By so doing, we will create strong relationships with customers, agents and brokers and rewarding opportunities for employees.
Hurricane Charley hits Florida, heralding the start of six weeks of battering by Hurricanes Frances, Ivan and Jeanne in the US and the Caribbean.
Asia, killing an estimated 300,000 people. Zurich sets up a program to donate USD1million to countries affected by the catastrophe and to match up to USD1million in charitable contributions made by thousands of our employees.
North America – market positions 2nd largest writer of property and casualty commercial multi-peril insurance1 2nd largest product liability insurer2 3rd largest personal lines insurer1
Europe – market positions 2nd largest general insurer in Switzerland1 3rd largest life insurer in Switzerland1 2nd largest insurer of unit-linked products in Germany2 4th largest general and life insurer in Germany3 3rd largest general insurer in the UK4 4th largest home insurer in the UK5 4th largest motor insurer in the UK5
For 2003, Zurich reports a net income of USD 2.1 billion (since restated to USD 2.0 billion) after a loss of USD 3.4 billion (including special provisions of
At half year 2004, Zurich reports a near doubling of net income to USD1,448 million.
For additional information, see our Web site at www.zurich.com under the link Investor Relations.
1 based on direct written premiums 2003 Source: Federal Office of Private Insurance 2 based on new business premiums 2003 Source: Tillinghast 3 based on gross written premiums 2003 Source: Kölner Institut für Versicherungsinformation 4 based on net earned premiums 2003 Source: Moody’s Insurance Statistical Supplement 5 based on gross earned premiums 2003 Source: Datamonitor UK Insurance Reports 2003 6 Source: Zurich’s internal research and analysis
Our business operating profit increased 36 percent over last year, generating a business operating profit return on equity after tax of 11.5 percent, up 1.7 percentage points from 2003 and approaching our medium-term performance target of 12 percent. We recorded excellent underwriting results in Continental
Businesses. These mitigated the impact of two factors on our commercial business in North
Our result was based on strong underlying improvements both in our General Insurance and Life Insurance businesses, record earnings contribution from Farmers Management
The year 2004 marked the end of an unprecedented two-year period characterized by the absence of large catastrophes. In August and
Zurich, came under heightened scrutiny by public authorities and regulators concentrating primarily on certain business practices involving insurance carriers and brokers, the use of nontraditional products and reinsurance. We proactively performed our own reviews and have taken remedial actions where necessary. In particular, we completed our response to the information requests relating to certain business practices involving insurance brokers and insurance carriers. We continue to strengthen our processes and are committed to comply with laws, regulations and ethical standards as embodied in Zurich Basics, our internal core values and basic principles.
In the last two years, Zurich has laid a firm foundation for sustained profitability. Financial and operational discipline has been instilled throughout the organization, and we are operating from a position of improved financial strength. Once again, we would like to extend our thanks to our employees who made this possible. Their dedication to our customers and their hard work and commitment contributed to the Group’s performance. We would also like to thank our customers for their continuing loyalty and our shareholders for the support they have shown us in 2004.
In line with our strategic goal to become the leading insurer in our chosen markets, we are committed to operational excellence and focusing on the most attractive sectors in general and life insurance. To ensure that operational improvements are ingrained in our culture and replicated across different units around the world, we are implementing one consistent and uniform Zurich Way of doing business. Using common methodologies to govern processes in underwriting, claims management, distribution, finance and talent management, we are driving the Zurich organization toward excellence.
The Zurich Way has become an integral part of our planning and is designed to generate operational improvements in 2005 and subsequent years, with the anticipated benefit in the first year amounting to USD 500 million after tax.
Wemmer heads Europe General Insurance. After 34 years with Farmers and the Zurich Group,
Vice-Chairman of the Board, member of the Nominations Committee and of the
Director, chairman of the Audit Committee and member of the Remuneration Committee
This strengthened capital base will support continued premium growth at Farmers, which in turn will be the source of growing management fee income for Zurich.
In Life Insurance, we aim to transform the business with a sales excellence program to improve productivity across the Group, a new business model in the UK, and by capitalizing on the strength of our agency networks in the US and Continental Europe.
Our newly-formed International Businesses division includes our General Insurance and Life
It is a fundamental requirement in our aspiration to become the leading global insurance company in our chosen general and life insurance markets.
US, small businesses are underwritten through the Zurich units in North America and the
Farmers Exchanges. Our General Insurance business in Europe covers commercial and personal lines. For our large corporate customers we are providing an integrated global platform.
We are changing the culture and raising the bar for all our employees. An important part of
The Zurich Way talent management initiative is that our top 200 senior executives have been assessed by external consultants. We have taken an inventory of our talent and where we have found gaps, we will fill them. We will continue to do so, and to upgrade our talent.
Across the world, our well-diversified business portfolio – both by geography and nature of risk exposure – is a strong competitive advantage.
So is our focus on our globally driven corporate customer business. In the end, however, the success of our market strategy will depend on operational excellence. Only companies able to excel in all activities will be consistent, long-term winners. Over the past two years, we have demonstrated the ability to deliver such excellence, and we are committed to continuing on that path.
The Zurich Way has been to create a common set of talent guidelines that our units around the globe will eventually adopt. This includes the areas of leadership assessment, employee recruitment, compensation and incentives, performance management, and career development.
The success of our business depends as much on the trust of our customers as on our ability to provide value.
Once again, common business processes are at the forefront of our thinking.The most tangible measures have come from file reviews that helped us identify and quantify the greatest opportunities for improvement. Our first initiative began in the UK and looked at the pricing of motor fleet risks, employers’ liability, and property insurance.
Since then, our business units in eight European countries have pooled their knowledge and experience to identify areas for further improvement in motor claims.Thousands of closed files were examined to see how we could have dealt with claims and other issues more efficiently.The business units also analyzed our claims and studied practices on the more serious personal injury claims. As a result, our motor claims teams are introducing changes that are benefiting our customers and our business, with a central project office ensuring rigorous implementation.
Because this type of disciplined monitoring has contributed to profit improvement programs in the past three years, we believe that targeted 2005 improvements of USD 500 million after tax are within reach.
Our twin aims are to develop new procedures and tools to produce a better and more consistent underwriting result, and to improve
We pay equal attention to commercial enterprises of all sizes. We offer our commercial customers a comprehensive range of general insurance products, including automobile, workers’ compensation, multi-peril, liability and property products, as well as fidelity and surety bonds and a range of speciality coverages. One example is Zurich’s provision of insurance cover for the ambitious restoration and renovation project at La Scala Theater in
In the US, Zurich and the Farmers Exchanges are among the largest insurance providers in the small business market.To enhance our service, a free Web-based service known as
Virtual Consulting helps insurance agents and their customers to identify causes of loss, and recommends solutions for minimizing them.
In the US, the Farmers Exchanges are typical of our determination to provide the best possible customer service.The personal touch is paramount, as in the case of Richard and Esther
Most of our neighbors have had pretty negative experiences with their carriers, and many may not be able to rebuild their homes.We have spread the word about our confidence in Farmers.”
ADAC in Germany, EasyGroup and Alliance and Leicester in the UK, and Halifax Bank in
In Europe, we can build on a strong network of 40,000 agents, brokers and financial advisers, offering both general and life insurance products and services.
Several of our employees spent time in the main branch of McDonald’s in Zurich, serving customers and learning the business requirements at first hand. We have since written a multiline program for McDonald’s
In another case, Nestlé was looking for a centrally managed program for its global motor fleet. Zurich experts in the US and Europe worked together to produce a multi-national insurance solution that offered consistent overall protection but with local service for Nestlé’s operations delivered through the Zurich network.The program now provides insurance protection to some 12,000 of Nestlé’s motor vehicles in central and eastern Europe, Asia, and
Hundreds of small businesses in Florida were grateful for our swift response when four hurricanes swept through the US and the
We worked with customers such as citrus growers, healthcare facilities and manufacturing plants to help them get back into operation as quickly as possible. In the immediate aftermath of Hurricane Charley in mid-August, we sent 200 claims professionals to the state. After
As the second largest insurer in general corporate business worldwide, we are building on a proven record of giving our customers and potential customers what they need. Our
Global Corporate business division emphasizes our commitment to this market, and draws on the strength of our established international network to develop deeper and stronger
Zurich Financial Services Group . Annual Report 2004 11 and mortgage products, as well as general insurance products.To help the new business grow, we are drawing on the expertise that Farmers has built up in the US in developing and retaining a highly effective tied sales force. The UK’s extensive distribution network gives us a strong position in the life market.
The other part of the UK life operation will comprise two business areas. One will manufacture competitive products for Openwork and existing independent financial advisers, and will look for new outlets.The second will be a specialist manager of important books of business where we no longer market the products, but where we need to give customers the priority they deserve. By reorganizing our businesses in this way, with focused management teams, we can concentrate on the different issues that each faces.
In the US, Farmers’ share of the life market has grown further through cross-selling of products to general insurance customers of the Farmers
Our Global Life Insurance business is benefiting from The Zurich Way throughout the organization. We are introducing a sales excellence program to improve the productivity of our tied sales force across the Group, based on our best practices in all major countries as well as from other industries. A pilot is running in Switzerland and will be expanded to key countries in Europe.
In Germany, we took full advantage of a unique sales opportunity provided by a pending change in the tax laws that enabled us to increase savings policy sales.The Deutsche Bank distribution channel performed particularly strongly. We have also introduced a new range of pension products to take full advantage of the changed tax laws.
12 Zurich Financial Services Group . Annual Report 2004 and Resorts Worldwide, observed: “Doing business with Zurich Risk Engineering has been an outstanding experience, oftentimes exceeding my expectations.”
We live in times of intense competition, but we are confident that our key differentiating factor is our unwavering commitment to operational and financial discipline in producing successful results, keeping our promises, and meeting our customers’ needs. We want our customers – wherever they are, however large or small their business or their needs may be –
to know that when they deal with Zurich, they are dealing with professionals. 57,000 people.
Zurich as its exclusive supplier of life insurance products. We have more than 10,000 agents in our major general insurance markets of
Germany, Switzerland, Italy and Spain, who can work closely with our colleagues in the Life
Across the world, 800 risk engineers serve multinational companies and small family businesses alike. Recruited locally, they understand the local safety culture and regulations, and can conduct risk assessments and service calls in the local language. Working to the same standards and procedures globally, they provide expert advice and services tailored to individual needs, including property protection, environmental and strategic risks, fleet management, business continuity, and health and safety.
In the following pages, you will meet members of our worldwide Zurich team. While their individual job assignments and responsibilities differ, all of them share the same commitment to our customers, their communities, their families, and the core values of the Zurich organization that give substance to The Zurich
Way. Through the commitment and character of these people, and the thousands of others like them who make up the Zurich organization worldwide, you will see how we are implementing – and in many cases already living –
People are at the heart of our business, whether customers, shareholders or employees. We know that our success depends on fulfilling the trust that is placed in us and providing value to the market.
14 Zurich Financial Services Group . Annual Report 2004 underwriting workstream, he helped define the common processes, language, metrics and improvement approach that are essential for our business.
The result was rewarding for Gary since, as a coach on and off the soccer field, he believes that his job is really about helping people discover the best in themselves. “Everything we do depends on our people. Reinforcing our culture by coaching and mentoring others is one of the best parts of my job.”
“It’s all about people, whether I’m coaching a soccer team or leading a project team at
America Commercial, he has helped many team leaders bring about change with
“Balancing work and home can be a bit of a challenge, but the Zurich environment is flexible enough to let you take care of both aspects of your life.”
That flexibility is only fair, since Angela’s contribution to answering the needs of Zurich’s customers has given legions of small business owners the flexibility and peace of mind necessary to achieve the same kind of balance in their own lives.
As the Chief Actuary for Zurich Small Business in the US, and the mother of two active children aged 10 and 13, she has many demands on her time. But this busy life provides her with ideal opportunities to do what she most enjoys –
helping others to help themselves. “People talk about mentoring, she says, but it’s really more the way you behave and interact with people in your day-to-day life. Along the way you can bring out the best in others. Most of the time,
Every Christmas, the Zurich agency in Wetzikon is transformed into an art gallery, open to an appreciative public. With support from Zurich,
Peter exhibits his art work and views part of his job as contributing to the cultural life of the local area.
People always come first for Peter Jud, whether as customers or as subjects of his paintings. He sees his philosophy as an essential ingredient of his success as a customer adviser in Zurich’s general agency in Wetzikon, Switzerland, where he offers all kinds of general and life insurance geared to personal customer needs.
Zurich’s priority is to meet the needs and expectations of our customers
Oxfam, and follows a series of successful assignments in India that Zurich employees have undertaken in recent years. All offer opportunities for personal development, and help to foster skills such as consultancy and coaching.
South Africa may have taught Sarah something about herself, the depth of her commitment to her professional role at Zurich and to the humanitarian needs of a wider world are truly a lesson in The Zurich Way.
One week Sarah Turley was working as a claims solicitor with Zurich in London. The next she was deep in discussion with a group of women in South Africa. The two activities may seem poles apart, but Sarah doesn’t see it that way. We encourage people to support their local communities – and sometimes even communities half a world away. Sarah’s month-long assignment to an Oxfam project in
Such investment becomes increasingly important as China moves from a planned economy to a market-led one. And Steven is ideally placed to understand the bigger picture, having had the opportunity to learn about the insurance industry on both sides of the world. He started his career as a marine underwriter and claims assessor with the state-run People’s Insurance
Company of China (PICC), and later won a scholarship from the British Council which enabled him to spend 18 months studying insurance at university in Scotland.
Steven Zhang has his eye on the future in more ways than one. As Zurich’s Chief Representative in Beijing, he oversees our operations in an exciting and rapidly developing market. He also has a hands-on appreciation of risks, from his previous career as chief officer of an ocean cargo ship. This helped him to value teamwork in a crew that drew its members from all parts of the world. It also showed him how people from many cultures can live and work together – a quality highly valued at Zurich.
As a family man with a daughter at university, he also takes a keen interest in education.
He shows his interest in practical terms by sponsoring two young girls at school in a poor region of China. Although education is free, children often have to pay for books, pencils and other materials – a heavy burden for many families.
Steven’s involvement grew out of Project Hope, a non-governmental organization founded 14 years ago to finance schooling for poor rural children as part of the China Youth
We’re investing in the future of an entire generation and of our country. Education is the key to lifting people out of poverty.”
To better serve the needs of customers, Nancy starts by asking herself how she would like to be treated. Her definition of a delighted customer is “Someone who understands and values the relationship with us and will recommend us to their family and friends. They also understand the value of insurance and the role we play in protecting them and their assets.”
Nancy draws another parallel between the business world and equestrianism. She came to the sport in her late forties just for the fun of it. Now it has become a passion with her, and probably one of the toughest physical and mental challenges she has ever faced.
As long as you are willing to accept the fact that you do make mistakes, you can learn from them and keep moving forward.”
Trust is all-important when Nancy Ballance is facing a tough equestrian competition. “There has to be a relationship of trust to draw on, especially if you or the horse aren’t at your peak. As you come to that big jump, one of you has to say
“It’s all about building trust and building that stable relationship that carries you through some of the tough times.”
Nancy’s team helps to look after the needs of customers and the agents who serve them. For agents, they have developed an information technology tool, Farmers Agency Dashboard, which gives them information about individual customers. This is where Nancy’s IT background proves invaluable: she spent the first 11 of her 20 years with Farmers as an IBM
customer engineer, and later worked on a related global project with colleagues from across the Zurich Group.
Risk Management We also benefit from the cooperation of our network of risk management and functional specialists within each business as well as at Corporate Center, where we have dedicated managers for each type of risk.
As a major, global insurance carrier, Zurich helps customers around the world cope with a broad range of business and personal risks. In turn, we face a number of risks ourselves.
• Investment and credit – risk associated with the Group’s investment portfolio, reinsurance agreements and other counterparty credit risk
• Financial risk – risk associated with currency fluctuations and management of the relative duration of our assets and liabilities.
The Board of Directors establishes Zurich’s corporate risk management framework, including a reporting system. In turn, the Audit
Committee of the Board assesses whether management addresses risk and control issues in a timely and appropriate manner.The Chief
Executive Committee, oversees the Group’s performance with regard to our risk management policies as well as the further development of these policies when required.The Chief Risk
Zurich’s experience in monitoring potential exposures from natural catastrophes is also applicable to threats posed by man-made catastrophes, particularly terrorism. Due to the
As an insurer, we absorb certain of our customers’ risks, and therefore we must carefully manage that transfer of risk. We do so in a variety of ways.These include setting limits on underwriting authority and requiring specific approvals for transactions involving new products or exceeding established limits.
We regularly use our Total Risk Profiling process to systematically surface a wide range of potential situations that could pose risks that warrant management attention.This process has been particularly effective for assessing operational risks. We also use our risk profiling process to assess, and then manage, potential risks posed by major new projects, such as mergers, divestments and acquisitions or the outsourcing of specific operational functions.
Due to the importance of information technology (IT) to our business processes and the very real external threats we face, IT is a toppriority operational risk. We retain central control over a global network of resources devoted to IT risk, including functions that are outsourced. We continuously strengthen controls and adapt standard security methods to our specific IT environment, so that we can prevent, detect and swiftly respond to threats to our systems and data. We have been able to operate our systems without major disruption, despite a trend of increasing external threats to IT
North America, to evaluate how insuring a particular customer’s risk might affect Zurich’s overall exposure.
Security Committee.This is the Group’s committee responsible for setting standards and procedures to protect Zurich from credit losses with reinsurers. We also limit our maximum credit exposure by reinsurance group. Even as the reinsurance market remained under downward rating pressure, our tight credit risk policy resulted in an A– average credit quality of our reinsurance portfolio; the reinsurers that compose our 10 largest reinsurance exposures are rated A+ and above.
Reinsurance Assets Quality 1 Other = unrated, information not available at counterparty level, etc.
Zurich Financial Services Group . Annual Report 2004 29 holder obligations. We diversify portfolios and asset managers and establish specific investment guidelines for each portfolio.We also carefully monitor investment exposures, compliance and performance. Group investments are recorded in a central database that allows us to evaluate our position against objectives, such as return and risk targets that include value at risk, adequate capital, liquidity capacity and other investment constraints.
business disruptions. Nonetheless, we were able to provide continuous service to our customers, and even enhance some of our operations, during very challenging conditions.
An effective system of internal controls is critical to risk management and sound business operations. In 2004 we launched a multi-year initiative to strengthen the consistency and documentation of our internal controls.
Although primarily focused on important controls for financial reporting, this initiative also applies to related operational controls.
Our Asset/Liability Management and Investment Committee manages the Group’s overall asset/liability matching exposure. It also oversees the activities of local asset/liability management committees. We are improving our asset and liability models to provide increased sophistication in our measurement of the Group’s exposure to our liabilities and to our assets such as fixed income, real estate and other investment categories across currencies and businesses.
While the setting of the model parameters and the testing are managed centrally, local variations take into account differences in specific product types. We monitor relative duration on both a business unit and Group level, and all exposures are captured in our risk-based capital measurement process.
Debt securities Equity securities* (For more information, see page 39) Real estate held for investment Mortgage loans Policyholders’ collateral and other loans Other Group investments Cash and cash equivalents
30 Zurich Financial Services Group . Annual Report 2004 the likelihood that a default would occur. We use this exposure aggregation information to detect and manage risk concentrations. The Chief Risk
Group Risk Management regularly monitors open positions.The Chief Risk Officer and the
As an international group, we are exposed to currency risk. We minimize our foreign exchange risk by matching the foreign exchange economic exposure of our assets and liabilities on local balance sheets, and by aligning the currency composition of our available capital to our internal capital requirements. We do not hedge emerging surpluses.
Zurich’s risk management activities are designed to protect the long-term sustainability and strength of our company, which in turn, helps secure the interests of our many stakeholders.
Even when we have made sure that our exposure to a counterparty is within set limits for each individual source of risk, our combined creditrelated exposures could overexpose our capital to that counterparty’s financial failure.Therefore, we limit our accumulated exposure to families of related counterparties across significant types of credit risk. We add together the exposure across such sources of credit risk as reinsurance assets, various types of investments and certain insurance products, derivatives and treasury instruments. We use best estimates, based on statistics and experience, to assign loss-given-default percentages and factors for
Corporate citizenship to us means thinking long-term and working to integrate social and environmental considerations into how we run our business and develop and market our products. It also means reaching out to contribute directly through time and financial contributions where we can add value.
Council. In the past year, the council worked to bring strategic focus and identify areas of priority such as helping the disadvantaged and promoting employee involvement. It also concentrated on increasing financial effectiveness and speed of reaction in times of need.
and other stakeholders’ long-term interests by pursuing our business with a focus on performance and responsibility. In these efforts, we are inspired and supported by Zurich
Basics, our core values and basic principles that help guide our conduct and decisions. We also have an overall corporate responsibility strategy and framework, along with dedicated functions, to help us execute on our commitment and enhance the value we deliver to our stakeholders and society at large.
Group Highlights Zurich Financial Services Group (the Group) recorded net income of USD 2,587 million for the year ended December 31, 2004, an increase of 29% compared with USD 2,009 million in 2003. Business operating profit improved by 36% over 2003 to USD 3,143 million for 2004.This result was built on the strong underlying performance of our core businesses and the stabilized development of our Centre operations.
General Insurance showed significant improvements in both business operating profit and net income across all key regions except for North America Corporate, which strengthened loss reserves for development in business written during the soft market years of 1997 through 2001. In addition, General Insurance, which had enjoyed a two-year period of benign catastrophe experience, was impacted by the four hurricanes in the US and the Caribbean and the tragic tsunami in Asia. Life Insurance continued its turnaround with an improved underlying performance, primarily in Europe, after consideration of divested businesses.This improvement is demonstrated in the increase of the new business profit margin to 11.4%. Farmers Management Services increased substantially its contribution to business operating profit and net income. Other Businesses also contributed strong results based on the management actions taken in 2003.The results across all segments were supported by the improved investment return and lower effective tax rate.
Performance highlights in USD millions, for the years ended December 31 2004 2003 Change
Life Insurance new business profit margin (as % of APE) 11.4% 9.0% 2.4 pts
Results for 2003 in this Group Financial Review are restated for the implementation of a new accounting standard. Business operating profit figures for 2003 have been restated to conform with the current year presentation. Details are set out in the sections “Basis of Current and Future Presentation and Comparability” and “Investment Performance.”
• General Insurance business operating profit decreased by USD 766 million to USD 1.4 billion, as a result of the USD 2.1 billion net strengthening of reserves related to prior accident years. In addition, General Insurance incurred losses of USD 680 million related to the hurricanes and USD 82 million related to the December tsunami.These factors have been partially compensated by improved underwriting results in the current year.
• Other Businesses recorded business operating profit of USD 137 million, an improvement of USD 1.1 billion from the business operating loss in 2003. Centre significantly improved its results following the restructuring actions taken in the prior year and the successful commutations in the current year. The wind-down of Zurich Capital Markets continued in 2004 and also contributed to the improved result in this segment.
• Net investment income on Group investments was USD 7.4 billion, which contributes to the business operating profit for each segment.This net investment income excludes income earned for unit-linked products of USD1.7 billion, which is managed on behalf of the policyholders of these products.
• The Group lowered its effective income tax rate by12.5 percentage points to 28.9%.This improvement is primarily due to the avoidance of large losses in low tax jurisdictions as incurred in the prior year.
Our return on equity improved by 1.2 percentage points to 13.3% for 2004 compared with the 2003 return of 12.1%.
Balance sheet highlights in USD millions, as of December 31 2004 2003 Change
The Group nevertheless determined that certain changes should be made to the manner in which such transactions were accounted for as a result of the way these arrangements developed over time. Accordingly, the Group recorded a charge before tax of approximately USD140 million in 2004 in order to align the accounting treatment of the transactions with Group accounting policy.
If these transactions were accounted for on the basis now viewed as appropriate in the years the transactions were initially recorded, the Group estimates that its consolidated net income before income taxes and minority interests would have been approximately USD165 million higher in 2003. Due to reductions in net operating results that would have been incurred in prior years, the Group estimates that the related impact on its consolidated shareholders’ equity as of December 31, 2003 would have been a reduction of approximately USD190 million, and a reduction of approximately USD 330 million as of December 31, 2002.These estimates are based on assumptions and judgments that the Group believes are reasonable.
Measuring Business Performance We manage our business units on their underlying performance using the measure of business operating profit. Business operating profit eliminates the impact of financial market volatility and other non-operational variables enabling us to assess the underlying insurance performance of each business.
Adjusted for: Net capital (gains) on investments and impairments, excluding capital markets and banking activities (4,771) (4,976)
Policyholder allocation of net capital gains on investments, including unit-linked products 4,493 4,254
Business operating profit 3,143 2,316 1 For details, refer to the section “Basis of Current and Future Presentation and Comparability.”
The Group has initiated several restructuring programs in 2004.The most significant of these relates to the transformation of the United Kingdom life operations, where management has decided to implement a new business model.This model has been designed to enable the UK life business to secure sustainable performance in line with Group hurdle rates.
In addition to business operating profit, we use embedded value to measure and manage our Life Insurance operations on a stand-alone basis. Embedded value is discussed in more detail in the Life Insurance section of the Segmental Financial Analysis.
Key Performance Indicators Our stated goal in the medium term is to achieve a blended return on equity of 12% on an after-tax business operating profit basis. A higher return on equity in one segment can compensate for lower returns in others allowing the Group to meet the stated 12% overall target rate. Returns on equity generated by General Insurance, Life Insurance and Farmers Management Services also compensate for certain headquarters expenses, debt expenses and any net operating losses from other operations.
Our return on equity based on net income for 2004 was 13.3%, an increase of 1.2 percentage points over 2003. Our business operating profit after-tax return on equity was 11.5%, an increase of 1.7 percentage points over 2003.This return, while improving, is below our medium term target of 12% due to the impact of the catastrophes and reserve strengthening discussed above.
Total NA NA Continental UKISA Rest of Corporate Consumer Europe the World 1.
NA NA Continental UKISA Rest of Corporate Consumer Europe the World
New business profit increased by USD 81 million from 192 million to USD 273 million in 2004, which is reflected in the improvement of the new business profit margin by 2.4 percentage points from 9.0% to 11.4% in 2004.
Business operating profit for Life Insurance increased by 24% to USD1.1 billion in 2004 with improvements in Continental Europe, UKISA and Rest of the World partially offset by a small reduction in North America Consumer related to the divestment of life businesses in 2003.
General Insurance – foreign currency impact on key financial highlights % change in % change Variance over the prior period, for the year ended 2004 local currency in USD
Life Insurance – new business profit margin in %, for the years ended December 31
Premium Volume and Management Fees Overall gross written premiums and policy fees rose 1% over 2003 (–4% in local currency) reaching USD 49.3 billion. After taking into account the special factors explained below, premiums have remained flat on a comparable basis.
Net earned premiums and policy fees increased 6% (unchanged in local currency) over 2003, to USD 41.8 billion. After adjusting for the factors explained below, net earned premiums grew by 4%.
General Insurance experienced growth in gross written premiums and policy fees of 4% (–1% in local currency) to USD 37.6 billion in 2004. After adjusting for divestments of businesses as well as exchange rate effects, premiums remained level. On a similar basis, net earned premiums increased by 7% still reflecting the effect of rate increases in previous periods now being earned as revenue as well as higher premium retention reflecting the reduction in our reinsurance program as our balance sheet has strengthened.
Investment Performance Total investments as shown in the Consolidated Balance Sheet include Group investments, where the Group bears all or part of the investment risk, and investments for unit-linked products, where policyholders bear the entire investment risk. The investments for unit-linked products and the related investment result have been reclassified following the implementation of SOP 03-01.
Group Investments for Net investment result and investments investments unit-linked products Total in USD millions, for the years ended December 31 2004 2003 2004 2003 2004 2003
Net capital gains on investments and impairments 948 811 3,986 4,369 4,934 5,180 in USD millions, as of December 31 2004 2003 2004 2003 2004 2003
We manage our diversified Group investment portfolio to optimize benefits for both shareholders and policyholders while ensuring compliance with local regulatory and business requirements under the guidance of our Asset/Liability Management and Investment Committee. Investments for unit-linked products are managed in accordance with the investment objectives of each unit-linked fund.
Net capital gains on investments and impairments for Group investments increased from USD 811 million in 2003 to USD 948 million in 2004. In both 2004 and 2003 we incurred impairments on investments, primarily equities, of USD 175 million and USD1.1 billion, respectively. The reduction in the year reflects the improvements in equity markets.The reduction in impairments was offset by lower net realized capital gains in 2004, particularly in debt and equity securities. A substantial portion of the net capital gains on investments and impairments relate to our Life Insurance segment. After taking into account the portion attributable to future policyholder benefit reserves, net capital gains on investments and impairments which flowed through to net income were USD 441 million and USD 926 million in 2004 and 2003, respectively.
The total investment return for Group investments was 5.9% compared with 4.9% in 2003. This return includes investment income, net capital gains on investments in the consolidated operating statement and movements in unrealized gains recorded in shareholders’ equity. The total investment result was USD 10.5 billion, after investment expenses of USD 289 million compared with USD 8.0 billion after investment expenses of USD 330 million in 2003.
Breakdown of Group investments in USD millions, as of December 31 2004 % of total 2003 % of total
Aggregate net gains on divestments in 2004, including post-completion adjustments such as deferred consideration for certain transactions closed in 2003, were USD 88 million.
Development of reserves for losses and loss adjustment expenses in USD millions 2004 2003 Change
Gross reserves for losses and loss adjustment expenses 51,068 45,306 13%
Total net losses and loss adjustment expenses paid (17,515) (16,516) 6%
Net reserves for losses and loss adjustment expenses 43,474 37,013 17%
Gross reserves for losses and loss adjustment expenses 57,813 51,068 13%
Of the total USD 43.5 billion net reserves for losses and loss adjustment expenses, USD 41.1 billion related to General Insurance and USD 2.2 billion to Other Businesses as of December 31, 2004.
The prior-year adverse reserve development recorded in 2003 was primarily in North America Corporate, USD1.0 billion, and in Centre, USD 540 million.
On April 21, 2004, a new USD 3 billion syndicated revolving credit facility was signed to replace the USD1.5 billion facility, which would have matured on May 28, 2004.The new syndicated credit facility consists of two equal tranches maturing in 2007 and 2009. Zurich Group Holding, together with Zurich Insurance Company and Farmers Group, Inc, are guarantors of the new facility, which allows for drawings of up to USD1.25 billion, USD1.5 billion and USD 250 million, respectively, for themselves and a number of defined subsidiary borrowers. No borrowings were outstanding as of December 31, 2004 under the new facility. Farmers Group, Inc. cancelled an existing USD 250 million credit facility in April 2004, which would have expired in September 2004.
Transfer arising from initial application of the “legal quote” legislation in Switzerland (226)
On a consolidated basis, Zurich Financial Services, with headquarters in Zurich, Switzerland, is subject to supervision by the Federal Office of Private Insurance (“FOPI“). Regulatory supervision of the Group for its insurance activities and its remaining banking and other regulated financial services activities, including supervision over consolidated solvency and capital adequacy at a Group level are coordinated between FOPI and the Swiss Federal Banking Commission (based on the Decree on the Consolidated Supervision of the Zurich Financial Services Group of April 23, 2001).
Summary of cash flows in USD millions, for the years ended December 31 2004 2003
Adjustments for: Net capital (gains) on investments and impairments (4,934) (5,180)
Farmers Management Services receives management fees as well as investment income and pays operating expenses and taxes. Surplus operating cash flows, plus the proceeds from the sale and maturity of investments as well as divestments, are reinvested through our investing activities. Our investment funds may be used to fund operating cash flow deficits.
ii) Clarification of the distinction between universal life insurance and investment products, resulting in certain products in the life business in the United Kingdom now being treated as insurance.The classification as insurance consequently resulted in the retrospective accrual of additional insurance reserves.
Adjustments to net income for the year ended December 31, 2003 in USD millions
Adjustments to business operating profit for the year ended December 31, 2003 in USD millions
The Group accounted for the initial application of this legislation in the Consolidated Financial Statements as of June 30, 2004, by transferring net unrealized gains on investments included in shareholders’ equity of USD 226 million to insurance reserves as “Policyholders’ contract deposits and other funds”. In addition, the Group recorded a pre-tax charge of USD 54 million during 2004.
In January 2005, a significant number of new and amended standards will become effective including the International Financial Reporting Standard on “Insurance Contracts” (IFRS 4). We continue to evaluate the impact on our financial statements and are closely monitoring developments as practical interpretations of IFRS 4 and other changes emerge.The principal change to our financial statements will result from the re-classification of certain life insurance products from insurance to investment and the consequent change in measurement and accounting treatment as investment products. As IFRS 4 does not define the accounting treatment of insurance products, we will continue to refer to US GAAP.
This and other changes will result in the restatement of shareholders’ equity, which could be significant, and net income as well as reclassifications in both the consolidated balance sheets and consolidated operating statements. However, we do not expect the changes will have any significant effect on the solvency positions of our businesses, which are generally determined based on regulatory requirements and accounting policies in each country in which we operate.
Customer segments: For 2004 General Insurance reporting a further breakdown of the segment into its customer segments (Global Corporate, Commercial and Personal) is provided as part of the Financial Supplement which is published on our Web site www.zurich.com. For 2005 General Insurance reporting our financial review will include information for these customer segments.
Summary of 2004 quarterly consolidated financial information in USD millions, for the three months ended 12/31/04 09/30/04 06/30/04 03/31/041
Net income before income taxes and minority interests 931 614 1,162 1,079 1 Restated for the introduction of SOP 03-01 in the half year 2004.
Summary of 2003 quarterly consolidated financial information in USD millions, for the three months ended 12/31/03 09/30/03 06/30/03 03/31/03
Business operating profit and net income by segment Business operating profit Net income/(loss) in USD millions, for the years ended December 31 2004 2003 Change 2004 2003 Change
Reconciliation of net income and business operating profit Farmers by business segment for 2004 General Life Mgmt Other Corporate in USD millions, for the year ended December 31, 2004 Insurance Insurance Services Businesses Center Total
Reconciliation of net income and business operating profit Farmers by business segment for 2003 General Life Mgmt Other Corporate in USD millions, for the year ended December 31, 2003 Insurance Insurance Services Businesses Center Total
Tax expense/ (benefit), adjusting for life policyholder tax 556 357 366 104 (8) 1,375
General Insurance Our 2004 result has shown significant improvements in both business operating profit and net income in all regions other than in North America Corporate. Overall our business operating profit fell by USD 766 million to USD 1.4 billion which was achieved after total hurricane and tsunami costs of USD 762 million and net strengthening of reserves of USD 2.1 billion.
In 2004, we have introduced our new approach to reserving which involves rolling reviews, peer review, greater oversight from the Corporate Center, use of consistent actuarial methodologies and processes and, when necessary, the use of third-party actuaries. As a result there has been significant strengthening of our reserves in North America Corporate relating to soft market years of 1997 through 2001 when cash flow underwriting was prevalent and claims subsequently inflated. These reviews have also identified redundancies in reserves in UK, Ireland and Continental Europe.
General Insurance – highlights in USD millions, for the years ended December 31 2004 2003 Change
Business operating profit and net income/(loss) by geographic region Business operating profit Net income/(loss) in USD millions, for the years ended December 31 2004 2003 Change 2004 2003 Change
Net income decreased by USD 352 million, or 20%, from USD1.8 billion for 2003 to USD1.4 billion for 2004. Impacted by the same factors as business operating profit, net income benefited from lower tax expenses and lower losses on divestments, partially offset by lower net capital gains on investments.
Gross written premiums and net Gross written premiums Net earned premiums earned premiums by geographic region and policy fees and policy fees in USD millions, for the years ended December 31 2004 2003 Change 2004 2003 Change
Gross written premiums and policy fees increased by USD1.4 billion, or 4%, to USD 37.6 billion for 2004. Taking into account the effects of divestments and exchange rate movements, premiums remained level in 2004. Despite the slowing down of rate increases in certain markets, we still experienced higher overall average rates in 2004 compared with the prior year. Volumes have decreased in certain competitive lines of business, as we have chosen not to write business that does not meet our technical price targets.
Net earned premiums and policy fees increased by USD 3.0 billion, or 11% (6% in local currency), from USD 27.1 billion for 2003 to USD 30.2 billion for 2004.This increase is the consequence of strong pricing in prior periods now flowing into earnings and higher premium retentions reflecting the reduction in our reinsurance program as our balance sheet has strengthened.
Centrally Managed Businesses and eliminations (97) 90 nm nm nm nm
Overall, the loss ratio increased by 4.5 percentage points to 77.6 % for 2004. This development was mainly due to increases in insurance benefits and losses of USD 3.5 billion, or 18% (13% in local currency), to USD 23.4 billion for 2004. In 2004, USD 680 million of net hurricane losses, USD 82 million of December tsunami losses and USD 2.1 billion of further reserve strengthening were recorded. Moreover, the Group has continued to benefit from the positive effects of our profit improvement initiatives as well as from the favorable current year loss development.
Rest of the World 36.1% 37.3% 1.2 pts 1 Including policyholder dividends and participation in profits.
North America Corporate – highlights in USD millions, for the years ended December 31 2004 2003 Change
Business operating profit was impacted by the exceptional claims of USD 612 million in 2004, from the hurricanes which struck the US and the Caribbean in the third quarter of 2004 and by the prior year development reserve strengthening of USD 2.6 billion. Business operating profit decreased from a profit of USD 664 million in 2003 to a loss of USD 1.2 billion in 2004.The adverse underwriting result was partly offset by a 27% higher net investment income reflecting strong net cash inflows in both 2003 and 2004.
Combined ratio 95.9% 98.7% 2.8 pts 1 Including policyholder dividends and participation in profits.
General Insurance – Continental Europe Continental Europe is our second largest General Insurance region. Financial information is provided for our four most significant markets, namely Switzerland, Germany, Spain and Italy as well as for Continental Europe Corporate (CEC), which writes business for large corporate customers in Europe and is managed centrally.
Combined ratio 94.0% 98.3% 4.3 pts 1 Including policyholder dividends and participation in profits.
Business operating profit improved by 67% to USD 1.0 billion and net income increased by 114% to USD 767 million for 2004 mainly due to the strong improvement in the net underwriting result as described below.
Gross written premiums Net earned premiums Breakdown of premiums by largest markets and policy fees and policy fees in USD millions, for the years ended December 31 2004 2003 Change 2004 2003 Change 1 Before elimination of intra-region transactions.
Gross written premiums and policy fees in Continental Europe grew by USD 660 million, or 7% (–2% in local currency), to USD 10.7 billion. This region benefited from the appreciation of the euro (10%) and Swiss franc (8%) against the US dollar, which was partially offset by the effects of several divestments closed in 2003. Adjusted for these factors, Continental Europe, in total, showed a slight increase in premiums.
Net underwriting result and combined ratio by largest markets Net underwriting result Combined ratio in USD millions, for the years ended December 31 2004 2003 Change 2004 2003 Change
Net earned premiums increased by USD 853 million, or 18%, to USD 5.7 billion for 2004. Excluding exchange rate movements, the increase was 5%.The rate and volume increases in written premiums experienced in the prior year have flowed through to earned premiums in 2004.
The net underwriting result increased by USD 566 million to USD 691 million in 2004, with the combined ratio improving by 9.7 percentage points to 87.8%. Insurance benefits and losses increased by 4% (–7% in local currency), or USD129 million, at a significantly lower growth rate than net earned premiums, to USD 3.7 billion for 2004.This development reflected favorable loss experience and net prior year reserve redundancies resulting in an improvement of the loss ratio to 65.2% for 2004.This region recorded USD 42 million of tsunami costs. Net technical expenses also increased at a lower growth rate than net earned premiums due to a continued focus on expense reduction resulting in an improvement in the expense ratio of 0.8 percentage point to 22.6% in 2004.
The improvement in business operating profit by USD 30 million, or 20%, to USD 180 million in 2004 was driven by the improved underwriting result and higher investment income.
Net income increased by 38% to USD145 million in 2004. Besides the factors that impacted business operating profit, net income benefited from higher net capital gains on investments.
The net underwriting result increased to USD 95 million for 2004 compared with USD 82 million in 2003 with positive contributions from most of our businesses in this region.The combined ratio increased slightly by 0.1 percentage point to 93.5% for 2004.
General Insurance – Centrally Managed Businesses The use of reinsurance, both internally and externally, is a key component of the Group’s risk mitigation and capital management strategies. Our Centrally Managed Businesses region includes internal reinsurance programs and businesses in run-off.
Centrally Managed Businesses – highlights in USD millions, for the years ended December 31 2004 2003 Change
Life Insurance In 2004, we saw the first rewards from our continuing efforts to strengthen the Life Insurance result. We made good progress in refocusing our business portfolio, redefining our business model, rebalancing our product portfolio, de-risking our balance sheet and optimizing our expense base.These efforts are now being reflected in our business results. Our business operating profit rose 24% to USD1.1 billion.The profitability of new business, as measured by the new business profit margin, further improved to 11.4% in 2004, up from 9.0% for 2003. The operating return on the embedded value of our life business was 10.8% within our target range of 10–12%. And our refocused product range is gaining acceptance in the marketplace, with total new business measured by annual premiums equivalent (APE) up by 15% after adjusting for divestments and discontinued business, the redesign of the Swiss group pension business model by the partial transfer to an external foundation and foreign exchange movements.
Since 2002, we have divested numerous life businesses to focus on profitable growth in our key markets. We are making major changes to our business model in Switzerland and in the UK. In Switzerland we restructured our group pension model, which started positively due to favorable capital markets in 2004. In the UK we are consolidating our remaining life portfolios into a single entity, permitting further operating and commercial synergies. We are reconstituting our distribution unit, now renamed Openwork, in partnership with our franchisees. Openwork will sell products manufactured by Zurich and other selected partners, to take full advantage of new flexibility permitted by UK regulation. The value realized by Openwork will be shared between Zurich and its franchise partners, who have shown very strong support for the new model.
We made further progress in reducing expenses with administrative and other operating expenses declining 19% over 2003 levels. In 2004, we committed to a wide range of initiatives impacting both revenues and expenses designed to increase our business operating profit by USD 280 million, a target we exceeded by 25%. We have refocused our product mix, concentrating on protection and lump sum savings, especially unit-linked business, and de-emphasizing guaranteed products or those with low margins. Our new product range is gaining traction in the marketplace. Our innovative products and service levels are being recognized with Germany, Ireland and the UK all receiving awards in the closing months of 2004. We took full advantage of an opportunity in Germany, where an impending tax change has led to exceptional demand for savings products. Our sales rose 54% (28% in local currency) to USD 794 million APE, with especially strong growth through our Deutsche Bank channel. Our IFA channel in the UK also grew strongly, and total new business premiums in the UK rose 38% (24% in local currency) to USD 4.7 billion. We also had strong growth at Farmers New World Life and in Italy.
Life Insurance – highlights in USD millions, for the years ended December 31 2004 2003 Change
Gross written premiums, policy fees and insurance deposits 19,272 20,163 (4%)
Business operating profit and net income by geographic region Business operating profit Net income in USD millions, for the years ended December 31 2004 2003 Change 2004 2003 Change
Net income decreased by USD 275 million, or 24%, from USD 1.1 billion in 2003 to USD 873 million for 2004 mainly due to higher net gain on divestments of businesses in 2003. Excluding the after-tax gain on divestments, net income increased by USD 123 million, or 17%.
Insurance deposits decreased by USD 245 million, or 3% (–12% in local currency), from USD 8.5 billion to USD 8.3 billion in 2004.This decrease arose from divestments in our North America Consumer operations and the transfer of Kemper Investors Life Insurance Company (Kemper Investors) to the Other Businesses segment. In UKISA, growth in insurance deposits was driven by an increase in investment bond product sales, whereas the decrease in the Rest of the World region was mainly attributable to the discontinued sales of annuity products in Japan.
Shareholders’ intangibles and recoverability in USD billions, as of December 31 2004 2003
Net shareholders’ intangibles after tax to be recovered from future earnings 3.5 3.1
Both of these amounts have been considered when assessing the recoverability of DAC and other intangible assets.
New business profit, after tax, contributed USD 273 million to embedded value operating profit, after tax, an increase of USD 81 million compared with 2003. In local currency the increase in new business profit was 27%, predominantly due to higher sales and expense optimizations in our businesses in Germany. This improvement corresponds to an increase of 2.4 percentage points in new business profit margin to 11.4% for the year 2004 from 9.0% for the year 2003.
Embedded value operating profit, after tax, was USD 1.1 billion corresponding to a 10.8% operating return on embedded value in 2004.This was 2.7 percentage points above the expected return of 8.1% for the period driven by the positive contribution from the value of the new business written.
A positive economic variance of USD 331 million was experienced in 2004.This result was primarily due to a better than expected investment performance, particularly in Switzerland. In addition clarification from the Swiss regulator on certain aspects of the implementation of the legal quote legislation resulted in a less severe shareholder impact than assumed in previous embedded value calculations. Overall, this resulted in a total embedded value profit, after tax, of USD 1.4 billion which corresponded to a total embedded value return, after tax, of 14.0% (5.9 percentage points above the expected return for 2004 of 8.1%).
North America Consumer – highlights in USD millions, for the years ended December 31 2004 2003 Change
The divestment of Zurich Life US in the third quarter of 2003 affected the underlying performance of this region which substantially explains all of the above variances. In addition, Kemper Investors is now included in Other Businesses.
The new business profit, after tax, was USD 74 million in 2004, an increase of USD 3 million over 2003.
Embedded value operating profit, after tax, for the year 2004 was USD 330 million resulting from the strong contribution from new business profit, changes in assets to better match liabilities and favorable mortality experience.The operating profit corresponds to an operating return on embedded value for the period of 15.0%.
Life Insurance – Continental Europe Continental Europe is our largest region in Life Insurance. Key financial information is provided for our most significant markets, namely Germany, Switzerland, Italy and Spain.
Continental Europe – highlights in USD millions, for the years ended December 31 2004 2003 Change
Total benefits, losses and expenses decreased by USD193 million, or 2% (–10% in local currency), from USD10.6 billion in 2003 to USD10.4 billion in 2004. Insurance benefits and losses decreased by 10% to USD 8.0 billion, mainly due to the decrease in Switzerland of 25% in local currency resulting from the redesign of the group pension business model. Policyholder dividends and participation in profits increased by USD 616 million from USD187 million in 2003 to USD 803 million in 2004, primarily attributable to Germany where the improvement in net capital gains on investments and impairments in 2004 was shared with policyholders after the loss participation in 2003. Underwriting and policy acquisition costs increased by USD 76 million, or 16% (6% in local currency) to USD 539 million for 2004 compared to USD 463 million in 2003. In Germany, higher amounts of deferred policy acquisition costs were amortized in 2004. Administration and other operating expenses were cut by USD 63 million, or 13% (20% in local currency), from USD 499 million in 2003 to USD 436 million in 2004.
Continental Europe – embedded value highlights in USD millions, for the years ended December 31 2004 2003 Change
APE and new business profit by market APE New business profit, after tax in USD millions, for the years ended December 31 2004 2003 Change 2004 2003 Change
Gross new business premiums (APE) for 2004 were USD1.1 billion, an increase of 11% in local currency, due to the high sales volumes in Germany, which more than offset the impact of divestments of various businesses during 2003, and the reduction in Switzerland as a consequence of the redesign of the Swiss group pension business model.
Continental Europe’s new business profit, after tax, increased by USD 71 million to USD134 million for 2004. This result reflects the increased sales volumes combined with expense optimizations in Germany, as well as increased profitability in other countries, particularly in Italy and Spain.
Embedded value operating profit, after tax, increased by USD 39 million to USD 419 million in 2004, corresponding to an operating return of 23.8%.The operating return arises from the contribution of new business during 2004 combined with a number of effects in Germany, including the impact of expense optimizations and an increase in the shareholders’ share of future profits. These effects were partially offset by the negative impact of changes in asset mix to better match liabilities.
UKISA – highlights in USD millions, for the years ended December 31 2004 2003 Change
Gross written premiums and policy fees increased by USD 540 million, or 32%, to USD 2.2 billion in 2004 compared with USD1.7 billion in 2003.This corresponds to an increase of 18% in local currency, which was largely driven by stock market movements and their corresponding impact on the change in deferred front-end fees and related items.
Total benefits, losses and expenses increased by USD 351 million, or 4%, from USD 8.5 billion in 2003 to USD 8.8 billion for 2004. Insurance benefits and losses slightly decreased by USD 9 million, or 1%, but more significantly by13% in local currency.This decrease was primarily due to the sale of Zurich Life UK and reserve releases in the closed books, offset by higher reserves due to increased business volumes and significant increases in complaints provisions following guidance from the Financial Services Authority. Policyholder dividends and participation in profits rose by USD 283 million, or 5%, to USD 5.9 billion for 2004.The implementation of the accounting standard (SOP 03-01) created greater volatility in policyholder dividends reflecting the movements in investment income and net realized capital gains attributable to policyholders now included in our total investment result. Underwriting and policy acquisition costs rose by USD123 million, or 25% (11% in local currency), to USD 619 million for 2004, driven by an increase in the amount of deferred policy acquisition cost amortization.This increase was partially offset by the higher amount of front-end fees included in gross written premiums. Administrative and other operating expenses decreased by 21% (–29% in local currency) to USD 551 million in 2004 due to divestments of businesses in 2003. After excluding the Threadneedle and Zurich Life UK divestment, administrative and other operating expenses increased due to internal restructuring projects.
UKISA – embedded value highlights in USD millions, for the years ended December 31 2004 2003 Change
New business profit, after tax, remained stable at USD 59 million. The 2003 new business profit included value generated by the life business distribution channel but arising in a non-insurance subsidiary. Profits from this source are not included in the 2004 new business profit. Excluding this effect, new business profit in 2003 was USD 39 million.
Rest of the World – highlights in USD millions, for the years ended December 31 2004 2003 Change
Gross written premiums, policy fees and insurance deposits 1,207 1,381 (13%)
Business operating profit improved by USD 25 million, or 54%, from USD 46 million in 2003 to USD 71 million in 2004.This positive development is attributable to the withdrawal in 2004 of unprofitable annuity products in Japan and investment products in Taiwan. Net income increased by USD 8 million, or 17%, to USD 54 million in 2004.The region recorded USD 29 million higher net capital gains on investments mainly in Australia, which were more than offset by a decrease of USD17 million of gain on divestments of businesses as well as USD 31 million higher income tax expenses in 2004.
Embedded value operating profit, after tax, increased by USD 64 million, or 160%, to USD 104 million in 2004 yielding an after-tax operating return of 13.7% compared with 5.9% in 2003.
In the fourth quarter, advertising expenditure and profiles were raised to increase brand awareness. In the independent agent distribution channel, market management was consolidated and a new strategy and value proposition was introduced.
Farmers Management Services – highlights in USD millions, for the years ended December 31 2004 2003 Change
Business operating profit increased by USD 107 million, or 11%, from USD 970 million for 2003 to USD 1.1 billion for 2004, as a result of the growth in revenues, reflecting the continuing increase in premiums earned by the Farmers Exchanges, as well as higher net investment income.
Other Businesses Our Other Businesses segment includes capital markets and banking activities and our Centre operations. This segment also includes centrally managed general and life insurance operations. Certain of the business operations in this segment were discontinued, divested or put into run-off in 2004 and 2003.
Centre significantly improved its business operating profit by USD 940 million from a net loss of USD 882 million in 2003 to a net profit of USD 58 million in 2004. Net income also increased substantially by USD 827 million to a net income of USD 9 million in 2004 compared with a net loss of USD 818 million in 2003, impacted by the USD1.1 billion provisions for reserve strengthening, write down of certain assets and other provisions. Centre continues actively to pursue commutation and asset disposal opportunities.The successful commutation of several deals in 2004 had a positive impact on the net results. Centre’s profitability is also affected by movements in financial markets because of the nature of its business, specifically the classification as trading of investments supporting life, health and disability insurance liabilities, and because of the restructure of its investment portfolio. Consequently, the net investment result reduced by USD166 million to USD 457million in 2004.
The wind-down of the Zurich Capital Markets (ZCM) business continues. As announced in July 2003, the Group and BNP Paribas (BNPP) signed a framework agreement to transfer certain derivative transactions and credit facilities and related assets of ZCM to BNPP. BNPP took over responsibility for servicing those transactions, and certain ZCM employees were transferred to BNPP. Designated trades have been novated, unwound or terminated. ZCM will continue to unwind its other business lines. ZCM recorded a net income of USD 93 million for 2004 compared to a net loss of USD 206 million in 2003. This positive result is primarily driven by reduced administrative and other expenses.
The other operations in this segment, including ZCM, recorded a business operating profit of USD 79 million in 2004 compared to a loss of USD 76 million in 2003. Net income increased by USD 281 million to USD 87 million in 2004.
Total benefits, losses and expenses increased by USD182 million in 2004. Administrative and other operating expenses increased as a result of the centralization of certain IT services previously incurred by the business units and of other services provided to local business operating units.
Underwriting and policy acquisition costs, net of reinsurance 10 7,243 6,445
Debt related to capital markets and banking activities 18 3,880 5,961
Consolidated statements of shareholders’ equity in USD millions, except number of shares, for the years ended December 31
Balance as of December 31, 2003, as previously reported 144,006,955 1,096
Transfer arising from initial application of “legal quote” legislation in Switzerland2 – –
Change in net unrealized gains / (losses) on investments not recognized in the operating statement – –
Balance as of December 31, 2004 144,006,955 1,096 1 Implementation of a new accounting standard as discussed in note 3, and as published in the Half Year Report 2004. 2 Transfer of net unrealized gains on investments to insurance reserves as “policyholders’ contract deposits and other funds” in connection with the initial application as of June 30, 2004 of the new “legal quote” legislation in Switzerland as described in note 11.
3 Effective as of June 30, 2004, the share capital was reduced by a nominal value reduction from CHF 9 to CHF 6.50 per each registered share.The payment to shareholders was made on July1, 2004.
Zurich Financial Services and its subsidiaries (collectively the “Group”) are an insurance-based financial services provider with an international network that focuses on chosen markets. Key markets are the United States, the United Kingdom and Continental Europe comprising primarily Germany, Switzerland, Italy and Spain. Core businesses are General and Life Insurance. The Group also distributes non-insurance products, such as mutual funds, mortgages and other financial services products, from selected third-party providers.
The holding company, Zurich Financial Services, is incorporated in Zurich, Switzerland. The Group operates through subsidiaries and branch offices. The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) and comply with Swiss law. IFRS does not contain guidelines governing the accounting treatment of certain transactions including those that are specific to insurance products. When a specific topic is not addressed by the standards, the IFRS Framework permits reference to another comprehensive body of accounting principles. In these cases, the Group typically refers to accounting principles generally accepted in the United States (US GAAP) for guidance.
Life Insurance: Life Insurance operations offer a broad line of life insurance, annuity and investment-type policies to individuals and groups.
Other Businesses: Other Businesses is the combination of the activities described below. In general, such activities are not considered to be core businesses, and certain of these business operations were discontinued, divested or put in run-off in 2004 and 2003.
Centrally managed insurance operations: In 2004, the Group made some changes to the way it manages its business. As a result, the Group manages certain general and life insurance operations on a central basis from its Corporate Center. Therefore, these operations have been included within the Other Businesses segment, and total assets and liabilities of USD 20 billion have been moved from the Life segment to the Other Businesses segment. Further, the risks and rewards of the transferred businesses differ from those contained within the Life segment. In addition, Reinsurance-run-off, which is also centrally managed, reflects the results of the run-off of liabilities that were retained and that were not transferred to Converium, the Group’s former reinsurance subsidiary, which was divested in 2001.
Corporate Center: Corporate Center includes our Group holding and financing companies, Corporate Center operations and alternative investments. This segment also includes some Group internal reinsurance operations that are not attributable to a specific segment but are managed on a global basis.
The Group’s secondary format for segment information is geographic: North America Corporate
(a) Consolidation principles The Group’s consolidated financial statements include the assets, liabilities, equity, revenues, expenses and cash flows of Zurich Financial Services and its subsidiaries. A subsidiary is an entity in which Zurich Financial Services owns, directly or indirectly, more than 50% of the outstanding voting rights, or which it otherwise has the power to control. The results of subsidiaries acquired are included in the consolidated financial statements from the date of acquisition. The results of subsidiaries that have been sold during the year are included up to the date control has ceased. All significant intercompany balances, profits and transactions are eliminated.
Associates and partnerships where the Group has the ability to exercise significant influence, as well as joint ventures where there is joint control, are accounted for using the equity method. Significant influence is presumed to exist when the Group owns, directly or indirectly, between 20% and 50% of the outstanding voting rights.
Revenues from investment management and distribution fees are based on contractual fee arrangements applied to assets under management and recognized as earned when the service has been provided.
Additionally, revenue can be earned from performance fees, which are based upon the achievement of performance levels in excess of pre-determined contractual benchmarks. Performance fees are recognized when it is probable that they will be received and the amount can be estimated reliably.
(c) Deferred policy acquisition costs The costs of acquiring new business, including commissions, underwriting and policy issue expenses, which vary with and are directly related to the production of new business, are deferred. Deferred policy acquisition costs are subject to recoverability testing at the time of policy issue and at the end of each accounting period. Future investment income is taken into account in assessing recoverability.
Deferred policy acquisition costs for participating traditional life insurance contracts are amortized over the expected life of the contracts as a constant percentage of estimated gross margins. Estimated gross margins include anticipated premiums and investment results less benefits and administration expenses, changes in the net level premium reserve and expected policyholder dividends, as appropriate. Estimated gross margins are re-estimated regularly with the impact of deviations of actual result from estimated experience on the amortization of deferred acquisition costs reflected in earnings.
Deferred policy acquisition costs for other traditional life insurance and annuity policies are amortized over the expected life of the contracts as a constant percentage of expected premiums. Expected premiums are estimated at the date of policy issue and are consistently applied throughout the life of the contract unless premium deficiency occurs.
(d) Insurance losses and reserves Losses: Losses and loss adjustment expenses are charged to income as incurred. Unpaid losses and loss adjustment expense reserves represent the accumulation of estimates for ultimate losses and include provisions for losses incurred but not yet reported (IBNR). The reserves represent estimates of future payments of reported and unreported claims for losses and related expenses with respect to insured events that have occurred. Reserving is a complex process dealing with uncertainty, requiring the use of informed estimates and judgments. The Group does not discount its loss reserves, other than for settled claims with fixed payment terms. Any changes in estimates are reflected in results of operations in the period in which estimates are changed.
For products containing guarantees in respect of minimum death benefits (“GMDB”), retirement income benefits (“GRIB”) and annuitization options (“GAO”), additional liabilities are recorded in proportion with the receipt of the contracted revenues.
(e) Reinsurance The Group’s insurance subsidiaries cede insurance premiums and risk in the normal course of business in order to limit the potential for losses arising from longer exposures. Reinsurance does not relieve the originating insurer of its liability. Certain Group insurance companies assume reinsurance business incidental to their normal business, as well as from the Farmers Exchanges. Centre ceased to write new contracts in 2003, but has honored its obligations and commitments with respect to existing contracts. Reinsurance assets include balances due from reinsurance companies for paid and unpaid losses and loss adjustment expenses, ceded unearned premiums and ceded future life policy benefits. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Reinsurance is recorded gross in the consolidated balance sheet unless a right of offset exists.
Financial assets are initially recorded at cost, net of transaction costs directly attributable to the acquisition. Held-to-maturity financial assets are subsequently carried at amortized cost using the effective interest rate method. Trading financial assets are subsequently carried at fair value, with changes in fair value recognized in the current period income. Available-for-sale financial assets are subsequently carried at fair value, with unrealized changes in fair value recorded in shareholders’ equity net of deferred income taxes, certain life policyholder liabilities, certain life deferred acquisition costs and minority interests. Loans originated by the Group are subsequently carried at amortized cost using the effective interest rate method, less allowances for doubtful accounts.
Financial assets are assessed for impairment on a regular basis. A financial asset is impaired if its carrying value exceeds the estimated recoverable amount and there is objective evidence of impairment to the financial asset. For an impaired financial asset impairment is recorded by reducing its carrying value through a charge to current period income. If an available-for-sale financial asset is determined to be impaired, the cumulative unrealized loss previously recognized in shareholders’ equity is removed from shareholders’ equity and recognized in the current period income.
(g) Derivative financial instruments Derivative financial instruments are carried at fair value on the balance sheet as assets or liabilities. Fair values are obtained from quoted market prices, dealer price quotations, discounted cash flow models and option pricing models, which incorporate current market and contractual prices for the underlying instrument, time to expiry, yield curves and volatility of the underlying. Inputs used in pricing models are generally market observable or can be derived from market observable data. Derivative financial instruments with positive fair values are recorded as derivative trading assets. Derivative financial instruments with negative fair values are recorded as derivative trading liabilities. Apart from derivative financial instruments designated as qualifying cash flow hedging instruments (see below), changes in fair value are recognized in current period income.
Derivative financial instruments include swaps, futures, forwards and option contracts, all of which derive their value mainly from underlying interest rates, foreign exchange rates, commodity values or equity instruments. A derivative contract may be traded on an exchange or over-the-counter (“OTC”). Exchange-traded derivatives are standardized and include futures and certain option contracts. OTC derivative contracts are individually negotiated between contracting parties and include forwards, caps, floors and swaps. Derivative financial instruments are subject to various risks similar to those related to the underlying financial instruments, including market, credit and liquidity risk.
Derivative financial instruments used for hedging: For the purpose of hedge accounting, hedges are classified as either fair value hedges when they hedge the exposure to changes in the fair value of a recognized asset or liability, or cash flow hedges where they hedge exposure to variability in cash flows that is either attributable to a particular risk associated with a recognized asset or liability or a forecasted transaction.
In relation to fair value hedges which meet the conditions for special hedge accounting, gains or losses from re-measuring the hedging instrument at fair value are recognized immediately in the operating statement. Gains or losses on the hedged item attributable to the hedged risk are adjusted against the carrying amount of the hedged item and recognized in the operating statement. Where the adjustment is to the carrying amount of a hedged interest-bearing financial instrument carried at amortized cost, the adjustment is amortized to current period income such that it is fully amortized by maturity.
In relation to cash flow hedges which meet the conditions for special hedge accounting, the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognized directly in shareholders’ equity and the ineffective portion is recognized in current period income. When the hedged firm commitment results in the recognition of an asset or a liability, then, at the time the asset or liability is recognized, the associated gains or losses that had previously been recognized in shareholders’ equity are included in the initial measurement of the acquisition cost or other carrying amount of the asset or liability. For other cash flow hedges, the gains or losses that are recognized in shareholders’ equity are transferred to the operating statement in the same period in which the item hedged affects the net profit and loss, for example when the future sale actually occurs.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. At that point in time, cumulative gains or losses on the hedging instrument recognized in shareholders’ equity are kept in shareholders’ equity until the forecasted transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognized in shareholders’ equity is transferred to current period income.
(k) Interest expense Interest expense is recognized when incurred on an amortized cost basis.
(l) Intangible assets Goodwill: Acquisitions of subsidiaries and associates are accounted for under the purchase method, whereby the purchase price is allocated to the fair value of assets and liabilities acquired at the date of acquisition with any residual amount allocated to goodwill. Goodwill is amortized using the straight-line method over its estimated economic life. Goodwill arising on strategic acquisitions of the Group to obtain long duration insurance contracts, customer relationships and distribution networks is amortized over a maximum period of 20 years. For all other acquisitions, goodwill is generally amortized over five years. The recoverability of the carrying value of the goodwill is reviewed periodically. If the carrying value of goodwill exceeds the recoverable amount, the carrying value is reduced through a charge to current period earnings.
Present value of profits of acquired insurance contracts is amortized over the expected life of the policies acquired, based on a constant percentage of the present value of estimated gross profits (margins) expected to be realized, or over the premium recognition period, as appropriate.
Other intangibles are carried at cost less accumulated amortization and consist primarily of acquired brand names and software costs that meet the recognition criteria for capitalization. The costs of these assets are amortized using the straight-line method over the following estimated economic lives: brand names 20 years; software three to five years.
Attorney-in-fact relationships: At the date of the acquisition of Farmers Group, Inc. and its subsidiaries (“FGI”) in 1988, a portion of the purchase price was assigned to the attorney-in-fact relationships. The asset representing the attorney-in-fact relationships represents the ability of FGI to generate future revenues based on the Group’s relationship with the Farmers Exchanges. This carrying value is amortized on a straight-line basis over 40 years. In determining the period of amortization, 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. In addition, the Group considered the historical attorney-in-fact relationship between FGI and the Farmers Exchanges.
(m) Income taxes The Group provides current tax expense according to the tax laws of each jurisdiction in which it operates. Income taxes are recognized using the asset and liability method. Deferred income taxes are recorded for temporary differences, which are based on the difference between financial statement carrying amounts and income tax bases of assets and liabilities using enacted income tax rates and laws. Losses for tax purposes are treated as deferred tax assets to the extent it is probable that the losses can offset future taxable income and is allowed by the applicable local tax laws and regulations.
Taxes payable by either the holding company or its subsidiaries on distribution to the holding company of the undistributed profits of subsidiaries are recognized as deferred income taxes unless a distribution of those profits is not intended or would not give rise to a tax liability.
Other defined post-employment benefits, such as medical care and life insurance, are also provided for certain employees and are primarily funded internally. The cost of such benefits is accrued over the service period of the employee based upon the actuarially determined cost for the period.
(p) Fixed assets Real estate (buildings) held for own use and other fixed assets are carried at cost less accumulated depreciation and any necessary write-downs due to impairment. The costs of these assets are depreciated principally on a straight-line basis over the following estimated useful economic lives: buildings 25 to 50 years; furniture and fixtures five to ten years; and computer equipment three to five years. Real estate (land) is carried at cost less any necessary write-downs. Maintenance and repair costs are charged to income as incurred. Costs of systems purchased from outside vendors and developed internally are deferred and amortized over expected useful lives up to five years. Gains and losses on disposal of fixed assets and real estate held for own use are determined based on their respective carrying amounts.
(s) Treasury stock Treasury stock is deducted from equity at its nominal value of CHF 6.50 and CHF 9 per share as of December 31, 2004 and 2003, respectively. Differences between this amount and the amount paid for acquiring, or received for disposing of treasury shares, are recorded as an adjustment to additional paid-in capital in shareholders’ equity.
(t) Foreign currency translation and transactions Foreign currency translation: In view of the international nature of the Group there are many individual entities with different functional currencies. Therefore, a common presentation currency is required. Due to the Group’s economic exposure to the US dollar (USD), the presentation currency of the Group has been determined to be the USD. Assets and liabilities of Group companies with functional currencies other than USD are translated at the end-of-period exchange rates, while operating statements are translated at average exchange rates for the period. The resulting translation differences are recorded directly in shareholders’ equity as cumulative translation adjustments.
Foreign currency transactions: Foreign currency monetary items are translated at end-of-period exchange rates, non-monetary items which are carried at historical cost denominated in a foreign currency are translated at historical rates. Revenues and expenses are translated using the exchange rate at the date of the transaction or a weighted average rate. The resulting exchange differences are recorded in the consolidated operating statement.
Operating statements Table 2 Balance sheets and cash flows Principal exchange rates as of for the years ended USD per foreign currency unit 12/31/04 12/31/03 12/31/04 12/31/03 76 Zurich Financial Services Group . Annual Report 2004
ii) Clarification of the distinction between universal life insurance and investment products, resulting in certain products in the life business in the United Kingdom now being treated as insurance. The classification as insurance consequently resulted in the retrospective accrual of additional insurance reserves.
iii) “Investments held on account and at risk of life insurance policyholders”, which are not bankruptcy protected from other creditors, and “Insurance reserves for life insurance where the investment risk is carried by policyholders” were reclassified to total investments and insurance reserves in the amount of approximately USD 50 billion. This change also resulted in the inclusion in the consolidated operating statements of additional investment result arising from the reclassified investments and a substantially corresponding charge in “policyholder dividends and participation in profits”. As a result, there is no material net impact on the Group’s operating results.
Table 3.1 Summary of restatement of key consolidated operating statement items due to implementation of a new accounting standard As previously Restatement Restated in USD millions, for the year ended December 31, 2003 reported adjustment 2003
Policyholder dividends and participation in profits, net of reinsurance (423) (5,622) (6,045)
Table 3.2 Summary of restatement of key consolidated balance sheet items due to implementation of a new accounting standard As previously Restatement Restated in USD millions, as of December 31, 2003 reported adjustment 2003
Insurance reserves for life insurance where the investment risk is carried by policyholders 73,233 (51,170) 22,063
The SOP 03-01 restatement adjustments have been recorded primarily in the Life Insurance segment, with the exception of the write-down of deferred policy acquisition costs which relate to business recorded in the Other Businesses segment.
• Goodwill acquired in a business combination is to be measured after initial recognition at cost less any accumulated impairment losses. Therefore, the goodwill is not amortized and instead must be tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired.
Table 4 Net gain on significant divestments only in USD millions, for the years ended December 31 2004 2003
Changes in 2003 The Group completed the sale of certain operations of Zurich France to Assicurazioni Generali SpA, recognizing a loss of USD 28 million before tax. The transaction included the life insurance operations (including Eagle Star business) and parts of consumer and commercial lines of the general insurance operations.
On March 31, 2003, the Group completed the sale of Rüd, Blass & Cie AG, Bankgeschäft to Deutsche Bank (Suisse) SA. For this transaction, a significant portion of the sales proceeds could not be recognized at the time of sale, as it was contingent on the development of assets under management over a period of 15 months subsequent to the closing. Finalization was completed in 2004.
Table 5 Management fees in USD millions, for the years ended December 31 2004 2003
Farmers Group, Inc. and its subsidiaries (“FGI”) are contractually permitted to receive a management fee of up to 20% (25% in the case of the Fire Insurance Exchange) of the gross premiums earned by the Farmers Exchanges. In order to enable the Farmers Exchanges to maintain appropriate capital and surplus while offering competitive insurance rates, FGI has historically charged a lower management fee than the maximum allowed. The range of fees has varied by line of business over time and from year to year. During the past five years, aggregate management fees have averaged between 12% and 13% of gross premiums earned by the Farmers Exchanges. The gross earned premiums of the Farmers Exchanges were USD14,020 million in 2004 (USD13,654 million in 2003).
Asset management fees were primarily earned by Threadneedle Asset Management Holdings Ltd., which was divested on 6. Investments
A summary of net investment income and net capital gains and losses and impairments is given below.
Net capital Table 6.1 Net investment gains/(losses) and Investment result income impairments1 Investment result in USD millions, for the years ended December 31 2004 2003 2004 2003 2004 2003
Real estate held for investment 840 799 471 135 1,311 934
The details of the investment balances as of December 31, 2004 and 2003 are given in the tables below.
Debt securities: Equity securities (including trading equity portfolios in capital markets and banking activities): of which: – Trading equity portfolios in capital markets and banking activities 2,773 1.1% 4,303 1.9%
Short-term investments include investments that have an original maturity of less than one year.
Cash and investments with a carrying value of USD 7,781 million and USD 7,466 million were deposited with regulatory authorities as of December 31, 2004 and 2003, respectively. As of December 31, 2004 and 2003, respectively, debt securities with a carrying value of USD 5,009 million and USD 3,742 million have been sold to financial institutions under short-term sale and repurchase agreements. These securities continue to be recognized as investments in the balance sheets and an obligation to repurchase them is included in liabilities in the balance sheets at that date. On December 31, 2004 and 2003, the volume of securities loaned out by the Group under securities lending programs was USD16.2 billion and USD 7.4 billion, respectively.
The amortized cost and estimated fair values of debt securities held-to-maturity and available-for-sale are shown by contractual maturity. Actual maturities may differ from contractual maturities because certain borrowers have the right to call or pre-pay certain obligations with or without call or pre-payment penalties.
Table 6.4 Equity securities (including trading equity portfolios 2004 2003 in capital markets and banking activities) USD % of total USD % of total as of December 31 millions investments millions investments
Unit-trusts (debt securities, real estate, short-term investments) 5,270 2.1% 4,192 1.9%
Table 6.5 Cost or Gross Gross Estimated Available-for-sale securities amortized cost unrealized gains unrealized losses fair value in USD millions, as of December 31 2004 2003 2004 2003 2004 2003 2004 2003
Swiss federal and cantonal governments 8,898 8,170 455 404 (12) (12) 9,341 8,562
Total equity securities – available-for-sale 11,753 14,233 1,303 1,179 (992) (1,887) 12,064 13,525
Net capital gains / (losses) on trading debt and equity securities 847 (50) 2,974 4,730 3,821 4,680
Table 6.8 Share in Ownership Investments in associates Carrying value profit/ (loss) interest
The Guarantee Company of North America, Canada 88 82 2 2 32.08% 32.08%
PSP Swiss Property AG, Switzerland1 – 269 11 19 12.40% 22.34%
Total investments held on account and at risk of life insurance policyholders 24,189 21,980
Total insurance reserves for life insurance where the investment risk is carried by policyholders 24,261 22,063
In certain countries,“Insurance reserves for life insurance where the investment risk is carried by policyholders” include amounts due to policyholders as well as deferred front-end fees and, thus, the reserves are carried at a higher amount than the total “Investments held on account and at risk of life insurance policyholders”.
The methods and assumptions used by the Group in estimating the fair value of the financial instruments and other investments are discussed below.
• Debt and equity securities: Fair values are based on quoted market prices when available. If quoted market prices are not available, then fair values are estimated on the basis of pricing models, discounted cash flow or other recognized valuation techniques. • Investments in associates are accounted for using the equity method. Accordingly, these participations are carried at the Group’s proportional interest of the investee’s shareholders’ equity. The fair value of these entities, particularly for publicly traded entities, may differ from the carrying value.
• Policyholders’ collateral and other loans: Fair values are estimated on the basis of discounted cash flow, pricing models, or other recognized valuation techniques.
Table 8 Total Total Fair value of financial instruments fair value carrying value in USD millions, as of December 31 2004 2003 2004 2003
Other Investments: Investments held by investment companies 1,728 1,576 1,728 1,576
To limit credit risk exposure derivative financial instruments are typically executed with counterparties rated A or better by Standard & Poor’s. Wherever possible, efforts are undertaken to net the credit exposure with individual counterparties in compliance with applicable laws.
Foreign exchange contracts: Foreign exchange contracts, which include spot, forward and futures contracts, represent agreements to exchange one currency for another currency at an agreed price and settlement date. Foreign exchange option contracts are similar to interest rate option contracts, except that they are based on currencies, rather than interest rates. Exposure to loss on these contracts will increase or decrease over their respective lives as currency exchange and interest rates fluctuate. For exchange-traded foreign exchange contracts, the Group’s exposure to off-balance sheet credit risk is limited, as these transactions are executed on organized exchanges that assume the obligation of counterparties and generally require security deposits and daily settlement of margins.
Table 9.1 Maturity profile of notional principal amounts and market values of derivative financial instruments Notional (excluding ZCM) Remaining life principal amounts Market values in USD millions, as of December 31 Up to 1year 1 to 5 years over 5 years 2004 2003 2004 2003
(d) Outstanding positions of Zurich Capital Markets (“ZCM”) ZCM’s risk management model focused on controlling incremental risk and actively monitoring existing portfolio risk. Existing portfolio risk is monitored through a variety of quantitative measures including Value-at-Risk (VaR) and stress testing.
Table 9.2 Maturity profile of notional principal amounts and market Notional values of derivative financial instruments (ZCM) Remaining life principal amounts Market values in USD millions, as of December 31 Up to 1year 1 to 5 years over 5 years 2004 2003 2004 2003
Futures/forwards of which: derivative trading asset 864 2,152 derivative trading liability (730) (1,850)
Total insurance benefits and losses 40,099 37,919 (5,599) (4,660) 34,500 33,259 of which: Losses and loss adjustment expenses paid 22,034 21,260 (4,519) (4,744) 17,515 16,516
Underwriting and policy acquisition costs 8,496 7,932 (1,253) (1,487) 7,243 6,445
The impact of the adoption of SOP 03-01 is discussed in note 3.
Table 11.1 Insurance reserves in USD millions, as of December 31 2004 2003
Reserves for unit-linked products relate to the implementation of SOP 03-01 as discussed in note 3.
Table 11.2 Development of reserves for losses and loss adjustment expenses in USD millions 2004 2003
Deferred charges relating to retrospective reinsurance assumed totaling USD 182 million and USD 265 million as of December 31, 2004 and 2003, respectively, have been deducted from reserves for losses and loss adjustment expenses.
Table 11.3 Reserves for losses and loss adjustment expenses for asbestos and environmental claims 2004 2003 in USD millions Gross Net Gross Net
The Group accounted for the initial application of this legislation in the consolidated financial statements as of June 30, 2004, by transferring net unrealized gains on investments included in shareholders’ equity of USD 226 million to insurance reserves as “Policyholders’ contract deposits and other funds”. In addition, the Group recorded a pre-tax charge of USD 54 million related to this change.
The Group, as a proxy for life insurance policyholders in the UK, is required to record taxes on investment income and gains each year. Accordingly, the tax benefit or expense attributable to UK life insurance policyholder earnings is included in income tax expense. The tax expense attributable to UK policyholder earnings was USD 254 million and USD 36 million for the years ended December 31, 2004 and 2003, respectively. In addition, deferred income tax on unrealized investment gains on unit-linked contracts is included as income tax expense and an accrual for future policy fees that will cover the tax charge is included in gross written premiums and policy fees revenue. Income tax is shown before reduction for the element attributable to policyholders.
Additional tax expense attributable to life insurance policyholder earnings 154 59
The current income tax payable (net of income tax receivable) as of December 31, 2004 and December 31, 2003 was USD 971 million and USD 614 million, respectively.
Ceded reinsurance arrangements do not relieve the Group from its direct obligations to its policyholders. Thus, a credit exposure exists with respect to reinsurance ceded to the extent that any reinsurer is unable to meet the obligations assumed under the reinsurance agreements. The Group holds substantial collateral as security under related reinsurance agreements in the form of deposits, securities and/or letters of credit. As of December 31, 2004 and 2003, 44% and 41%, respectively, of total reinsurance assets were collateralized.
The life insurance operations limit exposure to loss on any single life policy. Retention limits vary by territory and product line. Approximately 6.3% and 6.7% of gross written premiums and policy fees were ceded as of December 31, 2004 and 2003, respectively, for life operations, and 19.8% and 23.3% for general insurance operations as of December 31, 2004 and 2003, respectively.
Amortization charged to shareholders’ equity – – (105) (16) 4 10 (101) (6)
Table 16 Fixed assets in USD millions, as of December 31 2004 2003
Table 17 acquired insurance intangible Attorney-in-fact Intangible assets Goodwill contracts assets relationship Total
Notes and loans payable, due in the following year 2,873 2,855
Debt related to capital markets and banking activities 3,880 5,961 b) Senior debt
Zurich Finance (USA), Inc. 2.75% CHF bond, due July 2006 438 403 3.5% CHF bond, due July 2008 263 242 4.5% EUR bond, due September 2014 1,342 –
Zurich Insurance Company 3.875% CHF bond, due July 2011 880 807
Zurich Finance (USA), Inc. 5.75% EUR bond, due October 2023 668 620
(a) Debt related to capital markets and banking activities In 2003 a framework agreement was signed with BNP Paribas for the transfer of certain derivative transactions, credit facilities and related assets by Zurich Capital Markets (“ZCM”) to BNP Paribas. As of December 31, 2004, these transfers were completed and this contributed to a reduction of ZCM debt compared to December 31, 2003. In March 2004, all Commercial Paper outstanding under ZCM Matched Funding Corp.’s USD 2.5 billion US Commercial Paper Program matured and were fully repaid. As the program was not renewed, there were no amounts as of December 31, 2004.
As of December 31, 2004, the major part of ZCM’s debt comprised a number of structured notes, most of which carried floating rate coupons. The remainder consisted of fixed rate deposits with Zurich Bank.
Dunbar Bank p.l.c., a wholly-owned banking subsidiary of Allied Dunbar Assurance p.l.c., had total outstanding borrowings of GBP10 million and GBP 76 million at December 31, 2004 and 2003, respectively.These short-term borrowings were drawn under various committed credit facilities totaling GBP 400 million and GBP 415 million as of December 31, 2004 and 2003, respectively. Net proceeds of these funds were used to finance Dunbar Bank’s lending activities.
(b) Senior debt The Group has a Euro Medium Term Note Programme (EMTN Programme) which allows for the issuance of up to USD 4 billion of senior and subordinated notes. Issuing entities under the EMTN Programme include Zurich Finance (USA), Inc. and Zurich Finance (UK) p.l.c.
The zero coupon CHF 539 million exchangeable bond issued by Zurich International (Bermuda) Ltd. which was exchangeable into 4,800,000 registered shares of UBS AG and guaranteed by Zurich Insurance Company was due and repaid in July 2004. No exchange options were exercised over the whole term of the bond issue.
The 6.625% GBP 450 million perpetual bond is callable in 2022 and the 5.75% EUR 500 million bond, maturing in 2023, is callable in 2013.
Amounts due to reinsurers, agents and other insurance companies 3,238 3,264
Table 20 Minority interests in USD millions, as of December 31 2004 2003
Authorized, contingent and issued common stock, CHF 6.50 and CHF 9 par value, respectively 156,988,783 156,988,783
Issued common stock, CHF 6.50 and CHF 9 par value, respectively 144,006,955 144,006,955
Table 21.2 Preferred securities in USD millions, as of December 31 2004 2003
(b) Authorized stock Until June 1, 2005, the Board of Zurich Financial Services is authorized to increase its share capital by an amount not exceeding CHF 39,000,000 by issuing up to 6,000,000 fully paid registered shares with a nominal value of CHF 6.50 each. An increase in partial amounts is permitted. The Board determines the date of issue of such new shares, the issue price, type of payment, conditions for exercising pre-emptive rights, and the beginning of the dividend entitlement. The Board may issue such new shares by means of a firm underwriting by a banking institution or syndicate with subsequent offer of those shares to the current shareholders. The Board may allow the expiry of pre-emptive rights which have not been exercised, or it may place these rights as well as shares, the pre-emptive rights of which have not been exercised, at market conditions.
The Board of Directors is authorized, when issuing bonds or similar debt instruments connected with conversion and/or option rights, to restrict or withdraw the right of shareholders for advance subscription in cases where such bonds are issued for the financing or re-financing of a takeover of an enterprise, of parts of an enterprise, or of participations. If the right for advance subscription is withdrawn by the Board, the convertible bond or warrant issues are to be offered at market conditions (including standard dilution protection provisions in accordance with market practice) and the new shares are issued at then current convertible bond or warrant issue conditions. The conversion rights may be exercisable during a maximum of 10 years and option rights for a maximum of seven years from the time of the respective issue. The conversion or option price or its calculation methodology shall be determined in accordance with market conditions, whereby for shares of Zurich Financial Services the quoted share price is to be used as a basis.
(d) Preferred securities In February 2001, the Group placed six series of Trust Capital Securities (Zurich RegCaPS) in the total amount of USD 1,125 million (USD 1,096 million net of issuance costs) with a limited number of qualified institutional and corporate US investors. The securities, which were issued under Rule 144A in the United States, are perpetual, non-cumulative and have a par value of USD 1,000 each. They have no voting rights, except for certain specified circumstances and are linked to Farmers Group, Inc. Class C shares.The Group has the option to call the securities after five, seven or ten years, depending on the series. Two series have a fixed rate coupon (6.01% and 6.58%) and four have a floating rate coupon (between Libor +46 bps and +71 bps).These coupon rates step up after the first call dates.
(f) Dividends Dividends for Zurich Financial Services shares are declared in CHF.
Other than by operation of the restrictions mentioned above, the ability of Zurich Financial Services’ subsidiaries to pay dividends may be restricted or, while dividend payments per se may be legally permitted, may be indirectly influenced by minimum capital and solvency requirements that are imposed by insurance, bank and other regulators in the countries in which the subsidiaries operate as well as by other limitations existing in certain of these countries (e.g. foreign exchange control restrictions).
In the United States, restrictions on payment of dividends may be imposed by the insurance laws or regulations of an insurer’s state of domicile. For general insurance subsidiaries, dividends are generally limited over a twelve month period to 10% of the previous year’s policyholders’ surplus or previous year’s net income. For life, accident and health insurance subsidiaries, dividends are generally limited over a twelve month period to 10% of the previous year’s policyholders’ surplus or the previous year’s net gain from operations. Dividends paid in excess of statutory limitations require prior approval of the Insurance Commissioner of the insurer’s state of domicile.
Effect of potentially dilutive shares related to share-based compensation plans – 1,067,047 (0.13) (0.16)
Diluted earnings per share 2,009 143,090,281 14.04 18.86 1 The translation from USD into CHF has been done for information purposes only at the Group’s average exchange rates for the years ended December 31, 2004 and 2003, respectively.
The Group had 53,246 and 58,667 employees (full time equivalents) as of December 31, 2004 and 2003, respectively. Personnel and other related costs incurred for 2004 and 2003 were USD 4,462 million and USD 4,702 million, respectively.
The Group also operates post-employment plans, which provide employees with certain defined post-employment benefits other than pensions; the major plans are in the United States.
The summary of the status of the defined benefit plans and other defined post-employment benefits is given below.
Other defined post-employment benefits: Certain of the Group’s operating companies provide a post-employment benefit program for medical care and life insurance. Eligibility in the various plans is generally based on completing a specified period of eligible service and reaching a specified age. The programs pay a stated percentage of medical expenses reduced by deductibles and other coverage. The cost of post-employment benefits is accrued during the employees’ service period.The method of accounting and the frequency of valuations are similar to those for defined benefit pension plans.
Other defined Table 22.1 Defined benefit post-employment Weighted average assumptions used in determining the actuarial liabilities pension plans benefits
Expected long-term rate of return on assets 6.1% 6.1% 5.0% 6.6%
Asset / (liability) as of December 31 268 402 (67) (59)
The funded status discloses the balance of pension plan assets at current fair values less the pension liability at current conditions. Pensions, however, are long-term by nature. Short-term variations between long-term actuarial assumptions and actual experience may be positive or negative, i.e. resulting in actuarial gains or losses. In principle, such actuarial gains or losses are not recognized under IAS19 as it is expected that such actuarial gains and losses will equalize over time. Only unrecognized actuarial gains or losses exceeding certain “corridors” as defined in IAS19 are amortized through the operating statement (see table 22.4 below,“Net actuarial losses recognized in year”).
The funded status of the Group’s funded defined benefit plans moved from a deficit of USD 1,306 million as of December 31, 2003 to a deficit of USD 2,189 million as of December 31, 2004. Pension plans in the UKISA region accounted for substantially all of the movement in the balances. The increase in the present value of the pension obligations in UKISA, which increased greater proportionally than the fair value of plan assets thus impacting the funded status, is due to changes in actuarial assumptions about future pension benefits. The funded status was further impacted by the pension contribution holiday in the UK which continued in 2004, during which time pension assets of approximately USD 140 million were liquidated to pay benefits without new contributions added to plan assets. Foreign exchange movements also had a total impact on the funded status of the Group's funded defined benefit plans in Switzerland and the UKISA region of approximately USD 72 million.
Employee share plans Share Incentive Plan for employees in the UK: In June 2003, the Group established an Inland Revenue approved Share Incentive Plan and launched the partnership shares element of this plan. This plan enabled participating employees to make monthly purchases of Zurich Financial Services shares at the ruling market price out of their gross earnings. There were 500 and 507 participants in the plan as of December 31, 2004 and 2003 respectively. The Group also launched reward shares, the profit-sharing element of the Share Incentive Plan in March 2004 with share allocations being made in May 2004. The awards were based on the performance of the participating employee’s business units for the year, subject to a maximum award of 5% of participant’s base salary (before any flexible benefit adjustments ) or GBP 3,000. The total number of participating employees as of December 31, 2004, was 6,149.
Senior executive Group long-term incentive plans Senior Executives are granted annually performance options and performance shares which vest on an annual basis over the subsequent three year period.The actual level of vesting, which can be between 0% and 150% of the original number granted, depends on the performance of the Group during the previous calendar year.The current performance metrics are the Group’s return on equity (ROE) and the positioning of the Group’s total shareholder return against an international peer group of insurance companies. One-half of the shares that actually vest are sales-restricted/deferred for a further period of three years.The options have a seven-year term from the date of grant. Grants under the plan are made annually on April 3.The actual number of performance options and performance shares granted is determined such that the economic value is a defined percentage of the annual salary in the year of allocation. During 2004 and 2003, a total of 186 and 184 participants were granted shares and options under this plan.
The average share price for Zurich Financial Services shares in 2004 and 2003 was CHF188.76 and CHF154.65, respectively.
Table 23.3 Weighted average Weighted average Range of exercise prices of options outstanding as of December 31, 2004 contractual remaining expected in CHF life in years life in years
Additional information The shares and options granted during the period are the target allocations made under the performance option and the performance share plans together with any restricted share awards granted during the year. Whether these grants become vested or not will depend upon whether the performance achievements are met and the expense is then adjusted accordingly.
In the normal course of business, the Group enters into various transactions with related companies, including various reinsurance and cost-sharing arrangements. These transactions are not considered material to the Group, either individually or in the aggregate. Parties are considered to be related if one party has the ability to control or exercise significant influence over the other party in making financial or operational decisions.The table below sets forth related party transactions reflected in the consolidated balance sheets and consolidated operating statements.
6.15% certificates of contribution, due August 2014 (in 2003: 7.85%, due March 2010) 296 370 6.00% certificates of contribution, due September 2006 107 557
Conditions governing payment of interest and repayment of principal are outlined in the certificates of contribution and the surplus note. Generally, repayment of principal may be made only when the issuer has an appropriate amount of surplus, and then only after approval is granted by the issuer’s governing Board and the appropriate state insurance regulatory department. In addition, payment of interest may generally be made only when the issuer has an appropriate amount of surplus and then only after approval is granted by the appropriate state insurance regulatory department.
In addition, effective December 31, 2002, Farmers Re and ZIC entered into a 20% Personal Lines Auto Quota Share reinsurance treaty with the Farmers Exchanges under which each reinsured a percentage of the personal lines auto business written by the Farmers Exchanges. Under this treaty, Farmers Re assumes a 4% quota share of the premiums written and the ultimate net losses sustained in the personal lines auto liability and physical damage lines written by the Farmers Exchanges after all other reinsurance treaties are applied (ZIC reinsures 16% under this agreement). Losses assumed are subject to a maximum combined ratio of 112.5% as well as USD150 million of catastrophe losses and a minimum combined ratio of 97.0%. The reinsurance agreement, which can be terminated after 60 days notice by any of the parties, also provides for the Farmers Exchanges to receive a provisional ceding commission of 20% of premiums for acquisition expenses and 17.2% of premiums for other expenses with additional experience commissions that depend on loss experience.
Effective December 31, 2004, this 20% Personal Lines Auto Quota Share reinsurance treaty was cancelled and unearned premiums (USD 338 million) net of acquisition costs (USD 68 million) were transferred to the Farmers Exchanges.
The Group has provided guarantees or commitments to external parties, associates, partnerships and joint ventures.These arrangements include commitments under certain conditions to make liquidity advances to cover delinquent principal and interest payments, make capital contributions or provide equity financing.
Other commitments and contingent liabilities 271 1,082 1 Guarantee features embedded in life insurance products are not included. For such guarantee features refer to note 11, insurance reserves.
Commitments under investment agreements The Group has committed to contribute capital to subsidiaries, associates and third parties that engage in making investments in direct private equity, private equity funds, emerging market funds and hedge funds. Included in the remaining commitments is USD 473 million to Capital Z Investments II, L.P., USD167 million to Capital Z Investments, L.P. and USD116 million to Gresham. Part of these commitments may be called at any time and in any amount, based on various criteria.The remaining commitments also include a minimum allocation for hedge fund investments.
The Group also leases its real estate held for investment to outside parties under operating leases.
In 2003, the Group completed the divestments of various asset management operations. As part of these agreements, the Group has guaranteed certain minimum levels of “assets under management” to the acquirers.The guarantees provide that if the “assets under management” fall below those defined levels under certain conditions, the Group may be required to compensate for these shortfalls. The compensation is limited to the considerations received and the Group does not believe any such compensation to be probable.
Life insurance death and other benefits, net of reinsurance 118 206 12,166 9,303
(Decrease) / increase in future life policyholders’ benefits, net of reinsurance 9 8 (2,075) 1,820
Insurance benefits and losses, net of reinsurance 23,376 19,831 10,180 11,199
Policyholder dividends and participation in profits, net of reinsurance 9 11 6,754 5,861
Underwriting and policy acquisition costs, net of reinsurance 5,361 4,715 1,361 1,271
Interest credited to policyholders and other interest 150 118 755 885
Losses and loss adjustment expenses paid, net 16,639 15,184 92 94
Amortization and impairments of intangible assets 106 101 230 176 104 Zurich Financial Services Group . Annual Report 2004
Table 27.2 General Life Assets and liabilities by business segment Insurance Insurance in USD millions, as of December 31 2004 2003 2004 2003
Total assets after consolidation of investments in subsidiaries 101,597 90,523 204,541 184,755
1 Other related intangible assets consists of present value of profits of acquired insurance contracts and attorney-in-fact relationship.
Reserves for losses and loss adjustment expenses, net 41,079 31,986 95 76
Policyholders’ contract deposits and other funds, net 1,011 1,043 16,144 13,844
Zurich Australian Insurance Limited Sydney General Insurance 100.00 100.00 AUD 97.1
Centre Group Holdings Limited Hamilton Other Businesses 100.00 100.00 USD 0.3
ZCM Holdings (Bermuda) Limited Hamilton Other Businesses 100.00 100.00 USD 158.9
ZG Investments II Ltd. Hamilton Corporate Center 100.00 100.00 USD 0.01
ZG Investments IV Ltd. Hamilton Corporate Center 100.00 100.00 USD 0.01
Zurich International (Bermuda) Ltd. Hamilton Corporate Center 100.00 100.00 USD 9.9
Zurich International (France) Cie d’Assurances S.A. Levallois-Perret General Insurance 99.99 99.99 EUR 20.2
DA Deutsche Allgemeine Versicherung AG Oberursel General Insurance 100.00 100.00 EUR 24.5
Deutscher Herold Allgemeine Versicherung AG Bonn General Insurance 76.83 76.83 EUR 20.5
Zürich Beteiligungs-Aktiengesellschaft (Deutschland) Frankfurt /Main General Insurance 100.00 100.00 EUR 152.9
Eagle Star Life Assurance Company of Ireland Limited Dublin Life Insurance 100.00 100.00 EUR 17.5
Zurich International (Italia) S.p.A. Milan General Insurance 100.00 100.00 EUR 38.6
Zurich Investments Life S.p.A. Milan Life Insurance 100.00 100.00 EUR 34.0
Book value Voting Ownership of common stock rights interest (in local
Allied Dunbar Assurance p.l.c. Swindon, England Life Insurance 100.00 100.00 GBP 465.1
Claims Management Group Limited London, England Corporate Center 100.00 100.00 GBP 3.5
Zurich Assurance (2004) p.l.c. London, England Life Insurance 100.00 100.00 GBP 162.6
Zurich Financial Services (Jersey) Limited Jersey, Channel Islands Corporate Center 100.00 100.00 GBP 0.01
Zurich Financial Services (UKISA) Limited London, England Corporate Center 100.00 100.00 GBP 1,492.1
Zurich Holdings (UK) Limited Fareham, England Corporate Center 100.00 100.00 GBP 87.1
Zurich International Life Limited Douglas, Isle of Man Life Insurance 100.00 100.00 GBP 35.6
Kemper Investors Life Insurance Company Mercer Island, WA Other Businesses 100.00 100.00 USD 2.5
Universal Underwriters Insurance Company Overland Park, KA General Insurance 100.00 100.00 USD 15.0
Zurich Holding Company of America, Inc. Dover, DE Corporate Center 100.00 100.00 USD 0.6 1 The segments are defined in the Notes to the consolidated financial statements, note1, basis of presentation.
These consolidated financial statements are the responsibility of the Board of Directors. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We confirm that we meet the legal requirements concerning professional qualification and independence.
Gross new business premiums including deposits 252 711 of which: Annual premiums 106 175
Operating profit expected from in-force business and net assets, after tax 176 232
Closing embedded value after foreign currency translation effects 2,402 2,555 of which: Shareholders’ net assets 1,012 1,308
Discount Discount Investment Investment Initial Renewal Demorate rate return return expenses expenses graphy Lapses
Change in new business value 1% 1% 1% 1% 10% 10% 10% 10% in USD millions increase decrease increase decrease decrease decrease worsening worsening
This report describes the Group’s approach to corporate governance. It includes the information required by the 2002 Directive on Information Relating to Corporate Governance of the SWX Swiss Exchange. It also explains how, in 2004, the Group complied with the Swiss Code of Best Practice for Corporate Governance, issued in 2002 by the Swiss Business Federation. In light of the introduction of a more prescriptive corporate governance framework in Switzerland, it has now been decided that Zurich Financial Services, as a Swiss company, will continue to report its compliance with the Swiss rules and practice on corporate governance and remuneration. The Group no longer has a company with a primary listing in the UK, following unification of the corporate structure in 2001, so that compliance with the UK Combined Code is no longer required. Zurich Financial Services believes that the current Swiss rules on corporate governance and remuneration represent international standard corporate governance principles, which are appropriate for Zurich Financial Services and its shareholders. The Internal Control Statement on page 129, however, is in accordance with the UK Turnbull Guidance.
Group structure and shareholders Zurich Financial Services, the Group’s holding company, is a Swiss corporation, organized in accordance with the laws in Switzerland. The Group is managed reflecting both line of business and geography.
With the exception of Zurich Financial Services, with a primary listing on the SWX Swiss Exchange and a secondary listing on the London Stock Exchange, there are no other listed principal operating subsidiaries in the Group. Certain Group companies have listed debt issues under the Euro Medium Term Note Programme, preferred share issues and other financial instruments. For further information on the share listings of Zurich Financial Services, see the Shareholder Information on page 142.
As of December 31, 2004, Zurich Financial Services had authority to increase the share capital by CHF 39,000,000 representing 6,000,000 registered shares with a nominal value of CHF 6.50 each not later than June 1, 2005. It also had a contingent share capital of CHF 35,631,882 representing 5,481,828 registered shares with a nominal value of CHF 6.50 each. Moreover, there is an additional contingent share capital of CHF 9,750,000 representing 1,500,000 registered shares with a nominal value of CHF 6.50 each, which may be issued to employees of the Group.
At the Annual General Meeting on April 16, 2004, shareholders approved a share capital reduction in the form of a nominal value reduction of each registered share from CHF 9 to CHF 6.50. As a result of this reduction, the share capital was reduced by CHF 360,017,387.50 from CHF1,296,062,595 to a new total of CHF 936,045,207.50. The authorized capital was reduced to CHF 39,000,000 and the contingent capital was reduced to CHF 35,631,882 and CHF 9,750,000, respectively.
Zurich Financial Services shares are registered shares with a nominal value of CHF 6.50 each. The registered shares are fully paid and non-assessable. Pursuant to Article 14 of the Articles of Incorporation, each registered share carries one vote at the shareholder meetings and entitles the registered holder to exercise all other membership rights in respect of such share, provided registration in the share register is effected. Some interests in shares are held by investors in the form of CREST Depository Interests (CDIs)1 or American Depositary Receipts (ADRs)2.
2 Zurich Financial Services has established an American Depositary Share, or ADS, level 1 program in the United States. Under the program, The Bank of New York issues the ADSs. Each ADS represents the right to receive one-tenth of one registered Zurich Financial Services share. Each ADS also represents securities, cash or other property deposited with The Bank of NewYork but not distributed to ADS holders. ADSs are traded over the counter (OTC) and evidenced by American Depositary Receipts, or ADRs. ADS holders are not treated as one of Zurich Financial Services’ shareholders and are not able to directly enforce or exercise shareholder rights, which are governed by Swiss law. The Bank of New York as depositary may only exercise voting rights with respect to instructions received from beneficial owners of ADRs.
Zurich Financial Services had no public convertibles or options outstanding as of December 31, 2004. For information on employee share option plans see note 23 on pages 99 to 101 as well as pages 138 and 139.
Members of the Board of Directors as of December 31, 2004 Year of initial current term Name Nationality Age Position held appointment of office
Philippe Pidoux Swiss 61 Vice-Chairman Member of the Nominations Committee Member of the Audit Committee 19971 2006
Thomas Escher Swiss 56 Director Member of the Audit Committee 2004 2006
Rosalind Gilmore British 67 Director Member of the Remuneration Committee Member of the Audit Committee 19981 2005
Gerhard Schulmeyer German/ 66 Director American Member of the Remuneration Committee
Rolf Watter Swiss 46 Director Member of the Audit Committee 2002 2007 1 Mr. van Wachem has served on the board of Zurich Insurance Company since 1993, Mr. Pidoux and Mr. Mead since 1997. In 1998, after the merger between B.A.T Financial Services and Zurich Insurance Company (the “Merger”), they assumed office as members of one or more boards of the then Group holding structure consisting of Zurich Group Holding (then called Zurich Financial Services), Allied Zurich p.l.c. and Zurich Allied AG. The Group structure was re-organized in October 2000 (“Unification”). Mrs. Gilmore, Mr. Sankey and Mr. Schulmeyer were also members of one or several boards of the Group holding structure that was established with the Merger. Since Unification they have all served on the Board of Zurich Financial Services.
Thomas Konrad Escher graduated in electrical engineering and in business administration from the Swiss Federal Institute of Technology (ETH) and joined IBM corporation in 1974 as a marketing representative in New York. In 1985, he became a director of IBM Europe S.A., in Paris. In 1990, he took over as general manager of IBM Distribution and Support S.A. in Paris and Rome. In 1992, he became director of management consulting and chief information officer of IBM Switzerland and in 1995, general manager of IBM International Center for Asset Management in Zug. From 1996 until 1998, he was member of the executive management of Swiss Bank Corporation responsible for several regions in Switzerland and for information technology. In 1998, after the merger of Swiss Bank Corporation and Union Bank of Switzerland, he became head of IT in the division private clients and business banking of UBS AG as a member of the Group Managing Board. Since July 2002 he heads IT in the wealth management and business banking division. Mr. Escher is chairman of the Zurich Economic Society. He serves as a member of the board of several UBS companies and of the executive committee of the Institute of Information Management of the University of StGallen, Switzerland
Armin Meyer graduated with a PhD in electrical engineering from the Swiss Federal Institute of Technology (ETH) and joined BBC Brown Boveri Ltd in 1976 as a development engineer. In 1980, he became head of research and development for industrial motors and in 1984, he took over as head of the international business unit for electrical power generators. In 1988, he became president of ABB Drives Ltd. and in 1992, president of ABB Power Generation Ltd. From 1995 until 2000, he was executive vice president of ABB Ltd. and a member of that group’s executive committee. In 1997, he became a member of the board of directors of Ciba Specialty Chemicals at the time of its spin-off from Novartis, and has been its chief executive officer and chairman since 2001. He is a member of the foundation board of the International Institute for Management Development, IMD, in Lausanne, Switzerland, and of the board of the European Chemical Industry Council (Cefic) in Brussels, Belgium.
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 and the US. He was appointed to the board of directors in 1989 and was chief executive officer from 1991 to 1999 of that company. He was chairman of Gala Group Holdings p.l.c. until February 5, 2003, and is chairman of The Really Effective Development Company Ltd., and deputy chairman of Photo-Me International p.l.c. He is also a director of Pearson p.l.c., Cofra AG, Taylor Woodrow p.l.c., a board member of the UK’s Food Standards Agency and an advisor to a number of other companies.
Gerhard Hans Schulmeyer graduated from Frankfurt Technical College with a BSc in electronic engineering and from the University of Frankfurt with a BSc in international business. He also holds an MSc in Management Science from the Massachusetts Institute of Technology. After holding various management positions with Braun, Sony Wega and Motorola, he became in 1989 president and chief executive officer of ABB USA and member of the executive board of ABB Ltd. From 1994 until 1998, he was president and CEO of Siemens Nixdorf in Germany, and between 1999 and December 2001, he was president and CEO of Siemens Corporation in the US. Since January 2002, he has been Professor of Practice at the Sloan School of Management of the Massachusetts Institute of Technology. He is a non-executive director on the public boards of Alcan Inc., Ingram Micro Inc. and Korn/Ferry International. He is also a member of the advisory board of Banco Santander Central Hispano, a board member of the German Industrial Investment Council, and a member of the foundation board of the US National Chamber Foundation.
Manfred Gentz, 63, German, studied law at the universities of Berlin and Lausanne and graduated with a doctorate in law from the Berlin Free University. In 1970 he joined Daimler-Benz AG where he held various positions. In 1983, he was appointed member of the Board of Management of Daimler-Benz AG, responsible at first for Human Resources. From 1990 to 1995 he was chief executive officer of Daimler-Benz Interservices (debis) in Berlin and subsequently became chief financial officer of Daimler-Benz AG in 1995. In December 1998, Mr. Gentz was appointed to the Board of Management of DaimlerChrysler AG, where he was in charge of Finance and Controlling until December 2004. From 1987 to 1995 Mr. Gentz served on the Board of Supervisors of Agrippina Versicherung AG and since 1996 he has been on the Board of Supervisors of Zürich BeteiligungsAktiengesellschaft (Deutschland). In 1985 he was elected to the Board of Supervisors of Hannoversche Lebensversicherung AG, which appointed him proxy chairman in 1990. He will relinquish this position as well as the position on the Board of Supervisors of Zürich Beteiligungs-Aktiengesellschaft (Deutschland) prior to election to the Board of Zurich Financial Services. In addition to serving on the Board of Supervisors of adidasSalomon, the German Stock Exchange (Deutsche Börse AG) and DWS Investment GmbH, he is chairman of ICC (International Chamber of Commerce), Germany, the Aspen Institute Berlin and the Hanns Martin Schleyer Foundation. He is active in a number of scientific and cultural institutions.
The Board is chaired by the Chairman, or in his absence the Vice-Chairman, and comprises only non-executive members. It has a program of issues that is presented at its meetings throughout the year. The Board is regularly informed of developments regarding the Group and is provided with timely information in a form and of a quality appropriate for it to discharge its duties in accordance with the standards of care set out in Article 717 of the Swiss Code of Obligations. Board members are also subject to rules and regulations to avoid conflicts of interest and the use of inside information. Given the separation of roles of the Chairman and the Chief Executive Officer (“CEO”) and the fact that the Board of Directors is wholly non-executive, there is no requirement for a “lead” director to be appointed under the Swiss Code of Best Practice. Were the roles not separated, the Vice-Chairman would assume the role of lead director to ensure an orderly evaluation process of the Chairman and of the Chief Executive Officer and to serve as a contact to whom concerns of the other members of the Board could be communicated. The CEO attends the Board meetings ex officio, and, upon invitation by the CEO, members of the Group Executive Committee (“GEC”) as well as other executives attend the Board meetings. The Board is required to meet at least six times per year, however, during 2004 it has held 10 meetings of which two were by teleconference.
The Board may appoint committees for specific areas from among its members and establish terms of reference and rules with respect to delegated authority and the reporting-back. The Board has the following standing committees, which regularly report to the Board and submit proposals for resolutions to the Board.
The nominations committee, composed of five Board members, is entrusted with the succession planning with respect to the Board and the CEO and the review of proposals by the CEO regarding appointments to the GEC and Group Management Board (“GMB”). It proposes the principles for the nomination and the ongoing qualification of members of the Board and makes proposals to the Board on the composition of the Board, and the appointment of the Chairman, the Vice-Chairman and the CEO. Final decisions on nominations and appointments are made by the Board. The nominations committee met six times (of which one was by teleconference) during 2004 and particularly addressed the nomination and ongoing qualifications of the members of the Board of Directors and the succession planning for members of the GEC and the GMB. It regularly reports to the Board.
The remuneration committee comprises six members of the Board and proposes to the Board the principles of remuneration for the Group and the level of directors’ fees. Based on the remuneration principles, it determines the remuneration of the CEO and approves the remuneration of the members of the GEC and the GMB. The committee is also involved in determining the metrics and reviewing performance as it relates to amounts available for the senior management short-term and long-term incentive plans. The remuneration committee met six times in 2004. It regularly reports to the Board. Details of the Group’s remuneration principles are given in the Remuneration Report on page 130.
Subject to the powers reserved to the Board set out above, the Board has delegated the management of the Group to the CEO. The CEO and, under his supervision, the GEC, are responsible for the development and execution of the strategic and financial plans approved by the Board. The CEO has specific powers and duties relating to strategic, financial and other matters as well as to the structure and organization and manages, supervises and coordinates the activities of the members of the GEC. The CEO develops and implements management tools for the Group and represents the overall interests of the Group as against third parties. The CEO holds delegated authority to approve certain acquisitions and divestments of businesses and assets, investments and the establishment of new businesses, mergers, joint ventures or co-operations.
The Board supervises Management and monitors its performance through reporting and controlling processes. Regular reporting by the CEO and other executives to the Board includes appropriate information and updates, including key data for the core businesses, financial information, existing and threatening risks, and updates on developments in important markets and with regard to major competitors as well as other significant events.
Furthermore, the Group has adopted a coordinated and formalized approach to risk management and control. The process and the results of this approach are described below under “Internal Control Statement.”
The internal audit function and the external auditors also assist the Board in exercising its controlling and supervisory duties. The audit serves, in addition to the review of the financial reporting processes, to assess the suitability, reliability and functioning of the business organization with regard to technical and personnel matters and to examine the efficiency of the control systems. In addition, the internal audit function also reviews the compliance with the Group’s business and statutory requirements and regulations.
Information and control instruments vis-à-vis the Group Executive Committee and Group Management Board
The GEC is headed by the CEO and includes the Chief Operating Officer, the Group Finance Director, the Chief Investment Officer and the heads of the global business segments – General Insurance and Life. In addition the heads of the following business divisions are members of the GEC: North America Consumer, North America Commercial, Global Corporate and Europe General Insurance.
Further special committees, with a member of the GEC presiding, are established to facilitate the coordination and alignment of recommendations to the CEO for approval on specific subject matters that often are of cross-divisional and cross-functional nature: the Group Finance Committee and the Asset Liability Management / Investment Committee. The Group Finance Committee is chaired by the Group Finance Director and the ALM/ Investment Committee is chaired by the Chief Investment Officer. The Group Finance Committee monitors the implementation of finance related matters decided by the Board, the CEO and/or the GEC and gives recommendations for future course of action, while the ALM/ Investment Committee monitors and deals with issues relating to investment decisions.
David Wasserman American 50 Chief Investment Officer and Head of Group Strategic Planning
James J. Schiro graduated from St. John’s University, New York, with a Bachelor of Business Administration degree. He is also an honorary Doctor of Commercial Science of the same university. After qualifying as a certified public accountant, he joined Price Waterhouse in 1967 and held various management positions before becoming chairman and senior partner of the US firm in 1994. From 1995 to 1998, he integrated the US and European and other global operations of Price Waterhouse and was elected chief executive officer of the new company. After the merger of Price Waterhouse and Coopers & Lybrand in 1998, he became global chief executive officer of PricewaterhouseCoopers. He joined Zurich in March 2002 as Chief Operating Officer-Group Finance and was appointed Chief Executive Officer of the Group two months later. He is a member of the board of directors of PepsiCo. He is also vice-chairman of the Swiss American Chamber of Commerce and a member of the Business Council of the World Economic Forum, a member of the board of trustees of the Lucerne Festival in addition to serving as vice-chairman of the American Friends of the Lucerne Festival. Furthermore, he is a member of the Foundation Board of IMD, Lausanne, as well as a member of the boards of trustees of St John’s University, New York, and the Institute of Advanced Study in Princeton, New Jersey.
Patrick H. O’Sullivan graduated from Trinity College, Dublin, with a degree in business studies. He qualified with Arthur Andersen as a chartered accountant, followed by a Master of Science degree in accounting and finance from the London School of Economics. After qualifying he joined the Bank of America, working in London, Miami, Los Angeles and Frankfurt. In 1988 he joined the US investment bank Goldman Sachs as financial controller for Europe, and in 1990 moved to Financial Guaranty Insurance Company, a wholly-owned subsidiary of GE Capital. He was appointed to the FGIC board in 1993. The following year he joined BZW (former investment banking subsidiary of Barclays Bank p.l.c.) as head of International Banking & Structured Finance, and in 1996 he became BZW’s chief operating officer. He joined Eagle Star Insurance Company as chief executive in 1997, and was appointed chief executive officer of Zurich’s UK general insurance business the following year. He became Group Finance Director of Zurich Financial Services in December 2002.
David L.Wasserman graduated from Brown University, Providence (USA), with a degree in applied mathematics and economics. He began his career as an actuary, first with Aetna Insurance Company and later with the Insurance Services Office. In 1982 he joined KPMG Peat Marwick and was appointed Principal in 1987. He joined Zurich in 1991 and for nine years held various positions with Centre Group, latterly as chief executive officer. He became senior managing director of Zurich Global Assets in January 2001, and CEO of the Global Asset business division the following year. He was appointed Chief Investment Officer of Zurich Financial Services in April 2002 and was also appointed Head of Group Strategic Planning in July 2002.
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 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. He held positions in a public-private partnership in the business community and on the Executive Committee of the Dutch Employers’ Association.
Martin D. Feinstein graduated from California State University, Los Angeles (USA), with a Bachelor of Science degree, and later studied executive education at the University of Pennsylvania. He also earned several insurance professional designations: GCA, CPCU, and CLU. He joined Farmers Group, Inc. in 1970 where he held various management positions before he was elected its president and chief operating officer in 1995.Two years later he was appointed to his current position as chairman and chief executive officer. Mr. Feinstein was a member of the board of B.A.T Industries from 1997 until September1998. He is CEO of Zurich’s North America Consumer business division. Mr. Feinstein is a member of the Society of Chartered Property Casualty Underwriters (CPCU) and of the American Society of Chartered Life Underwriters (CLU). He is chairman of the board for the Insurance Information Institute, vice-chairman of the board of trustees for the American Institute for CPCU and chairman of the US Property-Casualty CEO Roundtable.
Axel P. Lehmann graduated with an MBA and PhD from the University of St Gallen in Switzerland. After several US research studies, he wrote a post-doctorate certification at the University of St Gallen and subsequently completed the Wharton Advanced Management Program. He was a lecturer at several universities and institutes and became vice-president of the Institute of Insurance Economics at the University of St Gallen and the European Center responsible for Consulting and Management Development. He was head of Corporate Planning and Corporate Controlling for Swiss Life, before he joined Zurich in 1996 and held various executive management and corporate development positions within Zurich Switzerland. He became a member of the Group Management Board responsible for Group-wide Business Development functions in November 2000. In September 2001, he was appointed Chief Executive Officer of the former Northern European region and subsequently Chief Executive Officer of the Zurich Group Germany. In March 2002, he became CEO of the Continental Europe business division. In 2004 he was in charge of the consolidation of the former Business Divisions Continental Europe and UKISA (United Kingdom, Ireland and Southern Africa) and assumed responsibility for the creation of the integrated General Insurance Europe Division. In September 2004 he assumed his current role as CEO Zurich North America Commercial. Mr. Lehmann is an honorary professor and lecturer for business administration and service management at the University of St Gallen in Switzerland.
Geoff Riddell graduated from Queen’s College, Oxford, with a degree in chemistry, and later qualified 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. Two years later he became CEO of the General Insurance business in the UK. In 2004 he became CEO Global Corporate. Mr. Riddell is a former member of the General Insurance Council of the Association of British Insurers, and was for three years chair of its Liability Committee. From 1990 to 1995, he was a member of the Hong Kong Federation of Insurers Council.
Members of the GEC are also part of the GMB, which includes the heads of certain business divisions, business units and Group functions. The GMB primarily focuses on communication, capability building and development of the Group, represents the businesses and functions and serves to foster horizontal collaboration throughout the Group.
The additional members of the GMB as at December 31, 2004, were as follows
Franz Wipfli Swiss 53 Head of Organizational Transformation Management 1 Mrs. Frese and Messrs. Aguirre, Bernet and Cela resigned from the GMB in December 2004. 2 As of January 1, 2005. 3 Until March 31, 2005. Thereafter, Mr. Hopkins will become a member of the GEC, succeeding Mr. Feinstein.
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.
With a view to ensure an orderly process, the Board determines the record date shortly before the shareholder meeting at which a shareholder needs to be registered in the share register in order to exercise his or her participation rights by attending the shareholder meeting. Such record date is published, together with the invitation to the shareholder meeting, in the Swiss Official Gazette of Commerce and in several newspapers.
Changes of control and defense measures The Articles of Incorporation of Zurich Financial Services do not provide for an opting out or opting up in the meaning of Articles 22 and 32 of the Federal Act on Stock Exchanges and Securities Trading.Therefore, mandatory offers have to be submitted when a shareholder or a group of shareholders acting in concert exceed 331/3% of the issued and outstanding share capital.
Auditors PricewaterhouseCoopers AG, Stampfenbachstrasse 73, in 8035 Zurich (“PwC”), is Zurich Financial Services’ external statutory auditor and Group auditor of its consolidated accounts. PwC assumes all auditing functions, which are required by law and 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 16, 2004, PwC was re-elected by the shareholders of Zurich Financial Services. The Board of Directors proposes that PwC be re-elected as statutory auditors and Group auditors for the business year 2005.
Duration of the mandate and term of office of the head auditor
The total of the auditing fees (including expenses and Value Added Taxes) charged by the Group auditors in the year 2004 amounted to USD 36.9 million (USD 29.7 million in 2003).
The audit committee meets at least four times a year with the external auditors. The audit committee reviews the qualification, performance and independence of external auditors and evaluates the cooperation received by the external auditors during their audit examination. It further elicits the comments of management regarding the 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 auditors and suggests areas requiring special emphasis.
The audit committee is responsible for making a nomination to the Board regarding the proposal for election of the external auditors by shareholders, for approving the remuneration and overseeing the work of the external auditors.
Information policy Zurich Financial Services has over 128,000 shareholders registered in its share register, ranging from private individual shareholders to large institutional investors. Each registered shareholder receives an invitation to the Annual General Meeting. Also available to any shareholder is an annual report including the letter to the shareholders providing an overview of the Group’s activities during the year and outlining the financial performance. Similar reports regarding half-year and quarterly results are available for all shareholders. However, shareholders may opt not to receive printed versions of one or all of the aforementioned reports.
Zurich Financial Services maintains a regular dialogue with investors through its Investor Relations department and responds to questions and issues raised by either institutional or private individual shareholders. In addition, Zurich Financial Services organizes investor days to provide comprehensive information about its businesses and strategic direction. On April 2, 2004, an analyst day was held in London, where the future management structure was introduced to analysts and on January 20, 2005, an investors day was held in London in order to discuss underwriting topics. In 2005, further investors days will be held on April 7, June 30 and September 29. A wide range of information about the Group and its businesses, including the aforementioned reports, is also accessible on Zurich Financial Services’ Web site www.zurich.com.
Zurich Financial Services will hold its Annual General Meeting on April 19, 2005. As part of the agenda, the Chairman and the CEO will present a review of the business of the Group for the year 2004. The meeting will be conducted in Zurich. An invitation setting out the agenda for this meeting and an explanation of the proposed resolutions will be issued to shareholders by Zurich Financial Services 20 working days before.
Internal Control Statement The Board is responsible for overseeing the Group’s internal control systems, which are designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable, and not absolute, assurance against material misstatement or loss.
Once a year the Group Executive Committee undertakes a Group-level risk assessment. The results of this assessment and the actions arising are also presented to the audit committee.
The audit committee has reviewed the effectiveness of the system of internal control operated by the Group for the period January1, 2004 up to the date of the report, and has reported to the Board accordingly.
Issues identified by this process have been communicated to the Board and are being addressed by the Group. A follow up process to monitor these issues and associated actions has been implemented.
To better structure the Annual Report and enable the information relating to the remuneration of Directors and Management to be more easily available to the reader, the Remuneration Report is presented as a separate report under its own heading. This Remuneration Report follows the recommended structure outlined in chapter five of the Directive on Information Relating to Corporate Governance of the SWX Swiss Exchange. The rest of the information to be disclosed according to the Directive of the SWX Swiss Exchange is included in the “Corporate Governance Report”, preceding this Remuneration Report.
Recognizing that Zurich Financial Services is a global insurance-based financial services organization, the level of Directors’ fees has been established to ensure the Group’s ability to attract and retain high caliber individuals. Directors’ fees are currently paid in cash and the Directors do not participate in any of the share-based programs established for the executive management of the Group.
The remuneration principles for the members of the Group Executive Committee (“GEC”) are structured to reflect the global and competitive nature of the Group’s businesses and to ensure that individuals with the required knowledge and experience can be attracted, motivated and retained to manage operations effectively. Actual compensation levels and overall terms and conditions are established to reflect the line of business; the relevant marketplace; and the skills, experience and contribution of the individual concerned. Significant emphasis is placed on variable compensation to ensure linkage between the rewards of executives and the performance achievements of the individual and the Group. Given the international mix of the members of the top management team, an appropriate balance of the compensation elements ensures that the overall package is competitive in their respective local marketplace.
The remuneration package for senior management, including the GEC, comprises a base salary and participation in short and long-term incentive programs, together with pension and other employee benefits. The performance drivers for the short and long-term incentive plans were redefined in 2003 to place a much greater emphasis on the Group’s financial and operating results and to further increase the alignment with shareholder interests. The size of the incentive pool under the short-term plan is directly linked to the Group’s profitability, while the long-term program includes performance-based vesting criteria on both share and share option grants. The actual level of performance vesting, which is assessed annually, is based on the Group’s actual Return on Equity (ROE) performance as well as the relative positioning of the Group’s total return to shareholders compared to a global industry peer group of insurance companies.
Directors’ Fees The fees paid to the non-executive Directors of Zurich Financial Services who held office in 2004 are shown in the table below.
Mrs. Gilmore is a member of a group health insurance plan in the UK with a benefit valued at USD 1,661 (2003: USD 1,315).There were no other benefits in kind provided to Directors of Zurich Financial Services.
In addition, fees are paid to the members of the board of directors of the Zurich Insurance Company. The membership of the Board and the fee structure was reviewed in 2004 and with effect from April 1, 2004, in addition to Messrs. Mead, Meyer, Pidoux, van Wachem and Watter all other members of the Board of Zurich Financial Services became members of the board of Zurich Insurance Company. Also with effect from this date, a fee level of CHF100,000 per annum was established, a reduction from the CHF 130,000 that had previously applied.
The following table specifies the number of members whose aggregate remuneration falls within the following bands: Between USD 1,625,001 and USD 3,250,000 2 4
Share plans for the Directors The members of the Board of Directors of Zurich Financial Services do not participate in the Long-Term Performance Share Plan for executive management; hence no shares have been allotted to them in the year under review or in earlier years.
Under the Group’s Long-Term Performance Share Plan running for the period January1, 2002, to December 31, 2004, the actual number of shares to be awarded is dependent on the financial performance of the Group during this three-year period and any awards will be made in 2005.
Market value of shares at the date of award CHF 213 CHF 161 1 To the extent that the share awards have not been deferred or sold prior to the end of 2004, these shares are included in the share interest table on page 133.
Conditional share allocations The total number of performance share allocations available to be delivered in future years to members of the GEC, if specified performance targets are met during the performance periods, was 71,851 as of December 31, 2004 (67,935 as of December 31, 2003), as set out in the table below.
Performance share Allocated price Performance period allocation CHF Year of award
Within the context of the long-term incentive program, the performance share allocations made in 2004 will be considered for vesting on a uniform basis during 2005, 2006 and 2007. The actual level of vesting each year (0 to 150% of the allocation) will depend upon the Group’s performance in relation to the ROE achievement and the positioning of the Group’s total return to shareholders compared to a global industry peer group of insurance companies.
In addition to the above, there were 21,137 restricted shares outstanding for members of the GEC as of December 31, 2004. 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. There were no grants of restricted shares in 2004.
Shareholdings of the Directors The shareholdings of the Directors, who held office at the end of the year, in the shares of Zurich Financial Services are shown below. All interests shown are beneficial, and include shares held by closely linked persons.
Ownership of Ownership of Zurich Financial Zurich Financial Services shares Services shares
Shareholdings of the members of the Group Executive Committee The shareholdings of the members of the GEC, who held office at the end of the year in the shares of Zurich Financial Services, are shown below. All holdings are beneficial, and include shares held by closely linked persons.
This table does not include the share interests of the members of the GEC through their participation in either the conditional share plans or the share option plans or if they have elected to defer receipt of their share awards.
Share options held by Directors The members of the Board of Directors of Zurich Financial Services do not participate in the share option plan for executive management; hence no share options have been allotted in the year under review or in earlier years.
Number Number Total number Exercise price of options of options of shares per share
None of the Directors or members of the GEC received any other compensation as set out above from the Group or from any of the Group’s companies.
As of December 31, 2004, the total amount of loans, including guarantee commitments, outstanding was USD 3 million for two members of the GEC.These loans represent mortgage loans, which are available to employees and customers in certain countries. Employees, including members of the GEC, benefit from a reduced interest rate of up to 1% less than the prevailing market interest rates on mortgage balances up to a maximum of USD 1 million. As of December 31, 2004 none of the Directors had loans.
As set out in the previous section, the highest paid remuneration for the Directors was USD 587,000 for Mr.van Wachem.
Principal activity and review of the year Zurich Financial Services Holding Company – Financial Statements
Its principal activity is the holding of subsidiaries. Revenues consist mainly of dividends and interests.Net income of Zurich Financial Services was CHF 530,597,277 for 2004 (CHF 94,351,041 for 2003).
Statements of income in CHF thousands, for the years ended December 31
Balance sheets (before appropriation of available earnings) in CHF thousands, as of December 31
Notes to the financial statements Zurich Financial Services Holding Company – Financial Statements 1. Basis of presentation
(a) Exchange rates Assets and liabilities expressed in currencies other than Swiss francs are translated at year-end exchange rates. Revenues and expenses are translated using the exchange rate at the date of the transaction. Unrealized exchange losses are recorded in the statement of income and unrealized exchange gains are deferred until realized.
Administrative expenses are primarily directors’ fees of CHF 2,455,679 (prior year CHF 2,587,289).
Zurich Financial Services has provided an unlimited guarantee in support of various entities belonging to the Zurich Capital Markets group of companies. In addition, Zurich Financial Services has agreed with the Superintendent of Financial Institutions, Canada, to provide additional capital in case the applicable capital adequacy tests for the Canadian business are not met and to provide assistance in case of liquidity issues.
Authorized stock Until June1, 2005, the Board of Zurich Financial Services is authorized to increase its share capital by an amount not exceeding CHF 39,000,000 by issuing up to 6,000,000 fully paid registered shares with a nominal value of CHF 6.50 each. An increase in partial amounts is permitted.The Board determines the date of issue of such new shares, the issue price, type of payment, conditions for exercising pre-emptive rights, and the beginning of the dividend entitlement.The Board may issue such new shares by means of a firm underwriting by a banking institution or syndicate with subsequent offer of those shares to the current shareholders.The Board may allow the expiry of pre-emptive rights which have not been exercised, or it may place these rights as well as shares, the pre-emptive rights of which have not been exercised, at market conditions.
The Board is further authorized to restrict or withdraw the pre-emptive rights of shareholders and to allocate them to third-parties if the shares are to be used: for the take-over of an enterprise, or parts of an enterprise or of participations or if issuing shares for the financing including re-financing of such transactions; or for the purpose of expanding the scope of shareholders in connection with the quotation of shares on foreign stock exchanges.
Contingent stock Capital market instruments and option rights to shareholders: The share capital of Zurich Financial Services may be increased by an amount not exceeding CHF 35,631,882 by issuing up to 5,481,828 fully paid registered shares with a nominal value of CHF 6.50 each (1) through the exercise of conversion and/or option rights which are granted in connection with the issuance of bonds or similar debt instruments by Zurich Financial Services or one of its Group companies in national or international capital markets and/or (2) by the exercise of option rights which are granted to the shareholders. When issuing bonds or similar debt instruments connected with conversion and/or option rights, the pre-emptive rights of the shareholders will be excluded.The current owners of conversion and/or option rights shall be entitled to subscribe for the new shares.The conversion and/or option conditions are to be determined by the Board.
Average selling price, in CHF 182 189 1 In CHF thousands.
The shares registered in the share ledger as of December 31, 2004, were owned by 128,655 shareholders of which 122,017 were private individuals holding 22.0% of the registered shares (or 13.8% of all outstanding shares), 2,556 were foundations and pension funds holding 10.0% of the registered shares (or 6.3% of all outstanding shares), and 4,082 were other legal entities holding 68% of the registered shares (or 42.6% of all outstanding shares).
Shares eligible as of February16, 2005 and February18, 2004, respectively 144,006,955 144,006,955 in CHF thousands (proposed) (approved)
No dividend is proposed to be paid out for 2004. For 2003, no dividend was paid either. Instead for 2003, the Board of Directors proposed to repay CHF 2.50 of the nominal value of each registered share, as a result of a reduction of the nominal value from CHF 9 to CHF 6.50 per registered share. This proposal was approved by the Annual General Meeting on April 16, 2004.
Proposed payout of nominal value reduction The Board of Directors proposes to repay CHF 4.00 of the nominal value of each registered share, as a result of a reduction of the nominal value from CHF 6.50 to CHF 2.50 per registered share. The proposed payout would reduce the share capital by CHF 576,027,820. The proposed payout of the nominal value reduction of CHF 4.00 per each registered share is expected at the beginning of July, 2005, subject to approval by the Annual General Meeting and subject to the fulfilment of the necessary requirements and the entry of the share capital reduction in the Commercial Register of the Canton of Zurich.
As statutory auditors, we have audited the accounting records and the financial statements (statements of income, balance sheets and notes on pages136 to139) of Zurich Financial Services for the year ended December 31, 2004.
Number of dividend-bearing shares with a nominal value of CHF 6.501 and CHF 9.002, respectively 144,006,955 144,006,955
Price year low 163.50 91.50 1 Nominal value reduction of CHF 2.50 per registered share was effective as of June 30, 2004.The payment was made on July1, 2004. 2 Nominal value reduction of CHF1 per registered share was effective as of July14, 2003. 3 Proposed payment of nominal value reduction of CHF 4.00 per registered share in 2005.
Zurich offers its shareholders the opportunity to deposit a range of Zurich Financial Services securities free of charge at SAG SIS Aktienregister AG in Switzerland. The securities deposit regulations as well as the application form for a securities custody account can be downloaded from SAG’s Web site: www.sag.ch.
US American Depositary Receipt (ADR) Program Depositary Nature Reuters /Bloomberg Exchange
Zurich shareholders The shares registered in the share ledger as of December 31, 2004, were owned by 128,655 shareholders: In September 2002, Zurich announced a comprehensive action plan to improve the Group’s profitability and strengthen its balance sheet. The figure depicts Zurich’s share price development since the launch of the program.
Results Reporting for the Three Months to March 31, 2005 May 19, 2005
CDI Holder Inquiries Lloyds TSB Registrars within the Zurich Financial The Causeway, Worthing Services corporate nominee West Sussex, BN99 6DA, United Kingdom service Nominee Service helpline: 0870 600 3970
American Depositary Receipts Zurich Financial Services has an American Depositary Receipt program with The Bank of New York (BNY). For more information call BNY’s ADR Services Center in the USA +1-888-bny-adrs or outside the USA on +1-610-382-7836. ADR holder assistance may also be obtained from BNY at www.adrbny.com.
The Annual Report 2004 is available on our Web site: www.zurich.com.
The Annual Report is published in English, German and French. In the case of inconsistencies in the German and French translations, the English original version shall prevail.
Printed end of February 2005 by St Ives Burrups Ltd., England
Information des médias Corporate Communications, Media and Public Relations Zurich Financial Services, Suisse
Nous voulons devenir le principal groupe d’assurance global sur les marchés d’assurance dommages et vie que nous avons sélectionnés, dégageant constamment des résultats de haut niveau en faveur de nos actionnaires.
En 2003, la Zurich a dégagé un bénéfice net de 2,1 milliards de dollars (retraité depuis à 2,0 milliards de dollars), après une perte de 3,4 milliards de dollars (comprenant une provision spéciale de 3,5 milliards de dollars après impôts) en 2002.
La Zurich nomme quatre banques pour diriger une facilité de crédit renouvelable de 3 milliards de dollars. L’intérêt du marché est élevé et la facilité
L’ouragan Charley touche la Floride, déclenchant le début de six semaines de tempêtes aux Etats-Unis et aux Caraïbes, avec les ouragans Frances, Ivan et Jeanne.
Une forte croissance du bénéfice net à 1.902 millions de dollars est annoncée pour les neuf premiers mois de 2004, en dépit de la pire saison d’ouragans depuis plus d’un siècle.
Indien, un tsunami désastreux se répand dans le sud de l’Asie, tuant environ 300.000 personnes. La
Pour toute information supplémentaire, veuillez consulter notre site Web www.zurich.com, lien investor relations.
Contacts 1 sur la base des primes émises brutes 2003 Source: recherches et analyses internes de la Zurich 2 y compris Farmers Exchanges*, sur la base des primes émises nettes 2003 Source: A.M. Best 3 sur la base des primes émises brutes 2003 Source: données provenant de compagnies similaires 1 y compris Farmers Exchanges*, sur la base des primes émises, affaires directes 2003 Source: A.M. Best 2 y compris Farmers Exchanges*, sur la base des primes émises nettes 2003 Source: A.M. Best *“Farmers Exchanges” fait référence à trois assureurs réciproques, à leurs succursales et à leurs filiales opérant essentiellement sous la marque Farmers à laquelle nous fournissons des services de gestion mais que nous ne possédons pas.
The following table presents the summarized consolidated results of the Group for the years ended December 31, 2004 and 2003 and the financial positions as of December 31, 2004 and 2003.The 2003 amounts have been restated following the adoption of a new accounting standard in 2004. Certain prior-year balances have also been reclassified to conform to the 2004 presentation.
General Insurance key performance indicators for the years ended December 31
Net income in USD millions, for the years ended December 31
Total1 North North Continental UKISA Rest of America America Europe the World Corporate Consumer 1.
Total North Continental UKISA Rest of America Europe the World Consumer