Outstanding balance sheet strength refl ected by economic • capital adequacy ratio of 136%
Growth driven by expanding product range and distribution • capabilities, both organically as well as through the ongoing successful integration of recent acquisitions in Europe, the U.S. and emerging markets 01_Contents_8638_Eng.indd 101_Contents_8638_Eng.indd 1 28/2/10 09:10:0028/2/10 09:10:00
General Insurance business operating profi t 3,463 3,535 (2%) General Insurance combined ratio 96.8% 98.1% 1.3 pts
Farmers business operating profi t 1,554 1,356 15% Farmers Management Services gross management result 1,291 1,142 13% Farmers Management Services managed gross earned premium margin 7.2% 6.9% 0.3 pts
Rest of the World in %, for the years ended December 31
Our strategy is built to maintain top-tier fi nancial results under any market conditions. In 2009 we became one of the top fi ve global insurers based on market capitalization1.
Our performance in delivery is also demonstrated through the following indicators.
S&P500 P&C Insurance index DJ STOXX 600 INSURANCE index Zurich Financial Services
3 Proposed gross dividend by the Board of Directors to the Annual General Meeting 2010.
Proposed dividend of CHF 163 per share for 2009 resulting in a payout ratio of 66% Dividends / EPS in respect of the business year (in CHF)1
Our business is insurance. We divide our business into three segments: General Insurance, Global Life, and Farmers.
General Insurance is the biggest of our three segments. It provides property and casualty products and services for individual and commercial customers. Its business model is to provide a global platform – including proposition management, claims management, distribution management, underwriting and customer relationship services – for local business delivery.
Global Life is is the next-biggest segment and a key growth engine for the Group. Global Life offers best-inclass life insurance, investments, savings, and pensions solutions to international and expatriate investors, corpoate customers and private banks. Propositions are offered through three key distribution channels that benefi t from a global reach: agents, IFA/Brokers and retail banks. Global Life is managed globally while remaining focused on local customer and distributor needs.
Farmers includes Farmers Re and Farmers Management Services, through which our Group manages the Farmers Exchanges, as well as Foremost, Bristol West and 21st Century products in the United States.
Activities Our General Insurance segment serves individuals, small and medium-sized businesses, commercial enterprises and major multinational corporations.
#2 largest general insurer in Switzerland based on gross written premiums 2008
#1 in IHT (Inheritance Tax) whole of life protection in the UK based on APE 2008 Source: ABI
#1 in worldwide expatriate regular premium savings based on APE 2008
#3 largest personal lines direct auto carrier in the U.S. (including 21st Century, excluding direct affi nity model carriers)
Zurich’s 2009 results refl ect our continued ability to execute against a proven strategy rooted in operational excellence and fi nancial discipline.
These results refl ect our continued ability to execute against a proven strategy rooted in operational excellence and fi nancial discipline. Given that strength, and with full confi dence in the sustainability of the Zurich strategy, the Board will recommend at the Annual General Meeting a gross dividend of CHF 16.00 per share, which represents an exceptionally high payout of earnings to shareholders and an extraordinary increase over last year’s CHF 11.00 gross dividend.
Similarly, Farmers continued to post greater profi tability and strong growth. Business operating profi t improved by a solid 10 percent, refl ecting not just the ongoing successful integration of 21st Century but also continued expense management as well as higher profi tability from Farmers Re following higher quota share arrangements.
And fi nally, total return on Group investments was 6.3 percent, including investment income, realized gains and losses and impairments, as well as changes in unrealized gains and losses reported in shareholders’ equity. This result refl ects our commitment to managing our investments in a disciplined way, and to continue relying on our proven methods for protecting our shareholders by managing our assets relative to liabilities on a risk-adjusted basis.
Together, these successes embody Zurich’s commitments to its various stakeholders. From customers who expect us to be backed by reliable service and fi nancial strength, to shareholders who expect sustainable value, to employees who expect challenging and fulfi lling careers, Zurich aims to serve its role in society in a way that makes all our stakeholders proud. We hope you agree that we achieved that goal in 2009.
We close this message by recognizing the extraordinary accomplishments of our outgoing Chief Executive Offi cer, James J. Schiro, who retired at the end of the year. Under his leadership Zurich emerged from an extremely tenuous situation and is today recognized as one of the strongest global insurers. The disciplined approach he instilled and championed will continue to serve this company for many years to come. We will not forget the debt we owe him.
Economic conditions tested insurers’ mettle over 2009: demand for certain lines of property & casualty coverage remained weak due to the ongoing recession, while the low interest rate environment continued to challenge all lines of business. By and large, the insurers that made the most headway in 2009 were those that could successfully execute on core business practice: earning our customers’ trust so that we could profi tably underwrite their risks. This is the challenge against which we were proud to test our strategy and ourselves. By year-end we were grateful for the trust that our customers placed in us, heartened by the solid fi nancial results they helped us deliver, and extremely pleased to achieve our long-standing goal of becoming one of the world’s top fi ve global insurers.
Managing risk in a changing world Amid ongoing economic uncertainty, we delivered sustained profi table growth in targeted business lines by keeping our focus on balance sheet strength and operational excellence.
Today we have controls in place to understand the riskreturn relationship in every aspect of our business – in every product we sell, in every asset we hold. Risk management, after all, is our business. No matter what market conditions prevail we are judged fi rst on our ability to help our customers manage their risks. This is the same standard by which we judge ourselves internally, which explains why we are continuously reaffi rming the harmony of our risk management practices with our actual and potential risk profi le. These practices form the proof of our commitment to maintaining a platform of strength and stability for our customers, our shareholders, and the wider community of stakeholders.
Risk management today is a living feature of our culture, with offi ces around the world empowered to identify, measure, manage, report on and monitor the risks that could impact the achievement of our objectives. These efforts are coordinated on a global basis and interconnect seamlessly with all areas of our business. We make sure that our exposure to natural catastrophe risk, for example, is geographically balanced, and we work with reinsurers to limit exposure in any given year. And to those reinsurers in turn, as well as the banks and other organizations with whom we collaborate, we apply strict credit risk controls in coordination with a focus on broad market developments. We are resolute in avoiding investments in products whose risk profi le we don’t understand; this basic principle guides us with regard to potential mergers and acquisitions.
Risk management is our business. We help our customers manage their risks, and are accountable for managing our own. In 2009 our robust, well-established risk management practices helped maintain a strong and stable foundation for the Group despite continued turmoil in our economic and operating environment.
The following is an unaudited summary of the major developments in Zurich’s risk management procedures over 2009. For the complete and audited Risk Review, please turn to page 97.
We are well-positioned to manage credit risk generally and to maintain that position going forward. We pay close attention to the credit quality of our counterparties, including banks and reinsurers, and continually assess possible concentration of credit risk. We also keep a close eye on market developments so that we can prepare for potential problems before they arise.
Our aim is to be the leading insurer in our chosen markets. To get there, we rely on the four cornerstones in the Zurich strategy: profi table growth, operational transformation, customer centricity and people management. Each has been validated repeatedly as a vital area of focus and confi rmed against our broader aim of being a responsible and sustainable company. Each of these four cornerstones played a key role in the solid results of 2009.
Building on fi rm foundations With the right approach to people management, a customer-centric attitude, and ongoing operational transformation, we will drive profi table growth.
Throughout our organization we are sharing the best practices and propositions, so that the best we have to offer is available to as many of our customers as possible, no matter which of our markets they live in, thereby taking maximum advantage of our global strength.
Through operational transformation we continue to build strength at our core – in such areas as risk management, investment management, underwriting and claims – while maintaining fl exibility, dynamism and innovation in our chosen markets.
The initiatives bundled under The Zurich Way are a keystone of operational transformation, and they continue to deliver outstanding results, comfortably exceeding the USD 900 million after-tax operational improvement target set for 2009. But operational transformation includes much more than The Zurich Way. Operational transformation delivers effi ciencies and creates global standards across all aspects of our business.
At Global Life, the manufacture and servicing of propositions is being concentrated into eight regional hubs, then tailored at the local level to meet customer needs precisely. Throughout our Group a range of similar measures is taking place to capture effi ciencies on global, regional and even local levels.
Our customers are at the heart of all we do. This means we understand our personal, commercial and corporate customers’ needs, and are entirely focused on meeting those needs. To this end we benchmark our performance using one consistent, Group-wide measure of customer satisfaction and loyalty, ensuring that customer centricity remains a source of competitive advantage.
In September, our entire organization took a break from the normal routine to connect with each other – through the intranet, videos, blogs and internal events – as well as with our customers directly. These activities were dedicated to honoring the customers who put their trust in us, and to learning how we might be able to serve them better going forward.
Another way an insurer demonstrates customer centricity is by anticipating the risks our customers face, and by showing them how to avoid them. By this or any other measure, 2009 was a banner year for customer focus.
Farmers took a comprehensive approach to helping its customers deal with the threat of wildfi res, an all-too familiar threat in the western U.S., where many Farmers customers live. Teaming with volunteers, fi refi ghters and other public responders, Farmers produced and distributed 400,000 wildfi re prevention information packs (with DVDs in English and Spanish) in Southern California. They also repeated the successful Firesafe program of 2008, spraying the houses of customers threatened by wildfi re with a clean, safe fi re retardant, free of charge.
With the tragic experience of 2007’s fl oods still fresh in mind, our UK team set up a Web site to help people prepare for the possibility of their return in 2009 (www.fi ghtingfl oods.co.uk) and a twitter channel to respond to customers’ questions. As the fl ooding in Cumbria came to pass, we set up temporary operations in the heart of the fl ooded community, with a dedicated Flood Claims Manager and industrial dryers at the ready to ensure a quick response. Similar measures were taken to help customers dealing with the enormously destructive fl oods that occurred in Turkey in September, when we took a similarly active approach to reaching out to our customers, using our Web site, text messaging service, call centers, and mobile Zurich HelpPoint service vehicles. By sharing our experiences in such events we deepen our reservoir of knowledge so that we can continually refi ne the practices we use to help our customers when risk events occur.
For all these reasons, we understand that investing in our people is an investment in our future. We are constantly striving to make sure that the processes and structures in place for empowering the roughly 60,000 employees of Zurich to meet our customers’ needs are converging on one global, Zurich-wide standard.
When it comes to being a responsible company, it all starts with the behavior and attitude of every individual who works at Zurich. Each one of us has to play a part in addressing the relevant economic, environmental and social issues in our everyday business.
To monitor progress and continue to improve our corporate responsibility performance we use such measures as the Dow Jones Sustainability Indexes (DJSI) and the FTSE4Good Index Series, as well as stakeholder feedback through measures such as customer and employee surveys.
1 Manfred Gentz Chairman of the Board, Chairman of the Governance and Nominations Committee, Member of the Remuneration Committee 2 Philippe O. Pidoux Vice Chairman of the Board, Member of the Governance and Nominations Committee, Member of the Remuneration Committee 3 Susan Bies Director, Member of the Risk Committee 4 Victor L.L. Chu Director, Member of the Governance and Nominations Committee 5 Thomas K. Escher Director, Member of the Remuneration Committee 6 Fred Kindle Director, Member of the Audit Committee 7 Armin Meyer Director, Member of the Risk Committee, Member of the Governance and Nominations Committee 8 Don Nicolaisen Director, Chairman of the Audit Committee, Member of the Risk Committee 9 Vernon L. Sankey Director, Chairman of the Remuneration Committee 10 Tom de Swaan Director, Member of the Audit Committee, Chairman of the Risk Committee 11 Rolf Watter Director, Member of the Audit Committee 03_Group_Overview_8631_Eng.indd 1903_Group_Overview_8631_Eng.indd 19 25/2/10 13:42:2925/2/10 13:42:29
Committed to deliver Our management lives the Zurich commitment to deliver day to day. With profound gratitude the GEC thanks outgoing CEO James J. Schiro for his years of outstanding service, and welcomes Martin Senn’s appointment to the role.
Chief Investment Offi cer 10 Dieter Wemmer Chief Financial Offi cer 1 Retired as Chief Executive Offi cer on December 31, 2009 2 As of January 1, 2010 Chief Executive Offi cer 03_Group_Overview_8631_Eng.indd 2103_Group_Overview_8631_Eng.indd 21 25/2/10 12:59:0225/2/10 12:59:02
Zurich Financial Services Ltd is committed to effective governance for the benefi t of its shareholders, customers, employees and other stakeholders based on the principles of fairness, transparency and accountability. Structures, rules and processes are designed to provide for proper organization and conduct of the business within the Zurich Financial Services Group (the ‘Group’ or ‘Zurich’) and to defi ne the powers and responsibilities of its corporate bodies and employees.
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 Offi cer (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 Switzerland1.
Farmers provides through Farmers Group, Inc. and its subsidiaries (FGI) non-claims related management services • to the Farmers Exchanges. FGI receives fee income for the provision of services to the Farmers Exchanges, which we manage but do not own, and to their customers. As from January 1, 2009, this segment also comprises the Farmers Re business which includes all reinsurance assumed from the Farmers Exchanges by the Group. The Farmers Exchanges are prominent writers of personal lines and small commercial lines business in the United States.
The Group’s secondary format for segment information continued to be geographic in 2009 and was as follows: Americas, Europe & Africa, Asia-Pacifi c & Middle East and Central Region. As a result of realignment of the previous International Businesses region into a new regional structure, as of January 1, 2009, Southern Africa is part of an expanded Europe & Africa region, Latin America is part of an expanded Americas region and Asia-Pacifi c & Middle East forms a new stand-alone region.
Significant shareholders According to the rules regarding disclosure of signifi cant shareholdings in Swiss companies listed in Switzerland, disclosure has to be made if certain thresholds are reached or have fallen below, starting at 3 percent. Call options and other fi nancial instruments are to be added to any position in shares, even if they allow for cash settlement only. Under this regime, disclosure must be made separately for purchase positions (including shares, long call options and short put options) and sale positions (including long put options and short call options). The percentage thresholds are calculated on the basis of the total amount of voting rights according to the entry in the commercial register.
Zurich Financial Services Ltd is obliged to announce shareholdings by third parties in its shares upon a respective notifi cation by the third party that a threshold has been crossed. During 2009 the Group received several notifi cations by third parties that they have either exceeded or fallen below the threshold of 3 percent with purchase or sale positions. The respective announcements can be found on Zurich’s Web site www.zurich.com ( com/main/investors/ourshares/disclosureofshareholdings/introduction.htm).
As of December 31, 2009, Zurich Financial Services Ltd is not aware of any person or institution, other than Barclays Plc and BlackRock, Inc., which, directly or indirectly, had an interest as benefi cial owner in shares, option rights and/or conversion rights relating to shares of Zurich Financial Services Ltd representing 3 percent or more of its issued shares.
Barclays Plc, 1 Churchill Place, London E14 5HP, United Kingdom, along with its subsidiaries, reported as per April 28, 2009, a purchase position of 3.02 percent. BlackRock, Inc., 40 East 52nd Street, New York, 10022, U.S.A., along with its subsidiaries, reported as per December 1, 2009, a purchase position of 3.39 percent.
Cross-shareholdings Zurich Financial Services Ltd has no interest in any other company exceeding 5 percent of the voting rights of that other company, where that other company has an interest in Zurich Financial Services Ltd exceeding 5 percent of the voting rights in Zurich Financial Services Ltd.
During the year 2009, 550,448 shares were issued to employees out of contingent share capital. As a result, on December 31, 2009 the share capital amounted to CHF 14,747,306.80 (147,473,068 shares) and the contingent share capital as specifi ed in Article 5ter(1a) of the Articles of Incorporation amounted to CHF 1,000,000.00 (10,000,000 shares) and the other contingent share capital as specifi ed in Article 5ter(2a) of the Articles of Incorporation amounted to CHF 264,383.10 (2,643,831 shares).
For information on changes of share capital during 2007, please see the Annual Report 2008 of Zurich Financial Services, Financial Report, pages 22 to 23, pages 136 to 137, and pages 274 to 277.
Summary of changes in the ordinary share capital over the last two years 2 Zurich Financial Services Ltd has established an American Depositary Share, or ADS, level 1 program in the United States. Under the program, The Bank of New York Mellon issues the ADSs. Each ADS represents the right to receive one-tenth of one Zurich Financial Services Ltd’s share. Each ADS also represents securities, cash or other property deposited with The Bank of New York Mellon but not distributed to ADS holders. ADSs are traded over the counter (OTC) and evidenced by American Depositary Receipts, or ADRs. ADS holders are not treated as shareholders of Zurich Financial Services Ltd and are not able to directly enforce or exercise shareholder rights. Only the Bank of New York Mellon as depositary may exercise voting rights with respect to instructions received from benefi cial owners of ADRs.
1 CREST is the system for the paperless settlement of trades in securities and the holding of uncertifi cated securities in the United Kingdom. CREST holds the shares in trust and issued dematerialized depository interests representing entitlements to Zurich Financial Services Ltd’s shares known as CDIs. As CDI holders are not the legal owners of the shares represented by the CDIs, they are not able to directly enforce or exercise rights that a holder of shares can. CDI holders will, however, have a benefi cial interest in the shares represented by the CDIs and be allowed as such to give instructions to CREST Depository on the exercise of certain noneconomic rights attached to the shares. Each CDI represents one Zurich Financial Services Ltd’s share.
Director Member of the Governance and Nominations Committee Member of the Risk Committee 2001 2010
All of the current Directors have served on the Board throughout the entire year 2009. All Directors of Zurich Financial Services Ltd are also members of the board of directors of Zurich Insurance Company Ltd. Mr. Gentz also serves as chairman of that board. In addition, Mr. de Swaan is a member of the board of directors of Zurich Insurance plc; he also chairs the audit committee of that board. Mr. Nicolaisen and Mrs. Bies have been appointed members of the board of directors of Zurich Holding Company of America (ZHCA) on October 19, 2009 and are also members of the respective audit committee. With the exception of Mrs. Bies, Mr. Nicolaisen and Mr. de Swaan, the Directors have no further board memberships within the Group.
Biographies Manfred Gentz 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 fi rst for human resources. From 1990 to 1995 he was chief executive offi cer of Daimler-Benz Interservices (debis) in Berlin and subsequently became chief fi nancial offi cer 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 member of the executive board of ICC (International Chamber of Commerce), Germany, and as its chairman. In addition he is active in a number of scientifi c and cultural institutions, among others, he chairs the curatorship of the Technische Universität Berlin.
Philippe Olivier Pidoux graduated from the University of Lausanne, Switzerland, with a doctorate in law and also holds a master’s degree in comparative jurisprudence from the University of Texas. He is a partner in the law fi rm BMP Associés in Lausanne, Switzerland. Mr. Pidoux was a member of the Government of the Canton of Vaud from 1986 until 1994 and a member of the Swiss Parliament between 1983 and 1999. From 1991 until 2003, he was a member of the board and as of 1999 vice chairman of the Swiss National Bank. In addition, from 1994 to April 2009 he was chairman of Publigroupe AG.
Susan Bies 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 fi nancial offi cer 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 fi nancial 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.
Fred Kindle graduated from the Swiss Federal Institute of Technology (ETH) in Zurich with a master’s degree in engineering. He worked as a marketing project manager with Hilti AG in Liechtenstein from 1984 until 1986, and then enrolled at Northwestern University, Evanston, Illinois, in the United States, where he earned an MBA. From 1988 until 1992 he was a consultant with McKinsey & Company in New York and Zurich. He then joined Sulzer Chemtech AG in Switzerland as the head of the Mass Transfer Department and in 1996 became the head of the Product Division. In 1999 he was appointed CEO of Sulzer Industries, one of the two operating groups of Sulzer AG. Two years later he became CEO of Sulzer AG, where he also served as board member. After joining ABB Ltd. in 2004, Mr. Kindle was appointed CEO of ABB Group in January 2005, a position he held until February 2008. He then became a partner of Clayton, Dubilier & Rice, a private equity fi rm based in New York and London. In his function as a partner of that fi rm Mr. Kindle serves as a chairman of Exova Ltd., Scotland, and as a director of Rexel SA, France. He is also on the board of VZ Holding Ltd., Zurich and Stadler Rail AG, Bussnang.
Don Nicolaisen graduated from the University of Wisconsin-Whitewater with a BBA degree and joined Price Waterhouse (which subsequently became PricewaterhouseCoopers), where he was admitted to partnership in 1978. He served in various capacities, including as auditor and as chairman of PricewaterhouseCoopers’ fi nancial services practice. He led that company’s national offi ce for accounting and Securities and Exchange Commission services from 1988 to 1994 and served on both the U.S. and global boards from 1994 to 2001. From September 2003 to November 2005, he was chief accountant of the U.S. Securities and Exchange Commission and was principal adviser to the Commission on accounting and auditing matters. He is a member of the board of directors of Verizon Communications Inc., Morgan Stanley and MGIC Investment Corporation. In addition, he is on the board of advisors for the University of Southern California Leventhal School of Accounting.
Vernon Louis Sankey graduated with a MA degree from Oriel College, Oxford and joined Reckitt and Colman in the UK in 1971, subsequently working in France, Denmark, the UK and the U.S. He was appointed to the board of directors in 1989 and was chief executive offi cer of that company from 1991 to 1999. From 2000 until September 2007 he was chairman of Photo-Me International plc. From 2001 until June 2007 he was a director of Cofra AG, Switzerland, and from 2004 until July 2007 of Taylor Woodrow plc. Between 2005 and 2008 he served as a director of Vividas Group plc. As of January 1, 2006, he has been a member of the supervisory board of Atos Origin SA, Paris, and since October, 2006 of Firmenich SA, Geneva, where he became chairman in October 2008. He was chairman of Thomson Travel Group plc until August 2000, of Gala Group Holdings plc until February 2003 and of The Really Effective Development 04_Corporate_Governance_7412_Eng.indd 3104_Corporate_Governance_7412_Eng.indd 31 24/2/10 20:03:1024/2/10 20:03:10
Company Ltd until March 2006. He also was a director of Pearson plc until April 2006 and is a former board member of the UK’s Food Standards Agency. In addition to his board roles, he is also an advisor to a number of other companies.
Tom de Swaan graduated from the University of Amsterdam with a master’s degree in economics. He joined De Nederlandsche Bank N.V. in 1972, and from 1986 until 1998 was a member of the governing board. In January 1999, he became a member of the managing board and chief fi nancial offi cer of ABN AMRO Bank. He retired from ABN AMRO on May 1, 2006, but continued as an advisor to the managing board until June 2007. Mr. de Swaan is a non-executive member of the board of GlaxoSmithKline Plc and chairman of its audit committee. He is a member of the supervisory board of Royal DSM, a Netherlands-based chemical group. Since May 3, 2007, he is also the vice chairman of the supervisory board of Royal Ahold, a global retail chain, and since May 10, 2008, he is chairman of the supervisory board of Van Lanschot NV, the holding company of F. van Lanschot Bankiers, an independent Dutch bank. From 1987 to 1988, he was chairman of the Amsterdam Financial Center, and from 1995 to 1997 chairman of the banking supervisory sub-committee of the European Monetary Institute. He was also a member of the Basel Committee on Banking Supervision from 1991 to 1996, its chairman from 1997 to 1998, and a non-executive director on the board of the UK’s Financial Services Authority from January 2001 until the end of 2006. Mr. de Swaan is also a director of a number of non-profi t organizations. Among others he is treasurer of the board of the Royal Concertgebouw Orchestra, the Netherlands Cancer Institute and the International Franz Liszt Piano Competition. Moreover, he chairs the advisory board of the Rotterdam School of Management.
Rolf Urs Watter graduated from the University of Zurich with a doctorate in law and holds a master of laws degree from Georgetown University in the U.S. He is admitted to the bar of the Canton of Zurich. Since 1994 he has been a partner in the law fi rm Bär & Karrer in Zurich and was a member of its executive board from 2000 and an executive director upon the incorporation of Bär & Karrer AG in 2007 until September 2009. He is a non-executive director of Nobel Biocare Holding AG (since 2007), of Syngenta AG (since 2000), UBS Alternative Portfolio AG (since 2000) and A.W. Faber-Castell (Holding) AG (since 1997). He formerly was a non-executive chairman of Cablecom Holding AG (2004-2008) and non-executive director of Centerpulse AG (2002–2003), of Forbo Holding AG (1999–2005) and of Feldschlösschen Getränke AG (2001–2004). He is a part-time professor at the Law School of the University of Zurich. In addition, he is a member of the SIX Admission Board and of its Disclosure Commission of Experts. He also serves as chairman of two charity institutions.
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 offi ce is three years. On the expiration of their terms of offi ce, 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 offi ce 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 offi ce as a Director, although exceptions may be made under special circumstances.
At the Annual General Meeting to be held on March 30, 2010, the terms of offi ce of Mrs. Bies and Messrs. Pidoux, Chu, Meyer and Watter will expire. Mrs. Bies and Messrs. Meyer, Chu and Watter have been proposed for re-election by the Board for a term of three years. Mr. Pidoux will not stand for re-election for the Board of Directors.
Josef Ackermann has been nominated as additional member of the Board of Directors of Zurich Financial Services Ltd for a term of two years.
Josef Ackermann, 62, Swiss, 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, 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, Germany, of Royal Dutch Shell plc, Holland, and of Belenos Clean Power Holding Ltd, Biel. He is a member of the International Advisory Council of Zurich Financial Services Group, and he also plays an active role in, among other things, the Initiative Finanzstandort Deutschland (member of the Initiators’ Group), the Institute of International Finance (chairman of the board), the World Economic Forum (vice chairman of the foundation board), the St. Gallen Foundation for International Studies (chairman) and the Metropolitan Opera New York (advisory director). Since 2007, Mr. Ackermann has been a visiting professor in fi nance at the London School of Economics. In 2008, he was named honorary professor at Frankfurt’s Johann Wolfgang Goethe University and was appointed to the honorary senate of the Lindau Meetings of Nobel Laureates. Furthermore, he is an honorary fellow of the London Business School and holds an honorary doctorate from the Democritus University of Thrace in Greece.
Given the separation of roles of the Chairman and the CEO and the fact that the Board of Directors is wholly nonexecutive, there is no requirement for a lead director to be appointed under the Swiss Code of Best Practice.
In 2009, average attendance at Board meetings was 94 percent. The members of the Board spend additional time participating in Board Committee meetings and preparing for meetings in order to discharge their duties.
The Board may appoint committees for specifi c areas from among its members and establish terms of reference and rules with respect to delegated authority and reporting to the Board. The committees assist the Board in performing its duties. To the extent that the committees are not authorized to take resolutions, they discuss and propose matters to the Board for taking the appropriate actions and passing resolutions before such matters are brought to the Board. The Board has the following standing committees, which regularly report to the Board and submit proposals for resolutions to the Board. On average, committee meetings lasted between one and three hours.
The Governance and Nominations Committee is composed of four Board members. It oversees the Group’s governance and measures it against best practice with a view to ensure that the rights of the shareholders are fully protected. It also develops and proposes to the Board corporate governance guidelines and reviews them from time to time. The Governance and Nominations Committee is further entrusted with succession planning with respect to the Board, the CEO and the members of the GEC and Group Management Board (GMB). In this regard, it proposes the principles for the nomination and ongoing qualifi cation of members of the Board and makes proposals to the Board on the composition of the Board, as well as the appointment of the Chairman, the Vice Chairman, the CEO and the other members of the GEC and GMB. The Committee reviews the system for management development and supervises progress made in respect of succession planning. Final decisions for nominations and appointments are made by the Board, subject to shareholder approval, where so required. During 2009 the Governance and Nominations Committee met fi ve times (of which one was a joint meeting with the Remuneration Committee) and particularly addressed the nomination and ongoing qualifi cations of the members of the Board of Directors and the succession planning for members of senior management. On average attendance at meetings of the Governance and Nominations Committee was 85 percent.
The Audit Committee has four members, all of whom meet the relevant requirements with respect to independence and qualifi cation. The Audit Committee charter provides that the Audit Committee as a whole should have (i) an understanding of IFRS and fi nancial statements, (ii) the ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves, (iii) experience in preparing, auditing, analyzing or evaluating fi nancial statements that present a breadth and level of complexity of accounting issues that are generally comparable to those of Zurich Financial Services 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 fi nancial reporting, and (v) an understanding of audit committee functions. The Audit Committee met seven times in 2009. Average attendance at meetings was 93 percent.
The Audit Committee serves as a focal point for communication and oversight regarding fi nancial accounting and reporting, internal control, actuarial, and compliance among the Management. It is responsible for reviewing the Group’s auditing process (including establishing the basic principles relating to and making proposals with respect to the audit of Zurich Financial Services Ltd and the Group) and reviews the internal control systems. The external auditors, the internal auditors and appropriate members of the GEC, the GMB and other executives attend its meetings in order to, among other things, discuss the auditors’ reports, to review and assess the auditing concept and the examination process and to assess the activities of internal and external auditors. For more information on the supervision and control over the external audit process, please see pages 45 to 46. 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 48 to 49.
Information and control instruments vis-à-vis the Group Executive Committee and Group Management Board The Board supervises Management and monitors its performance through reporting and controlling processes. Regular reporting by the CEO and other executives to the Board comprises appropriate information and updates, including key data for the core businesses, fi nancial information, existing and upcoming risks and updates on developments in important markets and with regard to major competitors as well as other signifi cant events. The Chairman of the Board regularly meets with the CEO. He also meets from time to time with all other GEC members and executives outside regular Board meetings. The other members of the Board do so as well, they meet especially with the Chief Financial Offi cer and the Group Chief Risk Offi cer.
The process and the results of this approach are further described on page 48 under the Risk management and internal control statement.
The GEC is headed by the CEO. As of December 31, 2009 members of the GEC included the Chief Financial Offi cer, the Chief Investment Offi cer and the Group Chief Risk Offi cer. To refl ect both lines of business and geography, the heads of General Insurance, Global Life, Farmers, North America Commercial, Global Corporate, Europe General Insurance, Asia-Pacifi c & Middle East and Americas were represented in the GEC.
For key areas specifi c cross-functional committees have been established to facilitate the coordination and alignment of recommendations to the CEO for approval on specifi c subject matters.
A standing committee of the GEC is the Group Balance Sheet Committee (GBSC), chaired by the CEO. This committee acts as a cross-functional body whose main function is to control the activities that materially affect the balance sheets of the Group or its subsidiaries. The GBSC is charged with setting the annual capital and balance sheet plans for the Group based on the Group strategy or fi nancial plan, as well as recommending specifi c transactions or unplanned business changes to the Group’s balance sheet. The GBSC has oversight of all main levers of the balance sheet. It assesses the Group’s capital adequacy, reinsurance, level of return, risk tolerance and desired growth. The GBSC reviews and recommends the Group’s overall risk tolerance levels. A further GEC committee is the Group Finance and Risk Committee (GFRC), chaired by the Chief Financial Offi cer. The GFRC acts as a cross-functional body for fi nancial and risk management matters in the context of the strategy and the overall business activity of the Group. It oversees fi nancial implications of business decisions and the effective management of the Group’s overall risk profi le, including risks related to insurance, fi nancial market and asset/liability, credit and operational risks as well as their interactions and provides recommendations for future courses of action with respect to potential M&A transactions and topics relating to fi nance and risk management.
All current members of the GEC served throughout the year 2009.
Patrick O’Sullivan retired from the GEC and his position as Chief Growth Offi cer on April 30, 2009. After Mr. O’Sullivan’s retirement the responsibility for driving profi table growth was transitioned back into the businesses. As from May 1, 2009, the Growth Council’s coordination and priority setting function is assumed by the Group Management Board and our core operating segments established a formal growth infrastructure with designated growth leaders.
Members of the GEC, as of 04_Corporate_Governance_7412_Eng.indd 3804_Corporate_Governance_7412_Eng.indd 38 24/2/10 20:03:1724/2/10 20:03:17
John J. Amore graduated with a degree in management from Embry-Riddle Aeronautical University, Daytona Beach (U.S.), and with an MBA in fi nance from New York University. Before joining Zurich in 1992, he was vice chairman of the Commerce and Industry Insurance Company, a member company of American International Group (AIG). He later became Chief Executive Offi cer of the Zurich U.S. Specialties business unit and was appointed Chief Executive Offi cer of Zurich U.S. in December 2000. In July 2001 he became a member of the GEC and was appointed CEO of Zurich North America Corporate business division. He held this position until end of August 2004. In April 2004 he was appointed CEO of the General Insurance business segment, and since September 2004 he has been concentrating on this global leadership role. Mr. Amore served as chairman of the American Insurance Association and was a member of its board from 2001 until March 2008. He serves as director on the board of overseers for the School of Risk Management, Insurance and Actuarial Science at St. John’s University in New York. He is an elected partner for the Partnership for New York City, an organization dedicated to maintaining the city’s position as a global center of commerce and innovation and serves on the U.S. Chamber of Commerce’s board of directors.
Mike Foley graduated in math and economics from Fairfi eld University, Connecticut. He joined the fi nancial management training program of Armtek Corporation, Connecticut, in 1984, and later gained an MBA in marketing/ fi nance from the JL Kellogg Graduate School of Management at Northwestern University in Evanston, Illinois. In 1989 he joined the Deepath Group investment banking fi rm in Lake Forest, Illinois, as an associate and became vice president responsible for managing the portfolio of equity investments in various acquired businesses. In 1993 he joined Electrocal, Inc in Connecticut as president, and three years later moved to McKinsey & Company in Chicago, where he became a principal and later led its North American property/casualty insurance practice. He joined Zurich in 2006 as Chief Operating Offi cer of its North America Commercial business division, and in January 2008 was appointed CEO of that division and a member of the Group Executive Committee.
Mario Greco earned an undergraduate degree in Economics from the University of Rome and completed a Master in International Economics and Monetary Theory at Rochester University, New York (USA). Mr. Greco started his professional career in management consulting, working with McKinsey & Company’s Milan offi ce from 1986 until 1994, becoming a partner in 1992 and a partner leader in the insurance segment. In 1995, he joined RAS (Allianz Group) in Milan as head of Claims Division. He became general manager in charge of the insurance business the following year, and in 1998 was appointed managing director. In 2000, he became the company’s chief executive offi cer, remaining in the position for four years. He was appointed head of Allianz’s Life Sustainability business in Munich in 2004, and later that year he was appointed to Allianz AG’s executive board, with responsibility for France, Italy, Spain, Portugal, Greece and Turkey. In April 2005, he joined the Sanpaolo IMI Group in Milan as the chief 04_Corporate_Governance_7412_Eng.indd 3904_Corporate_Governance_7412_Eng.indd 39 24/2/10 20:03:1824/2/10 20:03:18
Governance executive offi cer of EurizonVita, formerly named Aip, as part of a project to build up the Group’s insurance and asset management businesses. In October 2005, he was appointed chief executive offi cer 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 and became a member of the GEC. He is also a member of the board of directors of Editoriale l’Espresso Group, Indesit, Saras and Bocconi University, Milan.
Axel P. Lehmann 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 certifi cation 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 Groupwide Business Development functions in November 2000. In September 2001, he was appointed Chief Executive Offi cer for Northern, Central and Eastern Europe and subsequently Chief Executive Offi cer 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 and Ireland division with the Continental Europe division and assumed responsibility as CEO for the creation of the integrated Europe General Insurance business division. In September 2004, he became CEO of Zurich North America Commercial in Schaumburg/Chicago. In January 2008 he assumed his current role as Group Chief Risk Offi cer, with additional responsibility for Group IT. 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 and vice chairman of the Chief Risk Offi cer Forum (CRO Forum).
Geoffrey (Geoff) Riddell holds a MA degree in natural sciences (chemistry) from Oxford University (The Queen’s College) and later qualifi ed as a chartered accountant. He started his career with Price Waterhouse in 1978 and four years later moved to AIG, where he held various roles, including country manager for Hong Kong, Belgium and France. While in Hong Kong, he was responsible for setting up the fi rst 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 Offi cer (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-Pacifi c & Middle East (APME), responsible for both Life and General Insurance in the APME region and as Chairman of Global Corporate. Mr. Riddell is a former member of the General Insurance Council of the Association of British Insurers and for three years chaired its liability committee. From 1990 to 1995, he was a member of the Hong Kong Federation of Insurers Council. He became a director of Pool Re in February 2005 and of the Forum for Global Health Protection in 2007. He is a member of the Confederation of British Industry’s Chairmen’s Committee and chairs the CBI Financial Services Council. Until late 2009 he was a member of the Foundation Board of IMD in Lausanne, the City EU Advisory Committee and the Lord Mayor of London’s Advisory Committee.
Martin Senn received his commercial and banking diploma from the Business School in Basel, Switzerland and graduated from the International Executive Program at INSEAD in Fontainebleau and the Advanced Management Program at Harvard Business School. He is a trained banker and worked at the former Swiss Bank Corporation from 1976 to 1994 where his international career steps included treasurer in Hong Kong and regional treasurer for Asia and the Pacifi c region in Singapore before ultimately managing the company’s Tokyo offi ce. In 1994 he joined Credit Suisse where his executive roles included that of treasurer for the Head Offi ce and Europe, chairman and turnaround manager of Credit Suisse Group Japan with a mandate to restructure and reposition all legal entities of the Group in Japan. In 2001, he became a member of the Credit Suisse 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 offi cer of the Swiss Life Group. Mr. Senn joined Zurich on April 1, 2006 as Chief Investment Offi cer and became a member of the Group Executive Committee as per the same date. He is a member of the governing board of Avenir Suisse and treasurer of the Zurich Association of Economics. In addition he serves as Honorary Consul of the Republic of Korea in Zurich. He previously was a member of the board of directors of various banks and fi nancial services institutions. Mr. Senn was appointed Chief Executive Offi cer of the Group in August 2009, effective January 1, 2010.
Dieter Wemmer holds a PhD and a master’s degree in mathematics from the University of Cologne. From 1983 until 1986, he worked in pure mathematics at the universities of Cologne and Oxford. In 1986, he joined Zurich Re (Cologne), at that time a reinsurance subsidiary of Zurich’s German operation Agrippina, as a pricing actuary for life reinsurance. He became Head of Life Reinsurance and Chief Actuary fi ve years later. From 1992 until 1996, Mr. Wemmer held various positions with Agrippina, joining the management board in 1995 responsible for Controlling/Planning, Communication and Real Estate management. He was seconded to Zurich’s Corporate Center in 1996 as project manager for the implementation of International Accounting Standards (IAS) and US Generally Accepted Accounting Principles (US GAAP). One year later, he became Head of Financial Controlling. From 1999 until May 2003, he was Head of Mergers and Acquisitions, with additional responsibility for capital management and General and Life Actuarial from 2002. He became Chief Operating Offi cer of the Europe General Insurance business division in May 2003. In November 2004, he was appointed CEO Europe General Insurance and became a member of the Group Executive Committee. Since March 2007, he has assumed his current role as Chief Financial Offi cer of Zurich Financial Services Group. Mr. Wemmer is a member of the board of economiesuisse. In October 2009 he has been elected chairman of the European Insurance CFO Forum.
Changes to the GEC after January 1, 2010 On August 5, 2009, the Board of Directors appointed Martin Senn to the role of the Chief Executive Offi cer effective from January 1, 2010, following the retirement of James J. Schiro on December 31, 2009. Mr. Senn will continue to be responsible for the Investment Management function at the GEC level until a new Chief Investment Offi cer has been appointed.
Inga Beale British 46 Global Chief Underwriting Offi cer, Head of Organizational Transformation, and Internal Consulting (iCon)
Markus Hongler Swiss 52 Chief Executive Offi cer Zurich Insurance plc. and Chief Executive Offi cer Western Europe
Additional members of the GMB, as of 04_Corporate_Governance_7412_Eng.indd 4204_Corporate_Governance_7412_Eng.indd 42 24/2/10 20:03:2124/2/10 20:03:21
Convocation of the general meeting of shareholders General meetings of shareholders are convened by the Board of Directors or, if necessary, by the auditors and other bodies in accordance with the provisions set out in Articles 699 and 700 of the Swiss Code of Obligations. Shareholders with voting rights representing at least 10 percent of the share capital may call a shareholders’ meeting, indicating the matters to be discussed and the corresponding proposals. The invitation to shareholders is mailed at least 20 calendar days before the meeting is held and, in addition, is published in the Swiss Offi cial Gazette of Commerce and in several newspapers.
Registrations in the share register With a view to ensure an orderly process, shortly before the shareholders’ meeting the Board determines the record date at which a shareholder needs to be registered in the share register in order to exercise his or her participation rights by attending the shareholders’ meeting. Such record date is published, together with the invitation to the shareholders’ meeting, in the Swiss Offi cial Gazette of Commerce and in several newspapers.
Information policy Zurich Financial Services Ltd has approximately 116,000 shareholders registered in its share register, ranging from private individuals to large institutional investors. Each registered shareholder receives an invitation to the Annual General Meeting together with the Letter to Shareholders that provides an overview of the Group’s activities during the year and outlines its fi nancial performance. The more comprehensive Business Review and Financial Report are available 04_Corporate_Governance_7412_Eng.indd 4304_Corporate_Governance_7412_Eng.indd 43 24/2/10 20:03:2324/2/10 20:03:23
Zurich Financial Services Ltd maintains a regular dialogue with investors through its Investor Relations department and responds to questions and issues raised by institutional and private individual shareholders. In addition, Zurich Financial Services Ltd organizes investor days for institutional investors to provide comprehensive information on its businesses and strategic direction. Such presentations can be followed via webcast or conference call. The investor days in 2009 focused on Zurich’s three main business segments: Farmers (Strategy Update), held in London on May 20, 2009, General Insurance (Strategy Update) and Global Life (Strategy Execution Update), both events held in Zurich on May 27, 2009. Further investor days are planned for 2010 on topics of interest to the investment market. A wide range of information on the Group and its businesses, including the aforementioned results reporting documents and the full documentation distributed at the investor days, is also available on the Investor Relations section of Zurich’s Web site, www.zurich.com (
Employees The Group is committed to provide equal opportunities when recruiting and promoting people, whereby ability, experience, skills, knowledge and diversity are the guiding principles. The Group actively encourages employee involvement in its activities via print and online publications, team briefi ngs and regular meetings with employees’ representatives. For further information on the Group’s People Management activities, please refer to the Business Review on page 34, also available on Zurich’s Web site www.zurich.com ( business_review_2009_en.pdf).
External Auditors Duration of the mandate and term of office of the lead auditor PricewaterhouseCoopers AG, Birchstrasse 160, in 8050 Zurich (PwC), is Zurich Financial Services Ltd’s external auditor.
Auditing fees Total auditing fees (including expenses and value added taxes) charged by PwC in the year 2009 amounted to USD 32.9 million (USD 34.4 million in 2008).
Supervision and control over the external audit process The Audit Committee regularly meets with the external auditors, at least four times a year. During 2009, the Audit Committee met with the external auditors seven times. The external auditors regularly have private sessions with the Audit Committee, without Management present. Based on written reports, the Audit Committee discusses with the external auditors the quality of the Group’s fi nancial and accounting function and any recommendations that the external auditors may have. Topics considered during such discussions include strengthening of internal fi nancial controls, applicable accounting principles and management reporting systems. In connection with the audit, the Audit Committee obtains from the external auditors a timely report relating to the audited fi nancial statements of Zurich Financial Services Ltd and the Group.
The Audit Committee and the CEO are regularly informed of important fi ndings, including ineffective opinions, mitigation actions and attention provided by Management. Group Audit has unrestricted access to all accounts, records and documents and must be provided with all data and information needed in order to fulfi l its duties. Group Audit works in close cooperation with the external auditors, sharing risk assessments, work plans, audit reports and updates on audit actions. Group Audit and the external auditors meet regularly at all levels of the organization to optimize assurance provision and effi ciency.
The Audit Committee assesses the independence of Group Audit, and reviews its activities, plans, organization and quality as well as its mutual cooperation with the external auditors. In 2007, the Group commissioned an independent party to perform a review of Group Audit’s effectiveness. The results confi rmed Group Audit’s practices meet or exceed the professional requirements of the Institute of Internal Audit (IIA), and in a high proportion of cases are consistent with global internal audit leading practices. Notwithstanding this positive result, Group Audit is continuing to constantly challenge its operation to further increase its effectiveness, effi ciency and value contribution. As an example of this, from 2010, Group Audit will further align its organizational structure to mirror the functional structure of the business.
The Audit Committee annually approves the Group Audit Plan and quarterly reviews reports from the function on its activities as well as signifi cant risk, control and governance issues. The head of Group Audit reports to both the Chairman of the Audit Committee and the CEO and regularly meets with the Chairman of the Board. Group Audit has no operational responsibilities over the areas it reviews and all staff within Group Audit globally report to the head of Group Audit.
Compliance The Group’s core values are founded on the principle that it acts lawfully and seeks to do what is right. Sound compliance in everything the company helps to protect Zurich’s reputation and supports the achievement of the Group’s ambitious goals.
The compliance function provides policies and guidance, business advice and training, and further coordinates with Group Audit and the business quality assurance groups to ensure proper internal oversight of business and governance functions. This includes ongoing reviews of laws, regulations and other requirements at all levels of the organization. The compliance team supports Zurich’s management in maintaining and promoting a culture of compliance and ethics consistent with Zurich Basics, our company’s code of conduct. This robust compliance framework relies on an ongoing global compliance risk assessment and on a solid monitoring regime. The results of this assessment underpin the compliance function’s strategic planning which is conducted in consultation with business partners. Subsequently, the compliance plan is ratifi ed by Management.
Through a comprehensive program, the compliance function implements, embeds and enforces internal policies and guidance. As part of it, our compliance offi cers are active in the on-boarding of new employees and in the integration of newly acquired companies. To help employees understand their responsibilities under Zurich Basics and internal policies, all employees receive regular ethical and compliance training. In addition, the compliance function spearheads internal awareness campaigns on ethical and regulatory conduct. Each year Zurich managers confi rm their understanding and compliance with Zurich Basics and internal policies. Zurich encourages its employees to speak up and report improper conduct. Zurich does not tolerate retaliation against any employee who reports such concerns in good faith.
The Group’s compliance function, with compliance professionals around the world, is overseen by the Group Compliance Offi cer who reports to the Group General Counsel and regularly to the Board Audit Committee.
At the Management level Management committees are established to continuously review risk management and internal control matters. The Management committees consist of such business and functional members to ensure independence of the business in review. The results of such reviews performed by these Management committees are reported to the Board committees, as appropriate.
The Group has adopted a coordinated and formalized approach to risk management and internal control. The Group‘s core risk management and internal control systems and policies are generally established at the Group level with subsequent Group-wide implementation. The principal focus of the approach is on major risks that might impact the achievement of the Group‘s business objectives and on the activities to control and monitor these risks and to contribute to control effectiveness. At the business unit operating level, the responsibility for implementing and monitoring the effectiveness of the risk and internal control system rests with the business CEO and senior management. A risk-aware and control-conscious environment is fostered in the Group and reinforced by communication and training.
Effectively managing risks is a core strength. Management is responsible for the identifi cation, evaluation and control of signifi cant risks. The Group manages risks throughout the organization, under direction of the senior management. Zurich has Group-wide risk management policies, common methods and tools for assessing and modeling risks. The Group risk assessment processes are aligned with the Group planning process and are reviewed by the Group Executive Committee and the Board Risk Committee. Signifi cant risks, the results of the assessment and modeling processes and the relevant actions arising are reported regularly to the Risk Committee of the Board. Periodic local risk assessments are conducted using Zurich’s Total Risk Profi ling™ tool and business units are required, at least quarterly, to report key risks and implement action plans to mitigate them. Additional details are provided in the Risk Review in the Financial Report.
The Risk Committee has reviewed the Group’s risk tolerance and overseen Zurich’s enterprise-wide risk governance framework and the Audit Committee has reviewed the effectiveness of the system of internal control operated by the Group related to the calendar year 2009 up to the date of this Annual Report and have reported to the Board accordingly. The Board is satisfi ed that the reviews were conducted in accordance with the UK Turnbull Guidance (as revised in October 2005). The assessment included the consideration of the effectiveness of the Group’s ongoing process for identifying, evaluating, controlling and managing the risks of the business, including the scope and frequency of reports on both risk and control that were received and reviewed during the year by the Risk and Audit Committees and the Board, the important internal control matters discussed and associated actions taken by Management. Issues identifi ed by this process have been communicated to the Board and are being addressed by the Group.
Because the members of the Board of Directors of Zurich Financial Services Ltd are all independent non-executives, the information has been presented with the complete remuneration details of the Board of Directors contained in one section and that of the Group Executive Committee shown in a separate section.
All information required by articles 663bbis and 663c paragraph 3 of the Swiss Code of Obligations is also included in the notes to the fi nancial statements of Zurich Financial Services Ltd holding company.
Group Executive Committee and all other employees For the members of the Group Executive Committee and all other employees throughout the Group, a number of key elements have been implemented to provide a well balanced and effectively managed compensation program. These elements include a group-wide compensation philosophy, robust short and long term incentive compensation plans, effective governance and strong links to the business planning and the risk policies of the Group.
Guiding principles of the compensation philosophy The guiding principles are as follows: Promote a high performance culture by differentiating total compensation based on the relative performance of • businesses and individuals.
Link variable compensation awards to relevant performance factors which can include the performance of the • Group, business areas, e.g., segments, divisions, functions, units, and individual achievements.
Clearly defi ne the expected performance through a structured system of performance management and use this as • the basis for compensation decisions.
Base salary Fixed Cash Fixed remuneration, determined by scope and complexity of the role
For a defi ned group of executives and senior managers with annual vesting
Employee Benefi ts Fixed Employee benefi ts provided in line with local market practices
Long-term (3 years) incentives are for a defi ned group of executives and senior managers, whose specifi c roles • focus on the performance drivers of long-term shareholder value. The instruments used are primarily performance share and performance-based share options. The performance share and share option grants only vest if certain performance conditions are met. One third of the target grant is assessed for vesting in each of the three years following the grant date based on the Group’s performance achievements in terms of the Group’s return on common shareholders’ equity (ROE) and the position of the Group’s total shareholder return (TSR) compared with an international peer group of 28 insurance companies that are included in the Dow Jones Titan Insurance Index. Based on the actual ROE and TSR achievements, the vesting percentage can vary between 0 percent and 175 percent of the target grants. For the grants made in 2009, 2008 and 2007, these are assessed for vesting on the basis of considering the ROE and TSR performance over the three calender years prior to vesting. Previous grants are assessed on the basis of performance during the calendar year prior to vesting. Further details on the plans are set out in the section covering the actual remuneration of Group Executive Committee members.
Remuneration governance The Board of Directors defi nes the remuneration principles based on proposals of the Remuneration Committee. Based on these remuneration principles the Remuneration Committee is responsible for proposing to the Board on an annual basis the remuneration payable to the Directors, to the Chief Executive Offi cer (CEO) and to the other members of the Group Executive Committee. For the other members of the Group Executive Committee, these recommendations are based on proposals made by the CEO. The remuneration is approved by the Board of Directors. In the meetings of the Remuneration Committee and the Board of Directors where decisions are made on the compensation of the Chairman, the Chairman is not present. In making decisions on the compensation of the CEO, the CEO is not present. Where decisions are made on the compensation of other members of the GEC, those members are also not present at the meetings. The Remuneration Committee does not include members with interlinked company mandates. See page 34 in the Corporate Governance Report for further details of its responsibilities and for an overview on the authorities within the area of remuneration the following table.
The Governance Framework can be summarized as follows: Subject Recommendation from Final Approval from
Vesting levels under the LTIP Remuneration Committee based on proposals by CEO
The results of the benchmarking studies are taken into account in setting fee levels for Directors and compensation structures for members of the Group Executive Committee. In analyzing the results, factors considered are the market practices in the various countries and the internal relativities between positions. Overall positioning of the compensation structures is towards the median levels.
To align the interests of the Board of Directors and the Group Management Board with those of shareholders, members build their ownership position in the Company through their fee payments, their participation in long term compensation plans and through market purchases. Members have a period of 5 years to meet their ownership requirement and the Remuneration Committee monitors the compliance with these guidelines on an annual basis. To help build the ownership positions, all shares awarded to the Board of Directors as part of their annual fee and one half of all performance shares that vest for members of the Group Management Board have a three-year sales restriction.
At the Annual General Meeting to be held on March 30, 2010, Zurich will provide shareholders with an opportunity to express their views on the remuneration system through an advisory vote. As the ultimate decision on remuneration is within the powers of the Board of Directors, such a vote is non-binding in nature.
Remuneration and shareholdings of the members of the Board of Directors and the Group Executive Committee As of December 31, 2009, all of the Directors of Zurich Financial Services Ltd are non-executives, independent of management. The remuneration for Directors and for members of the Group Executive Committee, as well as their shareholdings, is therefore disclosed separately.
Except for the Chairman and Vice Chairman, Directors are remunerated with an annual basic fee of USD 205,000. One-third of this annual basic fee, i.e. USD 68,500, is allocated to sales-restricted Zurich Financial Services Ltd shares. The fee is pro-rated for members leaving or joining during the year. Committee members receive an additional cash fee of USD 40,000 for all Committees on which they serve, irrespective of the number. In addition, the chair of each Committee receives an annual fee of USD 20,000 and the chair of the Audit Committee receives an additional USD 10,000. Directors who reside in the United States receive an additional fee of USD 10,000 per annum. The Committees on which the members serve is set out in the Corporate governance report on page 29. In addition to the above, where a Director is also a member of a subsidiary board of Zurich Financial Services Group, the Director is entitled to an additional fee of USD 40,000 per annum plus USD 10,000 per annum if he or she also chairs the audit committee of such board.
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, 2009, amounted to USD 3,395,000. This included USD 2,476,500 in cash and a value at the grant date of USD 918,500 in three-year sales-restricted shares. The share price at the grant date was CHF 197.10. The corresponding amount for 2008 was USD 3,291,875, which comprised of USD 2,408,767 in cash and a value at the grant date of USD 883,108 in three-year sales-restricted shares. The share price at the grant date in 2008 was CHF 284.00.
(CHF 197.10) and the exchange rate (USD / CHF 1.0942) as of June 15, 2009, were adopted to calculate the number of shares based on the fi xed portion of the fee allocated in shares for the respective members. Where the value of the allocated shares did not equal the value of the portion of the fee to be allocated in shares, the difference was paid in cash. The amounts shown in the table above refl ect the fi xed amount in U.S. dollars of the portion of the fee to be allocated in shares.
– Mr de Swaan earned an annual fee of USD 40,000 for his membership of the board of Zurich Insurance plc and an annual fee of USD 10,000 for being Chair of the audit committee of Zurich Insurance plc in Ireland.
(CHF 284.00) and the exchange rate (USD / CHF 1.0476) as of June 15, 2008, were adopted to calculate the number of shares based on the fi xed portion of the fee allocated in shares for the respective members. Where the value of the allocated shares did not equal the value of the portion of the fee to be allocated in shares, the difference was paid in cash. The amounts shown in the table above refl ects the fi xed amount in U.S. dollars of the portion of the fee to be allocated in shares.
14 Mr de Swaan became Chairman of the Risk Committee on April 3, 2008. He received a pro rata fee for being Chair. 15 In addition to the fees he received as a Director of Zurich Financial Services Ltd and Zurich Insurance Company Ltd, Mr de Swaan earned a pro rata fee of USD 28,111 for his membership of the board of Zurich Insurance plc from April 17, 2008 (based on an annual fee of USD 40,000). He additionally also earned a pro rata fee of USD 2,056 for being Chair of the audit committee of Zurich Insurance plc from October 16, 2008 (based on an annual fee of USD 10,000).
Shareholdings of Directors The shareholdings of the Directors, who held offi ce at the end of the year, in the shares of Zurich Financial Services Ltd are shown below. All interests shown are benefi cial, including sales-restricted shares allocated to the members as part of their fee and shares held by related parties to the Directors.
M. Gentz, Chairman 4,274 2,978 Ph. Pidoux, Vice Chairman 2,850 2,470 S. Bies, Member 567 187 V. Chu, Member 567 187 Th. Escher, Member 5,850 5,470 F. Kindle, Member 10,850 10,470 A. Meyer, Member 2,174 1,794 D. Nicolaisen, Member 850 470 V.L. Sankey, Member 2,020 1,640 T. de Swaan, Member 850 470 R. Watter, Member 3,818 3,438 1 None of the Directors together with related parties to them held more than 0.5% of the voting rights as of December 31, 2009 or 2008, respectively.
Personal loans for Directors Unrelated to his Board membership and on terms and conditions available to other customers, Mr. Watter had a collateralized policy loan in the amount of CHF 2.5 million outstanding as of December 31, 2009 and 2008. The annual interest rate charged on the loan is 4 percent. Other than the loan for Mr. Watter, none of the Directors had outstanding loans, advances or credits as of December 31, 2008 or 2009.
Personal loans for former Directors As of December 31, 2009, and 2008, respectively, no former Director had outstanding loans, advances or credits.
Related parties to the Directors or to former members of the Board No benefi ts (or waiver of claims) have been provided to related parties of the Directors or related parties of former members of the Boards during the year 2009 and 2008, respectively. Neither had any related party of the Directors or of former members of the Boards outstanding loans, advances or credits as of December 31, 2009 and 2008.
As can be seen from the above charts, there is a signifi cant emphasis on performance related compensation through both the Short-Term Incentive Plan and Long-Term Incentive Plan. The distribution of the target values between shortterm (one year) and long-term incentives (three years) shows an emphasis towards long-term incentives.
The individual compensation elements are described in more detail below (the amounts for the highest paid executive are included): Value of total remuneration The total value of the various compensation elements earned by the members of the Group Executive Committee in 2009 was USD 47.8 million. This compares with an equivalent fi gure of USD 53.9 million earned in 2008 calculated on the same basis. The decrease in the value of total remuneration from 2008 to 2009 is largely explained by the reduction in the number of Group Executive Committee members over the period.
Value of pension benefits accruing during 2009 Members of the Group Executive Committee participate in the pension plan arrangements of the business units in which they are employed. The Group’s philosophy is to provide pension benefi ts through cash balance and/or defi ned contribution plans where funds are accumulated throughout a career to provide retirement benefi ts. The majority of Group Executive Committee members participate in such plans and, over time, all future Group Executive Committee members will participate in such plans. The other Group Executive Committee members continue to participate in defi ned benefi t plans that provide retirement benefi ts based on fi nal pensionable earnings and the number of years of service. The normal retirement ages vary from 60 to 65. The total value of pension benefi ts accruing to members of the Group Executive Committee during 2009, calculated on the basis of the Service Costs for the company as assessed under IAS 19 accounting principles, was USD 3.6 million. Service Costs value the amount of the pension benefi ts accruing during the year and for defi ned contribution plans takes the amount of the company contribution paid during the year.
Equity grants made to the Group Executive Committee under the Long-Term Incentive Plan in 2009 Remuneration components for Group Executive Committee members under the Long-Term Incentive Plan comprise an annual grant of performance shares and performance options. In extraordinary circumstances, restricted share grants may also be made. For members of the Group Executive Committee, the overall value of the target annual grants in 2009 was 125 percent of the base compensation. For the Chief Executive Offi cer the overall of the target annual grant value was set at 300 percent of the base compensation.
The target grants for the year are made on the third working day in April of that year. Thus, the target grants in 2009 were made on April 3, 2009. The target performance share and share option grants only vest if certain performance conditions are met. One-third of the target grant made in 2009 is assessed for vesting in each of the three years 2010, 2011 and 2012 based on the Group’s performance achievements in terms of the Group’s return on common shareholders’ equity (ROE) and the position of Group’s total shareholder return (TSR) compared with an international peer group of 28 insurance companies that are included in the Dow Jones Titan Insurance Index. Based on the actual ROE and TSR achievements, the vesting percentage can vary between 0 percent and 175 percent of the target grants. For the grants made since 2007, these are assessed for vesting on the basis of considering the TSR and ROE performance over the three calendar years prior to vesting. Grants made prior to 2007 are assessed on the basis of performance during the calendar year prior to vesting.
The vesting percentages are determined through interpolating the fi gures in the above matrix. As an example, with the relative TSR in the top quartile and an average ROE of 14 percent the vesting percentage would be 142 percent of the target grant.
The number of share awards that vested in 2009 to members of the Group Executive Committee serving in 2009 from the performance share grants made in 2006, 2007 and 2008 was 44,740. This represented a basic vesting level of 170 percent of target for the 2007 and 2008 grants and 126 percent of target for the 2006 grant 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.
Summary of total remuneration for the Group Executive Committee By reference to the above fi gures, the total remuneration of the Group Executive Committee members, comprising cash compensation, pensions, the value of other remuneration and the value of target equity grants for 2009 was USD 47.8 million, divided as follows: Base compensation 11.1 13.4 Cash incentive awards earned for the year 15.0 13.5 Service Costs for pension benefi ts 4 3.6 4.5 Value of other remuneration 5 2.1 2.9 Value of target performance share and restricted share grants 6 8.0 9.8 Value of target performance option grants 6 8.0 9.8 1 The remuneration shown in the table does not include any business related expenses incurred in the performance of the members’ services. 2 On the basis of 11 GEC members, of whom 10 served for the full year 2009. 3 On the basis of 12 GEC members, all of whom served during the full year 2008.
7 In line with applicable laws where the executives are employed, Zurich paid the company-related portion of contributions to social security systems, which amounted to USD 1.9 million in 2009 and to USD 3.4 million in 2008. Since the contributions are based on full earnings, whereas benefi ts are capped, there is not a direct correlation between the costs paid to the social security system and the benefi ts received by the executives.
The following table specifi es the total remuneration paid to the highest paid Group Executive Committee member: Base compensation 1.50 1.50 Cash incentive awards earned for the year 4.05 2.25 Service Costs for pension benefi ts 2 0.95 0.80 Value of other remuneration 3 0.85 0.50 Value of target performance share and restricted share grants 4 2.25 2.25 Value of target performance option grants 4 2.25 2.25 1 The remuneration shown in the table does not include any business related expenses incurred in the performance of the CEO’s services. 2 The amounts refl ect the total value of pension benefi ts, calculated on the basis of the Service Costs for the company as assessed under IAS 19 accounting principles. Service
4 The share and share option grants will vest in the future according to achievement of defi ned performance conditions. The value of the share and share options assumes that the grant will vest in the future at 100% of the target level with the valuation of the options based on the Black-Scholes option pricing model as set out in Note 25 to the consolidated fi nancial statements, the valuation of the target performance share grants based on the share price on the day prior to the grants (CHF 198.10 for 2009 and CHF 336.50 for 2008) and the valuation of the restricted share grants based on the share price on the date of the grants.
in USD million, for the years ended December 31Highest paid executive James J. Schiro, Chief Executive Offi cer1 05_Remuneration_Report_7416_Eng.indd 6205_Remuneration_Report_7416_Eng.indd 62 25/2/10 19:33:2025/2/10 19:33:20
Share grants Performance share grants The total number of target performance share grants outstanding as of December 31, 2009 under the Group’s Long-Term Incentive Plan was 70,166 (59,583 as of December 31, 2008). A summary of the outstanding grants as of December 31, 2009 is set out in the table below: Performance period
Within the context of the Group’s Long-Term Incentive Plan, these performance share grants are considered for vesting in one-third instalments during the three years after the grant. The actual level of vesting is determined in accordance with the remuneration principles set out above on pages 50 to 53 and the Long-Term Incentive Plan Vesting Matrix as described on page 60.
Restricted share grants In addition to the above performance share grants, there were 4,377 restricted shares outstanding for members of the Group Executive Committee as of December 31, 2009 (10,495 restricted shares were outstanding at the end of 2008). These restricted shares vest during 2010 and will be forfeited if the holders of such shares leave voluntarily before the vesting date and the employment relationship terminates.
Share option grants Under the share option program for senior management, the Group can issue share options to individuals within prescribed rules. The fi rst share option grant was made in 1999 and regular annual grants have been made since then. Prior to 2003, option grants were typically made on the basis of a seven-year option term, a three-year vesting period and an exercise price set at a 10 percent premium to the market rate during the month prior to the grant date. Under the rules of the plan, other parameters are allowed for option grants made under the share option program. In connection with the re-design of the Long-Term Incentive Program in 2003, the exercise price for the options granted since then has been set at the market price on the day prior to the date of grant. The performance based option grants are considered for vesting in one-third instalments during the three years after the grant. The actual level of vesting is determined under the performance in accordance with the remuneration principles set out above on pages 50 to 53 and the Long-Term Incentive Plan Vesting Matrix as described on page 60. Option grants are currently made each year on the third working day in April.
Summary of outstanding share grants 05_Remuneration_Report_7416_Eng.indd 6305_Remuneration_Report_7416_Eng.indd 63 24/2/10 20:06:3324/2/10 20:06:33
Under the share option program, the total number of shares under option for the Group Executive Committee members as of December 31, 2009, and 2008, respectively, is set out in the tables below.
Share and share option holdings of the Group Executive Committee The following table sets out the actual share and share option holdings of the Group Executive Committee members as of December 31, 2009 and December 31, 2008. In addition to any shares acquired in the market, the numbers include vested shares, whether sales-restricted or not, and vested share options received under the Group’s Long-Term Incentive Plan. However, the table does not include the share interests of the members of the Group Executive Committee through their participation in the currently unvested performance shares, unvested restricted shares or unvested performance share options.
2 The distribution of the vested options according to the grants identifi ed in the tables “Summary of outstanding options” is shown in the table below. 3 Includes an amount of 3,800 shares as of December 31, 2009 and 2008, for Mr Schiro, which are held by family run charitable foundations. 4 Retired from the GEC on April 30, 2009 5 Retired from the GEC on December 31, 2008
Number of vested shares and vested share options1, as of December 31Share and vested share option holdings of the GEC members 05_Remuneration_Report_7416_Eng.indd 6505_Remuneration_Report_7416_Eng.indd 65 24/2/10 20:06:3424/2/10 20:06:34
1 Retired from the GEC on April 30, 2009 2 Retired from the GEC on December 31, 2008
Distribution of vested share options 05_Remuneration_Report_7416_Eng.indd 6605_Remuneration_Report_7416_Eng.indd 66 24/2/10 20:06:3524/2/10 20:06:35
Additional honoraria and remuneration for members of the Group Executive Committee None of the members of the Group Executive Committee received any compensation from the Group or from any of the Group’s companies in 2009 and 2008 other than as set out above.
Personal loans for former members of the Group Executive Committee Former members of the Group Executive Committee are eligible to continue their mortgage loans following retirement on similar terms as when they were employed, in line with the terms available to employees in Switzerland as stated above. In this respect, one former member, Mr. Eckert, held an outstanding mortgage loan of CHF 2,500,000 as at December 31, 2009 (CHF 3,000,000 as at December 31, 2008) with a reduced interest rate of 2.0 percent (2.5 percent in 2008) applying on the fi rst CHF 1,000,000 (CHF 1,500,000 in 2008). Apart from this, no former members of the Group Executive Committee had any outstanding loans, advances or credits as of December 31, 2009 and 2008, respectively.
Related parties of Group Executive Committee members or of former members of the Group Executive Committee No benefi ts (or waiver of claims) have been provided to related parties of GEC members or related parties of former members of the GEC during the year 2009 and 2008. Neither had any related party of GEC members or of former members of the GEC outstanding loans, advances or credits as of December 31, 2009 and 2008.
Zurich Financial Services Group Annual Report 2009Financial Report 200968 06_Financial_Review_8212_Eng.indd 6806_Financial_Review_8212_Eng.indd 68g.indd 68 1/3/10 16:06:201/3/3/10 16:06:200
The information contained within the Financial Review is unaudited. This document should be read in conjunction with the Financial Report 2009 for the Zurich Financial Services Group and with its audited Consolidated Financial Statements as of December 31, 2009. Comparatives are for the year ended December 31, 2008 unless otherwise stated. All amounts, unless otherwise specifi ed, are shown in U.S. dollars and rounded to the nearest million with the consequence that the rounded amounts may not add to the rounded total in all cases. All ratios and variances are calculated using the underlying amounts rather than the rounded amounts. Certain comparatives including segment disclosures have been restated for changes in presentation and for reclassifi cations as set out in notes 1 and 30 of the audited Consolidated Financial Statements to conform to the 2009 presentation. The reclassifi cations had no impact on previously reported business operating profi t, net income or shareholders’ equity.
General Insurance gross written premiums and policy fees 34,157 37,151 (8%) Global Life gross written premiums, policy fees and insurance deposits 26,029 21,873 19% Farmers Management Services management fees and other related revenues 2,690 2,458 9% Farmers Re gross written premiums and policy fees 6,615 3,381 96%
2 Excluding average cash received as collateral for securities lending of USD 335 million and USD 1.0 billion in the years ended December 31, 2009 and 2008, respectively.
in USD millions, for the years ended December 31, unless otherwise stated 06_Financial_Review_8212_Eng.indd 7006_Financial_Review_8212_Eng.indd 70 25/2/10 13:04:0525/2/10 13:04:05
Zurich Financial Services Ltd and its subsidiaries (the Group) delivered a strong set of fi nancial results for the year ended December 31, 2009 as well as for the discrete fourth quarter 2009 which were a testament to a continued and disciplined execution of the Group’s stated strategic objectives. While growth was achieved in targeted areas, particularly in the Global Life and Farmers businesses, the focus on margins was maintained, which paid off in particular in a robust operational performance from the General Insurance business. In parallel, as a result of disciplined asset/liability and risk management philosophies, capital and solvency positions increased substantially compared with December 31, 2008. The combination of sustained profi tability, underscored by a business operating profi t (after tax) return on common shareholders’ equity of 17.2 percent for the year ended December 31, 2009, and a strong balance sheet, allowed for a dividend proposal of CHF 16.00 gross, which demonstrates the Group’s commitment to shareholder value creation.
Business operating profi t increased by USD 406 million or 8 percent to USD 5.6 billion in U.S. dollar terms and 10 percent on a local currency basis, with all core operating segments improving their performance on a local currency basis.
General Insurance • business operating profi t decreased by USD 72 million or 2 percent to USD 3.5 billion in U.S. dollar terms but increased by 1 percent on a local currency basis. The overall result was driven by an improved underwriting result primarily due to the Group’s disciplined approach to pricing insurance risks and lower levels of natural catastrophe losses. This improvement was partially offset by lower profi tability in personal lines business in Europe and lower run-off contributions from reserves established in prior years. The overall improvement in the underwriting result compensated for lower investment result.
Global Life • business operating profi t remained almost fl at decreasing by USD 13 million or 1 percent to USD 1.5 billion in U.S. dollar terms, but increased by USD 77 million or 5 percent on a local currency basis. 2009 experienced a higher level of one-off benefi ts compared with 2008, which drove the overall improvement in local currency. The underlying performance of the businesses remained strong as the continued roll-out of the industrial business model, with its combined focus on distribution and product pillars as well as expense discipline through shared product manufacturing and other operational platforms, enabled us to achieve robust volumes and margin levels.
Other Operating Businesses business operating loss improved by USD 160 million to a loss of USD 611 million primarily arising from gains on repurchases of subordinated debt executed against advantageous market conditions.
Total Group business volumes comprising gross written premiums, policy fees, insurance deposits and Farmers Management Services management fees increased by USD 4.6 billion or 7.1 percent in U.S. dollar terms and by USD 8.2 billion or 12.6 percent on a local currency basis, underscoring the Group‘s ability to grow selectively in line with its strategic objectives. The business volumes in the main operating segments developed as follows: General Insurance• gross written premiums and policy fees decreased by 8 percent to USD 34.2 billion in U.S. dollar terms and by 4 percent on a local currency basis. Average rate increases of 3.3 percentage points were achieved through disciplined underwriting focusing on margin enhancement. This was particularly evident in the Global Corporate and North America Commercial businesses. International Markets achieved an increase in local currency as a result of organic growth, mainly in markets where economic growth continued, but also as a result of acquisitions. These positive developments on rates and volumes did not fully compensate for the effects of underwriting actions on new business and renewals, and for the effects of a diffi cult economic environment, where decreases in customers’ insurable exposures were experienced, particularly in the construction and automotive industries in North America.
Global Life • gross written premiums, policy fees and insurance deposits increased by 19 percent to USD 26 billion in U.S. dollar terms and by 28 percent on a local currency basis. The new business annual premium equivalent (APE) increased by 12 percent in U.S. dollar terms and by 19 percent on a local currency basis. This growth supported net policyholder infl ows of USD 5.4 billion compared with net policyholder outfl ows of USD 2.2 billion in 2008. This resulted in total assets under management of USD 215 billion as of December 31, 2009 compared with USD 180 billion as of December 31, 2008. The growth was primarily driven by the Bank Distribution pillar with continued strong performance in Spain, the Corporate Life & Pensions pillar in the UK and Ireland, and the Private Banking Client Solutions pillar with strong sales in both, the UK and the newly established hub in Luxembourg.
Compared with 2008, ROE increased by 0.5 percentage points to 12.6 percent while BOPAT ROE increased by 0.4 percentage points to 17.2 percent. Diluted earnings per share increased by 4 percent to CHF 24.21 for the year ended December 31, 2009, compared with CHF 23.35 for the year 2008.
General Insurance delivered a much improved underwriting result in 2009, as a result of the focus on maintaining pricing and expense discipline. This substantially offset the lower non-technical result, which was primarily attributable to lower investment income, as well as the challenges posed by the economic and competitive market environment. Rate increases were achieved, particularly in the Global Corporate and commercial businesses and the Group managed expenses commensurately with reduced volumes of business. Determination to maintain pricing discipline, together with the diffi cult market environment which negatively impacted the level of customers’ insurable exposures, resulted in lower overall business volumes and retention levels. The benefi t of the absence of major insured natural catastrophes during the year was largely offset by exceptional adverse market conditions in some of the Group’s European personal lines businesses. The economic environment, however also affected the investment result as yields reduced. Strong expense management and underwriting discipline with a focus on maintaining margins have resulted in a 1 percent increase in business operating profi t compared with the prior year in local currency terms. In U.S. dollar terms, business operating profi t decreased slightly by USD 72 million, or 2 percent, to USD 3.5 billion.
Gross written premiums and policy fees, decreased by 8 percent or by USD 3.0 billion to USD 34.2 billion in U.S. dollar terms and by 4 percent on a local currency basis. Average rate increases of 3.3 percentage points were achieved in line with the Group’s technical pricing models. As a consequence, retention and new business levels were adversely affected. The reduction measured in local currency was primarily driven by North America Commercial where certain segments of the business were heavily affected by the economic environment which led to reduced customers’ insurable exposures. Global Corporate, in particular, was affected by the lower levels of insurance protection required by customers, which have been partially compensated for by rate increases. Europe General Insurance has also been impacted by the challenging market conditions resulting in lower premium volumes in local currency terms. International Markets increased by 3 percent in local currency terms through both organic growth and acquisitions. Despite the economic environment, the Group gained market share in certain targeted segments, positioning itself well for the future.
The net underwriting result increased by USD 336 million to USD 930 million with the combined ratio of 96.8 percent improving by 1.3 percentage points compared with 2008. Overall the loss ratio improved 1.6 percentage points mainly due to improvements in the attritional loss ratio refl ecting realized rate increases and the impact of the Group’s risk selection strategy which have begun to fl ow into the result, as well as the absence of major insured natural catastrophes. This improvement was offset by a higher attritional loss experience in our European personal motor business, mainly in Italy and the UK, as well as lower levels of favorable development of reserves established in prior years and higher levels of large loss experience. The lower levels of favorable development of reserves established in prior years included a charge for UK asbestos which has affected Global Corporate and Europe General Insurance. The expense ratio increased as a result of higher commissions due to a change in business mix and the Group’s approach to broker remuneration. Strict expense management and the benefi ts of cost savings programs mostly maintained the technical expenses in line with premium volume decrease despite continued strategic investments in profi table growth opportunities and operational transformation.
Following a very diffi cult year in 2008, various profi t improvement actions were taken such as improved pricing and expense management, as well as a stronger focus on building long-term customer partnerships. These actions, along with a favorable natural catastrophe experience, substantially improved the net underwriting result, leading to an overall increase in business operating profi t of USD 740 million to USD 787 million. The improvement in the underwriting result was partially offset by higher non-technical expenses, as a result of one-off benefi ts in 2008, and lower investment income in 2009 due to declining yields.
Margin enhancement as a result of disciplined underwriting was the primary contributor to a fl at business operating profi t of USD 1.2 billion, despite falling business volumes. The benefi t realized from favorable natural catastrophe experience was fully offset by the impact of signifi cantly reduced premiums due to lower economic activity, higher large loss experience and lower investment income due to declining yields.
The net underwriting result increased by USD 14 million to USD 257 million driven by more benign catastrophe experience compared with the prior year. The loss ratio developed favorably by 1.7 percentage points compared with the prior year. The decrease was attributable to lower catastrophe losses partially offset by lower levels of positive development from reserves established in prior years and by higher levels of large losses. The expense ratio increased by 1.3 percentage points, driven by higher commissions due to changes in the approach to broker remuneration in a competitive market environment and changes in business mix. Other technical expenses were managed largely in line with the drop in net earned premiums through the focused execution of a number of savings initiatives.
Most of Europe General Insurance businesses maintained strong levels of business performance, the result of which was significantly offset by weak personal lines motor results, mainly in Italy and the UK. These areas were and continue to be addressed with decisive underwriting and claims management actions. In addition, investment income decreased due to lower yields and a lower asset base, mainly as a result of the repatriation of capital to the Group following the transfer of the UK general insurance business to the Group’s single EU carrier based in Ireland. As a result, business operating profit decreased by USD 744 million or 40 percent to USD 1.1 billion in U.S. dollar terms and by 36 percent on a local currency basis.
Gross written premiums and policy fees decreased by USD 1.4 billion or 9 percent to USD 14.6 billion in U.S. dollar terms, and by only 1 percent on a local currency basis. Overall rates were successfully increased on average by 2.8 percent on business written in 2009. In personal lines businesses operating in mature markets, continued focus on pricing discipline impacted the ability to grow volumes given the intense competition. The UK personal motor business has led the market with rate increases but as a consequence had to accept a significant reduction in volume. Commercial lines business remained flat in local currency, mainly based on rate increases, despite the challenging economic environment.
Gross written premiums and policy fees 2,695 2,753 (2%) Net underwriting result 64 76 (15%) Business operating profi t 169 201 (16%) Loss ratio 61.5% 60.2% (1.3 pts) Expense ratio 35.3% 36.0% 0.6 pts Combined ratio 96.9% 96.2% (0.7 pts)
Business operating profi t decreased by USD 31 million or 16 percent to USD 169 million and decreased by 13 percent on a local currency basis. The decrease in local currency was attributable to a lower underwriting result as well as a decrease in investment income due to lower yields mainly in Australia.
The net underwriting result decreased by USD 12 million to USD 64 million refl ected in a 0.7 percentage point increase in the combined ratio to 96.9 percent. This was mainly attributable to a higher loss ratio of 1.3 percentage points due to higher large losses impacting both Asia-Pacifi c and Latin American regions. The Australian bush fi res in early 2009 also contributed to the higher loss ratio. The expense ratio decreased by 0.6 percentage points to 35.3 percent mainly due to expense reduction initiatives in Asia-Pacifi c, partially offset by increases in Latin America attributable to the acquisition in Brazil.
Gross written premiums and policy fees 12,440 10,794 15% Net investment income on Group investments 4,081 4,518 (10%) Insurance benefi ts and losses, net of reinsurance (10,594) (9,229) (15%) Underwriting and policy acquisition costs, net of reinsurance (1,116) (1,887) 41% Administrative and other operating expenses (2,237) (2,404) 7%
Total reserves for life insurance contracts, net of reinsurance, and liabilities for investment contracts 180,145 154,700 16%
The Global Life segment continues to execute on its strategy delivering strong results with profi table growth in a diffi cult market environment and performing well on all key metrics. The growth was driven through the distribution and proposition pillars as well as a strong focus on in-force management resulting in net policyholder infl ows compared with net policyholder outfl ows in 2008. Progress was made on developing the industrial business model benefi ting our unit costs and a notable increase in cross-border sales. The new business value not only increased in each successive quarter of 2009, but accelerated over the course of the year underpinned by effi ciency gains and focused efforts to shift the new business mix towards protection products.
New business annual premium equivalent (APE) increased by USD 406 million or 12 percent in U.S. dollar terms, to USD 3.7 billion and by 19 percent in local currency basis. Growth in Spain of USD 414 million included underlying growth of USD 45 million or 76 percent on a local currency basis and a contribution of USD 369 million from the businesses acquired in the third quarter of 2008. In the UK, APE decreased by 11 percent in U.S. dollar terms but increased by 6 percent on a local currency basis, driven by higher long-term savings sales and successful sales through our major banking partners. In the Americas, APE increased by 16 percent in U.S. dollar terms and by 21 percent on a local currency basis, driven by growth in Latin America from Corporate Life & Pensions sales, and our success in gaining participation in the reformed social security system in Chile. In Germany, APE decreased by 10 percent in U.S. dollar terms and by 5 percent on a local currency basis, as 2008 included a benefi t from the fi nal step-up of premiums in state subsidized pension contracts that increased unit-linked sales. APE in Emerging Markets in Asia were fl at in U.S. dollar terms but decreased 4 percent on a local currency basis as a result of reduced sales in Hong Kong and in the International/Expats business of Zurich International Solutions (ZIS) due to market conditions. In Ireland, where the market declined over 28 percent, APE decreased by 5 percent in U.S. dollar terms but remained fl at on a local currency basis as a result of strong growth in Corporate Life & Pensions business offsetting lower IFA/Brokers sales. APE in the Rest of the World increased by 69 percent in U.S. dollar terms and by 79 percent on a local currency basis driven by the early success of the newly formed Private Banking Client Solutions hub in Luxembourg and, in Italy by successful Bank Distribution activities as well as by strong IFA/ Brokers sales through the Finanza e Futuro distribution channel acquired in 2008.
Gross written premiums and policy fees increased by USD 1.6 billion or 15 percent in U.S. dollar terms to USD 12.4 billion and by 22 percent on a local currency basis. The increase on a local currency basis was due to the businesses acquired in Spain in the third quarter of 2008 and growth in Americas, partially offset by decreases in Germany and Switzerland due to lower single premium business in 2009.
Unit-linked 1 Protection Other 2 Total 1 Unit-linked includes insurance and investment contracts. 2 Other includes primarily group and individual savings products.
IFA/Brokers distribution reduced by USD 18 million or by 2 percent in U.S. dollar terms, to USD 924 million while increasing 11 percent on a local currency basis. Strong pension sales in the UK and successful sales campaigns by the Finanza e Futuro distribution channel in Italy acquired in 2008 were partially offset by lower sales of unit-linked pension products in Germany resulting from the market conditions earlier in the year.
Agents distribution reduced by USD 34 million or by 6 percent in U.S. dollar terms, to USD 503 million and by 3 percent on a local currency basis. Sales in many countries proved resilient to the fi nancial crisis mainly as a result of several customer and distributor focused programs. Growth continues in Latin America, Germany, Switzerland and Italy. These positive developments were offset by a decline in unit-linked sales in our Hong Kong domestic business driven by the reduced customer confi dence as a result of the fi nancial market environment, particularly in the fi rst half of 2009.
Corporate Life & Pensions distribution increased by USD 189 million or by 46 percent in U.S. dollar terms, to USD 603 million and by 60 percent on a local currency basis. The pillar experienced growth in both protection and pension business with the main contributions arising from ZIS, the UK and Latin America.
Private Banking Client Solutions achieved sales of USD 186 million through a convincing start for the newly formed operational Private Banking Client Solutions hub in Luxembourg with a fi rst product launch into Italy and by placing several tranches of an investment bond through a bank partner in the UK.
APE by distribution and proposition pillar and product 06_Financial_Review_8212_Eng.indd 8206_Financial_Review_8212_Eng.indd 82 24/2/10 20:09:4724/2/10 20:09:47
Farmers business operating profi t was USD 1.6 billion compared with USD 1.4 billion for the year ended December 31, 2008. Farmers Management Services contributed USD 1.3 billion compared with USD 1.2 billion in the prior year and Farmers Re contributed USD 228 million compared with USD 154 million in the prior year.
As a result of these changes and underlying improvements, the gross management result increased by USD 151 million, or 13 percent, while the managed gross earned premium margin improved by 0.3 percentage points to 7.2 percent from 6.9 percent.
Gross written premiums 17,620 16,710 5% Gross earned premiums 17,885 16,541 8%
Gross earned premiums in the Farmers Exchanges, which the Group manages but does not own, increased by USD 1.3 billion, of which USD 1.2 billion related to 21st Century and USD 217 million related to Small Business Solutions, acquired from Zurich North America in June 2008.
in USD millions, for the years ended December 31 in USD millions, for the years ended December 31Farmers Exchanges 06_Financial_Review_8212_Eng.indd 8406_Financial_Review_8212_Eng.indd 84 24/2/10 20:09:4724/2/10 20:09:47
Centre business operating result improved by USD 266 million to a profi t of USD 160 million, driven by positive impacts from interest rate and credit spread developments on an insurance portfolio where both assets and liabilities are carried at fair value. Banking activities decreased by USD 235 million to a loss of USD 182 million predominantly driven by an increase in loan loss provisions compared with the prior year, primarily refl ecting adverse developments in the Irish property market. Centrally managed businesses, which comprise portfolios that the Group manages with the intention to achieve a profi table run-off over time, decreased its loss by USD 218 million to a loss of USD 279 million, primarily due to the effect of the recovering capital markets on both investments and policyholders’ liabilities. The overall loss for the year 2009 resulted primarily from an increase of certain life insurance reserves addressing policyholders’ behavior. Other run-off experienced one-off benefi ts in 2008 which were not repeated in 2009.
in USD millions, for the years ended December 31 in USD millions, for the years ended December 31 06_Financial_Review_8212_Eng.indd 8506_Financial_Review_8212_Eng.indd 85 24/2/10 20:09:4824/2/10 20:09:48
Common stocks, including equity unit trusts 8,839 8,957 69,004 51,276 Unit trusts (debt securities, real estate and
Unit-linked investments increased by USD 21.0 billion or 27 percent in U.S. dollar terms to USD 99.2 billion since December 31, 2008. In local currency terms, unit-linked investments increased by 18 percent, primarily as a result of higher equity valuations following the recovery of markets overall in 2009 compared with the position at the end of 2008 but particularly since the low point in the market in April 2009. This increase is mirrored in higher unit-linked insurance and investment contract liabilities.
Net investment income 7,505 8,698 (14%) Net capital gains/(losses) on investments and impairments (1,423) (2,893) 51%
of which: net capital gains/(losses) on investments and impairments attributable to shareholders (1,375) (2,110) 35%
Net investment income 1,638 3,185 (49%) Net capital (losses)/gains on investments and impairments 10,837 (24,916) nm Net investment result, net of investment expenses 1 12,475 (21,731) nm
Total return on unit-linked investments 2 14.1% (21.7%) 35.8 pts 1 After deducting investment expenses of USD 426 million and USD 581 million for the for the years ended December 31, 2009 and 2008, respectively. 2 Total return is not annualized.
Total return on unit-linked investments improved by 35.8 percentage points to a positive return of 14.1 percent compared with a negative return of 21.7 percent in the prior year. Net investment income on unit-linked investments declined by 49 percent compared with 2008. Net capital gains of USD 10.8 billion increased signifi cantly compared with 2008 as a result of improved capital markets.
Insurance and investment contract liabilities Reserves for losses and loss adjustment expenses
Gross reserves for losses and loss adjustment expenses 65,218 67,890 61,396 63,383
Net reserves for losses and loss adjustment expenses 52,986 54,712 50,530 51,935
Net reserves for losses and loss adjustment expenses 55,903 52,986 52,514 50,530
One year later 85.7% 72.0% 66.1% 64.2% 68.1% 66.2% 71.7% 74.1% Two years later 85.8% 72.3% 65.4% 63.5% 66.6% 64.8% 70.6% Three years later 87.4% 74.5% 65.5% 63.7% 65.0% 63.3% Four years later 88.5% 74.7% 65.7% 62.9% 63.8% Five years later 90.2% 73.4% 65.0% 62.2% Six years later 90.2% 74.3% 64.6% Seven years later 90.3% 74.1% Eight years later 90.6%
This table represents the loss ratio development for individual accident years for the Group, with General Insurance segment being the primary driver. Individual accident years are affected by the level of large catastrophe losses which had the following impact on the loss ratios: the 2004 and 2005 hurricanes impacted the loss ratios by 2.8 and 4.6 percentage points, the winter storm Kyrill and the UK fl oods in 2007 impacted the loss ratio by 2.5 percentage points, and in 2008 the impact of hurricanes Gustav and Ike was 1.8 percentage points. The development of 2003 and subsequent years demonstrates the Group’s philosophy of taking a prudent initial view on reserving with the expectation of achieving a favorable development over time.
Development of cumulative net loss ratio 06_Financial_Review_8212_Eng.indd 9006_Financial_Review_8212_Eng.indd 90 24/2/10 20:09:5124/2/10 20:09:51
Interest and bonuses credited to policyholders 11,403 (18,615) 3,330 1,927 14,734 (16,689)
As of December 31 1 Includes reserves for unit-linked contracts, the net amounts of which were USD 46.5 billion and USD 35.1 billion, and liabilities for investment contracts, the net amounts of which were USD 46.4 billion and USD 36.2 billion as of December 31, 2009 and 2008, respectively.
2 Includes reserves for future life policyholders’ benefi ts, the net amounts of which were USD 72.7 billion and USD 70.9 billion and policyholders’ contract deposits and other funds, the net amounts of which were USD 14.6 billion and USD 12.5 billion as of December 31, 2009 and 2008, respectively.
3 As of January 1, 2008, reinsurers’ share of reserves for insurance contracts included USD 7.1 billion related to the reinsurance of a UK annuity portfolio. Subsequent to the approval from the UK High Court on June 30, 2008, the underlying contracts were transferred to the reinsurer, resulting in a reduction of gross reserves for insurance contracts and the related reinsurers’ share.
4 Premiums and claims include all balance sheet policyholder cash fl ows, fund deductions and profi t and loss experience.
Unit-linked insurance and investment contracts, net of reinsurance, increased by 30 percent, and by 20 percent in local currency terms, compared with December 31, 2008. The increase in local currency was mainly driven by the overall positive performance of the unit-linked funds in 2009 that benefi ted from the improvement in fi nancial markets during the year, the new Private Banking Client Solutions hub in Luxembourg and by net positive policyholder cash fl ows.
in USD millions, for the years ended December 31Global Life – Reserves and liabilities, net of reinsurance, by region 06_Financial_Review_8212_Eng.indd 9206_Financial_Review_8212_Eng.indd 92 24/2/10 20:09:5324/2/10 20:09:53
1 Of which USD 750 million currently classifi ed as operational debt are under review for such qualifi cation by Standard & Poor’s.
Operational debt increased by USD 752 million or 12 percent in U.S. dollar terms. The increase arose primarily from the requirements of the Group’s banking activities and an increase in obligations to repurchase securities. The change in the operational debt of banking activities was effected through the issuance, in September 2009, of USD 750 million of senior debt, through the Euro Medium Term Notes Programme (EMTN Programme), which was loaned directly to the Group’s banking activities, which then repaid USD 450 million of existing operational debt.
Financial debt increased by USD 789 million or 8 percent in U.S. dollar terms. Approximately USD 200 million were due to foreign exchange fl uctuations and the remainder was the result of several factors: the Group raised, in addition to the USD 750 million raised and then loaned to banking activities, a further USD 2.8 billion of which USD 2.0 billion was senior debt and USD 806 million was subordinated debt. This was partially offset by a USD 2.2 billion debt reduction, of which USD 1.4 billion was realized through the repayment of fi nancial debt held by capital markets and banking activities and USD 871 million through the repurchase of subordinated debt instruments. The repurchase generated gains of USD 210 million, which are included in the result of Other Operating Businesses.
in USD millions, as of December 31 06_Financial_Review_8212_Eng.indd 9306_Financial_Review_8212_Eng.indd 93 24/2/10 20:09:5424/2/10 20:09:54
Net income after taxes 3,215 21 3,236 Net other recognized income and expenses 4,413 64 4,478
Total equity increased by USD 7.7 billion or 32 percent to USD 31.5 billion compared with USD 23.8 billion as of December 31, 2008. The main drivers were net income after taxes for the year ended December 31, 2009 of USD 3.2 billion as well as net other recognized income of USD 4.5 billion. Net other recognized income before noncontrolling interests consisted primarily of net unrealized gains on investments of USD 3.3 billion, largely as a result of narrowing credit spreads and falling yields on debt securities, and favorable currency translation adjustments of USD 1.0 billion.
The Group received proceeds of USD 1.3 billion through capital transactions. USD 1.2 billion of this arose from the placement of shares with institutional investors through the accelerated book building transaction announced on April 17, 2009, to support the capital requirements for the increase in the All Lines quota share reinsurance treaty with the Farmers Exchanges. The remainder of USD 145 million related to other treasury share transactions.
The Annual General Meeting approved a gross dividend of CHF 11.00 per share on April 2, 2009. This gross dividend was recognized through shareholders’ equity during the second quarter of 2009.
Change in cash and cash equivalents excluding change in cash received as collateral for securities lending 267 1,460
Cash and cash equivalents as of January 1 2 16,888 17,128 Cash and cash equivalents as of December 31 2 17,471 16,888 1 Excluding cash received as collateral for securities lending. 2 Including cash received as collateral for securities lending.
Net cash provided by operating activities, which includes cash movements in and out of and within total investments as well as movements of debt attributable to our capital markets and banking activities, was a negative USD 2.5 billion for the year ended December 31, 2009. Net cash used in investing activities was USD 581 million, primarily related to the purchase of the management services business retained by the Group as a result of the 21st Century acquisition (see note 5 of the audited Consolidated Financial Statements). Net cash from fi nancing activities of USD 2.4 billion was the net result of debt issuances and debt repurchases of USD 2.6 billion, proceeds from capital transactions of USD 1.3 billion and the payment of dividends of USD 1.4 billion (see Capitalization section).
in USD millions, for the years ended December 31Summary of cash fl ows 06_Financial_Review_8212_Eng.indd 9506_Financial_Review_8212_Eng.indd 95 24/2/10 20:09:5524/2/10 20:09:55
Differences arise when functional currencies are translated into the presentation currency (U.S. dollar). The table below shows the effect of foreign currency rates on the translation of selected line items.
Gross written premiums and policy fees (2,212) (4%) Insurance benefi ts and losses, gross of reinsurance 1,680 4% Net income attributable to shareholders (14) – Business operating profi t (147) (3%)
Total investments 13,507 5% Reserves for insurance contracts, gross 9,034 4% Cumulative translation adjustment in shareholders’ equity 944 3%
The balance sheets are translated at end-of-period rates. The U.S. dollar has weakened against the euro and Swiss franc and especially against the British pound as of December 31, 2009 compared with December 31, 2008, resulting in an increase in U.S. dollar terms in most balance sheet line items.
variance over the prior period, for the year ended December 31, 2009Selected Group income statement line items variance over December 31, 2008, as of December 31, 2009Selected Group balance sheet line items 06_Financial_Review_8212_Eng.indd 9606_Financial_Review_8212_Eng.indd 96 24/2/10 20:09:5524/2/10 20:09:55
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 specifi es 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 specifi ed per risk type, refl ecting the Group’s willingness and ability to take risk, considering earning stability, economic capital adequacy, fi nancial fl exibility 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 fi nancial objectives. We regularly enhance the Zurich Risk Policy to refl ect new insights and changes in our environment and to refl ect changes to the Group’s risk tolerance. In 2009, the Zurich Risk Policy was updated and strengthened for various areas, including asset/liability management, life insurance, reinsurance and operational risks. Related procedures and risk controls were strengthened or clarifi ed for these areas and others, including post-merger integration and information security.
Risk management is not only embedded in our business but is also aligned with the Group’s strategic and operational planning process. We assess risks systematically and from a strategic perspective through our proprietary Total Risk Profi ling™ (TRP) process, which allows us to identify and then evaluate the probability of a risk scenario occurring, as well as the severity of the consequences should it occur. We then develop, implement and monitor appropriate improvement actions. The TRP process is integral to how we deal with change, and is particularly suited for evaluating strategic risks as well as risks to our reputation. At Group level this process is performed annually, reviewed regularly and closely tied to the planning process.
In addition to this qualitative approach the Group regularly measures and quantifi es material risks to which it is exposed. Our Risk-Based Capital model provides a key input into the Group’s strategic planning process as it allows an assessment as to whether the Group’s risk profi le is in line with the Group’s risk tolerance. In particular, our Risk-Based Capital model forms the basis for optimizing the Group’s risk-return profi le by providing consistent risk measurement across the Group.
The overview above highlights only key elements of the governance framework that specifi cally relate to risk management.
The Group Chief Risk Offi cer is a member of the GEC and reports directly to the CEO and the Risk Committee of the Board. He is a member of each of the management committees listed below, in order to provide a common and integrated approach to risk management, to allow for appropriate quantifi cation and, where necessary, mitigation of risks identifi ed in these committees.
At a Group level the management committees dealing with risks are: Group Balance Sheet Committee (GBSC) – acts as a cross-functional body whose main function is to control the • activities that materially affect the balance sheets of the Group and its subsidiaries. The GBSC is charged with setting the annual capital and balance sheet plans for the Group based on the Group’s strategy and its fi nancial plans, as well as recommending specifi c transactions or unplanned business changes to the Group’s balance sheet. The GBSC has oversight of all main levers of the balance sheet. It assesses the Group’s capital adequacy, reinsurance, level of return, and desired growth. The GBSC reviews and recommends the Group’s overall risk tolerance. It is chaired by the CEO. Group Finance and Risk Committee (GFRC) – acts as a cross-functional body for fi nancial and risk management • matters in the context of the strategy and the overall business activity of the Group. The GFRC oversees fi nancial implications of business decisions and the effective management of the Group’s overall risk profi le, including risks related to insurance, fi nancial markets and asset/liability, credit and operational risks as well as their interactions. The GFRC proposes remedial actions based on regular briefi ngs from Group Risk Management on the risk profi le of the Group. It reviews and formulates recommendations for future course of action with respect to potential 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 Group Chief Financial Offi cer, while the Group Chief Risk Offi cer acts as deputy.
Global Underwriting Committee (GUC) – acts as a focal point for underwriting policy and related risk controls for • General Insurance and is chaired by the Global Chief Underwriting Offi cer. Group Reinsurance Committee (GRC) – oversees the purchase of reinsurance on a global basis. This committee also • oversees the Group´s natural catastrophe exposure and is chaired by the Global Head of Group Reinsurance.
In addition to the risk management network, the Group has a set of audit, risk and control committees that encompass the major business reporting areas and business units. Each committee has terms of reference tailored to its specifi c business area and local requirements. In particular, the committees are responsible for providing oversight of activities, organization and quality of the risk management and control functions. This includes monitoring adherence to policies and periodic risk reporting. Risk reporting to regional management and audit committees is coordinated in the context of Zurich’s integrated assurance approach with other assurance, governance and control, technical and business functions to provide a holistic view of risks.
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•
Risk considerations are a key element in the strategic decision-making process. The Group assesses the implications of strategic decisions on Risk Based Return Measures (RBRM) and Risk-Based Capital in order to optimize the risk-return profi le and to take advantage of economically profi table growth opportunities as they arise.
The Group works on reducing the unintended risks of strategic business decisions through our risk assessment processes and tools, including the Total Risk Profi ling™ process. The Group Executive Committee regularly assesses key strategic risk scenarios for the Group as a whole, including scenarios for emerging risks and their strategic implications.
We specifi cally evaluate the risks of M&A transactions both from a quantitative and a qualitative perspective. We conduct risk assessments of M&A transactions to evaluate risks specifi cally related to the integration of acquired businesses. In 2009, we strengthened our risk controls related to post-merger integration. The Group has, for example, specifi cally assessed the capital and risk implications associated with the 21st Century acquisition and has reacted accordingly by selling ordinary shares and issuing capital notes from the EMTN program at the acquisition; integration of the acquired business into the Group’s framework for managing risk continues.
In 2009, the Group specifi cally assessed the risk implications of the strategic decision to outsource management of data centers and information technology infrastructure to a third party. Mitigating actions were planned and implemented as appropriate.
Insurance risk is the inherent uncertainty regarding the occurrence, amount or timing of insurance liabilities. The exposure is transferred to the Group through the underwriting process. We actively seek to write those risks we understand and that provide a reasonable opportunity to earn an acceptable profi t. As we assume certain customer risks, we aim to manage that transfer of risk, and minimize unintended underwriting risks, through such means as: Establishing limits for underwriting authority• Requiring specifi c approvals for transactions involving new products or where established limits of size and • complexity may be exceeded Using a variety of reserving and modeling methods to address the various insurance risks inherent in our • insurance business Ceding insurance risk through proportional, non-proportional and specifi c risk reinsurance treaties. The Group • centrally manages reinsurance treaties.
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 qualifi ed 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 and public attitudes that may affect the ultimate cost of settlement. In most instances these analyses are made throughout the year according to locally developed and agreed timetables . Analyses are performed by product line, type and extent of coverage and year of occurrence. The Group total loss and loss adjustment expense reserves are the consolidation of the locally calculated reserves which are then discussed and approved by Corporate Center actuaries and Group management. As with any projection there is an inherent uncertainty in the estimation of claim reserves due to the fact that the ultimate liability for claims will be impacted by trends as yet unknown including future changes in the likelihood of claimants bringing suit, the size of court awards, and the attitudes of claimants toward settlement of their claims.
In addition to the specifi c risks insured, each line of business could expose the Group to losses that could arise from natural and man-made catastrophes. The main concentrations of risks arising from such potential catastrophes are regularly reported to senior management. The most important peril regions and risks are European windstorm, California earthquake, U.S. and Caribbean windstorm and UK river fl ood, as well as potential terrorism exposures.
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 signifi cantly by geographic region and may change over time. Premiums ceded to reinsurers (including retrocessions) amounted to USD 5,222 million and USD 5,646 million for the years ended December 31, 2009 and 2008, respectively. Reinsurance programs such as catastrophe covers are managed on a global basis, and therefore, net premium after reinsurance is monitored on an aggregated basis.
Table 1.b in USD millions, for the year ended December 31, 2008
Table 2.a in USD millions, for the year ended December 31, 2009Insurance risk sensitivity for the General Insurance business
Insurance risk sensitivity for the General Insurance business 07_Risk_Review_7446_Eng.indd 10707_Risk_Review_7446_Eng.indd 107 24/2/10 20:10:4624/2/10 20:10:46
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, our accumulation monitoring and analyses contain a number of assumptions about the potential characteristics of such threats.
We review and aggregate workers’ injury and property exposures to identify areas of signifi cant concentration. We also assess other lines of business, such as liability and auto, although the potential exposure is not as signifi cant. The resulting data allows our underwriters to evaluate how insuring a particular customer’s risk might affect Zurich’s overall exposure. In North America, we use a vendor-provided catastrophe model to evaluate our potential exposures in every major U.S. city. We undertake more detailed and frequent analytics for cities in which we have greater exposure. In 2009, we continued to use a multi-disciplinary team to examine the vendor tool and make adjustments based on our own experience, expertise and view of the potential risks.
For other areas, our analysis has shown that our exposures are signifi cantly lower, due in large part to government provided pools. We periodically monitor accumulation limits for those areas.
Credit risk is the risk associated with a loss or potential loss from counterparties failing to fulfi ll their fi nancial • obligations, which are managed as part of credit risk.
A more diversifi ed portfolio of risks is less likely to be affected across the board by a change in any subset of the risks. As a result, the offsetting effects of Life and General Insurance, as well as between unit-linked and traditional business, reduce some of the risk associated with Life Insurance business.
In the life annuity business, the most signifi cant insurance risk is continued medical advances and improvement in social conditions that lead to increases in longevity. Annuitant mortality assumptions include allowance for future mortality improvements.
Other segments includes certain life insurance contracts, which contain guarantees for which liabilities have been recorded for additional benefi ts and minimum guarantees. These arise primarily in the subsidiary Kemper Investors Life Insurance Company (KILICO) which in the past wrote variable annuity contracts that provide policyholders with certain guarantees related to minimum death and income benefi ts. After 2001, KILICO no longer issued new policies with such features. New Life products developed with guaranteed fi nancial benefi ts are subject to review and approval by the Group-level product approval committee.
Refer to note 8 of the Consolidated Financial Statements for additional information on reserves for insurance contracts, and KILICO liabilities.
Sensitivities analysis for life insurance risk The Group reports sensitivities of Life Insurance business on Embedded Value and New Business Value to changes in economic and operating risk factors. The operating factors include discontinuance rates, expenses, mortality and morbidity. The embedded value methodology adopted by the Group is based on a “bottom up” market-consistent approach to allow explicitly for market risks. Refer to the Embedded Value Report for more information on the sensitivities of Life Insurance business to economic and operating risk factors.
The Group has policies and limits to manage market risk. We align our strategic asset allocation to our risk-taking capacity. We centralize management of certain asset classes to control aggregation of risk, and provide a consistent approach to constructing portfolios and selecting external asset managers. We also diversify portfolios, investments and asset managers. We regularly measure and manage market risk exposure. We have established limits on our concentration in investments by single issuers and certain asset classes as well as deviations of asset interest rate sensitivities from liability interest rate sensitivities, and we limit investments that are illiquid. The Group’s Balance Sheet Committee reviews and recommends the Group’s capital allocation to market risk, while the Asset/Liability Management and Investment Committee reviews and monitors the Group’s strategic asset allocation and its tactical boundaries and monitors the Group’s asset/liability exposure. The Group oversees the activities of local Asset/Liability Management and Investment committees and regularly assesses market risks both at a Group and at a local business level. Risk assessment includes quantifi cation of the contributions to fi nancial market risk from major risk drivers. The economic effect of potential extreme market moves is regularly examined and considered when setting the asset allocation.
In 2009, we strengthened our market and credit risk models to refl ect the turbulence of the fi nancial crisis. In line with its strategic asset allocation, the Group reduced its equity holdings in favor of fi xed income securities. We continue to diligently apply processes to manage market risk scenarios to test and analyze market hotspots, and risk mitigation actions have been taken to manage fl uctuations affecting asset/liability management and Risk-Based Capital.
The Group uses derivative fi nancial instruments to limit market risks arising from changes in currency exchange rates, interest rates, equity prices and credit quality of our assets and liabilities and our commitments to third parties. The Group enters into derivative fi nancial instruments mostly for economic hedging purposes and, in limited circumstances, the instruments may also meet the defi nition of an effective hedge for accounting purposes. The latter include crosscurrency interest rate swaps in fair value hedges and cross-currency swaps in cash fl ow hedges of our borrowings, in order to mitigate our exposure to foreign currency and interest rate risk. 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 fi nancial transactions; therefore, the Group addresses the risks arising from derivatives through a stringent policy that requires approval of a derivative program before 07_Risk_Review_7446_Eng.indd 11107_Risk_Review_7446_Eng.indd 111 24/2/10 20:10:5024/2/10 20:10:50
transactions are initiated, and by subsequent regular monitoring of open positions and annual reviews of derivative programs by Group Risk Management.
Analysis of market risk sensitivities Basis of presentation – General Insurance and rest of the business The tables in the following section show the estimated economic market risk sensitivities of Group investments, including real estate for own use, liabilities, including insurance and fi nancial liabilities, and the net impact for General Insurance and the rest of the business. Positive values represent an increase of the balance, whereas values in parentheses represent a decrease of the balance. Increases in the value of liabilities and decreases in the value of assets represent an economic risk for the Group. The net impact is the difference between the impact on Group investments and liabilities. The net impact represents the economic risk the Group faces related to changes in market risk factors, which is in line with management’s monitoring of the Group’s investment and liabilities base. As mentioned above, we have established limits on holdings in real assets and deviations of asset interest rate sensitivities from liability interest rate sensitivities , which limit the economic impact of interest rate, equity and real estate risk.
The basis of the presentation below is an economic valuation represented by the fair value for Group investments, IFRS insurance liabilities discounted at market rates to refl ect the present value of insurance liability cash fl ows and other liabilities, for example own debt. Own debt does not include subordinated debt, which we consider available to protect policyholders in a worst-case situation. For determining the sensitivities, investments and liabilities are fully re-valued in the given scenarios. Each instrument is re-valued separately taking the relevant product features into account. Nonlinear effects, where they exist, are fully refl ected in the model. The sensitivities are shown before tax. They do not include impact of Group-internal transactions.
Limitations of the analysis: The sensitivity analysis does not take into account actions that might be taken to mitigate losses, as we use an active • strategy to manage these risks. This strategy may involve changing the asset allocation, for example through selling and buying assets. 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 (credit spread risk).
Basis of presentation – Global Life The tables in the following section show the estimated economic sensitivity of the Embedded Value of the Global Life business to fi nancial market movements. In modeling these exposures, where appropriate, allowance has been made for dynamic actions that would be taken by management or by policyholders. For contracts with fi nancial options and guarantees, such as some participating business, movements in fi nancial markets can change the nature and value of these benefi ts. The dynamics of these liabilities are captured so that this exposure is quantifi ed, monitored, managed and where appropriate, mitigated.
Other currencies Total 100 basis points increase in the interest rate yield curves 100 basis points decrease in the interest rate yield curves
Table 4.b in USD millions, as of December 31, 2008Economic interest rate sensitivities for the Group’s General Insurance business 07_Risk_Review_7446_Eng.indd 11407_Risk_Review_7446_Eng.indd 114 24/2/10 20:10:5224/2/10 20:10:52
100 basis points decrease in the interest rate yield curves Total impact on Embedded Value 235 (675) (55) (40) 56 (479)
Other currencies Total 100 basis points increase in the interest rate yield curves Total impact on Embedded Value (109) 76 (15) 139 (60) 31 100 basis points decrease in the interest rate yield curves Total impact on Embedded Value (43) (1,056) (6) (179) 51 (1,233)
Table 5.a in USD millions, as of December 31, 2009Economic interest rate sensitivities for the Group’s Global Life business
10% decline in stock markets Group investments (362) (437) Liabilities na na Net impact (362) (437)
Table 6.b in USD millions, as of December 31, 2008Economic interest rate sensitivities for the rest of the businesses
Table 9 in USD millions, as of December 31Economic equity price sensitivities for the rest of the businesses 07_Risk_Review_7446_Eng.indd 11607_Risk_Review_7446_Eng.indd 116 24/2/10 20:10:5424/2/10 20:10:54
The table above shows the net income after tax (NIAT) before non-controlling interests, by major functional currencies. The table, therefore, gives an indication of the Group’s exposure to changes in currency exchange rates with respect to their impact on the Group’s NIAT expressed in USD.
Table 10 in USD millions, for the years ended December 31Net income after tax before noncontrolling interests, by major functional currencies
Credit risk is the risk associated with a loss or potential loss from counterparties failing to fulfi ll their fi nancial obligations. The Group’s exposure to credit risk is derived from the following main areas: Debt securities• Reinsurance assets• Mortgage loans and mortgage loans given as collateral• Other loans• Receivables• Derivatives•
The maximum exposure to credit risk consists mainly of on-balance sheet exposures. Off-balance sheet exposures are primarily related to collateral (e.g. letters of credit) used to protect the underlying credit exposures on the balance sheet. We also have off-balance sheet exposures related to undrawn loan commitments of Zurich Bank of USD 310 million and USD 561 million as of December 31, 2009 and 2008, respectively. Refer to note 26 of the Consolidated Financial Statements for undrawn loan commitments.
As of December 31, 2009 the largest concentration in the Group’s debt securities portfolio is in government and supranational debt securities at 41.9 percent. A total of USD 43,260 million or 54.6 percent of the non-government and non-supranational debt securities are secured. As of December 31, 2008, 41.5 percent of the Group’s debt portfolio was invested in governments and supranationals and a total of USD 38,187 million or 55.2 percent of the nongovernment and non-supranational debt securities were secured.
Debt securities − credit risk concentration by industry (%, as of December 31)
Credit risk related to reinsurance assets As part of our overall risk management strategy, the Group cedes insurance risk through proportional, non-proportional and specifi c risk reinsurance treaties. While these cessions mitigate insurance risk, the recoverables from reinsurers and receivables arising from ceded reinsurance expose the Group to credit risk.
Our Corporate Reinsurance Security Committee manages the credit quality of our cessions and reinsurance assets. The Group typically cedes new business to authorized reinsurers with a minimum rating of BBB. As of December 31, 2009, 74% of the business ceded to reinsurers that fall below BBB or are not rated are collateralized. 51% of this business is ceded to captive insurance companies.
Reinsurance assets in the table below are shown before taking into account the fair value of credit default swaps, bought by the Group to mitigate credit risks of the reinsurance exposure, and other collateral such as cash or letters of credit from banks rated at least ‘A,’ which can be converted into cash and deposits received under ceded reinsurance contracts.
The risk-weighted average credit quality of reinsurance assets (including receivables, but after deduction of collateral) was ‘A’ as of December 31, 2009 and 2008, respectively. Credit factors to determine the risk-weighted average credit quality of reinsurance assets are based on historical insurance impairment statistics, consistent with the prior year. For credit risk assessment purposes, collateral has been taken into account at nominal value as an approximation for fair value. For collateral we apply minimum requirements, such as a minimum rating for the issuers of letters of credit and guarantees, and for pledged assets a minimum coverage ratio of 100 percent.
The following table shows reinsurance premiums ceded and reinsurance assets split by rating. Due to the downgrade of large counterparties, there was a shift of reinsurance assets from the ‘AA’ category to the ‘A’ category.
% of total 1 The value of the collateral received amounts to USD 8,446 million and USD 8,662 million as of December 31, 2009 and 2008, respectively .
Credit risk related to other loans The credit risk arising from other loans is assessed and monitored together with the fi xed income securities portfolio. 69.1 percent of the reported loans are to government or supranational institutions, of which 99.5 percent are to the German Central Government or the German Federal States. The table below shows the composition of the loan portfolio by rating class. As of December 31, 2009, a total of USD 10,655 million or 70.7 percent of loans are secured. As of December 31, 2008, a total of USD 10,083 million or 72.1 percent of loans were secured.
Credit risk related to receivables The Group’s largest credit risk exposure to receivables is from third party agents, brokers and other intermediaries; the risk arises where they collect premiums from customers to be paid to the Group or pay claims to customers on behalf of the Group. The Group has policies and standards to manage and monitor credit risk from intermediaries with a focus on day-to-day monitoring of the largest positions. As part of these standards, the Group requires that intermediaries maintain segregated cash accounts for policyholder money. Additionally, the Group requires intermediaries to satisfy minimum requirements in terms of their capitalization, reputation and experience as well as providing short-dated business credit terms.
Refer to note 15 of the Consolidated Financial Statements for additional information on receivables.
Past due but not impaired fi nancial assets. Past due by: 1 to 90 days 5 106 – 1 1,473 1,584
Table 14.b in USD millions, as of December 31, 2008Analysis of fi nancial assets – prior year
Increase/(Decrease) in allowance for impairments 69 24 (1) 6 (5) Amounts written-off – – 1 – (68) Foreign currency translation effects (4) (8) – (1) (24)
The Group has Group-wide liquidity management policies and specifi c guidelines as to how local businesses have to plan, manage and report their local liquidity. This includes regularly conducting stress tests for all major carriers within the Group. The stress tests use a standardized set of internally defi ned stress events, and are designed to provide an overview of the potential liquidity drain the Group would face if it had to recapitalize local balance sheets.
At the Group level, similar guidelines apply and detailed liquidity forecasts based on the local businesses’ input and the Group’s own forecasts are regularly performed. As part of its liquidity management, the Group maintains suffi cient cash and cash equivalents to meet expected outfl ows including those for maturing debt obligations. In addition, the Group maintains internal liquidity sources that cover the Group’s potential liquidity needs, including under stressed conditions. The Group takes into account the amount, permanence of availability and speed of accessibility of the sources. The Group centrally maintains committed borrowing facilities, as well as access to diverse funding sources to cover contingencies. Funding sources include asset sales, external debt issuances and use of Letters of Credit. The Group maintains a broad range of maturities for external debt securities. A possible concentration risk could arise from a downgrade of the Group’s credit rating. This could impact the Group’s commitments and guarantees, thus potentially increasing the Group’s liquidity needs. These contingencies are also considered in the Group’s liquidity management.
The Group’s regular liquidity monitoring includes monthly reporting to the Group Finance and Risk Committee and executive management and quarterly reporting to the Board Risk Committee, covering aspects such as the Group’s actual and forecasted liquidity, possible adverse scenarios that could affect the Group’s liquidity and possible liquidity needs from the Group’s main subsidiaries, including under stressed conditions.
Table 15.b in USD millionsDevelopment of allowance for impairments – prior year 07_Risk_Review_7446_Eng.indd 12507_Risk_Review_7446_Eng.indd 125 25/2/10 18:32:3925/2/10 18:32:39
Expected maturity profi le for reserves for insurance contracts, net of reinsurance 07_Risk_Review_7446_Eng.indd 12607_Risk_Review_7446_Eng.indd 126 24/2/10 20:11:0124/2/10 20:11:01
Certain non-unit-linked contracts also provide for surrender of the contract by the policyholder at any time. Liabilities for such contracts amounted to USD 1,162 million and USD 2,417 million as of December 31, 2009 and 2008 respectively. The Group has established active management of the Global Life in-force business to improve persistency and retention.
Within this framework, the Group: Uses a scenario-based approach to quantify and allocate Risk-Based Capital for operational risk for all business units. • This approach allows us to compare information across the Group.
In the area of information security, we especially focused in 2009 on rolling out a global data classifi cation and ownership awareness campaign, which helps our businesses to establish best-practice data protection measures for electronic and non-electronic information assets.
A key task is keeping our business continuity plans up-to-date, with an emphasis on recovery from unexpected events such as natural catastrophes and the possibility of a pandemic. In 2009, the Group rolled out a new testing standard for business continuity management. The new standard reduces testing complexity and helps improve testing of the recovery capabilities for business-critical processes. In response to the H1N1 fl u outbreak in the spring of 2009, preparedness plans in the Group were reviewed and updated where appropriate to improve employee safety and business continuity.
The economic downturn increased the importance of addressing the risk of claims- and non-claims fraud. In 2009, the Group launched a global anti-fraud initiative in order to accelerate the Group’s ability to prevent, detect and respond to fraud. While claims fraud is calculated as part of insurance risk and non-claims fraud is calculated as part of operational risk for Risk-Based Capital, both are part of our common framework for assessing and managing operational risks.
We consider controls to be key instruments for monitoring and managing operational risk. Although primarily focused on important controls for fi nancial reporting, our internal control effort also includes related operational and compliance controls. Therefore, we continue to strengthen the consistency, documentation and assessment of our internal controls for signifi cant entities, processes and locations. Operational effectiveness of our key controls is assessed in various ways, including self assessment, management validation and independent testing. For more details, refer to the Risk Management and Internal Control Statement in the Corporate Governance Report (unaudited).
Additionally, we endeavor to preserve our reputation by adhering to applicable laws and regulations, and by following the core values and principles of Zurich Basics, our company’s code of conduct, which includes integrity and good business practice. We centrally manage certain aspects of reputation risk, for example, communications, through functions with the appropriate expertise.
Zurich’s policy is to manage our capital position by allocating capital to businesses earning the highest risk adjusted returns and pooling risks and capital as much as possible to operationalize our global risk diversifi cation, subject to local and Group regulatory solvency requirements and rating agency capital adequacy constraints.
We manage capital and solvency through an integrated and comprehensive framework of principles and governance structures as well as methodology, monitoring and reporting processes. At a Group executive level, the Group Balance Sheet Committee defi nes the capital management strategy and sets the principles, standards and policies for the execution of the strategy. Group Treasury and Capital Management is responsible for the execution of the capital management strategy within the mandate set by the Group Balance Sheet Committee.
The regulatory, rating agency and economic capital adequacy are major elements of our capital management framework.
For details on dividend payment, share buy-backs, and issuances and redemption of debt, refer to notes 22 and 23 of the Consolidated Financial Statements. For details on the 21st Century acquisition, refer to note 5 of the Consolidated Financial Statements. For details on the quota share reinsurance agreement provided to the Farmers Exchanges, refer to note 29 of the Consolidated Financial Statements.
In EU countries, insurance entities are required to maintain minimum solvency margins according to the existing Solvency I legislation. Solvency I capital is calculated as a fi xed percentage of premiums, claims, reserves and/or net amounts at risk. The required minimum solvency margin for general insurers is the greater of 16 percent of premiums written for the year or 23 percent of a three-year average of claims incurred, subject to the fi rst tranche (EUR 50 million) of premiums being at 18 percent and the fi rst tranche (EUR 35 million) of claims at 26 percent. In these calculations, premiums and claims for certain liability lines are increased by 50 percent. A reduction is given for reinsurance based on reinsurance claims recoveries over three years as a percentage of gross claims in those years, limited to a maximum of 50 percent. Life insurance companies are required to maintain a minimum solvency margin generally of 4 percent of insurance reserves, but reduced to 1 percent of insurance reserves for life insurance where the credit and market risks are carried by policyholders, plus 0.3 percent of the amount at risk under insurance policies. The same minimum capital requirements are applicable for insurance entities operating in Switzerland. In certain European countries, both EU and non-EU, further requirements have been imposed by regulators.
In the U.S., required capital is determined to be the ‘company action level risk-based capital’ calculated with the riskbased 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 profi le. The calculation is based on risk-sensitive factors that are applied to various asset, premium, claim, expense and reserve items.
Eligible equity Total equity 31,478 23,781 Net of intangibles and other assets (7,546) (6,217) Free reserves for policyholders dividends 2,799 2,325
Deferred policy acquisition costs non-life insurance (3,054) (2,793) Dividends, share buy-back and nominal value reduction 2 (2,226) (1,411) Total eligible equity 25,604 19,369 Total required solvency capital 12,932 12,142 Excess margin 12,672 7,227 Solvency I ratio 198% 160%
1 Under guidelines 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.
2 Amount for dividend refl ects the proposed dividend for the fi nancial year 2009, not yet approved by the Annual General Meeting.
The interest rate scenarios assume a parallel shift of all interest rates.• The equity market scenario assumes a concurrent movement of all stock markets.• The impact on unit-linked business is not included, as policyholders bear the investment risk.• The impact on changes to the required capital is not included in the sensitivities for the Solvency I ratio.• The major markets in which the Group invests are the United States and Europe. The major interest rate exposures • are to USD- and Euro-denominated assets and liabilities. The sensitivities do not indicate a probability of such events and do not necessarily represent the Group’s view of expected future market changes. Debt securities are primarily exposed to interest rate risk, while equity securities are primarily exposed to equity market risk. Debt securities can be affected also by spread widening due to changes in credit quality. The Group internal tax rate is assumed to be 21.9 percent.•
Economic capital adequacy (unaudited) The Group uses an additional capital management tool, our internal Risk-Based Capital (RBC) model, which is calibrated to an “AA” fi nancial strength target level. We defi ne RBC as being the capital required to protect the Group’s policyholders against any economic insuffi ciency to meet their claims over a one-year time horizon and at a confi dence level of 99.95 percent.
We use RBC to assess the economic capital consumption of our business on a one-balance-sheet approach. The RBC framework is an integral part of how we manage the Group. It is embedded in our organization and decision making, and is used in capital allocation, business performance management, pricing, reinsurance purchasing, transaction evaluation, risk optimization, and regulatory and rating agency communication.
Analysis of Group’s Available Financial Resources and Risk-Based Capital (USD billions as of January 1)
As of January 1, 2010 AFR amounted to USD 41 billion, while the latest estimate of the internal RBC requirements for the year 2010 amounted to USD 30 billion, resulting in an estimated Economic Capital Adequacy ratio of 136 percent compared to 95 percent for 2009 and 126 percent for 2008. The increase in AFR over 2009 was driven by strengthened IFRS equity. In addition, USD 2 billion of capital was raised through the issuance of senior debt. AFR includes a deduction for the proposed dividend for the respective fi nancial year, not yet approved by the Annual General Meeting. The increase in RBC is caused by the 21st Century acquisition as well as the strengthening of our market and credit risk models.
Zurich Financial Services Group Annual Report 2009Financial Report 2009136 08_Financial_Statements_Part1_7442_Eng.indd 136nancial Statements Part1 74408_Financial_Statatements_Partrt1_7442_Eng.indd 13ng.indd 1366 1/3/10 16:21:051/3/3/10 16:21:051:05
I 1. Consolidated income statements 139 2. Consolidated statements of comprehensive income 140 3. Consolidated balance sheets 142 4. Consolidated statements of cash fl ows 144 5. Consolidated statements of changes in equity 146
III 1. Report of the Statutory Auditor 264 08_Financial_Statements_Part1_7442_Eng.indd 13808_Financial_Statements_Part1_7442_Eng.indd 138 24/2/10 20:16:3624/2/10 20:16:36
Net investment result on unit-linked investments 6 12,475 (21,731) Net gain/(loss) on divestments of businesses 5 (5) 16 Other income 1,802 1,693 Total revenues 70,272 32,349 Benefi ts, losses and expenses Insurance benefi ts and losses, gross of reinsurance 1 11 39,522 31,387 Less ceded insurance benefi ts and losses 1 11 (3,261) 3,425 Insurance benefi ts and losses, net of reinsurance 11 36,261 34,811 Policyholder dividends and participation in profi ts, net of reinsurance 11 12,859 (21,514) Underwriting and policy acquisition costs, net of reinsurance 11 8,254 8,287 Administrative and other operating expense 13 7,248 6,729 Interest expense on debt 22 586 599 Interest credited to policyholders and other interest 533 773 Total benefi ts, losses and expenses 65,741 29,685 Net income before income taxes 4,531 2,663 Income tax expense 21 (1,295) 452 attributable to policyholders 21 (387) 1,184 attributable to shareholders 21 (908) (732)
Net income after taxes 3,236 3,116 attributable to non-controlling interests 21 77 attributable to shareholders 3,215 3,039 in USD
Comprehensive income for the period 3,039 (3,159) Details of movements during the period
Change (before reclassifi cation, tax and currency translation effects and after allocation to policyholders) (6,317) Reclassifi cation to income statement (before tax and currency translation effects and after allocation to policyholders) 2,089 Deferred income tax (before currency translation effects) 947 Foreign currency translation effects 121
Change (before reclassifi cation, tax and currency translation effects and after allocation to policyholders) 3,395 Reclassifi cation to income statement (before tax and currency translation effects and after allocation to policyholders) 1,014 Deferred income tax (before currency translation effects) (1,110) Foreign currency translation effects (7)
Reinsurers’ share of reserves for insurance contracts 1 8 18,627 18,595 26,970 Deposits made under assumed reinsurance contracts 3,861 2,397 1,359 Deferred policy acquisition costs 12 16,181 14,323 14,941
1 Effective June 30, 2008, the underlying contracts relating to a UK annuity portfolio ceded in 2007 for an amount of USD 7.1 billion were transferred to the reinsurer, resulting in a reduction of reinsurers’ share of reserves for insurance contracts.
Debt related to capital markets and banking activities 22 839 2,527 1,663 Senior and subordinated debt 22 11,444 8,455 8,300
Additional paid-in capital 23 11,400 10,131 10,289 Net unrealized gains/(losses) on available-for-sale investments 334 (2,957) 202 Cash fl ow hedges (9) (16) (103) Cumulative translation adjustment (396) (1,341) 1,385
Underwriting activities: 13,102 (24,588) Reserves for insurance contracts, gross 1 8,882 (19,773) Reinsurers’ share of reserves for insurance contracts 1 566 7,056 Liabilities for investment contracts 6,674 (9,486) Deferred policy acquisition costs (1,455) (975) Deferred origination costs (16) 8 Deposits made under assumed reinsurance contracts (1,453) (1,308) Deposits received under ceded reinsurance contracts (97) (110)
Proceeds from sale and repurchase agreements (14) (443) Movements in receivables and payables (60) (3,173) Net changes in debt for capital markets and banking activities (1,745) 1,035 Net changes in other operational assets and liabilities 974 509 Deferred income tax, net 453 (1,725) Net cash (used in)/provided by operating activities (2,470) 7,350 1 Effective June 30, 2008, the underlying contracts relating to a UK annuity portfolio ceded in 2007 for an amount of USD 7.1 billion were transferred to the reinsurer, resulting in a reduction of both the reinsurers’ share of reserves for insurance contracts and gross reserves for insurance contracts.
Other interest income received 7,146 8,831 Dividend income received 1,644 2,943 Other interest expense paid (1,146) (1,478) Income tax paid (1,019) (1,253)
Cash and cash equivalents comprise the following: Cash at bank and in hand 7,167 7,829 Cash equivalents 9,811 8,882 Cash held as collateral for securities lending 493 177 in USD millions, for the years ended December 31 in USD millions, as of December 31Cash and cash equivalents
The notes to the Consolidated Financial Statements are an integral part of these Consolidated Financial Statements.
Issuance of share capital – 1 – Dividends to shareholders – – – Redemption of preferred shares – (14) – Share-based payment transactions – 48 – Treasury share transactions 3 – (194) – Total comprehensive income for the year, net of tax – – (3,159)
Net income – – – Net unrealized gains/(losses) on available-for-sale investments – – 3,292 Cash fl ow hedges – – – Cumulative translation adjustment – – – Revaluation reserve – – – Net actuarial gains/(losses) on pension plans – – –
1 Includes all transaction costs amounting to USD 41 million deducted from the proceeds related to the issuance of USD 1.2 billion (CHF 1.3 billion) of capital through the accelerated book building transaction (see note 23).
2 The number of common shares issued as of December 31, 2009 was 147,473,068 (December 31, 2008: 142,122,620, December 31, 2007: 145,546,820). 3 The number of treasury shares deducted from equity amounted to 3,269,338 and 5,219,803 as of December 31, 2009 and December 31, 2008, respectively (see note 23).
Zurich Financial Services Ltd and its subsidiaries (collectively the “Group”) are an insurance-based fi nancial services provider with a global network. The Group also distributes non-insurance products, such as mutual funds, mortgages and other fi nancial services products, from selected third-party providers. The Group operates mainly in Europe, the USA, Latin America and Asia Pacifi c through subsidiaries, branch offi ces and representations.
The Group erroneously classifi ed certain products as traditional insurance and investment contracts that should have been classifi ed as unit-linked contracts. The classifi cation was corrected in the current period as the impact on the Group’s income statement was not material. The reclassifi cations in the balance sheet from Group investments to Investments held for unit-linked contracts, from Reserves for future life policyholder benefi ts to Reserves for unit-linked contracts, and from Deferred policy acquisition costs to Deferred origination cost and Deferred front end fees are footnoted in notes 8 and 12.
The following balances are generally considered to be non-current: equity securities, equity method accounted investment, real estate held for investment, deferred policy acquisition costs on life insurance contracts, deferred tax assets, goodwill, other intangible assets, property and equipment, and deferred tax liabilities.
All amounts in the Consolidated Financial Statements are shown in USD millions, rounded to the nearest million unless otherwise stated with the consequence that the rounded amounts may not add to the rounded total in all cases.
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 (49) million and USD 26 million for the years ended December 31, 2009 and 2008, respectively. Foreign currency exchange forward and swap gains/(losses) included in these amounts were USD 118 million and USD (801) million for the years ended December 31, 2009 and 2008, respectively.
USD per foreign currency unitPrincipal exchange rates 08_Financial_Statements_Part1_7442_Eng.indd 15008_Financial_Statements_Part1_7442_Eng.indd 150 24/2/10 20:16:4524/2/10 20:16:45
Net investment income on Group investments 8,725 (28) 8,698 Net capital gains/(losses) and impairments on Group investments (2,893) (2,893)
Net investment result on unit-linked investments (21,731) (21,731) Net gain/(loss) on divestments of businesses 16 16
Table 1.1 in USD millions, for the year ended December 31, 2008Reclassifi cations on consolidated income statement 08_Financial_Statements_Part1_7442_Eng.indd 15108_Financial_Statements_Part1_7442_Eng.indd 151 24/2/10 20:16:4624/2/10 20:16:46
Real estate held for investment 7,524 – 7,524 Mortgage loans 12,820 – 12,820
Investments for unit-linked contracts 78,203 – 78,203 Total investments 257,773 – 257,773 Reinsurers’ share of reserves for insurance contracts 18,595 – 18,595 Deposits made under assumed reinsurance contracts 2,397 – 2,397 Deferred policy acquisition costs 14,323 – 14,323 Deferred origination costs 770 – 770 Accrued investment income 2,429 – 2,429
Other intangible assets 6,464 169 6,633 Total assets 327,944 – 327,944
Table 1.2 in USD millions, as of December 31, 2008Reclassifi cation on consolidated balance sheet 08_Financial_Statements_Part1_7442_Eng.indd 15208_Financial_Statements_Part1_7442_Eng.indd 152 24/2/10 20:16:4724/2/10 20:16:47
In June 2007, IFRIC 13 “Customer Loyalty Programmes” was issued. IFRIC 13 is effective for reporting periods beginning on or after July 1, 2008. The interpretation explains how entities that grant loyalty award credits should account for their obligations to provide free or discounted goods or services (‘awards’) to customers who redeem award credits.
In January 2008, the IASB issued amendments to IFRS 2 “Vesting Conditions and Cancellations”. The amendments are effective for reporting periods beginning on or after January 1, 2009. The amended standard clarifi es that vesting conditions are service conditions and performance conditions only. Other features of a share-based payment are not vesting conditions. These features would need to be included in the grant date fair value for transactions with employees and others providing similar services; they would not impact the number of awards expected to vest or the valuation thereof subsequent to the date of grant. All cancellations whether by the entity or by other parties, should receive the same accounting treatment.
In February 2008, the IASB issued amendments to IAS 32 “Financial Instruments: Presentation” and to IAS 1 “Presentation of Financial Statements – Puttable Financial Instruments and Obligations Arising on Liquidation”. The amendments are effective for reporting periods beginning on or after January 1, 2009. The amended standards require entities to classify as equity all puttable fi nancial instruments, and instruments or components of instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation, provided such fi nancial instruments have particular features and meet specifi c conditions.
In March 2009, the IASB issued amendments to IFRS 7 “Improving Disclosures about Financial Instruments”. The amendments are effective for reporting periods beginning on or after January 1, 2009. The amendment requires enhanced disclosures about fair value measurement and liquidity risk. In particular, the amendment requires disclosure of fair value measurements by level of a fair value measurement hierarchy. These new disclosures have been included in note 27.
In January 2008, the IASB issued amendments to IAS 27 “Consolidated and Separate Financial Statements”. The amendments are effective for reporting periods beginning on or after July 1, 2009. The amended standard requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control and these transactions will no longer give rise to goodwill or gains and losses.
In July 2008, the IASB issued amendments to IAS 39 “Eligible Hedged Items”. The amendments are mandatory for reporting periods beginning on or after July 1, 2009. The amendments clarify how the principles that determine whether a hedged risk or portion of cash fl ows is eligible for hedge designation should be applied in particular situations.
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 fl ows 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 signifi cant intercompany balances, profi ts and transactions are eliminated in full.
Classifi cation Insurance and reinsurance contracts are those contracts that transfer signifi cant insurance risk. These contracts may also transfer fi nancial risk. Signifi cant insurance risk is defi ned as the possibility of paying signifi cantly more in a scenario where the insured event occurs than in a scenario where the insured event does not occur. Scenarios considered include those which have commercial substance.
– the performance of a specifi ed pool of contracts or a specifi ed type of contract; – realized and/or unrealized investment returns on a specifi ed pool of assets held by the issuer; or
As a consequence, no gain or loss is recognized as a result of the reclassifi cation of a contract from investment to insurance.
Once a contract has been classifi ed as an insurance contract, no reclassifi cation can be made subsequently.
DAC for contracts such as universal life, unit-linked and unitized with-profi ts contracts is amortized over the expected life of the contracts based on estimated gross profi ts expected to be realized over the life of the contract. Estimated gross profi ts are updated for historical and anticipated future experience using the latest revised interest rate for the remaining benefi t period. Resultant deviations from estimated experience are refl ected in income.
For certain products the DAC asset is adjusted for the impact of unrealized gains/(losses) on allocated investments that are recorded in equity (shadow accounting).
Unamortized DAC associated with internally replaced contracts that are, in substance, contract modifi cations, continue to be deferred and amortized. Costs associated with internally replaced contracts that are, in substance, new contracts, are written down at the time of replacement.
Liability adequacy tests Liability adequacy testing is performed for portfolios of contracts at each reporting date, in accordance with the Group’s manner of acquiring, servicing and measuring the profi tability of its insurance contracts. Net unearned premiums are tested to determine whether they are suffi cient to cover related expected claims, loss adjustment expenses, policyholder dividends, commission, amortization and maintenance expenses using current assumptions and considering investment returns. If a premium defi ciency is identifi ed, the DAC asset is written down by the amount of the defi ciency. If, after writing down the DAC asset to nil (for the respective portfolio of contracts), a premium defi ciency still exists, then a premium defi ciency reserve is recorded to provide for the defi ciency in excess of the DAC asset written down.
Future life policyholders’ benefi ts and policyholders’ contract deposits These represent the estimated future policyholder benefi t liability for traditional life insurance policies and for certain unit-linked contracts, respectively.
Future life policyholders’ benefi ts 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 deviation. These assumptions are locked-in at inception and are regularly assessed as part of the related liability adequacy testing over the period of the contract.
Future life policyholders’ benefi ts include the value of accumulated declared bonuses or dividends that have vested to policyholders.
For products containing guarantees in respect of minimum death benefi ts (GMDB), retirement income benefi ts (GRIB) and/or annuitization options (GAO), additional liabilities are recorded in proportion to the receipt of the contracted revenues coupled with a loss adequacy test taking into account policyholder behavior and current market conditions.
Reinsurance The Group’s insurance subsidiaries cede risk in the normal course of business in order to limit the potential for losses arising from certain exposures. Reinsurance does not relieve the originating insurer of its liability. Certain Group insurance companies assume reinsurance business incidental to their normal business, as well as from the Farmers Exchanges. Reinsurance assets include balances expected from reinsurance companies for paid and unpaid losses and loss adjustment expenses, ceded unearned premiums and ceded future life policy benefi ts. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Reinsurance is recorded gross in the consolidated balance sheet unless a legal right of offset exists.
If there is objective evidence that a reinsurance asset is impaired, the carrying amount of the asset is reduced to its recoverable amount. An impairment is considered to have taken place if it is probable that the Group will not be able to collect the amounts expected from reinsurers. The carrying amount of a reinsurance asset is reduced through the use of an allowance account, and the amount of any impairment loss is recognized in income.
Valuation techniques are used to establish the fair value of investment contracts at inception and at each subsequent reporting date.
Liabilities for investment contracts (amortized cost) Liabilities for investment contracts with fi xed and guaranteed terms are measured at amortized cost, using the effective interest rate method. Transaction costs are deducted from the initial amount and form part of the effective yield. Future assumptions, except for the effective interest rate, are reviewed as of each reporting date. Changes in the liability due to changes in future assumptions are recognized in income.
The effective interest rate method applies an interest rate (the effective interest rate) that exactly discounts the estimated future cash payments or receipts to the net carrying amount of the fi nancial liability, through the expected life of the fi nancial instrument or, when appropriate, a shorter period if the holder has the option to redeem the instrument before maturity.
d) Other revenue recognition Fees for non-claims related management services provided by FGI to the Farmers Exchanges are calculated primarily as a percentage of gross premiums earned by the Farmers Exchanges. FGI provides non-claims related management services to the Farmers Exchanges, including risk selection, preparation and mailing of policy forms and invoices, premium collection, management of the investment portfolios and certain other administrative and managerial functions. The Farmers Exchanges are directly responsible for their own claims functions, including the settlement and payment of claims and claims adjustment expenses, as well as for the payment of agent commissions and bonuses and the payment of premium and income taxes.
Revenues from investment management and distribution fees are based on contractual fee arrangements applied to assets under management and recognized as earned when the service has been provided. For practical purposes, the Group recognizes these fees on a straight-line basis over the estimated life of the contract.
Regular fees charged to the customer periodically (monthly, quarterly or annually) either directly or by making a • deduction from invested funds are billed in advance and recognized on a straight-line basis over the period in which the service is rendered. Fees charged at the end of the period are accrued as a receivable and are offset against the fi nancial liability when charged to the customer.
e) Net investment income Net investment income includes investment income earned and investment expenses incurred.
Investment expenses consist of operating expenses for real estate held for investment and other investment expenses. These expenses are recognized on an accrual basis.
f) Investments Investments include cash and cash equivalents, non-derivative fi nancial instruments, real estate held for investment, and investments in associates and joint ventures.
Financial assets at fair value through profi t or loss include fi nancial assets held for trading and those designated at fair value through profi t or loss at inception.
Loans and receivables are non-derivative fi nancial assets with fi xed or determinable payments that are not quoted in an active market other than those that the Group intends to sell in the short term or that it has designated at fair value 08_Financial_Statements_Part1_7442_Eng.indd 16108_Financial_Statements_Part1_7442_Eng.indd 161 24/2/10 20:16:5024/2/10 20:16:50
through profi t or loss or is holding as available-for-sale. Loans and receivables include loans where money is provided directly to the borrower, such as mortgage loans, policyholder loans and other loans.
Financial assets are initially recognized at fair value plus, in the case of all fi nancial assets not carried at fair value through profi t or loss, transaction costs that are directly attributable to their acquisition.
Held-to-maturity fi nancial assets Held-to-maturity fi nancial assets are subsequently carried at amortized cost using the effective interest rate method, less any charges for impairment. The amortization of premium and accretion of discount on held-to-maturity investments recognized in the current period is included in investment income.
The cumulative unrealized gains or losses recorded in shareholders’ equity are net of cumulative deferred income taxes, certain life policyholder liabilities and deferred acquisition costs. When available-for-sale fi nancial assets are sold, impaired or otherwise disposed of, the cumulative gains or losses previously recognized in shareholders’ equity are recognized in income.
Dividends on available-for-sale equity instruments are recognized in income when the Group’s right to receive payments is established. Dividends are included in the investment income line. Interest on available-for-sale debt instruments calculated using the effective interest method is recognized in the investment income line.
Other items Cash and cash equivalents are short-term highly liquid investments that are readily convertible into cash. This includes cash in hand, deposits held at call with banks, other short-term investments with original maturities of three months or less. Cash and cash equivalents also includes cash received as collateral for securities lending. Cash and cash equivalents are stated at face value.
Impairments of non-derivative financial instruments General The Group assesses at each balance sheet date whether there is objective evidence that a fi nancial asset or group of fi nancial assets is impaired. A fi nancial asset or group of fi nancial assets is impaired as a result of one or more events that have occurred after the initial recognition of the asset (a ’loss event’) and that loss event (or events) has an impact on the estimated future cash fl ows of the fi nancial asset or group of fi nancial assets that can be reliably estimated. Objective evidence that a fi nancial asset or group of assets is impaired includes observable data that comes to the attention of the Group as a result of one or more of the following events: a) signifi cant fi nancial diffi culty of the issuer or debtor; b) a breach of contract, such as a default or delinquency in payments; c) it becomes probable that the issuer or debtor will enter bankruptcy or other fi nancial reorganization; d) the disappearance of an active market for that fi nancial asset because of fi nancial diffi culties; or e) observable data indicating that there is a measurable decrease in the estimated future cash fl ows from a group of fi nancial assets since the initial recognition of those assets, although the decrease cannot yet be identifi ed with the individual fi nancial assets in that group, including: adverse changes in the payment status of issuers or debtors in that group; or•
national or local economic conditions that correlate with defaults on the assets in that group.•
Financial assets carried at fair value When a decline in the fair value of an available-for-sale equity security has been recognized directly in shareholders’ equity and there is objective evidence that the security is impaired, the cumulative loss already recognized directly in shareholders’ equity, including any portion attributable to foreign currency changes, is recognized in income. Such impairment arises when the fair value of the security is below the weighted-average cost by a signifi cant amount. Impairment thresholds are determined each quarter 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, Rest of Continental Europe, Asia Pacifi c). Additionally, the Group considers an available-for-sale equity security impaired when the fair value has been below the weighted-average cost for a prolonged period of 24 months or longer. The amount of the cumulative loss that is removed from shareholders’ equity and recognized in current period income is the difference between weighted-average acquisition cost and current fair value, less any impairment loss on that security previously recognized in income. Impairment losses recognized in income on equity securities classifi ed as available-for-sale are not reversed through income. When a previously impaired equity security increases in fair value, unrealized gains will be recognized through shareholders’ equity. Any subsequent losses, including any portion attributable to foreign currency changes, are also reclassifi ed from shareholders’ equity to income as impairments until the equity instrument is derecognized.
When a decline in the fair value of an available-for-sale debt security has been recognized directly in shareholders’ equity and there is objective evidence that the security is impaired, the cumulative loss already recognized directly in shareholders’ equity is recognized in income. Available-for-sale debt securities are evaluated for impairment if a loss event that has an impact on future cash fl ows and that can be reliably estimated has occurred. The amount of the cumulative loss that is removed from shareholders’ equity and recognized in income is the difference between the acquisition cost (net of any principal repayment and amortization) and current fair value, less any impairment loss on that debt security previously recognized in income. If the fair value of a debt instrument classifi ed as available-for-sale increases in a subsequent period, and the increase can be objectively related to an event occurring after the impairment loss was recognized in income, the impairment loss is reversed through income. This reversal would be recognized in income only up to the amount of the previously recognized impairment loss, adjusted for any amortization already recognized in income. Any subsequent gains are recognized directly in shareholders’ equity. Any subsequent losses, to the extent they do not represent impairment losses, are also recognized in shareholders’ equity.
g) Derivative financial instruments Derivative fi nancial instruments held by the Group include interest rate, currency and total return swaps, futures, forwards and option contracts, all of which derive their value mainly from changes in underlying interest rates, foreign exchange rates, commodity values or equity instruments. A derivative contract may be traded on an exchange or overthe -counter (OTC). Exchange-traded derivatives are standardized and include futures and certain option contracts. OTC derivative contracts are individually negotiated between contracting parties and include forwards, caps, fl oors and swaps. Derivative fi nancial instruments are subject to various risks similar to those related to the underlying fi nancial instruments, including market, credit and liquidity risk.
To qualify for hedge accounting, the relationship of the hedging instrument to the underlying transaction must meet several strict conditions on documentation, probability of occurrence, hedge effectiveness and reliability of measurement. If these conditions are not met, then the relationship does not qualify for hedge accounting, in which case the hedging instrument and the hedged item are reported independently 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.
substantially all the risks and rewards have not been retained or transferred, but control has been transferred.•
j) Securities lending Certain entities within the Group participate in securities lending arrangements whereby specifi c securities are loaned to other institutions, primarily banks and brokerage fi rms, for short periods of time. Under the terms of the securities lending agreements, the Group retains substantially all the risks and rewards of ownership of these loaned securities, and also retains contractual rights to cash fl ows therefrom. These securities are therefore not derecognized from the Group’s balance sheet. Cash received as collateral for loaned securities is recorded as an asset and a corresponding liability is established.
k) Repurchase and reverse repurchase transactions Securities sold under agreements to repurchase at a certain later date (Repurchase agreements) and securities purchased under agreements to resell (Reverse repurchase agreements) are generally accounted for as collateralized fi nancing transactions. The securities delivered under the repurchase agreement are not derecognized from the balance sheet, when all or substantially all of the risk and rewards are retained. The proceeds received are reported as a liability under Obligation to repurchase securities. Interest expense is charged to income using the effective interest rate method over the life of the agreement.