• Strategic acquisition in Malaysia with Malaysia Assurance Alliance Berhad (MAA)
• Distribution agreement renewed with Deutsche Bank in Germany and Italy
• Premium growth in nearly all active lines of business of the Farmers Exchanges, which we manage but do not own
We help individuals, small- and medium-sized companies and global corporations around the world understand and protect themselves from risk by offering a wide range of insurance products, solutions and advisory services.
Europe Our presence is anchored by major operations in Switzerland, the United Kingdom and long-standing businesses in six other European countries.
The Americas We entered a strategic alliance in Latin America and in 2012 we celebrate 100 years in the United States.
Thousands of Zurich professionals work in many fields to help our customers understand and manage risk.
Acting as one team with one purpose we take a global approach to resources and capabilities. We have the flexibility and speed to adapt our product and geographic mix to meet changing market conditions. Global processes and systems – from a unified Zurich approach to project management to a Group-wide people strategy – allow us to get the most from our strengths, and so to work steadily toward our aspiration to become the best global insurer as measured by our customers, shareholders and employees.
See page 80 for more information See page 85 for more information See page 88 for more information
Recognitions in 2011 • Claims services receive honors in Germany (TÜV Süd) and Switzerland (ESPRIX)
• #2 most-admired company in property and casualty insurance and #102 in the Fortune Global 500 (Fortune)
Resilient performance in 2011 In General Insurance, our business operating profit was USD 2.3 billion, 15 percent lower in U.S. dollar terms and 19 percent lower on a local currency basis. The sustained focus on profitability has continued to produce strong improvement in the underlying loss ratio, helping to offset the effect of the exceptional frequency and overall severity of catastrophe and weather-related loss events. Gross written premiums and policy fees increased by USD 1.5 billion to USD 34.6 billion or by 5 percent in U.S. dollar terms, but remained flat on a local currency basis. In order to maintain margins, average rates increased by over 3 percent, an improvement of 1 percentage point compared with 2010. Despite these rate increases, customer retention levels improved slightly compared with 2010.
Our net income attributable to shareholders over the year was USD 3.8 billion, or 10 percent higher than in 2010, and our return on equity was 11.9 percent, 0.6 percentage points higher than in 2010. Our business operating profit was USD 4.3 billion, leading to a business operating profit after tax return on equity of 10.2 percent.
This is a strong performance given natural catastrophes and the challenging environment, supported by the excellent total return from Group investments of 5.4 percent. Reflecting our strong cash flows and capital base, as well as our confidence in our business strategy, we are pleased to propose a dividend of CHF 17.00 per share.
We express our thanks to the employees of Zurich, whose hard work, diligence and expertise make these results possible. We also thank our customers, whose trust in us is especially valued in these uncertain times. Finally we express our thanks to you, our shareholders. Your confidence in us is an integral element of our aspiration to become the best global insurer as measured by our employees, our customers and you, our shareholders.
Megatrends: a look at the forces shaping the insurance market of the future.
individuals may not miss the task of visiting their bank to make deposits. Local banks, on the other hand, may find themselves competing with peer-to-peer networks that connect savers and borrowers directly.
Online reviews, whether by an objective consumer or by a member of one’s virtual community, can influence buying decisions just as decisively as a tip from a friend. As these platforms become faster and more ubiquitous, online ‘word of mouth’ will grow to be more powerful than ever. The more one’s product can be sold ‘virtually’ – a distinction of many insurance products – the more critical it is to be able to interact with customers over these platforms. Online communities may one day form the basis of mutual societies, for which traditional insurers would serve more as administrators than product providers. As a forward-looking insurer we are focused on how online platforms can help us work better and connect with our customers more effectively.
The processes that underlie the rise of online platforms are directly applicable to core insurance operations. Technologies such as cloud computing can be leveraged to make a global workforce more efficient and mobile. For customers, such technologies make insurance prices more directly comparable and thus push for
Online platforms Computers, tablets and smartphones offer alternative spaces to conduct interactions. As a forward-looking insurer we are focused on how online platforms can help us work better and connect with our customers more effectively.
The role of insurance in society The second megatrend is increased regulation and legislation with regard to insurance. The financial crisis has provoked an inevitable demand for regulatory reform in many jurisdictions. While some gaps in regulation appear obvious in retrospect, the process of ‘fixing’ the global financial system has few clear answers and leaves many openings for unintended consequences. At Zurich we are especially eager to make clear that the insurance sector had a benign influence on financial markets during the crisis. The nature of the insurance sector’s influence arises from fundamental qualities of the insurance business model.
Global economic rebalancing Of course labor markets are not rebalancing in isolation. The fourth trend concerns the rebalancing of the global economy overall. Most mature economies are saddled with debt and low growth, with small but growing risk of serious social unrest. Meanwhile emerging markets are poised to continue delivering the greater part of global economic growth, and in so doing will solidify gains in influence and stature. With this rebalancing, former emerging markets will emerge not just as markets, but as true global leaders. Brazil, China, India, and many of the countries that have taken part in the ‘Arab Spring’ will feature more prominently in shaping the international order. New global insurance titans are likely to come forward from these countries, some perhaps internally generated, as demand for insurance rises in line with economic growth. And with growth, too, comes construction and development – perhaps in areas vulnerable to natural or climate-driven catastrophes. This last aspect of growth is of obvious concern to insurers, and one we are committed to addressing proactively.
Changes for labor Opportunities for low-skilled workers are becoming scarcer, a trend which is reinforced by technological changes. For highly skilled workers the picture is nearly the opposite. This trend points out that it is critical to attract and retain top talent.
Economic rebalancing Most mature markets are saddled with debt and low growth, with small but growing risk of serious social unrest. Meanwhile emerging markets are poised to continue delivering the greater part of economic growth. New global insurance titans are likely to come forward from these countries as demand for insurance rises in line with economic growth.
The best global insurer will be the one that can monitor these trends most insightfully and navigate their interaction most successfully. In the following pages we will show how we are positioning Zurich to win that title.
The best global insurer will be the one that can monitor these trends most insightfully and navigate their interaction most successfully.
We take a Group-wide approach to capabilities and resources, fully leveraging the strength of our global organization. We focus on developing our talent base, improving systems and streamlining our business.
Our strategy targets profitability and growth through a combination of efficiency-enhancing measures, disciplined portfolio management, expansion into high potential markets and improving our customer proposition. We strive to protect our business by maintaining strict financial discipline, attracting the best talent in the industry, keeping our focus strictly on insurance and preserving organizational agility so that we can respond quickly to emerging risks and opportunities.
Staying on course We stayed true to this approach in 2011. We remained focused on our strategic business operating profit after-tax return on equity target of 16 percent, recognizing that so long as current conditions persist, achieving a return of around two percentage points below our strategic target is more realistic. We also aim to pay an attractive and sustainable dividend to our shareholders, proposed at CHF 17.00 for 2011. Our strong cash flow generation and capital position provide solid support to these goals going forward.
Our ability to continue delivering profitable growth is reflected by the operating performance of each of our core business segments. It is also visible in the strong progress we have made in building our franchise through alliances, acquisitions, joint ventures and distribution agreements.
The effective execution of our strategy has enabled us to deliver a strong result.
profitable growth in Malaysia and other markets in the area – a highly attractive region which, with a young and growing population, stands out for its great economic potential.
The long-term alliance with Banco Santander (SA) allows us to work through their more than 5,600 bank branches to reach a potential 36 million customers in Brazil, Mexico, Chile, Uruguay and Argentina with our general and life insurance solutions. The alliance makes Zurich the fourth- largest insurer in Latin America. Similarly to the Malaysian market, the low rate of insurance penetration in these Latin American countries coupled with promising growth forecasts give us every confidence that this 25-year strategic distribution agreement will be a cornerstone of profitable growth.
The alliance with Santander follows a proven pattern of success for Zurich. In 2002 we entered into a distribution agreement with Deutsche Bank. Over the course of that collaboration we grew revenue, new business value and commissions significantly faster than other insurers in markets where we were competing directly. In Germany, Italy and Spain, Deutsche Bank now has twice the market share of bank-sold insurance compared to its peers. In 2011 we renewed the distribution agreement with Deutsche Bank for another ten years, signaling mutual and continued satisfaction with the growth generated in bank distribution.
We add value in our current business by enhancing our customer management capabilities, leveraging customer insights and predictive modeling to increase the attractiveness of our products, and by taking advantage of changes in the distribution landscape to make our products more accessible.
This flexibility helps us keep an open mind to forms of insurance that we do not currently cover, and to reviewing the forms we do. For example, in North America we use state-of-the-art underwriting tools to determine where we are under-pricing risk, and where our pricing is adequate to the risks assumed. Such enhanced visibility
Our strategy is driving portfolio actions across the entire North American commercial business.
The right people Our people management strategy ensures that we have the best people in our industry and use their talents wisely. We have set our sights on improving our attractiveness to top talent. We are developing measures for both external comparison and internal measures of performance, and we continue to listen closely to our people through the Group-wide employee engagement survey.
TZW, our headline transformational program since 2004, has been repositioned in 2011 to further enhance the way we work, connect and collaborate at Zurich. TZW stands for a commitment to creating a global work environment where fresh ideas, successes and knowledge are actively exchanged. Our people have great ideas to improve the way we work, and TZW offers a simple mechanism to share those ideas, whether they are for a new product, a new service, or a smarter process.
Since its relaunch in summer 2011, TZW has established a global network with 100 subject matter experts. At the core of this effort is the TZW Exchange, an intranet- based knowledge platform that fosters collaboration and engagement across the enterprise. The TZW Exchange helps us to identify best practices throughout the Group, avoiding unnecessary duplication of effort. Next year, TZW will be elevated to a higher level by further embedding best practice sharing to manage corporate knowledge in a standardized and reusable way.
A responsible corporation Being a responsible company is fundamental to our long-term sustainability and integral to how we do business. We are committed to creating sustainable value for our shareholders, our customers, our employees and the communities in which we live and work. We focus on areas related to our core competencies so that we can apply our insurance and risk management expertise to enhance our contribution to society.
• Improve combined ratio by 3-4 points relative to global competitors by 2013 while contributing to the Group’s strategic BOPAT-ROE target of 16%
• 30% of NBV from Asia-Pacific and Middle East (APME) and Latin America
Strength and stability The Group’s capital position remains strong with shareholders’ equity of USD 31.6 billion at broadly the same level as December 31, 2010. In March 2011, Moody’s Investors Service upgraded the insurance financial strength rating of Zurich Insurance Company Ltd
Net income attributable to shareholders increased by USD 339 million to USD 3.8 billion, or by 10 percent, generating a return on equity of 11.9 percent, up 0.6 percentage points compared with 2010. The overall result benefited from net capital gains including the gain realized on the sale of part of the Group’s investment in New China Life Insurance Co., Ltd, as well as valuation gains on derivatives held for economic hedging, which mitigated business, investment and balance sheet risks.
Gross written premiums and policy fees increased by USD 1.5 billion to USD 34.6 billion, or by 5 percent in U.S. dollar terms and flat on a local currency basis.
Average rate increases of more than 3 percent were achieved despite the slow economic recovery in the U.S. and depressed economic activity in many European countries. Growth in local currency continued to be driven by International Markets, primarily in Latin America and Asia-Pacific, as well as by selected industry segments in North America and Europe. Customer retention levels improved slightly compared with 2010, mainly in International Markets and Europe.
The development of business volumes over the year reflects that our focus on achieving selective growth and increased profit margins through disciplined underwriting has remained unchanged. This re-shaping is concentrating our portfolio on the most profitable and strategic lines of business in mature markets and supporting investment in emerging markets.
The results in Global Life show that our progress is on track in terms of generating an increasing share of new business value in Latin America and Asia-Pacific and Middle East. With the acquisition of MAA and joint venture with Banco Santander we expect this trend to accelerate, in addition to other growth and cash flow objectives set by Global Life.
Farmers Farmers business operating profit decreased by USD 200 million to USD 1.5 billion, or by 12 percent. Farmers Management Services business operating profit increased by USD 5 million to USD 1.4 billion mainly driven by a reduction in operating expenses and 21st Century expenses in 2011 offset in part by lower revenues resulting from the planned run-off of the 21st Century agency auto book of business in the Farmers Exchanges, which are managed but not owned by Farmers Group, Inc., a wholly owned subsidiary of the Group. Farmers Re business operating profit decreased by USD 205 million to USD 116 million, or by 64 percent, reflecting the net reduction in the All Lines Quota Share reinsurance agreement (All Lines agreement) with the Farmers Exchanges, as well as high weather-related losses in the U.S. in 2011, higher loss trends, and reduced investment income.
Farmers Management Services management fees and other related revenues decreased by USD 11 million to USD 2.8 billion, which was in line with the decrease in gross earned premiums in the Farmers Exchanges. This decrease was primarily driven by the planned run-off of the 21st Century agency auto book of business, partially offset by the fee income from the continued increase of gross earned premiums in the Farmers Exchanges from 21st Century direct, and from business and specialty insurance. The 16 percent decrease to USD 3.5 billion in gross written premiums of Farmers Re reflects various participation changes to the All Lines agreement and consequent portfolio transfers.
Rapid progress The results in Global Life show that our progress is on schedule in terms of generating an increasing share of new business value in Latin America and Asia-Pacific and Middle East. With recent acquisitions that trend is only expected to grow.
Group structure and shareholders 23 Capital structure 26 Board of Directors – members 28 Group Executive Committee – members 29 Board of Directors 30 Group Management 37 Shareholders’ participation rights 41 Information Policy 42 Changes of control and defense measures 42 External Auditors 43 Group Audit 44 Group Compliance 45 Risk Management and Internal Control Statement 45
This report describes the Group’s approach to corporate governance and illustrates the key elements of corporate governance within the Group. It includes the information required by the Directive on Information Relating to Corporate Governance of the SIX Swiss Exchange (as of October 29, 2008, effective July 1, 2009). It also explains how, in 2011, the Group complied with the Swiss Code of Best Practice for Corporate Governance, issued in 2002 by economiesuisse, as amended in October 2007. Furthermore, the Group continues to publish a Risk Management and Internal Control Statement (see pages 46 and 47) in accordance with the UK Turnbull Guidance.
The Zurich Financial Services Group has been under group supervision by the Swiss Financial Market Supervisory Authority (FINMA) and its predecessor authority the Federal Office for Private Insurance (FOPI) since a decree of April 2001. In its recent decree of December 28, 2011, FINMA has clarified that Zurich is subject to insurance group supervision according to article 64 et seq. of the Swiss Insurance Supervision Law (“ISL”) and does not qualify as a conglomerate. The ISL requires Swiss insurance companies and groups to establish and maintain strong governance and risk management systems that are appropriate to their business activities as well as effective internal control systems. It prescribes the calculation of a risk based solvency margin at Group and legal entity level, pursuant to the Swiss Solvency Test (SST), and additionally a Solvency I margin (expected to become redundant when Swiss insurance supervision is acknowledged equivalent to the EU’s Solvency II regulations). The reporting of all major intra-group transactions is also part of Swiss group supervision. In addition to the group supervision exercised by FINMA and its supervision over Zurich Insurance Company Ltd and Zurich Life Insurance Company Ltd, the insurance subsidiaries and remaining financial services entities of the Zurich Group are supervised by relevant local supervisory authorities.
An effective structure is in place providing for cooperation between the Board of Directors, Management and internal control functions. This structure establishes checks and balances and is designed to provide for institutional independence of the Board of Directors from the Group Chief Executive Officer (CEO) and the Group Executive Committee (GEC) responsible for managing the Group on a day-to-day basis. The Board of Directors of Zurich Financial Services Ltd is composed entirely of independent non-executive members. The roles of Chairman of the Board of Directors and CEO are separated, thus providing for separation of powers between the functions and ensuring the autonomy of the Board.
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. Over the last years Zurich has streamlined its business portfolio to concentrate on insurance. In recognition of this strategic focus, the Board of Directors proposes to replace the reference to financial services in the company name by indicating the insurance activity of the Group instead. Accordingly, the Board of Directors will propose at the Annual General Meeting on March 29, 2012, to change the company name to Zurich Insurance Group Ltd. In case the proposed name change is approved by the shareholders, the Group’s Annual Report from the reporting year 2012 onwards will be renamed correspondingly. Likewise the Annual Report for Zurich Insurance Company Ltd and its subsidiares, currently named “Zurich Insurance Group”, will be renamed to Zurich Insurance Company Ltd Annual Report.
This management structure leads to the reporting of the Group based on the following primary business segments: • General Insurance serves the property-casualty insurance needs of a wide range of customers, from individuals to small and medium-sized businesses, commercial enterprises and major multinational corporations.
• Global Life pursues a strategy with market-leading propositions in unit-linked and protection products through global distribution and proposition pillars to develop leadership positions in its chosen markets.
• Farmers provides through Farmers Group, Inc. (FGI) and its subsidiaries non-claims related management services to the Farmers Exchanges. FGI receives fee 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 only 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.
As of January 1, 2011, the Group implemented changes in the way it manages General Insurance and Global Life on a secondary level. The General Insurance segment is managed based on market-facing businesses, including: Global Corporate, North American Commercial, Europe, Latin America, Asia-Pacific, Middle East, and Africa. The Global Life segment is managed on a regional-based strucure within a global framework, including: North America, Latin America, Europe, Asia-Pacific and Middle East.
For more detailed information on the Group’s segments and its geographic structure see note 29 of the Consolidated Financial Statements, starting on page 253. A detailed review of the respective business segment and division results during 2011 can be found in the Operating and Financial Review starting on page 76. Furthermore, an overview of the Group’s business strengths and activities is contained in the Annual Review, available on Zurich’s website www.zurich.
Zurich Financial Services Ltd is obliged to announce shareholdings by third parties in its shares when notification is received from a third party that a threshold has been reached. During 2011 the Group received several notifications by third parties that they have either exceeded or subsequently fallen below the threshold of three percent as a result of purchases or sales. As of December 31, 2011, Zurich Financial Services Ltd is not aware of any person or institution, other than BlackRock, Inc., New York, Norges Bank, Oslo and Aberdeen Asset Management PLC, Aberdeen, 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 related announcements of these notifications can be found via the search facility on the SIX Disclosure Office’s platform: Zurich Financial Services Ltd is not aware of any person or institution which, as of December 31, 2011, directly or indirectly, alone or with others, exercised or was a party to any arrangements to exercise control over Zurich Financial Services Ltd.
Authorized and contingent share capital As of December 31, 2011, 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, representing 10,000,000 fully paid registered shares with a nominal value of CHF 0.10 each until 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 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 390,943.70 as specified in Article 5ter(2a) of the Articles of Incorporation, representing 3,909,437 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, see the Consolidated Financial Statements, note 22 on pages 227 to 229.
During 2010, a total of 950,232 shares were issued to employees out of the contingent capital. As a result, on December 31, 2010, the share capital amounted to CHF 14,658,689.60 (146,586,896 shares) and both the authorized capital and the contingent share capital (as specified in Article 5bis(1) and in Article 5ter(1a) of the Articles of Incorporation, respectively) amounted to CHF 1,000,000.00 (10,000,000 shares) and the other contingent share capital (as specified in Article 5ter(2a) of the Articles of Incorporation) amounted to CHF 470,836.30 (4,708,363 shares). All shares are listed.
Shares and participation certificates Zurich Financial Services Ltd’s shares are registered shares with a nominal value of CHF 0.10 each. The shares are fully paid. Pursuant to Article 14 of the Articles of Incorporation, each share carries one vote at shareholders’ meetings and entitles the registered holder to exercise all other membership rights in respect of that share.
Some interests in shares are held by investors in the form of American Depositary Receipts (ADRs)1. As of December 31, 2011, investors held 19,688,410 ADRs (representing 1,968,841 Zurich Financial Services Ltd shares).
Profit sharing certificates Zurich Financial Services Ltd has not issued any profit sharing certificates.
Limitations on transferability and nominee registrations The Articles of Incorporation do not provide for any limitations on transferability except for the following: 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 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.
There are special provisions relating to the registration of, and exercise of rights attaching to shares by the Bank of New York Mellon in connection with the Zurich Financial Services Ltd ADR program.
Chief Risk Officer, Regional Chairman of Europe 6 Christian Orator Chief Administrative Officer 7 Cecilia Reyes Chief Investment Officer 8 Geoff Riddell Regional Chairman of Asia-Pacific & Middle East 9 Kristof Terryn Group Head of Operations 10 Pierre Wauthier 3
2 Assumed role of Regional Chairman of Europe on October 1, 2011.
Manfred Gentz German 1942 Chairman of the Board Chairman of the Governance and Nominations Committee Member of the Remuneration Committee
Josef Ackermann Swiss 1948 Vice Chairman of the Board Member of the Governance and Nominations Committee Member of the Remuneration Committee
Don Nicolaisen American 1944 Director Chairman of the Audit Committee Member of the Risk Committee
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 Daimler-Benz AG in 1995. In December 1998, Mr. Gentz was appointed to the board of management of DaimlerChrysler AG, where he was in charge of Finance and Controlling until December 2004. From 1987 to 1995 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 a 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 non-executive 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 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 (Honorary Senate member) and the Metropolitan Opera New York (advisory director). In 2007, Mr. Ackermann accepted an appointment as Visiting Professor in Finance at the London School of Economics. In July 2008, he was appointed Honorary Professor at the Johann Wolfgang Goethe University Frankfurt. Furthermore, he is an Honorary Fellow of the London Business School and holds an Honorary Doctorate from the Democritus University of Thrace in Greece.
Susan Bies, born 1947, graduated with a BS degree from the State University College at Buffalo, New York, and with a MA degree from Northwestern University, Evanston, Illinois, where she later gained a PhD. She began her career in 1970 as regional and banking structure economist with the Federal Reserve Bank of St. Louis, Missouri, and two years later became assistant professor of economics at Wayne State University, Detroit, Michigan. In 1977, she moved to Rhodes College, Memphis, Tennessee in a similar role, and in 1979 joined First Tennessee National Corporation in Memphis, where she remained until 2001. During the early years, her areas of responsibility included tactical planning and corporate development. In 1984 she became chief financial officer and chairman of the asset/liability committee. In 1995, she became executive vice president of risk management, and auditor and chairman of the executive risk management committee, as well as continuing her duties with the asset/liability committee. From 2001 until 2007, she was a member of the Board of Governors of the Federal Reserve System. Between 1996 and 2001, Mrs. Bies was a member of the Emerging Issues Task Force of the Financial Accounting Standards Board. From 2007 to 2008 she was a member of the Securities and Exchange Commission’s advisory committee on improving financial reporting, and chairman of its substantive complexity sub-committee. In June 2009, Mrs. Bies became a member of the board of directors of The Bank of America Corporation.
Victor L.L. Chu, born 1957, graduated with a LL.B from 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. Mr. Chu is also vice chairman of Asia House in London, a trustee of the WWF in Hong Kong, and a member of the Mayor of London’s International Business Advisory Council.
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 a 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 the 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.
Corporate governance report and is a former board member of the UK’s Food Standards Agency. In addition to his board roles, he is also an advisor to a number of other companies.
Rolf Urs Watter, 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 (currently serving as an interim chairman of the board) of Nobel Biocare Holding AG (since 2007), of Syngenta AG (since 2000), UBS Alternative Portfolio AG (since 2000) and A.W. Faber-Castell (Holding) AG (since 1997). He was formerly a non-executive chairman of Cablecom Holding AG (2004-2008) and non-executive director of Centerpulse AG (2002-2003), of Forbo Holding AG (1999-2005) and of Feldschlösschen Getränke AG (2001-2004). He is a part-time professor at the Law School of the University of Zurich. In addition, he is a member of the SIX Regulatory Board and of its Disclosure Commission of Experts. He also serves as chairman of two charity institutions.
Elections and terms of office The Articles of Incorporation require that the Board shall consist of not fewer than seven and not more than 13 members. The ordinary term of office is three years. On the expiration of their terms of office, Directors may be re-elected immediately. The Articles of Incorporation require elections to be organized in such a way as to ensure that no more than four Directors complete their term of office at any one general shareholders’ meeting. The election of a member of the Board is effected on an individual basis. Directors are elected by a majority of the votes cast. Zurich Financial Services Ltd’s Organizational Rules provide that no individual of 70 years of age or older shall be nominated or stay in office as a Director, although exceptions may be made under special circumstances.
Corporate governance report continued from 2004 to 2007 of Gallaher Group, and from 2007 to 2010 she was the independent Chairman of MF Global Inc. In July 2010 Ms. Carnwath was awarded an honorary doctorate from the University of Reading. Ms. Carnwath is a Senior Advisor of Evercore Partners and an independent Chairman of ISIS Equity Partners LLP. She is Chairman of the Board of Land Securities Group plc and a member of the Board of Barclays plc, Man Group plc and PACCAR Inc.
Rafael del Pino, born 1958, graduated in Civil Engineering from the Universidad Politécnica Madrid in 1981, and obtained an MBA from MIT Sloan School of Management in 1986. He began his career with Ferrovial before becoming a consultant with Boston Consulting Group in Paris, and returned in 1986. From 1992 to 1999 he was CEO of Grupo Ferrovial, and in 1999 he was appointed Executive Vice Chairman. In 2000 Mr del Pino assumed the position of Executive Chairman and Managing Director of Ferrovial S.A.. During his career at Ferrovial he has transformed the company from a mostly domestic construction company to a leading provider of infrastructure services around the world. Mr del Pino is a member of the board of Banesto (Banco Español de Crédito S.A.) and the International Advisory Board of Blackstone. He also maintains contact with the academic world through membership on the MIT Energy Initiative’s External Advisory Board, the MIT Corporation, the International Advisory Board of IESE and the European Advisory Board of Harvard Business School.
The Board consists entirely of Directors who are non-executive, independent from the Management, and who have never held an executive position in the Group. The Governance and Nominations Committee annually reviews the independence of the Board members and reports its findings to the Board for final determination. Board members are also subject to rules and regulations to avoid conflicts of interest and the use of inside information. A self-assessment of the full Board is carried out once a year. In 2011, the Board’s self-assessment was carried out on the basis of a comprehensive questionnaire. A detailed report was produced for and considered by the Board.
The Board is required to meet at least six times each year; during 2011 it held 10 meetings (of which six were partly attended by tele-/videoconference and one was held over two days). One meeting was fully dedicated to the discussion of strategic topics. Five meetings lasted four or more hours per day, and the remaining five meetings took about three hours on average. In addition, the Board approved four circular resolutions.
In 2011, average attendance at Board meetings was 93 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 make resolutions, they discuss and propose matters to the Board to take appropriate actions and pass resolutions. In 2011, committee meetings lasted between one and three hours on average. The Board has the following standing committees, which regularly report to the Board and submit proposals for resolution by 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 ten times in 2011. Average attendance at meetings of the Audit Committee was 93 percent.
The Audit Committee serves as a focal point for communication and oversight regarding financial accounting and reporting, internal control, actuarial practice, and compliance. It is responsible for reviewing the Group’s auditing process (including establishing the basic principles relating to and making proposals with respect to the audit of Zurich Financial Services Ltd and the Group) and reviews the internal control systems. The external auditors, the internal auditors and appropriate members of the GEC and other executives attend its meetings in order to, among other things, discuss the auditors’ reports, review and assess the auditing concept and the examination process, and assess the activities of internal and external auditors. For more information on the supervision and control of the external audit process, see page 44. At least annually, the Audit Committee, at least annually, reviews the standards of internal control, including the activities, plans, organization and the quality of internal audit and Group Compliance.
Statements regarding internal control and the procedures in place regarding internal control according to the UK Turnbull Guidance are given on pages 46 and 47.
The Risk Committee, consisting of four members, 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
Subject to the powers reserved to the Board as set out above, the Board has delegated the management of the Group to the CEO. The CEO and, under his leadership, the GEC are responsible for the development and execution of the strategic and financial plans approved by the Board. The CEO has specific powers and duties relating to strategic, financial and other matters as well as to the structure and organization of the Group and manages, supervises and coordinates the activities of members of the GEC. The CEO ensures that appropriate management tools for the Group are developed and implemented and represents the overall interests of the Group against third parties. The CEO holds delegated authority to approve certain acquisitions and divestments of businesses and assets, investments and the establishment of new businesses, mergers, joint ventures or cooperation with other organizations.
The internal audit function and the external auditors as well as the compliance function also assist the Board in exercising its controlling and supervisory duties. Information on major areas of activities of these functions is set out on pages 43 to 46.
For key areas, cross-functional committees have been established to facilitate the coordination and alignment of recommendations to the CEO for approval on specific subject matters.
Martin Senn Swiss 1957 Chief Executive Officer Mike Foley American 1962 Chief Executive Officer North America Commercial & Regional Chairman of the Americas Mario Greco Italian 1959 Chief Executive Officer General Insurance Kevin Hogan American 1962 Chief Executive Officer Global Life Axel Lehmann Swiss 1959 Chief Risk Officer & Regional Chairman of Europe 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 Pierre Wauthier French / British 1960 Chief Financial Officer
All current members of the GEC served throughout 2011 except for Pierre Wauthier. He was appointed Chief Financial Officer and member of the GEC effective October 1, 2011 succeeding Dieter Wemmer who had resigned from the GEC and his positions as the Chief Financial Officer and Regional Chairman of Europe effective September 30, 2011. Also, effective October 1, 2011, Axel Lehmann assumed the role of the Regional Chairman of Europe in addition to his role as Chief Risk Officer. Further, Mike Foley assumed the role of the Regional Chairman of the Americas for Zurich effective July 1, 2011 in addition to his role as CEO North America Commercial. Paul N. Hopkins retired from the GEC and his positions as Regional Chairman of the Americas for Zurch and Chairman of the Board of Farmers Group, Inc. effective June 30, 2011.
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, 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 on 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 the Honorary Consul of the Republic of Korea in Zurich and as a member of the board of directors of the Swiss-American 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), the European Financial Services Roundtable (EFR), the advisory board of Tsinghua School of Economics and Management, of the board of trustees of the Lucerne Festival and the board of directors of the Atlantic Council. He was previously a member of the board of directors of various banks and financial services institutions.
Mario Greco, born 1959, earned a graduate 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
Corporate governance report 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 the 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, Switzerland, Austria, Greece and Turkey. In April 2005, he joined the Sanpaolo IMI Group in Milan as the chief executive officer of EurizonVita, 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. Mr Greco is a member of the Board of Zurich Holding Company of America, Inc. He is also a member of the board of directors of Editoriale l’Espresso Group, Indesit and Saras.
Axel P. Lehmann, born 1959, graduated with an MBA and PhD from the University of St. Gallen in Switzerland. After several U.S. research studies, he wrote a post-doctorate certification at the University of St. Gallen and subsequently completed the Wharton Advanced Management Program. He was a lecturer at several universities and institutes and became vice president of the Institute of Insurance Economics at the University of St. Gallen and the European Center, responsible for Consulting and Management Development. He was head of Corporate Planning and Corporate Controlling for Swiss Life before he joined Zurich in 1996 and held various executive management and corporate development positions within Zurich Switzerland. He became a member of the Group Management Board responsible for Group-wide Business Development functions in November 2000. In September 2001, he was appointed Chief Executive Officer for Northern, Central and Eastern Europe and subsequently Chief Executive Officer of the Zurich Group Germany. In March 2002, he became CEO of the Continental Europe business division and a member of the GEC. In 2004, he was in charge of the consolidation of the United Kingdom, Ireland and South Africa with the Continental Europe business division. In September 2004, he became CEO of Zurich American Insurance Company and the North America Commercial business division in Schaumburg/Chicago. In January 2008 he assumed his current role as Group Chief Risk Officer, with additional responsibility, since 2011, as Chairman of the board of directors of Farmers Group, Inc. and Regional Chairman of Europe and previously for Group IT from 2008 until 2010. Mr. Lehmann is an honorary professor for business administration and service management and Chairman of the board of the Institute of Insurance Economics at the University of St. Gallen in Switzerland. He is also a member of the board of directors of UBS AG and a member and past Chairman of the Chief Risk Officer Forum (CRO Forum).
Cecilia Reyes, born 1959, holds a PhD in finance from London Business School and an MBA from the University of Hawaii. She worked from 1990 until 1995 for Credit Suisse in Zurich in various roles in Credit Suisse Asset Management, Global Treasury and Securities Trading. In 1995, she joined ING Barings in London and in 1997 she became a Director and Head of Trading Risk Analytics. After that she moved to Amsterdam in 2000 as Head of Risk Analytics for ING Asset Management to develop risk management methods for the asset management operation. Ms. Reyes joined
Zurich in January 2001 as Regional Manager for Group Investments with responsibility for North America, and became Regional Manager for Europe and International Businesses in July 2004. From April 2006 until March 2010 she was Head of Investment Strategy Implementation. In April 2010, she assumed her current role as Chief Investment Officer and became a member of the GEC.
Geoffrey (Geoff) Riddell, born 1956, holds an MA degree in natural sciences (chemistry) from Oxford University (The Queen’s College) and later qualified as a chartered accountant. He started his career with Price Waterhouse in 1978 and four years later moved to AIG, where he held various roles, including country manager for Hong Kong, Belgium and France. While in Hong Kong, he was responsible for setting up the first foreign general insurance company in China. Mr. Riddell joined Zurich in May 2000, initially as managing director of Zurich Commercial in the UK, and then became managing director of the UK Corporate and Government businesses. In November 2002, he was appointed CEO of General Insurance in the UK, Ireland and Southern Africa. Mr. Riddell assumed the position of Chief Executive Officer (CEO) of Global Corporate in April 2004, and was promoted to be a member of the Group Executive Committee in October 2004. On January 1, 2009 he took on the roles of CEO of Asia-Pacific & Middle East (APME), responsible for both Life and General Insurance in the APME region and Chairman of Global Corporate. In July 2010, he assumed the newly created role of Regional Chairman of Asia-Pacific & Middle East. Mr. Riddell is a former member of the General Insurance Council of the Association of British Insurers and for three years chaired its liability committee. From 1990 to 1995, he was a member of the Hong Kong Federation of Insurers Council. He was a director of Pool Re from February 2005 until August 2010 and of the Forum for Global Health Protection from 2007 until the end of 2010. He was a member of the Confederation of British Industry’s Chairmen’s Committee and chaired the CBI Financial Services Council until September 2010. Until late 2009, he was a member of the Foundation Board of IMD in Lausanne, the City of London EU Advisory Committee and the Lord Mayor of London’s Advisory Committee.
Pierre Wauthier, born 1960, holds a master’s degee in international finance from l’Ecole des Hautes Etudes Commerciales in Paris and a master’s degree (Maîtrise) in private law from the Sorbonne University in Paris. He started his professional career in 1982 at KPMG. After that, he worked for two years at the French Ministry of Foreign Affairs. In 1985, he joined J.P. Morgan in Paris where he held various senior positions. In 1994, he joined J.P. Morgan’s office in London as Vice President, among others responsible for the Insurance Product Group. Mr. Wauthier joined Zurich in 1996 as Corporate Credit and Investment Risk Manager, served from 1999 to 2002 as Head of Investor Relations and Rating Agency Management and became Executive Vice President and Chief Financial Officer of Zurich’s wholly owned subsidiary Farmers Group, Inc. in 2002. In 2007, he became Group Treasurer, and in 2010 also Head of Centrally Managed Businesses. On October 1, 2011, he was appointed Chief Financial Officer of Zurich Financial Services Group and became a member of the GEC.
Changes to the GEC as from January 1, 2012 As from January 1, 2012, Jeff Dailey assumed the position of Chief Executive Officer Farmers Group, Inc. and became a member of the GEC as of the same date.
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 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.
Zurich Financial Services Ltd used electronic voting for all the resolutions taken at last year’s Annual General Meeting. In accordance with Swiss practice, Zurich Financial Services Ltd informs all shareholders at the beginning of the general meeting of the aggregate number of proxy votes received.
Convocation of the general meeting of shareholders General meetings of shareholders are convened by the Board of Directors or, if necessary, by the auditors and other bodies in accordance with the provisions set out in Articles 699 and 700 of the Swiss Code of Obligations. Shareholders with voting rights representing at least 10 percent of the share capital may call a shareholders’ meeting, indicating the matters to be discussed and the corresponding proposals. The invitation to shareholders is mailed at least 20 calendar days before the meeting is held and, in addition, is published in the Swiss Official Gazette of Commerce and in several newspapers.
For addresses and further upcoming important dates, see the Shareholder Information starting on page 340 (Financial Calendar on page 342).
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 a tender process in 2007, 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.
in USD millions, as of December 31Audit and non-audit fee amounts d
In 2011, the Group strengthened its governance practices and structures at the local and regional levels for regular review of risk management and internal controls. Local management, led by the legal entity CEO, is responsible for the maintenance of appropriate controls and for ensuring that risks are appropriately identified and addressed. They meet frequently with risk and assurance functions to ensure an effective system of risk identification and mitigation and maintenance of sound internal controls. In addition, regular review of reporting by risk and other assurance functions is carried out by (1) subsidiary boards or subsidiary board audit committees and, additionally, (2) regional oversight
The internal control system focuses on key financial reporting, operational and compliance controls. The system encompasses the policies, processes and activities that contribute to the reliability of financial reporting, the effectiveness and efficiency of operations and compliance with laws and regulations. In 2011, further progress was made to develop and improve the Group’s control system while maintaining the focus on the effectiveness of the overall internal control environment.
This statement does not apply to risk management and internal control of insurance operations in Latin America related to the long-term alliance with Banco Santander entered into in 2011.
2011 Remuneration summary 49 2011 Remuneration report 51 Remuneration governance 51 Remuneration philosophy 54 Remuneration and shareholdings of the Board of Directors 60 Remuneration and shareholdings of the Group Executive Committee 63 Remuneration of employees 70
In 2011, the Board of Directors continued to oversee and take decisions on the design and implementation of the remuneration principles, rules and architecture. The previous assessment that these are aligned with the delivery of the Group’s strategy and reflect current international best practices in terms of governance, plan design and disclosure continues to be confirmed. The Group’s remuneration architecture is simple, transparent and market competitive, promotes a high performance culture, has an orientation towards the long-term and is aligned with risk considerations.
Zurich operates a balanced and effectively managed remuneration system which is aligned with risk-considerations and provides for competitive total remuneration opportunities that attract, retain, motivate and reward the employees to deliver outstanding performance. Total remuneration for an individual employee is influenced by factors including the scope and complexity of the role, business performance and affordability, individual performance, internal relativities, external competitiveness and legal requirements. Target opportunities are benchmarked to median levels in clearly defined markets (depending on the role this can be global, regional or local) and take into account the internal structures.
Base salaries / Fees Short-term incentives Long-term incentives / Share-based remuneration
Total remuneration 4 1 For all employees equals the cash incentives earned for the year 2 Includes the fees allocated in restricted shares for Directors 3 Includes other employee benefits, pension benefits and other remuneration costs 4 Actual, gross and for cash amounts based on the accrual principle
Remuneration expenditure should be considered in the context of Zurich‘s overall revenues, capital base and profitability. The key figures are set out in the table below and reflect data for 2011 as presented in this annual report: Gross written premiums and fees 1 52,967 Business operating profit 4,261 Net income attributable to shareholders 3,766 Shareholders’ equity 31,636 Cost of dividends paid after tax 2,213 Total variable remuneration pool for all employees 618 – as a percentage of gross written premiums and fees 1% – as a percentage of shareholders’ equity 2%
As can be seen from these metrics, relative to Zurich’s overall revenues and capital position, expenditure on variable remuneration constitutes relatively small percentages. Among other factors, in determining the amount of the total variable remuneration pool for all employees, the Board also considers the long-term economic performance of the Group. For 2011, the average economic profit generated over the previous three years was higher than the amount spent on variable remuneration, as was the case in 2010. On a general note, year-on-year remuneration comparisons in US dollars at all levels of the company, be it for Directors, GEC or for all other employees, have been heavily impacted by the fluctuation in exchange rates.
Summary of further key remuneration aspects in 2011 In addition to the remuneration context and outcomes described above, further key aspects for 2011 are outlined below: • The remuneration system as set out in the Remuneration report for 2010 was subject to a non-binding advisory vote at the Annual General Meeting on March 31, 2011 with 94.6 percent votes in favor.
• The criteria and process used to re-assess the management positions that are considered key risk takers for the Group were clarified and documented, building on the cooperation between Group Human Resources and Group Risk Management.
in USD million, for the year ended December 312011 remuneration highlights in USD million, for the year ended December 31Key financial figures
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 them, if appropriate.
During 2011, the Board of Directors continued to monitor the remuneration architecture and operational implementation, and a joint meeting of the Remuneration Committee and the Risk Committee was held in September 2011. Overall the Board of Directors continues to be firmly of the opinion that the existing remuneration architecture is aligned with the delivery of the Group’s strategy and reflects current international best practices in terms of the governance, plan design and disclosure.
In 2011, a number of actions were implemented (which will continue going forward) as follows: • A joint meeting between the Remuneration Committee and the Risk Committee took place to discuss a risk review of the remuneration architecture and the remuneration governance framework. For this joint meeting, the Group Risk Management function evaluated the remuneration architecture and reported its findings on whether and how the remuneration architecture is consistent with effective risk management and does not encourage inappropriate risk taking that exceeds the Group’s level of tolerated risk.
• Long-term incentive grants were made solely in the form of performance shares (options were discontinued from 2011 onwards). This recognizes market trends and the Board of Directors is of the opinion that performance shares best align the ultimate rewards to individuals with actual performance achievements. Option grants made in the period up to and including 2010 continue to earn out in accordance with the terms and conditions of those grants.
• During the annual process to determine the variable remuneration funding, Group Risk Management consulted with other control, governance and assurance functions and provided the CEO with a review of risk factors to consider when overall performance for the funding of incentives was being assessed. The Chief Risk Officer is available to discuss these findings with the Remuneration Committee and the Board of Directors. Among other factors the CEO takes into account the assessment by Group Risk Management when presenting his proposals for the funding of the short-term and long-term incentive pools to the Remuneration Committee, which in turn makes its recommendation to the Board of Directors for final approval.
The approval framework is set out below: Subject Recommendation from Final approval from
Remuneration Committee and Risk Committee based on proposals by the CEO
Guidelines on share ownership requirements for Directors and members of the Group Executive Committee To align the interests of the Board of Directors and the GEC with those of shareholders, Directors and GEC members build their ownership position in the Company and have to meet a certain ownership requirement. Directors achieve this through part of their fee payment being made in three years sales restricted shares and market purchases. GEC members achieve this through their participation in long-term incentive plans and market purchases. Directors and GEC members have a period of five years to meet their ownership requirement and the Remuneration Committee monitors compliance with these guidelines on an annual basis.
Based on their role on the Board and the fee structure described on page 60, fee levels are established for each member of the Board of Directors of Zurich Financial Services Ltd. Fees are paid in cash and in shares with approximately one-third of the fee being provided in three-year sales restricted shares of Zurich Financial Services Ltd.
Zurich is committed to providing competitive total remuneration opportunities that attract, retain, motivate and reward employees to deliver outstanding performance. The remuneration philosophy is an integral part of the overall offering to employees. Zurich has a clearly defined global performance management process which supports the achievement of the overall business strategy and operating plans, and links individual pay with business and personal performance. This is delivered through the remuneration framework overseen by the GEC, the Remuneration Committee and the Board of Directors itself.
Guiding principles of the remuneration philosophy The guiding principles for the remuneration philosophy as set out in the Remuneration Rules are as follows: • The Group’s remuneration architecture is simple, transparent and implementable. For those individuals considered to be key risk takers for the Group, it is oriented towards the long-term.
Total remuneration Total remuneration for an individual employee is influenced by a number of factors such as the scope and complexity of the role, business performance and affordability, individual performance, internal relativities, and legal requirements. As described on pages 54 and 56 target opportunities are benchmarked to median levels in clearly defined markets. Depending on the position, the global, regional or the respective local market is utilized for benchmarking. The remuneration mix between base salary and variable pay is also aligned with local market practices and the internal structures. Zurich is transparent in the communication of how the reward structure is defined and the processes used for decision making. Total remuneration includes the following elements:
Generally paid within an 80 percent – 120 percent range of relevant market median
• A number of distinct short-term incentive pools are established to cover each area of the Group’s business. For example, for the most senior executive group, each business segment, operations, the functional areas and the Corporate Center. The pool structure is reviewed each year. Each participant is allocated to one of the STIP funding pools.
• 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 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 percent and 175 percent 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.
• Depending on the size of the STIP funding pool and the individual performance rating, short-term incentive awards can vary between 0 percent and 200 percent of the individual target award level.
During 2011, approximately 10,000 employees were transferred from local incentive plans to the Group plan.
Deferral of the long-term incentives is achieved by: • pro rata vesting of the long-term incentive grants in one third installments over the three years following the year of grant, and
Long-term incentive plans applied by the Group may include i) performance shares, ii) performance based options, or iii) restricted shares, or a combination thereof. With effect from January 1, 2011 the regular long-term incentive grants are made in performance shares and no option grants have been made since January 2011. The key design features for the 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 three year calendar period prior to the vesting date and the vesting percentage, based on the actual ROE and TSR achievements, can vary between 0 percent and 175 percent 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: Level of vesting for share and share option target grants
Where the actual ROE lies in between the values in the table, the vesting percentage is determined by interpolating the figures in the above matrix. As an example, with the relative TSR in the top quartile and an average ROE of 14 percent over the three year period, the vesting percentage would be 142 percent of the target grant.
Remuneration and shareholdings of the members of the Board of Directors and the Group Executive Committee As of December 31, 2011, 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.
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 CHF 50,000 in 2011 (USD 40,000 in 2010) per annum plus CHF 10,000 in 2011 (USD 10,000 in 2010) per annum if he or she also chairs an audit committee of such a board. Given the increased responsibilities and time commitment for the Boards in Ireland, i.e. Zurich Insurance plc (ZIP) and Zurich Life Assurance plc (ZLAP), the fees for these subsidiary boards were increased from CHF 50,000 to CHF 75,000 with effect from July 1, 2011.
The annual basic fee for the Vice Chairman during 2011 was CHF 375,000 (USD 330,000 in 2010), of which an amount of CHF 80,000 in 2011 (USD 68,500 in 2010) is allocated to sales restricted Zurich Financial Services Ltd shares. The annual basic fee for the Chairman of the Board of Zurich Financial Services Ltd during 2011 was CHF 1,000,000 (USD 700,000 in 2010) and one-third of the total amount, i.e. CHF 333,500 in 2011 (USD 233,500 in 2010) is allocated to sales restricted Zurich Financial Services Ltd shares. Neither the Chairman nor the Vice Chairman receive any additional fees for their committee work.
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, 2011, amounted to CHF 4,257,500 (USD 4,762,571). This included CHF 3,079,000 (USD 3,444,264) in cash and a value at the allocation date of CHF 1,178,500 (USD 1,318,306) in three-year sales restricted shares. The share price at the allocation date was CHF 218.90. The corresponding amount for 2010 was USD 3,445,000, which comprised 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 grant date in 2010 was CHF 246.50. The Directors’ fees are not pensionable.
2 Committee members receive a cash fee of CHF 50,000 (USD 40,000 in 2010) for all Committees on which they serve, irrespective of the number. The Committees on which the Directors serve are set out in the Corporate Governance Report on page 30.
6 The shares allocated to the Directors are sales-restricted for three years. 7 As of June 30, 2011, Mr Gentz was allocated 1,523 shares, Mr Ackermann was allocated 571 shares, and the other Board members were allocated 365 shares based on a full year’s membership. The share price (CHF 218.90) as of June 15, 2011 was 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 Swiss francs for 2011 and in US dollars for 2010 (translated into Swiss francs) of the portion of the fee to be allocated in shares.
Zurich Insurance plc and of the board of Zurich Life Assurance plc. He also earned an annual fee of CHF 10,000 for being chair of the audit committees of these two companies. In 2010, he received an annual fee of USD 40,000 for his membership of the board and an annual fee of USD 10,000 for being chair of the audit committees of these two companies.
11 At the Annual General Meeting on March 30, 2010 Mr Pidoux retired from the Board and Mr Ackermann was elected to the Board and was appointed Vice Chairman. 12 As of June 30, 2010, Mr Gentz was allocated 1,071 shares, Mr Ackermann was allocated 235 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 US dollars (translated into Swiss francs) of the portion of the fee to be allocated in shares.
Remuneration for former Directors No benefits (or waiver of claims) have been provided to former members of the Boards during the year 2011, nor were any provided during the year 2010.
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 as 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.
The individual remuneration elements are described in more detail below (the amounts for the highest paid executive are also included): Value of total remuneration The total value of the various remuneration elements earned by the members of the GEC in 2011 was USD 50.3 million, an increase of USD 4.5 million compared with USD 45.8 million earned in 2010 calculated on the same basis. The increase is almost entirely due to fluctuations in exchange rates. In Swiss francs, the total value declined from CHF 47.2 million in 2010 to CHF 45.4 million in 2011.
Overall funding for the incentives is based on the overall group profit performance in 2011 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 2011 vary between 75 percent and 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 2011 Members of the GEC participate in the pension plan arrangements of the entities where 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 remaining GEC members participate in defined benefit plans that provide retirement benefits based on final pensionable earnings and the number of years of service. Normal retirement ages vary from 60 to 65. The total value of pension benefits accruing to members of the GEC during 2011, calculated on the basis of the service costs for the company as assessed under IAS 19 accounting principles, was USD 3.4 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.
Equity grants made to the Group Executive Committee under the Group Long-Term Incentive Plan in 2011 As described above, GEC members received under the Group Long-Term Incentive Plan in 2011 an annual grant of performance shares. In extraordinary circumstances, restricted share grants may also be made. For members of the GEC, including the CEO, the value of the target grants in 2011 was set between 100 percent and 225 percent of the base salary.
As in previous years, the target grants for 2011 were made on the third working day in April, i.e. on April 5, 2011. The target number of performance shares was calculated by dividing the monetary value of the grant by the share price on the day prior to the grant respectively. Effective in 2011, all long-term incentive grants were made solely in the form of performance shares.
The vesting of the grants and the performance criteria are set out on pages 57 to 59. The following equity grants were made in 2011: Performance share grants The total number of target performance share grants made to members of the GEC during 2011 was 63,787. This compares with an equivalent figure of 29,129 made for 2010, the increase reflects that no option grants were made in 2011. The value of the target performance share grants made on April 5, 2011 to members of the GEC in 2011 was USD 16.8 million at the date of grant based on the assumption of 100 percent vesting and a share price of CHF 243.60 on the day prior to the grant. For those GEC members who joined during 2011, the number and the value of the share grants is based on the grant for 2011 pro-rated for the time spent as a GEC member during the year.
The number of share awards that vested in 2011 to members of the GEC serving in 2011 from the performance share grants made in 2008, 2009 and 2010 was 32,737. This represented a basic vesting level of 135 percent of target given the actual ROE and TSR performance achievements. One-half of the shares that vest under the plan are sales restricted for three years from the date of vesting.
Share option grants There were no share option grants in 2011.
5 Includes employee benefits, expatriate allowances, perquisites, benefits-in-kind and any other payments due under employment contracts. Benefits-in-kind have been valued using market rates.
Highest total remuneration for Group Executive Committee members The highest paid remuneration for the GEC members was CHF 7.9 million for Mr Senn, the Group’s CEO. This amount reflects his 2011 base salary, the cash incentive earned for 2011, the value of pension benefits, other remuneration and the value of the target performance shares granted in 2011. This compares with an amount of CHF 7.1 million in 2010. All Mr Senn’s remuneration is paid in Swiss francs.
Compensation changes for members of the GEC, where applicable, were focused on increasing the long-term part of variable compensation. The change in Mr Senn’s remuneration in 2011 was entirely due to an increase in the value of his target long-term incentive grant. This further aligns his remuneration with the long-term interest of shareholders.
3 Includes employee benefits, perquisites, benefits-in-kind and any other payments due under the employment contract. Benefits-in-kind have been valued using market rates. 4 The share and share option grants will vest in the future according to the achievement of defined performance conditions. The value of the share and share options assumes that the grant will vest in the future at 100 percent of the target level with the valuation of the options based on the Black-Scholes option pricing model as set out in Note 24 to the consolidated financial statements, the valuation of the target performance share grants based on the share price on the day prior to the grants (CHF 243.60 for 2011 and CHF 259.90 for 2010).
Termination arrangements for members of the Group Executive Committee who gave up their functions during the year During 2011, one member retired and another left the Group. Agreements with the departing members provided remuneration in accordance with their employment contracts. No termination payments were paid.
Remuneration for former Group Executive Committee members As described in last year’s report the member retiring at the end of 2010, after long service with the Group, is being retained as a consultant in 2011 and 2012. Recognizing the prior contractual obligations, adherence to postemployment obligations and the provision of services in 2011 the member received remuneration in the amount of USD 2.4 million during 2011. No other former members of the GEC received remuneration in 2011.
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 55 and the Long-Term Incentive Plan vesting matrix as described on page 59.
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. Starting in 2011, there are no further option grants.
Under the share option program, the total number of shares under option for the GEC members as of December 31, 2011, and 2010, respectively, is set out in the tables below.
M. Senn, Chief Executive Officer 20,936 81,362 15,806 49,220 J. Amore, Senior Advisor 3 – – 21,590 102,147 M. Foley, Chief Executive Officer North America Commercial and Regional Chairman of the Americas 9,726 41,348 10,459 23,996 M. Greco, Chief Executive Officer General Insurance 7,847 36,885 5,387 15,809 K. Hogan, Chief Executive Officer Global Life 1,466 8,185 442 2,237 P. Hopkins, Chairman of the Board of Farmers Group, Inc. and former Regional Chairman of the Americas 4 – – 7,733 48,381 A. Lehmann, Chief Risk Officer and Regional Chairman of Europe 18,671 86,713 16,711 64,628 C. Orator, Chief Administrative Officer 5,868 12,987 5,026 14,035 C. Reyes, Chief Investment Officer 2,555 15,123 1,333 6,002 G. Riddell, Regional Chairman of Asia-Pacific & Middle East 22,182 62,685 19,071 67,640 K. Terryn, Group Head of Operations 2,239 16,391 1,187 10,233 P. Wauthier, Chief Financial Officer 5 3,936 25,061 – – D. Wemmer, Chief Financial Officer and Regional Chairman of Europe 6 – – 17,102 67,816 1 None of the GEC members together with parties related to them held more than 0.5 percent of the voting rights as at December 31, 2011 or 2010, either directly or through share options.
Year of grant Total 1 Mr Hopkins retired on June 30, 2011. Mr Dailey was appointed as CEO of Farmers and member of the GEC as of January 1, 2012. 2 Mr Wauthier was appointed on October 1, 2011.
In 2011, the Board of Directors approved the extension of the trading plan concept to selected executives who are often prohibited from being able to deal in Zurich securities because of the nature of their function.
Personal loans for members of the Group Executive Committee As of December 31, 2011 and as of December 31, 2010, there were no loans, advances or credits outstanding for GEC members.
Personal loans for former members of the Group Executive Committee Former members of the GEC are eligible to continue their mortgage loans following retirement on similar terms to those when they were employed, in line with the terms available to employees in Switzerland as stated above.
All employees The following section includes information regarding the total remuneration earned by employees for the financial year 2011 across the Group, including remuneration for GEC members. The information provided is set out in accordance with the additional disclosure requirements defined in the FINMA Circular on Remuneration Schemes, applicable for the first time in 2010. The Group had 52,648 and 54,934 employees (full-time equivalents) as of December 31, 2011 and 2010, respectively.
• The total amount of sign-on incentive payments made in the performance year. These payments were made to people whose hire date was in 2011.
The total number of beneficiaries receiving variable remuneration is approximately 48,000 in 2011 (52,000 in 2010).
Total remuneration Combining the fixed and variable remuneration the total remuneration for all employees is as follows: Cash – fixed 4,025 3,746 Cash – variable1 482 527
Total remuneration 5,672 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. From 2011 onwards, options are no longer granted. 4 Includes other remuneration and pension benefits.
in USD million, for the year ended December 31Variable remuneration in USD million, for the year ended December 31Total remuneration
Value of outstanding deferred remuneration The Group’s remuneration system includes instruments for the deferral of remuneration, and the following table provides an overview of the overall value of the outstanding deferred remuneration at December 31, 2011 and 2010: Unvested performance share grants 203 166 Unvested performance option grants 22 53 Unvested restricted share grants 6 6 Vested but sales restricted shares 143 148 Value of overall outstanding deferred remuneration 374 372
Impact on net income in 2011 and 2010 from remuneration granted in prior years Under the Group Long-Term Incentive Plan, a calculation is made at the date of vesting each year to determine the actual number of shares and options to be awarded to plan participants relative to the number that was expected to be awarded at the grant date. Any difference in value is charged to income in the year of vesting. For shares and options vesting in 2011 and in 2010, there was no material difference in the actual and estimated amounts and therefore there was no financial impact in 2011 or in 2010.
Sign-on payments paid / number of beneficiaries1 3 7 – – Severance payments paid / number of beneficiaries2 3 7 1 2 Total of sign-on and severance payments 6 14 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.
2 These severance payments include payments to employees or former employees, in cash or in any other form, that represent additional benefits in excess of what is required by applicable law / statute. They do not include payments corresponding to standard "garden leave", that are not contrary to applicable law, and do not go beyond reasonable local market practice in amount, nature or duration, and are in accordance with reasonable payments generally made in the relevant market to persons in comparable positions.
In summary, the Group has maintained a good result despite the frequency and cost of significant catastrophe and weather-related events, while executing on the Group’s focus on improved profitability from underlying underwriting and maintaining its strong capital position.
General Insurance gross written premiums and policy fees 34,572 33,066 5% Global Life gross written premiums, policy fees and insurance deposits 27,711 27,675 – Farmers Management Services management fees and other related revenues 2,767 2,778 – Farmers Re gross written premiums and policy fees 3,529 4,194 (16%)
Farmers business operating profit 1,486 1,686 (12%) Farmers Management Services gross management result 1,333 1,338 – Farmers Management Services managed gross earned premium margin 7.3% 7.3% –
Return on common shareholders’ equity (ROE) 11.9% 11.4% 0.6 pts Business operating profit (after tax) return on common shareholders’ equity (BOPAT ROE) 10.2% 12.9% (2.6 pts)
1 Parentheses around numbers represent an adverse variance. 2 Changes to the basis of calculation of embedded value, including new business, are set out in the Embedded value report and in the Global Life section of the Operating and financial review.
3 Excluding average cash received as collateral for securities lending of USD 246 million in the year ended December 31, 2010 in USD millions, for the years ended December 31, unless otherwise stated
The Group’s focus on the mitigation of market risk is reflected in the investment gains on derivatives, held for economic hedging, which offset losses in business and investment results and cover balance sheet risks. Robust and sustained underwriting discipline during the continued economic difficulties has improved the underlying General Insurance result, partially compensating for above-average losses from catastrophes and weather-related events.
• General Insurance business operating profit decreased by USD 402 million to USD 2.3 billion, or by 15 percent in U.S. dollar terms and 19 percent on a local currency basis. The sustained focus on profitability has continued to produce strong improvements in the underlying loss ratio, helping to partly offset the effect of the exceptional frequency and overall severity of catastrophe and significant weather-related loss events. Major catastrophe losses of USD 1.0 billion in 2011, before the Group’s aggregate catastrophe reinsurance recovery, arose from floods and earthquakes in the Asia-Pacific region and a hurricane in the U.S. By comparison, major catastrophe losses in 2010 were USD 275 million due to the earthquake in Chile and floods in Australia.
Other Operating Businesses reported an increase in its business operating loss of USD 34 million to USD 835 million primarily as a result of positive one-off items included in 2010, as well as the strengthening of the Swiss franc against the Group’s reporting currency, the U.S. dollar.
Non-Core Businesses reported a business operating loss of USD 8 million compared with a loss of USD 157 million in 2010. The improvement resulted mainly from lower banking loan loss provisions of USD 128 million compared with USD 349 million in 2010.
Net income attributable to shareholders increased by USD 339 million to USD 3.8 billion, or by 10 percent. The overall result benefited from net capital gains including the gain realized on the sale of part of the Group’s investment in New China Life Insurance Co., Ltd (NCI), and valuation gains on derivatives. In 2010, costs were recorded for the settlement of a class action suit in the U.S. The shareholders’ effective tax rate was 24.1 percent for the year ended December 31, 2011, compared with 20.3 percent for the year ended December 31, 2010, primarily as a result of fluctuations in the geographic profit mix, as well as favorable one-off tax settlements in 2010.
ROE of 11.9 percent increased by 0.6 percentage points due to the increase in net income attributable to shareholders. BOPAT ROE was 10.2 percent. Diluted earnings per share decreased to CHF 22.62 for the year ended December 31, 2011, compared with CHF 24.33 in 2010.
Business operating profit of USD 169 million decreased by USD 572 million compared with 2010 mainly due to major catastrophes and weather-related losses but also due to higher large losses, which masked significant improvement in the underlying underwriting result. Investment income increased compared with 2010 due to higher invested assets, but this was more than offset by a deterioration of non-technical expenses in 2011 as a result of fewer gains on foreign currency transactions and other positive one-offs in 2010.
The net underwriting result deteriorated by USD 506 million to a loss of USD 301 million reflected in the 9.8 percentage points increase in the combined ratio to 105.6 percent. The loss ratio deteriorated by 10.6 percentage points compared with 2010. Underlying loss ratio improvements resulting from increased rates and better risk selection helped to compensate for the significant impact from major catastrophe and weather-related events. The expense ratio improved 0.8 percentage points to 20.3 percent mainly driven by higher volumes and a reduction in other underwriting expenses as a result of disciplined cost management. This was partially offset by continued strategic investments in both Asia-Pacific and the Middle East.
Business operating profit decreased by USD 70 million to USD 1.0 billion, or by 6 percent in U.S. dollar terms. The net underwriting result improved by USD 98 million compared with 2010, but this improvement was offset by lower investment income as a result of lower yields and lower hedge fund gains reflecting market volatility.
Gross written premiums and policy fees 12,932 12,427 4% Net underwriting result 379 287 32% Business operating profit 964 774 25% Loss ratio 70.8% 72.3% 1.5 pts Expense ratio 26.2% 25.4% (0.8 pts) Combined ratio 97.0% 97.7% 0.7 pts
The net underwriting result decreased by USD 197 million to a loss of USD 265 million reflected in the 5.5 percentage points increase in the combined ratio to 107.8 percent. The loss ratio increased by 5.6 percentage points to 72.9 percent, impacted by the major catastrophe losses from the floods in Australia, the tsunami and earthquake in Japan and the earthquakes in New Zealand, as well as by the severe weather events in Australia including the Victoria storms and Cyclone Yasi. These impacts were partially offset by benign catastrophe experience in Latin America, which in 2010 was affected by the earthquake in Chile. The lower expense ratio was mainly driven by targeted expense saving initiatives partially offset by investments in emerging markets.
Total reserves for life insurance contracts, net of reinsurance, and liabilities for investment contracts 184,599 187,196 (1%)
New business – highlights 3, 4 New business annual premium equivalent (APE) 3,992 3,699 8% Present value of new business premiums (PVNBP) 33,399 31,399 6% New business margin, after tax (as % of APE) 24.5% 23.3% 1.2 pts New business margin, after tax (as % of PVNBP) 2.9% 2.7% 0.2 pts New business value, after tax 980 862 14%
2 Net policyholder flows are defined as the sum of gross written premiums and policy fees and deposits, less policyholder benefits. 3 In 2011, new business figures have been determined including a liquidity premium in the discount rate and, for greater consistency with other European insurers, a cost of capital applied to residual non-hedgeable risks of 4 percent. The 2010 comparatives have been restated to reflect these changes.
Asia-Pacific and Middle East 136 112 524 463 25.9% 24.3% 124 79
New business value, after tax was USD 980 million, an increase of USD 118 million or 14 percent in U.S. dollar terms and 7 percent on a local currency basis. Excluding the effect of the refinement in methodology described in footnote 4 of the results overview table, new business value was flat in U.S. dollar terms and decreased by 5 percent on a local currency basis. Volume growth was more than offset by a reduction in new business margin of 1.7 percentage points in local currency. In U.S. dollar terms, overall new business margin for the year remains at a strong level of 21.6 percent excluding the methodology change and 24.5 percent including the change. Margin was positively impacted by an increase in the proportion of protection business sold which was particularly evident in Spain, where higher levels of protection business meant new business value decreased only marginally compared with 2010 despite lower overall APE. The change in persistency assumptions in North America negatively impacted new business margin as did product mix in the UK which experienced higher growth in lower margin products. Lower interest rates in other countries in Europe also reduced margin on some lines of business.
Insurance deposits increased by USD 745 million to USD 16.1 billion, or by 5 percent in U.S. dollar terms and by 1 percent on a local currency basis driven by single premium volumes with increases in Corporate Life & Pensions in the UK and Asia-Pacific and Middle East as well as in Private Banking Client Solutions in the UK being partially offset by reductions in Spain, Ireland and Germany.
IFA/Brokers decreased new business value by USD 16 million to USD 185 million, or by 8 percent in U.S. dollar terms and 13 percent on a local currency basis. Growth in Latin America was more than offset by lower sales in the UK and the domestic Irish market as well as reduced volumes for cross-border business manufactured in the European hub in Ireland for distribution in Italy, where 2010 benefited from additional sales resulting from an Italian fiscal amnesty. Lower volumes also put pressure on new business margins which fell by 0.9 percentage points.
Agents decreased new business value by USD 19 million to USD 130 million, or by 13 percent in U.S. dollar terms and 15 percent on a local currency basis. Increased sales in Switzerland and Latin America improved new business value but this was offset by the negative impact of the reduced new business margin in North America resulting from a change in persistency assumptions and lower sales in Italy and Germany.
Corporate Life & Pensions increased new business value by USD 164 million to USD 293 million. Excluding the corporate protection methodology refinement, new business value increased by USD 45 million, or by 34 percent in U.S. dollar terms and 23 percent on a local currency basis. Global relationships with major employee benefit consultants and leveraging the Group’s Global Corporate presence drove volume increases in all regions, the most significant of which were in Asia-Pacific and Middle East and in the UK.
Business operating profit of USD 116 million decreased by USD 205 million, or by 64 percent, primarily due to an increase in losses in 2011 as well as the effect of the reduction in the All Lines agreement on both investment income and the underwriting result. Investment income decreased by USD 48 million, or by 26 percent primarily due to the lower All Lines agreement participation rates.
The loss ratio increased by 4.0 percentage points compared with 2010, mainly driven by the impact of large weatherrelated losses, including a series of tornadoes which hit the Midwest and Southeast regions of the U.S. in April and May along with higher loss trends resulting from higher auto property and physical damage trends both industry-wide and at Farmers. The expense ratio decreased by 0.8 percentage points mainly driven by lower experience commissions.
Gross earned premiums in the Farmers Exchanges decreased by USD 162 million to USD 18.1 billion, or by 1 percent, driven mainly by the continuing effect of the planned run-off of the 21st Century agency auto book of business on earned premiums in 2011. This was partially offset by increased gross earned premiums from 21st Century direct, and from business and specialty insurance as gross written premiums growth in previous periods has been earned.
Holding and financing reduced its business operating loss by USD 74 million to USD 589 million, or by 11 percent mainly reflecting movements in foreign currencies and the effect of the interest rate differential primarily between the euro and Swiss franc. Headquarters business operating loss increased by USD 108 million to USD 246 million, or by 78 percent. This was primarily driven by the effects of the strong Swiss franc in 2011 combined with the one-off reduction in pension expenses in 2010 following the outsourcing of an IT data center.
Other run-off 3 58 (94%) Total business operating profit (8) (157) 95%
Centrally managed businesses, which comprise run-off portfolios that are managed with the intention to pro-actively reduce capital risk while maximizing profit opportunities, reported a business operating loss of USD 11 million, compared with a loss of USD 215 million in 2010. This improvement was primarily driven by lower charges for loan loss provisions in Zurich’s Banking activities of USD 128 million compared with USD 349 million in 2010. Centre’s business operating profit increased by USD 21 million, mainly driven by reserve releases in its life business, slightly offset by a less positive impact from movements in financial markets on an insurance portfolio where both assets and liabilities are carried at fair value. Other centrally managed businesses reported a profit of USD 18 million driven by reserve releases in a part of the non-life run-off business, partially offset by costs and accounting-related charges in connection with the run-off of Zurich Specialties London Limited. In 2010, Other centrally managed businesses reported a profit of USD 54 million, mainly driven by positive reserve developments.
1 Common stocks, including equity unit trusts contains Group investments of USD 89 million and 125 million for the years ended December 31, 2011, and December 31, 2010, respectively, that were previously presented in a separate row, ”Trading equity portfolios in capital markets and banking activities.“
The quality of the Group’s investment portfolio remains high. Investment grade securities continue to comprise 98 percent of the Group’s debt securities, of which 38 percent are rated AAA as of December 31, 2011. This is a decline of 15 percentage points since December 31, 2010 mainly due to the downgrade of the credit ratings of U.S. government securities. The Group’s investment strategy remains disciplined and the Group continues to selectively reduce risks which it believes to be unacceptable, where the risks are not adequately compensated, or which incur disproportionately high regulatory capital charges.
1 After deducting investment expenses of USD 252 million and USD 225 million for the for the years ended December 31, 2011 and 2010, respectively 2 Excluding average cash received as collateral for securities lending of USD 246 million for the year ended December 31, 2010
Total net investment income increased by 1 percent in U.S. dollar terms to USD 7.2 billion, but decreased by 4 percent on a local currency basis, driven mainly by lower reinvestment yields on debt securities.
Total return, net of investment expenses, on average Group investments was 5.4 percent, the same as in 2010. Debt securities, which are invested to match the Group’s insurance liability profiles, returned a positive 5.7 percent, equity securities returned a negative 1.3 percent and other investments, mainly real estate and mortgages, returned a positive 7.0 percent.
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.
Gross reserves for losses and loss adjustment expenses 68,107 68,126 63,864 63,517
Net reserves for losses and loss adjustment expenses 56,014 55,944 52,672 52,554
Total net losses and loss adjustment expenses paid (22,909) (23,240) (20,301) (19,408)
Net reserves for losses and loss adjustment expenses 55,124 56,014 52,899 52,672
As of December 31, 2011, the Group net reserves for losses and loss adjustment expenses decreased by USD 0.9 billion since December 31, 2010, to USD 55.1 billion. This decrease was mostly driven by a USD 1.3 billion favorable development in the reserves as of December 31, 2010 and the implementation of a reinsurance contract related to the run-off insurance business of Zurich Specialties London Limited in anticipation of a portfolio transfer to be executed when regulatory approval is received. Further details of reserve developments are shown in note 8 of the audited Consolidated financial statements.
One year later 72.0% 66.1% 64.2% 68.1% 66.2% 71.7% 74.1% 72.0% 73.2% Two years later 72.3% 65.4% 63.5% 66.6% 64.8% 70.6% 72.4% 70.7% Three years later 74.5% 65.5% 63.7% 65.0% 63.3% 69.4% 72.3% Four years later 74.7% 65.7% 62.9% 63.8% 62.6% 68.6% Five years later 73.4% 65.0% 62.2% 63.2% 61.6% Six years later 74.3% 64.6% 62.1% 62.6% Seven years later 74.1% 64.4% 61.9% Eight years later 74.1% 64.5% Nine years later 74.2%
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.
Net reserves as of December 31 184,599 187,196 18,027 17,331 202,626 204,527
As of December 31 1 Includes reserves for unit-linked contracts, the net amounts of which were USD 47.6 billion and USD 50 billion, and liabilities for investment contracts, the net amounts of which were USD 50.7 billion and USD 50.9 billion as of December 31, 2011 and 2010, respectively 2 Includes reserves for future life policyholders’ benefits, the net amounts of which were USD 72.1 billion and USD 72.9 billion and policyholders’ contract deposits and other funds, the net amounts of which were USD 14.2 billion and USD 13.4 billion as of December 31, 2011 and 2010, respectively 3 The 2011 movement of USD 1’983 million mainly related to the acquisition of MAA (USD 1’852 million).
Total reserves and liabilities for insurance and investment contracts, net of reinsurance, decreased by USD 2.6 billion or by 1 percent in U.S. dollar terms, and remained flat on a local currency basis compared with December 31, 2010. This was mainly a consequence of the weakening of financial markets which decreased unit-linked fund values offset by an increase related to the acquisition of MAA in Malaysia.
in USD millions, as ofGlobal Life – reserves and liabilities, net of reinsurance, by region
Collateralized loans Senior debt Subordinated debt Total 12/31/11 12/31/10 12/31/11 12/31/10 12/31/11 12/31/10 12/31/11 12/31/10 1 Moody’s issued a new guideline on operational debt in May 2011 and confirmed to the Group in August 2011 that they will exclude the Group’s repurchase agreement obligations from their total leverage calculation. As a consequence amounts relating to repurchase agreement obligations have now been excluded from operational debt and therefore are not shown in the table. Repurchase agreement obligations were USD 1.8 billion and USD 3.3 billion as of December 31, 2011 and December 31, 2010 respectively. Standard & Poor’s had already previously excluded these obligations from operational debt.
Total operational and financial debt, as revised for the exclusion of repurchase agreement obligations, increased by USD 39 million to USD 12.2 billion or by 0.3 percent.
Operational debt, as revised for the exclusion of repurchase agreement obligations, decreased by USD 522 million to USD 1.1 billion since December 31, 2010, or by 32 percent due to the repayment of USD 521 million of collateralized loans.
Financial debt increased by USD 561 million to USD 11.2 billion, or by 5 percent in U.S. dollar terms and 6 percent on a local currency basis. A new subordinated loan note of CHF 500 million issued under the Euro Medium Term Note Programme (EMTN Programme) in March 2011 refinanced the early redemption of hybrid debt which was classified as preferred securities in shareholders’ equity as of December 31, 2010. Other changes in the Group’s financing consisted of the repayment in July 2011 of commercial paper of USD 400 million refinanced by the issuance of USD 400 million under the Group’s new European Commercial Paper Programme in October and December 2011, the repayment on maturity of CHF 1.0 billion and CHF 300 million senior bonds, refinanced by the issuance of three senior notes totaling CHF 1.3 billion under the EMTN Programme.
Redemption of preferred securities (476) – (476) Share-based payment transactions 22 – 22 Total comprehensive income 1,883 (74) 1,809
The Swiss Solvency Test (SST) has become fully effective and mandatory as of January 1, 2011. Under the SST, the Group is required to use a company-specific internal model to calculate risk-bearing and target capital. The Group is required to file the SST biannually. For June 30, 2011, the Group filed on a consolidated basis an SST capitalization ratio of 225 percent compared with 223 percent as of December 31, 2010. The ratio is subject to the Swiss Financial Market Supervisory Authority (FINMA) review, as well as its approval of the Group’s internal model.
The Group also continues to be subject to Solvency I requirements based on the Swiss Insurance Supervisory Law. The Solvency I ratio as of December 31, 2011, increased to 242 percent from 232 percent as of December 31, 2010.
Net cash provided by/(used in) operating activities 3,888 1,543 Net cash used in investing activities (1,176) (135) Net cash provided by/(used in) financing activities (2,439) (2,049) Foreign currency translation effects on cash and cash equivalents 48 (383)
Cash and cash equivalents as of January 1 1 9,726 10,749 Cash and cash equivalents as of December 31 1 10,048 9,726
The Group operates worldwide in multiple currencies and seeks to match foreign currency exposures on an economic basis. Details of the principal exchange rates used by the Group are set out in note 1 of the audited Consolidated financial statements.
Zurich’s approach to risk management aims to protect the Group’s capital, enhance value creation, optimize our risk-return profile, support decision making and protect Zurich’s reputation and brand. The Risk review describes the Group’s risk management framework and risk governance, presents an analysis of its main risks, and reports on capital management and capital adequacy.
The Risk review is an integral part of the Consolidated financial statements (except for the “Swiss Solvency Test Requirement” and “Internal Model Capital Adequacy” sections presented on pages 145–149).
Capital management and analysis of capital adequacy Capital management 140 Analysis of capital adequacy 141
The mission of risk management at Zurich Financial Services Group (Zurich, or the Group) is to promptly identify, measure, manage, report and monitor risks that affect the achievement of strategic, operational and financial objectives. This includes adjusting the risk profile in line with the Group’s stated risk tolerance to respond to new threats and opportunities in order to optimize returns.
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 the Group’s risk tolerance, 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 2011, the Zurich Risk Policy was updated and strengthened for various areas, including enterprise risk management, credit risk and asset/liability management. Related procedures and risk controls were strengthened or clarified for these areas. In 2011, Zurich focused on strengthening processes to assess adherence to requirements in the Zurich Risk Policy.
Various governance and control functions coordinate to help ensure that objectives are being achieved, risks are identified and appropriately managed and internal controls are in place and operating effectively. This coordination is referred to as “integrated assessment and assurance.”
An important element of the Group’s risk management framework is a well-balanced and effectively managed remuneration program. This includes a Group-wide remuneration philosophy, robust short- and long-term incentive plans, strong governance and links to the business planning, performance management and risk policies of the Group. Based on the Group’s Remuneration Rules, the Board establishes the structure and design of the remuneration arrangements so that they do not encourage inappropriate risk taking. For more information on Zurich’s remuneration system, see the “Remuneration Report (unaudited).”
Rating agencies are interested in risk management as a factor in evaluating companies. Standard & Poor’s, a rating agency with a separate rating for Enterprise Risk Management, has rated Zurich’s overall Enterprise Risk Management as “strong.” Reinsurance risk, credit risk and market risk controls remain “excellent.” Asset and liability management, reserving risk, catastrophe risk and operational risk controls, as well as strategic and emerging risk management, are seen as “strong.” Zurich is rated either “excellent” or “strong” in all of Standard & Poor’s dimensions for Enterprise Risk Management.
The Group is also involved in a number of international industry organizations engaged in advancing the regulatory dialogue pertaining to insurance and financial services. For example, in 2011, Zurich senior executives contributed to the drafting of key papers issued by the CRO Forum (an organization composed of the chief risk officers of major insurance companies and financial conglomerates that focuses on developing and promoting industry best practices in risk management). In 2011, Zurich’s Chief Risk Officer served as chair of the CRO Forum. In addition, Zurich’s Chief Financial Officer served until October 2011 as chair of the CFO Forum (an organization composed of the chief financial officers of major European insurance companies and financial conglomerates particularly active in contributing to the
Risk review continued development of new accounting and regulatory standards, as well as establishing the principles for Embedded Value reporting). Zurich is also a contributing partner to the annual report on global risks, a collaborative effort under the auspices of the World Economic Forum (WEF) and produced in conjunction with the WEF Risk Response Network.
Board of Directors level The Board of Directors of Zurich Financial Services Ltd has ultimate oversight responsibility for the Group’s risk management. It establishes the guidelines for the Group’s risk management framework and key principles, particularly as articulated in the Zurich Risk Policy, and decides on changes to such guidelines and key principles, as well as transactions reaching specified thresholds.
Risk Management function, the Group’s general policies and procedures and satisfies itself that effective systems of risk management are established and maintained. It 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. The Risk Committee assesses the independence and objectivity of the Group Risk Management function, approves its terms of reference, reviews the activities, plans, organization and quality of the function, and reviews key risk management principles and procedures.
To facilitate information exchange between the Audit Committee of the Board and the Risk Committee of the Board, the chairperson of the Audit Committee is a member of the Risk Committee and vice-versa. The Risk Committee met seven times in 2011 (once jointly with the Remuneration Committee).
• Group Finance and Risk Committee (GFRC) – acts as a cross-functional body for financial and risk management matters in the context of the strategy and the overall business activity of the Group. The GFRC oversees financial implications of business decisions and the effective management of the Group’s overall risk profile, including risks related to insurance, financial markets and asset/liability, credit and operational risks as well as their interactions. The GFRC proposes remedial actions based on regular briefings from Group Risk Management on the risk profile of the Group. It reviews and formulates recommendations for future courses of action with respect to potential merger and acquisition (M&A) transactions, changes to the Zurich Risk Policy, internal insurance programs for the Group, material changes to the Group’s risk-based capital methodology and the overall risk tolerance. The GFRC is chaired by the Chief Financial Officer, while the Chief Risk Officer acts as deputy.
At Group level there are two centers of expertise: risk analytics and risk and control. The risk analytics department quantitatively assesses insurance, financial market and asset/liability, credit and operational risks and is the Group’s center of excellence for risk quantification and modeling. The risk and control department includes operational risk management, internal control framework, risk reporting, risk governance, and risk operations. The risk management network consists of the Chief Risk Officers (CROs) of the Group’s segments and regions, and the Local Risk Officers (LROs) of the business units and functions and their staff. While their primary focus is on operational and business-related risks, they are responsible for providing a holistic view of risk for their area. The risk officers are part of the management teams in their respective businesses and therefore are embedded in the business. The LROs also report to the segment or regional CROs, who in turn report to the Group’s Chief Risk Officer. The CROs of the Group’s segments and regions are members of the executive leadership team of the Group’s Chief Risk Officer.
In order to enable a consistent, systematic and disciplined approach to risk management, Zurich categorizes its main risks as follows: • Strategic – the unintended risk that can result as a by-product of planning or executing a strategy • Insurance – risk associated with the inherent uncertainty regarding the occurrence, amount or timing of insurance liabilities • Market – risk associated with the Group’s balance sheet positions where the value or cash flow depends on financial markets • Credit – risk associated with a loss or potential loss from counterparties failing to fulfill their financial obligations • 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 • Operational – risk associated with the people, processes and systems of the Group, and external events such as outsourcing, catastrophes, legislation, or external fraud • Reputation – risk that an act or omission by the Group or any of its employees could result in damage to the
Strategic risk corresponds to the unintended risk that can result as a by-product of planning or executing the strategy. A strategy is a long term plan of action designed to allow the Group to achieve its goals and aspirations. Strategic risks can arise from: • Inadequate assessment of strategic plans • Improper implementation of strategic plans • Unexpected changes to assumptions underlying strategic plans
• Liability includes general/public and product liability, excess and umbrella liability, professional liability including medical malpractice, and errors and omissions liability.
• Special lines include directors and officers, credit and surety, crime and fidelity, accident and health, and crop. • Worker injury includes workers compensation and employers liability.
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. Inflation is monitored on a country basis; the monitoring process relies on both Zurich’s economic view on inflation and specific claims activity, and feeds into actuarial models and Zurich’s underwriting processes such as technical price reviews.
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 those risks phenomena whose full nature and effects are not yet known with the degree of certainty in other insurance exposures. 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, solar storms and cyber threats. In addition, the Group is engaged in the report on global risks with the World Economic Forum, where risks are considered from a global perspective. Zurich is also a standing member of and actively contributes to the Emerging Risk Initiative of the CRO Forum.
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 5.3 billion and USD 5.1 billion for the years ended December 31, 2011 and 2010, 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.
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. 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 (54) (76) (126) (34)
+1% in net loss ratio Net income before tax (49) (76) (124) (29)
Table 2.b in USD millions, for the year ended December 31, 2010
The Group models at the local and Group level in order to assess and aggregate its exposures. The Group models exposures centrally in a center of excellence for consistency in approach and to form a global perspective on accumulations. The center of excellence for catastrophe modeling works with the local businesses to help improve the overall quality of data, by analyzing and comparing data quality levels, providing priorities for data quality improvements and supporting implementation with advice and external data, where required. The Group models potential losses from property policies located in hazard-prone areas with material exposure and adjusts for nonproperty related losses. These assessments principally address climate-induced perils such as windstorms, river floods, tornadoes and hail, and geologically induced perils such as earthquakes. The Group constantly seeks to improve its modeling, fill in gaps in models with additional assessments and increase the granularity of data collection in order to increase the accuracy and utility of the information.
Risks from man-made catastrophes Man-made catastrophes include such risks as industrial accidents and all types of terrorism attacks. Zurich’s experience in monitoring potential exposures from natural catastrophes is also applicable to threats posed by man-made catastrophes, particularly terrorism. Due to the high degree of uncertainty about what events might actually occur, the Group’s accumulation monitoring and analyses contain a number of assumptions about the potential characteristics of such threats.
Although the Group’s analysis has shown its exposures outside North America are lower, in large part due to government-provided pools, in 2011 the Group extended its approach to improve its view of the risk for countries with the next greatest potential net exposure. The Group periodically monitors accumulation limits for these and other areas, and continues to refine its analytics.
Life insurance risk The risks associated with life insurance include: • Mortality risk is the risk that actual policyholder death experience on life insurance policies is higher than expected. • Longevity risk is the risk that annuitants live longer than expected. • Morbidity risk is the risk that policyholder health-related claims are higher than expected.
• Policyholder behavior risk is the risk that policyholders’ behavior in discontinuing and reducing contributions or withdrawing benefits prior to the maturity of the contract is worse than expected. Poor persistency rates may lead to fewer policies remaining on the books to defray future fixed expenses and reduce the future positive cash flows from the business written, potentially impacting its ability to recover deferred acquisition expenses.
• Expense risk is the risk that expenses incurred in acquiring and administering policies 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.
From a risk-management perspective, unit-linked products have been designed in order to reduce much of the market and credit risk associated with traditional business for the Group. Those risks inherent in these products are largely passed on to the policyholder, although a portion of the Group’s management fees are linked to the value of funds under management and hence are at risk if the fund values decrease. Unit-linked products carry mortality risk and market risk to the extent that there are guarantees built into the product design. Contracts may have minimum guaranteed death benefits where the sum at risk depends on the fair value of the underlying investments. For certain contracts these risks are mitigated by explicit mortality and morbidity charges.
The Group defines concentration risk in the Global Life business as the risk of exposure to increased losses associated with inadequately diversified portfolios of assets and/or obligations. Concentration risk for a life insurer may arise with respect to investments in a geographical area, economic sector, or individual issuers, or due to a concentration of business written within a geographical area, of a policy type, or of underlying risks covered.
Zurich is exposed to two main types of concentration risk in its Global 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. 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.
Other life insurance liabilities Total reserves 1 See note 29 of the Consolidated financial statements for additional information on the Group’s segments.
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 its segments, General Insurance and Global Life, and bundles programs where appropriate to benefit from diversification and economies of scale. These efforts for General Insurance have led to a decreasing expenditure for treaty reinsurance while growth in the General Insurance Global Corporate segment has increased premium cessions to captives and co-reinsurers, resulting in an overall stable cession rate.
Due to its strong balance sheet, Zurich is able to structure and align its reinsurance programs to achieve an optimum risk/reward ratio. Zurich has managed its central reinsurance purchasing according to these principles for General Insurance since 2003 and for Global Life since 2008. The Group is therefore able to manage its risks to retain a significant and stable portion of premium, as shown in the illustrations below.
1 Life insurance gross written premium ceded to reinsurers for 2007 reflects the one-off transaction “Windsor Life” (as stated in the 2007 Annual Report).
The Group uses reinsurance to manage risk to unusually severe or unusually frequent events, as illustrated in the following page, through the main in-force reinsurance covers as of December 31, 2011 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 catastrophe bonds in place. These covers are reviewed continuously and are subject to change going forward.
Losses retained by Zurich Financial Services Group for an individual event325 1,555*
Notes: • Structures are in place (via reinstatements) to cover 2 significant individual events per region.
• USD 1,000 million reinsurance protection for U.S. includes a bilateral risk swap of USD 100 million.
Reinsurance for natural catastrophes – unusually frequent natural catastrophe events (in USD millions, as of December 31, 2011)
Market risk is the risk associated with the Group’s balance sheet positions where the value or cash flow depends on financial markets. Fluctuating risk drivers resulting in market risk include: • Equity market prices • Real estate market prices • Interest rates and credit spreads • Currency exchange rates
The Group uses derivative financial instruments to limit market risks arising from changes in currency exchange rates, interest rates, equity prices and credit quality of assets and liabilities and commitments to third parties. The Group enters into derivative financial instruments mostly for economic hedging purposes and, in limited circumstances, the instruments may also meet the definition of an effective hedge for accounting purposes. The latter include crosscurrency interest rate swaps in fair value hedges and cross-currency swaps in cash flow hedges of Zurich’s borrowings, in order to mitigate exposure to foreign currency and interest rate risk. In compliance with Swiss insurance regulation, the Group’s policy prohibits speculative trading in derivatives, meaning a pattern of “in and out” activity without reference to an underlying position. Derivatives are complex financial transactions; therefore, the Group addresses the risks arising from derivatives through a stringent policy that requires approval of a derivative program before transactions are initiated, and by subsequent regular monitoring by Group Risk Management of open positions and annual reviews of derivative programs.
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 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
Interest rate and credit spread risk Interest rate risk is the risk of loss resulting from changes in interest rates, including changes in the shape of yield curves. The Group is exposed to interest rate risk including from debt securities, reserves for insurance contracts, liabilities for investment contracts, employee benefit plans and loans and receivables. Changes in interest rates affect the Group’s held-to-maturity floating-rate debt securities and unhedged floating rate borrowings through fluctuations in interest income and interest expense. Changes in interest rates affect the Group’s held-for-trading debt securities and fair value hedged borrowings through periodic recognition of changes in their fair values through the income statement. Changes in interest rates affect the Group’s available-for-sale debt securities through periodic recognition of changes in their fair values through shareholders’ equity. The Group also manages credit spread risk, which describes the sensitivity of the values of assets and liabilities due to changes in the level or the volatility of credit spreads over the risk-free interest rate yield curves.
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 insurance 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 sensitivities show the effects of a change of certain risk factors, while other assumptions remain unchanged. • The interest rate scenarios assume a parallel shift of all interest rates in the respective currencies. They do not take into account the possibility that interest rate changes might differ by rating class, these are disclosed separately as credit spread risk sensitivities.
• The sensitivity analysis is based on economic net assets, and not on IFRS equity or on IFRS profit and loss. • The sensitivity analysis is calculated after tax; the Group effective tax rate is assumed to be 24.1 percent for 2011.
For 2010, it is calculated at 20.3 percent. For the Non-Core Businesses with life insurance characteristics, specific tax rates have been applied.
• The assumptions on policyholder behavior, such as lapsing of policies, 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 on the following page show the estimated impacts of a 100 basis 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, 2011 and 2010, respectively.
Other currencies Total 100 basis points increase in the interest rate yield curves Group investments (1,082) (469) (302) (318) (160) (2,331)
Table 4.b in USD millions, as of December 31, 2010Economic interest rate sensitivities for the General Insurance business – prior period
Table 5.a in USD millions, as of December 31, 2011Economic interest rate sensitivities for the Global Life business – current period
Other currencies Total 100 basis points increase in the interest rate yield curves Total impact on Embedded Value (207) 156 (73) 29 (67) (164)
Other currencies Total 100 basis points increase in the interest rate yield curves Group investments (731) (116) (28) (5) (1) (882)
Other currencies Total 100 basis points increase in the interest rate yield curves Group investments (743) (106) (29) (1) (1) (880)
10% decline in stock markets Group investments (473) (435) Liabilities – – Net impact before tax (473) (435) Tax impact 114 88 Net impact after tax (359) (347)
Net impact before tax (174) (399) Tax impact 42 71 Net impact after tax (132) (329)
Table 9 in USD millions, as of December 31Economic equity price sensitivities for the rest of the businesses
Other currencies Total 100 basis points increase in credit spreads Net impact before tax (1,162) (370) (192) (102) (101) (1,926)
Other currencies Total 100 basis points increase in credit spreads Net impact before tax (826) (12) (62) (1) (1) (902)
Table 12.b in USD millions, as of December 31, 2010Economic credit spread sensitivities for the rest of the businesses – prior period
10% increase in EUR / USD rate 1,049 907 GPB / USD rate 354 435 CHF / USD rate (309) (137) Other currencies / USD rates 477 482
The Group manages individual exposures as well as credit risk concentrations. The Group’s objective in managing credit risk exposures is to maintain them within parameters that reflect the Group’s strategic objectives and risk tolerance. Sources of credit risk are assessed and monitored, and the Group has policies to manage the specific risks within the various subcategories of credit risk. To assess counterparty credit risk, the Group uses the ratings assigned by external rating agencies, qualified third parties, such as asset managers, and internal rating assessments. When there is a difference among external rating agencies, the Group assesses the reasons for the inconsistencies and applies the lowest of the respective ratings unless other indicators of declining credit quality justify the assignment of alternative internal credit ratings. The Group maintains counterparty credit risk databases, which record external and internal sources of credit intelligence.
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 Group’s limits for counterparty aggregation as of December 31, 2011 and December 31, 2010, respectively. The Chief Risk Officer routinely reports the largest exposures by rating category to the Risk Committee of the Board.
The maximum exposure to credit risk consists mainly of on-balance sheet exposures. Off-balance sheet exposures are primarily related to collateral, such as letters of credit, used to protect the underlying credit exposures on the balance sheet. The Group also has off-balance sheet exposures related to undrawn loan commitments of USD 57 million and USD 149 million as of December 31, 2011 and 2010, respectively. See note 25 of the Consolidated financial statements for undrawn loan commitments.
Cash and cash equivalents amounted to USD 8.8 billion as of December 31, 2011 and USD 8.2 billion as of December 31, 2010. 50 percent of the total was with the ten largest global banks, whose average rating was “A+” as of December 31, 2011 and 2010, respectively. The risk-weighted average rating of the overall cash portfolio has decreased from “A+” to “A” in 2011 due to several downgrades of large financial institutions.
The risk-weighted average issuer credit rating of the Group’s debt securities portfolio is “A+” (2010: “AA-”). Applying a linear average, the average rating would be “AA”, (2010: “AA”), which is in line with the Group’s risk policy.
As of December 31, 2011 the largest concentration in the Group’s debt securities portfolio is in government and supranational debt securities at 46.6 percent. A total of USD 38.7 billion or 50.1 percent of the non-government and non-supranational debt securities are secured. As of December 31, 2010, 43.2 percent of the Group’s debt portfolio was invested in governments and supranationals and a total of USD 41.3 billion or 51.4 percent of the non-government and non-supranational debt securities were secured.
Rest of Eurozone 622 695 Eurozone Supranationals & similar 111 36
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, 2010, collateral increased by USD 200 million to USD 8.2 billion.
In Switzerland, the residential property market has seen steady price growth since 2000, raising concerns about the development of a price bubble. Nevertheless, with the exception of the Lake Geneva area, where residential real estate prices have doubled in the last 10 years, price appreciation in the Swiss market has been modest. In 2011, the Group undertook a review of the Swiss mortgage portfolio in which critical positions, large loans (concentrations) and regional risks were evaluated. No major risks of impairment were identified in this review. Mortgages in the Lake Geneva region represent approximately 31 percent of the Swiss portfolio, and the bulk of those mortgages was granted years ago and is therefore not affected by recent price developments. Furthermore, to mitigate the impact of potential bubbles in the portfolio, the Group has established a process to regularly review regional property markets, and to tighten underwriting standards in areas with strong price appreciation. A similar portfolio review was undertaken for the German mortgage portfolio in 2011 and no major risks were identified. Zurich’s German and Swiss mortgage portfolios remain strong and well managed, loss impairments and losses remain low and LTV lending buffers are generally strong.
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 2011, 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 18 of the Consolidated financial statements for additional information on receivables.
To limit credit risk, derivative financial instruments are typically executed with counterparties rated “A-” or better by an external rating agency. In addition, it is the Group standard to only transact derivatives with counterparties where the Group has an ISDA Master Agreement with a Credit Support Annex in place. This mitigates credit exposures from OTC transactions due to close-out netting and requires the counterparty to post collateral when the derivative position is beyond an agreed threshold. The Group mitigates credit exposures from derivative transactions further by using exchange-traded instruments whenever possible.
Analysis of financial assets The following tables provide an analysis, for non unit-linked businesses, of the age of financial assets that are past due but not impaired and of financial assets that are individually determined to be impaired.
Table 18.a in USD millions, as of December 31, 2011Analysis of financial assets – current period
The tables below show how the allowances for impairments of financial assets shown in tables 18.a and 18.b have developed over the 2010 and 2011 financial years.
Increase/(Decrease) in allowance for impairments – 103 – – 42 Amounts written-off – (33) – (1) (31)
Table 18.b in USD millions, as of December 31, 2010Analysis of financial assets – prior period
The table on the following page provides an analysis of the expected maturity profile of reserves for insurance contracts, net of reinsurance, based on expected cash flows without considering the surrender values as of December 31, 2011 and 2010. Reserves for unit-linked insurance contracts amounting to USD 59.1 billion and USD 61.8 billion as of December 31, 2011 and 2010, respectively, are not included in the table on the following page, as policyholders can generally surrender their contracts at any time, at which point the underlying unit-linked assets would be liquidated. Risks from the liquidation of unit-linked assets are borne by the policyholders of unit-linked contracts.
Expected maturity profile for reserves for insurance contracts, net of reinsurance – current period
Expected maturity profile for reserves for insurance contracts, net of reinsurance – prior period
Within this framework, the Group: • Uses a scenario-based approach to assess and quantify risk-based capital for operational risk for all business units. This approach allows comparison information across the Group.
• Conducts operational risk assessments through which operational risks are identified for key business areas and are qualitatively assessed. Risks identified and assessed above a certain threshold must be mitigated, and escalated in specific reports at the Group level. Plans for improvement actions are documented and tracked on an ongoing basis. The Group uses a scoping exercise to determine which business units and Group-wide functional areas conduct operational risk assessments. A significant input to the scoping is risk-based capital consumption for operational risk. In 2011, the scoping resulted in at least 34 percent of business units, responsible for at least 61 percent of operational risk Risk-Based Capital, conducting operational risk assessments. In the assessments, the Group uses such sources of information as Total Risk Profiling™, internal control assessments, and audit findings, as well as scenario modeling and loss event data.
Other sources of information Use supplemental sources of information, including: • Total Risk Profiling™ • Internal control evaluations • Audit findings
In the area of information security, the Group continued to focus on its global data security improvement initiative with special emphasis on data classification and ownership, improving data security with its suppliers and monitoring access to customer data. This helps the Group’s businesses to further enhance governance of electronic and nonelectronic information assets to protect data from theft or loss and ensure compliance with regulation and policies.
The Group considers controls to be key instruments for monitoring and managing operational risk. Although primarily focused on important controls for financial reporting, internal control efforts also include related operational and compliance controls. Therefore, the Group continues to strengthen the consistency, documentation and assessment of internal controls for significant entities and business processes. Operational effectiveness of key controls is assessed by self assessment and independent testing. For more details, see the “Risk Management and Internal Control Statement” in the “Corporate Governance Report (unaudited).”
Risks to the Group’s reputation include the 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. Every risk type has potential consequences for Zurich’s reputation, and therefore, effectively managing each type of risk helps Zurich reduce threats to its reputation.
Capital management framework The Group’s capital management framework forms the basis for actively managing capital within Zurich. Major elements are economic, regulatory, and rating agency capital adequacy.
Within these defined principles, the Group manages its capital using a number of different capital models taking into account economic, regulatory, 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.
Zurich Financial Services Ltd is not subject to legal restrictions on the amount of dividends it may pay to its shareholders other than under the Swiss Code of Obligations. The Swiss Code of Obligations provides that dividends may only be paid out of freely distributable reserves or retained earnings and that 5 percent of annual retained earnings must be allocated to a general legal reserve until such reserve in the aggregate has reached 20 percent of the paid-in share capital; therefore the earnings allocated to those reserves are restricted. As of December 31, 2011, the amount of the general legal reserve exceeded 20 percent of the paid-in share capital of the Group. Similarly, company laws in many countries in which the Group’s subsidiaries operate may restrict the amount of dividends payable by those subsidiaries to their parent companies.
For details on dividend payments, and issuances and redemptions of debt, see notes 21 and 22 of the Consolidated financial statements.
As of December 31, 2011 the IFSR of Zurich Insurance Company Ltd, the main operating entity of the Group, was rated “AA-/stable” by Standard and Poor’s, “Aa3/stable” by Moody’s and “A+ (superior)/stable” by A.M. Best. On March 9, 2011, Moody’s upgraded the IFSR of the Group to “Aa3” from “A1,” recognizing the improvements in the Group’s capital adequacy, financial flexibility, and asset quality, while producing a very good operating performance in recent times and maintaining an excellent market position and excellent business diversification.
In each country in which the Group operates, the local regulator specifies the minimum amount and type of capital that each of the regulated entities must hold in addition to their liabilities. The Group targets to hold, in addition to the minimum capital required to comply with the solvency requirements, an adequate buffer to ensure that each of its regulated subsidiaries meets the local capital requirements. The Group is subject to different capital requirements depending on the country in which it operates. The main areas are Switzerland and European Economic Area countries, and the U.S.
Regulatory requirements in Europe In Switzerland, the transition period for the Swiss Solvency Test (SST) expired and the SST became fully effective and mandatory as of January 1, 2011. Under SST, groups, conglomerates and reinsurers are required to use companyspecific internal models to calculate risk-bearing and target capital. Internal models must be approved by the Swiss Financial Market Supervisory Authority (FINMA). In 2011, 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 January 1, 2011 and as of July 1, 2011. For more details, see the “Swiss Solvency Test Requirement” section in the Risk Review.
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 their interactions. As part of the risk management system, all EU/EEA insurance and reinsurance entities will be required to conduct their own risk and solvency assessment, including the assessment of the overall solvency needs reflecting their specific risk profiles. As part of the disclosure provisions, companies will have to publicly report their solvency and financial condition.
Other regulatory requirements 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 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.
Solvency I requirements at Group level 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 2010 and as drafted for filing with the Swiss regulator for 2011.
Total eligible equity 27,977 28,300 Total required solvency capital 11,582 12,217 Excess margin 16,395 16,083 1 Includes a preliminary estimate for intangibles related to the acquisition in Latin America (for more information, see note 5 of the Consolidated financial statements). 2 Under regulations issued by FINMA during 2007, dated subordinated debt issuances are admissible up to 25 percent of the capital requirement, undated issuances up to 50 percent of the capital requirement.
3 Amount for dividend reflects the proposed dividend for the financial year 2011, not yet approved by the Annual General Meeting. 4 As filed with FINMA for 2010. The preliminary solvency ratio stated in the 2010 Consolidated financial statements was 243%.
The chart on the following page shows the estimated impact on the Group’s solvency position of a one percentage point increase/decrease in yield curves, a separate 20 percent rise/decline in all stock markets, after consideration of hedges in place and a separate one percentage point change in credit spreads, as of December 31, 2011. The sensitivities are considered three separate but instantaneous scenarios.
• The sensitivities show the effects from a change of certain risk factors, while other assumptions, such as policyholder assumptions, remain unchanged.
Risk review continued 1 Does not include sensitivities to the underlying assets and liabilities related to the acquisition in Latin America (for more information, see note 5 of the Consolidated financial statements).
2 The credit spread sensitivity is applied to corporate debt, mortgages and Euro currency sovereign debt (excluding Germany).
Sensitivity of the Group’s Solvency I ratio to changes in: Interest rate +100bps
Development of the Group’s Swiss Solvency Test ratio (in USD billions rounded)
The Group’s Swiss Solvency Test Target Capital split by risk type (%, as of July 1 and January 1, 2011)
USD 20bn USD 19bn 1 Other includes the impact of SST extreme scenarios, market value margin, and expected General Insurance result.
Risk review 1 Does not include sensitivities to the underlying assets and liabilities related to the acquisition in Latin America (for more information, see note 5 of the Consolidated financial statements). The impact of sensitivities on changes to the SST Target Capital is only approximated and only taken into account on Market/ALM risk.
2 The credit spread sensitivity is applied to corporate debt, mortgages and Euro currency sovereign debt (excluding Germany). The credit spread sensitivity does not take into account the buffering effect of policyholder participation.
In addition to the sensitivities shown above, the Group also evaluates certain stress scenarios on the SST ratio. Scenarios are defined as events that have a very small probability of occurrence and that could, if realized, negatively affect the Group’s SST Available Financial Resources. The following chart shows three groups of scenarios: market and credit risk-specific, general insurance risk-specific, and life insurance risk-specific. In the current market environment the market and credit risk-specific scenarios particularly focus on peripheral EU debt exposure and adverse financial market impact on equity markets and interest rates in the EU. The general insurance risk-specific scenarios present the three largest natural catastrophe events to which the Group is exposed. Lapse risk represents the Group’s largest life insurance risk-specific exposure.
Scenario 2: Additional financial market impact • Scenario 1 • Decrease in asset values from adverse market developments
While the Group’s RBC model and the SST model are broadly the same, below is a summary of the main differences between the two approaches: • Model calibration – RBC calibration is based on a Value at Risk at a 99.95% confidence level, whereas SST calibration is based on an Expected Shortfall at a 99% confidence level. Thereby, the Group sets itself a higher financial strength target than the SST regulatory requirement.
1 The Group’s estimated RBC allocated by segment as of January 1, 2011 has been updated from the Risk Review in the 2010 Annual Report, based on the actual model results.
Consolidated financial statements 152 Report of the statutory auditor 280 Embedded value report 282 Holding company 318 Report of the statutory auditor 334 Shareholder information 338 Financial calendar 342 Contact information 343 Glossary 344
Net investment result on unit-linked investments 6 (3,544) 10,093 Net gain/(loss) on divestments of businesses 5 6 38 Other income 1,488 1,442 Total revenues 52,983 67,857 Benefits, losses and expenses Insurance benefits and losses, gross of reinsurance 11 38,106 38,591 Less ceded insurance benefits and losses 11 (5,052) (4,106) Insurance benefits and losses, net of reinsurance 11 33,054 34,484 Policyholder dividends and participation in profits, net of reinsurance 11 (2,685) 10,801 Underwriting and policy acquisition costs, net of reinsurance 11 8,523 8,649 Administrative and other operating expense 13 8,270 7,976 Interest expense on debt 21 586 556 Interest credited to policyholders and other interest 479 529 Total benefits, losses and expenses 48,227 62,995 Net income before income taxes 4,757 4,862 Income tax expense 20 (965) (1,355)
attributable to policyholders 20 242 (462) attributable to shareholders 20 (1,206) (894)
Change (before reclassification, tax and foreign currency translation effects and after allocation to policyholders) 866 207 (1,469) 73 (1,328) (1,651) Reclassification to income statement (before tax and foreign currency translation effects and after allocation to policyholders) (644) 53 (43) – – (633) Deferred income tax (before foreign currency translation effects) 113 (71) – (19) 352 376 Foreign currency translation effects (4) (13) – – 44 26 in USD millions, for the years ended December 31
Total comprehensive income 2010 Comprehensive income for the period, as restated 3,428 2,081 65 (724) 28 (162) 1,288 4,716 (14) 4,702 Details of movements during the period
Change (before reclassification, tax and foreign currency translation effects and after allocation to policyholders) 3,069 (45) (704) 41 (192) 2,169 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 2011 Comprehensive income for the period 3,766 332 176 (1,512) 54 (933) (1,883) 1,883 (74) 1,809 Details of movements during the period
Reinsurers’ share of reserves for insurance contracts 8 19,361 18,816 18,751 Deposits made under assumed reinsurance contracts 2,711 2,837 3,870 Deferred policy acquisition costs 12 16,864 16,281 16,146
Accrued investment income 2,589 2,749 2,744 Receivables and other assets 18 32,766 17,671 17,100 Mortgage loans given as collateral 15 223 743 1,102
Assets held for sale 1 54 – 67 1 See note 5.
Additional paid-in capital 22 9,907 11,630 11,400 Net unrealized gains/(losses) on available-for-sale investments 2,800 2,468 387 Cash flow hedges 232 56 (9) Cumulative foreign currency translation adjustment (2,632) (1,120) (396)
Reserves for insurance contracts, gross (1,189) 5,781 Reinsurers’ share of reserves for insurance contracts (728) (18) Liabilities for investment contracts 167 7,058 Deferred policy acquisition costs (860) (611) Deferred origination costs 34 (23) Deposits made under assumed reinsurance contracts 133 1,032 Deposits received under ceded reinsurance contracts 199 (214)
Net capital (gains)/losses on total investments and impairments 3,119 (9,430) Net change in trading securities and derivatives (13) 7 Net change in money market investments 1,645 411 Sales and maturities
Balance as of December 31, 2009, as previously reported 10 11,400 387 (9) (396) 98 17,253 28,743 561 29,304 1,800 31,104 Total adjustments due to restatement – – – – – – (79) (79) – (79) (1) (79) Balance as of December 31, 2009, as restated 10 11,400 387 (9) (396) 98 17,174 28,665 561 29,226 1,799 31,025
Net changes in capitalization of non-controlling interests – – – – – – – – – – (443) (443)
Balance as of December 31, 2010, as previously reported 10 11,630 2,468 56 (1,125) 126 18,344 31,509 475 31,984 1,337 33,321 Total adjustments due to restatement – – – – 5 – (85) (79) – (79) (1) (80) Balance as of December 31, 2010, as restated 10 11,630 2,468 56 (1,120) 126 18,259 31,429 475 31,905 1,336 33,241
Total comprehensive income for the period, net of tax – – 332 176 (1,512) 54 2,830 1,880 4 1,883 (74) 1,809
4 The number of treasury shares deducted from equity as of December 31, 2011 amounted to 1,373,392 (December 31, 2010: 1,399,080, December 31, 2009: 3,269,338).
Net income – – – – – – 3,416 3,416 11 3,428 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 – – – – (724) – – (724) – (724) Revaluation reserve – – – – – 28 – 28 – 28 Net actuarial gains/(losses) on pension plans – – – – – – (162) (162) – (162)
Zurich Financial Services Ltd and its subsidiaries (collectively the “Group”) are an insurance-based financial services provider with a global network. The Group also distributes non-insurance products, such as mutual funds, mortgages and other financial services products, from selected third-party providers. The Group operates mainly in Europe, the USA, Latin America and Asia Pacific through subsidiaries, branch offices and representations.
On February 15, 2012 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 29, 2012.
Certain amounts recorded in the Consolidated financial statements reflect estimates and assumptions made by management about insurance liability reserves, investment valuations, interest rates and other factors. Critical accounting judgments and estimates are discussed in note 4. Actual results may differ from the estimates made.
In the Group’s General Insurance business in Germany, prior year results were misstated for a period of time due to some errors in adjustments between local GAAP and IFRS. This resulted in incorrect reserves for losses, unearned premium reserves and deferred acquisition costs for some specific products. The errors identified by management, have resulted in a restatement of equity of USD 80 million and USD 79 million as of December 31, 2010 and January 1, 2010 respectively. For the year ended December 31, 2010 the impact on net income after taxes was a loss of USD 6 million and on business operating profit a loss of USD 5 million. The impact on various line items as of December 31, 2010 in the consolidated balance sheet and the consolidated income statement are set out in the restatement tables. Consolidated income statements, consolidated balance sheets, consolidated statements of cash flows, consolidated statements of changes in equity and notes 8, 11, 12, 20, 22 and 29 have been restated accordingly.
• The Group erroneously classified certain life insurance products. The classification was corrected in 2011 as the impact on the Group’s consolidated income statement was not material. The reclassifications in the balance sheet from other liabilities to future life policyholders’ benefits and liabilities for investment contracts as well as from future life policyholders’ benefits to liabilities for investment contracts, from liabilities for investment contracts to reserves for unit-linked contracts and from reserves for unit-linked contracts to liabilities for investment contracts are set out in notes 8 and 9.
The following balances are mixed in nature (including both current and non-current portions): debt securities, mortgage loans, other loans, reinsurers’ share of reserves for insurance contracts, deposits made under assumed reinsurance contracts, deferred origination costs, other assets, mortgage loans given as collateral, reserves and investments for unit- linked contracts, liabilities for investment contracts, deposits received under ceded reinsurance contracts, deferred front-end fees, reserves for losses and loss adjustment expenses, reserves for unearned premiums, future life policyholders’ benefits, policyholders’ contract deposits and other funds, other liabilities, collateralized loans, senior and subordinated debt, and assets and liabilities held for sale.
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 112 million and USD 134 million for the years ended December 31, 2011 and 2010, respectively. Foreign currency exchange forward and swap gains/ (losses) included in these amounts were USD 130 million and USD (141) million for the years ended December 31, 2011 and 2010, respectively.
Net investment result on unit-linked investments 10,093 – 10,093 Net gain/(loss) on divestments of businesses 38 – 38 Other income 1,442 – 1,442
Benefits, losses and expenses Insurance benefits and losses, gross of reinsurance 38,591 – 38,591 Less ceded insurance benefits and losses (4,106) – (4,106) Insurance benefits and losses, net of reinsurance 34,484 – 34,484 Policyholder dividends and participation in profits, net of reinsurance 10,801 – 10,801 Underwriting and policy acquisition costs, net of reinsurance 8,636 13 8,649 Administrative and other operating expense 7,976 – 7,976 Interest expense on debt 556 – 556 Interest credited to policyholders and other interest 529 – 529 Total benefits, losses and expenses 62,982 13 62,995 Net income before income taxes 4,868 (6) 4,862 Income tax expense (1,355) – (1,355)
Table 1.2 in USD millions, for the year ended December 31, 2010Restatement of the consolidated income statement
Cash and cash equivalents 8,558 – (376) 8,182 Equity securities 13,729 – – 13,729 Debt securities 140,254 – – 140,254 Real estate held for investment 8,274 – – 8,274 Mortgage loans 11,851 – – 11,851
Investments for unit-linked contracts 107,947 – – 107,947 Total investments 303,845 – – 303,845 Reinsurers’ share of reserves for insurance contracts 18,809 – 7 18,816 Deposits made under assumed reinsurance contracts 2,832 4 – 2,837 Deferred policy acquisition costs 16,326 – (45) 16,281 Deferred origination costs 866 – – 866 Accrued investment income 2,749 – – 2,749 Receivables and other assets 17,676 (4) – 17,671 Mortgage loans given as collateral 743 – – 743 Deferred tax assets 2,067 – – 2,067 Property and equipment 1,689 – – 1,689
Liabilities Reserve for premium refunds 518 – – 518 Liabilities for investment contracts 50,667 – – 50,667 Deposits received under ceded reinsurance contracts 1,362 – – 1,362 Deferred front-end fees 5,626 – – 5,626 Reserves for insurance contracts 242,646 – 72 242,719 Obligations to repurchase securities 3,330 – – 3,330 Accrued liabilities 3,011 – – 3,011 Other liabilities 18,396 – – 18,396 Collateralized loans 743 – – 743 Deferred tax liabilities 4,585 – (31) 4,554 Senior debt 6,453 – – 6,453 Subordinated debt 5,004 – – 5,004
Equity Shareholders’ equity 31,984 – (79) 31,905 Non-controlling interests 1,337 – (1) 1,336
Table 1.3 in USD millions, as of December 31, 2010Restatement and reclassifications of the consolidated balance sheet
Standards, amendments and interpretations effective or early adopted as of January 1, 2011 and relevant for the Group’s operations The following amendments to accounting standards and interpretations of standards relevant to the Group have been implemented for the financial year beginning January 1, 2011 with no material impact on the Group’s financial position or performance.
In November 2009, amendments to International Financial Reporting Interpretations Committee (IFRIC) 14 “Prepayments of a minimum funding requirement” were issued. The amendments to IFRIC 14, which itself is an interpretation of IAS 19 “Employee Benefits” is effective for annual reporting periods beginning on or after January 1, 2011. In the limited circumstances when an entity is subject to minimum funding requirements and makes an early payment of contributions to cover those requirements, IFRIC 14 permits the entity to treat the benefit of such an early payment as an asset.
In November 2009, as part of the phased project to replace IAS 39 “Financial Instruments: Recognition and Measurement”, the IASB issued IFRS 9 “Financial Instruments” which reconsiders the classification and measurement of financial assets. Under the new requirements, the classification of financial assets is based on how the reporting entity manages these assets (business model) and on the contractual cash flow characteristics of the specific financial assets. The measurement of financial assets will be either amortized cost or fair value through profit or loss, whereby for equity instruments an irrevocable election can be made on an instrument-by-instrument basis to record fair value through other comprehensive income (OCI). In October 2010, the IASB completed a subsequent phase of IFRS 9 “Financial Instruments” by carrying forward unchanged most of the requirements in IAS 39 regarding the classification and measurement of financial liabilities. The requirements related to the fair value option for financial liabilities were amended insofar as the effects of changes in a liability’s credit risk will be recorded in OCI rather than through the income statement, unless this presentation creates an accounting mismatch. Also, the IASB has carried forward to IFRS 9 the existing IAS 39 requirements related to the derecognition of financial assets and financial liabilities. In December 2011 the IASB issued an amendment to IFRS 9 that defers its mandatory effective date from January 1, 2013 to January 1, 2015, with earlier adoption permitted. The amendment also provides relief from the requirement to restate comparative financial statements for the effect of applying IFRS 9 and requires additional transition disclosures to describe the effect that the initial application of IFRS 9 has on the classification and measurement of financial instruments. The Group plans to assess the impact of this standard on its financial statements in conjunction with the revised standard IFRS 4 “Insurance Contracts”. Changes to the IFRS timetable may have an impact on this approach.
In October 2010, the IASB amended IFRS 7 “Financial Instruments: Disclosures” to include additional disclosure requirements regarding transfers of assets (for example, securities sold under repurchase agreements or securities lending transactions) with the aim of increasing the transparency of the risk exposures relating to such transferred assets. The accounting treatment for such transferred assets is unchanged. The amendment will be effective for annual reporting periods beginning on or after July 1, 2011.
In May 2011, the IASB issued IFRS 10 “Consolidated Financial Statements”, IFRS 11 “Joint Arrangements” and IFRS 12 “Disclosure of Interests in Other Entities”. IFRS 10 builds on existing principles by identifying control as the determining factor for consolidation for all types of entities. IFRS 11 “Joint Arrangements” provides principles for the financial reporting of joint arrangements. The standard addresses inconsistencies by requiring a single method to be applied by the Group for all its interests in jointly controlled entities. IFRS 12 provides a comprehensive standard on disclosure requirements for all forms of interests in other entitles (incl. joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles). The new standards are effective for annual periods beginning on or after January 1, 2013, with earlier adoption permitted. The Group expects that the adoption of IFRS 10 may result in additional consolidation of certain structured entities that are currently accounted for as associates.
In December 2011, the IASB issued amendments to IFRS 7 “Financial Instruments: Disclosures” introducing disclosure requirements that are intended to better assess the potential effect of offsetting arrangements. The amendments apply for annual periods beginning on or after January 2013, and interim periods within those annual periods.
The principal accounting policies applied in these Consolidated financial statements are set out below. These policies have been consistently applied to all years presented unless otherwise stated.
a) Consolidation principles The Group’s Consolidated financial statements include the assets, liabilities, equity, revenues, expenses and cash flows of Zurich Financial Services Ltd and its subsidiaries. A subsidiary is an entity in which Zurich Financial Services Ltd owns, directly or indirectly, more than 50 percent of the outstanding voting rights, or which it otherwise has the power to control. The results of subsidiaries acquired are included in the Consolidated financial statements from the date of acquisition. The results of subsidiaries that have been divested during the year are included up to the date control ceased. All significant intercompany balances, profits and transactions are eliminated in full.
Acquisition transactions with non-controlling interests are accounted for as transactions with parties external to the Group. The effect of transactions with non-controlling interests are recorded in equity if there is no change in control.
Consolidated financial statements b) Foreign currency translation and transactions Foreign currency translation In view of the international operations of the Group, there are many individual entities with different functional currencies. A functional currency is the currency of the primary economic environment in which an entity operates. Therefore, a common presentation currency is required. Due to the Group’s economic exposure to the U.S. dollar (USD), the presentation currency of the Group has been determined to be the USD. Assets and liabilities of Group companies with functional currencies other than USD are translated into the presentation currency at end-of-period exchange rates, while income statements and statements of cash flows are translated at average exchange rates for the period. The resulting translation differences are recorded directly in other comprehensive income (OCI) as cumulative translation adjustments.
The Group also issues products containing an embedded option that entitle the policyholder to switch all or part of the current and future invested funds into another product issued by the Group. Where this results in the reclassification of
Life insurance Premiums from traditional life insurance contracts, including participating contracts and annuity policies with life contingencies, are recognized as revenue when due from the policyholder. Benefits and expenses are provided against such revenue to recognize profits over the estimated life of the policies. Moreover, for single premium and limited pay contracts, premiums are recognized in income when due with any excess profit deferred and recognized in income in a constant relationship to the insurance in-force or, for annuities, the amount of expected benefit payments.
The reserves for life benefits for other traditional life insurance policies are calculated using a net level premium valuation method based on actuarial assumptions including mortality, persistency, expenses and investment return including a margin for adverse deviations. These assumptions are locked-in at inception and are regularly assessed as part of the liability adequacy testing over the period of the contract.
Policyholders’ contract deposits represent the estimated policy benefits for investment type insurance contracts invested in non unit-linked funds. This liability comprises the accumulation of premium received less charges plus declared policyholder dividends.
For products managed on a dynamic basis, an option in IFRS 4 is used to measure the insurance liabilities using current financial and non-financial assumptions, to better reflect the way these products are managed. Financial assets relating to these liabilities are designated as “fair value through profit or loss”.
Discretionary participation features (DPF) For products containing DPF the amount of the DPF is deemed to be the investment return on all related assets where the apportionment between the shareholder and the policyholder has not yet been determined. The liability includes certain elements of net unrealized gains/(losses) and retained earnings attributable to the DPF, based on the mandated rates applied to these gains and earnings on the assumption that they had been realized as of the balance sheet date.
Reinsurance contracts that do not transfer significant insurance risk are accounted for using the deposit method. A deposit asset or liability is recognized based on the premium paid or received less any explicitly identified premiums or fees to be retained by the ceding company. Interest on deposits is accounted for using the effective interest rate method. Future cash flows are estimated to calculate the effective yield and revenue and expense are recorded as interest income or expense. Reinsurance deposit assets or liabilities also include funds deposited or held by the Group, respectively under assumed or ceded reinsurance contracts, when funds are retained by the reinsured under the terms of the contract.
Reinsurance assets are assessed for impairment on a regular basis for any events that may trigger impairment. Triggering events may include legal disputes with counterparties, changes in capital and surplus levels or changes in credit ratings of a reinsurer, and historical experience regarding collectibility from specific reinsurers. Impairment is considered to have occurred if it is probable that the Group will not be able to collect the amounts expected from reinsurers. If a reinsurance asset is impaired, the carrying amount of the asset is reduced to its recoverable amount, through the use of an allowance account, and the amount of the impairment loss is recognized in income. If a decrease in the impairment loss can be related objectively to an event occurring after the impairment loss was initially recognized, the impairment loss is reversed through income.
Consolidated financial statements d) Liabilities for investment contracts (without DPF) The Group issues investment contracts without fixed terms (unit-linked) and investment contracts with fixed and guaranteed terms (fixed interest rate).
Unit-linked investment contracts These represent portfolios maintained to meet the specific investment objectives of policyholders who bear the credit, market and liquidity risks related to the investments. The liabilities are carried at fair value, with fair value being determined by reference to the underlying financial assets. The related assets for unit-linked investment contracts are classified as designated at fair value through profit or loss in order to reduce measurement inconsistencies. If the investment contract is subject to a put or surrender option, the fair value of the financial liability is never recorded at less than the amount payable on surrender, discounted for the required notice period, where applicable.
Financial assets held for trading are debt and equity securities which the Group buys with the principal intention to resell in the near term.
Loans and receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market and are not classified in any of the other categories. Loans and receivables include loans where money is provided directly to the borrower, such as mortgage loans, policyholder loans and other loans.
Impairment of financial assets (excluding derivative financial instruments) General The Group assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. Objective evidence of impairment exists if one or more loss events occurred after the initial recognition of the asset which impact the estimated future cash flows such as: a) significant financial difficulty of the issuer or debtor;
Objective evidence of impairment exists for an available-for-sale equity security when its fair value is below the weighted-average cost by a significant amount. Impairment thresholds are determined quarterly on the basis of the underlying price volatility of securities within the various equity markets in which the Group invests (such as North America, UK, Switzerland, other European countries, Asia Pacific). Additionally, the Group considers an equity security to be impaired when its fair value has been below the weighted-average cost for a prolonged period of 24 consecutive months or longer.
Derivative financial instruments, except those designated under a qualifying hedge relationship are classified as held for trading assets or liabilities and carried at fair value on the balance sheet with changes in fair value recognized in income.
To qualify for hedge accounting, the relationship of the hedging instrument to the underlying transaction must meet several strict conditions on documentation, probability of occurrence, hedge effectiveness and reliability of measurement. At inception of a hedge and on an ongoing basis, the hedge relationship is formally assessed in order to determine whether the hedging instruments are highly effective in offsetting changes in fair values or cash flows of hedged items attributable to the hedged risk. If these conditions are not met, then the relationship does not qualify for hedge accounting, in which case the hedging instrument and the hedged item are reported independently in accordance with the respective accounting policy as if there was no hedging designation. Where hedge accounting conditions are met, the accounting treatments are as follows: Fair value hedges Gains or losses from re-measuring the derivatives that are designated and qualify as fair value hedges are recognized immediately in the same line item of the consolidated income statement as the offsetting change in fair value of the risk being hedged. Offsetting gains or losses on the fair value of the hedged item attributable to the hedged risk are adjusted against the carrying amount of the hedged item and recognized in income.
Preference shares, which are mandatorily redeemable or can be put back for redemption at the option of the holder on a specific or determinable date are classified as liabilities. Dividends on these preference shares are recognized in income as interest expense.
i) Derecognition of financial assets and liabilities Financial assets are derecognized when the right to receive cash flows from the assets has expired, or when the Group has transferred its contractual right to receive the cash flows from the financial asset, and either
Under a reverse repurchase agreement, the securities received are not recognized on the balance sheet, as long as the risk and rewards of ownership have not been transferred to the Group. The cash delivered is derecognized and a corresponding receivable is recorded and reported within “Other Receivables”. Interest income is recognized in income using the effective interest rate method over the life of the agreement.
k) Intangible assets Intangible assets include goodwill, present value of future profits from acquired insurance contracts, attorney-in-fact relationships, distribution agreements and other intangible assets, such as customer relationships and contracts, affinity partnerships, computer software licenses and capitalized software development costs.
Goodwill Goodwill arises on the acquisition of subsidiaries, associates and jointly controlled entities and represents the excess of the cost of acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired entity at the acquisition date.
Goodwill on the acquisition of subsidiaries is capitalized as a separate line and reviewed for impairment annually, or more frequently if impairment indicators are observed. For the purpose of impairment testing, goodwill is allocated to cash generating units (CGU) based on the level at which management monitors operations and makes decisions relating to the continuation or disposal of assets and operations. On this basis, as of January 1, 2011, the Group aggregates CGUs
If goodwill has been allocated to a CGU and an operation within that unit is disposed of, the carrying amount of the operation includes attributable goodwill when determining the gain or loss on disposal.
Distribution agreements Distribution agreements are either entered into separately for a consideration or are acquired in a business combination. The useful lives may extend up to 30 years and are estimated based on the period of time over which they are expected to provide economic benefits, after taking into account all economic and legal factors such as stability of the industry, competitive position and the period of control over the assets. They are amortized using the straight-line method over their useful lives and reviewed for impairments at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
Costs associated with research and maintenance of computer software are expensed as incurred. Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire and bring to use the specific software.
m) Treasury shares Zurich Financial Services Ltd shares and preferred securities classified as equity instruments held by the Group are classified as treasury shares and are deducted from shareholders’ equity, net of transaction costs and tax. The nominal value of treasury shares is deducted from share capital. The difference between the nominal value and the amount paid to acquire the treasury shares, is allocated between additional paid-in capital and retained earnings. No gain or loss is recognized in the income statement on the purchase, sale, issue or cancellation of treasury shares.
Under the Group’s equity-settled share-based compensation plans, the fair value of the employee services received in exchange for the grant of shares and/or previously options is recognized as an expense in income over the vesting period, with a corresponding amount recorded in additional paid-in capital.
As the fair value of the options which the Group uses for its employee schemes cannot be compared with those in the market, the Group estimates the fair value using the Black-Scholes model. This model requires inputs such as share price, exercise price, implied volatility, risk-free interest rate, expected dividend rate and the expected life of the option.
Actuarial gains and losses are recognized in full in the period in which they occur and are presented on a separate line in the consolidated statement of comprehensive income. Actuarial gains and losses result from experience adjustments (the effects of differences between the previous actuarial assumptions and what has actually occurred during the accounting period), changes in actuarial assumptions since the previous balance sheet date, and differences between the expected and actual returns on plan assets.
Past service costs represent the change in the defined benefit obligation following plan amendments that relate to employee service in prior periods. To the extent that past service costs are vested, they are recognized immediately. Unrecognized past service costs represent past service costs that have not yet vested, and are recognized on a straightline basis over the average vesting period.
r) Income taxes The Group provides current tax expense according to the tax laws of each jurisdiction in which it operates. Deferred income taxes are recognized using the asset and liability method. Deferred income taxes are recorded for temporary differences, which are based on the difference between financial statement carrying amounts and income tax bases of assets and liabilities using enacted income tax rates and laws. Losses for tax purposes are treated as deferred tax assets to the extent it is probable that they can be utilized against future taxable income in the respective jurisdictions.