We defi ne RBC as being the capital required to protect the Group’s policyholders against any economic insuffi ciency to meet their claims over a one year time horizon and at a confi dence level of 99.95 percent.
At the Group level, we compare RBC to the Group’s Available Financial Resources (AFR) to derive Economic Capital Adequacy. AFR refl ects fi nancial resources available to cover policyholder liability claims in excess of their expected value. It is derived by adjusting the IFRS shareholders’ equity to refl ect the full economic capital base available to absorb any unexpected volatility in our business activities.
The chart below shows the AFR at the beginning of the respective year (based on the IFRS balance sheet as of December 31 of the prior year) to cover the risks that could materialize during the year indicated.
Ratio: As of January 1, 2008 our AFR amounted to USD 38 billion, while our latest assessment of internal risk based capital requirements for the year 2008 amounted to USD 30 billion, resulting in an economic capital adequacy ratio of 126 percent compared 113 percent for 2007. The increase in available fi nancial resources was primarily driven by economic profi ts (including changes in value in force) generated in 2007. The Zurich internal risk based capital after diversifi cation for 2008 is broken down as follows by segments and risk types: Allocated capital by segment (%)
Total allocated capital = USD 30 billion RBC plus USD 2 billion direct allocation to Farmers Management Services 6840_p090-125.indd 1246840_p090-125.indd 124 25/2/09 14:18:1225/2/09 14:18:12
I 1. Consolidated income statements 129 2. Consolidated statements of comprehensive income 130 3. Consolidated balance sheets 132 4. Consolidated statements of cash fl ows 134 5. Consolidated statements of changes in equity 136
Revenues Gross written premiums and policy fees 51,894 47,456 Less premiums ceded to reinsurers 1 (6,226) (13,197) Net written premiums and policy fees 45,667 34,259 Net change in reserves for unearned premiums 11 (1,560) (495) Net earned premiums and policy fees 44,107 33,763 Farmers management fees and other related revenues 14 2,458 2,266 Net investment result on Group investments 6 5,832 10,094
Net investment result on unit-linked investments 6 (21,731) 7,142 Net gain/(loss) on divestments of businesses 5 16 118 Other income 1,665 1,900 Total revenues 32,349 55,285 Benefi ts, losses and expenses Insurance benefi ts and losses, gross of reinsurance 1 11 31,387 34,923 Less ceded insurance benefi ts and losses 1 11 3,425 (11,632) Insurance benefi ts and losses, net of reinsurance 1 11 34,811 23,291 Policyholder dividends and participation in profi ts, net of reinsurance 11 (21,514) 8,526 Underwriting and policy acquisition costs, net of reinsurance 11 8,287 7,559 Administrative and other operating expense 13 6,729 6,679 Interest expense on debt 21 599 685 Interest credited to policyholders and other interest 773 957 Total benefi ts, losses and expenses 29,685 47,698 Net income before income taxes 2,663 7,587 Income tax expense 20 452 (1,791)
Basic earnings per share 22 21.80 39.73 Diluted earnings per share 22 21.63 39.29 in CHF
Basic earnings per share 22 23.53 47.63 Diluted earnings per share 22 23.35 47.11 1 In 2007, 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 consolidated income statement in 2008.
Change (excluding tax, reclassifi cation and currency translation effects and after allocation to policholders) (686) Reclassifi cation to income statement (182) Foreign currency translation effects 33 Deferred income tax 225 2008 Comprehensive income for the period 3,039 (3,159) Detail of movements during the period
Other assets 4,095 3,405 Mortgage loans given as collateral 16 1,233 2,243 Deferred tax assets 20 2,901 1,682 Property and equipment 17 1,889 1,972
Net capital (gain)/loss on investments and impairments 27,809 (5,645) Net change in trading securities 2,069 (80) Sales and maturities
1 In 2007, the consolidated statements of cash fl ows included proceeds of USD 6.3 billion from the sale of debt securities, a reduction in cash and cash equivalents of USD 0.6 billion and an increase in reinsurers’ share of reserves for insurance contracts of USD 7.0 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 were transferred to the reinsurer, resulting in a reduction of both the reinsurers’ share of reserves for insurance contracts and gross reserves for insurance contracts.
Cash fl ows from investing activities Sales of property and equipment 309 274 Purchase of property and equipment (444) (338) Investments in associates, net 11 (73) Acquisitions of companies, net of cash acquired (1,319) (543) Divestments of companies, net of cash balances (5) 58 Other acquisitions and divestments related cashfl ow – – Dividends from associates 5 5 Net cash used in investing activities (1,442) (617) Cash fl ows from fi nancing activities Dividends paid (2,104) (1,339) Net movement in treasury shares (812) (1,669) Redemption of preferred securities and repayments to non-controlling interests (124) – Issuance of debt 2,420 1,898 Payments on debt outstanding (1,930) (1,576) Net cash used in fi nancing activities (2,551) (2,686) Foreign currency translation effects on cash and cash equivalents (1,896) 640 Change in cash and cash equivalents excluding change in cash held as collateral for securities lending 1 1,161 (4,243) Cash and cash equivalents as of January 1, excluding cash held as collateral for securities lending 15,059 19,302 Cash and cash equivalents as of December 31, excluding cash held as collateral for securities lending 16,220 15,059 Change in cash held as collateral for securities lending (1,700) (1,943) Cash and cash equivalents as of January 1, including cash held as collateral for securities lending 16,936 23,122 Cash and cash equivalents as of December 31, including cash held as collateral for securities lending 16,397 16,936 thereof: – cash and cash equivalents – Group Investments 11,965 13,943 – cash and cash equivalents – unit linked 4,431 2,993
As of December 31, 2008 and 2007, cash and cash equivalents restricted as to use were USD 1,097 million and USD 1,150 million, respectively. Cash and cash equivalents held for the benefi t of policyholders in connection with unitlinked products amounted to USD 4,431 million and USD 2,993 million as of December 31, 2008 and 2007, respectively.
of which: share buy-back program – (208) – Total comprehensive income for the period, net of tax – – (609)
Balance as of December 31, 2007, as previously reported 10 10,289 195 Total adjustments due to restatement – – 7 Balance as of December 31, 2007, as restated 10 10,289 202 Issuance of share capital – 1 – Dividends to shareholders – – – Redemption of preferred securities – (14) – Share-based payment transactions – 48 – Treasury share transactions 1 – (194) –
1 Please refer to table 22.3 for information regarding treasury share transactions.
in USD millions in USD millions 6841_p126-169.indd 1366841_p126-169.indd 136 25/2/09 14:15:3025/2/09 14:15:30
Zurich Financial Services and its subsidiaries (collectively the “Group”) are an insurance-based fi nancial services provider with a global network. The Group also distributes non-insurance products, such as mutual funds, mortgages and other fi nancial services products, from selected third-party providers. The Group operates mainly in Europe, the USA and Asia Pacifi c through subsidiaries, branch offi ces and representations.
General information The consolidated fi nancial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) and comply with Swiss law. Where IFRS does not contain clear guidance governing the accounting treatment of certain transactions including those that are specifi c to insurance products, IFRS permits reference to another comprehensive body of accounting principles that uses a similar conceptual framwork. In these cases, the Group typically refers to accounting principles generally accepted in the United States of America (US GAAP) for guidance.
Disclosures under IFRS 4 “Insurance Contracts” and IFRS 7 “Financial Instruments: Disclosures” relating to the nature and extent of risks, and capital disclosures under IAS 1 “Presentation of Financial Statements” have been included in the “Risk review” on pages 90 to 125, and they form an integral part of the consolidated fi nancial statements.
Signifi cant subsidiaries included in the scope of consolidation are disclosed on pages 236 to 238.
Certain amounts recorded in the consolidated fi nancial statements refl ect estimates and assumptions made by management about insurance liability reserves, investment valuations, interest rates and other factors. Critical accounting judgments and estimates are discussed in note 4. Actual results may differ from the estimates made.
Income from profi t participation relating to life reinsurance contracts are now presented as part of other income. This was previously reported as part of underwriting and policy acquisition costs and amounted to USD 133 million for
Financial information the year ended December 31, 2007. This change in presentation is refl ected in the consolidated income statement and note 11.
Amortization charges for deferred origination costs, previously reported as part of administrative and other operating expense and amounting to USD 103 million for the year ended December 31, 2007, are now included in underwriting and policy acquisition costs. This change in presentation is refl ected in the consolidated income statement, note 11 and note 13.
The Group’s balance sheet is not presented using a current/non-current classifi cation. However, the following balances are generally considered to be current: cash and cash equivalents, short-term investments, deferred policy acquisition costs on general insurance contracts, accrued investment income, receivables, reserve for premium refunds, accrued liabilities and obligation to repurchase securities.
Maturity tables have been provided for the following balances: reserves for insurance contracts (table 13 in “Risk review”), liabilities for investment contracts (table 14 in “Risk review”), debt securities (table 6.4), derivative assets and derivative liabilities (tables 7.1 and 7.2), collateralized loans (table 16) and outstanding debt (table 21.3).
The table below summarizes the principal exchange rates that have been used for translation purposes. Net gains on foreign currency transactions included in the consolidated income statements were USD 26 million and USD 131 million for the years ended December 31, 2008 and 2007, respectively. Foreign currency exchange forward and swap losses included in these amounts were USD (801) million and USD (249) million for the years ended December 31, 2008 and 2007, respectively.
Net capital gains/(losses) and impairments on Group Investments 1,498 5 1,503 Insurance benefi ts and losses, net of reinsurance 23,378 87 23,465 Income tax expense 1,787 (4) 1,783
Net income attributable to shareholders 5,626 88 5,714 Basic earnings per share in CHF 46.88 0.75 47.63 Diluted earnings per share in CHF 46.37 0.74 47.11
Reserves for insurance contracts 240,648 (55) 240,593 Reinsurers’ share of reserves for insurance contracts 20,063 (3) 20,060 Deferred tax assets 2,336 4 2,340 Deferred tax liabilities 4,804 – 4,804
Changes in the German Insurance Supervisory Law Effective January 1, 2008, the German Insurance Supervisory Law changed its requirements for policyholder participations for life insurance. While, in the past, it was required that a minimum of 90 percent of the gross surplus was allocated to the policyholder, a more specifi c allocation is now required. A minimum of 90 percent of the total investment return less 100 percent of the minimum guaranteed interest on the policyholder account, a minimum of 75 percent of the risk profi ts and a minimum of 50 percent of the positive expense result is now allocated to the policyholder. In 2008, the Group has recognized a gain of USD 357 million net of income taxes as a result of this change in the law.
To be consistent with the Group’s management structure, the following immaterial transfer between primary segments has been made for 2008 fi nancial reporting: Zurich Eurolife S.A. from Other Businesses to Global Life
The Group’s secondary format for segment information is geographic as follows: North America
Financial information 2. Implementation of new accounting standards and amendments to published accounting standards
Standards and amendments early adopted by the Group In September 2007, the IASB issued the revised IAS 1 “Presentation of Financial Statements”. The revised standard is mandatory for reporting periods beginning on or after January 1, 2009. The main objective of revising the standard is to aggregate information in fi nancial statements on the basis of shared characteristics and introduce a statement of comprehensive income. The revised standard requires an entity to present, in a statement of changes in equity, all owner changes in equity. All non-owner changes in equity (comprehensive income) are required to be presented in one statement of comprehensive income or in two statements (a separate income statement and statement of comprehensive income). The Group has opted to present comprehensive income in two statements.
Standards, amendments and interpretations issued that are not yet effective The following standards, amendments and interpretations of existing published standards are not yet effective but will be relevant to the Group’s operations. The Group is currently evaluating the impact of adopting these standards, amendments and interpretations.
In January 2008, the IASB issued amendments to IAS 27 “Consolidated and Separate Financial Statements”. The amendments are mandatory for reporting periods beginning on or after July 1, 2009. The amended standard requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control and these transactions will no longer give rise to goodwill or gains and losses.
In February 2008, the IASB issued amendments to IAS 32 “Financial Instruments: Presentation” and to IAS 1 “Presentation of Financial Statements – Puttable Financial Instruments and Obligations Arising on Liquidation”. The amendments are mandatory for reporting periods beginning on or after January 1, 2009. The amended standards require entities to classify as equity all puttable fi nancial instruments, and instruments or components of instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation, provided such fi nancial instruments have particular features and meet specifi c conditions.
In January 2008, the IASB issued amendments to IFRS 2 “Vesting Conditions and Cancellations”. The amendments are mandatory for reporting periods beginning on or after January 1, 2009. The amended standard clarifi es that vesting conditions are service conditions and performance conditions only. Other features of a share-based payment are not vesting conditions. These features would need to be included in the grant date fair value for transactions with employees and others providing similar services; they would not impact the number of awards expected to vest or the valuation thereof subsequent to the date of grant. All cancellations, whether by the entity or by other parties, should receive the same accounting treatment.
In June 2007, IFRIC 13 “Customer Loyalty Programmes” was issued. IFRIC 13 is mandatory for reporting periods beginning on or after July 1, 2008. The interpretation explains how entities that grant loyalty award credits should account for their obligations to provide free or discounted goods or services (‘awards’) to customers who redeem award credits.
In November 2008, IFRIC 17 “Distributions of Non-cash Assets to Owners” was issued. IFRIC 17 is mandatory for reporting periods beginning on or after July 1, 2009. The interpretation clarifi es when a dividend payable should be recognized and how distributions of assets other than cash should be measured when an entity pays dividends to its owners.
The principal accounting policies applied in the presentation of these consolidated fi nancial statements are set out below. These policies have been consistently applied to all years presented unless otherwise stated.
b) Insurance contracts and investment contracts with discretionary participating features (DPF) IFRS does not provide specifi c guidance on all aspects of recognition and measurement of insurance and reinsurance contracts. The Group’s accounting policies for insurance and reinsurance contracts are therefore based on those developed by the Group before the adoption of IFRS 4. At the time of adoption, the Group primarily considered the US GAAP pronouncements issued by the Financial Accounting Standards Board (FASB) on insurance and reinsurance contracts in areas where IFRS4 did not include specifi c requirements.
A number of insurance and investment contracts contain DPF which entitle the contract holder to receive, as a supplement to guaranteed benefi ts, additional benefi ts or bonuses: that are likely to be a signifi cant portion of the total contractual benefi ts; the amount or timing of which is contractually at the discretion of the Group; and that are contractually based on: the performance of a specifi ed pool of contracts or a specifi ed type of contract; realized and/or unrealized investment returns on a specifi ed pool of assets held by the issuer; or the net income of the company, fund or other entity that issues the contract.
The Group also issues products containing an embedded option to the policyholder to switch all or part of the current and future invested funds into another product issued by the Group, usually from a unit-linked product into a unitized with-profi ts contract or similar. Certain of these products allow policyholders to switch back to the previous product at their convenience. Where this results in the reclassifi cation of an investment product to a product that meets the defi nition of an insurance contract, the previously held reserve and the related deferred origination costs are also reclassifi ed and are accounted for in accordance with the accounting policies for such products on a prospective basis.
Once a contract has been classifi ed as an insurance contract, no reclassifi cation is can be made subsequently.
Amounts collected as premiums from investment type contracts such as universal life, unit-linked and unitized withprofi ts contracts are reported as deposits. Revenue from these contracts consists of policy fees for the cost of insurance, administration and surrenders during the period. Front-end fees are recognized over the estimated life of the contracts.
DAC for contracts such as universal life, unit-linked and unitized with-profi ts contracts is amortized over the expected life of the contracts based on a constant percentage of the present value of estimated gross profi ts expected to be realized over the life of the contract. Estimated gross profi ts include expected amounts to be assessed for mortality, administration, investment and surrender, less benefi t claims in excess of policyholder balances, administrative expenses and interest credited. Estimated gross profi ts are revised regularly and the interest rate used to compute the present value of revised estimates of expected gross profi ts is the latest revised rate applied to the remaining benefi t period. Deviations of actual results from estimated experience are refl ected in earnings.
For life contracts, the net premium reserve, calculated on a locked-in basis and reduced by the unamortized balance of DAC or present value of future profi ts of acquired insurance contracts (PVFP) is compared with the gross premium reserve, calculated on a best-estimate basis as of the valuation date. If there is a defi ciency, the DAC or PVFP is written down to the extent of the defi ciency. If, after writing down the DAC or PVFP to nil (for the respective portfolio of contracts), a defi ciency still exists, the net liability is increased by the amount of the remaining defi ciency.
Future life policyholders’ benefi ts and policyholders’ contract deposits These represent the estimated future policyholder benefi t liability respectively for traditional life insurance policies and for certain unit-linked contracts.
The minimum mandated amounts, which are to be paid to policyholders plus any declared additional benefi ts, are recorded in liabilities. The remainder of any undeclared discretionary balances are not included in the liability but are included in shareholders’ equity until such time as the discretionary element of a bonus is determined and declared.
The Group’s main valuation techniques incorporate all factors that market participants would consider and are based on observable market data. If market data is not observable, the Group uses assumptions based on its own experience. The fair value of a unit-linked fi nancial liability is determined using the current unit values that refl ect the fair values of the fi nancial assets contained within the Group’s unitized investment funds linked to the fi nancial liability, multiplied by the number of units attributed to the contract holder at the balance sheet date.
If the investment contract is subject to a put or surrender option, the fair value of the fi nancial liability is never recorded at less than the amount payable on surrender, discounted for the required notice period, where applicable.
Rental income earned on real estate held for investment is recognized on an accruals basis.
Investment expenses consist of operating expenses for real estate held for investment and other investment expenses, including investment management fees. These expenses are recognized on an accruals basis.
Categories of non-derivative fi nancial instruments Non-derivative fi nancial instruments are classifi ed as fi nancial assets at fair value through profi t or loss, fi nancial assets held-to-maturity, loans and receivables, and fi nancial assets available-for-sale. The classifi cation depends on the purpose for which the investments were acquired. Management determines the classifi cation of these investments at initial recognition with reference to its long-term investment objectives.
Held-to-maturity fi nancial assets Held-to-maturity fi nancial assets are subsequently carried at amortized cost using the effective interest rate method, less any provision for impairment. The amortization of premium and accretion of discount on held-to-maturity investments recognized in the current period is included in investment income.
Available-for-sale fi nancial assets Available-for-sale fi nancial assets are subsequently carried at fair value, with changes in fair values recognized in shareholders’ equity until the securities are either sold or impaired. The cumulative unrealized gains or losses recorded in shareholders’ equity are net of cumulative deferred income taxes, certain life policyholder liabilities and deferred acquisition costs. Realized gains or losses on sale are based on the difference between the proceeds received and the carrying value of the investment plus any unrealized gains or losses on the investment recorded in shareholders’ equity using the specifi c identifi cation method. When available-for-sale fi nancial assets are sold, impaired or otherwise disposed of, the cumulative gains or losses previously recognized in shareholders’ equity are recognized in income. The amortization of premium and accretion of discount on available-for-sale debt securities is computed using the effective interest method and is recognized in income.
Unrealized gains and losses on securities classifi ed as available-for-sale are analyzed between differences resulting from foreign currency translation, differences resulting from changes in the amortized cost and other fair value changes. Foreign currency translation differences on monetary available-for-sale investments, such as debt securities, are recognized in income. Foreign currency translation differences on non-monetary assets, such as equity securities, are recognized directly in shareholders’ equity. Other unrecognized gains and losses on available-for-sale investments are recognized directly in equity.
The fair values of quoted investments are based on current bid prices. If the market for a fi nancial asset is not active, the Group establishes fair value by using valuation techniques. These include the use of recent arms length transactions, reference to other instruments that are substantially the same, discounted cash fl ow analysis and pricing models making maximum use of market inputs and relying as little as possible on entity specifi c inputs.
Financial information c) it becomes probable that the issuer or debtor will enter bankruptcy or other fi nancial reorganization; d) the disappearance of an active market for that fi nancial asset because of fi nancial diffi culties; or e) observable data indicating that there is a measurable decrease in the estimated future cash fl ows from a group of fi nancial assets since the initial recognition of those assets, although the decrease cannot yet be identifi ed with the individual fi nancial assets in that group, including: adverse changes in the payment status of issuers or debtors in that group; or national or local economic conditions that correlate with defaults on the assets in that group.
Financial assets carried at amortized cost For held-to-maturity fi nancial assets as well as loans and receivables, impairment is considered to have taken place if it is probable that the Group will not be able to collect principal and/or interest due according to the contractual terms of the instrument. When impairment is determined to have occurred, the carrying amount of the held-to-maturity fi nancial assets, policyholders’ loan or other loans is decreased through a charge to income. The impairment for heldto -maturity fi nancial assets is measured as the difference between the carrying amount of the assets and the present value of estimated future cash fl ows, using the original effective interest rate for the fi nancial assets. The carrying amount of mortgage loans or receivables is reduced through the use of an allowance account, and the movement in the impairment allowance is recognized as an impairment loss in income. The allowance is determined using an analytical method based on knowledge of each loan group or receivable. The method is usually based on historical statistics, adjusted for known or anticipated trends in the group of fi nancial assets or individual accounts. If the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment loss was recognized, the impairment loss is reversed through income. This reversal shall not result in a carrying amount of the fi nancial asset that exceeds what the amortized cost would have been had the impairment not been recognized at the date the impairment is reversed.
Financial assets carried at fair value When a decline in the fair value of an available-for-sale equity security has been recognized directly in shareholders’ equity and there is objective evidence that the security is impaired, the cumulative loss already recognized directly in shareholders’ equity is recognized in income. Such an impairment arises when the fair value of the security has been signifi cantly below the weighted-average cost, usually considered to be more than 50 percent for any period of time. Additionally, the Group considers an available-for-sale equity security for impairment when the fair value has been below the weighted-average cost by more than 20 percent for more than 12 months. The amount of the cumulative loss that is removed from shareholders’ equity and recognized in current period income is the difference between acquisition cost and current fair value, less any impairment loss on that security previously recognized in income. Impairment losses recognized in income on equity securities classifi ed as available-for-sale are not reversed through income. When a previously impaired equity security increases in fair value, unrealized gains will be recognized through shareholders’ equity. Any subsequent losses, including any portion attributable to foreign currency changes, are also reclassifi ed from shareholders’ equity to income as impairments until the equity instrument is derecognized.
When a decline in the fair value of an available-for-sale debt security has been recognized directly in shareholders’ equity and there is objective evidence that the security is impaired, the cumulative loss already recognized directly in shareholders’ equity is recognized in income. The amount of the cumulative loss that is removed from shareholders’ equity and recognized in income is the difference between the acquisition cost (net of any principal repayment and amortization) and current fair value, less any impairment loss on that debt security previously recognized in income. Impairment losses are recognized in income. If the fair value of a debt instrument classifi ed as available-for-sale
increases in a subsequent period, and the increase can be objectively related to an event occurring after the impairment loss was recognized in income, the impairment loss is reversed through income. This reversal would be recognized in income only up to the amount of the previously recognized impairment loss, adjusted for any amortization already recognized in income. Any subsequent gains are recognized directly in shareholders’ equity. Any subsequent losses, to the extent they do not represent impairment losses, are also recognized in shareholders’ equity.
g) Derivative financial instruments Derivative fi nancial instruments include interest rate, currency and total return swaps, futures, forwards and option contracts, all of which derive their value mainly from changes in underlying interest rates, foreign exchange rates, commodity values or equity instruments. A derivative contract may be traded on an exchange or over-the-counter (OTC). Exchange-traded derivatives are standardized and include futures and certain option contracts. OTC derivative contracts are individually negotiated between contracting parties and include forwards, caps, fl oors and swaps. Derivative fi nancial instruments are subject to various risks similar to those related to the underlying fi nancial instruments, including market, credit and liquidity risk.
Derivative fi nancial instruments, except those qualifying for hedge accounting are classifi ed as held for trading assets or liabilities and carried at fair value on the balance sheet with changes in fair value recognized in income.
Derivative fi nancial instruments that qualify for hedge accounting For the purpose of hedge accounting, hedging instruments are classifi ed as fair value hedges which hedge the exposure to changes in the fair value of a recognized asset or liability, cash fl ow hedges which hedge exposure to variability in cash fl ows that is either attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction, or hedges of the net investment in a foreign operation.
When the Group discontinues fair value hedge accounting because it determines that the hedging instrument no longer qualifi es as an effective fair value hedge, the hedging instrument will be carried separately on the consolidated balance sheet at its fair value, and the value of the hedged asset or liability will no longer be adjusted for changes in fair value attributable to the hedged risk. Interest-related fair value adjustments made to the underlying hedged items will be amortized in income over the remaining life of the hedged item. Any unamortized interest-related fair value adjustment is recorded in income upon sale or extinction of the hedged asset or liability, respectively. Any other fair value hedge adjustments remain part of the carrying amount of the hedged asset or liability and are recognized in income as part of the gain or loss on disposal of the hedged item.
Financial liabilities are derecognized when they are extinguished, that is when the obligation is discharged, is cancelled or has expired.
k) Repurchase and reverse repurchase transactions Securities sold under agreements to repurchase at a certain later date (Repurchase agreements) and securities purchased under agreements to resell (Reverse repurchase agreements) are generally accounted for as collateralized fi nancing transactions. The securities sold under the repurchase agreement are not derecognized from the balance sheet, when all or substantially all of the risk and rewards are retained. The proceeds of the sale are reported as a liability under Obligation to repurchase securities. Interest expense is charged to income using the effective interest rate method over the life of the agreement.
In cases such as in events of default by a third party, it may be determined that the risks and rewards of ownership over the collateral have been obtained by the Group. At such point in time, the securities held under the reverse repurchase agreement are recognized on the balance sheet at fair value and the original receivable is derecognized. Any shortfall is recorded as a loss in income.
When fair value hedge accounting is applied to borrowings, the carrying values of borrowings are adjusted for changes in fair values related to the hedged exposure.
n) Goodwill and other intangible assets Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifi able assets of the acquired subsidiary/associate at the acquisition date. Goodwill on acquisition of subsidiaries is included in intangible assets. Goodwill on acquisition of associates is included in investments in associates and is tested for impairment as part of the overall measurement of the carrying amount of those investments.
For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash infl ows from continuing use of that group of assets (the ‘cash generating unit’ (CGU)), and that is largely independent of the cash infl ows of other assets or groups of assets. The Group’s CGUs, on which impairment losses are assessed, represent the lowest level at which goodwill is monitored for internal management purposes.
Indications that goodwill related to a cash generating unit may be impaired include events or changes in circumstances that may have a signifi cant negative impact on the operations of the cash generating unit, or material adverse changes in the assumptions used in determining its recoverable amount.
Other intangible assets Other intangible assets include customer relationships and contracts, affi nity partnerships, distributions agreements, computer software licenses and capitalized software development costs.
Intangible assets acquired in a business combination are recognized separately from goodwill at the acquisition date if their fair values can be measured reliably, the assets are separable or arise from contractual or other legal rights, and they are controlled by the entity.
Present value of future profi ts from acquired insurance contracts (PVFP) On the acquisition of life insurance businesses a customer contract intangible asset representing the present value of future profi ts from the acquired insurance contracts is determined. This asset is amortized over the expected life of the policies acquired, based on a constant percentage of the present value of estimated gross profi ts (margins) expected to be realized, or over the premium recognition period, as appropriate. PVFP is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recovered.
Attorney-in-fact relationships (AIF) The AIF refl ects the ability of the Group to generate future revenues based on the Group’s relationship with the Farmers Exchanges. In determining that these relationships have an indefi nite useful life, the Group considered the organizational structure of inter-insurance exchanges, under which subscribers exchange contracts with each other and appoint an attorney-in-fact to provide certain management services and the historical AIF between FGI and the Farmers Exchanges. AIF is not subject to amortization but is tested for impairment annually and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Under the Group’s cash-settled, share-based payment compensation plan, the Group allows participants to take their option award in the form of Share Appreciation Rights (SAR). Hence, the Group incurs a liability which is measured at the fair value of the SAR. As the fair value of the options which the Group uses for its employee schemes cannot be compared to the ones in the market, the Group estimates the fair value using the Black-Scholes model. This model requires inputs such as share price, exercise price, implied volatility, risk-free interest rate, expected dividend rate and the expected life of the option. The liability is measured at initial recognition and at each balance sheet date until settled thereby taking into account the terms and conditions on which the SAR were granted, and the extent to which the participants have rendered service to date. The fair value of the participants’ services received in exchange for the SAR is recognized as an expense in income over the vesting period and measured by reference to the fair value of the liability.
r) Property and equipment Own use property is defi ned as property held by the Group for use in the supply of services or for administrative purposes. Buildings held for own use and equipment are carried at cost less accumulated depreciation and any accumulated impairment loss. These assets are depreciated usually on a straight-line basis to income over the following estimated useful lives: buildings 25 to 50 years; furniture and fi xtures fi ve to ten years; and computer equipment three to six years.
Assets that have an indefi nite useful life, for example land, are not subject to amortization and are tested regularly for impairment. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the carrying value of the asset exceeds its expected recoverable amount. The recoverable amount is the higher of fair value less costs to sell and value in use. Assets are grouped on a cash generating unit level if the recoverable amount cannot be separately determined.
Critical accounting estimates are those which involve the most complex or subjective judgments or assessments, and relate to general insurance and life insurance reserves, the determination of fair value for fi nancial asset and liabilities, impairment charges, the determination of fair values of assets and liabilities attributable to business combinations, deferred policy acquisition costs, deferred taxes, retirement and other defi ned benefi t post-employment plans and share-based compensation and cash incentive plans. In each case, the determination of these items requires management to make informed judgments based on information and fi nancial data that may change in future periods. Because of the uncertainties involved in such judgments, actual outcomes and results may differ from assumptions and estimates made by management.
The Group has given proper consideration to the current economic environment and the impact it has across these areas. Management has ensured, inter alia, that economic assumptions, used in determination of insurance and investment contract assets and liabilities and in preparation of cash fl ow forecasts for the purposes of testing fi nancial and non-fi nancial assets for impairment, have been properly updated to refl ect the current economic outlook; fair values of fi nancial instruments refl ect the current market conditions, including liquidity risk and current credit spreads; and long-term rates of return and discount rates, used in calculating the defi ned benefi t pension plans assets and respective liabilities, have been updated accordingly.
a) Reserves for losses and loss adjustment expenses The Group is required to establish reserves for payment of losses and loss adjustment expenses that arise from the Group’s general insurance products and the run-off of its former third party reinsurance operations. These reserves represent the expected ultimate cost to settle claims occurring prior to, but still outstanding as of, the balance sheet date. The Group establishes its reserves by product line, type and extent of coverage and year of occurrence. Loss reserves fall into two categories: reserves for reported losses and reserves for incurred but not reported (IBNR) losses. Additionally, reserves are held for loss adjustment expenses, which contain the estimated legal and other expenses expected to be incurred to fi nalize the settlement of the losses.
The Group establishes IBNR reserves, generally on an undiscounted basis, to recognize the estimated cost of losses for events which have already occurred but which have not yet been notifi ed. These reserves are established to recognize the estimated costs required to bring claims for these not yet reported losses to fi nal settlement. As these losses have not yet been reported, the Group relies upon historical information and statistical models, based on product line, type and extent of coverage, to estimate its IBNR liability. The Group also uses reported claim trends, claim severities, exposure growth, and other factors in estimating its IBNR reserves. The Group revises these reserves as additional information becomes available and as claims are actually reported.
The time required to learn of and settle claims is an important consideration in establishing the Group’s reserves. Short-tail claims, such as for automobile and property damage, are normally reported soon after the incident and are generally settled within months following the reported incident. Long-tail claims, such as bodily injury, pollution, 6841_p126-169.indd 1616841_p126-169.indd 161 27/2/09 18:38:2627/2/09 18:38:26
b) Future life policyholders’ benefits and policyholders’ contract deposits The future life policyholders’ benefi ts and policyholders’ contract deposits liabilities contain a number of assumptions regarding mortality (or longevity), lapses, surrenders, expenses and investment returns. These assumptions are determined with reference to past experience adjusted for new trends, current market conditions and future expectations. As such the liabilities for future life policyholders’ benefi ts and policyholders’ contract deposits may not represent the ultimate amounts paid out to policyholders. For example: The estimated number of deaths determines the value of the benefi t payments. The main source of uncertainty arises because of the potential for pandemics and wide-ranging lifestyle changes, such as changes in eating, smoking and exercise habits, which could result in earlier deaths for age groups in which the Group has signifi cant exposure to mortality risk.
For contracts that insure the risk of longevity, such as annuity contracts, an appropriate allowance is made for people living longer. Continuing improvements in medical care and social conditions could result in further improvements in longevity in excess of those allowed for in the estimates used to determine the liability for contracts where the Group is exposed to longevity risk.
Financial information c) Fair value of financial assets and liabilities As described in note 3, all fi nancial assets and liabilities are recorded initially at fair value. Subsequently, derivative fi nancial instruments, fi nancial assets classifi ed as held for trading, designated at fair value, available-for-sale and fi nancial liabilities designated at fair value are carried at fair value. While all the other fi nancial instruments are carried at amortized cost, their fair values are disclosed in note 26.
Refer to notes 6, 7 and 26 for further information on the fair value of fi nancial assets and liabilities.
For a non-derivative fi nancial asset, the decision to record an impairment is based on a review of objective evidence, such as the issuer’s current fi nancial position and future prospects and the national or economic conditions that may correlate with defaults on the asset, as well as the availability of an active fi nancial market for that fi nancial asset. For a quoted available-for-sale asset the impairment decision is further based on an assessment of the probability that the current market price will recover to former levels within the foreseeable future. The recoverable amount is determined by reference to the market price. For non-quoted available-for-sale fi nancial assets, the recoverable amount is determined by applying recognized valuation techniques.
For attorney-in-fact (AIF) relationships, the recoverable amount of AIF relationship is determined on the basis of valuein -use calculations. These calculations use cash fl ow projections based on business plans and the surplus development in the Farmers Exchanges. Business plans are approved by management and typically cover a 5-year period. Cash fl ows beyond that 5-year period are extrapolated for 20 years assuming zero growth.
Refer to notes 3, 6, 15, 17 and 18 for further information on impairments of assets.
h) Employee benefits The Group has defi ned benefi t pension plans and other post-employment plans. In assessing the Group’s liability for these plans, critical judgments include estimates of mortality rates, rates of employment turnover, disability, early retirement, discount rates, expected long-term rates of return on plan assets, future salary increases, future pension increases and increases in long-term healthcare costs. These assumptions may differ from actual results due to changing economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. These differences may result in variability of pension income or expense recorded in future years.
Refer to note 23 for further information on employee benefi ts.
i) Share-based compensation and cash incentive plans The Group has adopted various share-based compensation and cash incentive plans to attract, retain and motivate executives and employees. Share-based compensation plans include plans under which shares and options to purchase shares, based on the performance of the businesses, are awarded. The fair value of options granted are estimated using the Black-Scholes option pricing model. The key factors involve, but are not limited to, the expected share price volatility, expected change in dividend rate and contracted option life. These assumptions may differ from actual results due to changes in economic conditions.
Book value of net assets prior to acquisition 22 140 202 104 468 Fair value of net tangible assets acquired 35 140 190 102 468 Identifi able intangible assets, net of deferred tax 76 548 1,762 219 2,606
“Banco Sabadell” sets out the acquisition of 50 percent of life insurance, pension and general insurance operations of Banco Sabadell S.A. (Banco Sabadell), all based in Spain, which the Group completed on September 18, 2008. Total acquisition costs for BanSabadell Vida S.A. de Seguros y Reaseguros (BSV) and BanSabadell Pensiones E.G.F.P., S.A. (BSP) amounted to USD 832 million and, based on the initial purchase price allocation, include net tangible assets
Total acquisition costs for Can Soluciones amounted to USD 133 million, including the present value of an expected earn-out payment of USD 55 million, and, based on the initial purchase price allocation, include net tangible assets acquired of USD 14 million and identifi able intangible assets, net of deferred tax, of USD 140 million (USD 199 million before tax, relating to a distribution agreement with Caja de Ahorros y Monte de Piedad de Navarra). The residual goodwill of USD 56 million represents expected synergies from the effi ciencies gained through a service level agreement with Can Soluciones relating to the management and administration of the business. 50 percent of net tangible assets acquired and of identifi able intangible assets, net of deferred tax, refl ect non-controlling interests in Can Soluciones, amounting to USD 77 million. The Group has management control of the jointly-owned company, which is therefore fully consolidated.
Total acquisition costs for Baden-Badener amounted to USD 40 million and, based on the initial purchase price allocation, include net tangible assets acquired of USD 25 million, identifi able intangible assets, net of deferred tax, of USD 5 million (USD 6 million before tax), and residual goodwill of USD 10 million, representing expected synergies and growth opportunities.
The acquisition of 87.35 percent of Companhia de Seguros Minas Brasil, a general insurer based in Brazil, and of 100 percent of Minas Brasil Seguradora Vida e Previdência S.A., a life insurer based in Brazil, from Banco Mercantil do Brasil S.A. (Banco Mercantil) and two private investors was completed on November 28, 2008. As part of this transaction, the Group entered into an exclusive distribution agreement with Banco Mercantil for both life and general insurance products. The initial purchase price for both companies including the consideration for the distribution agreement amounted to USD 127 million. In addition, an earn-out component of up to USD 21 million based on future performance under the distribution agreement has been agreed. The Group is currently in the process of preparing the initial accounting and, therefore, as of December 31, 2008, the initial purchase price was recorded as an unconsolidated investment in other assets and is not included in table 5.1.
On March 5, 2007, the Group purchased 100 percent of the surety writer ACC Seguros y Reaseguros de Daños, S.A. in Spain. Total acquisition costs amounted to USD 41 million with residual goodwill generated of USD 9 million.
On April 4, 2007, the Group purchased 66 percent of the insurance company OOO “NASTA” in Russia, which was subsequently renamed Zurich Retail Insurance Company Ltd., Russia, with an agreed path to 100 percent ownership by 2010. The total consideration for the acquisition of 100 percent interest in Nasta was composed of an initial cash payment of USD 260 million plus a deferred payment estimated to amount to a present value of USD 178 million at the initial acquisition date. Residual goodwill arising from the initial accounting of this acquisition amounted to USD 370 million, representing the expected growth opportunities for the Group in the Russian market. Identifi able intangible assets have been valued at USD 28 million, mainly representing the Nasta distribution network.
On July 3, 2007, the Group, through its fully owned subsidiary FGI completed the acquisition of 100 percent of Bristol West Holdings, Inc. (Bristol West) in the US. As part of this transaction, FGI sold the underlying insurance business, consisting of non-standard auto insurance, to the Farmers Exchanges (which FGI manages but does not own). Net of the business sold to the Farmers Exchanges, FGI incurred total acquisition costs of USD 353 million (including transaction costs of USD 9 million). Net assets acquired amounted to negative USD 32 million due to the assumption of a debt obligation of USD 50 million. The residual goodwill arising from the acquisition amounted to USD 385 million and refl ects the economic benefi t of the management services which remained with FGI. This transaction did not affect the Group’s scope of consolidation.
On September 5, 2007, the Group acquired 100 percent of Wrightway Underwriting Limited, an underwriting agency in Ireland, for a consideration of USD 27 million plus expected earn-out payments depending on the acquired company’s performance. Total acquisition costs amounted to USD 29 million and identifi able intangible assets, net of deferred tax, amounted to USD 12 million. The residual goodwill of USD 15 million represents expected growth opportunities and synergies.
Divestments The Group divested all of its shares in Truckwriters, Inc., Valiant Insurance Company, and Risk Enterprise Management Limited all based in the United States. The Group sold Finium Trustee Limited and the Zurich Master Super Fund and sold its interest in Lonsdale Financial Group Limited and Wrap Account Limited all based in Australia.
Rental operating expenses for real estate held for investment included in investment expenses for total investments amounted to USD 179 million and USD 170 million for the years ended December 31, 2008 and 2007, respectively,
Investment result, gross for Group investments 8,987 8,838 (2,893) 1,503 6,094 10,342 Investment expenses for Group investments (261) (247) – – (261) (247) Investment result, net for Group investments 8,725 8,591 (2,893) 1,503 5,832 10,094 1 Including net capital gains/(losses) on derivative fi nancial instruments of USD 1,352 million and USD (33) million for the years ended December 31, 2008 and 2007, respectively, of which net capital gains/(losses) on derivatives attributable to cash fl ow hedge ineffectiveness amounted to USD 5 million and USD (9) million for the years ended December 31, 2008 and 2007, respectively.
Realized capital gains on Group investments 556 1,273 458 482 1,013 1,755 Realized capital losses on Group investments (1,130) (130) (622) (813) (1,752) (944)
Table 6.2 in USD millions, for the years ended December 31Net capital gains, losses and impairments on equity and debt securities – total investments
Cash and cash equivalents 16,397 6.4 16,936 5.4 Equity securities: Fair value through profi t or loss 65,089 25.3 106,786 33.8 of which: trading equity portfolios in capital markets and banking activities 786 0.3 1,606 0.5
Cash and cash equivalents 11,965 6.7 13,943 7.2 Equity securities: Fair value through profi t or loss 4,935 2.7 6,609 3.4 of which: trading equity portfolios in capital markets and banking activities 786 0.4 1,606 0.8