The Annual Report is published in English, German and French. In the event of inconsistencies in the German and French translations, the English original version shall prevail.
Group overview Financial highlights 3 Zurich at a glance 4 Message from the Chairman and CEO 6 Market environment 10 Our values 12 Our strategy 14 Our strategy – measuring our performance 16 Our performance 18
Group performance review Operating and financial review 68 Risk review 95
• General Insurance organization streamlined and focused on targeted lines of business
• Group Operations formed to oversee cost and efficiency measures across the Group and provide capabilities for change globally
• Outstanding balance sheet strength reflected by Solvency I ratio of 243 percent
Farmers business operating profit 1,686 1,554 8% Farmers Management Services gross management result 1,338 1,291 4% Farmers Management Services managed gross earned premium margin 7.3% 7.2% 0.1 pts
Return on common shareholders’ equity (ROE) 11.4% 16.1% (4.7 pts) Business operating profit (after tax) return on common shareholders’ equity (BOPAT ROE) 12.9% 17.6% (4.7 pts)
in USD millions, for the years ended December 31, unless otherwise stated
For the first time since 2003, a Zurich-branded life product is offered in the U.S.
Employees pull together to help customers and colleagues after the disaster.
We pass a key milestone as we accelerate our strategy for growth across the Middle East.
See page 72 for more information See page 78 for more information See page 81 for more information
We are well positioned to outperform in an environment which remains challenging.
Our business operating profit was USD 4.9 billion, a decrease of 13 percent, and net income was USD 3.4 billion, a decrease of 13 percent, for the year ended December 31, 2010.
• Transactional excellence and expense management • Intensifying The Zurich Way
• Continued disciplined risk-adjusted long-term view • Follow-through measurement of business decisions
Central to this approach is delivering on our brand promise, developing an agile organization, maintaining our financial discipline, and staying true to our core values of integrity, customer centricity, excellence, teamwork and sustainable value creation.
At Farmers, business operating profit rose 8 percent to USD 1.7 billion driven by strong results at both Farmers Management Services and Farmers Re. The acquisition of 21st Century made a strong contribution to the Exchanges, which are managed but not owned by Farmers Group, Inc., a wholly-owned subsidiary of Zurich. The Exchanges’ multi-channel and new product strategies continued to gain traction in 2010. The ‘Farmers Auto 2.0’ product was available in 27 states by year-end, helping agents deliver new business growth and improve Farmers’
In Global Life, gross written premiums, policy fees and insurance deposits rose 6 percent to USD 27.7 billion. The increase was driven by higher levels of new business, particularly in single premium products, as well as
Regional chairmen focusing on business development and stakeholder management in three regions
During the year, we made small but strategic acquisitions in Indonesia and the Middle East, increased our presence in Turkey, and participated along with other shareholders in a capital issue by New China Life. The Global Life business segment also reintroduced Zurich-branded life insurance products in the U.S. for the first time since 2003.
We would like to take this opportunity to thank John Amore for his many years of dedicated service to Zurich. John retired from the Group Executive Committee effective December 31 after a long and distinguished career in the insurance industry. John joined Zurich in 1992 and became a member of the Group Executive Committee in 2001. He was appointed CEO of the global General Insurance business segment in 2004. John played a central role in building our U.S. and global businesses and leaves a strong legacy.
Finally, we would like to thank you, Zurich’s shareholders, for your continued support. Your trust in us is greatly appreciated and remains a vital part of our success.
Cost efficiency, long a hallmark of the Zurich approach, is now being driven by our Group Operations function, which is targeting USD 500 million in expense reductions on a run-rate basis by 2013. Focusing our growth strategies on leading in profitable market segments that require less capital – an approach now in full stride at Global Life – increases our ability to overcome the challenge of low investment yields. A risk-based decisionmaking process that looks at the economic value of our transactions helps us evaluate exactly which opportunities meet those criteria.
The ability to choose markets wisely becomes doubly important when we consider another aspect of the ‘new normal’: a world in which weak economic growth is the rule, especially in mature markets (Figure 2). With that in mind we aim to reach the most attractive lines of insurance by applying a combination of discipline and speed. We focus on lines that match our strengths, such as mid-sized commercial insurance in General Insurance, and insuring small businesses through Farmers. And in the economies where growth has not slowed down, we’ve been reaching out to the corporations operating there, notably through our International Programs business, as well as to the expanding middle classes living in these regions, especially through Global Life.
Data analytics Sophisticated data analysis helps us achieve growth in shrinking personal lines markets.
Weak economic growth has also created another challenge for our industry: excess capacity. All insurers are competing for a shrinking pool of insurable assets. Economic activity broadly defined – from payrolls to auto sales to research and development – has been muted by the downturn. Inevitably this puts downward pressure on insurers’ premium volumes, and therefore their earnings.
Playing to our strengths Early recognition of the low interest rate environment sharpened our focus on making sure our premiums were sufficient to preserve profitability. We believe that this long-term focus goes to the heart of our fiduciary relationship to shareholders. We also believe it is a strength to customers concerned about stability and counterparty risk, as evidenced by our 2010 top-line revenue, which has remained strong compared to 2009 despite our firm and sometimes unyielding stance in markets where we see unsustainable pricing trends.
Zurich has met this challenge in a number of ways. First, as a Swiss insurer, Zurich has a head start in meeting the requirements of an economic risk-based approach to regulation. Through the Swiss Solvency Test (SST), we have already anticipated many of the steps implied by Solvency II. Our internal model has already received preliminary approval for 2011 by FINMA, the Swiss regulator, with full model approval ongoing. In 2010 we filed an SST capitalization ratio of more than 200 percent with FINMA. At a broader level, we take the opportunity to engage with regulators and peers to advance the debate on how insurers can serve society. And as we continue to manage our business in the face of regulatory uncertainty and market upheaval, we take heart in our organizational agility – a strength and strategic cornerstone of the Zurich approach.
Our commitment to integrity, customer centricity, sustainable value creation, excellence and teamwork fosters trust with our shareholders and our customers. This commitment allows us to attract and retain the highest caliber employees and encourages the dialogue necessary for innovation and growth. It nurtures talent and mitigates internal risks through openness and transparency. It helps us secure the support of regulators and the investment community.
Our values are not merely aspirations or fondly held ideals. They can be seen every day in the way we conduct our business and in our dedication to being a responsible corporate citizen. They are reflected in our economic success, low staff turnover, customer retention, growing customer base, and in our participation in industry groups and the wider community.
Our core values are: Integrity To treat everyone fairly and honestly. To comply with all applicable laws, regulations and internal policies.
Our people Our values are essential to bringing out the best in ourselves and others.
Teamwork To work together as one team…one Zurich. Collaborating and applying our global insights to deliver the best for our stakeholders. To value our diverse, talented workforce; and support them so that they can contribute to their full potential.
A key component of sustainable value creation, and indeed of all our values, is our commitment to a high standard of corporate responsibility. We proactively address environmental, social and governance issues. We focus on long-term success over short-term gains, and aspire to be agile and to manage change smoothly along the way.
Zurich Basics states our basic values and the rules of conduct that outline our commitment to meeting the highest ethical, legal and professional standards. Our values of integrity, customer centricity, excellence, teamwork and sustainable value creation guide our actions and foster trust with our stakeholders, helping us to meet or exceed their expectations.
In 2010 we undertook a Group-wide strategic review for delivering sustainable profitable growth and better supporting the competitiveness of our customer-facing businesses and to set priorities for 2011 to 2013.
Profitable Growth The first cornerstone is to deliver sustainable profitable growth. The most straightforward way to achieve this is to play to our global strength and expertise. Our International Programs (IPZ) business is such a success – providing corporate customers with integrated, compliant solutions that work across the markets in which they operate. We put a similar focus on Zurich Fleet Intelligence (ZFI) – another area of expertise which we can then leverage on a global scale. ZFI is an innovative product that offers companies the chance to revolutionize the way they manage their auto fleets. ZFI integrates telematics – vehicle-based systems that use GPS sensors to provide fleet owners and operators with extensive information on driver behavior, vehicle location and performance. When these devices are combined with a comprehensive fleet risk management program, road safety becomes business as usual. ZFI is currently being rolled out in the U.S., the UK, and Australia, with new markets in the pipeline.
A final way to achieve growth is to bolster our presence in growing markets, whether those are new geographies or new lines. In December 2010 we closed on the acquisition of Compagnie Libanaise D’Assurances SAL (CLA), a privately owned Lebanese insurer with branch operations in the United Arab Emirates (UAE), Kuwait and Oman. In
Indonesia we acquired 80 percent of PT Mayapada Life to establish our presence in one of the fastest growing life insurance markets in Asia.
And while we’re there for the cure, we’re even better at prevention. Again in North America, where intense snowstorms pounded the mid-Atlantic region, businesses were menaced by the crushing weight of snow accumulating quickly on their rooftops. Our local Risk Engineering team worked around the clock locating roofing consultants, cranes, and people to ensure snow removal kept pace with snowfall. For a customer in Delaware, where almost 70 centimeters of snow hit over a weekend, it was a race against time to clear it before the second storm hit just hours later. The prompt attention and ability to tap into networks of suppliers – even during record snow falls – meant that we were able to provide this customer with the kind of service they needed to keep them in business.
Operational Transformation By creating a Group Operations function this year, we reaffirmed our commitment to continuous improvement and operational transformation. More than 6,000 employees, along with some 6,000 more who work for strategic suppliers, are combining to drive process improvements on a global basis. Group Operations is also the home of The Zurich Way set of initiatives, which will itself be expanded to become the umbrella program for building global capabilities in support of achieving our Group aspiration to become the best global insurer as measured by our shareholders, customers and employees.
People Management We aspire to be the best insurer as measured by our customers, our shareholders, and – of critical importance – in the eyes of our employees. We aim to be the employer of choice. The people management cornerstone of our strategy highlights this focus to leverage and promote our company’s greatest resource.
Every employee should feel – and be – empowered to perform expertly in his or her clearly defined role. Effective onboarding and global employee management systems provide an infrastructure to achieve this. Employees and their managers are given the tools to measure performance transparently, with fair rewards and recognition to match.
Employees stay motivated when they understand our mission and how their work helps us to achieve it. To create this understanding we rely on company leaders, in whom we invest significant resources for coaching and training. To nurture the ambition of all employees, we offer individual development planning and provide opportunities for further training, and develop succession plans so that our most talented people can move into broader roles. To confirm our progress we measure employee engagement annually, and act on those results.
Organizational Agility Our markets are changing, sometimes radically, and so are the regulatory requirements we must meet in order to serve them. Recognizing the challenges we face on these two fronts, and the speed with which we’ll need to adapt, we have affirmed organizational agility as a critical skill and strategic cornerstone following this year’s strategic review. Our first action was to dramatically lighten the burden on our segments – grouping all back office tasks (like procurement and IT) under Group Operations – in order to allow them to focus on the tangible parts of the customer experience, like distribution and customer service.
Financial Discipline Financial discipline has been a long-standing element of our corporate philosophy. This year, however, we have elevated the trait to the level of strategic cornerstone to emphasize the urgency of bringing expenses down Group-wide so that we can seize the historic opportunities before us. Every segment is enacting specific plans to make sure we continue to contain costs. Together we have delivered more than USD 900 million in benefits in 2010 (as measured by economic value after tax) under The Zurich Way programs. The variety and locations of all the various initiatives is immense, though all are united in purpose: increasing our capacity to deliver sustainable profitable growth.
Proposed dividend of CHF 173 per share for 2010 resulting in a payout ratio of 70% Dividends / EPS in respect of the business year (in CHF)1
The Zurich Way Achieved 2010 target of USD 900m Economic Value (after tax)
This is a reflection of the strong positions enjoyed by each of our three business segments – General Insurance, Global Life, and Farmers – which allows them to generate robust underlying performances even in challenging conditions. To strengthen those positions we laid out a plan for each segment going forward, and enhanced their capacity to make good on the Group’s global reach by uniting common functions under the newly formed Group Operations function.
General Insurance About two-thirds of the gross written premiums earned at General Insurance come from commercial and corporate insurance, with the remaining third from personal lines businesses. Our commercial and corporate customers require tailored, focused solutions which may draw on an array of skills and know-how. This covers the range from insuring the activities of a major multinational, to helping a small business manage the risks to its storefront and
employees. In personal lines, by contrast, the products are fairly standardized, putting a much greater emphasis on distribution and price.
With a strong concentration on technical and underwriting excellence, General Insurance is already six years into an ongoing journey to maximize profitability and claim market leadership. We are now re-committed to a change agenda that has only just begun, with a host of measures to better identify and meet customer needs, grow Zurich’s people power, reduce cost, improve operational excellence and efficiency, and further drive profitable growth. We’re simplifying our organizational structure, shortening the distance of all employees to the markets we serve. By continuing to invest in our people and leverage our global strengths, we aim to improve
IPZ The International Programs (IPZ) business at Zurich helps corporations manage risk around the globe.
Four ongoing trends give us confidence that we can perform even better: the high proportion of wealth held by “baby boomers” seeking retirement and inheritance planning solutions; the increasing need for private retirement and healthcare provision as governments’ provisions decrease; the transfer of pension risk from employers to individuals; and the rapidly-growing middle class in developing markets. Global Life is well-positioned to capitalize on all of these trends.
Given our strong position, and the great opportunities we see ahead of us, we’re confident that the strategy we have in place at Global Life will place us among the top five of European-based global insurers by 2013, as measured by new business value.
Farmers Farmers is a unique fee-based model operating in the United States, comprised of Farmers Management Services and Farmers Re, which we own, and the Farmers Exchanges which are owned by their policyholders. Farmers Management Services receives a fee for providing non-claims management services to the Farmers Exchanges, which in turn sell insurance to individuals and small businesses. Farmers Re provides reinsurance to the Exchanges.
We’re putting all our weight behind this new function. The Group Operations footprint consists of more than 6,000 employees, along with some 6,000 more who work for strategic suppliers. With a budget of USD 4.4 billion, USD 2.1 billion of which is allocated to information technology, Group Operations is managing about 40 percent of the Group’s total expense base, and supports 70 business units in 40 countries.
In exchange, all our businesses are counting on continued expense savings and quality enhancements in shared services, covering everything from printing to procurement. Core support functions such as IT and project management will continue to improve in terms of flexibility and responsiveness, helping the businesses to deliver on their ambitious growth and expense-saving agendas. The entire set of sustainable, infrastructural changes and improvements grouped under The Zurich Way is also now in the hands of Group Operations. The Zurich Way will continue to be the program for driving global capabilities and spreading best practices.
In 2010 Group Operations captured more than USD 100 million in savings by harmonizing procurement processes, with more room for improvement going forward. Two shared services platforms operating independently in Europe and North America were merged into one. We’re generating substantial savings by restructuring IT infrastructure costs into variable costs through global outsourcing. And alongside taking these opportunities we will essentially be building a new Group Operations organization, one that is empowered to carry out the even larger tasks that are set for 2011 and beyond.
Group structure and shareholders Operational Group structure Zurich Financial Services Ltd, the Group’s holding company, is a Swiss corporation organized in accordance with the laws of Switzerland.
The Group pursues a customer-centric strategy and is managed on a matrix basis, reflecting both lines of business and geography, which is mirrored in the areas of responsibilities assigned to the members of the GEC. The GEC is headed by the Group CEO and includes the CEOs of the business segments, the Chief Financial Officer, the Chief Investment Officer, the Chief Risk Officer, the Chief Administrative Officer and the Group Head of Operations. The geographic regions of Europe & Africa, Americas and Asia-Pacific & Middle East are represented by Regional Chairmen who focus on stakeholder management and business development in their regions. For further information on the GEC please refer to pages 29, and 36 to 40.
• Farmers provides through Farmers Group, Inc. and its subsidiaries (FGI) non-claims related management services to the Farmers Exchanges. FGI receives fee
Corporate governance report income for the provision of services to the Farmers Exchanges, which are managed but not owned by Farmers Group, Inc., a wholly owned subsidiary of the Group. This segment also comprises the Farmers Re business which includes all reinsurance assumed from the Farmers Exchanges by the Group. The Farmers Exchanges are prominent writers of personal lines and small commercial lines business in the United States.
For more detailed information on the Group’s segments and its geographic structure please refer to note 30 to the Consolidated Financial Statements, starting on page 234. A detailed review of the respective business segment and division results during 2010 can be found in the Operating and Financial Review starting on page 68. Furthermore, an overview of the Group’s business strengths and activities is contained in the Annual Review, available on Zurich’s Web site www.zurich.com ( zurich.com/main/reports/annual_review_2010_en.pdf).
Zurich Financial Services Ltd is listed on the SIX Swiss Exchange. Certain Group companies have listed debt issues under the Euro Medium Term Note Programme and other financial instruments.
Significant shareholders According to the rules regarding the disclosure of significant shareholdings in Swiss companies listed in Switzerland, disclosure has to be made if certain thresholds are reached or have fallen below, starting at three percent. Call options and other financial instruments are to be added to any position in shares, even if they allow for cash settlement only. Under this regime, disclosure must be made separately for purchase positions (including shares, long call options and short put options) and sale positions (including long put options and short call options). The percentage thresholds are calculated on the basis of the total amount of voting rights according to the entry in the commercial register.
Zurich Financial Services Ltd is obliged to announce shareholdings by third parties in its shares upon a respective notification by the third party that a threshold has been crossed. During 2010 the Group received several notifications by third parties that they have either exceeded or fallen below the threshold of three percent with purchase or sale positions. As of December 31, 2010, Zurich Financial Services Ltd is not aware of any person or institution, other than BlackRock, Inc and Norges Bank, which, directly or indirectly, had an interest as a beneficial owner in shares, option rights and/or conversion rights relating to shares of Zurich Financial Services Ltd representing three percent or more of its issued shares. The respective announcements can be found via the search facility on the SIX Disclosure Office’s platform: disclosure/major_shareholders_en.html.
Capital Structure Share capital As of December 31, 2010, the ordinary share capital of Zurich Financial Services Ltd amounted to CHF 14,658,689.60 divided into 146,586,896 fully paid registered shares with a nominal value of CHF 0.10 each. The Board of Directors will propose to the shareholders at the Annual General Meeting on March 31, 2011, a dividend of CHF 17.00 per share. As the dividend payment is being planned from the capital contribution reserve, it will be exempt from Swiss withholding tax.
Authorized and contingent share capital As of December 31, 2010, as specified in Article 5bis(1) of the Articles of Incorporation, the Board of Directors of Zurich Financial Services Ltd is authorized to increase the share capital by up to CHF 1,000,000.00, representing 10,000,000 fully paid registered shares with a nominal value of CHF 0.10 each by no later than March 30, 2012. The contingent share capital of Zurich Financial Services Ltd, as specified in Article 5ter(1a) of the Articles of Incorporation, may be increased by an amount not exceeding CHF 1,000,000.00 by issuing up to 10,000,000 fully paid registered shares with a nominal value of CHF 0.10 each by exercising conversion and/or option rights which are granted in connection with the issuance of bonds or similar debt instruments by Zurich Financial Services Ltd or one of its Group companies in national or international capital markets; and/or option rights which are granted to the shareholders. Moreover, there is an additional contingent share capital of CHF 470,836.30, as specified in Article 5ter(2a) of the Articles of Incorporation, representing 4,708,363 fully paid registered shares with a nominal value of CHF 0.10 each, which may be issued to employees of the Group. For further information on the capital structure and the authorized and contingent share capital, please refer to the Consolidated Financial Statements, note 23 on pages 207 to 210.
Changes of share capital during 2009 As of December 31, 2008, Zurich Financial Services Ltd had bought back 3,750,500 of its registered shares over a second trading line within its buy-back program authorized by the Board of Directors on February 13, 2008. In March 2009, the Board of Directors decided not to propose the destruction of these shares to the Annual General Meeting of shareholders but to keep the shares as treasury shares for use in connection with the funding of potential acquisitions in the future or for employee share-based compensation. This rededication of the shares had been approved by the Swiss Takeover Board.
At the Annual General Meeting on April 2, 2009, the shareholders approved an increase in both authorized and contingent share capital to a new maximum of CHF 1,000,000.00 each, allowing for enhanced financial flexibility of the company for future capital management. On April 17, 2009, Zurich Financial Services Ltd placed 4,800,000 new shares issued under its authorized share capital and 1,914,096 rededicated treasury shares, bought back under the share buy-back program authorized in 2008, with institutional investors via an accelerated bookbuild. This capital increase reduced the authorized capital to CHF 520,000.00. The proceeds from the capital increase executed on April 17, 2009, and the rededicated treasury shares were used in connection with the funding of the acquisition of 21st Century completed on July 1, 2009.
Summary of changes in the ordinary share capital over the last two years 1 CREST is the system for the paperless settlement of trades in securities and the holding of uncertificated securities in the United Kingdom. CREST holds the shares in trust and issues dematerialized depository interests representing entitlements to Zurich Financial Services Ltd’s shares known as CDIs. As CDI holders are not the legal owners of the shares represented by the CDIs, they are not able to directly enforce or exercise rights that a holder of shares can. CDI holders, however, have a beneficial interest in the shares represented by the CDIs and are entitled to the economic rights attached to the shares. Each CDI represents one Zurich Financial Services Ltd’s share.
2 Zurich Financial Services Ltd has established an American Depositary Share, or ADS, level 1 program in the United States. Under the program, The Bank of New York Mellon issues the ADSs. Each ADS represents the right to receive one-tenth of one Zurich Financial Services Ltd’s share. Each ADS also represents securities, cash or other property deposited with The Bank of New York Mellon but not distributed to ADS holders. Zurich’s ADSs are traded over the counter (OTC) and are evidenced by American Depositary Receipts, or ADRs. Since 1st July 2010, Zurich’s ADRs are traded on “OTCQX”, an electronic platform operated by OTC Markets Group Inc. (formerly “Pink OTC Markets Inc.”) under the symbol ZFSVY. ADS holders are not treated as shareholders of Zurich Financial Services Ltd and are not able to directly enforce or exercise shareholder rights. Only The Bank of New York Mellon as Depositary of the level 1 program may exercise voting rights with respect to instructions received from beneficial owners of ADRs.
For information on changes of share capital during 2008, please see the Annual Report 2009 of Zurich Financial Services Ltd, Financial Report, pages 26 to 27, pages 146 to 147, and pages 219 to 222.
Some interests in shares are held by investors in the form of CREST Depository Interests (CDIs)1 or American Depositary Receipts (ADRs)2. As of December 31, 2010, investors held 190,104 CDIs (representing 190,104 Zurich Financial Services Ltd’s shares) and 22,544,200 ADRs (representing 2,254,420 Zurich Financial Services Ltd’s shares).
Limitations on transferability and nominee registrations The Articles of Incorporation do not provide for any limitations on transferability except for formalities for the transfer of undocumented shares.
Registration as a shareholder requires a declaration that the shareholder has acquired the shares in his or her own name and for his or her own account. Nominees holding Zurich Financial Services Ltd’s shares may for the benefit of, or as nominee for, another person be registered for up to 200,000 shares with voting rights notwithstanding that the nominee does not disclose the identity of the beneficial owner. A nominee, however, is entitled to be registered as shareholder with voting rights of more than 200,000 shares if the nominee undertakes to disclose the identity of each beneficial owner and to inform the beneficial owners about corporate actions, to consult as to the exercise of voting rights and pre-emptive rights, to transfer dividends and to act in the interests of and in accordance with the instructions of the beneficial owner.
Convertible bonds and options Zurich Financial Services Ltd had no public convertibles or options outstanding as of December 31, 2010. For information on employee share option plans, please refer to the Consolidated financial statements, note 25 on pages 216 to 218.
Chairman of the Board Chairman of the Governance and Nominations Committee Member of the Remuneration Committee 2005 2011
Vice Chairman of the Board Member of the Governance and Nominations Committee Member of the Remuneration Committee 2010 2012
Susan Bies American 1947 Director Member of the Risk Committee 2008 2013
Thomas Escher Swiss 1949 Director Member of the Remuneration Committee 2004 2012
Director Chairman of the Risk Committee Member of the Audit Committee 2006 2011
Members of the Board of Directors, as of December 31, 2010
Except for Mr. Ackermann whose term commenced in April 2010, all of the current Directors have served on the Board throughout 2010. Mr. Pidoux retired from the Board at the Annual General Meeting during 2010. All Directors of Zurich Financial Services Ltd are also members of the board of directors of Zurich Insurance Company Ltd. Mr. Gentz also serves as chairman of that board. In addition, as from January 2010 Mr. de Swaan is a member of the board of directors of Zurich Insurance plc and Zurich Life Assurance plc; he also chairs the audit committees of those boards. Mr. Nicolaisen and Mrs. Bies are members of the board of directors of Zurich Holding Company of America, Inc. (ZHCA) and are also members of the respective audit committee. With the exception of Mrs. Bies, Mr. Nicolaisen and Mr. de Swaan, the Directors have no further board memberships within the Group.
Fritz Gerber is the Honorary Chairman of Zurich Financial Services Ltd. He was chairman of Zurich Insurance Company between 1977 and 1995 and its chief executive officer between 1977 and 1991. In recognition of his leadership and services to that company, he was appointed Honorary Chairman. Such designation does not confer Board membership or any Director’s duties or rights, nor does it entitle him to any Director’s fees.
Biographies Manfred Gentz, born 1942, studied law at the universities of Berlin and Lausanne and graduated with a doctorate in law from the Berlin Free University. In 1970 he joined Daimler-Benz AG where he held various positions. In 1983, he was appointed member of the board of management of Daimler-Benz AG, responsible at first for human resources. From 1990 to 1995 he was chief executive officer of Daimler-Benz Interservices (debis) in Berlin and subsequently became chief financial officer of DaimlerBenz AG in 1995. In December 1998, Mr. Gentz was appointed to the board of management of DaimlerChrysler AG, where he was in charge of Finance and Controlling until December 2004. From 1987 to 1995 he served on the board of supervisors of Agrippina Versicherung AG and from 1996 to 2005 he was a member of the board of supervisors of Zürich Beteiligungs-Aktiengesellschaft (Deutschland). From 1985 to 2005 Mr. Gentz was on the board of supervisors of Hannoversche Lebensversicherung AG (from 1990 as its vice chairman). From May 2005 until March 2006, he was chairman of the supervisory board of Eurohypo AG. He served as a member of the board of supervisors of adidas AG from 2004 until May 2009 and of DWS Investment GmbH from December 1995 until April 2009. In addition, Mr. Gentz was appointed a member of the board of supervisors of the German Stock Exchange (Deutsche Börse AG) in May 2003 and as its chairman in December 2008. He also serves as member of the executive board of ICC (International Chamber of Commerce), Paris, and serves as chairman of its German National Committee. In addition, he is active in a number of scientific and cultural institutions.
Josef Ackermann, born 1948, studied economics and social sciences at the University of St. Gallen, and in 1977 – after obtaining his doctorate – he joined Schweizerische Kreditanstalt (SKA). In 1990, he was appointed to the executive board of SKA, becoming its president in 1993. In 1996, Mr. Ackermann joined the management board of Deutsche Bank AG, where he was responsible for the investment banking division. In 2002, he became spokesman of the management board and chairman of the group executive committee. On February 1, 2006, he was appointed chairman of the management board. Mr. Ackermann is a member of the supervisory board of Siemens AG (second deputy chairman), Germany, a nonexecutive member of the board of directors of Royal Dutch Shell plc, The Netherlands, and vice-chairman of the board of directors of Belenos Clean Power Holding Ltd, Biel. He also plays an active role in, among other things, the Initiative Finanzstandort Deutschland (member of the Initiators’ Group), the Institute of International Finance (chairman of the board of directors), the World Economic Forum (co-chairman of the foundation board), the St. Gallen Foundation for International Studies (chairman), the Foundation Lindau Nobelprizewinners Meetings at Lake Constance (Honoray Senate member) and the Metropolitan Opera New York (advisory director). In 2007, Mr. Ackermann accepted an appointment as Visiting
Victor L.L. Chu, born 1957, graduated with a LL.B from the University College London in 1979. He is admitted to practice law in England and Hong Kong. Since 1982 he has practiced in the field of corporate, commercial and securities laws, with special emphasis on China and regional investment transactions. From 1995 to 2000, Mr. Chu was deputy secretary-general of the International Bar Association. Since 1988 he has served as chairman of First Eastern Investment Group, a leading direct investment firm focusing on China. He is also chairman of First Eastern Investment Bank Limited and FE Securities Limited. Over the past 20 years he has served at various times as director and council member of the Hong Kong Stock Exchange, a member of the Hong Kong Takeovers and Mergers Panel, a member of the Hong Kong Securities and Futures Commission’s advisory committee and a part-time member of the Hong Kong Government’s Central Policy Unit. He is currently a foundation board member of the World Economic Forum and co-chairs the Forum’s International Business Council. He is also chairman of the International Chamber of Commerce’s Commission on Financial Services and Insurance and vice chairman of Asia House in London. Mr. Chu is a trustee of the London-based International
Fred Kindle, born 1959, graduated from the Swiss Federal Institute of Technology (ETH) in Zurich with a master’s degree in engineering. He worked as a marketing project manager with Hilti AG in Liechtenstein from 1984 until 1986, and then enrolled at Northwestern University, Evanston, Illinois, in the United States, where he earned an MBA. From 1988 until 1992 he was a consultant with McKinsey & Company in New York and Zurich. He then joined Sulzer Chemtech AG in Switzerland as the head of the Mass Transfer Department and in 1996 became the head of the Product Division. In 1999 he was appointed CEO of Sulzer Industries, one of the two operating groups of Sulzer AG. Two years later he became CEO of Sulzer AG, where he also served as board member. After joining ABB Ltd. in 2004, Mr. Kindle was appointed CEO of ABB Group in January 2005, a position he held until February 2008. He then became a partner of CD & R LLP, a private equity firm based in New York and London. In his function as a partner of that firm Mr. Kindle serves as a chairman of Exova Ltd., Scotland, BCA Group, United Kingdom, and as a director of Rexel SA, France. He is also on the board of VZ Holding Ltd, Zurich and Stadler Rail AG, Bussnang.
Don Nicolaisen, born 1944, graduated from the University of Wisconsin-Whitewater with a BBA degree and joined Price Waterhouse (which subsequently became PricewaterhouseCoopers), where he was admitted to partnership in 1978. He served in various capacities, including as auditor and as chairman of PricewaterhouseCoopers’ financial services practice. He led that company’s national office for accounting and Securities and Exchange Commission services from 1988 to 1994 and served on both the U.S. and global boards from 1994 to 2001. From September 2003 to November 2005, he was chief accountant of the U.S. Securities and Exchange Commission and was principal adviser to the Commission on accounting and auditing matters. He is a member of the board of directors of Verizon Communications Inc., Morgan Stanley and MGIC Investment Corporation. In addition, he is on the board of advisors for the University of Southern California Leventhal School of Accounting.
Food Standards Agency. In addition to his board roles, he is also an advisor to a number of other companies.
Rolf Urs Watter, born 1958, graduated from the University of Zurich with a doctorate in law and holds a master of laws degree from Georgetown University in the U.S. He is admitted to the bar of the Canton of Zurich. Since 1994 he has been a partner in the law firm Bär & Karrer in Zurich and was a member of its executive board from 2000 and an executive director upon the incorporation of Bär & Karrer AG in 2007 until September 2009. He is a non-executive director of Nobel Biocare Holding AG (since 2007), of Syngenta AG (since 2000), UBS Alternative Portfolio AG (since 2000) and A.W. FaberCastell (Holding) AG (since 1997). He formerly was a nonexecutive chairman of Cablecom Holding AG (2004-2008) and non-executive director of Centerpulse AG (2002-2003), of Forbo Holding AG (1999-2005) and of Feldschlösschen Getränke AG (2001-2004). He is a part-time professor at the Law School of the University of Zurich. In addition, he is a member of the SIX Regulatory Board and of its Disclosure Commission of Experts. He also serves as chairman of two charity institutions.
The business address for each Board member is Mythenquai 2, 8002 Zurich, Switzerland.
At the Annual General Meeting on March 30, 2010, Mr. Ackermann has been elected as a new member of the Board of Directors for a term of two years. Mrs. Bies and Messrs. Meyer, Chu and Watter have been re-elected to the Board for a term of three years. At the Annual General Meeting to be held on March 31, 2011, the terms of office of Mr. Gentz, Mr. de Swaan and Mr. Kindle will expire. All three members have been proposed for re-election by the Board. Mr. Gentz has been nominated for a term of one year and Messrs. de Swaan and Kindle for a term of three years each.
The Board elects from its members the Chairman and the Vice Chairman, and appoints the Secretary.
The Board is required to meet at least six times each year; during 2010 it held 13 meetings (of which five were partly attended by phone and two were held over two days). One meeting was fully dedicated to the discussion of strategic topics. Seven meetings lasted between four and eight hours per day, and the remaining five meetings took about two hours on average. In addition, the Board approved three circular resolutions.
In 2010, average attendance at Board meetings was 88 percent. The members of the Board spent additional time participating in Board Committee meetings and preparing for meetings in order to discharge their duties.
The Board may appoint committees for specific areas from among its members and establish terms of reference and rules with respect to delegated authority and reporting to the Board. The committees assist the Board in performing its duties. To the extent that the committees are not authorized to take resolutions, they discuss and propose matters to the Board for taking the appropriate actions and passing resolutions before such matters are brought to the Board. In 2010, committee meetings lasted between two and three hours on average. The Board has the following standing committees, which regularly report to the Board and submit proposals for resolutions to the Board.
The Audit Committee has four members, all of whom meet the relevant requirements with respect to independence and qualification. The Audit Committee charter provides that the Audit Committee as a whole should have (i) an understanding of IFRS and financial statements, (ii) the ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves, (iii) experience in preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to those of Zurich Financial Services Ltd and the Group or experience in actively supervising one or more persons engaged in these activities, (iv) an understanding of internal controls and procedures for financial reporting, and (v) an understanding of audit committee functions. The Audit Committee met seven times in 2010. Average attendance at meetings was 96 percent.
The Audit Committee also reviews the annual, half-year and quarterly financial results of the Group before submission to the Board. Private sessions with external auditors and internal audit are scheduled at most of the Audit Committee meetings to enable discussions without Management present.
Statements regarding internal control and the procedures in place regarding internal control according to the UK Turnbull Guidance are given on pages 44 and 45.
The Risk Committee has four members. In 2010, it met six times (once jointly with the Governance and Nominations Committee and with the Remuneration Committee); attendance on average was 100 percent. The Risk Committee oversees the Group’s risk management, in particular the Group’s risk tolerance, including agreed limits that the Board regards as acceptable for Zurich to bear, the aggregation of agreed limits across the Group, the measurement of adherence to agreed risk limits, and the Group’s risk tolerance in relation to anticipated capital levels. It further oversees the Group-wide risk governance framework, including risk management and control, risk policies and their implementation as well as the risk strategy, and the monitoring of operational risks. The Risk Committee also reviews the methodologies for risk measurement and the Group’s adherence to its risk limits, and reviews the performance of the Risk Management function. It further reviews, with business management and the Group risk management function, the Group’s general policies and procedures, and ensures that effective systems of risk management are established and maintained. The Risk Committee receives periodic reports from Group Risk Management and assesses whether significant issues of a risk management and control nature are being appropriately addressed by Management in a timely manner. For further information on risk governance please refer to the Risk Review on pages 95 to 131.
To facilitate an ongoing exchange of information between the Risk Committee and the Audit Committee, the Chairman of the Audit Committee is a member of the Risk Committee and the Chairman of the Risk Committee is a member of the Audit Committee. The Chairman of the Board regularly participates in Audit and Risk Committee meetings as a guest.
Areas of responsibility of the Board and Management In addition to determining the overall strategy of the Group and the supervision of senior management, the Board addresses key matters in the area of strategy, finance, structure and organization and business development. The Board approves the Group’s strategic plan and the annual financial plans developed by Management, and reviews and approves the annual, half-year and quarterly financial statements of Zurich Financial Services Ltd and the Group. It establishes guidelines for overall business policies and capital allocation and approves major changes in the Group’s business activities, including major lending and borrowing transactions and major business developments, such as acquisitions or disposals of businesses or assets, investments or new businesses, mergers, joint ventures and cooperations. The Board also considers other matters of strategic importance to the Group including the Group’s risk profile and its risk tolerance.
Corporate governance report continued also meets from time to time with all other GEC members and executives outside regular Board meetings. The other members of the Board do so as well, especially with the Chief Financial Officer and the Chief Risk Officer.
The Group has an information and financial reporting system in place. The annual plan for the Group, which includes a summary of financial and operational metrics, is reviewed by the GEC in detail and approved by the Board. Monthly plan updates are prepared to compare actual performance to the plan. Full-year forecasts are revised if necessary to reflect changes in sensitivities and risks that may impact the results of the Group. Action is taken, where appropriate, when variances arise. This information is reviewed by the GEC on a monthly basis and by the Board on a quarterly basis.
The process and the results of this approach are further described on pages 44 and 45 under the Risk Management and Internal Control Statement.
Management Board Group Executive Committee To the extent not reserved by the Board, management is delegated to the CEO. The CEO, and under his supervision the GEC, are responsible for dealing with strategic, financial and business policy issues of Group-wide relevance, including consolidated performance, capital allocation and mergers and acquisitions.
The GEC is headed by the Group CEO. As of December 31, 2010, members of the GEC included the Chief Financial Officer, the Chief Investment Officer, the Chief Risk Officer, the Chief Administrative Officer and the Group Head of Operations. To reflect both lines of business and geography, the CEOs of the business segments General Insurance, Global Life, and Farmers, as well as the CEO of North America Commercial and the Regional Chairmen of Europe & Africa, Americas, and Asia-Pacific & Middle East were represented in the GEC.
Biographies Martin Senn, born 1957, received his commercial and banking diploma from the Business School in Basel, Switzerland and graduated from the International Executive Program at INSEAD in Fontainebleau and the Advanced Management Program at Harvard Business School. He is a trained banker and worked at the former Swiss Bank Corporation from 1976 to 1994 where his international career steps included treasurer in Hong Kong and regional treasurer for Asia and the Pacific region in Singapore before ultimately managing the company’s Tokyo office. In 1994, he joined Credit Suisse where his executive roles included that of treasurer for the Head Office and Europe and chairman and turnaround manager of Credit Suisse Group Japan with a mandate to restructure and reposition all legal entities of the Group in Japan. In 2001, he became a member of the Credit Suisse Banking executive board and was appointed head of its Trading and Investment Services Division. From 2003 until 2006, he served as a member of the corporate executive board and as chief investment officer of the Swiss Life Group. Mr. Senn joined Zurich on April 1, 2006 as Chief Investment Officer and became a member of the Group Executive Committee as per the same date. He was appointed Chief Executive Officer of the Group with effect from January 1, 2010. He is a member of the foundation board of Avenir Suisse and treasurer of the Zurich Association of Economics. In addition, he serves as Honorary Consul of the Republic of Korea in Zurich and as a member of the board of directors of the SwissAmerican Chamber of Commerce. Mr. Senn is also a member of the board of the Geneva Association and of the Institute of International Finance (IIF). Besides that, he is a representative of the Property and Casualty CEO Roundtable, a member of the Pan European Insurance Forum (PEIF), of the European Financial Services Roundtable (EFR), member of the advisory board of Tsinghua School of Economics and Management and of the board of trustees of the Lucerne Festival. He previously was a member of the board of directors of various banks and financial services institutions.
Martin Senn Swiss 1957 Chief Executive Officer John Amore American 1948 Senior Advisor Mike Foley American 1962 Chief Executive Officer North America Commercial Mario Greco Italian 1959 Chief Executive Officer General Insurance Kevin Hogan American 1962 Chief Executive Officer Global Life Paul Hopkins American 1956 Chairman of the Board of Farmers Group, Inc. & Regional Chairman of the Americas Axel Lehmann Swiss 1959 Chief Risk Officer Christian Orator Swiss / Austrian 1963 Chief Administrative Officer Cecilia Reyes Swiss / Philippine 1959 Chief Investment Officer Geoff Riddell British 1956 Regional Chairman of Asia Pacific & Middle East Kristof Terryn Belgian 1967 Group Head of Operations Dieter Wemmer German 1957 Chief Financial Officer & Regional Chairman of Europe & Africa
Corporate governance report continued until December 2010. Mr. Amore served on the U.S. Chamber of Commerce’s board of directors from 2008 until December 2010. Mr. Amore retired from Zurich on December 31, 2010.
Mario Greco, born 1959, earned an undergraduate degree in Economics from the University of Rome and completed a Master in International Economics and Monetary Theory at Rochester University, New York (USA). Mr. Greco started his professional career in management consulting, working with McKinsey & Company’s Milan office from 1986 until 1994, becoming a partner in 1992 and a partner leader in the insurance segment. In 1995, he joined RAS (Allianz Group) in Milan as head of Claims Division. He became general manager in charge of the insurance business the following year, and in 1998 was appointed managing director. In 2000, he became the company’s chief executive officer, remaining in the position for four years. He was appointed head of Allianz’s Life Sustainability business in Munich in 2004, and later that year he was appointed to Allianz AG’s executive board, with responsibility for France, Italy, Spain, Portugal, Greece and Turkey. In April 2005, he joined the Sanpaolo IMI Group in Milan as the chief executive officer of EurizonVita, formerly named Aip, as part of a project to build up the Group’s insurance and asset management businesses. In October 2005, he was appointed chief executive officer of EFG, the company holding the Sanpaolo IMI Group’s investments in EurizonVita and Banca Fideuram, and Eurizon Capital. He joined Zurich on October 1, 2007, as the designated CEO Global Life, he became a member of the GEC and took on the roles of CEO Global Life in April 2008. In July 2010, he assumed the role of CEO General Insurance. He is also a member of the board of directors of Editoriale l’Espresso Group, Indesit and Saras.
Kevin Hogan, born 1962, graduated from Dartmouth College in Hanover, New Hampshire. He started his professional career in 1984 at AIG with American International Underwriters (AIU) in New York and subsequently held underwriting management positions in Chicago, Tokyo, Hong Kong and Singapore. In 1998, he was appointed president of AIG’s Accident & Health Division in New York and was elected an AIG vice president in 2001. In 2002 he also became chief operating officer at AIU. Mr. Hogan moved to Beijing as senior executive of AIG’s partnership with the People’s Insurance Company of China in 2003. In 2005 he became AIG’s senior life division executive for China and Taiwan, where he was responsible for AIA China and Nan-Shan. In 2008 he returned to New York as AIG’s Chief Distribution Officer, Foreign Life and Retirement Services. He joined Zurich in December 2008 as CEO Global Life Americas. In this role he led Zurich’s Life insurance business in North and South America with accountability for Farmers Life, Zurich American Life Insurance Company (formerly KILICO) and Zurich’s Latin America Life Operations. He became CEO Global Life and member of the GEC in July 2010.
Paul N. Hopkins, born 1956, holds a Bachelor of Science degree in business from the Eastern Illinois University and completed the Advanced Executive Education program of the Wharton Business School. He joined the Farmers organization in 1978 as an agent and subsequently became a Farmers employee, where he held positions of increasing responsibility in the sales and marketing area. In 1992 he transferred to the Los Angeles Regional Office as Assistant Vice President, Regional Operations. He became Vice President Agencies in 1995, and Senior Vice President Agencies two years later. In 1998, he was made Senior Vice President and Chief Marketing Officer, a position he held until January 1, 2000, when he was appointed Senior Vice President of State Operations. His next assignment, as Senior Vice President of Strategic Alliances, became effective in April 2001. In August 2002 he was promoted to Executive Vice President, Market Management, and two years later became President of Farmers Group, Inc. Mr. Hopkins was appointed a member of Zurich’s Group Management Board in December 2004. From April 2005 until December 2008, he was chief executive officer of Farmers Group, Inc. and a member of Zurich’s Group Executive Committee. In 2006, Mr. Hopkins was named chairman of the board of ZFUS Services, LLC, Zurich’s North American shared services platform. As of January 1, 2009, he was appointed CEO Americas, and in February 2009 was appointed chairman of the board of Farmers Group, Inc. In April 2009, his duties were expanded to include oversight of the Group’s global growth activities, and he was named chairman of the board and CEO of Zurich Holding Company of America in 2010. In July the same year he assumed the newly created role of Regional Chairman of the Americas. Mr. Hopkins further serves as a member of the board of trustees for the American Institute for Chartered Property Casualty Underwriters, now known as the Institutes. He also serves as a member of the board of the Insurance Information Institute, the American Insurance Association (AIA), and as of March 2010 was elected member of the AIA’s executive committee.
Axel P. Lehmann, born 1959, graduated with an MBA and PhD from the University of St. Gallen in Switzerland. After
Christian Orator, born 1963, holds a PhD and master’s degree in Law from the University of Vienna as well as a master’s degree in Comparative Law from Dickinson School of Law, Pennsylvania. He joined Zurich as sales agent in Austria in 1989. One year later he became product manager for Zurich Kosmos AG. From 1993 until 2005 he held various executive and operational positions in Austria, the U.S., and Germany in Underwriting, Distribution and Market Management within the Zurich Group. From January 2005 until July 2007 he was Head of Special Projects in the office of the Chief Administrative Officer based in Zurich. From August 2007 until August 2010 he was Global Chief Claims Officer in General Insurance. With effect from September 2010 he assumed his current position as Chief Administrative Officer and member of the GEC.
Kristof Terryn, born 1967, holds a law degree and a degree in economics from the University of Leuven, Belgium, as well as an MBA from the University of Michigan. He started his professional career in 1993 in the banking industry at Dexia in Luxembourg where he worked in the Capital Markets department and in Strategic Planning. In 1997, he joined McKinsey & Company Inc. where he held various positions within the financial services practice in Brussels and the Chicago office. He joined Zurich in 2004 as Head of Planning and Performance Management. In 2007, he became Chief Operating Officer for the Global Corporate business division and in January 2009 took over the position of Chief Operating Officer for
Dieter Wemmer, born 1957, holds a PhD and a master’s degree in mathematics from the University of Cologne. From 1983 until 1986, he worked in pure mathematics at the universities of Cologne and Oxford. In 1986, he joined Zurich Re (Cologne), at that time a reinsurance subsidiary of Zurich’s German operation Agrippina, as a pricing actuary for life reinsurance. He became Head of Life Reinsurance and Chief Actuary five years later. From 1992 until 1996, Mr. Wemmer held various positions with Agrippina, joining the management board in 1995 responsible for Controlling/ Planning, Communication and Real Estate management. He was seconded to Zurich’s Corporate Center in 1996 as project manager for the implementation of International Accounting Standards (IAS) and US Generally Accepted Accounting Principles (US GAAP). One year later, he became Head of Financial Controlling. From 1999 until May 2003, he was Head of Mergers and Acquisitions, with additional responsibility for capital management and General and Life Actuarial from 2002. He became Chief Operating Officer of the Europe General Insurance business division in May 2003. In November 2004, he was appointed CEO Europe General Insurance and became a member of the GEC. Since March 2007, he has assumed his current role as Chief Financial Officer of Zurich Financial Services Group with extended responsibilities in the newly created role of Regional Charirman Europe as of July 2010. Mr. Wemmer is a member of the board of economiesuisse. In October 2009 he was elected chairman of the European Insurance CFO Forum. He is also a member of the strategy board of the European Insurance and Reiinsurance Federation (CEA).
During the first half of 2010 Inga Beale additionally held the position of Head of Organizational Transformation and was responsible for the Internal Consulting function (ICon). With effect from July 2010 these responsibilities transferred to the newly established Group Operations function led by Kristof Terryn and Ms. Beale focused entirely on her Global Chief Underwriting Officer role. Michael Paravicini retired and was succeeded by Markus Nordlin who was appointed Chief Information Technology Officer effective September 2010. Patrick Manley assumed responsibility for General Insurance in Europe as from January 2011, and Markus Hongler will leave the company at the end of March 2011. Richard P. Kearns held the position of Chief Administrative Officer until the end of August 2010 when Christian Orator took on this role. Mr. Kearns remains a member of the Group Management Board until his retirement at the end of March 2011 to assist the transition of responsibility. Peter Goerke left the Group in January 2011 and Peter J. Wright was appointed Group Head of Human Resources.
A shareholder with voting rights can attend shareholders’ meetings of Zurich Financial Services Ltd in person. He or she may also authorize, in writing, another shareholder with voting rights or any person permitted under the Articles of Incorporation and a more detailed directive of the Board to represent him or her at the shareholders’ meeting. Based on the Articles of Incorporation, minors or wards may be represented by their legal representatives, married persons by their spouses and a legal entity may be represented by a
Corporate governance report person authorized to bind it by his or her signature, even if such persons are not shareholders. Furthermore, authority of representation may be given to the Independent Representative of Shareholders, to a statutory representative or to representatives of bank accounts who do not need to be shareholders themselves. Zurich Financial Services Ltd may under certain circumstances authorize the beneficial owners of the shares that are held by professional persons as nominees (such as a trust company, bank, professional asset manager, clearing organization, investment fund or other entity recognized by Zurich Financial Services Ltd) to attend the shareholders’ meetings and exercise votes as proxy of the relevant nominee. For further details, see page 27.
Statutory quora Pursuant to the Articles of Incorporation, the general meeting constitutes a quorum irrespective of the number of shareholders present and shares represented. Resolutions and elections generally require the approval of a simple majority of the votes cast, excluding abstentions, blank and invalid votes, unless respective provisions in the Articles of Incorporation (of which there are none) or mandatory legal provisions stipulate otherwise. Article 704 of the Swiss Code of Obligations provides for a two-thirds majority of votes cast representing an absolute majority of nominal values of shares represented for certain important matters, such as the change of the company purpose and domicile, the dissolution of the company, and matters relating to capital increases. In the event of the votes being equally divided, the decision rests with the Chairman.
Agenda The Board of Directors is responsible for developing the agenda and sending it to the shareholders. Shareholders with voting rights who together represent shares with a nominal value of at least CHF 10,000 may request in writing, no later than 45 days before the day of the meeting, that specific proposals be included on the agenda.
Information Policy Zurich Financial Services Ltd has approximately 122,000 shareholders registered in its share register, ranging from private individuals to large institutional investors. Each registered shareholder receives an invitation to the Annual General Meeting. The Letter to Shareholders that provides a quarterly overview of the Group’s activities during the year and outlines its financial performance, the more comprehensive Annual Review, the Annual Report and half-year reports are available on Zurich’s Web site www. zurich.com ( resultsandreports/financialreports/introduction.htm) and are also being printed. Shareholders may opt to receive printed versions of those documents. Further documents regarding the results reporting (on a quarterly basis) are also available for all shareholders on Zurich’s Web site.
Zurich Financial Services Ltd will hold its Annual General Meeting on March 31, 2011. As part of the agenda, the Chairman, the Chief Executive Officer and the Chief Financial Officer will present a review of the business of the Group for the year 2010. The meeting will be conducted in the Hallenstadion in Zurich-Oerlikon. An invitation setting out the agenda for this meeting and an explanation of the proposed resolutions will be issued to shareholders by Zurich Financial Services Ltd at least 20 days before the meeting.
For addresses and further upcoming important dates, please refer to the Shareholder Information starting on page 312 (Financial Calendar on page 316).
PwC assumes all auditing functions, which are required by law and by the Articles of Incorporation of Zurich Financial Services Ltd. They are elected by the shareholders of Zurich Financial Services Ltd on an annual basis. At the Annual General Meeting of shareholders on March 30, 2010, PwC was re-elected by the shareholders of Zurich Financial Services Ltd. The Board of Directors proposes that PwC be re-elected at the upcoming Annual General Meeting as external auditors for the business year 2011. PwC fulfils all necessary requirements under the new Swiss Federal Act on the Admission and Oversight of Auditors and has been admitted as a registered auditing company by the Federal Audit Oversight Authority under this Act.
PwC and its predecessor organizations, Coopers & Lybrand and Schweizerische Treuhandgesellschaft AG, have served as external auditors of Zurich Financial Services Ltd and its predecessor organizations since May 11, 1983. As in 2000, the Group conducted in 2007 a tender process, inviting all major auditing firms to submit their work programs and tender offers for 2008 and subsequent years. After a thorough review, the Group came to the conclusion that PwC’s work program and offer prevailed.
Total non-audit fees 5.8 4.2 – Tax advice 0.5 0.4 – Legal advice 0.0 0.0 – Transaction consulting incl. due diligence 0.6 0.5 – Audit-related advice 2.3 1.7 in USD millions, as of December 31Audit and non-audit fee amounts
Supervision and control over the external audit process The Audit Committee regularly meets with the external auditors, at least four times a year. During 2010, the Audit Committee met with the external auditors seven times. The external auditors regularly have private sessions with the Audit Committee without Management present. Based on written reports, the Audit Committee discusses with the external auditors the quality of the Group’s financial and accounting function and any recommendations that the external auditors may have. Topics considered during such discussions include strengthening of internal financial controls, applicable accounting principles and management reporting systems. In connection with the audit, the Audit Committee obtains from the external auditors a timely report relating to the audited financial statements of Zurich Financial Services Ltd and the Group.
The Audit Committee oversees the work of the external auditor. It reviews, at least annually, the qualification, performance and independence of the external auditors and reviews any matters that may impair their objectivity and independence based on a written report by the external auditors describing the firm’s internal qualitycontrol procedures, any material issues raised and all relationships between the external auditors and the Group and/or its employees that could be considered to bear on the external auditors’ independence. The Audit Committee evaluates the cooperation of the external auditors during their audit examination. It elicits the comments of management regarding the performance (based on criteria such as the understanding of Zurich’s business, the technical knowledge and expertise, etc.) and the quality of the working relationship (responsiveness of the external auditors to the needs of Zurich Financial Services Ltd and the Group, and the clarity of communication). The Audit Committee reviews, prior to the commencement of the annual audit, the scope and general extent of the external audit and suggests areas requiring special emphasis.
Group Audit The internal audit function of the Group (“Group Audit”) is tasked with providing independent and objective assurance to the Board, the Audit Committee, the CEO and Management. It does this by developing an annual audit plan, using a risk-based methodology, which is updated on a rolling basis to reflect changes in risk and priority. The plan is based on the full spectrum of business risks. Group Audit executes the plan by bringing a systematic and disciplined approach to evaluate, comment upon and improve risk management, control and governance processes. It assesses the suitability, reliability and functioning of the business organization with regard to technical and personnel matters and reviews the efficiency and effectiveness of the Group’s control systems. In
Corporate governance report continued addition, the internal audit function reviews the financial reporting processes and compliance with the Group’s business regulations. Key issues raised by Group Audit are communicated to the responsible management function, the CEO and the Audit Committee using a suite of reporting tools.
The Audit Committee and the CEO are regularly informed of important findings, including ineffective opinions, mitigation actions and attention provided by Management. Group Audit has unrestricted access to all accounts, records and documents and must be provided with all data and information needed in order to fulfil its duties. Group Audit works in close cooperation with the external auditors, sharing risk assessments, work plans, audit reports and updates on audit actions. Group Audit and the external auditors meet regularly at all levels of the organization to optimize assurance provision and efficiency. The Head of Group Audit does attend each meeting of the Audit Committee.
The Audit Committee assesses the independence of Group Audit, and reviews its activities, plans, organization and quality as well as its mutual cooperation with the external auditors. In 2007, the Group commissioned an independent party to perform a review of Group Audit’s effectiveness. The results confirmed Group Audit’s practices meet or exceed the professional requirements of the Institute of Internal Audit (IIA), and in a high proportion of cases are consistent with global internal audit leading practices. Notwithstanding this positive result, Group Audit is continuing to constantly challenge its operation to further increase its effectiveness, efficiency and value contribution. In January 2010, Group Audit further aligned its organizational structure to mirror the functional structure of the business and to make the function more effective and responsive, with a flatter structure and clearer roles, responsibilities and lines of accountability to empower all audit professionals.
Group Compliance The Group’s core values are founded on the principle that it acts lawfully and seeks to do what is right. Sound compliance in everything the company does helps to protect Zurich’s reputation and supports the achievement of the Group’s ambitious goals.
Effectively managing risks is a core strength. Management is responsible for the identification, evaluation and control of significant risks. The Group manages risks throughout the organization, under direction of the senior management. Zurich has Group-wide risk management policies as well as common methods and tools for assessing and modeling risks. The Group risk assessment processes are aligned with the Group planning process and are reviewed by the Group Executive Committee and the Board Risk Committee. Significant risks, the results of the assessment and modeling processes and the relevant actions arising are reported regularly to the Risk Committee of the Board. Periodic local risk assessments are conducted using Zurich’s Total Risk Profiling™ tool and business units are required, at least quarterly, to report key risks and implement action plans to mitigate them. Additional details are provided in the Risk Review in the Annual Report.
The Group’s annual business plan includes risk management considerations, as well as strategic and business direction, financial information and key indicators. During the year, the Board, the Audit and Risk Committees and Group Management receive regular reports summarizing financial condition, financial and operating performance, as compared to plan, and key risk exposures.
Processes and controls in the organization are subject to risk-based reviews by Management, Group Audit, Group Compliance and Group Risk Management. Management reviews include the effective implementation of policies and procedures including claims, investment, underwriting, actuarial, treasury, accounting and reporting, as well as effectiveness of control for significant locations and information technology systems. The Board, the Audit and Risk Committees receive regular and, as needed, special reports from the Chief Risk Officer, Group General Counsel, Head of Group Compliance, Chief Financial Officer and Group Controller, Head of Group Audit and financial and business senior management on the adequacy of the control structure in place. In addition, the external auditors regularly report their conclusions, observations and recommendations arising from their independent audit process.
The Risk Committee has reviewed the Group’s risk tolerance and overseen Zurich’s enterprise-wide risk governance framework and the Audit Committee has reviewed the effectiveness of the system of internal control operated by the Group related to the calendar year 2010 up to the date of this Annual Report and have reported to the Board accordingly. The Board is satisfied that the reviews were conducted in accordance with the UK Turnbull Guidance (as revised in October 2005). The assessment included the consideration of the effectiveness of the Group’s ongoing process for identifying, evaluating, controlling and managing the risks of the business, including the scope and frequency of reports on both risk and control that were received and reviewed during the year by the Risk and Audit Committees and the Board, the important internal control matters discussed and associated actions taken by Management. Issues identified by this process have been communicated to the Board and either have been orare being addressed by the Group.
The structure of the Remuneration Report is in alignment with the requirements of the Swiss Code of Obligations, the SIX Directive, the Swiss Code of Best Practice and the FINMA Circular on Remuneration Schemes.
The first part of the report describes the general principles and the governance framework, and the second part provides details of each of the remuneration elements. Because the members of the Board of Directors of Zurich Financial Services Ltd are all independent non-executives, the information has been presented with the complete remuneration details of the Board of Directors contained in one section, that of the Group Executive Committee (GEC) shown in the next section, and this is followed by a section including the information requested by the FINMA Circular on Remuneration Schemes for all employees.
All information required by articles 663bbis and 663c paragraph 3 of the Swiss Code of Obligations is also included in the notes to the financial statements of Zurich Financial Services Ltd holding company.
Remuneration governance Remuneration architecture The Board of Directors is responsible for the design and implementation of the remuneration principles and the remuneration rules (together the “Remuneration Rules”). To support the Board of Directors in performing these duties it has established a Remuneration Committee. The Remuneration Committee comprises four members of the Board, all of whom are experienced in the area of remuneration. The Remuneration Committee evaluates on an annual basis the remuneration architecture and the Remuneration Rules and proposes to the Board of Directors any amendments to it, if appropriate.
• With regard to the operational implementation of the remuneration architecture across the Group, Group Audit will expand its assessment and report to the Board of Directors on a regular basis.
• Further steps have been taken to structure the remuneration of the control functions to avoid conflicts of interest, by ensuring that the incentives for all employees in control functions are determined by reference to Group profitability rather than by the profitability of the business controlled by such functions.
Overall Remuneration Architecture Remuneration Committee and Risk Committee based on proposals by the CEO
In addition to the above, and in line with the requirements of the FINMA Circular on Remuneration Schemes, the Board of Directors also approves the aggregate amount of variable remuneration for the performance year (“Total Variable Remuneration Pool”) taking into account the long-term economic performance of the Group. For further details on the calculation of the Total Variable Remuneration Pool see pages 63 and 64.
The results of the benchmarking studies are taken into account in setting fee levels for Directors and the remuneration structures and levels for members of the GEC. In analyzing the results, factors considered are the market practices in the various countries and the internal relativities between positions. Overall positioning of the remuneration structures is towards the median levels.
In reviewing remuneration structures and practices on a regular basis, the Remuneration Committee and the Board of Directors receive independent advice from the executive compensation practice at Hewitt Associates. This advisor was appointed by the Remuneration Committee and is accountable to it. During the first half of 2010 Hewitt Associates spun off part of its U.S. executive compensation practice to create the independent firm Meridian Compensation Partners LLC (Meridian). In the second half of 2010 Hewitt Associates was acquired by Aon Corp. Both, Meridian and Aon Hewitt provide advice to the Board of Directors, whereby the lead consultant is employed by Meridian. Meridian does not provide any other services to the Group. Although Aon Hewitt is a large, international brokerage and human resources firm and, as such, other practices within Aon Hewitt undertake work with the Group from time to time, the Remuneration Committee does not consider the independence and integrity of the advice it receives from Aon Hewitt to be compromised by these separate assignments. For their activities, management is supported by a variety of firms operating in the field of international executive compensation.
Guidelines on share ownership requirements for Directors and members of the Group Management Board To align the interests of the Board of Directors and the Group Management Board (GMB) with those of shareholders, Directors and GMB members build their ownership position in the Company. Directors achieve this through part of their fee payment being made in shares and market purchases. GMB members achieve this through their participation in long-term incentive plans and market purchases. Directors and GMB members have a period of 5 years to meet their ownership requirement and the Remuneration Committee monitors the compliance with these guidelines on an annual basis. To help build the ownership positions, all shares awarded to the Directors as part of their annual fee and one half of all performance shares that vest for members of the GMB have a three-year sales restriction.
Total remuneration Total remuneration is influenced by a number of factors such as the scope and complexity of the role, business performance and affordability, individual performance, internal equity, and legal requirements. As described above on page 47 and 48 target opportunities are benchmarked to median levels in clearly defined markets and take into account internal equity considerations.
Generally paid within an 80% – 120% range of relevant market median
For executives, senior managers and a broader group of employees, paid annually
Vesting is determined based on the Group’s Total Shareholder Return (TSR) and Return on common shareholders equity (ROE) achievements over the three calendar years prior to the vesting date
Variable pay Incentive plans are designed to provide a range of award opportunities linked to levels of performance. Business and individual performance may result in superior remuneration levels above target for superior performance, and reduced levels below target for performance below expectations. Variable pay opportunities are provided, in markets where this is the norm, to motivate employees to achieve key short- and long-term business goals to increase shareholder value. Variable pay opportunities may include both short-term and long-term incentives: Short-term (1 year) incentives are performance-driven based on the following design: • Short-term incentive awards are paid in cash.
• The actual funding for the STIP pool, as a percentage of the target pool, is assessed at the end of the performance year. The Board of Directors has approved a STIP performance grid, which links business performance to the potential size of the actual funding pool. Taking into account the relevant business performance and risk considerations, the Group CEO makes recommendations on the size of the various STIP funding pools to the Remuneration Committee, which then discusses and seeks approval from the Board of Directors.
• The relevant business performance is assessed against the business plan that is approved by the Board of Directors in December of the year prior to the performance year. The financial measures to fund the pools typically include the Group’s Net Income for the senior executive group and the relevant Business Operating Profit (BOP) for the business segments. Depending on the actual achievements, the STIP funding pools can vary between 0% and 175% of the target pools. In assessing the business results, the financial performance of the area as well as a review of risk considerations by the Chief Risk Officer are taken into account.
• The allocation of the STIP funding pool to individual participants is then based on the size of the funding pool available, the results of the unit that the individual is working in and the performance achievements of the individual participant during the year. Any violations of internal rules or external provisions by the respective individual are taken into account in the individual performance rating. The individual performance achievements are assessed through the Group’s performance management system and process. The Group’s performance management process utilizes an individual rating scale between 1 and 5, with 5 being the highest rating, and a target distribution guideline for each of the ratings.
• Depending on the size of the STIP funding pool and the individual performance rating, short-term incentive awards can vary between 0% and 200% of the individual target award level.
• In this way, short-term incentive awards are differentiated based on the performance achievements of the business and the individual.
Long-term (3 year) incentives support the achievement of the Group’s longer term financial goals and are utilized for a defined group of executives and senior managers, whose specific roles focus on the performance drivers of long-term shareholder value. This group contains the individuals with the highest levels of total remuneration, as well as those individuals whose activities have a significant influence on the risk profile of the Group. In alignment with the Group’s risk profile and business strategy, long-term incentives are provided with deferred effect taking into account material risks and the time horizon thereof. Such deferred remuneration is structured in a way as to promote the risk awareness of the participants and to encourage the participants to operate the business in a sustainable manner.
Deferral of the long-term incentives is achieved by: • pro rata vesting of the long-term incentive grants in one third instalments over the three years following the year of grant, and
Group’s long-term incentive plans are as follows: • Each participant has a target award established for the year of grant.
• For performance based grants, these grants only vest if certain Group performance conditions are met in terms of the absolute return on common shareholders’ equity (ROE) and the position of the Group’s total shareholder return (TSR) compared with an international peer group of insurance companies based on the Dow Jones Titan Insurance Index. Performance is measured over a 3 year calendar period prior to the vesting date and the vesting percentage, based on the actual ROE and TSR achievements, can vary between 0% and 175% of the target grants. If the minimum performance thresholds are not met, the target grants will not vest. The vesting percentage is proposed by the CEO to the Remuneration Committee and the Committee makes a recommendation to the Board of Directors for final approval. The vesting matrix is as follows: The following table shows how the tranches under the various annual grants vest throughout consecutive calendar years. As a result there are always three tranches of different years’ grants that are assessed for vesting in each calendar year.
• The right to modify awards to reflect individual circumstances is reserved for the CEO except for modifications regarding members of the GEC and GMB where such right is reserved for the Remuneration Committee of the Board and the Board of Directors. An adjustment of +/-25% to the regular vesting level may be applied before distribution. If circumstances warrant it exceptions to the +/-25% adjustment may be made, but any such adjustment is reserved exclusively for the Remuneration Committee and the Board of Directors.
Employee benefits The Group provides employee benefits which are designed by reference to local market practices. Employees are normally required to contribute to the cost of these benefits, and the overall benefits offering is based on the relevant market median.
Remuneration and shareholdings of the members of the Board of Directors and the Group Executive Committee As of December 31, 2010, all of the Directors of Zurich Financial Services Ltd are non-executives, independent of management. The remuneration for Directors and for members of the GEC, as well as their shareholdings, is disclosed separately.
Insurance Company Ltd. The shares are provided as part of the overall fee which is not subject to the achievement of any defined performance targets. There were no changes in the fee structure in 2010 compared with 2009.
Except for the Chairman and Vice Chairman, Directors are remunerated with an annual basic fee of USD 205,000. One-third of this annual basic fee, i.e. USD 68,500, is allocated to sales restricted Zurich Financial Services Ltd shares. The fee is pro-rated for members leaving or joining during the year. Committee members receive an additional cash fee of USD 40,000 for all committees on which they serve, irrespective of the number of their committee work. In addition, the chair of each committee receives an annual fee of USD 20,000 and the chair of the Audit Committee receives an additional USD 10,000. Directors who reside in the United States receive an additional fee of USD 10,000 per annum. The committees on which the Directors serve is set out in the Corporate Governance Report on page 30. In addition to the above, where a Director is also a member of one or more subsidiary boards of Zurich Financial Services Group, the Director is entitled to an additional fee of USD 40,000 per annum plus USD 10,000 per annum if he or she also chairs an audit committee of such a board.
Based on this structure, the total aggregate fees allocated to the Directors of Zurich Financial Services Ltd and Zurich Insurance Company Ltd for the year ended December 31, 2010, amounted to USD 3,445,000. This included USD 2,553,625 in cash and a value at the allocation date of USD 901,375 in three-year sales restricted shares. The share price at the allocation date was CHF 246.50. The
Remuneration report continued corresponding amount for 2009 was USD 3,395,000, which comprised of USD 2,476,500 in cash and a value at the allocation date of USD 918,500 in three-year sales restricted shares. The share price at the grant date in 2009 was CHF 197.10.
Of which allocated in Shares 6, 12 1 The remuneration shown in the tables does not include any business-related expenses incurred in the performance of the Board members’ services. 2 Committee members receive a cash fee of USD 40,000 for all Committees on which they serve, irrespective of the number. The Committees on which the Board members serve are set out in the Corporate Governance Report on page 30.
3 Committee chairs receive an annual fee of USD 20,000 and the chair of the Audit Committee receives an additional USD 10,000. The Committees on which the Board members serve and the chairs are set out in the Corporate Governance Report on page 30. 4 Directors who reside in the US receive an additional fee of USD 10,000 per annum. 5 The cash fees are defined in US Dollars, but paid in the actual currencies where the Board members reside, based on the relevant exchange rate at the dates of the payment. 6 The shares allocated to the Directors are sales-restricted for three years. 7 As of June 30, 2010, Mr Gentz was allocated 1,071 shares and the other Board members were allocated 314 shares based on a full year’s membership. The share price (CHF
246.50) and the exchange rate (USD / CHF 1.131) as of June 15, 2010, were adopted to calculate the number of shares based on the fixed portion of the fee allocated in shares for the respective members. Where the value of the allocated shares did not equal the value of the portion of the fee to be allocated in shares, the difference was paid in cash. The amounts shown in the table above reflect the fixed amount in U.S. dollars of the portion of the fee to be allocated in shares.
11 In line with applicable laws, Zurich paid the company-related portion of contributions to social security systems, which amounted to USD 85,136 in 2010. The corresponding contributions amounted to USD 80,670 in 2009. Any personal contributions of the Directors to social security systems are included in the amounts shown in the table above.
The current fee structure for Directors has been in effect since 2007 with the current fee level for the Chairman being effective from January 1, 2008. With the help of its advisers, the Remuneration Committee has reviewed the current fee structure against relevant market levels including the payments being made for the insurance companies in the Dow Jones Titan Index and the larger companies in the Swiss SMI Index. These comparisons indicated that the current fee structure has fallen behind prevailing market levels, one important reason being that the current fee structure for all Directors is established in US Dollars and the currency has depreciated significantly in recent years. Further to the review, the Board has agreed to make amendments and the following fee structure will be effective for 2011; all fees will be determined in Swiss Francs, the total fee for the Chairman will be CHF 1,000,000 and the fee for the Vice Chairman will be CHF 375,000. The fee for all other Directors will be CHF 240,000 and they will receive an additional fee of CHF 50,000 for their committee work irrespective of the number of committees they serve on. In addition, the chair of each committee will receive an annual fee of CHF 30,000 and the chair of the Audit Committee will receive an additional supplement of CHF 10,000. The additional fee that has previously been paid to those Directors resident in the United States will be eliminated. As in the past, approximately one-third of the fee for the Chairman and one third of the basic fee for all other Directors will be allocated in three year sales restricted shares with the balance of fees being paid in cash. In addition to the above, where a Director is also a member of a subsidiary board of Zurich Financial Services Group, the Director is entitled to an additional fee of CHF 50,000 per annum plus CHF 10,000 per annum if he or she also chairs the audit committee of such board.
Remuneration for former Directors No benefits (or waiver of claims) have been provided to former members of the Boards during the year 2010, nor were any provided during the year 2009.
Share plans for Directors The members of the Board of Directors of Zurich Financial Services Ltd and Zurich Insurance Company Ltd do not participate in any of the share-based incentive plans established for executive management. However, as mentioned above, part of the fees of the Directors of Zurich Financial Services Ltd are allocated to three-year sales restricted shares. As mentioned above, the shares provided to Directors are part of the overall fee and are not subject to the achievement of any defined performance targets.
Related parties to the Directors or to former members of the Board No benefits (or waiver of claims) have been provided to related parties of the Directors or related parties of former members of the Boards during the years 2010 and 2009, respectively. Neither had any related party of the Directors or of former members of the Boards outstanding loans, advances or credits as of December 31, 2010 and 2009.
Group Executive Committee Remuneration of the Group Executive Committee The total remuneration of the members of the GEC for 2010 comprised the value of cash remuneration (including short-term cash incentive), pensions, other remuneration and the target equity grants made under the Group’s Long-Term Incentive Plan in 2010.
The remuneration structure and the mix of the individual remuneration elements for GEC members are determined by taking into account relevant market practices and internal relativities.
As can be seen from the above charts, there is an appropriate balance of the remuneration elements with a significant emphasis on performance related remuneration through both the Short-Term Incentive Plan and Long-Term Incentive Plan. The distribution of the target values between short-term (one year) and long-term incentives (three years) shows an emphasis towards long-term incentives.
The total value for 2010 comprises the following elements (the comparative figures for 2009 are shown in the table on total remuneration for all GEC members): Base salaries and annual cash incentives paid for 2010 The total amount of base salaries and annual cash incentive awards earned under the Short-Term Incentive Plan for 2010 was USD 25.0 million. This comprised USD 11.4 million in base salaries and USD 13.6 million in annual cash incentive awards, which reflect the amounts to be paid in 2011 for 2010 performance. As set out on page 51 the annual cash incentive awards are determined individually and are performance based.
Overall funding for the incentives is based on the overall group profit performance in 2010 and actual awards to individuals are based on a combination of factors, including the results of the business that the GEC member is responsible for and their individual performance with regard to the accomplishment of strategic objectives during the year. For members of the GEC, including the CEO, the target levels under the Short-Term Incentive Plan for 2010 were set at 100 percent of the base salary. The maximum award for all GEC members, including the CEO, is 200 percent of the target level.
Value of pension benefits accruing during 2010 Members of the GEC participate in the pension plan arrangements of the business units in which they are employed. The Group’s philosophy is to provide pension benefits through cash balance and/or defined contribution plans where funds are accumulated throughout a career to provide retirement benefits. The majority of GEC members participate in such plans and, over time, all future GEC members will participate in such plans. The other GEC members continue to participate in defined benefit plans that provide retirement benefits based on final pensionable earnings and the number of years of service. The normal retirement ages vary from 60 to 65. The total value of pension benefits accruing to members of the GEC during 2010, calculated on the basis of the service costs for the company as assessed under IAS 19 accounting principles, was USD 3.0 million. Service costs value the amount of the pension benefits accruing during the year and for defined contribution plans take the amount of the company contribution paid during the year.
Value of other remuneration paid in 2010 Members of the GEC received other remuneration in 2010 in relation to employee benefits, expatriate allowances, perquisites, benefits-in-kind and any other payments due under each member’s employment contract, including any termination payments accrued during the year for members giving up their function during the year. The total value of the other remuneration elements in 2010 was USD 3.6 million. Benefits-in-kind have been valued using market rates.
CEO, the value of the target grants in 2010 was set between 100% and 175% of the base salary.
No restricted share grants were made to members of the GEC during 2010 and 2009.
Share option grants The total number of target share option grants made to members of the GEC during 2010 was 260,324. This compares with an equivalent figure of 146,867 for 2009. The value of the target share option grants made on April 5, 2010 was USD 7.1 million at the date of grant, based on the assumption of 100 percent vesting and the BlackScholes valuation of the options at the date of grant. For those GEC members who joined during 2010 the number and the value of the option grants is based on the grant for 2010 pro-rated for the time spent as a GEC member during the year.
The number of share option awards that vested in 2010 to members of the GEC serving in 2010 from the share option grants made in 2007, 2008 and 2009 was 217,337. This represented a basic vesting level of 153 percent of target given the actual ROE and TSR performance achievements.
4 The amounts reflect the total value of pension benefits accruing to members of the GEC during 2010 and 2009, respectively, calculated on the basis of the Service Costs for the company as assessed under IAS 19 accounting principles. Service Costs value the amount of the pension benefits accruing during the year and for defined contribution plans takes the amount of the company contribution paid during the year. Service Costs do not include the interest costs on accrued benefits, adjustments for actuarial gains and losses, nor the expected return on any assets held.
in USD million, for the years ended December 31All GEC members 1
Base remuneration 1.55 1.50 Cash incentive awards earned for the year 2.55 4.05 Service Costs for pension benefits 2 0.20 0.95 Value of other remuneration 3 0.10 0.85 Value of target performance share and restricted share grants 4 1.30 2.25 Value of target performance option grants 4 1.30 2.25 1 The remuneration shown in the table does not include any business related expenses incurred in the performance of the CEO’s services. 2 The amounts reflect the total value of pension benefits, calculated on the basis of the Service Costs for the company as assessed under IAS 19 accounting principles. Service
5 Mr Senn’s remuneration is paid in Swiss Francs. The amounts have been converted from Swiss Francs to US Dollars at the relevant exchange rates throughout the year and the cash incentive to be paid in 2011 has been converted at the year-end rate in 2010.
Based on these figures, the value of the total remuneration for all members comprises 40 percent (prior year 35 percent) in fixed remuneration elements (comprising base salaries, service costs for pension benefits and other remuneration) and 60 percent (prior year 65 percent) in performance related components (comprising the cash incentive awards under the ShortTerm Incentive Plan together with the value of the target performance share grants, restricted share grants and share option grants).
6 The share and share option grants will vest in the future according to achievement of defined performance conditions. The value of the share and share options assumes that the grant will vest in the future at 100% of the target level with the valuation of the options based on the Black-Scholes option pricing model as set out in Note 25 to the consolidated financial statements, the valuation of the target performance share grants based on the share price on the day prior to the grants (CHF 259.90 for 2010 and CHF 198.10 for 2009).
7 In line with applicable laws where the executives are employed, Zurich paid the company-related portion of contributions to social security systems, which amounted to USD 2.1 million in 2010 and to USD 1.9 million in 2009. Since the contributions are based on full earnings, whereas benefits are capped, there is not a direct correlation between the costs paid to the social security system and the benefits received by the executives.
Remuneration for former Group Executive Committee members In connection with the transition of duties from the former CEO, James J. Schiro to Martin Senn, Zurich entered into an agreement with Mr Schiro for him to provide expertise and advice during the first six months of 2010. For these services Mr Schiro received fees and benefits in the amount of USD 0.3 million. Besides these payments no benefits (no waiver of claims) have been provided to former members of the GEC during the year 2010, nor during the year 2009.
Within the context of the Group’s Long-Term Incentive Plan, these performance share grants are considered for vesting in one-third installments during the three years after the grant. The actual level of vesting is determined in accordance with the remuneration principles set out above on page 49 and the Long-Term Incentive Plan Vesting Matrix as described on page 53.
Restricted share grants There were 987 restricted shares outstanding as of December 31, 2010 for members of the GEC (4,377 restricted shares were outstanding at the end of 2009).
Share option grants Under the share option program for senior management, the Group has issued share options in the past to individuals within defined rules. As mentioned above, starting in 2011 there will be no further option grants.
The first share option grant was made in 1999 and regular annual grants have been made since then. Prior to 2003, option grants were typically made on the basis of a seven-year option term, a three-year vesting period and an exercise price set at a 10 percent premium to the market rate during the month prior to the grant date. Under the rules of the plan, other parameters are allowed for option grants made under the share option program. In connection with the re-design of the Long-Term Incentive Program in 2003, the exercise price for the options granted since then has been set at the market price on the day prior to the date of grant. The performance based option grants are considered for vesting in one-third installments during the three years after the grant. The actual level of vesting is determined by the Long-Term Incentive Plan Vesting Matrix as described on page 53. Option grants were made each year on the third working day in April.
Share grants Performance share grants The total number of target performance share grants outstanding as of December 31, 2010 for members of the
Year of expiry as of December 31, 2009Summary of outstanding options, 2009
2 The distribution of the vested options according to the grants identified in the tables “Summary of outstanding options” is shown in the table below. 3 Mr Schiro retired from his function as Chief Executive Officer on December 31, 2009. The share amount includes an amount of 3,800 shares as of December 31, 2009 for Mr
The following tables show how the totals of the vested share options owned by the GEC members are distributed according to the grants identified in the tables “Summary of outstanding options” as of December 31, 2010 and 2009, respectively.
CHF 1,000,000. Apart from this, no former members of the GEC had any outstanding loans, advances or credits as of December 31, 2009.
All employees The following chapter includes the information regarding the total remuneration earned by employees for the financial year 2010 across the Group, including the remuneration for GEC members. The information provided is set out in accordance with the additional disclosure requirements set out in the FINMA Circular on Remuneration Schemes, applicable for the first time in 2010. Comparative year-on-year figures will be provided in the future.
• The total amount of sign-on incentive payments made in the performance year. These payments were made to people whose hire date was in 2010.
Total remuneration Combining the fixed and variable remuneration the total remuneration for all employees is as follows: Cash – fixed 3,746 Cash – variable1 527 Shares2 92 Options3 28 Other4 963 Total remuneration 5,356 1 Includes cash incentive awards, sign-on and severance payments in cash. 2 Includes performance share grants, restricted share grants and sign-on payment in shares. 3 Includes performance option grants. 4 Includes other remuneration and pension benefits.
The figures do not include any charges or credits that derive from remuneration paid out during the financial year 2010 that derive from previous financial years: Commission payments made to employed sales agents are not included in the calculation of the Total Variable Remuneration Pool. The sales commission plans of the employed agents are not considered part of the profitability based incentive plans. Sales commissions, like the commissions paid to a broker or other external distributors represent a distribution cost and not an incentive cost. The employed sales agents do not generate financial risks as they are not involved in establishing the price levels for the products they sell. With regard to operational and reputation risks, in particular due to potential mis-selling, the control of these risks is addressed by the mandatory and Groupwide adherence to the Zurich Risk Policy and Zurich Basics, the Group’s code of conduct.
Sign-on and severance payments for Key Risk Takers As mentioned above, the Group as a principle does not grant sign-on or severance payments. However, if circumstances in the Group’s interest warrant such payments, these can be approved through a clear governance process. With regard to the disclosure of sign-on and severance payments for the individuals that have a material influence on the risk profile of the Group, a population of approximately 100 key positions as defined by the Board of Directors are taken into account. The following sign-on and severance payments were made to this group of individuals in 2010: 2010 # of beneficiaries
Sign-on payments paid in / number of beneficiaries1 – – Severance payments paid in / number of beneficiaries2 1 2 Total of sign-on and severance payments 1 2 1 Sign-on payments are a one-time commitment to make payments that are agreed on the execution of an employment contract which can include remuneration for incentives foregone with a previous employer.
in USD million, for the year ended December 31Sign-on and severance payments for Key Risk Takers
Business operating profit 4,875 5,593 (13%) Net income attributable to shareholders 3,434 3,963 (13%)
General Insurance gross written premiums and policy fees 33,066 34,157 (3%) Global Life gross written premiums, policy fees and insurance deposits 27,675 26,029 6% Farmers Management Services management fees and other related revenues 2,778 2,690 3% Farmers Re gross written premiums and policy fees 4,194 6,615 (37%)
Group investments average invested assets 3 195,532 187,063 5% Group investments result, net 7,990 5,929 35% Group investments return (as % of average invested assets) 4.1% 3.2% 0.9 pts Total return on Group investments 5.4% 6.4% (1.1 pts)
Business operating profit by segment in USD millions, for the years ended December 31
Zurich Financial Services Ltd and its subsidiaries (collectively “the Group”) delivered full year results for the year ended December 31, 2010, that reflect its strong focus on profitability with robust underlying performances from all core businesses despite difficult underlying economic conditions in many of the markets in which the Group operates. Group results were also impacted by a number of significant events during the year.
• Global Life business operating profit remained flat at USD 1.5 billion in U.S. dollar terms, and increased by 1 percent on a local currency basis. Allowing for special operating items, which were lower than in 2009, underlying performance improved by 7 percent driven by increases in the expense and risk margins.
Other Operating Businesses business operating loss increased by USD 190 million to USD 801 million reflecting a normalized run-rate for Group financing costs, with 2009 having benefited from one-off gains associated with the buyback of subordinated debt.
Non-Core Businesses reported a business operating loss of USD 157 million compared with USD 290 million in 2009. The loss for the year included the increase of USD 330 million in banking loan loss provisions relating to commercial loans on property development in the UK and Ireland booked in the second quarter of 2010. The reduced losses compared with 2009 arose principally from the effect of losses in 2009 driven by volatile financial markets, the impact of which has been mitigated in 2010 through the dynamic hedge strategy implemented in March 2010.
• Global Life gross written premiums, policy fees and insurance deposits increased by USD 1.6 billion to USD 27.7 billion, or by 6 percent in U.S. dollar terms and 9 percent on a local currency basis. This increase was primarily driven by higher levels of new business, particularly in single premium products but also from continued focus on in-force management.
Net income attributable to shareholders decreased by USD 529 million to USD 3.4 billion, or by 13 percent as a result of the lower business operating profit. Net investment gains were largely offset by the costs of the class action lawsuit settlement in the U.S. and by the effect of the restatement on the 2009 result as a consequence of the change of measurement to a fair value basis for a closed life insurance book in the U.S.
ROE of 11.4 percent was affected by the decrease in net income attributable to shareholders and the continued strengthening of the Group’s capital position. BOPAT ROE was 12.9 percent. Diluted earnings per share decreased by 18 percent to CHF 24.38 for the year ended December 31, 2010, compared with CHF 29.88 in 2009.
Gross written premiums and policy fees 33,066 34,157 (3%) Net earned premiums and policy fees 27,837 29,071 (4%) Insurance benefits and losses, net of reinsurance (19,795) (20,622) 4% Net underwriting result 577 930 (38%) Net investment income 2,867 3,070 (7%) Net non-technical result (excl. items not included in BOP) (796) (650) (22%) Business operating profit 2,673 3,463 (23%) Loss ratio 71.1% 70.9% (0.2 pts) Expense ratio 26.8% 25.9% (0.9 pts) Combined ratio 97.9% 96.8% (1.1 pts)
Gross written premiums and policy fees decreased by USD 1.1 billion to USD 33.1 billion or 3 percent in both U.S. dollar terms and on a local currency basis. In line with the strategy to maintain margins, average rate increases of 2 percentage points were achieved, with increased rates in European markets while the Group’s North American rates remained broadly flat in a market environment of reduced rates. The depressed levels of economic activity have reduced many insured customer exposures and lower levels of new business activity have also been evident in European and North American markets. Despite this, premium growth has been achieved in International Markets, as well as in certain commercial units in North America and specific market segments in Europe. In the North American market, where insured customer exposures are lower than in the prior year, competitors have aggressively defended their portfolios and the market continued to experience rate decreases. However, North American new business and customer retention levels continued to develop favorably. European volumes continue to be under pressure because of higher unemployment and other recessionary impacts. In the personal lines motor business, underwriting actions implemented to restore margins have impacted new business and retention levels negatively.
The net underwriting result decreased by USD 352 million to USD 577 million, or by 38 percent. The combined ratio was 97.9 percent, a deterioration of 1.1 percentage points compared with 2009. The loss ratio was impacted by the earthquakes in Chile and New Zealand, the floods in Australia and Tennessee, and the higher occurrence of severe weather in North America and Europe compared with an average experience in 2009. In addition, higher levels of large losses were experienced when compared with 2009. The loss ratio benefited from higher favorable development of reserves established in prior years as well as from a lower underlying loss ratio with increases in rates and targeted underwriting actions now improving the result. The expense ratio developed unfavorably by 0.9 percentage points to 26.8 percent driven largely by the reduction in net earned premiums resulting from lower business volumes, return premiums and reinsurance reinstatement premiums.
Business operating profit decreased by USD 46 million to USD 741 million, or by 6 percent in U.S. dollar terms and 7 percent on a local currency basis. The decrease was attributable to losses incurred by corporate customers from the Chilean and New Zealand earthquakes, floods in Australia and Tennessee and a higher occurrence of large losses. The underlying loss ratio improved compared with 2009. Investment income was lower due to reduced yields, repatriation of capital to the Group and a reduction in hedge fund gains compared with 2009. The non-technical result benefited from favorable foreign currency gains on transactions and some non-recurring provision releases.
Gross written premiums and policy fees were USD 7.6 billion, nearly flat in both U.S. dollar and local currency terms. Global Corporate continued to focus on underwriting and pricing discipline. As a result average rate increases of 1 percent were achieved on business written with most of the increases arising in European markets while rates in North America showed a slight negative trend. Towards the end of the year, growth in European property lines was achieved. Recession-related impacts on insured customer exposures also resulted in lower premiums. In North America, the market environment remained very competitive, and reduced new business volumes were accepted in order to maintain required margins. Premiums in Asia-Pacific and the Middle East increased 52 percent, although from a small base, reflecting the strategy to expand the Group’s presence in those markets. This, together with improved retention levels compared with 2009, helped maintain overall volumes.
The net underwriting result decreased by USD 41 million to USD 217 million, or by 16 percent. This was reflected in the increase of 0.2 percentage points in the combined ratio to 97.1 percent. The loss ratio improved compared with the prior year by 1.2 percentage points driven by higher favorable development of reserves established in prior years and a slightly lower level of large losses; however, these improvements were partially offset by higher weather-related losses. The expense ratio increased by 1.5 percentage points driven mostly by a reduction in earned premiums that was due to lower premium volume and return premiums. The commission ratio improved slightly due to the impact of changes in the business mix, but this was partially offset by profit commissions paid relating to profits arising from the prior year on crop business. The other underwriting expense ratio increased as a result of the lower earned premiums, while absolute underlying expenses increased only marginally, primarily as a result of non-recurring items benefiting the prior year results.
Gross written premiums and policy fees decreased by USD 1.3 billion to USD 13.3 billion or by 9 percent in U.S. dollar terms and 7 percent on a local currency basis. The market environment in many European countries remains challenging with depressed economic activity and higher unemployment levels impacting commercial lines premium volumes in particular. The personal lines businesses throughout Europe remained focused on improving margins and as such an average rate increase of 5 percent has been achieved. The rate and segmented underwriting strategies for personal lines businesses have impacted new business and renewal premiums while keeping the retention ratio broadly flat. Selective premium growth was achieved in certain segments of commercial and specialties lines of business.
The net underwriting result increased by USD 105 million to USD 327 million or by 47 percent in U.S. dollar terms and 37 percent on a local currency basis. The rate actions and underwriting improvement strategies contributed to an improvement in the loss ratio of 1.7 percentage points to 71.9 percent. However, lower favorable development of reserves established in prior years had an adverse impact, particularly in Germany as certain longer tail business has developed unfavorably. In addition, some countries continued to experience adverse claims development in motor, particularly in the UK, where the increase in the underlying loss ratio was attributable to continuing claims farming activity. In Italy, efforts to improve profitability through rate increases and targeted underwriting actions have progressively improved the underlying loss ratio and the business achieved a significant improvement in the underwriting result, with a return to profitability in the second half of the year. The increase in the expense ratio was driven by the impact of lower earned premiums as volumes have fallen, as well as a number of one-off items.
Business operating profit decreased by USD 122 million to USD 48 million, or by 72 percent in U.S. dollar terms and 43 percent on a local currency basis. The decrease was attributable to a lower underwriting result in both the AsiaPacific and Latin America regions due to earthquakes in Chile, Mexico, Australia and New Zealand, as well as severe weather events in Australia, including the floods in Queensland in late December. Between the Chile earthquake and the Queensland floods alone, International Markets was impacted by USD 47 million in 2010. This result was partially offset by an improved investment result driven by higher yields and a non-technical benefit related to currency revaluations in Latin America.
The net underwriting result decreased by USD 166 million to a loss of USD 102 million, reflected in the combined ratio of 104.6 percent, an increase of 7.8 percentage points. The impact of natural catastrophes, particularly the earthquakes in Chile, Mexico, Australia and New Zealand, the floods in Australia and other severe weather losses as well as a higher frequency of large losses resulted in an increase in the loss ratio to 68.3 percent, equivalent to an increase of 6.8 percentage points. The higher expense ratio was driven by costs related to investment in the Asia-Pacific region, coupled with higher marketing expenses in Japan. The underlying expense ratio in Latin America remained flat.
New Business – highlights New business annual premium equivalent (APE) 3,699 3,667 1% Present value of new business premiums (PVNBP) 31,399 29,515 6% New business margin, after tax (as % of APE) 22.1% 21.3% 0.8 pts New business margin, after tax (as % of PVNBP) 2.6% 2.6% 0 pts New business value, after tax4 817 782 4%
New business value, after tax, increased by USD 35 million to USD 817 million or by 4 percent in U.S. dollar terms and 7 percent on a local currency basis. Growth was driven by a combination of increased volumes and continued focus on high-margin business, resulting in a new business margin, after tax, of 22.1 percent, or an increase of 0.8 percentage points. The major contributors to the increase in new business value were improved margins in Bank Distribution, growth in IFA/Broker value, continued strong growth in Corporate Life & Pensions, and growth in the Direct and Central Initiatives pillar, partly offset by lower value contributed by the Agents pillar. The improved margins in Bank Distribution were achieved through a focus on sales of higher margin products, especially in Germany and Spain, that more than compensated for the impact of reduced volumes of savings products in markets where the Group did not compete with uneconomic pricing behaviors. The growth in IFA/Broker value was driven by strong growth in Italy and the UK from the European hub in Ireland, and increased margins in Germany. The strong growth in Corporate Life & Pensions resulted from the effective execution of the distribution strategy through employee benefit consultants in the UK and Latin America. Direct and Central Initiatives value increased as a result of growth in fee-based businesses in the UK and direct marketing initiatives in Japan. These improvements in new business value were partly offset by lower value contributed by the Agents driven businesses in the U.S., Switzerland and Hong Kong due to interest rate development and reduced volumes.
Net reserves increased by USD 7.0 billion to USD 187.2 billion or by 4 percent in U.S. dollar terms and 7 percent on a local currency basis. The net reserves increased due to increased net policyholder flows and the recovery of financial markets. Assets under management increased by 4 percent in U.S. dollar terms and by 6 percent on a local currency basis, compared with December 31, 2009. Net policyholder flows increased by USD 86 million to USD 5.5 billion in U.S. dollar terms driven by new business flows.
Bank Distribution increased new business value by USD 22 million to USD 213 million or by 12 percent in U.S. dollar terms and 19 percent on a local currency basis. This improvement was predominantly driven by higher volumes and margin improvements in Germany and higher margins in Spain due to growth in protection sales, as well as higher margins generated through Global Life’s banking partners in the UK which together more than offset reduced volumes of short-term savings products in Spain.
Corporate Life & Pensions increased new business value by USD 23 million to USD 124 million or by 23 percent in U.S. dollar terms and 23 percent on a local currency basis. This growth was mainly driven by increased pension sales in the UK, increased protection sales in Latin America, and increased margins in international corporate business.
Farmers business operating profit was USD 1.7 billion, compared with USD 1.6 billion for 2009. Farmers Management Services contributed USD 1.4 billion compared with USD 1.3 billion and Farmers Re contributed USD 321 million compared with USD 228 million.
Management and other related expenses increased by USD 41 million to USD 1.4 billion or by 3 percent driven by an increase of USD 63 million related to the full year costs from 21st Century. The underlying expenses of the remaining business were lower compared with 2009 reflecting continued strict expense discipline and the benefits of ongoing operational transformation. Overall, the gross management result improved by USD 47 million to USD 1.3 billion, or by 4 percent, while the managed gross earned premium margin improved by 0.1 points to 7.3 percent.
Business operating profit increased by USD 93 million to USD 321 million, or by 41 percent. This result was driven by favorable loss trends. On June 30, 2010, the All Lines quota share participation with the Farmers Exchanges, which are managed but not owned by Farmers Group, Inc., a wholly owned subsidiary of the Group, reduced from 35 percent to 25 percent and further reduced to 12 percent on December 31, 2010. In 2009, participation changed in various steps from 25 percent to 37.5 percent during the year. As a result of these changes in participation and the consequent portfolio transfers, gross written premiums and policy fees decreased by USD 2.4 billion to USD 4.2 billion or by 37 percent compared with 2009.
The loss ratio improved 1.7 percentage points as a result of favorable underwriting trends, particularly in the auto and homeowner lines of business, compared with 2009. The higher expense ratio resulted from an increase in the ceding commission on the All Lines quota share reinsurance treaty, reflecting changes to the underlying business mix in the Farmers Exchanges.
Gross written premiums 18,131 17,620 3% Gross earned premiums 18,311 17,885 2%
Gross earned premiums in the Farmers Exchanges, which are managed but not owned by Farmers Group, Inc., a wholly owned subsidiary of the Group, increased by USD 426 million to USD 18.3 billion or by 2 percent driven by the 21st Century acquisition in July 2009, partly offset by lower gross earned premium in the other lines of business.
Centre business operating profit decreased by USD 121 million to a profit of USD 39 million, mainly driven by a lower positive impact of financial markets on an insurance portfolio where both assets and liabilities are carried at fair value, and from reserve increases. Banking activities decreased by USD 125 million to a loss of USD 307 million. The loss for the year included the increase of USD 330 million in banking loan loss provisions relating to commercial loans on property development in the UK and Ireland booked in the second quarter 2010, compared with provisions of USD 236 million booked in 2009. Subsequent reviews of the provisions in the second six months of the year have not resulted in any further increases. Centrally managed businesses, which comprise portfolios that are managed with the intention to achieve a profitable run-off over time, improved by USD 392 million to a profit of USD 113 million, primarily driven by the lower impact of reserve increases as a consequence of the implementation of a dynamic hedge strategy in March 2010. As set out in note 1 of the audited Consolidated financial statements, there has been a change in accounting policy for a closed book of variable annuity products in the U.S. Along with the implementation of the dynamic hedge strategy, this has reduced future volatility and the economic exposure associated with this block of business. Additionally, the loss in the prior year reflected an increase of certain life insurance reserves addressing policyholders’ behavior.
Unit-linked investments increased by USD 8.8 billion to USD 107.9 billion, or by 9 percent since December 31, 2009. On a local currency basis, unit-linked investments increased by USD 12.8 billion, or 13 percent, driven by positive cash flows and performance of financial markets in 2010. This increase is mirrored in higher unit-linked insurance and investment contract liabilities.
Net investment income 7,092 7,505 (5%) Net capital gains/(losses) on investments and impairments 898 (1,576) nm of which: net capital gains/(losses) on investments and impairments attributable to shareholders 279 (1,528) nm
Total return, net of investment expenses, on average Group investments was positive 5.4 percent. Debt securities, which are invested to match the Group’s insurance liability profiles, returned 5.2 percent. Equity securities returned 18.2 percent, as equity markets recovered to the highest level since September 2008 and other investments, mostly real estate and mortgages, returned 2.7 percent.
in USD millions, as ofBreakdown of investments in USD millions, for the years ended December 31Performance of Group investments
Total net investment income decreased by USD 413 million to USD 7.1 billion, or by 5 percent in U.S. dollar terms and 4 percent on a local currency basis. Net investment income yield was 3.6 percent, a decrease of 38 basis points compared with the prior year. This decrease was driven by cash balances yielding lower returns and lower income returns from investing cash flows into debt securities at lower yields.
Total net capital gains on investments and impairments were USD 898 million, compared with losses of USD 1.6 billion in the prior year. The net capital gains comprised USD 1.5 billion of gains realized from active management, USD 384 million of gains from asset revaluations and USD 1.0 billion of impairments. The positive asset revaluations on securities designated as fair value through profit and loss were driven by gains on debt securities of USD 373 million and gains on equity securities of USD 294 million offset by negative revaluations on other investments of USD 283 million, largely due to derivatives. Impairments consisted of USD 497 million attributable to equity securities, USD 407 million to mortgages and other investments and USD 97 million to debt securities.
1 After deducting investment expenses of USD 532 million and USD 524 million for the for the years ended December 31, 2010 and 2009, respectively.
in USD millions, for the years ended December 31Performance of unit-linked investments
Reserves for losses and loss adjustment expenses The majority of the Group’s reserves for losses and loss adjustment expenses are attributable to General Insurance. The remaining reserves mostly relate to Farmers Re and Non-Core Businesses.
Total net losses and loss adjustment expenses paid (23,240) (23,689) (19,408) (20,235)
The increase in the total net reserves during the year included USD 1.4 billion favorable development emerging from reserves established in prior years. This favorable development is primarily attributable to General Insurance and breaks down into many individual movements by business division, country, line of business, and accident year. In Global Corporate, favorable development of USD 443 million was approximately equally shared between North America and the rest of the world. North America Commercial favorable development of USD 434 million arose mostly from specialties, program, middle market commercial, and surety businesses. Europe General Insurance favorable development of USD 371 million arose from several European countries, except Germany, where the Group experienced adverse development of USD 155 million. The remaining favorable development came from Group Reinsurance, International Markets, and the assumed business from Farmers Re; this was somewhat offset by adverse development at Centre.
Reserves for life insurance contracts and liabilities for investment contracts The majority of the Group’s reserves for life insurance contracts and liabilities for investment contracts are attributable to Global Life. Life insurance reserves in other segments relate predominantly to companies that are in run-off or are centrally managed, and are included only in this first table.
Fee income and other expenses (1,875) (1,367) (1,995) (2,178) (3,870) (3,546) Interest and bonuses credited to policyholders 9,911 11,403 3,418 3,330 13,329 14,734
(Decreases)/increases recorded in other comprehensive income (35) 28 (193) 1,129 (228) 1,157
As of December 31 1 Includes reserves for unit-linked contracts, the net amounts of which were USD 50.0 billion and USD 46.5 billion, and liabilities for investment contracts, the net amounts of which were USD 50.9 billion and USD 46.4 billion as of December 31, 2010 and 2009, respectively.
3 The 2010 movement includes USD (884) million related to the reclassification to other reserves categories following the review of contract classification (see note 1 of the audited Consolidated financial statements) and USD (160) million related to loss of control of Caixa Sabadell (see note 5 of the audited Consolidated financial statements).
Total reserves and liabilities for insurance and investment contracts, net of reinsurance, increased by USD 7.1 billion or by 4 percent in U.S. dollar terms compared with December 31, 2009, and by USD 13.3 billion or by 7 percent on a local currency basis. The increase was driven by continuing improvements in financial markets and positive net policyholder flows, primarily driven by higher levels of new business, particularly in single premium products in the UK and the European hub in Ireland. These increases were partly offset by the impact of loss of control of Caixa Sabadell and decreases recorded in other comprehensive income due to changes in unrealized gains and losses.
in USD millionsGroup reserves for life insurance contracts, net of reinsurance, and liabilities for investment contracts in USD millionsGlobal Life – Development of reserves and liabilities
Other life insurance liabilities, net of reinsurance, decreased by USD 1.0 billion or by 1 percent in U.S. dollar terms compared with December 31, 2009, but increased by USD 915 million or by 1 percent on a local currency basis. The increase was driven by higher interest and bonuses credited to policyholders, offset by the combined effect of the loss of control of Caixa Sabadell in Spain (see note 5 of the audited Consolidated financial statements) and the reserve reclassification.
1 Deposits previously presented under operational debt related to banking activities (USD 814 million as of December 31, 2009) are now presented under "other liabilities". See notes 1 and 22 of the audited Consolidated financial statements.
2 The operational senior debt includes the book value of the USD 750 million senior debt issued under the EMTN Programme by Zurich Finance (Luxembourg) S.A. in September 2009, which was loaned directly to the Group’s capital markets and banking activities. This issue was recognized as operational debt by Moody’s but not by Standard & Poor’s. In addition, it includes an adjustment of USD 100 million for non-recourse debt.
As of December 31, 2009, as previously reported 29,678 1,800 31,478 Adjustment arising from the change in accounting policy 1 (374) – (374) As of December 31, 2009, as restated 29,304 1,800 31,104 Proceeds from issuance of share capital 205 – 205 Proceeds from treasury share transactions (61) – (61)
Net income after taxes 3,434 79 3,513 Net other recognized income and expenses 1,283 (92) 1,191
Total equity increased by USD 2.2 billion to USD 33.3 billion, or by 7 percent, compared with USD 31.1 billion as of December 31, 2009. Net income after taxes of USD 3.5 billion and net other recognized income and expenses of USD 1.2 billion more than offset the dividend payments of USD 2.2 billion. Changes in net other recognized income and expenses were driven by net unrealized gains of USD 2.1 billion, offset by changes in net actuarial losses on pension plans of USD 162 million and negative currency translation adjustments of USD 813 million.
Cash and cash equivalents as of January 1 1 16,389 15,009 Cash and cash equivalents as of December 31 1 15,721 16,389
Net cash provided by operating activities, which includes cash movements in and out of, as well as within, total investments, was USD 2.3 billion for the year ended December 31, 2010. Net cash used in investing activities of USD 135 million was primarily related to net cash outflows from purchases and sales of property and equipment and the acquisition of Compagnie Libanaise d’Assurances SAL for USD 48 million. Net cash outflows from financing activities of USD 2.5 billion were primarily the result of the payment of dividends of USD 2.2 billion (see Capitalization section) and the repayment of outstanding debt of USD 200 million (see Indebtedness section).
The income statements are translated at average exchange rates. Throughout 2010, the U.S. dollar has on average been stronger against the euro and the British pound, but has been weaker against the Swiss franc compared with 2009. The result has been a reduction in U.S. dollar terms in gross written premium which was partially compensated by a favorable impact on insurance benefits and losses.
Total investments (5,382) (2%) Reserves for insurance contracts, gross (4,134) (2%) Cumulative translation adjustment in shareholders’ equity (729) (2%)
Analysis by risk type Risk type description 101 Strategic risk 101 Insurance risk 102 Market risk 109 Credit risk 115 Liquidity risk 122 Operational risk 124 Risks to the Group’s reputation 125
Capital management and analysis of capital adequacy Capital management 126 Analysis of capital adequacy 127
The Group’s major risk management objectives are to: • Protect the capital base by monitoring that risks are not taken beyond the Group’s risk tolerance
• Enhance value creation and contribute to an optimal risk-return profile by providing the basis for an efficient capital deployment
To support the governance process, the Group relies on documented policies and guidelines. The Zurich Risk Policy is the Group’s main risk governance document; it specifies risk limits and authorities, reporting requirements, procedures to approve any exceptions and procedures for referring risk issues to senior management and the Board of Directors. Limits are specified per risk type, reflecting the Group’s willingness and ability to take risk, considering earnings stability, economic capital adequacy, financial flexibility and liquidity, franchise value and reputation, the Group’s strategic direction and operational plan, and a reasonable balance between risk and return, aligned with economic and financial objectives. The Group regularly enhances the Zurich Risk Policy to reflect new insights and changes in the Group’s environment and to reflect changes to the Group’s risk tolerance. In 2010, the Zurich Risk Policy was updated and strengthened for various areas, including liquidity risk, remuneration, information risk and country risk. Related procedures and risk controls were strengthened or clarified for these areas.
One of the key elements of the Group’s risk management framework is to foster risk transparency by establishing risk reporting standards throughout the Group. The Group regularly reports on its risk profile, current risk issues, adherence to its risk policies and improvement actions both at a local and on a Group level. The Group has procedures in place for the timely referral of risk issues to senior management and the Board of Directors.
The Group also seeks external expertise from its International Advisory Council, Natural Catastrophe Advisory Council and Climate Change Advisory Council to better understand and assess risks, particularly regarding areas of complex change. For discussion of these councils, see the Corporate Governance Report (unaudited). In addition, the Investment Management Advisory Council provides feedback to Investment Management on achieving superior risk-adjusted returns versus liabilities for the Group’s invested assets.
Risk review member of the Risk Committee and vice-versa. The Risk Committee met six times in 2010.
At a Group level the management committees dealing with risks are: • Group Balance Sheet Committee (GBSC) – acts as a cross-functional body whose main function is to control the activities that materially affect the balance sheets of the Group and its subsidiaries. The GBSC is charged with setting the annual capital and balance sheet plans for the Group based on the Group’s strategy and financial plans, as well as recommending specific transactions or unplanned business changes to the Group’s balance sheet. The GBSC has oversight of all main levers of the balance sheet. It assesses the Group’s capital adequacy, reinsurance, level of return, and desired growth. The GBSC reviews and recommends the Group’s overall risk tolerance. It is chaired by the CEO.
The management committees rely on output provided by technical committees, including: • Asset/Liability Management and Investment Committee (ALMIC) – deals with the Group’s asset/liability exposure and investment strategies and is chaired by the Chief Investment Officer.
Group Risk Management organization The Chief Risk Officer leads the Group Risk Management function, which develops methods and processes for identifying, measuring, managing, reporting and monitoring risks throughout the Group. Group Risk Management proposes changes to the risk management framework and the Group’s risk policies; it makes recommendations on the Group’s risk tolerance and assesses the risk profile. The Chief Risk Officer is responsible for the oversight of risks across the Group; he regularly reports risk matters to the Chief Executive Officer, senior management committees and the Risk Committee of the Board.
In addition to the risk management network, the Group has a set of audit, risk and control committees that encompass the major business reporting areas and business units. Each committee has terms of reference tailored to its specific business area and local requirements. In particular, the committees are responsible for providing oversight of activities, organization and quality of the risk management and control functions. This includes monitoring adherence to policies and periodic risk reporting. Risk reporting to regional management and audit committees is coordinated in the context of Zurich’s integrated assurance approach with other assurance, governance and control, technical and business functions to provide a holistic view of risks.
• Liquidity – risk that the Group does not have sufficient liquidity to meet its obligations when they fall due, or would have to incur excessive costs to do so
• Reputation – risk that an act or omission by the Group or any of its employees could result in damage to the Group’s reputation or loss of trust among its stakeholders
In 2010, the Group enhanced its assessment of strategic risks by implementing procedures to aggregate and analyze its exposures by country. This helps the Group evaluate when making strategic decisions whether its aggregated exposures, including insurance and investment exposures, to a country could become overly concentrated.
The Group specifically evaluates the risks of M&A transactions both from a quantitative and a qualitative perspective. The Group conducts risk assessments of M&A transactions to evaluate risks specifically related to the integration of acquired businesses.
Insurance risk is the inherent uncertainty regarding the occurrence, amount or timing of insurance liabilities. The exposure is transferred to Zurich through the underwriting process. Zurich actively seeks to write those risks it understands and that provide a reasonable opportunity to earn an acceptable profit. As Zurich assumes certain customer risks, it aims to manage that transfer of risk, and minimize unintended underwriting risks, through such means as: • Establishing limits for underwriting authority • Requiring specific approvals for transactions involving new products or where established limits of size and complexity may be exceeded
• Using a variety of reserving and modeling methods to address the various insurance risks inherent in the Group’s insurance business
• Ceding insurance risk through proportional, nonproportional and specific risk reinsurance treaties. The Group centrally manages reinsurance treaties.
• Special lines include directors and officers, credit and surety, crime and fidelity, accident and health, and crop.
The Group’s underwriting strategy is to take advantage of the diversification of general insurance risks across industries and geographic regions in which the Group operates. The Group seeks to optimize shareholder value by achieving its mid-term return on equity goals. Doing so necessitates a prudent, stable underwriting philosophy that aims to take advantage of its competitive strengths while avoiding risks with disruptive volatility. At the core of the Group’s underwriting is a robust governance process. The Group’s four major processes for underwriting governance – underwriting strategy, authorities, referrals and reviews – are implemented at Group and local levels.
The Group faces the risk that actual losses emerging on claims provisions may be higher than anticipated. Because of this uncertainty, General Insurance reserves are regularly measured, reviewed and monitored. The total loss and loss adjustment expense reserves are calculated based on work performed locally by qualified and experienced actuaries. To arrive at their reserve estimates, the actuaries take into consideration, among other things, the latest available facts, historical trends and patterns of loss payments, exposure growth, court decisions, economic conditions, in particular inflation, and public attitudes that may affect the ultimate cost of settlement. In most instances these analyses are made throughout the year according to locally developed and agreed timetables. Analyses are performed by product line, type and extent of coverage and year of occurrence. The Group total loss and loss adjustment expense reserves are the consolidation of the locally calculated reserves which are then discussed and approved by Corporate Center actuaries and Group management. As with any projection there is an inherent uncertainty in the estimation of claim reserves due to the fact that the ultimate liability for claims will be impacted by trends as yet unknown including future changes in the likelihood of claimants bringing suit, the size of court awards, and the attitudes of claimants toward settlement of their claims.
The Group closely monitors potential new emerging risk exposures. Zurich has an Emerging Risk Group, with crossfunctional expertise to identify, assess and recommend actions for such risks on a Group level. Emerging risks are phenomena whose full nature and effects are not yet known. They may affect the financial results of Zurich’s underwriting operations now, or in the future. Examples of such risks are the possible consequences of nanotechnology, electromagnetic fields, genetically modified organisms and solar storms. In addition, the
The table below shows the Group’s concentration of risk within the General Insurance business by region and line of business based on direct written premiums before reinsurance. The Group’s exposure to general insurance risks varies significantly by geographic region and may change over time. General Insurance premiums ceded to reinsurers (including retrocessions) amounted to USD 5.1 billion and USD 5.2 billion for the years ended December 31, 2010 and 2009, respectively. Reinsurance programs such as catastrophe covers are managed on a global basis, and therefore, net premium after reinsurance is monitored on an aggregated basis.
Table 1.a in USD millions, for the year ended December 31, 2010
Sensitivities analysis for General Insurance risk The following table shows the sensitivity of net income before tax and the sensitivity of net assets, using the Group effective income tax rate, as a result of adverse development in the net loss ratio by one percentage point. Such an increase could arise from either higher frequency of the occurrence of the insured events or from an increase in the severity of resulting claims or from a combination of frequency and severity. The sensitivities do not indicate a probability of such an event and do not consider any non-linear effects of reinsurance. Based on the assumptions applied in the presentation of the sensitivity analysis in the table below, each additional percentage point increase in the loss ratio would lead to a linear impact on net income before tax and net assets applying the assumptions as for this table. In addition, the Group monitors insurance risk by evaluating extreme scenarios, taking into account non-linear effects of reinsurance contracts.
+1% in net loss ratio Net income before tax (49) (76) (131) (22)
Modeling natural catastrophes Understanding the potential effects of natural catastrophes is a critical component of risk management for General Insurance. While specific catastrophes are unpredictable, modeling helps to determine potential losses should catastrophes occur. The Group uses a combination of third party and in-house models to manage its underwriting and accumulations in modeled areas to stay within intended exposure limits and to guide the levels of reinsurance Zurich buys.
The Group reviews and aggregates workers’ injury and property exposures to identify areas of significant concentration. The Group also assesses other lines of business, such as liability and auto, although the potential exposure is not as significant. The resulting data allows underwriters to evaluate how insuring a particular customer’s risk might affect Zurich’s overall exposure. In North America, Zurich uses a vendor-provided catastrophe model to evaluate potential exposures in every major U.S. city. The Group undertakes more detailed and frequent analytics for cities in which Zurich has greater exposure. In 2010, Zurich continued to use a multi-disciplinary team to examine the vendor tool and make adjustments based on its own experience, expertise and view of the potential risks.
• Longevity risk is the risk that annuitants live longer than expected.
• Morbidity risk is the risk that policyholder health-related claims are higher than expected.
• Market risk is the risk associated with the Group’s balance sheet positions where the value or cash flow depends on financial markets, which is analyzed in the ‘Market Risk’ section in the Risk Review.
• Credit risk is the risk associated with a loss or potential loss from counterparties failing to fulfill their financial obligations, which is analyzed in the ‘Credit Risk’ section in the Risk Review.
The Group’s use of market-consistent embedded value reporting principles allows Zurich to further understand and report on the risk profile of its Life products and how risks would change in differing market conditions. Embedded value is the measure that markets use to value life businesses, which is considered industry best practice. For more information, see the Embedded Value Report.
Zurich is exposed to two main types of concentration risk in its Life business: • From a market risk perspective, interest rate guarantees in Germany and Switzerland expose Zurich to financial losses that may arise as a result of adverse movements in financial markets. The Group also writes variable annuity business in the U.S. with minimum guaranteed death benefits and income retirement benefits. The management of these guarantees is a combination of asset-liability matching and hedging; see the ‘Market Risk’ section in the Risk Review.
The table on the next page shows the Group’s concentration of risk within the Life business by region and line of business based on reserves for Life Insurance on a net basis. The Group’s exposure to life insurance risks varies significantly by geographic region and line of business and may change over time.
Reinsurance for General Insurance and Life Insurance The Group’s objectives for purchasing reinsurance are to provide market-leading capacity for customers while protecting the balance sheet and optimizing the Group’s capital efficiency. The Group follows a centralized purchasing strategy for both General Insurance and Life Insurance, and bundles programs where appropriate to benefit from diversification and economies of scale. Due to its strong balance sheet, Zurich is able to structure and align its reinsurance programs to achieve an optimum risk/reward ratio. The Group is able to manage its risks to retain a significant and stable portion of premium, as shown in the illustration below for General Insurance. For Life Insurance, since 2007 Zurich has applied the same focus on risk and reward with the goal to optimize external protection.
The Group continues to use traditional reinsurance markets and other alternatives, such as catastrophe bonds, to protect against extreme single events and increased frequency of events. The Group is able to use its global reach in particular for catastrophe protection, where it has in place a combination of per event and annual aggregate covers, which protects the Group’s business both per event and by region, and also for multiple events across regions. This helps to reduce the risks posed by the frequency of catastrophes, as well as their severity.
The Group uses reinsurance to manage risk to unusually severe or unusually frequent events, as illustrated on the following page, through the main in-force reinsurance covers as of December 31, 2010 for natural catastrophe events. The Group participates in the underlying risks through its retention and through its participation in the excess layers. The contracts are on a risk-occurrence basis except the aggregate catastrophe cover which operates on an annual aggregate basis. In addition to these covers, the Group has per risk programs, local catastrophe covers, bilateral risk swaps and cat bonds in place. These covers are reviewed continuously and are subject to change going forward.
in USD millions Notes: n addition to the reinsurance secured on a geographic basis through catastrophe treaties, the Group has secured USD 200 million* additional reinsurance at a global level. This is through the Global Top Layer Catastrophe Cover, which is available should any one of the regions losses for a single event exceed the totals shown in this chart.
Individual losses greater than USD 25 million are aggregated Once these add up to USD 1,000 million reinsurance kicks in in USD millions
Cover excludes U.S. named windstorms and California earthquake, co-participation of 50%.
The Group has policies and limits to manage market risk. The Group aligns its strategic asset allocation to its risktaking capacity. The Group centralizes management of certain asset classes to control aggregation of risk, and provides a consistent approach to constructing portfolios and selecting external asset managers. The Group also diversifies portfolios, investments and asset managers. The Group regularly measures and manages market risk exposure. The Group has established limits on concentration in investments by single issuers and certain asset classes as well as deviations of asset interest rate sensitivities from liability interest rate sensitivities, and the Group limits investments that are illiquid.
The Group Balance Sheet Committee reviews and recommends the Group’s capital allocation to market risk, while the Asset/Liability Management and Investment Committee reviews and monitors the Group’s strategic asset allocation and tactical boundaries and monitors the Group’s asset/liability exposure. The Group oversees the activities of local Asset/Liability Management and Investment Committees and regularly assesses market risks both at a Group and at a local business level. Risk assessment includes quantification of the contributions to financial market risk from major risk drivers. The economic effect of potential extreme market moves is regularly examined and considered when setting the asset allocation.
Risk from equity securities and real estate The Group is exposed to various risks resulting from price fluctuations on equity securities, real estate and capital markets. Risks arising from equity securities and real estate could affect the Group’s liquidity, reported income, surplus and regulatory capital position. The exposure to equity risk includes, but is not limited to, common stocks, including equity unit trusts; common stock portfolios backing participating with-profit policyholder contracts, and equities held for employee benefit plans. The exposure to real estate risk includes direct holdings in real estate, listed real estate company shares and funds, as well as real estate debt securities such as commercial and residential mortgages, commercial and residential mortgage-backed securities and mezzanine debt. Returns on unit-linked contracts, whether classified as insurance or investment contracts, may be exposed to risks from equity and real estate, but these risks are borne by policyholders. However, the Group is indirectly exposed to market movements from unit-linked contracts both with respect to earnings and with respect to economic capital. Market movements impact the amount of fee income earned when the fee income level is dependent on the valuation of the asset base. Also, the value of in-force business for unit-linked business can be negatively impacted by adverse movements in equity and real estate markets.
For determining the sensitivities, investments and liabilities are fully re-valued in the given scenarios. Each instrument is re-valued separately taking the relevant product features into account. Non-linear effects, where they exist, are fully reflected in the model. The sensitivities are shown after tax. They do not include the impact of Group-internal transactions.
The following tables on sensitivities for the rest of the businesses include Farmers, Other Operating Businesses and Non-Core Businesses. Where Non-Core Businesses includes business with Life characteristics, the analysis is based on market-consistent embedded value market risk sensitivities. See the Embedded Value Report for more details on the market risk sensitivities specifications.
• The equity market scenarios assume a concurrent movement of all stock markets.
• The sensitivity analysis is calculated after tax; the Group internal tax rate is assumed to be 20.3 percent for 2010. For 2009, it is calculated at 22.7 percent.
Basis of presentation – Global Life The tables in the following section show the estimated economic sensitivity of the Embedded Value of the Global Life business to financial market movements. In modeling these exposures, where appropriate, allowance has been made for dynamic actions that would be taken by management or by policyholders. For contracts with financial options and guarantees, such as some participating business, movements in financial markets can change the nature and value of these benefits. The dynamics of these liabilities are captured so that this exposure is quantified, monitored, managed and where appropriate, mitigated.
• The assumptions on policyholder behavior, such as lapses, included in the sensitivity analysis for Global Life may be different from actual behavior. Therefore, the actual impact may deviate from the analysis.
Analysis of economic sensitivities for interest rate risk The tables below show the estimated impacts of a one percentage point increase/decrease in yield curves of the major currencies U.S. dollar (USD), euro (EUR), British pound (GBP), Swiss franc (CHF) and ‘other currencies’ after consideration of hedges in place, as of December 31, 2010 and 2009, respectively.
Other currencies Total 100 basis points increase in the interest rate yield curves Group investments (1,153) (588) (275) (264) (143) (2,424)
Other currencies Total 100 basis points increase in the interest rate yield curves Group investments (802) 84 (254) 11 (3) (964)
Analysis of economic sensitivities for equity risk The table below shows the estimated impacts from a 10 percent decline in stock markets, after consideration of hedges in place, as of December 31, 2010 and 2009, respectively. For Global Life, the analysis also includes the impact from a 10 percent decline in property market values.
10% decline in stock markets Group investments (435) (362) Liabilities – na Net impact before tax (435) (362) Tax impact 88 82 Net impact after tax (347) (280)
The table below shows the sensitivity of the total IFRS equity to changes in exchange rates for the main functional currencies to which the Group is exposed. Positive values represent an increase in the value of the Group’s total equity. The sensitivity analysis does not take into account management actions. The sensitivities show the effects of a change of the exchange rates only, while other assumptions remain unchanged. The sensitivities are reasonably possible as of the balance sheet date, but do not indicate a probability of such events occurring in the future. They do not necessarily represent Zurich’s view of expected future market changes. While the table below shows the effect of a 10 percent increase in currency exchange rates, a decrease of 10 percent would have the converse effect.
Net impact before tax (399) (312) Tax impact 71 67 Net impact after tax (329) (245)
Table 8 in USD millions, as of December 31Economic equity price sensitivities for the Global Life business
Table 10 in USD millions, as of December 31Sensitivity of the Group’s total equity to exchange rate fluctuations
Credit risk is the risk associated with a loss or potential loss from counterparties failing to fulfill their financial obligations. The Group’s exposure to credit risk is derived from the following main areas: • Cash and cash equivalents • Debt securities • Reinsurance assets • Mortgage loans and mortgage loans given as collateral • Other loans • Receivables • Derivatives
Although the Group actively uses collateral to mitigate credit risks, the principle is nevertheless to manage the underlying credit risks independently from the collateral. In light of the 2008-2009 banking crisis, the Group has established limits and quality criteria to identify acceptable letter of credit providers. Letters of credit enable Zurich to limit the risk embedded in reinsurance captives and deductibles.
Credit risk concentration The Group regularly monitors and limits credit exposures by individual counterparty and related counterparties by the aggregated exposure across the various types of credit risk for that counterparty. The Group’s exposure to counterparties’ parent companies and subsidiaries across sources of credit risk is aggregated to include reinsurance assets, investments, certain insurance products and derivatives. Best estimates, based on statistical data and own assessment, are used to assign loss-given-default percentages and loss dependency factors reflecting, for example, double default events. The aggregated exposure information is compared with the Group’s limits. The limits vary based on the underlying rating category of the counterparty. There was no material exposure in excess of the limits at December 31, 2010 and December 31, 2009, respectively. The Group Chief Risk Officer routinely reports the largest exposures by rating category to the Risk Committee of the Board.
As of December 31, 2010, investment grade securities comprise 98.5 percent of the Group’s debt securities, and 52.5 percent are rated ‘AAA’. Debt securities rated ‘BBB’ and below are within the limits of the Group’s risk policy. As of December 31, 2009, investment grade securities comprised 97.9 percent of debt securities, and 50.9 percent were rated ‘AAA’. The Group’s investment policy prohibits speculative grade investments, unless specifically authorized and under exceptional circumstances. The Group identifies investments expected to be downgraded to below investment grade and implements appropriate corrective actions.
December 31, 2009, 41.7 percent of the Group’s debt portfolio was invested in governments and supranationals and a total of USD 43.0 billion or 54.3 percent of the non-government and non-supranational debt securities were secured.
The second largest concentration in the Group’s debt securities portfolio is to financial institutions (including banks), at 23.0 percent, of which 44.6 percent is secured. In response to the 2010 European sovereign debt crisis, the Group identified and selectively reduced subordinated credit exposure issued by banks with weak credit profiles, and credit exposure to banks supported by weaker sovereigns.
The third largest concentration is to structured finance securities (mortgage backed securities (MBS)/asset backed securities (ABS) and similar). Although credit risks of underlying securities are diverse in nature, the Group also considers macro impacts that may affect structured finance sub-categories (e.g. auto or credit card ABS’s) in its credit assessments. All structured finance exposures are assessed on a look-through basis prior to acquisition and not merely on the strength of prevailing credit ratings or credit profiles.
Credit risk related to reinsurance assets As part of its overall risk management strategy, the Group cedes insurance risk through proportional, non- proportional and specific risk reinsurance treaties. While these cessions mitigate insurance risk, the recoverables from reinsurers and receivables arising from ceded reinsurance expose the Group to credit risk.
Compared with December 31, 2009, collateral went down by USD 465 million to USD 8.0 billion. The decrease in collateral was mainly due to the fact that it became more difficult for Zurich’s insureds to obtain affordable letter of credit cover in light of the financial crisis. Nevertheless the increase in unsecured exposure to captives is still within the Group’s defined risk boundaries. Because the Group expects the pressure on obtaining collateral to continue, the Group continues to work with its largest customers on solutions for alternative credit mitigants.
The risk-weighted average credit quality of reinsurance assets (including receivables, but after deduction of collateral) was ‘A’ as of December 31, 2010 and 2009, respectively. Credit factors to determine the risk-weighted average credit quality of reinsurance assets are based on historical insurance impairment statistics, consistent with the prior year. For credit risk assessment purposes, collateral has been taken into account at nominal value as an approximation for fair value. For collateral the Group applies minimum requirements, such as a minimum rating for the issuers of letters of credit and guarantees, and for pledged assets a minimum coverage ratio of 100 percent.
Credit risk related to mortgage loans and mortgage loans given as collateral Mortgage loans and mortgage loans given as collateral expose the Group to credit risk. The mortgage business is dependent on local property market conditions and local legislation. Investment portfolio allocations made to mortgages consider these factors and are within the framework of the strategic asset allocation defined by the Group Asset/Liability Management Investment Committee and adapted and approved by local investment committees (except for the activities of Zurich Bank, which has its own policies that are aligned with the Group’s policies). Conservative lending criteria (i.e. maximum mortgage loan to property value ratios) and the diversification of loans across many single borrowers, particularly in Germany and in Switzerland, help reduce potential loss. Zurich Bank has however suffered from concentrations to a smaller number and type of borrowers, such as property developers and investors. Furthermore, business units are required to clearly state criteria for determining borrower and collateral quality in their local mortgage policies. The Group specifies requirements for the local policies and sets monitoring and reporting standards. The Group closely monitors the performance of the portfolios in terms of impairments and losses.
The Group’s largest mortgage loan portfolios are in Germany (USD 6.1 billion, including mortgage loans given as collateral) and in Switzerland (USD 4.3 billion); these are predominantly secured against residential property. The next largest portfolio comprises loans granted by Zurich Bank (including the UK property lending activity of Dunbar Bank) of USD 1.8 billion (after provisions) in the UK and Ireland. They concern residential and commercial property development financing or investment loans, secured as either property under development or completed developments. During 2010, the banks ceased to originate new business in this area. Deteriorating economic conditions and decreases in property values in the UK and Ireland have led to a significant worsening of property loan performance at Zurich Bank, where impaired mortgage loans increased by USD 618 million over the year to USD 1.2 billion as of December 31, 2010. Similarly, past due but not impaired loans at Zurich Bank also increased by USD 498 million to USD 711 million as of December 31, 2010.
Mortgage loans are lent against underlying property (collateral). In Switzerland, the underlying properties of individual loans are revalued every 10 years. In Germany, the property valuation is not generally reassessed after the granting of the mortgage loan. A less frequent or no revaluation of the underlying property means that reported loan-to-value (LTV) ratios will be higher (lower) than they would be if property prices have risen (fallen) since their valuation. To ensure LTV ratios are not understated and to identify potentially higher LTV loans, the Group has undertaken to revalue properties in locations where property prices may have fallen since their valuation and to be conservative in valuing or revaluing property in locations where prices have substantially risen. Property valuations at Zurich Bank are reviewed regularly as part of the need to continually assess the appropriateness of provisioning on a portfolio that is largely impaired.
millions total 1 The value of the collateral received amounts to USD 8.0 billion and USD 8.4 billion as of December 31, 2010 and 2009, respectively.
Table 13 as of December 31Reinsurance premiums ceded and reinsurance assets by rating of reinsurer and captive
Table 14 as of December 31Other loans by rating of issuer
Past due but not impaired receivables should be regarded as unsecured, but some of these receivable positions may be offset by collateral. The Group reports internally on Group past-due receivable balances and strives to keep the balance of past-due positions as low as possible, while taking into account customer satisfaction. In 2010, the Group continued efforts to reduce past-due receivables through both short- and long-term initiatives to improve processes and systems; some progress was made, particularly in reducing long-outstanding past-due receivables. Longer-dated past-due receivable balances often relate to positions in dispute or subject to litigation.
See note 15 of the Consolidated financial statements for additional information on receivables.
Table 15.a in USD millions, as of December 31, 2010Analysis of financial assets – current period
Neither past due nor impaired financial assets 136,097 12,105 1,090 14,557 16,103 179,952 Past due but not impaired financial assets. Past due by: 1 to 90 days – 137 – – 1,188 1,325
Past due but not impaired financial assets – 263 9 – 2,164 2,437
Impairment allowances on collectively assessed financial assets – 34 – – 276 310 1 Available-for-sale debt securities are included net of USD 510 million of impairment charges recognized during 2009.
Table 15.b in USD millions, as of December 31, 2009Analysis of financial assets – prior period
Liquidity risk is the risk that the Group may not have sufficient liquid financial resources to meet its obligations when they fall due, or would have to incur excessive costs to do so. Zurich’s policy is to maintain adequate liquidity and contingent liquidity to meet its liquidity needs under both normal and stressed conditions. To achieve this, the Group assesses, monitors and manages its liquidity needs on an ongoing basis.
At the Group level, similar guidelines apply and detailed liquidity forecasts based on the local businesses’ input and the Group’s own forecasts are regularly performed. As part of its liquidity management, the Group maintains sufficient cash and cash equivalents and high quality, liquid investment portfolios to meet expected outflows including those for maturing debt obligations. In addition, the Group maintains internal liquidity sources that cover the Group’s potential liquidity needs, including under stressed conditions. The Group takes into account the amount, permanence of availability and speed of accessibility of the sources. The Group centrally maintains committed borrowing facilities, as well as access to diverse funding sources to cover contingencies. Funding sources include asset sales, external debt issuances and use of letters of credit. The Group maintains a broad range of maturities for external debt securities. A possible concentration risk could arise from a downgrade of the Group’s credit rating. This could impact the Group’s commitments and guarantees, thus potentially increasing the Group’s liquidity needs. These contingencies are also considered in the Group’s liquidity management.
The table below provides an analysis of the maturity of liabilities for investment contracts based on expected cash flows as of December 31, 2010 and 2009. The undiscounted contractual cash flows for liabilities for investment contracts are USD 50.8 billion and USD 48.4 billion as of December 31, 2010 and December 31, 2009, respectively. Liabilities for unit-linked investment contracts amount to USD 44.9 billion and USD 40.1 billion as at December 31, 2010 and 2009, respectively. The policyholders of unit-linked investment contracts can generally surrender their contracts at any time at which point the underlying unit-linked assets would be liquidated. Risks from the liquidation of unit-linked assets are borne by the policyholders of unit-linked investment contracts.
Expected maturity profile for liabilities for investment contracts – current period
Other sources of information Use supplemental sources of information, including: Total Risk Profiling™ Internal control evaluations Audit findings
Improvement actions to mitigate operational risk exposure where the risk is deemed to be above a specified threshold, e.g. by strengthening internal controls
Overview by business and type of operational risk for evaluation, mitigation, monitoring, reporting
In addition to its overall framework, the Group has specific processes and systems in place to focus continuously on high priority operational matters such as information security, managing business continuity, and combating fraud.
A key task is keeping the Group’s business continuity plans up-to-date, with an emphasis on recovery from events such as natural catastrophes and the possibility of a pandemic. In 2010, the Group continued to develop its existing business continuity capability. A full review of the business continuity operating model was undertaken in the first half of the year. Initial steps to implement the review findings were undertaken to provide a more globally consistent business continuity program.
Addressing the risk of claims and non-claims fraud continues to be of importance. In 2010, the Group continued a global anti-fraud initiative to further improve the Group’s ability to prevent, detect and respond to fraud. While claims fraud is calculated as part of insurance risk and non-claims fraud is calculated as part of operational risk for risk-based capital, both are part of the common framework for assessing and managing operational risks.
The Group’s capital management strategy is to maximize long term shareholder value by optimizing capital allocation while managing the balance sheet at ‘AA’ level and in accordance with regulatory, solvency and rating agency requirements. In particular, the Group endeavors to manage its capital such that the Group and all of its regulated entities are adequately capitalized in compliance with the relevant regulatory capital adequacy requirements.
Dividends Share buy-back Share issuances Senior & hybrid debt Reinsurance Securitization
Zurich’s policy is to manage its capital position by allocating capital to businesses earning the highest risk- adjusted returns and pooling risks and capital as much as possible to operationalize its global risk diversification, subject to local and Group regulatory solvency requirements and rating agency capital adequacy constraints.
Within these defined principles, the Group manages its capital using a number of different capital models taking into account regulatory, economic and rating agency constraints. The Group’s capital and solvency position is monitored and reported regularly. Based on the results of the capital models and defined standards and principles, Group Treasury and Capital Management has a set of measures and tools available to manage capital within the defined constraints. This tool set is referred to as the capital management program.
In the financial year, the Group undertook a number of actions. It continued its major legal entity reorganization project in Europe by transferring its main German General Insurance unit into a German branch of its Irish carrier, Zurich Insurance plc, following the transfer of Italy, Spain and Portugal on January 1, 2010.
In EU countries, insurance entities are required to maintain minimum solvency margins according to the existing Solvency I legislation. Solvency I capital is calculated as a fixed percentage of premiums, claims, reserves and/or net amounts at risk. The required minimum solvency margin for general insurers is the greater of 16 percent of premiums written for the year or 23 percent of a threeyear average of claims incurred, subject to the first tranche (EUR 50 million) of premiums at 18 percent and the first tranche (EUR 35 million) of claims at 26 percent. In these calculations, premiums and claims for certain liability lines are increased by 50 percent. A reduction is given for reinsurance based on reinsurance claims recoveries over three years as a percentage of gross claims in those years, limited to a maximum of 50 percent. Life insurance companies are required to maintain a minimum solvency margin generally of 4 percent of insurance reserves, but reduced to 1 percent of insurance reserves for life insurance where the credit and market risks are carried by policyholders, plus 0.3 percent of the amount at risk under insurance policies. The same minimum capital requirements are applicable for insurance entities operating in Switzerland. In certain European countries, both EU and non-EU, further requirements have been imposed by regulators.
Some countries have already introduced, or are in the process of introducing, requirements for an economic riskbased capital assessment. In Switzerland, the transition period for the Swiss Solvency Test (SST) has expired and the SST has become fully effective and mandatory as of January 1, 2011. Under SST, groups, conglomerates and reinsurers are required to use company-specific internal models to calculate risk-bearing and target capital. Internal models must be approved by the Swiss Financial Market Supervisory Authority (FINMA). In 2010, Zurich continued to further enhance and refine its internal model to meet evolving regulatory requirements. The model approval process continues with FINMA, which has approved on a provisional basis the use of Zurich’s internal model for 2011, without prejudicing the final approval of the internal model. Zurich has filed an SST ratio with FINMA in excess of 200 percent for the Group, both as of December 31, 2009 and as of June 30, 2010.
On November 25, 2009 the directive on Solvency II was adopted. Solvency II introduces a new regime and reflects the latest developments in prudential supervision, actuarial methods and risk management. It includes economic risk-based solvency requirements, which are more risk sensitive and more sophisticated than Solvency I. Solvency II capital requirements also consider all material risks and
In the U.S., required capital is determined to be the ‘company action level risk-based capital’ calculated with the risk-based capital model of the National Association of Insurance Commissioners. This method, which builds on regulatory accounts, measures the minimum amount of capital for an insurance company to support its overall business operations by taking into account its size and risk profile. The calculation is based on risk-sensitive factors that are applied to various asset, premium, claim, expense and reserve items.
The Group’s banking operations, based in Europe, adopted Basel II as of January 1, 2008. Under Basel II, required capital is calculated on a risk-based approach. The Group is closely following and will adopt the Basel III framework in which new requirements are expected to be implemented in phases between 2013 and 2019. Key aspects of the new global banking standards include higher quality of capital, better coverage of risk, an internationally harmonized leverage ratio, capital buffers, minimum global liquidity standards as well as stronger standards for supervision, public disclosure and risk management.
The Group continues to be subject to Solvency I requirements based on the Swiss Insurance Supervisory Law. The following table sets out the Solvency I position as filed with FINMA for 2009 and as drafted for filing with the Swiss regulator for 2010.
Deferred policyholder acquisition costs non-life insurance (2,754) (3,054) Dividends, share buy-back and nominal value reduction (2,643) 2 (2,226) Total eligible equity 28,184 25,239 Total required solvency capital 11,613 12,966 Excess margin 16,571 12,273 Solvency I ratio 243% 195%
2 Amount for dividend reflects the proposed dividend for the financial year 2010, not yet approved by the Annual General Meeting.
The chart below shows the estimated impact on the Group’s solvency position of a one percentage point
• The impact on unit-linked business is not included, as policyholders bear the majority of investment risk.
• The impact on changes to the required capital is not included in the sensitivities for the Solvency I ratio.
Sensitivities for Solvency I ratio and total IFRS equity (As of December 31, 2010)
Monetary impact on total IFRS equity 2010 totaI IFRS equity: USD 33.3bn
Rating agency leverage Rating agencies apply their own models to evaluate the relationship between the required risk capital for a company or group and its available capital resources. The Group maintains a continuous dialogue with rating agencies regarding the assessment of capital adequacy and leverage position.
The Group uses an additional capital management tool, its internal risk-based capital (RBC) model. This model targets a total capital level that is calibrated to an ‘AA’ financial strength. Zurich defines RBC as being the capital required to protect the Group’s policyholders in order to meet all of their claims with a confidence level of 99.95 percent over a one-year time horizon.
As of January 1, 2011 AFR amounted to USD 40 billion, while the latest estimate of the internal RBC requirements for the year 2011 amounted to USD 34 billion, resulting in an estimated Economic Solvency Ratio of 119 percent compared with 136 percent for 2010. The decrease in AFR over 2010 was driven by a reduction in the amount of eligible senior debt, a reduction in the embedded value of the Global Life business and a discount release on
Risk-Based Capital (RBC) allocated by segment (%, as of January 1)
General Insurance Global Life Farmers Other Operating Businesses and Non-Core Businesses
Operational risk Premium & Reserve risk Life insurance risk Investment credit risk
Risk-Based Capital (RBC) split by risk type (%, as of January 1)
The following chart shows a split of the RBC allocated to the segments. As of January 1, 2011 the total allocated capital corresponds to the RBC of USD 34 billion plus USD 2 billion directly allocated to the Farmers Management Services.
Consolidated financial statements 135 Report of the statutory auditor 254 Significant subsidiaries 256 Embedded value report 259 Holding company 292 Report of the statutory auditor 308 Shareholder information 312 Financial calendar 316 Contact information 317 Glossary 318
II 1. Basis of presentation 144 2. New accounting standards and amendments to published accounting standards 148 3. Summary of significant accounting policies 150 4. Critical accounting judgements and estimates 165 5. Acquisitions and divestments 170 7. Derivative financial instruments and hedge accounting 179 8. Reserves for insurance contracts and reinsurers’ share of reserves for insurance contracts 184 9. Liabilities for investment contracts with and without discretionary participation features (DPF) 189 10. Equity component relating to contracts with DPF 189 11. Gross and ceded insurance revenues and expenses 190 12. Deferred policy acquisition costs and deferred origination costs 191 13. Administrative and other operating expenses 191 14. Farmers management fees and other related revenues 192 16. Mortgage loans given as collateral and collateralized loans 193 17. Property and equipment 194 18. Goodwill and other intangible assets 195 19. Other assets 197 20. Other liabilities 197 21. Income taxes 199 23. Shareholders’ equity 207 24. Employee benefits 210 25. Share-based compensation and cash incentive plans 216 26. Contingent liabilities, contractual commitments and financial guarantees 219 27. Fair value of financial assets and financial liabilities 223 28. Related party transactions 230 29. Farmers Exchanges 232 30. Segment information 234 31. Events after the balance sheet date 253
attributable to policyholders 21 (462) (387) attributable to shareholders 21 (893) (1,167)
Basic earnings per share 23 23.63 27.78 Diluted earnings per share 23 23.44 27.58 in CHF
Change (before reclassification, tax and foreign currency translation effects and after allocation to policyholders) 3,548 119 944 (2) 288 4,898 Reclassification to income statement (before tax and foreign currency translation effects and after allocation to policyholders) 1,014 (96) – – – 918 Deferred income tax (before foreign currency translation effects) (1,144) (16) – – (63) (1,223) Foreign currency translation effects (7) – – – (53) (61)
2010 Comprehensive income for the period 3,434 2,081 65 (729) 28 (162) 1,283 4,717 (13) 4,704 Details of movements during the period
Change (before reclassification, tax and foreign currency translation effects and after allocation to policyholders) 3,069 (45) (709) 41 (192) 2,164 Reclassification to income statement (before tax and foreign currency translation effects and after allocation to policyholders) (589) 134 (20) – – (475) Deferred income tax (before foreign currency translation effects) (520) (6) – (13) 51 (488) Foreign currency translation effects 121 (18) – – (22) 81 in USD millions, for the year ended December 31
Liabilities Reserve for premium refunds 518 649 620 Liabilities for investment contracts 9 50,667 46,124 35,979 Deposits received under ceded reinsurance contracts 1,362 1,558 1,619 Deferred front-end fees 5,626 5,543 4,695 Reserves for insurance contracts 8 242,646 242,094 224,078 Obligations to repurchase securities 3,330 3,976 3,608
Debt related to capital markets 22 400 25 2,079 Senior and subordinated debt 22 11,057 11,444 8,455
Cash flows from operating activities Net income attributable to shareholders 3,434 3,963 Adjustments for: Net (gain)/loss on divestments of businesses (38) 5 Income from equity method accounted investments (17) (4) Depreciation, amortization and impairments of fixed and intangible assets 1,086 892 Other non-cash items 789 554
Reserves for insurance contracts, gross 5,785 7,664 Reinsurers’ share of reserves for insurance contracts (13) 625 Liabilities for investment contracts 7,058 6,674 Deferred policy acquisition costs (622) (1,455) Deferred origination costs (23) (16) Deposits made under assumed reinsurance contracts 1,028 (1,453) Deposits received under ceded reinsurance contracts (214) (97)
Net capital (gains)/losses on total investments and impairments (9,430) (9,261) Net change in trading securities and derivatives 7 214 Net change in money market investments 411 (142) Sales and maturities
Cash and cash equivalents comprise the following: Cash at bank and in hand 7,363 7,388 Cash equivalents 8,358 9,000 Cash held as collateral for securities lending – 493 in USD millions, for the year ended December 31 in USD millions, as of December 31Cash and cash equivalents
Net changes in capitalization and non-controlling interests – – – – – – – – – – 48 48 Balance as of December 31, 2009, as restated 10 11,400 387 (9) (396) 98 17,253 28,743 561 29,304 1,800 31,104
Net income – – – – – – 3,422 3,422 11 3,434 Net unrealized gains/(losses) on available-for-sale investments – – 2,081 – – – – 2,081 – 2,081 Cash flow hedges – – – 65 – – – 65 – 65 Cumulative foreign currency translation adjustment – – – – (729) – – (729) – (729) Revaluation reserve – – – – – 28 – 28 – 28 Net actuarial gains/(losses) on pension plans – – – – – – (162) (162) – (162)
On March 30, 2010, the cancellation of the 1,836,404 shares with nominal value of CHF 0.10 each repurchased through the Group share buy-back program until December 2008 was approved by the Annual General Meeting. The effective date of the capital reduction was June 15, 2010.
On February 9, 2011 the Board of Directors of Zurich Financial Services Ltd authorized 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 March 31, 2011.
The accounting policies applied by the reportable segments are the same as those applied by the Group. 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 dividends, realized capital gains as well as gains and losses on transfer of net assets, which are eliminated against equity. For the Consolidated financial statements inter-segment revenues and transfers are eliminated.
Disclosures under IFRS 4 “Insurance Contracts” and IFRS 7 “Financial Instruments: Disclosures” relating to the nature and extent of risks, and capital disclosures under IAS 1 “Presentation of Financial Statements” have been included in the “Risk Review” on pages 96 to 131, and they form an integral part of the Consolidated financial statements.
Reserves for premium rebates previously reported as reserves for premium refunds amounting to USD 94 million as of December 31, 2009, are now presented as deferred front-end fees to better reflect the nature of the underlying transactions. The classification was corrected in the current year as the impact on the Group’s income statement was not material.
The following balances are generally considered to be non-current: equity securities, real estate held for investment, equity method accounted investments, deferred policy acquisition costs on life insurance contracts, deferred tax assets, property and equipment, goodwill, other intangible assets and deferred tax liabilities.
Maturity tables have been provided for the following balances: reserves for insurance contracts (tables 17a and 17b in the “Risk Review”), liabilities for investment contracts (tables 18a and 18b in the “Risk Review”), debt securities (table 6.4), derivative assets and derivative liabilities (tables 7.1 and 7.2), collateralized loans (table 16), other financial liabilities (table 20.2) and outstanding debt (table 22.3).
The table below summarizes the principal exchange rates that have been used for translation purposes. Net gains/(losses) on foreign currency transactions included in the consolidated income statements were USD 134 million and USD (49) million for the years ended December 31, 2010 and 2009, respectively. Foreign currency exchange forward and swap gains/(losses) included in these amounts were USD (141) million and USD 118 million for the years ended December 31, 2010 and 2009, respectively.
Change in accounting policies in 2010 The Group decided to dynamically hedge the risks associated with its closed U.S. life book included in its Non-Core Businesses segment, starting in March 2010. In order to offset the accounting volatility from the fair valuation of the hedge, the Group concluded that it should measure the underlying insurance liabilities in this book of business at current value and as a consequence has changed its accounting policy for this closed U.S. life book by exercising the option in IFRS 4 to remeasure designated insurance liabilities using current financial and non-financial assumptions. All financial assets, which were previously designated as available-for-sale, related to these insurance liabilities have therefore also been redesignated at fair value through profit or loss. As a consequence of this change in accounting policy, prior year figures have been restated to ensure comparability. Business operating profit (BOP) has not been restated, as the business was not managed on a fair value basis, prior to the implementation of the dynamic hedge and therefore to restate BOP would not be a fair reflection of a sustainable operating profit nor provide comparability with the previous period.
Revenues Gross written premiums and policy fees 53,817 – – 53,817 Less premiums ceded to reinsurers (5,844) – – (5,844) Net written premiums and policy fees 47,973 – – 47,973 Net change in reserves for unearned premiums (746) – – (746) Net earned premiums and policy fees 47,227 – – 47,227 Farmers management fees and other related revenues 2,690 – – 2,690 Net investment result on Group investments 6,082 (153) – 5,929
Net investment result on unit-linked investments 12,475 – – 12,475 Net gain/(loss) on divestments of businesses (5) – – (5) Other income 1,802 – – 1,802
Benefits, losses and expenses Insurance benefits and losses, gross of reinsurance 39,522 (1,217) – 38,304 Less ceded insurance benefits and losses (3,261) 59 – (3,201) Insurance benefits and losses, net of reinsurance 36,261 (1,158) – 35,103 Policyholder dividends and participation in profits, net of reinsurance 12,859 – – 12,859 Underwriting and policy acquisition costs, net of reinsurance 8,254 – 149 8,403 Administrative and other operating expense 7,248 (1) (149) 7,098 Interest expense on debt 586 – (31) 555 Interest credited to policyholders and other interest 533 – 31 563 Total benefits, losses and expenses 65,741 (1,159) – 64,582 Net income before income taxes 4,531 1,006 – 5,537 Income tax expense (1,295) (258) – (1,553)
Net income after taxes 3,236 747 – 3,983 attributable to non-controlling interests 21 – – 21 attributable to shareholders 3,215 747 – 3,963 in USD
Basic earnings per share 24.39 5.70 – 30.09 Diluted earnings per share 24.21 5.66 – 29.88
Table 1.1 in USD millions, for the year ended December 31, 2009Restatement and reclassifications of consolidated income statement
Reinsurers’ share of reserves for insurance contracts 18,627 124 – 18,751 Deposits made under assumed reinsurance contracts 3,861 – – 3,861 Deferred policy acquisition costs 16,181 – – 16,181 Deferred origination costs 856 – – 856 Accrued investment income 2,744 – – 2,744
Liabilities Reserve for premium refunds 649 – – 649 Liabilities for investment contracts 46,124 – – 46,124 Deposits received under ceded reinsurance contracts 1,558 – – 1,558 Deferred front-end fees 5,543 – – 5,543 Reserves for insurance contracts 241,412 682 – 242,094 Obligations to repurchase securities 3,976 – – 3,976 Accrued liabilities 2,839 – – 2,839
Table 1.2 in USD millions, as of December 31, 2009Restatement of consolidated balance sheet
Standards, amendments and interpretations effective or early adopted as of January 1, 2010 and relevant for the Group’s operations The following new accounting standards or amendments to and interpretations of standards relevant to the Group have been implemented for the financial year beginning January 1, 2010 with no material impact on the Group’s financial position or performance.
In July 2008, the IASB issued amendments to IAS 39 “Eligible Hedged Items”. The amendments are mandatory for reporting periods beginning on or after July 1, 2009. The amendments clarify how the principles that determine whether a hedged risk or portion of cash flows is eligible for hedge designation should be applied in particular situations.
In April 2009, the IASB issued several minor amendments as part of the IASB’s annual improvements project. The amendments are effective for reporting periods beginning on or after January 1, 2010 with the exception of amendments regarding IFRS 5 “Non-current Assets Held for Sale and Discontinued Operations”, IAS 38 “Intangible Assets”, IFRIC 9 “Reassessment of Embedded Derivatives” and IFRIC 10 “Interim Financial Reporting and Impairment” which are effective for reporting periods beginning on or after July 1, 2009.
In November 2009, the IASB issued IFRIC Interpretation 19 ‘Extinguishing Financial Liabilities with Equity Instruments’ which clarifies the accounting when the terms of a financial liability are renegotiated and result in the issue of equity instruments by an entity to settle, in full or in part, that financial liability. The interpretation is effective for annual periods beginning on or after July 1, 2010 with earlier application being permitted.
In November 2009, the IASB issued amendments to IAS 24 “Related Party Disclosures”. The amendments will be effective for reporting periods beginning on or after January 1, 2011. The amendment provides a partial exemption from the disclosure requirements for government-related entities and clarifies the definition of a related party.
In December 2010, the IASB issued amendments to IAS 12 “Income Taxes”. The amendments will be effective for reporting periods beginning on or after January 1, 2012. The amendments provide a practical approach for measuring deferred taxes when investment property is measured using the fair value model.
Acquisition transactions with non-controlling interests are accounted for as transactions with parties external to the Group. Effects of transactions with non-controlling interests are recorded in equity if there is no change in control.
The Consolidated financial statements are prepared as of December 31 based on individual company financial statements at the same date. In some cases information is included with a time lag of up to three months. The effects on the Group’s Consolidated financial statements are not material.