group in our chosen general and life insurance markets, consistently delivering top-tier results for our shareholders. By so doing, we will create strong relationships with customers, agents and brokers and rewarding opportunities for employees.
Financial Highlights (unaudited) The following table presents the summarized consolidated results of the Group for the years ended December 31, 2006 and 2005 and the financial positions as of December 31, 2006 and 2005. Certain prior year amounts have been reclassified to conform to the 2006 presentation.
General Insurance gross written premiums and policy fees 34,178 33,401 2%
Farmers Management Services gross operating margin (in %) 4 49.1% 51.9% (2.8 pts)
Global Life – 1 new business margin, after tax (in % of APE)
United United Rest of International Total States Kingdom Germany Switzerland Europe Businesses 1 In %, for the years ended December 31.
Global Life gross written premiums, policy fees and insurance deposits 21,022 19,536 8%
Global Life gross new business annual premium equivalent (APE) 2,368 2,303 3%
Business operating profit (after tax) return on common shareholders’ equity 6 18.1% 13.6% 4.5 pts 1 Positive / (negative) change.
3 Global Life new business value is the present value of the projected after tax profit from life insurance contracts sold in the year. 4 Farmers Management Services gross operating margin is calculated as the sum of Farmers management fees less management expenses, divided by Farmers management fees.
Business operating profit for Zurich Financial Services Group (the Group) increased by 48 percent to USD 5.9 billion demonstrating the strong underlying performance of our operating segments.
• General Insurance business operating profit increased by USD 1.9 billion to USD 3.8 billion driven by the 6.6 percentage point improvement in the combined ratio, resulting from an underlying improvement to our net underwriting result and also reflecting the benign catastrophe experience in 2006 relative to 2005.
• Global Life business operating profit increased by 8 percent to USD 1.2 billion, reflecting the shift in business mix to more profitable products. Targeted sales initiatives and changes in the operating model led to an increase of 27 percent to our new business value, after tax.
• In the first quarter of 2006, we recorded USD 325 million for the settlement of regulatory matters in the United States. On a segment basis we allocated USD 240 million of restitutions to General Insurance, North America Commercial, and USD 65 million of fines and USD 20 million of costs to Corporate Functions.
• The USD 2.6 billion decrease in net capital gains on investments and impairments was primarily attributable to the Global Life segment where the net gains on unit-linked equities were lower than 2005, and we recorded net capital losses on debt securities as a result of rising interest rates.
Net income attributable to shareholders increased by USD 1.3 billion, or 41 percent, to USD 4.5 billion for the year ended December 31, 2006.
• The shareholders’ effective tax rate was 26.8 percent compared with 29.1 percent for the year ended December 31, 2005. The decrease was primarily the result of lower taxed income levels from shifts in the geographic profit mix and the utilization of tax losses. The Group’s overall effective income tax rate of 31.3 percent includes the impact of tax expense attributable to policyholders in certain jurisdictions. This rate decreased by 7.8 percentage points from 39.1 percent for the year ended December 31, 2005, primarily due to lower levels of policyholder net capital gains on investments.
Our business operating profit (after tax) return on common shareholders’ equity increased by 4.5 percentage points to 18.1 percent, demonstrating the strength of our business mix. Return on common shareholders’ equity increased by 3.5 percentage points to 19.0 percent.
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 1 (10,589) (13,205)
Segmental in USD millions, for the years ended December 31 performance highlights
1 Insurance deposits were USD 10.8 billion and USD 9.0 billion for the years ended December 31, 2006 and 2005, respectively. 2 After intercompany eliminations
Highlights by region in USD millions, for the years ended December 31 Business operating profit Combined ratio
The net underwriting result increased by USD 709 million to USD 265 million, driven by an absence of catastrophes, fewer large individual property losses and a continued focus on underwriting discipline. Consequently, the combined ratio improved by 14.6 percentage points, driven by a 14.7 percentage point decrease in the loss ratio. The expense ratio increased by 0.1 percentage points to 17.6 percent after absorbing business mix driven changes in commission costs.
Net underwriting result improved by USD 860 million to USD 391 million, driving a 9.4 percentage point decrease in the combined ratio. The primary driver of the 8.8 percentage point improvement in the loss ratio was the focus on underwriting discipline, which has allowed us to maintain technical price while continuously
improving our risk selection process. These efforts, along with an absence of the large catastrophes seen in recent years, have benefited the loss ratio. The expense ratio continued to be impacted by the 2005 hurricanes as involuntary market assessments and other premium based levies imposed by state governments had an adverse 0.7 percentage point impact on the expense ratio compared with the prior year. Despite these impacts, the expense ratio improved by 0.6 percentage points due to efficiency improvements driven by operational transformation.
Europe General Insurance in USD millions, for the years ended December 31 2006 2005 Change
Gross written premiums and policy fees increased by USD 172 million, or 1 percent, from USD 12.2 billion to USD 12.4 billion. Spain and Italy increased by 6 and 4 percent on a local currency basis, respectively, predominantly driven by personal motor lines. We saw increases in Switzerland and Germany despite difficult conditions in highly saturated markets. Competitive pressures affecting rates, new business and renewals were most obvious in the UK, which decreased by 5 percent on a local currency basis.
Zurich Financial Services Group · Annual Report 2006 · Financial Report 8 Financial Review
Business operating profit decreased by USD 70 million, or 27 percent, from USD 256 million to USD 186 million for the year ended December 31, 2006, primarily as a result of a decrease in the net underwriting result.
Net underwriting result decreased by USD 80 million, primarily due to a 3.5 percentage point increase in the loss ratio. The decrease was largely due to weather-related losses in Australia, South Africa and Latin America, coupled with a weakening in the motor portfolio in Latin America. Following reserves reviews, we recorded charges to improve the reserves position in Japan, while we saw positive prior year development in Australia. The 0.5 percentage point increase in the expense ratio was primarily attributable to Asia where a one-off charge for policy acquisition expenses was made.
Gross written premiums and policy fees increased by USD 243 million, or 88 percent, to USD 518 million due to additional assumed written premiums from other Group entities, which were then retroceded, resulting in a USD 47 million increase in net earned premiums and policy fees.
New business margin, after tax (as % of PVNBP) 2.6% 2.2% 0.4 pts
1 Insurance deposits in International Businesses for 2005 have been presented to exclude deposits received as funds under management. 2 APE is taken as annual premiums plus 10% of single premiums. 3 German footnote
Highlights by region in USD millions, for the years ended December 31 New business margin,
Business operating profit decreased by 3 percent to USD 228 million for the year ended December 31, 2006. The USD 26 million gain in 2005 from the sale and leaseback of the Farmers New World Life headquarters more than offset the effects of the 2006 increases in protection product sales and net investment income.
United Kingdom in USD millions, for the years ended December 31 2006 2005 Change
New business margin, after tax (as % of APE) 12.2% 9.9% 2.3 pts
New business annual premium equivalent (APE) increased by 8 percent on a local currency basis, driven by higher sales of investment products more than offsetting lower pension sales. New business margin, after tax (as a percentage of APE) increased by 2.3 percentage points to 12.2 percent mainly as a result of a lower new business cost base due to the revised business model, more favorable reinsurance conditions for term products and revised mortality assumptions.
New business annual premium equivalent (APE) increased by 16 percent on a local currency basis, primarily due to increases in single premium products, particularly annuities and credit life insurance. In November 2006, changes to the tax law conferred an advantage on pension products. In addition, during the last quarter of 2006 we sold a large group pension contract. New business margin, after tax (as a percentage of APE) increased by 7.2 percentage points to 23.7 percent as a result of the increase in risk free rates compared with the prior year leading to a reduction in the cost of options and guarantees. Additionally, synergies following the merger of the life entities and the revision of lapse and mortality assumptions resulted in a benefit.
New business annual premium equivalent (APE) decreased by 6 percent on a local currency basis as increases in individual life single premiums resulting from the launch of new products did not offset decreases in group life contracts as a result of the continued transfer to external foundations. New business margin, after tax (as a percentage of APE) increased by 33.0 percentage points to 38.8 percent, primarily due to asset management fees for group life contracts placed with external foundations, benefits realized from refinements to the business model and an increase in risk free rates compared with the prior year, which led to a reduction in the cost of options and guarantees.
Business operating profit increased by USD 17 million, or 9 percent, to USD 200 million, primarily due to the shift in business to unit-linked products. Increases occurred in most countries, in particular in Ireland, where growth, especially in single premium investment products, was the primary driver.
New business margin, after tax (as % of APE) 31.7% 30.7% 1.0 pts
1 Insurance deposits in International Businesses for 2005 have been presented to exclude deposits received as funds under management.
New business annual premium equivalent (APE) increased by 20 percent on a local currency basis, primarily due to Hong Kong where sales campaigns in the first half of 2006 resulted in higher new business volumes. New business margin, after tax (as a percentage of APE) increased by 1.0 percentage point to 31.7 percent primarily due to Chile resulting from revised persistency assumptions. This was offset by Australia due to increased policy acquisition expenses and the change in risk free rates, in addition to marketing expenses in Japan.
Business operating profit decreased by USD 19 million, or 2 percent, to USD 1.2 billion during 2006. Management fees and other related revenues increased by 4 percent. This is in line with the full year growth of 2 percent in gross earned premiums at the Farmers Exchanges, which we manage but do not own. In addition to an increase of USD 52 million in management fees, other related revenue increased by USD 23 million, primarily as a result of increased service fees, auto membership fees and property inspection fees. In 2006 work began on the creation of a shared service platform in North America. In addition, several investments were made in agency development and other growth initiatives. Altogether, these investments led to an increase in management and other related expenses, causing a reduction in gross operating margin to a solid 49.1 percent.
The Farmers Exchanges achieved a 2 percent increase in gross earned premiums compared with 2005, driven by increases across all major lines of business. The 1.2 percentage point improvement in the combined ratio was attributable to a decrease in the loss ratio as a result of the lower level of catastrophes compared with 2005.
Zurich Financial Services Group · Annual Report 2006 · Financial Report 14 Financial Review
Business operating profit increased by USD 141 million with solid contributions from both Farmers Re and Centre. Farmers Re contributed USD 181 million to Other Businesses business operating profit. The effect of lower levels of reinsurance ceded by the Exchanges to Farmers Re in 2006 more than offset improved loss development primarily due to the more benign catastrophe experience in 2006. Other operations within the segment contributed USD 373 million with profits arising in certain run-off businesses, including Centre’s contribution of USD 246 million.
Total investments as shown in the consolidated balance sheet include Group investments, where we bear part or all of the investment risk, and investments for unit-linked products, where policyholders bear the investment risk.
Movements in net unrealized gains on investments included in total equity (1,555) (300) nm
1 After deducting investment expenses of USD 265 million and USD 251 million for the years ended December 31, 2006 and 2005, respectively. 2 Excluding average cash received as collateral for securities lending of USD 4.2 billion and USD 4.9 billion in the years ended December 31, 2006 and 2005, respectively.
Net investment income from our Group investments increased by 2 percent to USD 7.9 billion resulting in an increase of return on net investment income from 4.2 percent to 4.3 percent. Investment income from the General Insurance segment increased due to a growing asset base and higher interest rates on reinvestment. This increase offset a reduction in the investment income from our Global Life segment, which declined due to a strategic shift of assets to unit-linked products.
Net capital gains on investments and impairments on Group investments decreased by 39 percent to USD 1.5 billion for the year ended December 31, 2006, compared with the prior year. The value of our debt securities, particularly in our UK Life with-profits business, declined due to rising interest rates in 2006 compared with 2005. This decrease was partially offset by gains on equity securities, particularly in the UK General Insurance and Germany life businesses.
Zurich Financial Services Group · Annual Report 2006 · Financial Report 16 Financial Review
Performance of Unit-linked Investments in USD millions, for the years ended December 31 2006 2005 Change
1 After deducting investment expenses of USD 461 million and USD 381 million for the years ended December 31, 2006 and 2005, respectively.
Performance of Total Investments in USD millions, for the years ended December 31 2006 2005 Change
Total investment result, net of investment expenses 1 19,467 22,847 (15%)
Insurance benefits and losses, net of reinsurance 8,326 7,868 8,325 7,900
Balance sheet highlights in USD millions, as of 12/31/06 12/31/05 Change
Total investments as presented in the consolidated balance sheets include Group investments, where we bear part or all of the investment risk, and investments for unit-linked products, where policyholders bear the investment risk. Investments for unit-linked products include investments held for liabilities related to insurance and investment contracts except for investment policies with discretionary participation features where the investments are managed as part of Group investments.
Net purchases of debt securities of USD 2.6 billion for the year ended December 31, 2006, were mostly offset by negative revaluations resulting in a net increase of USD 809 million after adjusting for foreign currency movements of USD 9.3 billion.
Zurich Financial Services Group · Annual Report 2006 · Financial Report 20 Financial Review
The gross reserves for losses and loss adjustment expenses balance includes the Group’s loss reserves, the majority of which are included within the General Insurance segment.
Gross reserves for losses and loss adjustment expenses increased by USD 4.1 billion, and 2 percent on a local currency basis from January 1, 2006, to December 31, 2006. Net losses and loss adjustment expenses incurred in the current period declined predominantly due to lower catastrophe losses in 2006 compared with 2005. Overall, prior accident year loss development was favorable at USD 218 million. Payments in 2006 were impacted by the large catastrophes which occurred in 2005.
The loss ratios within the triangle reflect both a steady improvement in underwriting quality and the more conservative reserving position.
Zurich Financial Services Group · Annual Report 2006 · Financial Report 22 Financial Review
Liabilities for investment contracts have increased on a local currency basis by 10 percent as of December 31, 2006, mainly due to the growth of the business, especially in Ireland, the Isle of Man and the UK, but also as a result of equity market increases, particularly in the UK.
Capitalization and Indebtedness in USD millions, as of 12/31/06 12/31/05 Change
Debt related to capital markets and banking activities 1,889 2,139 (12%)
Total operational debt remained flat at USD 10.5 billion. The decrease in our collateralized loans balance resulted from maturities of the mortgage loans securing them. In addition, debt related to capital markets and banking activities decreased by USD 250 million. These decreases offset the USD 849 million increase in our obligation to repurchase securities related to investment management activities in our UK businesses.
The Group has access to a syndicated revolving credit facility of USD 3 billion that terminates in 2011. Zurich Group Holding, together with Zurich Insurance Company and Farmers Group, Inc., are guarantors of the facility and can draw up to USD 1.25 billion, USD 1.5 billion and USD 250 million, respectively. No borrowings were outstanding under this facility as of December 31, 2006.
Change in net unrealized gains on investments excluding translation adjustments (415) (6) (421)
In March 2006 we listed one million shares of contingent capital on the SWX Swiss Exchange (742,444 of which were issued as of December 31, 2006) to fulfill obligations under employee share and option plans. Proceeds from shares issued as of December 31, 2006 totaled USD 104 million.
Zurich Financial Services Group · Annual Report 2006 · Financial Report 24 Financial Review
Summary of in USD millions, for the years ended December 31 cash flows
Change in cash and cash equivalents excluding change in cash received as collateral for securities lending 391 1,651
Cash and cash equivalents as of January 1, including cash received as collateral for securities lending 23,482 22,457
Consolidated income statements in USD millions, for the years ended December 31 Notes 2006 2005
Underwriting and policy acquisition costs, net of reinsurance 10 6,982 7,253
Assets in USD millions, as of December 31 Notes 2006 2005
Zurich Financial Services Group · Annual Report 2006 · Financial Report 28 Consolidated Financial Statements
Depreciation, amortization and impairments of fixed and intangible assets 460 447
Zurich Financial Services Group · Annual Report 2006 · Financial Report 30 Consolidated Financial Statements
Foreign currency translation effects on cash and cash equivalents 1,637 (1,661)
As of December 31, 2006 and 2005, cash and cash equivalents restricted as to use were USD 423 million and USD 331 million, respectively. Cash and cash equivalents held for the benefit of policyholders in connection with unit-linked products amounted to USD 5,696 million and USD 4,758 million as of December 31, 2006 and 2005, respectively. Cash received as collateral for securities lending was USD 3,820 million and USD 4,571 million as of December 31, 2006 and 2005, respectively.
Change in net unrealized gains/(losses) on investments not recognized in the income statement – – –
Distribution to shareholders: Nominal value reduction of share capital (449) – –
Zurich Financial Services Group · Annual Report 2006 · Financial Report 32 Consolidated Financial Statements
The Board of Directors of Zurich Financial Services has authorized on February 14, 2007, these consolidated financial statements for issue. These financial statements will be submitted for approval to the Annual General Meeting of Shareholders to be held on April 3, 2007.
Zurich Financial Services and its subsidiaries (collectively the “Group”) are an insurance-based financial services provider with a global network. 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. Where IFRS does not contain clear guidance governing the accounting treatment of certain transactions including those that are specific to insurance products, 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.
Certain amounts recorded in the consolidated financial statements reflect estimates and assumptions made by management about insurance liability reserves, investment valuations, interest rates and other factors. Significant estimates are discussed in note 5. Actual results may differ from the estimates made.
The revised accounting standards, discussed in note 3, did not result in the restatement of previously published consolidated financial statements. However, certain reclassifications have been made to prior year amounts and segment disclosures to conform to the current year presentation. These reclassifications have no effect on the previously reported net income.
The following balances are of a mixed nature (including both current and non-current portions): debt securities, mortgage loans, policyholders’ collateral and other loans, other investments – other, reinsurers’ share of reserves for insurance contracts, deposits made under assumed reinsurance contracts, deferred front-end fees, deferred origination costs, derivative trading assets and other assets, mortgage loans given as collateral, fixed assets, liabilities for investment contracts, deposits received under ceded reinsurance contracts, reserves for losses and loss adjustment expenses, reserves for unearned premiums, future life policyholders’ benefits, policyholders’ contract deposits and other funds, obligation to repurchase securities, derivative liabilities and other liabilities, collateralized loans, debt related to capital markets and banking activities, and senior and subordinated debt.
Zurich Financial Services Group · Annual Report 2006 · Financial Report 34 Consolidated Financial Statements
Segment information The Group is managed on a matrix basis, reflecting both line of business and geography. Accordingly, segment information is presented in two formats. The primary format is based on the operating businesses of the Group and how they are strategically managed to offer different products and services to specific customer groups. The Group’s primary business segments are as follows: • General Insurance
In 2005, the Group’s primary reporting segments were defined as General Insurance, Life Insurance, Farmers Management Services, Other Businesses and Corporate Functions. The only change to the primary segments in 2006 was to rename Life Insurance as Global Life. However, to be consistent with the Group’s management structure, the following transfers between primary segments have been made for 2006 financial reporting: • Kemper Corporation and Kemper Real Estate Inc. from Corporate Functions to Other Businesses
• Zurich Compagnie d’Assurances Luxembourg, Zurich Corporate Solutions Switzerland from General Insurance to Other Businesses
The 2005 segmental results have been restated to reflect these changes.
The Group’s secondary format for segment information is geographic as follows: • North America
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Group accounts for inter-segment revenues and transfers as if the transactions were with third parties at current market prices, with the exception of realized capital gains, which are eliminated.
b) Insurance contracts and investment contracts with discretionary participating features (DPF)
A number of insurance and investment contracts contain DPF which entitle the contract holder to receive, as a supplement to guaranteed benefits, additional benefits: • whose amount or timing is contractually at the discretion of the Group; and
• that are contractually based on: • the performance of a specified pool of contracts or a specified type of contract; • realized and/or unrealized investment returns on a specified pool of assets held by the issuer; or
Deferred policy acquisition costs for investment type contracts such as universal life, unit-linked and unitized with-profits contracts are amortized over the expected life of the contracts based on a constant percentage of the present value of estimated gross profits expected to be realized over the life of the contract. Estimated gross profits include expected amounts to be assessed for mortality, administration, investment and surrender, less benefit claims in excess of policyholder balances, administrative expenses and interest credited. Estimated gross profits are revised regularly and the interest rate used to compute the present value of revised estimates of expected gross profits is the latest revised rate applied to the remaining benefit period. Deviations of actual results from estimated experience are reflected in earnings.
The impact on the deferred policy acquisition cost asset of the change in unrealized gains or losses on investments is recognized through an offset to unrealized gains or losses at the balance sheet date.
Liability adequacy tests Liability adequacy testing is performed by portfolio of contracts, in accordance with the Group’s manner of acquiring, servicing and measuring the profitability of its insurance contracts. Net unearned premiums are tested to determine whether they are sufficient to cover related expected claims, loss adjustment expenses, policyholder dividends, commission, amortization and maintenance expenses. If there is a premium deficiency, the deferred policy acquisition cost asset is written down by the amount of the deficiency. If, after writing down the deferred policy acquisition cost asset to nil (for the portfolio of contracts), a premium deficiency still exists, then a premium deficiency reserve is recorded to provide for the deficiency in excess of the deferred policy acquisition cost asset written down.
Future life policyholders’ benefits for participating traditional life insurance policies are calculated using a net level premium valuation method based on actuarial assumptions equal to guaranteed mortality and interest rates.
Reserves for unit-linked products are recorded as equal to the consideration received plus accumulated investment yield less any fees charged or dividends paid to the policyholder.
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.
Zurich Financial Services Group · Annual Report 2006 · Financial Report 38 Consolidated Financial Statements
Reinsurance assets are assessed for impairment on a regular basis. If there is objective evidence that a reinsurance asset is impaired, the carrying amount of the asset is reduced to its recoverable amount. The impairment is considered to have taken place if it is probable that the Group will not be able to collect the amounts due from reinsurers. The carrying amount of a reinsurance asset is reduced through the use of an allowance account, and the amount of the impairment loss is recognized in the income statement.
Reinsurance contracts are assessed to ensure that underwriting risk, defined as the reasonable possibility of significant loss, and timing risk, defined as the reasonable possibility of a significant variation in the timing of cash flows, are transferred by the ceding company to the reinsurer. Those contracts that do not transfer both risks, referred to in total as insurance risk, are accounted for using the deposit method. A deposit asset or liability is recognized based on the consideration paid or received less any explicitly identified premiums or fees to be retained by the ceding company. Deposits for contracts that transfer only significant underwriting risk are subsequently measured based on the unexpired portion of coverage until a loss is incurred, after which the present value of expected future cash flows under the contract is added to the remaining unexpired portion of coverage. Changes in the deposit amount are recorded in the consolidated income statements as an incurred loss. Interest on deposits that transfer only timing risk, or no risk at all, are accounted for using the effective interest rate method. Future cash flows are estimated to calculate the effective yield, and revenue and expense are recorded as interest income or expense. Premiums paid under the retroactive contracts are included in reinsurance recoverables in the balance sheet. If the amount of gross claims provisions reinsured is higher than the premium paid, reinsurance receivables are increased by the difference, and the gain is deferred and amortized over the period in which the underlying claims are paid.
c) Investment contracts (without DPF) The Group issues investment contracts without fixed terms (unit-linked) and investment contracts with fixed and guaranteed terms (fixed interest rate).
Investment contracts without fixed terms are financial liabilities where the fair value of the contract is determined with reference to the fair value of the underlying financial assets, derivatives and/or investment property (unit-linked) and are recorded at inception at their fair value.
The costs of acquiring new investment contracts without investment management services are included as part of the effective interest rate used to calculate the amortized-cost measure of the related liabilities.
Zurich Financial Services Group · Annual Report 2006 · Financial Report 40 Consolidated Financial Statements
Held-to-maturity financial assets are debt securities which the Group has the ability and positive intent to hold to maturity. Fair value through profit or loss has two sub-categories: financial assets held for trading and those designated at fair value through profit or loss at inception. The fair value option is mainly used for financial assets backing unit-linked insurance and investment contracts to reduce measurement inconsistencies and certain investments that are managed on a fair value basis. Trading financial assets are debt and equity securities which the Group buys with the principal intention to resell in the near term. Derivatives are also classified as held for trading unless they are designated as hedges. The remaining debt and equity securities are classified as available-for-sale.
Measurement Financial assets are initially recorded at fair value plus, in the case of a financial asset that is not at fair value through profit or loss, transaction costs directly attributable to the acquisition. Held-to-maturity financial assets are subsequently carried at amortized cost using the effective interest rate method, less provision for impairment. Fair value through profit or loss 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. The cumulative unrealized gains or losses recorded in shareholders’ equity are net of cumulative deferred income taxes, certain life policyholder liabilities, certain life deferred acquisition costs and minority interests. The realized gain or loss on divestment is based on the difference between the proceeds received and the carrying value of the investment plus any unrealized gains or losses on the investment recorded in shareholders’ equity using the specific identification method. When available-for-sale financial assets are sold, impaired or otherwise disposed of, the cumulative gains and losses previously recognized in shareholders’ equity are included in the current period income. The amortization of premium and accretion of discount on available-for-sale and held-to-maturity investments in debt securities is computed using the effective interest method and is recognized in current period income.
Investments backing certain life insurance policies with participation features are held as fair value through profit or loss in order to reduce measurement inconsistencies. Movements in the carrying value of these assets are recognized in current period income to match the offsetting amounts attributable to policyholders.
When a decline in the fair value of an available-for-sale asset has been recognized directly in shareholders’ equity and there is objective evidence that the asset is impaired, the cumulative loss that had been recognized directly in shareholders’ equity is removed from equity and recognized in current period income. The amount of the cumulative loss that is removed from shareholders’ equity and recognized in current period income is the difference between acquisition cost (net of any principal repayment and amortization) and current fair value, less any impairment loss on that asset previously recognized in income.
For held-to-maturity financial assets and loans and receivables the impairment is considered to have taken place if it is probable that the Group will not be able to collect principal and interest due according to the contractual terms of the instrument. When impairment is determined to have occurred, the carrying amount of the held-tomaturity financial assets is decreased through a charge to current period income. The amount of the impairment loss is the difference between the asset’s carrying value and the present value of expected future cash flows discounted at the security’s original effective interest rate.
The carrying amount of loans and receivables is reduced through the use of an allowance account, and the amount of the loss is recognized in the income statement.
Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less. Cash and cash equivalents also includes cash received as collateral for securities lending. Cash and cash equivalents are stated at face value, with holdings of foreign notes and coins valued at year-end closing prices.
Real estate held for investment Real estate held for investment purposes is initially recorded at cost (including transaction costs) and is subsequently measured at fair value with changes in fair value recognized in current period income. No depreciation is recorded for real estate held for investment. The gain or loss on disposal of real estate held for investment is based on the difference between the proceeds received and the carrying value of the investment.
f) Derivative financial instruments Derivative financial instruments are carried at fair value on the balance sheet as trading 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 instrument. 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 and those 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.
In addition to the derivative financial instruments described above, the Group enters into contracts that are not considered derivative financial instruments in their entirety but that include embedded derivative features. Such
Zurich Financial Services Group · Annual Report 2006 · Financial Report 42 Consolidated Financial Statements
To qualify for hedge accounting, the relationship of the hedging instrument to the underlying transaction must meet several strict conditions on documentation, probability of occurrence, hedge effectiveness and reliability of measurement. If these conditions are not met, then the relationship does not qualify for hedge accounting, in which case the hedging instrument and the hedged item are reported independently as if there was no hedging relationship.
Gains or losses from re-measuring of derivatives that are designated and qualify as fair value hedges are recognized immediately in the income statement. Offsetting gains or losses on the fair value hedged item attributable to the hedged risk are adjusted against the carrying amount of the hedged item and recognized in the income 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.
h) Obligation to repurchase securities Sales of securities under agreements to repurchase are accounted for as collateralized borrowing transactions and are recorded at their contracted repurchase amount plus accrued interest at the balance sheet date.
For one of the Group’s non-USD debt issuances fair value hedge accounting is applied. When hedge accounting is applied to debt issuances in a currency different than the functional currency of the entity, the carrying values of debt issues are adjusted for changes in fair values related to hedged exposure rather than carried at amortized cost.
j) Interest expense Interest expense is recognized when incurred on an amortized cost basis.
Goodwill Acquisitions of subsidiaries and associates are accounted for under the purchase method, whereby the purchase price is allocated to the fair value of the Group’s share of the identifiable assets and liabilities of the acquired subsidiary or associate at the date of acquisition with any residual amount allocated to goodwill. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Goodwill is allocated to cash generating units for the purpose of impairment testing. The Group’s cash generating units, on which impairment losses are assessed, are the reporting units. Goodwill is also tested for impairment whenever there is an indication that the associated cash generating unit may be impaired. For the purpose of impairment testing, the recoverable amount of the cash generating unit will be determined. An impairment loss will be recorded if the recoverable amount is less than the carrying amount of the cash generating unit, including goodwill.
The recoverable amount of a cash generating unit is the higher of its fair value less costs to sell and its value in use. Fair value less costs to sell is based on the best information available to reflect the amount that the Group could obtain, at the balance sheet date, from the disposal of the cash generating unit in an arm’s length transaction between knowledgeable, willing parties, after deducting the costs of disposal. The information considered includes quoted market prices, current share values in the market place for similar publicly traded entities, and recent sale transactions of similar entities or businesses in the market place. Value in use is determined using the present value of estimated future cash flows expected to be generated from or used by the cash generating unit. The estimated future cash flows are based on best estimate assumptions, such as revenue and expense projections, growth rate, interest rates and investment yields, and inflation rate.
Present value of future profits from acquired insurance contracts (PVFP) As a result of certain acquisition of insurance businesses and the application of purchase accounting, the Group carried a customer contract intangible asset representing the present value of future profits from the acquired contracts or PVFP. This asset 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.
Attorney-in-fact relationships (AIF) At the date of the acquisition of FGI in 1988, a portion of the purchase price was assigned to the attorney-infact relationships. The asset representing the attorney-in-fact relationships reflects the ability of FGI to generate future revenues based on the Group’s relationship with the Farmers Exchanges. In determining that these relationships have an indefinite useful life, the Group considered the organizational structure of inter-insurance exchanges, under which subscribers exchange contracts with each other and appoint an attorney-in-fact to provide certain management services. In addition, the Group considered the historical attorney-in-fact relationship between FGI and the Farmers Exchanges. The Group reviews the value of this intangible asset on an annual basis and also whenever there is a change in these circumstances.
Taxes paid by certain of our life insurance businesses are based on the investment result less allowable expenses. To the extent that these taxes exceed the amount that would have been payable in respect of the shareholders’ share of taxable profits, it is normal practice for certain of our businesses to recover this tax from policyholders. While the relevant company has the contractual right to charge policyholders for the taxes attributable to their share of the investment result less expenses, the obligation to pay the tax authority rests with the company and therefore, the full amount of tax including that charged to policyholders is accounted for as an income tax. Income tax expense therefore includes an element attributable to policyholders. In addition, deferred tax on unrealized gains on investment contracts with DPF related to certain unit-linked policies is included as income tax expense and an accrual for future policy fees to recover the tax charge is included in gross written premiums and policy fee revenue.
Other post-retirement benefits Other defined post-employment benefits, such as medical care and life insurance, are also provided for certain employees and are primarily funded internally. Similar to retirement benefits, the cost of such benefits is accrued over the service period of the employee based upon the actuarially determined cost for the period.
o) 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
Real estate (land) held for own use 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 the disposal of fixed assets and real estate held for own use are determined based on their respective carrying amounts and recorded in income.
q) Provisions Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Provisions are only discounted where the effect of the time value of money is considered material.
Zurich Financial Services Group · Annual Report 2006 · Financial Report 46 Consolidated Financial Statements
Foreign currency translation In view of the international nature of the Group, there are many individual entities with different functional currencies. A functional currency is the currency of the primary economic environment in which the entity operates. 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 US dollar. Assets and liabilities of Group companies with functional currencies other than US dollars are translated into the presentation currency at end-of-period exchange rates, while income 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 and foreign currency non-monetary items, which are carried at fair value 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 income statement, except when the gain or loss on a non-monetary item measured at fair value is recognized directly in equity in which case any exchange component of that gain or loss is also recognized directly in equity.
The table below summarizes the principal exchange rates that have been used for translation purposes. Net losses on foreign currency transactions included in the consolidated income statements were USD (115) million and USD (71) million for the years ended December 31, 2006 and 2005, respectively. Foreign currency exchange forward and swap gains and (losses) included in the amounts above were USD 154 million and USD (453) million for the years ended December 31, 2006 and 2005, respectively.
3. Implementation of new accounting standards and amendments to published accounting standards effective in 2006 and 2005 2006 implementation of amendments to published standards The Group has implemented several amendments to accounting standards within the International Financial Reporting Standards (IFRS) framework, which became effective January 1, 2006. However these changes did not have a material impact on the Group’s Financial Statements.
In December 2004, the IASB released a revised version of IAS 19 “Employee Benefits”. The amendment to IAS 19 introduces an additional option for actuarial gains and losses arising in post-employment defined benefit plans to be recognized outside profit or loss providing all of the actuarial gains and losses for all defined benefit plans are recognized in the period in which they occur. It also adds new disclosure requirements. As the Group has not changed the accounting policy adopted for recognition of actuarial gains and losses, adoption of this amendment only impacts the format and extent of disclosures presented in note 25 to the consolidated financial statements.
In June 2005, the IASB issued amendments to IAS 39 “Financial Instruments: Recognition and Measurement” in relation to the fair value option, which is effective for accounting periods beginning on or after January 1, 2006. This amendment restricts the possibility to designate instruments at fair value through profit and loss that are not held for trading or derivatives. This amendment had no implication for the Group, since the Group had already applied the restrictions of the fair value option and all instruments that it had previously designated at fair value through profit and loss meet the conditions for designation.
In December 2005, IAS 21 “The Effects of Changes in Foreign Exchange Rates” has been amended to require that exchange differences arising in consolidation on loan financings that form part of a net investment in a foreign operation and are denominated in another currency than the functional currencies of both the reporting entity and the foreign operation, are reclassified to equity in the consolidated financial statements of the reporting entity. This amendment had no significant impact on the Group’s financial position or results.
IFRIC 4 “Determining whether an Arrangement Contains a Lease”, which has become effective for accounting periods beginning on or after January 1, 2006, did not have a material impact on the Group’s Financial Statements.
b) qualitative and quantitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about credit risk, liquidity risk and market risk. The qualitative disclosures describe management’s objectives, policies and processes for managing those risks. The quantitative disclosures provide information about the extent to which the entity is exposed to risk, based on information provided internally to the entity’s key management personnel. Together, these disclosures provide an overview of the entity’s use of financial instruments and the exposures to risks they create.
In November 2006 the IASB released IFRS 8 “Operating Segments”. IFRS 8 is effective January 1, 2009. IFRS 8 sets out the reqirements for disclosure of information about an entity’s operating segments, as well as about the entity’s products and services, the geographical areas in which it operates, and its major customers.
In September 2005, the AICPA issued Statement of Position 05-01 (SOP 05-01) “Accounting by Insurance enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts”, effective for modifications or exchanges of insurance contracts in fiscal years beginning after December 15, 2006. SOP 05-01 provides guidance on accounting by insurance enterprises for deferred acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in FASB Statement of Financial Accounting Standards No. 97 “Accounting and Reporting by Insurance
IFRIC 8, “Scope of IFRS 2,” is effective for annual periods beginning on or after May 1, 2006. IFRIC 8 requires consideration of transactions involving the issuance of equity instruments where the identifiable consideration received is less than the fair value of the equity instruments issued to establish whether they fall within the scope of IFRS 2.
IFRIC 9, “Reassessment of Embedded Derivatives,” is effective for annual periods beginning on or after June 1, 2006. IFRC 9 requires an entity to assess whether an embedded derivative is required to be separated from the host contract and accounted for as a derivative when the entity first becomes a party to the contract. Subsequent reassessment is prohibited unless there is a change in the terms of the contract that significantly modifies the cash flows that otherwise would be required under the contract, in which case reassessment is required.
IFRIC 10, “Interim Financial Reporting and Impairment,” is effective for annual periods beginning on or after November 1, 2006. IFRIC 10 prohibits the impairment losses recognized in an interim period on goodwill and investments in equity instruments and in financial assets carried at cost to be reversed at a subsequent balance sheet date.
IFRIC 11, “IFRS 2 – Group and Treasury Share Transactions,” is effective for annual periods beginning on or after March 1, 2007. IFRIC 11 requires that share-based transactions in which an entity receives services as consideration for its own instruments shall be accounted for as equity settled. This is regardless of whether the entity meets this obligation by purchasing the equity instruments from another party or whether the obligation is met by the entity itself or its shareholders. IFRIC 11 also requires that where share based payments to employees are met by another group entity, provided that the arrangement is accounted for as equity-settled in the consolidated financial statements of the parent, the entity shall also account for this as equity settled.
The Group has analyzed the impact of IFRS 7 on its disclosures, as well as the related data collection requirements, in preparation for adopting this standard for its financial year beginning January 1, 2007. Based on the analysis performed up to December 31, 2006, IFRS 7 will not have an impact on the Group’s financial position or results.
IAS 39, “Financial Instruments: Recognition and Measurement,” was revised in December 2003 as part of the IASB’s project to improve IAS 32, “Financial Instruments: Disclosure and Presentation,” and IAS 39. Further amendments were made in 2005 and 2004. These changes related to Fair Value Hedge Accounting for a Portfolio Hedge of Interest Rate Risk.
The IASB issued IFRS 3, “Business Combinations,” on March 31, 2004. In accordance with the transitional provisions of the standard, the Group has applied this standard to business combinations for which the agreement date is on or after March 31, 2004. The remaining requirements of IFRS 3 were adopted as of
The IASB issued IFRS 5, “Non-current Assets Held for Sale and Discontinued Operations,” on March 31, 2004. The standard adopts the classification “held for sale”, introduces the concept of a disposal group, and specifies that assets or disposal groups that are classified as held for sale are carried at the lower of carrying amount and fair value less costs to sell. It also replaced IAS 35, “Discontinuing Operations,” regarding the accounting treatment for discontinued operations.
IAS 27, “Consolidated and Separate Financial Statements,” was revised in March 2004. The adoption of the revised guidance with respect to the consolidation requirements of venture capital organizations, mutual funds and similar entities resulted in an equivalent gross up of the Group’s assets and liabilities to reflect the liabilities to third parties and minority interests. Also, IAS 27 revised requires the disclosure of minority interests within equity separately from shareholders’ equity.
The accounting policy for securities lending was changed, primarily driven by the revised IFRS which led the Group to review its previous policy and make changes to the criteria for recognizing collateral received as part of securities lending arrangements. As a result of the Group having future economic benefits and retaining significant risk and rewards of the cash collateral received, the Group now recognizes both cash collateral and an equal and offsetting liability related to the cash collateral. No income effect resulted from the change in this policy.
During the years ended December 31, 2006 and 2005, the Group completed divestments of several businesses and recognized post-completion adjustments on divestments made in the previous year.
In 2005, the companies and businesses divested did not materially contribute to the Group’s net income attributable to shareholders.
Critical accounting estimates are those which involve the most complex or subjective judgments or assessments, and relate to general insurance and life insurance reserves, the determination of fair value for financial assets and liabilities, impairment charges, deferred policy acquisition costs, deferred taxes and pension benefits. In each case, the determination of these items requires management to make informed judgments based on information and financial data that may change in future periods.
The Group’s reserves for reported losses and loss adjustment expenses are based on estimates of future payments to settle reported general insurance claims and claims from the run-off of its former third party reinsurance operations. The Group bases such estimates on the facts available at the time the reserves are established. The Group generally establishes these reserves on an undiscounted basis to recognize the estimated costs of bringing pending claims to final settlement, taking into account inflation, as well as other factors that can influence the amount of reserves required, some of which are subjective and some of which are dependent on future events. In determining the level of reserves, the Group considers historical trends and patterns of loss payments, pending levels of unpaid claims and types of coverage. In addition, court decisions, economic conditions and public attitudes may affect the ultimate cost of settlement and, as a result, the Group’s estimation of reserves. Between the reporting and final settlement of a claim circumstances may change, which would result in changes to established reserves. Items such as changes in law and interpretations of relevant case law, results of litigation, changes in medical costs, as well as costs of vehicle and home repair materials and labor rates can substantially impact ultimate settlement costs. Accordingly, the Group reviews and re-evaluates claims and reserves on a regular basis. Amounts ultimately paid for losses and loss adjustment expenses can vary significantly from the level of reserves originally set.
Zurich Financial Services Group · Annual Report 2006 · Financial Report 52 Consolidated Financial Statements
reserve reviews of the Group’s businesses throughout the world. Management considers the results of these reviews and adjusts its loss and loss adjustment expense reserves, where necessary.
Refer to notes 10 and 11 for further information on reserves for losses and loss adjustment expenses.
• Under certain contracts, the Group has offered product guarantees (or options to take up product guarantees), including fixed minimum interest rate or mortality rate returns. In determining the value of these options and/or benefits, estimates have been made as to the percentage of contract holders that will exercise them. Changes in investment conditions could result in significantly more contract holders exercising their options and/or benefits than has been assumed.
Refer to notes 7, 8, 9 and 21 for further information on the fair value of financial assets and liabilities.
For quoted available-for-sale financial assets the decision to make an impairment provision is based on a review of the issuer’s current financial position and future prospects and an assessment of the probability that the current market price will recover to former levels within the foreseeable future. The recoverable amount is determined by reference to the market price. For non-quoted available-for-sale financial assets, the Group takes into consideration the issuer’s current financial position and future prospects in determining whether an impairment provision is required. The recoverable amount is determined by applying recognized valuation techniques.
Impairments are recorded in the current period income statement when they occur.
Refer to notes 7, 16, 18, 19 and 20 for further information on impairments of assets.
Zurich Financial Services Group · Annual Report 2006 · Financial Report 54 Consolidated Financial Statements
• Credit risk – risk associated with a loss or potential loss from a counterparty failing to fulfill its financial obligations related to the investment portfolio, reinsurance assets and other exposures.
The Board of Directors establishes the Group’s corporate risk management framework. Zurich’s enterprise risk management framework was further strengthened in 2006 through the establishment of a Risk Committee at Board level. The Risk Committee serves as a focal point for oversight regarding risk management. It reviews the Group’s enterprise-wide risk governance framework, including risk management methodologies, policies, models and reporting and risk strategy. To facilitate information exchange between the Audit Committee of the Board and the Risk Committee, the chairperson of the Audit Committee is a member of the Risk Committee and vice versa. The Risk Committee of the Board assesses whether management is addressing risk issues in a timely and appropriate manner. The Group Chief Risk Officer regularly reports to the Risk Committee of the Board regarding the Group’s risk profile and mitigation actions.
The Group has additional management committees at all levels of the organization that regularly and systematically review risks in the Group’s various businesses and ensure appropriate management attention.
The Chief Executive Officer, together with the Group Executive Committee, oversees the Group’s performance with regard to its risk management policies as well as the further development of these policies when required. The Group Chief Risk Officer reports to the Chief Executive Officer. The Group also benefits from the cooperation of its network of risk management and functional specialists within each business as well as at Corporate Center, where it has dedicated managers for various types of risk.
Group-wide risk management policies specify risk limits and authorities, reporting requirements, and procedures for referring risk issues to senior management. The Group regularly monitors its risks through analyses and reports, and through relevant risk modeling.
General insurance risks General insurance risk includes the reasonable possibility of significant loss due to uncertainty of the frequency of insured events occurring and the uncertainty of the severity of the resulting claims.
Direct written for the year ended December 31, 2005 premiums and policy fees by line of business and by region
Third Party Accident Motor Property Liability and Health Other 2 1 Including intercompany eliminations. 2 Including policy fees of USD 44 million (Europe USD 27 million and International Businesses USD 17 million).
The main risks in each line of business are as follows: • Motor includes, but is not limited to, auto physical damage and auto third party liability risks; • Property includes, but is not limited to, fire and flood risks; • Third Party Liability includes, but is not limited to, the liability risks, such as workers injury, from the Group’s customers. Premiums underwritten in this line of business have included cover for risks such as asbestos and environmental risks. The reserves arising from these risks are shown in note 11; • Accident and Health includes, but is not limited to, the accident and health insurance risks from the Group’s personal customer segment; and
• Other includes, but is not limited to, other risks such as credit and surety, marine and aviation.
The Group assesses natural catastrophe risk by modeling potential losses from its property policies located in the most hazard prone areas and adjusting for non-property related losses. These assessments principally address the risk of tornadoes, hail, windstorms, earthquakes, and river floods.
North America 368 – – 260 1 Including intercompany eliminations. 2 Including individual annuity and individual life. 3 Including policy fees of USD 2,333 million (North America USD 260 million, Europe USD 1,920 million and International Businesses USD 153 million).
The main risks in each line of business are as follows: • Individual annuity includes, but is not limited to, longevity and interest rate risks arising on personal annuity insurance contracts. Longevity risk is the risk that an annuitant may live longer than expected. Individual life includes, but is not limited to, mortality, morbidity and interest rate risks arising on personal life insurance contracts. Mortality risk is the risk that a policyholder dies sooner than expected. Morbidity risk is the risk that a policyholder suffers disability.
• Group includes, but is not limited to, mortality, morbidity, longevity and interest rate risks arising on commercial death, disability and annuity insurance contracts.
As part of its overall risk management strategy, the Group cedes insurance risk via proportional, nonproportional and specific risk reinsurance treaties. While these cessions mitigate insurance risk, the recoverable from reinsurers exposes the Group to credit risk.
Rating 1 Including receivables from reinsurers. 2 Including collateral of USD 8,974 million.
The overall average rating of our debt portfolio is AA+. The largest concentration in our debt portfolio is in governments and supranationals at 44.3%. A total of 59.1% of the non-government and non-supranational debt securities are secured by government guarantee or other collateral.
The Group routinely manages credit exposures by individual counterparty and by individual sources of credit risk. In addition the Group monitors the accumulation of credit risk and limits the aggregated exposure across related counterparties and significant types of credit risk. The exposure from parent companies and subsidiaries across such sources of credit risk as reinsurance assets, various types of investments and certain insurance products, derivatives and treasury instruments is added together. Best estimates, based on statistics and experience are used, to assign loss-given-default percentages and factors for the likelihood that a default would occur. The aggregated exposure information is compared to the Group’s limits. The Group Chief Risk Officer regularly reports the 20 largest exposures in every rating category to the Risk Committee of the Board.
To limit credit risk, derivative financial instruments are typically executed with counterparties rated A- or better by an external rating agency. Almost all derivatives have CSA (Credit support annex) in place which will require the counterparties to post collateral when the derivative position is beyond an agreed threshold.
c) Financial market and ALM risk The Group is exposed to changes in interest rates, currency exchange rates, equity and real estate markets, as these changes can affect the value of assets and liabilities and margins depending on the pricing structure.
Table 6.7 below shows, both for the General Insurance Businesses and Life Insurance Businesses, the estimated impacts on total investments, reserves for insurance contracts and liabilities for investment contracts (including unit-linked contracts) and net assets of a one percentage point increase in yield curves and a 10% decline in all stock markets as of December 31, 2006. All amounts shown are before taxation effects.
Interest rate and in USD millions, as of December 31, 2006 equity market sensitivities for the Group’s general insurance and life insurance businesses
General Life Insurance Insurance Business 1 Business 1 1% increase in the interest rate yield curves
Reserves for insurance contracts and liabilties for investment contracts – (3,328)
Reserves for insurance contracts and liabilties for investment contracts – (7,718)
Debt securities are primarily exposed to interest rate risk while equity securities are primarily exposed to equity market risk. Debt securities can also be affected by spread-widening due to changes in credit quality. Some of the above impacts have been estimated after taking into account changes that would be absorbed by policyholders.
Currency risk As an international group, the Group is exposed to various currency risks. Most prominently, those risks can affect its liquidity, its reported profits and losses, its reported equity and its regulatory capital position. The Group attempts to minimize its currency risk by matching foreign currency positions on local balance sheets within prescribed limits. Because the Group holds a portfolio of risks from its businesses denominated in various currencies, the Group also holds its available capital in various currencies. The Group does not take speculative positions on foreign currency market movements. Foreign currency is a centrally managed risk, with hedging coordinated at the Corporate Center.
The effect on shareholders’ equity of a 10% movement in the exchange rate, is similar to that of the effect on the movements on net assets.
Zurich Capital Markets (ZCM) has portfolios of derivative products, including total return swaps, for the benefit of their customers and their investment books. ZCM’s positions on derivative financial instruments are separately reported in note 9.
Investment result in USD millions, for the years ended December 31
3 Including rental operating expenses for real estate held for investment of USD 163 million and 146 million for the years ended December 31, 2006 and 2005, respectively.
Zurich Financial Services Group · Annual Report 2006 · Financial Report 62 Consolidated Financial Statements
Equity securities (including trading equity portfolios in capital markets and banking activities): Fair value through profit or loss 95,049 30.7% 78,692 28.4%
As of December 31, 2006 and 2005, respectively, debt securities with a carrying value of USD 6,144 million and USD 5,295 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.
Cash and investments with a carrying value of USD 4,469 million and USD 4,786 million were deposited with regulatory authorities as of December 31, 2006 and 2005, respectively.
The table below presents the carrying value of debt securities by maturity.
Six years through ten years 816 313 24,346 23,449 4,103 3,597
Zurich Financial Services Group · Annual Report 2006 · Financial Report 64 Consolidated Financial Statements
thereof: Common stock portfolios backing participating with-profit policyholder contracts 1,604 1.4% 1,691 1.8%
Realized capital in USD millions, gains/(losses) and for the years ended December 31 impairments on available-for-sale debt and equity securities
Policyholders’ collateral and other loans: fair values are estimated on the basis of discounted cash flow, pricing models, or other recognized valuation techniques.
Debt: fair values are estimated using discounted cash flow calculations based upon the Group’s current incremental borrowing rates for similar types of borrowings with maturities consistent with those remaining for the debt being valued.
Equity securities (including trading equity portfolios in capital markets and banking activities) 109,005 90,314 109,005 90,314
Zurich Financial Services Group · Annual Report 2006 · Financial Report 68 Consolidated Financial Statements
Maturity profile of in USD millions, as of December 31 notional principal amounts and market values of derivative financial instruments (ZCM)
Zurich Financial Services Group · Annual Report 2006 · Financial Report 70 Consolidated Financial Statements
Life insurance death and other benefits 10,787 10,811 (293) (275) 10,494 10,536
Decrease in future life policyholders’ benefits (1,418) (674) (99) (49) (1,517) (723)
Underwriting and policy acquisition costs 7,823 7,962 (841) (709) 6,982 7,253
Net change in USD millions, for the years ended December 31 in reserves for unearned premiums
(reinsurers’ share of reserves for insurance contracts, gross) 1 (20,302) (20,715)
Total reserves for insurance contracts, net 220,346 199,209 1 Gross of allowance for uncollectible amounts of USD 239 million and USD 221 million as of December 31, 2006 and 2005, respectively.
Significant delays occur in the notification of claims and a substantial measure of experience and judgment is involved in assessing outstanding liabilities, the ultimate cost of which cannot be known with certainty as of the balance sheet date. The reserves for losses and loss adjustment expenses are determined on the basis of information currently available; however, it is inherent in the nature of the business written that the ultimate liabilities may vary as a result of subsequent developments.
Deferred charges relating to retrospective reinsurance assumed totaling USD 121 million and USD 129 million as of December 31, 2006 and 2005, respectively, and have been deducted from reserves for losses and loss adjustment expenses.
Net reserves re-estimated as of: Three years later 30,636 36,118 42,004
Cumulative (deficiency) / redundancy as a percentage of initial net reserves (38.3%) (24.1%) (13.5%) (3.5%) 0.5%
Policyholders’ in USD millions, as of December 31 contract deposits and other funds (gross of reinsurance)
Roll forward of in USD millions policyholders’ contract deposits and other funds
Long-duration contract liabilities included in future life policyholders’ benefits result primarily from traditional participating and non-participating life insurance products. Short-duration contract liabilities are primarily accident and health insurance products. The liability for future life policyholder benefits has been established based upon the following: • interest rates which vary by country, year of issuance and product; • mortality rates based on published mortality tables adjusted for actual experience by geographic area and modified to allow for variations in policy form; and
• surrender rates based upon actual experience by geographic area and modified to allow for variations in policy form.
The amount of policyholder dividends to be paid is determined annually by each Group life insurance company. Policyholder dividends include life policyholders’ share of net income and unrealized appreciation of investments that are required to be allocated by the insurance contract or by local insurance regulations. Experience adjustments relating to future policyholders’ benefits and policyholders’ contract deposits vary according to the type of contract and the country. Investment, mortality and morbidity results may be passed through by experience credits or as an adjustment to the premium mechanism, subject to local regulatory provisions.
In 2005 net changes include the following significant movements: • USD 177 million related to changes in interest rate assumptions; • USD 205 million related to changes in morbidity assumptions, primarily related to termination rate experience on disability; and
Maturity schedule in USD millions, as of of reserves for December 31, 2006 insurance contracts
Reserves Reserves Reserves for losses for losses for losses Future life Future life Future life and loss and loss and loss policy- policy- policyadjustment adjustment adjustment holders’ holders’ holders’
expenses, expenses, expenses, benefits, benefits, benefits, gross ceded net gross ceded net
The net amount at risk is the present value of payouts exceeding the current policyholder account balance assuming the payout criteria in all policies are collectively triggered as of the balance sheet date. As we do not consider this a likely scenario we did not provide for this amount but followed the accretion guidance in 12. Liabilities for investment contracts (with and without DPF)
Liabilities related to investment contracts with discretionary participation features (DPF) 6,315 5,995
Zurich Financial Services Group · Annual Report 2006 · Financial Report 78 Consolidated Financial Statements
The fair value of financial liabilities at amortized cost is based on a discounted cash flow valuation technique and is shown in note 8. The discount rate is determined by current market assessment of the time value of money and risk specific to the liability.
As of December 31 50,705 40,999 13. Equity component relating to contracts with DPF
FGI is contractually permitted to receive a management fee of up to 20% (25% in the case of the Fire Insurance Exchange) of the gross premiums earned by the Farmers Exchanges, which the Group manages but does not own. 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 USD 14,721 million and USD 14,380 million for the years ended December 31, 2006 and 2005, respectively.
Foreign currency 1 Net of eliminations of intersegment transactions. 2 Amortization recorded directly to common shareholders’ equity through change in unrealized gains and losses on investments for Global Life was USD (55)
Income tax in USD millions, for the years ended December 31 expense – policyholder/ shareholder attribution
The Group is required to record taxes on policyholder earnings for life insurance policyholders in certain jurisdictions. Accordingly, the income tax expense or benefit attributable to these life insurance policyholder earnings is included in income tax expense. In certain jurisdictions an accrual for future policy fees that will cover the tax charge is included in gross written premiums and policy fees revenue.
Expected income tax expense attributable to shareholders 30.2% 1,907 32.3% 1,514
Increase/(reduction) in taxes resulting from: Tax exempt and lower taxed income (636) (419)
Current tax in USD millions, as of December 31 receivables and payables
The 2005 numbers are shown before the netting of timing differences of USD 1,993 million.
Deferred tax charge included in shareholders’ equity amounted to USD 312 million and USD 384 million for the years ended December 31, 2006 and 2005, respectively.
Deferred tax assets in USD millions, as of December 31 by taxpayer group
Deferred tax assets, net of valuation allowance and other Deferred tax assets tax liabilities
Management assesses the recoverability of the deferred tax assets carrying values based on future years taxable income projections and believe that the carrying values of the deferred tax assets as of December 31, 2006, are recoverable.
Fixed assets in USD millions Land Buildings Furniture Computer Other held for held for and equip- fixed own use own use fixtures ment assets Total
Gross carrying value as of January 1, 2006 355 1,341 378 684 510 3,268
Gross carrying value as of January 1, 2005 457 1,688 478 747 644 4,014
Additions, capital improvements and transfers 37 82 10 124 74 327
Intangible assets in USD millions, as of December 31 by segments Goodwill
Net carrying value as of December 31 660 605 1 This intangible asset relates to insurance contracts only. 2 Other intangibles include internally generated capitalized software development costs and other costs.
In 2006, impairment charges of USD 12 million were recorded in the income statement. USD 6 million of the 2006 impairment charge relates to entities in Australia which are being wound down, thus there are no operating cash flows to support the goodwill balance. Therefore, the balance was written off in full. The remaining USD 6 million of the goodwill impairment for 2006 relates to the Spanish life operations.
Other liabilities in USD millions, as of December 31 2006 2005
Zurich Financial Services Group · Annual Report 2006 · Financial Report 88 Consolidated Financial Statements
Zurich Capital Markets Notes and loans payable within 1 year 1,050 653
EUB Holdings Limited Notes and loans payable within 1 year 738 779
Notes and loans payable in more than 1 year 1 99
Centre Solutions (Bermuda) Ltd. Note payable in more than 1 year 56 65
Various short- and medium-term debt instruments payable in more than 1 year 142 296
Zurich Finance (UK) p.l.c 6.625% GBP 450 bond, undated notes 867 762
ZFS Finance (USA) Trust I Series I 6.15% USD 600 ECAPS, due December 2065 593 592
ZFS Finance (USA) Trust II Series II 6.45% USD 700 ECAPS, due December 2065 690 689
Total debt 9,602 9,679 1 These bonds are economically hedged, but hedge accounting treatment has not been applied. 2 In 2005 unamortized transaction costs were reported separately. 3 The bond is part of a qualifying fair value hedge relationship.
Zurich Financial Services Group · Annual Report 2006 · Financial Report 90 Consolidated Financial Statements
5.75% payable annually up 5.75% to October 2, 2013 Redeemable in whole EUR 500 bond, and then reset quarterly to Quarterly on quarterly at par plus due October 2023 3-month EURIBOR plus 2.67%. or after October 2, 2013 any accrued interest.
4.5% payable annually up 4.5% to June 15, 2015 Redeemable in whole EUR 500 bond, and then reset quarterly to Quarterly on quarterly at par plus due June 2025 3-month EURIBOR plus 2.20%. or after June 15, 2015 any accrued interest.
6.45% payable semiannually Redeemable in whole Series II 6.45% until June 15, 2016 or in part at par plus USD 700 ECAPS, and then reset quarterly to At any time on any accumulated and due December 2065 the Adjustable Rate plus 2.00% 2 or after June 15, 2016 unpaid distributions.
On February 15, 2006, the Board of Zurich Financial Services approved the issuance of a maximum of 1,000,000 dividend-paying shares from the contingent share capital to employees. At the Annual General Meeting on April 20, 2006, shareholders approved a share capital reduction in the form of a nominal value reduction of each registered share from CHF 2.50 to CHF 0.10. At the effective date of the nominal value reduction on July 3, 2006 Zurich Financial Services had 144,565,255 issued and fully paid shares, including 558,300 shares issued out of the contingent capital. As a result of this reduction, the share capital was reduced by CHF 346,956,612 from CHF 361,413,137.50 to a new total of CHF 14,456,525.50. As of December 31, 2006, a total of 742,444 shares were issued to employees from contingent share capital. As a consequence, 144,749,399 fully paid shares with a nominal value of CHF 0.10 were issued as of December 31, 2006, amounting to a share capital of
In the previous year, shareholders approved, at the Annual General Meeting on April 19, 2005, a share capital reduction in the form of a nominal value reduction of each registered share from CHF 6.50 to CHF 2.50. As a result of that reduction, the share capital was reduced by CHF 576,027,820 from CHF 936,045,207.50 to CHF 360,017,387.50.
Employee participation Following the decision of the Board of Directors of Zurich Financial Services of February 15, 2006, to issue up to a maximum of 1,000,000 dividend-paying shares with a nominal value of CHF 0.10 each out of the 1,500,000 shares available for employees, until December 31, 2006, 742,444 shares of this contingent share capital have been issued. Consequently, as of the same date, the share capital may be increased by an amount not exceeding CHF 75,755.60 by issuing the remaining 757,556 fully paid registered shares with a nominal value of CHF 0.10 each to employees of Zurich Financial Services and Group companies. The pre-emptive rights of the shareholders, as well as the right for advance subscription, are excluded. The issuance of shares or respective option rights to employees shall be subject to one or more regulations to be issued by the Board of Directors and shall take into account performance, functions, levels of responsibility and criteria of profitability. Shares or option rights may be issued to the employees at a price lower than that quoted on the stock exchange.
d) Preferred securities In February 2001, the Group placed six series of Trust Capital Securities (Zurich RegCaPS) for 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. On March 30, 2006, and April 11, 2006, the Group redeemed the Series I and III of the Zurich RegCaPS, respectively. The liquidation amounts totaled USD 425 million in aggregate. Of the remaining series totaling USD 700 million, one has a fixed rate
e) Additional paid-in capital This reserve is not ordinarily available for distribution.
f) Dividend restrictions and capital and solvency requirements Zurich Financial Services is not subject to legal restrictions on the amount of dividends it may pay to its shareholders other than under the Swiss Code of Obligations. The Swiss Code of Obligations provides that dividends may only be paid out of freely distributable reserves or retained earnings and that 5% of annual retained earnings must be allocated to the general legal reserve until such reserve in the aggregate has reached 20% of the paid-in share capital. As of December 31, 2006, the amount of the general legal reserve exceeded 20% of the paid-in share capital of Zurich Financial Services. Similarly, the company laws of many countries in which Zurich Financial Services’ subsidiaries operate may restrict the amount of dividends payable by such subsidiaries to their parent companies.
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 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 such as foreign exchange control restrictions.
Several regulatory changes came into force in Switzerland on January 1, 2006. Amongst others the capital requirements were changed to include a risk-based target capital for insurance companies and insurance groups (Swiss Solvency Test). Risk-bearing and target capital have to be determined building on a risk-based capital model by 2008 for groups, conglomerates, reinsurers and small companies. Large legal entities had to carry out calculations in 2006 as part of a compulsory field test. These may be developed using the entity’s own riskbased capital model to be approved by the Federal Office of Private Insurance (FOPI). Groups, conglomerates and reinsurers use company specific internal models. The new target capital must be built up by the beginning of 2011. Zurich has built on its existing internal risk-based capital model for the Group and for Zurich Insurance Company in close consultation with FOPI and submitted field test results to FOPI for all its Swiss legal entities.
Zurich Financial Services Group · Annual Report 2006 · Financial Report 94 Consolidated Financial Statements
The Group operates a number of active retirement benefit arrangements for employees, the majority of whom belong to defined benefit plans. Other employees participate in defined contribution plans, which provide benefits equal to amounts contributed by both the employer and the employee plus investment returns.
Most of the Group’s defined benefit plans are funded through contributions by the Group and, in some cases, the employee to trusts or foundations independent of the Group’s finances. In these cases, the annual funding requirements are determined in accordance with local funding and actuarial cost methods. Where plans are not specifically funded, for example, as is usual in the case of pension plans in Germany, a liability for the accrued pension obligations is recognized in the Group’s balance sheet.
The funded status of the Group’s funded defined benefit plans moved to a deficit of USD 1,119 million as of December 31, 2006 from a deficit of USD 2,015 million as of December 31, 2005.
Pensions, however, are long-term by nature. Short-term variations between long-term actuarial assumptions and actual experience may be positive or negative, resulting in actuarial gains or losses. In accordance with IAS 19, 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 IAS 19 are amortized through the income statement (see table 25.3 below).
On June 16, 2005, the Boards of Trustees of the pension plans for the Group’s employees based in Switzerland adopted new pension plan arrangements that reflect the changed economic and demographic environment. The principal changes to the pension plans, which became effective January 1, 2006, were the conversion from a defined benefit to a defined contribution system and the separation of the pension plan as an autonomous foundation. Employees transferred to the new arrangements, and future benefits at normal retirement for current active participants are targeted to be similar to those under the former arrangements. However, following a transition period of three years, the current additional benefits that are provided on early retirement will gradually be phased out over a nine-year period. The calculation of the reduced long-term obligation under IAS 19 resulted in a one-time non-cash gain of USD 103 million recorded in 2005.
Movement in in USD millions defined benefit plan obligations – funded and unfunded plans
Movement in in USD millions fair value of plan assets – funded plans
Fair value of plan assets as of January 1 8,597 6,586 13 17
The summary of the balance sheet changes in relation to defined benefit plans and other defined postemployment benefits is given below.
Summary of balance in USD millions sheet movements – funded and unfunded plans
Actuarial gains and losses have arisen over 2006 due to differences between actual and expected experience on the Group’s plan assets and defined benefit obligations, together with the impact of the change in actuarial assumptions to reflect economic conditions at the year end. These are summarized as follows: Table 25.8
The principal financial assumptions used to calculate the Group’s defined benefit pension and defined postemployment benefit obligations as at December 31, 2006 and the Group’s pension expense for 2007 are as follows: Table 25.9
Weighted average as of December 31 assumptions used in determining the actuarial liabilities for other defined post-employment benefits
The assumed life expectancy in each country has been based on the most up to date mortality tables in accepted general use in that market. Where appropriate these tables make allowance for projected future improvements in life expectancy.
The Group has adopted various share-based compensation and cash incentive plans to attract, retain and motivate executives and employees. The plans are designed to reward employees for their contribution to the performance of the Group and to encourage employee share ownership. Share-based compensation plans include plans under which shares and options to purchase shares, based on the performance of the businesses, are awarded. Share-based plans are based on the provision of Zurich Financial Services shares.
a) Cash incentive plans Various businesses throughout the Group operate short-term incentive programs for executives, management and, in some cases, for employees of that business unit. Awards are made in cash, based on the accomplishment of both organizational and individual performance objectives. The expenses recognized for these cash incentive plans amounted to USD 358 million and USD 296 million for the years ended December 31, 2006 and 2005, respectively.
UK Sharesave Plan The plan is open to employees in the UK. Participants enter into a savings contract with a bank for the accumulation of contributions of between GBP 5 and GBP 250 per month for a period of three or five years. An interest bonus is credited at the end of the savings period. Participants are granted options to acquire Zurich Financial Services shares at a pre-determined price, which is not less than 80% of the market price prior to grant. Options under the plan can normally be exercised for a period of six months after the end of the savings period. Early exercise, limited to the value of shares that can be acquired with accrued savings, is permitted in certain circumstances. There were a total of 569 and 864 participants in this plan as of December 31, 2006 and 2005, respectively. There have been no new grants under this plan since 2002.
Share Incentive Plans for employees in Switzerland The Employee Incentive Plan introduced for employees in Switzerland continued to operate in 2006. Under this plan, employees have the option to acquire sales-restricted shares at a 30% discount to the market value, with the maximum value of the discount being CHF 1,500. During 2006, 5,811 employees participated in the Employee Incentive Plan compared with 6,002 in 2005. For the year ended December 31, 2006, 1,830 employees received shares under the 2005 employee performance share plan. For the year ended December 31, 2005, 1,870 employees received shares under the 2004 employee performance share plan.
The average share price for Zurich Financial Services shares in 2006 and 2005 was CHF 294.63 and CHF 221.19, respectively.
Contracted option life 7 years 7 years 1 Share price as at date of grant.
Outstanding loans and guarantees granted to members of the Group Executive Committee amounted to USD 4 million for the years ended December 31, 2006 and 2005. No outstanding loans or guarantees were granted to the directors of Zurich Financial Services and Zurich Insurance Company for either of the years ended December 31, 2006 and 2005. The terms “directors” and “members of the Group Executive Committee” in this context include the individual as well as members of the respective households. The above figures include the fees paid to members of the Board of Directors of Zurich Financial Services and Zurich Insurance Company, which were USD 3.2 million and USD 2.8 million, in 2006 and 2005 respectively.
Zurich Financial Services Group · Annual Report 2006 · Financial Report 104 Consolidated Financial Statements
a) Surplus note and certificates of contribution issued by the Farmers Exchanges As of December 31, 2006 and 2005, FGI and other Group companies held the following surplus note and certificates of contribution issued by the Farmers Exchanges. Originally these were purchased by FGI in order to supplement the policyholders’ surplus of the Farmers Exchanges.
Effective December 31, 2004, Farmers Re and ZIC entered into a 12% All Lines Quota Share reinsurance treaty under which they each assume a percentage of all lines of business written by the Farmers Exchanges, prospectively. Under this treaty, which amended the 10% All Lines Quota Share reinsurance treaty in effect since December 31, 2002, Farmers Re and ZIC assume a 2.4% and 9.6% respective quota share of the premiums written and the ultimate net losses sustained in all lines of business written by the Farmers Exchanges after the APD reinsurance agreement has been applied. Underwriting results assumed are subject to a maximum combined ratio of 112.5% and a minimum combined ratio of 93.5%. In addition, under this treaty the Farmers
Other commitments and contingent liabilities 36 312 1 Guarantee features embedded in life insurance products are not included. For such guarantee features refer to note 11 on 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 227 million to Capital Z Investments II, L.P., USD 86 million to Capital Z Investments, L.P. and USD 54 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.
Guarantees, surety bonds, letters of credit The Group knows of no event of default that would require it to satisfy guarantees. Irrevocable letters of credit and surety bonds have been issued to secure certain reinsurance contracts.
Indemnity agreements The Group, through certain of its subsidiaries, has agreed to arrangements that cap Converium’s net exposure for losses arising out of the September 11, 2001 event at USD 289 million. As of December 31, 2006, the Group has recorded in this respect provisions in the amount of USD 103 million. During 2006, the additional coverage that was provided to Converium by the Group for net losses in excess of USD 59 million related to the Amerisafe/Unicover pool business was fully and finally commuted with a payment of USD 20.6 million.
Pledged assets Total assets pledged including securities pledged in respect of securities repurchase agreements amounted to USD 6,042 million and USD 5,679 million as of December 31, 2006 and December 31, 2005, respectively. Assets pledged were financial assets.
On December 11, 2001, the Group divested its third party reinsurance business operated under the “Zurich Re” brand name by offering the shares of the newly established Converium Holding AG to the public. As part of the formation of Converium Holding AG and the subsequent public offering of its shares, the Group entered into various contracts with Converium Holding AG and its subsidiaries, including certain Quota Share Retrocession Agreements. These Quota Share Retrocession Agreements, together with subsequent amendments, provide for the reinsurance premium to Converium to be retained by the Group on a funds withheld basis. Converium may call for payment in cash certain amounts of the funds withheld on pre-determined dates. If Converium calls for such payments on July 1, 2007, the maximum amount that would be payable by the Group is estimated to be in the range of approximately USD 200 million to USD 250 million.
Litigation and regulatory investigations The Group and its subsidiaries are continuously involved in legal proceedings, claims and litigation arising, for the most part, in the ordinary course of their business operations.
Net change in reserves for unearned premiums (208) (376) (5) 1
Insurance benefits and losses, net of reinsurance 19,934 21,069 8,655 9,100
Interest credited to policyholders and other interest 211 204 583 716
Reinsurers’ share of reserves for insurance contracts 13,661 13,974 1,785 1,561
Policyholders’ contract deposits and other funds, gross 930 862 14,117 13,854
Zurich Financial Services Group · Annual Report 2006 · Financial Report 112 Consolidated Financial Statements
Zurich Financial Services Group · Annual Report 2006 · Financial Report
Zurich Financial Services Australia Limited Sydney General Insurance 100.00 100.00 AUD 22.8
ZCM Holdings (Bermuda) Limited Hamilton Other Businesses 100.00 100.00 USD 147.2
ZG Investments III Ltd. Hamilton Corporate Functions 100.00 100.00 USD 0.01
Zurich Versicherung Aktiengesellschaft (Deutschland) Frankfurt / Main General Insurance 94.96 94.96 EUR 142.2 1 The segments are defined in the notes to the consolidated financial statements, note 1, basis of presentation.
Zurich Insurance Ireland Ltd. Dublin General Insurance 100.00 100.00 EUR 4.6
South African Eagle Insurance Company Limited 2 Bryanston General Insurance 73.61 73.61 ZAR 3.0
Zurich Life Insurance Company Ltd. Zurich Corporate Functions 100.00 100.00 CHF 60.0
“Zurich” Investment Management AG Zurich Corporate Functions 100.00 100.00 USD 8.3
Zurich Insurance (Taiwan) Ltd. Taipei General Insurance 98.90 98.90 TWD 2,000.0
Allied Zurich Limited Swindon, England Corporate Functions 100.00 100.00 GBP 378.1
Eagle Star Insurance Company Limited Fareham, England Other Businesses 100.00 100.00 GBP 50.0
as of 31 December 2006 Book value of common stock (in Voting Ownership local currency
Zurich Employment Services Limited Swindon, England Life Insurance 100.00 100.00 GBP 9.0
Zurich Specialties London Limited London, England Other Businesses 100.00 100.00 GBP 150.0
Farmers Reinsurance Company Los Angeles, CA Other Businesses 100.00 100.00 USD 5.0
Farmers Services, LLC 3 Wilmington, DE Services 100.00 100.00 USD –
Zurich American Insurance Company (and subsidiaries) New York, NY General Insurance 100.00 100.00 USD 5.0
Zurich Finance (USA), Inc. Wilmington, DE Corporate Functions 100.00 100.00 USD0.000001
Zurich Holding Company of America, Inc. Dover, DE Corporate Functions 100.00 100.00 USD 0.6 3 This entity is an LLC that has no share capital.-
Zurich Financial Services Group (Zurich) has reported Embedded Value (EV) in respect of the year ended December 31, 2006 together with comparative figures for the year ended December 31, 2005 in line with the European Embedded Value Principles issued by the CFO Forum, for the companies and business reported in its Global Life segment (Global Life), which is defined as covered business. Certain other life businesses are included in Other Businesses segment and have been excluded from the EV. This report primarily relates to Global Life, but information relating to Other Businesses is given in section 2.f below.
Embedded Value in USD millions, as of December 31 2006 2005
The value of business in-force is the present value of future projected profits from covered business, and can be defined as the certainty equivalent value of business in-force less frictional costs, time value of options and
guarantees and cost of non market risk. Further details of the methodology used in the calculation of these items are given in section 4.
Frictional costs are applied to the total capital held by the covered business. As of December 31, 2006 total capital is the sum of: • USD 3.4 billion of minimum solvency margin required by regulation; • USD 1.0 billion of any additional solvency margin that life business units consider is in practice required; and,
Present value of new business premiums (PVNBP) 3 19,487 18,816 1 Gross of minorities. 2 APE is taken as new annual premiums plus 10% of single premiums. 3 PVNBP is equal to new single premiums plus the present value of annual premiums.
New business 1 in USD millions, for the years ended December 31 margin after tax before tax 2 after tax before tax 2
1 Gross of minorities. 2 In certain countries, particularly in the UK, where life insurance companies pay tax in respect of both policyholders and shareholders, the results shown in the above table are before shareholders’ tax but after deducting policyholders’ tax.
Zurich Financial Services Group · Annual Report 2006 · Financial Report 124 Embedded Value Report
New business in USD millions, for the years ended December 31 value, after tax
Analysis of in USD millions, for the year ended December 31, 2006 movement in Embedded Value
Closing Embedded Value before foreign currency translation effects 6,551 6,374 12,925
Closing Embedded Value after foreign currency translation effects 7,176 6,916 14,092
Total operating profit after tax consists of the following: • Expected transfer from value of business in-force to shareholders’ net assets, after tax shows the profits expected to emerge during the period in respect of business that was in-force at the beginning of the period. The net effect is zero, as the reduction in value of business in-force is offset by the increase in shareholders’ net assets. The expected profits do not include changes in solvency margin over the period.
• Expected return on in-force business and shareholders’ net assets, after tax is calculated as the expected change in the EV resulting from a projection of the assets and liabilities over the period based on expected “real world” returns. Further details are given below in section 5.a “Expected return for the analysis of movement”.
• New business value, after tax reflects the value added by new business written during the period. This item is valued at the point of sale. The reduction in shareholders’ net assets shown in respect of new business (i.e. new business strain) excludes the solvency margin set up in respect of the new business. Including solvency margin, the new business strain is USD 0.7 billion.
Dividends and capital movements reflect dividends paid by the covered business to the Group and capital received from the Group. Capital movements can also relate to value of business in-force in respect of acquisitions and disposals, or corporate restructuring.
10% fall in equity and property market values (571) n/a 100 basis points increase in risk discount rate (721) (93)
10% increase in implied volatilities for risk free yields (775) (20)
Operating sensitivities 10% decrease in voluntary discontinuance rates 328 51 10% decrease in maintenance expenses 299 30 10% decrease in initial expenses and commissions n/a 109 5% improvement in mortality and morbidity for assurances 210 21 5% improvement in mortality for annuities (179) (1)
The key assumption changes represented by each of these sensitivities are as follows: Economic sensitivities
f) Life business included in Other Businesses Zurich writes life business in Kemper Investors Life Insurance Company and in Centre operations, which are not managed in Global Life, but are centrally managed. The main products written by these businesses are: • Variable annuity contracts that provide annuitants with guarantees related to minimum death and income benefits; • Disability business; and,
EV for Other Businesses has increased by USD 0.8 billion, from 2005 to 2006 mostly due to Kemper Life Insurance Company. Value of business in-force has increased as a result of higher interest rates and a capital injection to support a strengthening of the reserve basis.
EV results for 2006 and 2005 are converted from local currency using different exchange rates. Our comments in this section relate to business issues only and not to movement in exchange rates.
InterUnited United Switzer- Rest of national States Kingdom Germany land Europe Businesses Total
Certainty equivalent value of business in-force 2,031 3,120 690 719 1,638 563 8,761
Value of business in-force 1,675 2,597 336 493 1,391 424 6,916
Certainty equivalent value of business in-force 1,912 2,886 589 610 1,251 453 7,701
Value of business in-force 1,544 2,438 103 184 1,022 336 5,627
Frictional Costs The frictional costs have increased broadly in line with the shareholders’ net assets and reflect changes in the economic conditions. In Switzerland the increase was also due to the revision to the minimum level of capital to which frictional costs are applied.
• In Switzerland, the strong reduction was mainly related to improved investment conditions due to the higher yield curve and lower implied volatilities. For individual business the reduction is also due to the refinement of expected management actions as investment conditions change, and the implementation of an interest rate hedge.
• In International Businesses, the time value of options and guarantees has remained stable. The time value of options and guarantees relates mostly to business in Hong Kong that provides minimum interest rate guarantees at maturity. The unit linked and protection products written in this region have no significant time value of options and guarantees.
• In Germany, higher interest rates have reduced shareholder exposure to operational risks such as longevity experience due to higher profit sharing.
• In Switzerland, the increase in risk free rates and ongoing implementation of Zurich’s group pension business model have kept the cost of non market risk for the shareholders at constant level.
Zurich Financial Services Group · Annual Report 2006 · Financial Report 130 Embedded Value Report
New business value, as % APE as % PVNBP after tax
Geographical In USD millions, analysis of for the year ended December 31, 2006 new business value, after tax – 2006
Cost of non market risk (10) (8) (3) (4) (14) (9) (48)
• In the US, the new business value decreased following a review of cost allocations. Also contributing to the decrease was the effect of rising interest yields in the US, which result in higher discounting of future profits. The proportion of interest sensitive business in the new business is lower than for the existing business portfolio, and hence the time value of options and guarantees is small.
• In Switzerland, there was a large increase in new business value primarily due to asset management fees for group pension contracts placed with external foundations, benefits realized from refinements to the business model and an increase in risk free rates compared with the prior year, which led to a reduction in the cost of options and guarantees.
• In Rest of Europe, there was an increase in value primarily attributable to the repricing of two main products and revised persistency assumptions in the Isle of Man. These effects were partially offset by Spain where the initial costs associated with the shift to the higher margin risk business were spread over lower sales than in 2005. The reduction in the time value of options and guarantees for Rest of Europe is mostly due to Italy as a result of the reduction of investment guarantees offered on new business as well as the increase in the risk free rates over 2006.
• In International Businesses, there was an increase in value as a result of profitable new business sold in Hong Kong and Chile. This business has very limited financial options and guarantees.
Geographical in USD millions, for the year ended December 31, 2006 analysis of movement in Embedded Value
Total operating profit, after tax 267 62 213 183 314 188
• In Germany, operating profit includes a significant contribution from new business value. In addition the corporate restructuring of the German entities increased shareholder value partly offset by an increase in expense assumptions. Economic variance reflects the strong increase in the risk free yield curve and a reduction in the Euro interest rate volatilities over 2006.
EV represents the shareholders’ interests in the entities included in Global Life as set out in the Group’s consolidated IFRS financial statements. EV excludes any value from future new business. Zurich has adopted the methodology for its EV based on the European Embedded Value Principles issued by the CFO Forum in May 2004, selecting a “bottom-up” market consistent approach. The following sets out the principles adopted and definitions used in that approach.
For certain smaller companies, no EV has been calculated but these companies have been included in the EV at their shareholders’ equity value, as calculated in accordance with IFRS. The contribution from these companies to the EV is approximately 2%.
The results are disclosed in a format Zurich considers to be appropriate for the market consistent methodology that has been adopted.
Certainty equivalent value is the value calculated using discount rates consistent with those applied to the underlying cash flows in the capital markets. It includes the intrinsic value but excludes the time value of options and guarantees which is allowed for separately, as described below.
Frictional costs reflect a deduction for the cost of holding shareholder capital. Under Zurich’s market consistent framework, these frictional costs represent tax in respect of future investment income on total available capital plus investment management costs. In Germany, they also include the policyholders’ share of investment income on the capital.
The application of frictional costs to the total capital of each life business is in line with Zurich’s holistic approach to the EV. The tax and costs in respect of total capital will in practice have to be met, and it is appropriate therefore that this is allowed for in the EV. For the purpose of these calculations, required capital is assumed to run down in line with existing business. Free surplus is also assumed to run down in line with existing business except where there are specific plans for the earlier distribution of the free surplus.
No allowance is made for “agency costs” as these are considered to be subjective and depend on the view of each shareholder.
Time value of options and guarantees represents additional costs in excess of the intrinsic value of options and guarantees which are already allowed for in the certainty equivalent value. These are based on the variability of investment returns which need to be allowed for explicitly under the European Embedded Value Principles. The time value has been calculated on a market consistent basis using stochastic modeling techniques, and making allowance for expected management and policyholder behavior.
For products with significant guarantees, the time value has been calculated on a market consistent basis by deducting the average present value of shareholder cash flows using 1,000 stochastic economic simulations from the certainty equivalent value (both for the value of business in-force and for new business value). For most products, the average value has been calculated using Monte Carlo simulations. For a small number of products, the time value of options and guarantees has been derived using closed form solutions.
Where appropriate, the calculation of the time value of options and guarantees makes allowance for: • dynamic actions that would be taken by Management under different economic simulations, for example to implement a life business’ investment strategy; and
Cost of non market risk is an explicit additional deduction from the value of in-force business, over and above the frictional costs, reflecting an allowance for the impact on shareholder value of variability in insurance, business and operational risks.
However, in certain cases this symmetry does not hold, and Zurich considers that it is appropriate to make explicit allowance for this within the EV. Examples where this occurs are given in section 3.a “Cost of non market risk” above.
Currently, no consensus exists in the market as to the best way to allow for non market risk, and this issue will be kept under review as best practice begins to emerge. In the meantime, the allowance made in the EV represents Management’s view on an appropriate adjustment for the costs of non market risk taking into account the different risk profiles in its life businesses.
f) New business New business covers new contracts sold during the reporting period.
New business also includes new premiums written during the period on existing contracts and variations to premiums on existing contracts where these premiums and variations have not previously been assumed as part of business in-force. In this respect, the definition of new business has been chosen consistently with the definition of renewals for business in-force so that new business values are counted once and only once.
In certain profit sharing funds, the new business written can affect the time value of options and guarantees for business written in prior years, and this effect is taken into account in the new business value.
g) Asset and liability data used For 2006, Zurich has adopted a combination of approaches for obtaining the asset and liability data and for performing the EV calculations.
• The main part of Zurich’s EV, including our US, UK and Ireland operations, has been calculated using a “hard close” approach. This means that all asset as well as liability data reflect the actual position as of the valuation date.
• Switzerland, Italy, Spain and Hong Kong have used asset and liability data as of November 30 with adjustments made to asset data to reflect the change in swap curves between November 30 and December 31. New business value allows for all business written to December 31.
Zurich Financial Services Group · Annual Report 2006 · Financial Report 136 Embedded Value Report
For 2005, the EV results were calculated using a hard close approach for all countries.
In practice, Zurich has applied a computational method known as a “risk neutral” approach. This involves projecting the assets and liabilities using a distribution of asset returns where all asset types, on average, earn the same risk free rate.
i) Economic scenario generator For 2006, all operations have used actual yield curves observable as of December 31 for the calculation of the certainty equivalent value of business in-force.
• For Italy, Spain and Hong Kong, the simulations used for calculation of time value of options and guarantees reflect the yield curves observable as of November 30 and implied volatilities quoted by a number of investment banks as of November 30.
All simulations used for the 2005 EV results were calibrated using actual yield curves and implied volatilities as of December 31, 2005.
k) Holding companies Holding companies that belong to Global Life have been consolidated in the EV at their local statutory net asset value. Related expenses are small and so have been excluded from the projection assumptions. Holding companies outside Global Life are not included in the EV of the covered business.
m) Debt Where a loan exists between a company in Global Life and a Group company not within Global Life, the loan is valued for EV purposes consistently with the value shown in the Group’s IFRS financial statements.
n) “Look through” principle – Service companies There are some companies within Global Life that provide administration and distribution services. These are valued on a “look through” basis. The results do not include any Group service companies outside Global Life.
In Germany, the majority of distribution and administration is provided by service companies. These are valued on a “look through” basis. These companies also provide limited services to companies outside Global Life, and the present value of the profits and losses on these services are included in the EV and the new business value.
p) Employee share options The costs of share options granted to employees are not included in the EV, other than to the extent that they are allowed for in the local statutory accounts upon which the shareholders’ net assets are based. Further information on the costs of share options is given in the Group’s IFRS financial statements.
Zurich Financial Services Group · Annual Report 2006 · Financial Report 138 Embedded Value Report
Future economic assumptions, for example, investment returns and inflation, are based on period end conditions and assumed risk discount rates are consistent with these.
Market consistent framework Zurich has adopted a computational method known as “risk neutral”. With this method the key economic assumptions are: • the risk free rates; • the implied volatilities of different assets; and,
Expected asset returns in excess of the risk free rate have no bearing on the calculated EV.
Corporate bonds and government bonds have been modeled using the risk free yield curves and swaption volatilities shown above.
The following table shows the annualized implied volatilities of equity indices used in the EV calculation, derived from the simulations used in the calculation. These figures are based on at-the-money-forward European options on capital indices, consistent with traded options in the market.
1 Year 2 Year 5 Year 10 Year 20 Year 40 Year
Zurich Financial Services Group · Annual Report 2006 · Financial Report 140 Embedded Value Report
Inflation Inflation assumptions have been derived from the yields on index linked bonds relative to the risk free yield curve, where index linked bonds exist. Elsewhere, a statistical approach based on past inflation has been used.
Appropriate allowance has been made for expense inflation to exceed the assumed level of price inflation as life company expenses include a large element of salary related expenses.
The following table shows inflation assumptions for the stochastically modeled economies, derived from the simulations used in the EV: Table 5.5
“Expected return” for the analysis of movement – Investment return assumptions The expected return for the analysis of movement is based on a projection from beginning of period to end of period. This requires assumptions regarding the investment returns expected to be achieved over the period on different asset classes. The investment return assumptions (for this purpose only) are based on the “real world” returns expected by Zurich. The use of real world investment assumptions gives a more realistic basis for the expected return calculation.
Participating business Rates of future bonus or crediting rates have been set at levels consistent with the risk neutral investment return assumptions and current bonus plans. In the UK, bonus rates have been set so as to exhaust any remaining assets in the relevant long-term funds. In other European life businesses and in the US, bonuses have been set to be consistent with the investment return assumptions and with the book value approach used by these life businesses in practice.
c) Dynamic decisions To reflect more realistically the outcome in stochastic simulations, the assumptions for each simulation make allowance for the actions that policyholders and management are expected to take in response to the investment conditions modeled.
Zurich Financial Services Group · Annual Report 2006 · Financial Report 142 Embedded Value Report
Review of Embedded Value for the year ended December 31, 2006 of the Global Life segment (Global Life) of Zurich Financial Services
We have reviewed the Embedded Value for Global Life of Zurich Financial Services (“Zurich”) as set out in Zurich’s Annual Report for the year end 2006 (“the Disclosure”). The Disclosure comprises the Embedded Value of Global Life as at December, 31 2006 together with the value of new business generated and the analysis of movement in the Embedded Value during 2006 (together “the Embedded Value results”). The scope of our review covered Zurich’s major life insurance companies and considered the methodology adopted together with the assumptions and calculations made by Zurich in its Embedded Value. It also covered Zurich’s estimation of the Embedded Value of life business held outside Global Life, as described in section 2.f of the Disclosure. Certain smaller companies in the Zurich Group have been excluded from the scope of our review. These companies together comprise 2% of Zurich’s Embedded Value.
The Embedded Value results, the assumptions underlying them and the information contained in the Disclosure are the sole responsibility of the Board of Directors of Zurich. They have been prepared by Zurich on the basis of Zurich’s methodology as described in the Disclosure.
Our review was conducted in accordance with generally accepted actuarial practices and processes. It comprised a combination of such reasonableness checks, analytical review and checks of clerical accuracy as we considered necessary to provide reasonable assurance that the Embedded Value results have been compiled free of significant error. However, we have relied without verification upon the completeness and accuracy of data and information supplied by Zurich, including the shareholders’ net assets as disclosed in the audited local statutory accounts and the IFRS accounts of the companies in the Global Life.
The calculation of Embedded Value results necessarily makes numerous assumptions with respect to economic conditions, operating conditions, taxes, and other matters, many of which are beyond Zurich’s control. Although the assumptions used represent estimates which the Directors believe are together reasonable, actual experience in future may vary from that assumed in the calculation of the Embedded Value results and any such variations may be material. Deviations from assumed experience are normal and are to be expected. Embedded Value does not purport to be a market valuation and should not be interpreted in that manner since it does not encompass all of the many factors that may bear upon a market value.
• the methodology and assumptions used are appropriate and save as noted in the Disclosure are compliant with the European Embedded Value Principles set out by the CFO Forum in May 2004 (the “CFO Forum Principles”); • the assumptions taken together made by Zurich are reasonable; and
Our opinion is made solely to Zurich’s Directors as a body. To the fullest extent permitted by law we do not accept or assume responsibility to anyone other than Zurich’s Directors as a body for our work in respect of this opinion or for the conclusions that we have reached.
After-tax return on opening Embedded Value before foreign currency translation effects 11.9% 14.1% (1.2%) 9.3%
Zurich Financial Services Group · Annual Report 2006 · Financial Report 144 Embedded Value Report
New business margin, after tax (as % of APE) 21.2% 17.3%
Other European Spain Ireland Isle of Man Countries Rest of Europe
Assets in CHF thousands, as of December 31 Notes 2006 2005
3. Administrative expense Administrative expense consists mainly of directors’ fees of CHF 2,936,941 (prior year CHF 2,634,268), and management fees of CHF 8,000,000 (prior year CHF 8,000,000).
6. Commitments and contingencies Zurich Financial Services has provided unlimited guarantees in support of various entities belonging to the Zurich Capital Markets group of companies and to the Farmers Group Inc. In addition, Zurich Financial Services has agreed with the Superintendent of Financial Institutions, Canada, to provide additional capital in case the applicable capital adequacy tests for the Canadian business are not met and to provide assistance in case of liquidity issues.
Furthermore, Zurich Financial Services has entered into various support agreements and a guarantee for the benefit of its subsidiaries. These contingencies amounted to CHF 4,061 million as of December 31, 2006 (CHF 4,118 million as of December 31, 2005).
7. Shareholders’ equity a) Issued share capital As of December 31, 2006 Zurich Financial Services had 144,749,399 issued and fully paid registered shares of CHF 0.10 par value, amounting to a share capital of CHF 14,474,939.90. As of December 31, 2005, the share capital amounted to CHF 360,017,387.50, divided into 144,006,955 fully paid registered shares of CHF 2.50 par value.
Zurich Financial Services Group · Annual Report 2006 · Financial Report 152 Zurich Financial Services Holding Company – Financial Statements
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.
Capital market instruments and option rights to shareholders: The share capital of Zurich Financial Services may be increased by an amount not exceeding CHF 548,182.80 by the issuance of up to 5,481,828 fully paid registered shares with a nominal value of CHF 0.10 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.
8. Reserve for treasury shares This reserve fund corresponds to the purchase value of all Zurich Financial Services shares held by Group companies of Zurich Financial Services as shown in the table below.
Decrease due to nominal value reduction of common stock (384) (1,053)
Shares eligible as of December 31, 2006 and 2005, respectively 144,749,399 144,006,955
If this proposal is approved, a payment of CHF 7.15 per share, after deductions of 35% Swiss withholding tax, is expected to be paid starting from April 10, 2007, free of charge and in accordance with dividend payment instructions.
2 These figures are based on the issued and outstanding share capital as of December 31, 2006. They may change following a resolution of the Board of Directors dated February 14, 2007, according to which the remaining contingent capital shares for employees (up to 757,556 shares) may be issued up until the proposed record date for the dividend payment, i.e. April 9, 2007. Treasury shares and shares held for cancellation by Zurich Financial Services on April 9, 2007 are not entitled to dividends.
Market capitalization (in CHF millions at end of period) 47,478 40,322
Price period low 251.75 188.00 1 Proposed gross dividend, subject to approval by shareholders at the Annual General Meeting 2007; expected payment date is on April 10, 2007. 2 Payout to shareholders of CHF 7.00 per share (comprising of a regular dividend of CHF 4.60 and a payout of CHF 2.40 per share in form of a reduction of the nominal value) effective July 3, 2006; payment was made on July 4, 2006. 3 Nominal value reduction of CHF 4.00 per registered share was effective as of July 1, 2005.
Zurich Financial Services Swiss Market Index DJ Stoxx Insurance Source: Datastream
The shares registered in the share ledger as of December 31, 2006, were owned by 112,662 shareholders of whom 106,839 were private individuals holding 20.15 percent of the registered shares (or 11.78 percent of all outstanding shares), 2,226 were foundations and pension funds holding 8.00 percent of the registered shares (or 4.67 percent of all outstanding shares), and 3,597 were other legal entities holding 71.85 percent of the registered shares (or 41.99 percent of all outstanding shares).
Zurich offers its shareholders the opportunity to deposit a range of Zurich Financial Services securities free of charge at S A G SIS Aktienregister AG in Switzerland. The securities deposit regulations as well as the application form for a securities custody account can be downloaded from S A G’s Web site at www.sag.ch.
Corporate Citizenship/ Responsibility Inquiries Group Government and Industry Affairs Zurich Financial Services, Switzerland
Securities Custody Service Zurich Financial Services, Custody Accounts c/o SAG SIS Aktienregister AG P.O. Box 4601 Olten, Switzerland
CDI Holder Inquiries within the Zurich Financial Services corporate nominee service
Lloyds TSB Registrars The Causeway, Worthing West Sussex, BN99 6DA, United Kingdom Nominee Service helpline: 0870 600 3979 Lloyds TSB share dealing helpline: 0870 850 0852
The Annual Report 2006 of Zurich Financial Services Group consists of two publications: the Corporate Review and the Financial Report. Both reports are available on our Web site and can be downloaded at www.zurich.com.
The Financial Report consists of the financial review, the audited consolidated financial statements including the notes, as well as the audited financial statements of the Zurich Financial Services holding company. The Financial Report is published in English.
Combined Ratio A critical measure of success for an insurance company. The sum of the loss ratio, expense ratio and policyholder dividends and participation in profit ratio for a general insurance company or a reinsurance company. A combined ratio below 100 generally indicates profitable underwriting. A combined ratio over 100 generally indicates unprofitable underwriting. An insurance company with a combined ratio over 100 may be profitable to the extent net investment results exceed underwriting losses.
Agent A person acting as an independent contractor for one insurance company, called an exclusive or tied agent, or for multiple companies, called an independent agent, authorized to represent those companies to insureds. In life insurance an agent is also called a life underwriter and is responsible for sales and service of policies.
Annual Premium Equivalent (APE) New annual premiums plus 10 percent of single premiums. APE is an industry standard measure of life insurance new business volume.
Broker Similar to an independent agent, however without the qualification of legal representative. Brokers advise and assign policies of their clients to insurance companies in exchange for commissions.
Business operating profit (BOP) Zurich’s internal metric for assessing performance. It reflects adjustments for taxes, net realized capital gains (excluding Capital Markets & Banking) and net unrealized capital losses on investments, policyholders’ share of investment results for the life business, and significant items attributable to special circumstances.
International Financial Reporting Standards (IFRS) Formerly IAS (International Accounting Standards). This is the Group’s accounting standard.
New Business Value The present value of the projected after-tax stream of profits from new life insurance contracts sold in the year.
The Zurich Way A unique Zurich approach to the delivery of our products and services, and the performance of our internal business practices, designed to drive profitable growth by ensuring a consistent, best-inclass customer experience on a world-wide basis.
Certain statements in this document are forward-looking statements, including, but not limited to, statements that are predications of or indicate future events, trends, plans or objectives. Forward-looking statements include statements regarding our targeted profit improvement, return on equity targets, expense reductions, pricing conditions, dividend policy and underwriting claims improvements. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties and can be affected by other factors that could cause actual results and Zurich Financial Services’ plans and objectives to differ materially from those expressed or implied in the forward looking statements (or from past results). Factors such as (i) general economic conditions and competitive factors, particularly in our key markets; (ii) performance of financial markets; (iii) levels of interest rates and currency exchange rates; (iv) frequency, severity and development of insured claims events; (v) mortality and morbidity experience; (vi) policy renewal and lapse rates; and (vii) changes in laws and regulations and in the policies of regulators may have a direct bearing on Zurich Financial Services’ results of operations and on whether Zurich Financial Services will achieve its targets. Zurich Financial Services undertakes no obligation to publicly update or revise any of these forward-looking statements, whether to reflect new information, future events or circumstances or otherwise.