Reinsurers’ share of reserves for insurance contracts 11 227 – 238 Deferred policy acquisition costs 573 67 – 640 Receivables and other assets 393 290 – 683 Distribution agreement, gross of deferred tax 1,670 337 – 2,007 Present value of future profits, gross of deferred tax 309 – – 309
Liabilities for investment contracts (309) – – (309) Reserves for insurance contracts (11,775) (391) – (12,166)
Deferred tax liabilities (491) (108) – (599) Senior and subordinated debt – – (511) (511)
Divestments On January 12, 2012, the Group sold all of its shares in La Boliviana Ciacruz de Seguros y Reaseguros S.A. and Zurich Boliviana de Seguros Personales S.A. based in Bolivia, general and life insurance companies. As of December 31, 2011 these companies were classified as held for sale and the resulting loss on divestment of businesses amounted to USD 13 million.
Real estate held for investment 816 859 (331) (33) 485 825
Rental operating expenses for real estate held for investment included in investment expenses for total investments amounted to USD 194 million and USD 203 million for the years ended December 31, 2012 and 2011, respectively.
Table 6.1a in USD millions, for the years ended December 31Investment result for total investments
Investment result, gross, for Group investments 6,963 7,437 2,201 2,182 9,163 9,619 Investment expenses for Group investments (252) (252) – – (252) (252) Investment result, net, for Group investments 6,711 7,185 2,201 2,182 8,911 9,367 1 Net capital losses on derivative financial instruments attributable to cash flow hedge ineffectiveness amounted to USD 7 million and USD 13 million for the years ended December 31, 2012 and 2011, respectively.
Impairment charges on Group investments included in net capital gains/losses on investments and impairments amounted to USD 208 million and USD 458 million, including impairment charges on mortgage loans and other loans of USD 114 million and USD 133 million, for the years ended December 31, 2012 and 2011, respectively.
Real estate held for investment 310 328 (342) (79) (32) 249
Investment result, gross, for unit-linked contracts 2,344 2,367 8,431 (5,302) 10,775 (2,934) Investment expenses for unit-linked contracts (508) (610) – – (508) (610) Investment result, net, for unit-linked contracts 1,836 1,757 8,431 (5,302) 10,268 (3,544)
Table 6.1b in USD millions, for the years ended December 31Investment result for Group investments
Table 6.1c in USD millions, for the years ended December 31Investment result for unit-linked contracts
Debt securities: Fair value through profit or loss 21,047 6.3 20,605 6.6 of which: Trading securities 48 0.0 42 0.0 Securities designated at fair value through profit or loss 20,999 6.3 20,563 6.6
Debt securities: Fair value through profit or loss 8,985 4.3 8,780 4.4 of which: Trading securities 48 0.0 42 0.0 Securities designated at fair value through profit or loss 8,937 4.3 8,738 4.4
As of December 31, 2012 and 2011, respectively, debt securities with a carrying value of USD 1,550 million and USD 1,807 million have been sold to financial institutions under short-term sale and repurchase agreements. These securities continue to be recognized as investments in the Group’s consolidated balance sheets. Obligations to repurchase these securities amounted to USD 1,539 million and USD 1,794 million as of December 31, 2012 and 2011, respectively.
The analysis in table 6.4 is provided by contractual maturity. Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay certain obligations with or without call or prepayment penalties.
Debt securities Swiss federal and cantonal governments 3,925 3,104 466 511 (3) – 4,388 3,615
Other governments and supra-nationals 36,226 34,744 2,795 1,553 (350) (1,302) 38,672 34,995
Mortgage and asset-backed securities 18,838 19,713 730 939 (87) (242) 19,481 20,410 1 Net of impairments (see table 6.2).
millions of which: common stock portfolios backing participating with profit policyholder contracts 534 4.3 498 3.8 – – 534 498
Mortgage and asset- backed securities 763 6.1 857 6.5 225 214 988 1,072
Joint ventures: MCIS Zurich Insurance Berhad 43 41 5 4 40.00% 40.00%
Less amount of net unrealized gains/(losses) on investments attributable to: Life policyholder dividends and other policyholder liabilities (3,918) (1,349) Present value of future profits (523) (199) Life deferred acquisition costs and present value of future profits (48) 103 Deferred income taxes (1,385) (834) Non-controlling interests (23) 3 1 Net unrealized gains/(losses) include net gains arising on cash flow hedges of USD 238 million and USD 232 million as of December 31, 2012 and 2011, respectively. In 2012 and 2011 the Group applied the cash flow hedge methodology to hedge foreign currency risk exposure and deferred the attributable basis spreads in shareholders’ equity, whereas the fair value hedge methodology was used to hedge interest rate exposure with changes in the fair value being recorded through the income statement.
Table 6.10 in USD millions, as of December 31Net unrealized gains/(losses) on Group investments included in other comprehensive income
Table 7.1 shows the fair value and notional amounts for instruments which do not qualify for hedge accounting as of December 31, 2012 and 2011, respectively. Whilst these notional amounts express the extent of the Group’s involvement in derivative transactions, they are not, however, representative of amounts at risk. Fair values for derivative financial instruments are included in the consolidated balance sheets in receivables and other assets, and other liabilities.
Foreign exchange contracts: OTC Cross currency swaps 444 – – 444 – (45) 423 – (28)
In terms of notional amounts, the major changes compared with December 31, 2011 were an increase of interest rate swaps related to a closed book of variable annuities products within the U.S. life business and an increase of swaptions, mainly long receiver, in order to protect the German and the Irish life insurance books against falling interest rates.
Equity contracts Equity contracts are entered into, either on a portfolio and/or a macro level to protect equity investments against a decline in equity market prices or to manage the risk return profile of equity exposures. Most equity contracts are purchased put options.
The increase in the notional amount of put options between December 31, 2012 and December 31, 2011 was mainly driven by two new hedges to reduce the equity risk and to protect the Group against the tail risk related to the euro debt crisis. Total return swaps and exchange traded options relating to the dynamic hedging strategy that has been put in place to reduce the volatility associated with a closed book of variable annuities products within its U.S. life business.
Almost all positions are for hedging purposes. With respect to the short positions, call options are used in collar structures to mitigate the hedging costs for some life portfolios and the written put positions are part of the dynamic hedge or are fully backed by long put positions and relate only to legacy positions.
Foreign exchange contracts Foreign exchange contracts are cross currency swaps and forward contracts which are used to hedge the Group’s foreign currency exposures and to manage balance sheet mismatches. As of December 31, 2012 there was no open forward option position.
Credit contracts As of December 31, 2012, there were no open positions for this product class, mainly as a result of matured positions.
Other contracts Other contracts predominantly include stable value products (SVPs), which are designed to amortize on a quarterly basis investment gains and losses of the investment portfolios underlying certain life insurance policies, which are owned by banks (Bank Owned Life Insurance or BOLI) and other companies (Company Owned Life Insurance or COLI). Premiums received from policyholders under these policies are invested in separate account portfolios. Throughout the life of the policies, policyholders are entitled, in addition to mortality cover, to the tax-exempt investment returns of such separate account portfolios. The policies are long duration contracts providing charges and benefits over a policy life that can be greater than 45 years. When SVPs form part of these investment portfolios, they reduce the volatility of the policyholders’ investment returns. In the event that a policy is surrendered which has a positive SVP value, the policyholder would be entitled to recover such SVP value as well as the market value of the underlying investments. Certain policy features as well as the applicable tax regulations provide disincentives for surrender. The Group monitors the risk of surrender on an ongoing basis and considers the likelihood of surrender as an input factor to the model to determine the fair value of the SVPs. During 2012, there were no surrenders compared with two policy surrenders in 2011. The fair value of the derivative liability recognized in respect of the SVPs, was nil and USD 52 million as of December 31, 2012 and 2011, respectively. The notional SVP derived value was USD 93 million and USD 523 million as of December 31, 2012 and 2011, respectively, representing the total loss before surrender charges in the unlikely event that all policies would have been surrendered on those dates.
Fair value hedges: Cross currency interest rate swaps 672 858 – 1,530 252 – 1,518 269 –
Interest rate swaps – – 1,097 1,097 37 – – – –
Cash flow hedges: Options on interest rate swaps – 923 2,284 3,207 438 – 3,130 414 –
Net investment hedges: Forwards 273 – – 273 – (2) – – – Total net investment hedges 273 – – 273 – (2) – – –
A fair value hedge relationship on 20 percent of the EUR 1.0 billion 4.5 percent senior note due for repayment in 2014 issued by Zurich Finance (USA), Inc. (see note 21), was entered into on January 1, 2007 and will end on the maturity of the underlying debt instrument in 2014.
A fair value hedge relationship on the EUR 500 million 3.375 percent senior note due for repayment in June 2022 issued by Zurich Insurance Company Ltd (see note 21), was entered into on June 27, 2012 and will end on the maturity of the underlying debt instrument in 2022.
Table 7.3 sets out gains and losses arising from fair value hedges: Gains/(losses) on hedging instruments 1 20 (6) on hedged items attributable to the hedged risk (30) –
The net gains deferred in other comprehensive income on derivative financial instruments designated as cash flow hedges were USD 4 million and USD 245 million before tax for the years ended December 31, 2012 and 2011, respectively.
Fin an cial info rm atio n 8. Reserves for insurance contracts and reinsurers’ share of reserves for insurance contracts
Reserves for losses and loss adjustment expenses 69,986 67,762 (12,601) (12,421) 57,385 55,341
1 The 2012 net movement includes a transfer of USD 1,224 million from policyholders’ contract deposits and other funds, partially offset by USD (235) million relating to a reinsurance agreement which transfers the benefits and risks of some of the Group’s general insurance portfolio to RiverStone Insurance (UK) Limited, and by USD (33) million transferred to future life policyholders’ benefits (see note 1). The 2011 net movement relates mainly to acquisitions/divestments (see note 5).
The increase of USD 2,044 million during the year ended December 31, 2012 in net reserves for losses and loss adjustment expenses is mostly driven by the reclassification of USD 1,224 million transferred from policyholders’ contract deposits and other funds to reserves for losses and loss adjustment expenses (see note 1), and the foreign currency impact of USD 693 million. Additionally, USD 571 million of favorable reserve development emerged from reserves established in prior years. Gross of reinsurance, the favorable development was USD 676 million. This favorable development was primarily attributable to the General Insurance business segment and mainly relates to the following movements by market-facing business, country and line of business: Table 8.1 in USD millions, as of December 31Reserves for insurance contracts
Gross reserves for losses and loss adjustment expenses 51,068 57,765 60,425 64,535 67,890 65,218 68,126 68,274 67,762 69,986
Cumulative (deficiency)/ redundancy of net reserves (6,662) (2,686) 841 3,279 3,580 3,176 2,700 1,819 571 Cumulative (deficiency)/ redundancy as a percentage of initial net reserves (18.0%) (6.2%) 1.8% 6.5% 6.5% 6.0% 4.8% 3.2% 1.0%
Losses and loss adjustment expenses incurred 67 79 36 – Losses and loss adjustment expenses paid (67) (55) (41) (25) Acquisitions/(divestments) and transfers 1 – (21) – – Foreign currency translation effects 1 – 1 –
Reserves for asbestos claims increased by USD 49 million gross but decreased USD 89 million net during 2012. During 2011, the gross reserve decreased by USD 125 million but increased USD 4 million on a net basis. As a significant portion of the Group’s reserves are held in British pounds, there was an increase in gross and net reserves reported for 2012 due to the strengthening of the currency compared with the U.S. dollar. Without this effect, the total gross reserve would also have decreased. In addition, in 2012, following an in-depth review of asbestos, pollution and health (APH) book of business in the U.S., gross and net reserves were strengthened. Despite these increases, the total net reserves have decreased due to a reinsurance agreement which transfers the benefits and risks of some of the Group’s APH portfolio to RiverStone Insurance (UK) Limited, prior to a portfolio sale until regulatory clearance is obtained.
Reserves for environmental claims increased by USD 2 million gross and USD 4 million net, but decreased by USD 4 million gross and by USD 25 million net during the years ended December 31, 2012 and 2011, respectively.
While the Group believes that it has made adequate provision for these claims, it is possible that future adverse development could have a material effect on the Group’s results of operations, cash flows and financial position. The net reserve amounts relating to such claims are not discounted for the time value of money.
The net impact of changes in assumptions on net future life policyholders’ benefits was USD 8 million and USD 400 million for the years ended December 31, 2012 and 2011, respectively. The net changes are shown in table 8.6.
Fee income and other expenses (230) (344) (60) 7 (290) (337) Interest and bonuses credited to policyholders 708 628 (81) (79) 627 549 Change in assumptions – 91 – – – 91
(Decrease)/increase recorded in other comprehensive income 2,313 477 – – 2,313 477 1 The 2012 net movement includes USD (1,224) million transferred to loss reserves and loss adjustment expenses and USD (66) million transferred to future life policyholders’ benefits (see note 1). The 2011 net movement includes USD 266 million from the acquisition of ZIMB and USD 107 million from Zurich Santander (see note 5).
Table 8.7 in USD millions, as of December 31Policyholders’ contract deposits and other funds gross
Liabilities related to unit-linked investment contracts 50,923 44,220 Liabilities related to investment contracts (amortized cost) 1,305 1,131 Liabilities related to investment contracts with DPF 5,903 5,607
Increase/(decrease) recorded in other comprehensive income 4 (6) Foreign currency translation effects 1,991 (723) As of December 31 58,131 50,958 1 The 2012 movement includes USD (151) million transferred to reserves for unit-linked contracts (see note 1). The 2011 movement includes USD 309 million from Zurich Santander (see note 5), USD 140 million transferred from reserves for unit-linked contracts, USD 246 million transferred from other liabilities, USD 135 million transferred from non-technical provisions and USD 27 million transferred from future life policyholders’ benefits (see note 1 of the Consolidated financial statements 2011).
Certain investment and insurance contracts sold by the Group contain benefit features for which the amount and timing of declaration and payment are at the discretion of the Group. Where that discretion has not been exercised, the total amount of undeclared funds surplus is included in other comprehensive income. Mandated allocations related to unrealized results and earnings are included in policyholder liabilities and, upon declaration, discretionary bonuses are allocated to policyholders. The changes in table 10 represent the increase or decrease in unallocated gains and retained earnings after charging discretionary bonuses to policyholder liabilities.
Table 10 in USD millionsDevelopment of the equity component relating to contracts with DPF
Losses and loss adjustment expenses 26,936 26,873 (3,168) (4,408) 23,769 22,465 Life insurance death and other benefits 10,334 11,259 (351) (644) 9,983 10,615 Total insurance benefits and losses 37,271 38,132 (3,519) (5,052) 33,752 33,080
Table 11.3 in USD millions, for the years ended December 31Underwriting and policy acquisition costs
As of December 31, 2012 and 2011, deferred policy acquisition costs related to non-controlling interests were USD 572 million and USD 499 million, respectively.
Fin an cial info rm atio n 13. Administrative and other operating expense
Wages and salaries 3,330 3,276 Other employee benefits 706 565 Amortization and impairments of intangible assets 874 805 Depreciation and impairments of property and equipment 210 191 Rent, leasing and maintenance 431 453 Marketing costs 212 209 Life recurring commission 365 386 Asset and other non-income taxes 131 58 IT costs 845 804 Litigation and settlement costs 97 77 Restructuring costs 210 222 Foreign currency translation (53) (157)
Table 13 reflects the costs by nature after allocation of certain costs, in particular wages and salaries as well as other employee benefits, on a functional basis.
Table 13 in USD millions, for the years ended December 31Administrative and other operating expense
As part of the Deutscher Herold transaction in 2002, the Group acquired various mortgage loans. In 2012 the remaining mortgage loans were redeemed in line with the original contract terms.
Undiscounted cash flows 2 1 Allocation to the time bands is based on the expected maturity date. 2 Based on the earliest contractual maturity.
Fin an cial info rm atio n 16. Property and equipment
Net carrying value as of January 1, 2012 325 709 152 95 299 1,580
Net carrying value as of December 31, 2012 313 682 158 79 299 1,530
Net carrying value as of December 31, 2011 325 709 152 95 299 1,580
The fire insurance value of the Group’s own-use property and equipment totaled USD 3,036 million and USD 2,917 million as of December 31, 2012 and 2011, respectively.
Net carrying value as of January 1, 2012 2,060 1,184 4,132 1,025 1,616 104 10,121
Net carrying value as of December 31, 2012 2,107 844 3,815 1,025 1,670 94 9,555
As of December 31, 2012, intangible assets relating to non-controlling interests were USD 201 million for the present value of future profits (PVFP) of acquired insurance contracts, USD 1,789 million for distribution agreements and USD 11 million for software.
Gross carrying value as of January 1, 2011 2,241 2,528 2,607 1,025 3,967 195 12,563
Divestments and transfers 1 (12) – – – – – (12)
Amortization charged to other comprehensive income – 82 – – – – 82
Net carrying value as of December 31, 2011 2,060 1,184 4,132 1,025 1,616 104 10,121
Gross carrying value as of December 31, 2011 2,186 2,824 4,562 1,025 4,210 190 14,997 1 The reduction in Goodwill is mainly a result of a revised earn-out calculation within one of the Group’s Spanish General Insurance operations and the classification as held for sale of the Group’s operation in Bolivia.
As of December 31, 2011, intangible assets related to non-controlling interests were USD 277 million for the present value of future profits (PVFP) of acquired insurance contracts, USD 1,950 million for distribution agreements and USD 5 million for software.
Additions to goodwill of USD 33 million related to the acquisition of Compagnie Libanaise d’Assurances SAL. The acquisition of several smaller companies generated a further USD 12 million of goodwill and earn-out payments to Deutsche Bank Group for the acquisition of Zurich Life and Pensions S.p.A. Italy (formerly DWS Vita S.p.A.) increased goodwill by USD 6 million.
The decision to decentralize its direct insurance efforts in the Group’s General Insurance operations in Switzerland and Spain was the main driver of software impairments, resulting in USD 85 million charge for software which will no longer be used.
Financial assets Derivative assets 1,813 2,126 Receivables from policyholders 3,514 3,365 Receivables from insurance companies, agents and intermediaries 5,884 5,539 Receivables arising from ceded reinsurance 1,117 1,187 Reverse repurchase agreements 988 814 Amounts due from investment brokers 493 321 Other receivables 1,973 2,032 Allowance for impairments 1 (327) (320) Other assets 135 134 Non-financial assets Current tax receivables 1,198 825 Accrued premiums 688 684 Prepaid expenses 275 286 Prepaid insurance benefits 333 432 Other assets 340 404 Total receivables and other assets 18,423 17,828 1 Allowance for impairments includes USD 79 million and USD 81 million as of December 31, 2012 and 2011, respectively, for receivables arising from ceded reinsurance.
Table 18 in USD millions, as of December 31Receivables and other assets
Table 19.2 shows the maturity schedule of other financial liabilities as of December 31, 2012 and 2011, respectively.
Undiscounted cash flows 3 1 Excluding liabilities for defined benefit plans. 2 Allocation to the time bands is based on the expected maturity date. 3 Based on the earliest contractual maturity.
As of January 1 254 155 Provisions made during the period 174 179 Increase of provisions set up in prior years 43 45 Provisions used during the period (170) (112) Provisions reversed during the period (6) (2) Foreign currency translation effects 5 (11) As of December 31 297 254
During the year ended December 31, 2011, the Group initiated several restructuring programs, recording a total charge to income of USD 179 million. A further USD 45 million was recorded in respect of restructuring programs initiated in prior years. The main restructuring program impacted several European countries within the General Insurance operations with estimated costs of USD 112 million. In addition, the Group recorded USD 85 million of software impairments as outlined in note 17.
As of January 1 (2,493) (2,415) Net change recognized in the income statement (463) 136 Net change recognized in equity (409) 376 Net changes due to acquisitions/(divestments) 44 (618) Foreign currency translation effects (63) 28 As of December 31 (3,384) (2,493)
Net deferred tax liabilities attributable to policyholders (321) (154) Net deferred tax liabilities attributable to shareholders (3,063) (2,339) Net deferred tax liabilities (3,384) (2,493)
Table 20.7 in USD millions, as of December 31Deferred taxes – policyholder/ shareholder attribution
Tax loss carryforwards 484 – 617 – Gross deferred tax assets/(liabilities) before valuation allowance 3,514 (1,549) 3,851 (1,662) Valuation allowance (112) – (113) – Gross deferred tax assets/(liabilities) after valuation allowance 3,403 (1,549) 3,738 (1,662) Deferred tax assets 1,854 2,076
Deferred acquisition and origination costs 89 (2,662) 60 (2,565) Depreciable and amortizable assets 247 (2,585) 287 (2,620) Life policyholders’ benefits and deposits 1 1,162 (961) 956 (777) Unrealized (gains)/losses on available-for-sale investments and cash flow hedges 209 (1,364) 303 (1,075) Accruals and deferred income 116 (94) 109 (169) Reserves for losses and loss adjustment expenses 149 (82) 142 (243) Reserves for unearned premiums 50 (72) 47 (64) Deferred front-end fees 616 – 634 – Pensions and other employee benefits 482 (40) 457 (37)
Tax loss carryforwards 127 – 203 – Gross deferred tax assets/(liabilities) before valuation allowance 3,992 (9,218) 4,121 (8,678) Valuation allowance (12) – (12) – Gross deferred tax assets/(liabilities) after valuation allowance 3,980 (9,218) 4,109 (8,678) Deferred tax liabilities (5,238) (4,569)
As of December 31, 2012 and 2011, the aggregate amount of temporary differences associated with investments in subsidiaries, branches and associates and interests in joint ventures, for which deferred tax liabilities have not been recognized amount to approximately USD 22 billion and USD 21 billion, respectively. In the remote scenario in which these temporary differences were to reverse simultaneously, the resulting tax liabilities would be very limited due to participation exemption rules.
Table 20.8 in USD millions, as of December 31Deferred tax assets/(liabilities) analysis by source
For which deferred tax assets have not been recognized, expiring 5 to 20 years 102 169 > 20 years or with no time limitation 629 598
Table 20.9 in USD millions, as of December 31Tax losses carryforwards and tax credits
Zurich Insurance Group Annual Report 2012 233Consolidated financial statements 21. Senior and subordinated debt
Senior debt Zurich Insurance Company Ltd 3.75% CHF 500 million notes, due September 2013 6 545 531 2.25% CHF 500 million notes, due July 2017 6 543 529 2.875% CHF 250 million notes, due July 2021 6 269 262 2.375% CHF 525 million notes, due November 2018 6 568 553 1.50% CHF 400 million notes, due June 2019 5,6,7 440 – 3.375% EUR 500 million notes, due June 2022 5,6,7 682 – Zurich Finance (Luxembourg) S.A. 3.25% USD 750 million notes, due September 2013 5,6,7 757 764 Zurich Finance (USA), Inc. 4.50% EUR 1 billion notes, due September 2014 2,6,7 1,333 1,312 4.875% EUR 800 million notes, due April 2012 1,6 – 1,037 6.50% EUR 600 million notes, due October 2015 3,6,7 790 776 Euro Commercial Paper Notes 400 400 Zurich Santander Insurance America S.L. 7.5% EUR 167 million loan, due December 2035 220 236 Other Various debt instruments payable in more than 1 year 113 141 Senior debt 6,660 6,541 Subordinated debt Zurich Insurance Company Ltd 12.0% EUR 143 million perpetual capital notes 6 188 184 7.5% EUR 425 million notes, due July 2039 6 557 547 8.25% USD 500 million perpetual capital notes 6 495 – Zurich Finance (UK) plc 6.625% GBP 450 million perpetual notes 4,6 723 690 Zurich Finance (USA), Inc. 5.75% EUR 500 million notes, due October 2023 1,6 652 641 4.5% EUR 500 million notes, due June 2025 5,6,7 705 688
ZFS Finance (USA) Trust IV Series IV 5.875% USD 500 million Trust Preferred Securities, due May 2062 – 250
ZFS Finance (USA) Trust V Series V 6.5% USD 1 billion Trust Preferred Securities, due May 2067 498 497
Other Various debt instruments payable in more than 1 year 73 44 Subordinated debt 5,861 5,476 Total senior and subordinated debt 12,521 12,017 1 The bond is economically hedged, but hedge accounting treatment has not been applied. 2 The bond is part of a qualifying cash flow hedge (80 percent of the total) and fair value hedge (20 percent of the total). 3 The bond is part of a qualifying cash flow hedge (100 percent).
(USA) Trusts IV and V, are called before 2042 and 2047 respectively, the Group will issue a replacement debt instrument with terms and provisions that are as or more equity-like than the replaced notes.
5 These bonds are part of qualifying fair value hedges (100 percent). 6 Issued under the Group’s Euro Medium Term Note Programme (EMTN Programme). 7 The Group applied the cash flow hedge methodology to hedge the foreign currency exposure and deferred the attributable basis spreads in shareholders’ equity, whereas the fair value hedge methodology was used to hedge the interest rate exposure with changes in the fair value being recorded through the income statement.
None of the debt instruments listed in table 21.1 were in default as of December 31, 2012 or 2011.
The increase is mainly the result of 8.25% USD 500 million perpetual capital notes issued in January 2012 by Zurich Insurance Company Ltd under its EMTN Programme and the translation effects of the U.S. dollar against the currencies in which the notes were issued. This was partially offset by the early redemption of the remaining USD 250 million of 5.875% USD 500 million Series IV Fixed/Floating Trust Preferred Securities issued by ZFS Finance (USA) Trust IV in 2007, which were called in June 2012.
Collateralized loans Senior debt Subordinated debt Total 1 Operational senior debt includes USD 750 million in senior debt issued under the EMTN Programme by Zurich Finance (Luxembourg) S.A. in September 2009, which was loaned directly to the Group’s banking activities. This issue has been recognized as operational debt by Moody’s but not by Standard & Poor’s.
4.25% CHF 700 million, perpetual notes 4.25% payable annually up to May 26, 2016 and then reset quarterly to 3-month CHF-Libor plus 3.046%.
8.25% USD 500 million, perpetual capital notes 8.25% per annum payable quarterly until January 18, 2018. Resets to the 6-Year USD mid swap rate plus 6.84% until January 18, 2024. Resets thereafter every 6 years to the 6-Year USD mid swap rate plus 7.84%.
Rate, subject to a maximum under (ii) and (iii) of 13% for Series II.
Interest expense on debt amounted to USD 570 million and USD 586 as of December 31, 2012 and 2011, respectively. The lower interest expense on senior debt was mainly due to the maturity of the 4.875% EUR 800 million notes in April 2012 as well as the positive impact of refinancing the 3.875% CHF 1 billion notes in July 2011 and the 3.5% CHF 300 million notes in November 2011 at lower rates. This reduction was partially offset by the 7.5% EUR 167 million senior loan to support the Group’s business in Latin America and the issuance of two new senior notes under the EMTN Programme in June 2012. By contrast interest expense on subordinated debt increased mainly as a result of the issuance of two new subordinated notes in March 2011 and January 2012, partially offset by the early redemption in June 2012 of the remaining USD 250 million of 5.875% USD 500 million Series IV Fixed/Floating Trust Preferred Securities.
Credit facilities On December 4, 2012 the Group amended the revolving credit facility agreement dated October 31, 2011 and redenominated the total amount of EUR 2.5 billion maturing in 2018 at the latest into USD 3.2 billion. Farmers Group, Inc. and its subsidiaries ceased to be a borrower and a guarantor under the facility and Zurich Insurance Company Ltd assumed this additional borrowing capacity and became the exclusive guarantor of the total amount of USD 3.2 billion.
Table 21.4 in USD millions, as of December 31Maturity schedule of outstanding debt
Zurich Insurance Group Annual Report 2012 237Consolidated financial statements 22. Shareholders’ equity
Authorized, contingent and issued share capital As of December 31, 2011 17,129,526 171,295,259 0.10 a) Issued share capital The issued share capital of Zurich Insurance Group Ltd as of December 31, 2012 amounts to CHF 14,830,012.30 divided into 148,300,123 fully paid registered shares with a nominal value of CHF 0.10 each.
b) Authorized share capital Until March 29, 2014, the Board of Directors of Zurich Insurance Group Ltd is authorized to increase the share capital by an amount not exceeding CHF 1,000,000 by issuing up to 10,000,000 fully paid registered shares with a nominal value of CHF 0.10 each. An increase in partial amounts is permitted. The Board of Directors would determine the date of issue of any such new shares, the issue price, type of payment, conditions for exercising pre-emptive rights, and the commencement of entitlement to dividends.
The Board of Directors is further authorized to restrict or withdraw the pre-emptive rights of shareholders and to allocate them to third parties if the shares are to be used for the take-over of an enterprise, or parts of an enterprise or of participations or if issuing shares for the financing including re-financing of such transactions, or for the purpose of expanding the scope of shareholders in connection with the quotation of shares on foreign stock exchanges.
c) Contingent share capital Capital market instruments and option rights to shareholders The share capital of Zurich Insurance Group Ltd may be increased by an amount not exceeding CHF 1,000,000 by the issuance of up to 10,000,000 fully paid registered shares with a nominal value of CHF 0.10 each (i) by exercising conversion and/or option rights which are granted in connection with the issuance of bonds or similar debt instruments by Zurich Insurance Group Ltd or one of its Group companies in national or international capital markets; and/or (ii) by exercising option rights which are granted to current shareholders. When issuing bonds or similar debt instruments connected with conversion and/or option rights, the pre-emptive rights of the shareholders will be excluded. The current owners of conversion and/or option rights shall be entitled to subscribe for the new shares. The conversion and/or option conditions are to be determined by the Board of Directors.
Employee participation During 2012 and 2011, 914,301 shares and 798,926 shares, respectively, were issued to employees from contingent share capital under the program described above. As a result, on December 31, 2012 and 2011, respectively, the remaining contingent share capital, which can be issued to employees of Zurich Insurance Group Ltd and its subsidiaries, amounted to CHF 299,514 and CHF 390,944 or 2,995,136 and 3,909,437 fully paid registered shares, respectively, with a nominal value of CHF 0.10 each. Pre-emptive rights of the shareholders, as well as the right for advance subscription, are excluded. The issuance of shares or respective option rights to employees is subject to one or more regulations to be issued by the Board of Directors and takes into account performance, functions, levels of responsibility and criteria of profitability. Shares or option rights may be issued to employees at a price lower than that quoted on the stock exchange.
Basic earnings per share is computed by dividing net income attributable to common shareholders by the weighted average number of shares outstanding for the year, excluding the weighted average number of shares held as treasury shares and preferred securities. Diluted earnings per share reflects the effect of potentially dilutive shares.
Most of the Group’s defined benefit pension plans are funded through contributions by the Group, and in some cases the employee, to trusts or foundations independent of the Group’s finances. In these cases, the annual funding requirements are determined in accordance with local funding and actuarial cost methods. Where plans are not funded, a liability for the accrued pension obligations is recognized in the Group’s consolidated balance sheets.
Other defined post-employment benefits Certain of the Group’s operating companies provide post-employment benefit programs covering medical care and/or life insurance. Eligibility for the various plans is generally based on completion of a specified period of eligible service and reaching a specified age. The programs typically pay a stated percentage of medical expenses subject to deductibles and other factors. The cost of post-employment benefits is accrued during the employees’ service periods. The method of accounting and the frequency of valuations are similar to those for defined benefit pension plans.
Unrecognized past service cost – (1) (1) – (1) – – – – – Cumulative impact of asset ceiling – (3) (3) (15) (7) – – – – –
Table 23.2 in USD millions, as of December 31Status of unfunded defined benefit plans
Actuarial gain/(loss) included in other comprehensive income (1,083) (1,894) (3) (4)
Employer contributions paid directly to meet benefits 30 – 21 –
Table 23.6 in USD millionsMovement in funded and unfunded defined benefit plan obligation
Fair value of plan assets as of January 1 14,902 13,791 – – Expected return on plan assets 608 756 – – Actuarial gain/(loss) included in other comprehensive income 611 560 – –
Effect of curtailments or settlements (211) – – – Foreign currency translation effects 483 (105) – – Fair value of plan assets as of December 31 16,268 14,902 – –
The actual returns on defined benefit pension plan assets for the years ended December 31, 2012 and 2011 were gains of USD 1,219 million and USD 1,316 million, respectively.
Actuarial gain/(loss) as of January 1 (4,200) (2,914) (2,672) (2,907) (1,308) Experience adjustments on plan liabilities (212) (190) 205 (37) (147) Experience adjustments on plan assets 611 560 388 318 (1,485) Changes due to discount rate assumptions (1,452) (1,602) (742) (103) 223 Changes due to other actuarial assumptions 577 (105) (65) 144 (392)
Expected long-term rate of return on assets 2.6% 4.6% 4.7% 4.3% 3.4% 6.2% 6.4% 4.5%
Current average life expectancy for a 65 year old male 21.2 22.9 19.5 18.6 21.1 22.9 19.6 18.4
The expected long-term rate of return on assets was derived separately for each of the Group’s funded benefit plans. Each major asset class is assigned an expected long-term rate of return, net of investment expenses, appropriate for the environment in which that plan is invested. The overall expected long-term rate of return on assets for a plan is calculated as the weighted average of the expected return for each asset class, weighted by the plan’s target allocation to each asset class.
a) Cash incentive plans Various businesses throughout the Group operate short-term incentive programs for executives, management and, in some cases, for employees of that business. Awards are made in cash, based on the accomplishment of both organizational and individual performance objectives. The expense recognized for these cash incentive plans amounted to USD 490 million and USD 487 million for the years ended December 31, 2012 and 2011, respectively.
The explanations below provide a more detailed overview of the main plans of the Group.
Share Incentive Plan for employees in Switzerland Under this plan, employees have the option to acquire sales-restricted shares at a 30 percent discount to the market value. The maximum permitted investment in shares is equivalent to CHF 3,500 per employee per annum. During 2012, 4,894 employees were eligible to participate in the share incentive plan for employees in Switzerland compared with 5,448 in 2011. For the years ended December 31, 2012 and 2011, 1,385 and 1,084 employees, respectively, purchased shares under the 2011 and 2010 share plan.
Shares granted during the period 549,831 537,955 226 244 Options granted during the period 1 – – – –
Table 24.5 for the years ended December 31Options and shares during the period
Commitments under lease agreements The Group has entered into various operating leases as lessee for office space and certain computer and other equipment. Lease expenses totaled USD 102 million and USD 141 million for the years ended December 31, 2012 and 2011, respectively.
Table 25.1 in USD millions, as of December 31Quantifiable commitments and contingencies
Indemnity agreements The Group, through certain of its subsidiaries, has agreed to arrangements that cap Converium’s (now Scor Holding (Switzerland) AG) and its successor companies’ net exposure for losses arising out of the September 11, 2001 World Trade Center event in New York. As of December 31, 2012 the Group has recorded provisions of USD 44 million, for losses in excess of USD 289 million.
Pledged assets The majority of assets pledged to secure the Group’s liabilities relate to debt securities pledged under short-term sale and repurchase agreements. The total amount of pledged financial assets including the securities under short-term sale and repurchase agreements amounted to USD 9,445 million and USD 8,147 million as of December 31, 2012 and 2011, respectively.
An action entitled Fuller-Austin Asbestos Settlement Trust, et al. v. Zurich American Insurance Company (ZAIC), et al., was filed in May 2004 in the Superior Court for San Francisco County, California. Three other similar actions were filed in 2004 and 2005 and have been coordinated with the Fuller-Austin action (collectively, the Fuller-Austin Case). In addition to ZAIC and four of its insurance company subsidiaries, Zurich Insurance Company Ltd and Orange Stone Reinsurance Dublin (Orange Stone) are named as defendants. The plaintiffs, who are historical policyholders of the Home Insurance Company (Home), plead claims for, inter alia, fraudulent transfer, tortious interference, unfair business practices, alter ego and agency liability relating to the recapitalization of Home, which occurred in 1995 following regulatory review and approval. The plaintiffs allege that pursuant to the recapitalization and subsequent transactions, various Zurich entities took assets of Home without giving adequate consideration in return, and contend that this
Consolidated financial statements continued forced Home into liquidation. The plaintiffs further allege that the defendants should be held responsible for Home’s alleged obligations under their Home policies. The trial judge designated the plaintiffs’ claims for constructive fraudulent transfer for adjudication before all other claims; he subsequently ordered an initial bench trial on certain threshold elements of those fraudulent transfer claims and on certain of defendants’ affirmative defenses. The trial commenced on November 1, 2010. Closing arguments were heard on February 22 and 23, 2012, and a decision is pending. The Group maintains that the Fuller-Austin Case is without merit and intends to continue to defend itself vigorously.
Total securities at FV through profit or loss 12,530 13,224 12,530 13,224
Table 26.1a in USD millions, as of December 31Fair value (FV) and carrying value of financial assets and financial liabilities – Group investments and other Non-unit-linked
Level 1 – this category includes financial assets for which fair values are determined based on quoted prices (unadjusted) in active markets for identical instruments. A market is considered active only if transactions take place with sufficient frequency and volume to provide pricing information on an ongoing basis. The Group has classified under level 1 the majority of common stocks, government bonds and certain corporate bonds and investments in unit trusts that are traded in very liquid markets.
Level 2 – this category includes financial assets and liabilities for which fair values are determined using valuation techniques with all significant inputs based on observable market data. Depending on the nature of the instruments and the market in which they are traded, examples of observable market data may include quoted prices, broker quotes, interest rates, yield curves etc. The Group has classified under level 2 the majority of corporate bonds, investments in unit trusts, agency-backed and senior tranches of asset-backed securities, and OTC derivative financial instruments. While markets for these instruments do not meet the strict requirements to be classified as active, they offer sufficient transaction volumes and, therefore, observable market data to enable the Group to determine their fair value. The Group has also classified under level 2 liabilities related to unit-linked investment contracts.
Total available-for-sale securities 43,392 91,772 3,239 138,402 Securities at FV through profit or loss Trading
Table 26.2b in USD millions, as of December 31, 2011Fair value hierarchy – prior period
Transfers out of Level 3 (261) (4) – (42) – – –
Transfers out of Level 3 (40) (1,566) – – – (27) –
During the year ended December 31, 2011, the Group transferred USD 1.6 billion of equity securities from Level 3 to Level 1. The transfer arose because the investment in New China Life Insurance Company Ltd was listed on the Hong Kong Stock Exchange on December 15, 2011.
Table 26.3b in USD millionsDevelopment of financial instruments classified under level 3 – prior period
Sensitivity of fair values reported for level 3 instruments to changes in key assumptions As of December 31, 2012 and 2011 under level 3, the Group classified asset-backed securities (ABSs) amounting to USD 2.8 billion and USD 2.5 billion, respectively. These ABSs include non-agency backed securities for which the limited market activity observable during the year required the Group’s external pricing providers to make certain internal valuation assumptions. To determine the fair value of these investments, pricing providers use valuation models that are based on an expected present value technique.
The key assumptions driving the valuation of these investments include discount margins and rates for prepayment, recovery and default. The effect on reported fair values of using reasonably possible alternative values for each of these assumptions, while the other key assumptions remain unchanged, is disclosed in tables 26.4a and 26.4b. While these tables illustrate the overall effect of changing the values of the unobservable inputs by a set percentage, the significance of the impact and the range of reasonably possible alternative assumptions, may differ significantly between investments, given their different terms and circumstances.
As of December 31, 2012 and 2011, under level 3 the Group also classified investments in hedge funds and private equity funds amounting to USD 2.0 billion and USD 1.9 billion, respectively. These investments are valued based on regular reports from the issuing funds and fair values are reviewed by a team of in-house investment professionals and may be adjusted based on their understanding of the circumstances of individual investments. Investments in hedge funds and private equity funds have not been included in the sensitivity analysis due to the large number of valuation assumptions that while, in total, have a significant effect on the fair value of these investments, when considered individually, the impact of changing them to reasonably possible alternative values would not be significant.
Table 26.4a as of December 31, 2012Sensitivity analysis of Level 3 ABSs to changes in key assumptions – current period
Total investments at FV through profit or loss 46,589 71,066 2,829 120,484
Table 26.5b in USD millions, as of December 31, 2011Fair value hierarchy – prior period
Sales / redemptions (21) (329) Transfers into level 3 – 1 Transfers out of level 3 – (4) Foreign currency translation effects – (5)
Table 26.6a in USD millionsDevelopment of financial assets classified under level 3 – current period
In the normal course of business, the Group enters into various transactions with related companies, including various reinsurance and cost-sharing arrangements. These transactions are not considered material to the Group, either individually or in aggregate. Parties are considered to be related if one party has the ability to control or exercise significant influence over the other party in making financial or operational decisions.
Table 27.1 sets out related party transactions with equity method accounted investments, reflected in the consolidated income statements and consolidated balance sheets.
for the years ended December 31, 2012 2011 Net earned premiums and policy fees 13 28 Net investment result on Group investments 18 15 Insurance benefits and losses, net of reinsurance (9) (4) Underwriting and policy acquisition costs, net of reinsurance (1) (2) Administrative and other operating expense (2) (2)
as of December 31, 2012 2011 Other loans 18 21 Deposits made under assumed reinsurance contracts 4 5 Receivables and other assets 5 7 Reserves for insurance contracts (11) (11) Other liabilities (1) (3)
Table 27.2 summarizes related party transactions with key personnel reflected in the Consolidated financial statements. Key personnel includes members of the Board of Directors of Zurich Insurance Group Ltd and Zurich Insurance Company Ltd and members of the Group Executive Committee.
Remuneration of key personnel of the Group Cash compensation, current benefits and fees 31 33 Post-employment benefits 3 3 Share-based compensation 14 19 Total remuneration of key personnel 48 55
As of December 31, 2012 and 2011 there were no loans, advances or credits outstanding from members of the Group Executive Committee. Outstanding loans and guarantees granted to members of the Board of Directors amounted to USD 3 million for both the years ended December 31, 2012 and December 31, 2011. The terms “members of the Board of Directors” and “members of the Group Executive Committee” in this context include the individual as well as members of their respective households. The figures in table 27.2 include the fees paid to members of the Board of Directors of Zurich Insurance Group Ltd and Zurich Insurance Company Ltd, which were USD 5 million for both the years ended December 31, 2012 and December 31, 2011.
No provision for non-repayment has been required in 2012 and 2011 for the loans or guarantees made to members of the Group Executive Committee.
Farmers Group, Inc. and its subsidiaries (FGI) provide certain non-claims related management services to the Farmers Exchanges, which are managed but not owned by Farmers Group, Inc. a wholly owned subsidiary of the Group. The finances and operations of the Farmers Exchanges are governed by independent Boards of Governors. In addition, the Group has the following relationships with the Farmers Exchanges.
a) Certificates of contribution issued by the Farmers Exchanges As of December 31, 2012 and 2011, FGI and other Group companies held the following certificates of contribution issued by the Farmers Exchanges. Originally these were purchased by FGI in order to supplement the policyholders’ surplus of the Farmers Exchanges.
Conditions governing payment of interest and repayment of principal are outlined in the certificates of contribution. Generally, repayment of principal may be made only when the issuer has an appropriate amount of surplus, and then only after approval is granted by the issuer’s governing board and the appropriate state insurance regulatory department in the U.S. In addition, payment of interest may generally be made only when the issuer has an appropriate amount of surplus and then only after approval is granted by the appropriate state insurance regulatory department in the U.S.
All Lines Quota Share reinsurance agreement Certain of the Farmers Exchanges participate in an All Lines Quota Share reinsurance agreement (All Lines agreement) with Farmers Re Co and ZIC which has been amended over the years, with the participation ratio at 12 percent as of December 31, 2010. The All Lines agreement provided for a cession of a quota share of the premiums written and the ultimate net losses sustained in all lines of business written by the Farmers Exchanges after the APD agreement has been applied. The All Lines agreement, which can be terminated after 90 days notice by any of the parties, also provides for the Farmers Exchanges to receive a provisional ceding commission of 26.7 percent, 9.0 percent of premiums for unallocated loss adjustment expenses and 5.3 percent of premiums for other expenses. In addition, under the All Lines agreement, the Farmers Exchanges catastrophe losses are subject to a maximum of USD 1.2 billion.
Effective December 31, 2011, the All Lines agreement was amended subsequent to which Farmers Re Co and ZIC entered into a 20.0 percent All Lines agreement, under which each assumes a percentage of all lines of business written by the Farmers Exchanges, prospectively. Under the All Lines agreement, which amended the 12.0 percent All Lines agreement in effect since December 31, 2010, Farmers Re Co and ZIC assume a 4.0 percent and 16.0 percent respective quota share of the premiums written and the ultimate net losses sustained in all lines of business written by the Farmers Exchanges after the APD agreement has been applied. In addition, under the All Lines agreement, the Farmers Exchanges catastrophe losses are subject to a maximum of USD 1.2 billion. As a result, Farmers Re Co and ZIC are subject to a maximum annual catastrophe loss of USD 48.0 million and USD 192 million, respectively. Unearned premiums totaling USD 527 million were transferred from the Farmers Exchanges to Farmers Re Co and ZIC as a result of their increased participation in the All Lines agreement as from December 31, 2011. In addition, Farmers Re Co and ZIC remitted USD 141 million of reinsurance commissions to the Farmers Exchanges for acquisition expenses due to the increased participation in the All Lines agreement. Ceded premiums earned and commissions were USD 1,984 million and USD 635 million, respectively, and recoveries totaled USD 1,396 million, for the year ended December 31, 2011.
Subject to the approval of the California Department of Insurance, effective December 31, 2012, the All Lines agreement was amended such that Farmers Re Co assume a 2.5 percent instead of 4 percent quota share and ZIC continues to assume a 16.0 percent quota share of the premiums written and the ultimate net losses sustained in all lines of business written by the Farmers Exchanges after the APD agreement has been applied. The remaining 1.5 percent quota share is assumed by a third party on the same terms as Farmers Re Co and ZIC. Unearned premiums totaling USD 102 million were transferred from Farmers Re Co to the Farmers Exchanges as a result of its decreased participation in the All Lines agreement effective December 31, 2012. In addition, the Farmers Exchanges remitted USD 27 million of reinsurance commissions to Farmers Re for acquisition expenses due to the decreased participation in the All Lines agreement.
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 are managed but not owned by Farmers Group, Inc. a wholly owned subsidiary of the Group. This segment also includes all reinsurance assumed from the Farmers Exchanges by the Group. Farmers Exchanges are prominent writers of personal and small commercial lines of business in the U.S.
For the purpose of discussing financial performance the Group considers General Insurance, Global Life and Farmers to be its core business segments.
Net investment income on Group investments 2,516 2,799 3,991 4,146 124 133 396 524 342 429 (658) (847) 6,711 7,185 Net capital gains/(losses) and impairments on Group investments 71 8 842 429 – – – – (24) 558 – – 889 995
of which: inter-segment revenues (510) (576) (367) (343) (69) (67) (1,171) (1,336) (56) (59) 2,173 2,381 – – Benefits, losses and expenses Insurance benefits and losses, net 1 20,527 20,939 9,592 9,503 3,198 2,105 56 58 380 475 – – 33,752 33,080
Net written premiums and policy fees 29,736 29,247 12,880 10,901 4,361 3,529 66 82 454 (110) – – 47,496 43,650 Net change in reserves for unearned premiums (540) (171) (259) (36) 56 (545) – 1 1 2 – – (741) (751)
Table 29.1 in USD millions, for the years ended December 31Business operating profit by business segment
Net income after taxes 3,967 3,775 attributable to non-controlling interests 89 25 attributable to shareholders 3,878 3,750 1 The impact on Group level relates to foreign currency translation differences. 2 Includes USD 85 million as of December 31, 2011 of software impairments related to a restructuring program impacting several European countries (see notes 17 and 19). 3 Includes USD 67 million related to a voluntary settlement of an insurance liability in Italy. 4 Includes USD 100 million charitable commitment to the Z Zurich Foundation.
Add back: Business operating profit attributable to non-controlling interests 52 (2) 132 26 – – (22) – 1 1 164 26 Net income before shareholders’ taxes 3,049 2,528 1,712 1,672 1,435 1,464 (1,097) (716) 169 31 5,268 4,979 Income tax expense/(benefit) attributable to policyholders – – 194 (242) – – – – – – 194 (242)
Table 29.2 in USD millions, for the years ended December 31Reconciliation of BOP to net income after income taxes
Reserves for losses and loss adjustment expenses, gross 66,542 64,311 – 39 1,580 1,410 27 28 1,969 2,559 (131) (586) 69,986 67,762 Reserves for unearned premiums, gross 16,023 15,356 – 970 1,262 1,318 4 4 20 22 (9) (9) 17,300 17,661 Future life policyholders’ benefits, gross 96 92 78,718 75,432 – – 6 6 5,020 5,097 (33) (42) 83,807 80,584 Policyholders’ contract deposits and other funds, gross 32 1,269 17,572 14,300 – – – – 2,420 2,787 – – 20,024 18,356 Reserves for unit-linked contracts, gross – – 62,243 57,337 – – – – 11,874 11,507 – – 74,117 68,844
Equity Common shareholders’ equity 34,494 31,484 Preferred securities – – Shareholders’ equity 34,494 31,484 Non-controlling interests 2,368 2,489 Total equity 36,862 33,973 Total liabilities and equity 409,267 386,971 Supplementary information Additions and capital improvements to property, equipment and intangible assets 331 368 150 176 120 171 150 124 – – – – 751 840 1 As of December 31, 2012 the General Insurance, the Global Life and Farmers segments included assets held for sale amounting to USD 36 million, USD 22 million and USD 31 million, respectively, relating to land and buildings formerly classified as real estate held for investment and the General Insurance segment also includes assets held for sale amounting to USD 10 million, relating to land and buildings formerly classified as real estate held for own use. As of December 31, 2011, the General Insurance and Global Life segments included assets held for sale amounting to USD 38 million and USD 17 million, respectively, relating to the sale of a company in Bolivia (see note 5).
Real estate held for investment 2,827 2,911 5,334 5,130 101 132 43 42 256 258 – – 8,561 8,472
Total assets (after cons. of investments in subsidiaries) 124,916 118,972 255,372 236,354 9,834 10,023 20,520 21,291 29,705 30,906 (31,081) (30,575) 409,267 386,971 Liabilities Liabilities for investment contracts – – 58,131 50,958 – – – – – – – – 58,131 50,958 Reserves for insurance contracts, gross 82,693 81,029 158,533 148,076 2,841 2,728 36 39 21,303 21,972 (174) (637) 265,233 253,207
2 As of December 31, 2011, the General Insurance and Global Life segments included liabilities held for sale amounting to USD 41 million and USD 14 million, respectively, relating to the sale of a company in Bolivia (see note 5).
Table 29.4 in USD millions, for the years ended December 31General Insurance – Customer segment overview
Gross written premiums and policy fees from external customers of which
Table 29.5 in USD millions, for the years ended December 31General Insurance – Revenues by region
Bermuda 24 – North America 252 254 Europe United Kingdom 213 199
Table 29.7 in USD millions, for the years ended December 31Global Life – Overview
Gross written premiums and policy fees 823 793 3,005 674 8,748 9,355 912 686 142 106 (40) (30) 13,590 11,583 Net earned premiums and policy fees 611 579 2,686 645 8,405 8,961 786 580 133 100 – – 12,621 10,865
Table 29.8 in USD millions, for the years ended December 31Global Life – Revenues by region
North America United States 165 174 North America 165 174 Latin America Chile 472 490
Table 29.10 in USD millions, for the years ended December 31Farmers – Overview
Business operating profit before non-controlling interests (758) (589) (167) (246) – – (925) (835) Non-controlling interests (22) – – – – – (22) –
Gross written premiums and policy fees 475 594 Net earned premiums and policy fees 455 (108) Insurance benefits and losses, net 380 475 Policyholder dividends and participation in profits, net 694 133 Total net technical expenses 56 76 Net underwriting result (675) (792) Net investment income 66 47 Net capital gains/(losses) and impairments on investments 816 944 Net non-technical result (excl. items not included in BOP) (78) (206) Business operating profit before non-controlling interests 129 (7) Non-controlling interests 1 1 Business operating profit 128 (8)
Zurich Insurance Group Annual Report 2012 283Consolidated financial statements 30. Significant subsidiaries
Australia Zurich Australia Limited Sydney Global Life 100 100 AUD 0.5 Zurich Australian Insurance Limited Sydney General Insurance 100 100 AUD 6.6 Zurich Financial Services Australia Limited Sydney General Insurance 100 100 AUD 22.8 Austria
Zurich Minas Brasil Seguros S.A. Belo Horizonte General Insurance / Global Life 100 100 BRL 684.1
Zurich Finance (Luxembourg) S.A. Luxembourg Other Operating Businesses 100 100 EUR 2.1
Zurich Santander Seguros México, S.A. 2 Mexico City General Insurance / Global Life 51 51 MXN 190.0
Zurich Santander Holding (Spain), S.L. 2 Madrid Global Life 51 51 EUR 94.3 Zurich Santander Holding Dos (Spain), S.L. 2 Madrid Global Life 51 51 EUR 40.0 Zurich Santander Insurance America, S.L. 2 Madrid Global Life 51 51 EUR 177.0 Zurich Vida, Compañía de Seguros y Reaseguros, S.A. – Sociedad Unipersonal Madrid Global Life 100 100 EUR 56.4 Switzerland Genevoise Real Estate Company Ltd Geneva Global Life 100 100 CHF 20.4
Eagle Star Insurance Company Limited Fareham, England Non-Core Businesses 100 100 GBP 25.0 Sterling ISA Managers Limited Swindon, England Global Life 100 100 GBP 92.9 Zurich Assurance Ltd Swindon, England Global Life 100 100 GBP 236.1
Zurich Financial Services (UKISA) Limited Swindon, England Other Operating Businesses 100 100 GBP 1,492.1
Farmers Reinsurance Company 8 Los Angeles, CA Farmers 100 100 USD 58.8 Farmers Services LLC 9 Wilmington, DE Farmers 100 100 USD – Zurich American Corporation Wilmington, DE Non-Core Businesses 100 100 USD 0.00001 Zurich American Life Insurance Company Schaumburg, IL Non-Core Businesses 100 100 USD 2.5
Zurich Holding Company of America, Inc. Wilmington, DE Other Operating Businesses 100 100 USD 0.02 1 The segments are defined in the notes to the Consolidated financial statements, note 29, Segment information. 2 Relates to Zurich Santander (see note 5). 3 Zurich Insurance Holding (Cyprus) Limited indirectly holds 99.9% of Zurich Insurance Company Limited in Russia which is a wholly owned subsidiary of the
Zurich Insurance Group. 4 In addition buy out options exist which allow the minority shareholders to sell 15.17 percent of the shares of Deutscher Herold Aktiengesellschaft to the
Opinion In our opinion, the Consolidated financial statements for the year ended December 31, 2012 give a true and fair view of the financial position, the results of operations and the cash flows in accordance with the International Financial Reporting Standards (IFRS) and comply with Swiss law.
This report describes the development of the embedded value of the Zurich Insurance Group (the Group) for the year ended December 31, 2012.
Key results in USD millions, for the years ended December 31
Opening embedded value 15,846 16,472 (627) Closing embedded value 18,861 15,846 3,016 Embedded value operating earnings 1,739 1,363 376 of which new business value 890 980 (90) Embedded value earnings 2,150 200 1,950 Return on opening embedded value 14.0% 1.3% 12.8%
2 A liquidity premium has been included in the time value of options and guarantees since December 31, 2011. 3 Embedded value for Zurich Santander and Zurich Insurance Malaysia Berhad (ZIMB) is included in the end of year Global Life embedded value result. See section 6 for further details.
4 New business for 2012 does not include any amounts from Zurich Santander or Zurich Insurance Malaysia Berhad (ZIMB). The new business value from Zurich Santander and ZIMB for the year 2012 was USD 195 million. See section 6 for further details.
Embedded value operating earnings were USD 1,739 million. Of this, USD 954 million was the expected emergence of value from in-force business and USD 890 million from new business, partially offset by adverse operating variances of USD 105 million arising from experience variances and assumption changes.
New business net of non-controlling interests (109) 1 (726) (836) 1,679 844 926 Expected contribution at reference rate 36 54 90 183 274 205 Expected contribution in excess of reference rate (21) 27 6 674 680 535 Transfer to shareholders’ net assets 470 1 671 1,141 (1,141) – –
Dividends & capital movements end of period 367 375 742 318 1,059 (55)
in USD millions, for the years ended December 31Analysis of embedded value earnings
Embedded value increased in Latin America by USD 932 million to USD 1,615 million, mainly due to the inclusion of the Zurich Santander embedded value as at December 31, 2012. The embedded value added by Zurich Santander was USD 820 million.
In the UK, embedded value increased by USD 438 million. The main drivers were strong new business value, modeling changes and favorable exchange rate movements partially offset by economic variances.
In Germany, positive impacts came from various modeling changes. These were partially offset by expense assumption updates and other operating variances. The net impact on the embedded value was an increase of USD 531 million.
In Ireland, stable new business value and good unit-linked performance were partially offset by adverse persistency. The total embedded value increased by USD 47 million.
In Rest of Europe, embedded value increased by USD 302 million, mainly from positive investment variances as credit spreads narrowed in Italy and Portugal.
Required capital is the amount of shareholders’ net asset value required to cover the target capital requirement, covering both minimum solvency margin and target excess solvency margin. Free surplus is the difference between the target capital requirement and the shareholders’ net asset value.
In Germany and Switzerland, surplus in the main life insurance entities is treated as required capital and free surplus is related to other companies included in the covered business. The increase in free surplus in Germany is mainly related to growth in assets outside of the main life insurance entities. In Switzerland, free surplus in 2012 was largely flat.
Present value of new business premiums (PVNBP) 2 8,055 7,808 8,617 10,815 35,296 7,249 8,382 7,011 10,756 33,399
2 A liquidity premium has been included in the time value of options and guarantees since December 31, 2011. 3 New business for 2012 does not include any amounts from Zurich Santander or Zurich Insurance Malaysia Berhad (ZIMB). The new business value from Zurich Santander and ZIMB for 2012 was USD 195 million. See section 6 for further details.
Annual premium equivalent (APE) increased in North America due to higher volumes and sales of new products launched in the North American market. Margins increased on protection business as a result of price increases, improved utilization of reinsurance and lower interest rates. In total, new business value increased by USD 49 million or 81 percent compared with 2011.
Latin America, excluding Zurich Santander, reported an increase in APE of USD 443 million mainly as a result of the successful participation in the Social Security (SIS) biennial bid process in Chile. Other contributions came from increased sales of Corporate Life and Pensions business in Mexico. New business value increased by USD 29 million or 50 percent on a local currency basis, reflecting lower margins on the Chile SIS contract.
In Germany, APE and margins reduced. The reduction in margin was mainly attributable to lower interest rates, resulting in reduced spreads on traditional business. As a result, new business value reduced by USD 134 million or 77 percent on a local currency basis.
In Switzerland, APE increased by USD 69 million, mainly due to a change to the method of recognizing group pension premiums. This also had the effect of reducing the margin for this type of business. However, margins for unit-linked products and lower guaranteed interest rates on traditional business increased the overall margin. New business value increased by USD 16 million or 196 percent on a local currency basis.
In the Other region, new business value before the methodology refinements was down 8 percent on a local currency basis compared with the same period of 2011. The effect of the inclusion of the renewal methodology was lower in 2012 resulting in a decrease in new business value after methodology refinements.
Fin an cial info rm atio n 4. Expected contribution and transfer to shareholders’ net assets
Embedded value split of operating experience variance in USD millions, for the year ended December 31, 2012
• Other operating experience variances negatively impacted embedded value by USD 34 million. The main contributor was the UK.
Embedded value split of operating assumption changes in USD millions, for the year ended December 31, 2012
• Mortality and morbidity assumption updates increased embedded value by USD 160 million. The main contributors were North America and the UK contributing USD 51 million and USD 47 million respectively.
• Expense assumption changes reduced embedded value by USD 217 million. The main contributor was the UK, where updated expense assumptions decreased embedded value by USD 122 million. Germany, Switzerland and North America also made assumption updates with smaller negative impacts on embedded value partially offset by an update in Ireland with a positive impact on embedded value.
Other operating variances Other operating variances include modeling changes and non-recurring expenses and operating variances not captured elsewhere.
• Development expenses reduced embedded value by USD 176 million. This was predominantly made up of USD 60 million to fund a new platform in the UK, USD 35 million to fund hub development in Ireland and USD 34 million to expand operations in Asia-Pacific and Middle East.
Other non-operating variances Other non-operating variances include the impact of legal, tax and regulatory changes in the year as well as other significant one-off items.
Impact on embedded value of other non-operating variances was USD 6 million. Positive impacts in North America and Switzerland were offset by exchange rate impacts from Asia-Pacific and Middle East.
Acquisitions In 2011, the Group acquired businesses in Malaysia and Latin America. The impact of these transactions has now been included for the first time in the Global Life embedded value as of December 31, 2012.
The life business acquired in Malaysia has been included in the Group consolidated IFRS accounts since December 31, 2011. However this is the first time the embedded value has been reported in Global Life and it has been recorded as a transfer in at the end of the period. Previously the value of this business was included as the unadjusted IFRS net asset value in the non-covered business which was consolidated in the Group MCEV.
The contribution to embedded value net of non-controlling interests from the ZIMB and the Zurich Santander business as of December 31, 2012, was USD 1,160 million. The unadjusted IFRS net asset value of USD 1,422 million corresponding to these businesses has been removed from the non-covered business reported in the Group MCEV in section 11. The new business value of ZIMB and Zurich Santander has not been consolidated in the Global Life new business value 2012 result. The new business value for the year ended December 31, 2012 for these businesses was USD 195 million gross of non-controlling interests.
Dividends and capital movements Dividends and capital movements reflect dividends paid by Global Life to the Group, shown as a negative number in the table below, and capital received from the Group, shown as a positive number in the table. Capital movements can also relate to the value of business in-force in respect of acquisitions and disposals, or corporate restructuring.
Changes in value for Global Life arising from dividend and capital movements are offset by equal and opposite value changes in the non-covered businesses of the Group and therefore have no impact on Group MCEV as shown in Section 11, except as noted below.
In Switzerland, the reported statutory capital was reduced by USD 278 million due to an opening accounting adjustment related to the initial consolidation of an investment subsidiary. Although this had no impact on IFRS accounts, this amount was not offset by an increase elsewhere and as a result Group MCEV was reduced. In addition, a dividend of USD 86 million was paid from Switzerland to the Group.
Foreign currency translation effects Foreign currency translation effects represent the impact of adjusting values to end-of-period exchange rates. The weakening of the U.S. dollar against other currencies increased the U.S. dollar embedded value by USD 387 million.
Value of business in-force of which: Asia-Pacific and Middle East 1,994 (91) (15) (122) 1,766 1,512 1 CE is the certainty equivalent value of business in-force. 2 FC is the frictional cost. 3 TVFOG is the time value of financial options and guarantees including the application of a liquidity premium. 4 CRNHR is the cost of residual non-hedgeable risk (see Section 12 d) for further details).
in USD millions, as of December 31, 2012 and December 31, 2011Components of value of business in-force in USD millions, as of December 31Maturity profile of value of business in-force
Fin an cial info rm atio n 8. Reconciliation of IFRS shareholders’ equity to embedded value
Embedded value 18,861 890 Operating sensitivities 10% increase in initial expenses n / a (5%) 10% decrease in maintenance expenses 3% 9% 10% increase in voluntary discontinuance rates (4%) (13%) 10% decrease in voluntary discontinuance rates 5% 16% 5% improvement in mortality and morbidity for assurances 3% 12% 5% improvement in mortality for annuities (1%) (1%) Required capital set equal to minimum solvency capital – –
Economic sensitivities 100 basis points increase in risk free yield curve (2%) 15% 100 basis points decrease in risk free yield curve 2% (25%) 10% fall in equity market values (1%) n / a 10% fall in property market values (1%) n / a 25% increase in implied volatilities for risk free yields (1%) (2%) 25% decrease in implied volatilities for risk free yields 1% 3% 25% increase in implied volatilities for equities and properties (1%) (3%) 25% decrease in implied volatilities for equities and properties 1% 2%
The key assumption changes represented by each of these sensitivities are given in Section 12 r).
The Group has written life business in Zurich American Life Insurance Company and in its Centre operations, which are not managed by Global Life and are included in non-core life businesses. The main products that have been written by these businesses were: • variable annuity contracts that provide annuitants with guarantees related to minimum death and income benefits; • disability business; and
Embedded value 0.8 0.7 in USD billions, as of December 31Estimated embedded value of life businesses in Non-Core Businesses
3 Adjustments refer to opening adjustments, dividend and capital movements and foreign currency translation effects. 4 As of December 31, 2012 the ZIMB and Zurich Santander businesses are included in the covered business, whereas previously they were included in non-covered business. See section 6 for further details.
The Group has applied the Market Consistent Embedded Value (MCEV) Principles and Guidance issued by the European Insurance CFO Forum in October 2009, for its Embedded Value (EV) Report for the companies and businesses in its Global Life segment (the covered business). This report primarily relates to Global Life. Non-core life businesses is given in Section 10 and to the total Group in Section 11. The embedded value methodology adopted by the Group is based on a “bottom-up” market consistent approach to allow explicitly for market risk. In particular, asset and liability cash flows are valued using risk discount rates consistent with those applied to similar cash flows in the capital markets and options and guarantees are valued using market consistent models calibrated to observable market prices. Where markets exhibit a limited capacity, the valuation is based on historical averages.
All amounts shown in USD are rounded with the consequence that the rounded amounts may not add to the rounded total in all instances.
c) Shareholders’ net assets Shareholders’ net assets represent the market value of net assets held in respect of the covered business, and consists of the required capital and free surplus. The level of required capital reflects the amount of capital considered by the local Directors to be appropriate to manage the business. This would be set at least at the level equal to the regulatory required capital, at which the regulator would intervene to request a capital injection and in addition, for the main companies, an adequate buffer to cover short term volatilities in solvency due to financial and non-financial risks or to achieve the capital required to maintain the desired credit rating.
In the UK, a dual capital regime exists with the second pillar currently more stringent than the first pillar. The first pillar is a solvency one basis. Under the second pillar basis the value of in-force is counted as an admissable asset with a subsequent risk charge. Under this basis, when the Group writes new business with an in-force value greater than the risk charge, the level of required capital decreases. Similarly, when in-force value emerges into shareholders’ net assets, a portion of this release needs to be allocated to required capital to offset the now reduced value of the in-force asset. This required capital impact is a feature of an economic capital mechanism which differs markedly from the current solvency one basis.
d) Value of business in-force The value of business in-force is the present value of future projected profits, distributable after tax to shareholders from the covered business. It is defined as the certainty equivalent value of business in-force less frictional costs, the time value of financial options and guarantees, and the cost of residual non-hedgeable risk. These components are explained below.
Time value of financial options and guarantees (TVFOG) represents additional costs in excess of the intrinsic value of options and guarantees which are already allowed for in the CE value. These are based on the variability of investment returns which need to be allowed for explicitly under the MCEV Principles. The time value is calculated on a market consistent basis using stochastic modeling techniques, and after making allowance for expected management and policyholder behavior.
The capital is projected over the lifetime of the business using appropriate risk drivers for each risk type. The present value of the risk capital is calculated by applying the swap curve as of the valuation date. The CRNHR allows for diversification across risk types and across geographical segments. This approach complies with all areas of the MCEV Principles except Guidance 9.7 which does not allow for diversification benefits between covered and non-covered business. The embedded value report does allow for diversification between covered and non-covered business, which is consistent with the management view of the business and adds an estimated USD 508 million to embedded value.
Quarterly new business is valued on a discrete basis. New business value is calculated separately for each quarter using assumptions, both operating and economic, as of the start of the relevant quarter. Once calculated, the new business value will not change in local currency terms.
g) Market consistent discounting The Group has adopted a “bottom-up” market consistent approach for the projection and discounting of future cash flows in the calculation of the embedded value. As a result, the risks inherent in the cash flows are allowed for in a way that is consistent with the way the market is expected to allow for such risks.
The risk free yield curve assumptions are based on the swap curve in each major currency (U.S. dollars, euro, British pounds and Swiss francs). For liabilities where payouts are either independent or move linearly with markets, deterministic techniques (referred to as “certainty equivalent”) have been used. In such cases, the projection and discounting are based on the same risk free yield curve. Further details are set out under “Economic assumptions” in Section 13.
Simulations are produced for the economies in the U.S., the UK, Switzerland and the eurozone. In each economic area, risk free nominal interest rates are modeled using a LIBOR market model. The excess return on other asset classes relative to the total returns on risk free assets are then modeled using a multi-factor lognormal model. Hong Kong uses U.S. dollar simulations as their principal liabilities are U.S. dollar-denominated. Chile uses closed form solutions rather than simulations. The other operations not mentioned above have no significant options and guarantees. Further details are set out under “Economic assumptions” in Section 13.
i) Corporate Center costs Headquarters’ costs are recharged to covered business in the relevant countries based on contractual framework and included in the projected expenses. Costs not recharged are small and have been excluded from the projected assumptions.
j) Holding companies Holding companies allocated to Global Life have been consolidated in the embedded value at their local statutory net asset value. Related expenses are small and so have been excluded from the projection assumptions. Holding companies outside Global Life are not included in the embedded value of the covered business.
l) Debt Where a loan exists between a company in Global Life and a Group company outside Global Life, the loan is valued for embedded value purposes at the same value as that included outside Global Life under IFRS.
In the UK, a multi-tie distribution company (Openwork) is included in the embedded value on a “look through” basis. After allowance for certain one-off expenses, profits and losses are attributed to new business value. Certain future revenue streams, mainly renewal commissions on business sold, are discounted and contribute to the new business value and to the value of business in-force.
In Germany, the majority of distribution and administration is provided by service companies. These are valued on a “look through” basis. These companies also provide limited services to companies outside Global Life. The value of business in-force and new business value reflect the services provided to companies within Global Life. Net asset value consists, however, of the full statutory equity of these service companies.
o) Employee share options The costs of share options granted to employees are not included in the embedded value, other than to the extent that they are allowed for in the local statutory accounts upon which the shareholders’ net assets are based. Further information on the costs of share options is given in the Group’s consolidated financial statements.
Embedded value report continued r) Sensitivities The key assumption changes represented by each of the sensitivities in Section 9 are as follows: Operating sensitivities
A 5 percent improvement in mortality assumptions for annuities means that, for example, if the actuarial mortality assumption for annuities was 90 percent of a particular table, this would decrease to 85.5 percent.
Fin an cial info rm atio n 13. Embedded value assumptions
The Group applies liquidity premium in the operating currencies of U.S. dollar, euro, British pound and Swiss franc in its embedded value.
The maintenance expense assumptions allow for the expected cost of providing future service benefits in respect of the Group staff pension schemes. An adjustment to the embedded value is noted in Section 12 n) for pension scheme liabilities under IAS 19 and no allowance is made in the expense assumptions for any contributions as a result of past service benefits.
Where service companies have been valued on a look through basis, the value of profits or losses arising from these services have been included in the embedded value and new business value.
Embedded value report continued c) Dynamic decisions To reflect more realistically the outcome of stochastic simulations, the assumptions for each simulation make allowance for the behaviors of policyholders and management actions in response to the investment conditions modeled.
Embedded value information: Opening embedded value 2,780 2,818 683 631 9,701 10,334 2,465 2,548 217 142 15,846 16,472 Dividends and capital movements start of period (109) (35) (5) (14) (365) (464) (11) (7) (45) (5) (534) (525)
Present value of new business premiums (PVNBP) 1,227 1,024 2,458 1,320 26,998 26,784 3,058 2,943 1,554 1,328 35,296 33,399
United Kingdom Germany Switzerland Ireland Spain Rest of Europe Europe total
Present value of new business premiums (PVNBP) 14,112 11,830 4,503 5,530 2,544 1,593 3,033 2,720 1,335 3,328 1,471 1,782 26,998 26,784
New business margin (% of APE) 16.4% 12.5% 8.2% 29.1% 11.5% 6.0% 18.5% 20.2% 62.9% 29.2% 21.5% 18.0% 17.9% 19.0% New business margin (% of PVNBP) 1.4% 1.3% 0.8% 3.1% 1.0% 0.6% 2.2% 2.5% 7.0% 3.2% 2.4% 2.1% 1.7% 2.0%
New business information: Annual premiums 583 554 382 493 107 88 116 125 69 93 116 122 1,374 1,475
This embedded value report has been prepared in all material respects in accordance with the Market Consistent Embedded Value Principles and Guidance issued by the European Insurance CFO Forum in October 2009.
Board of Directors’ responsibility The Board of Directors is responsible for the preparation of the EV Report in accordance with the MCEV Principles and Guidance, including the applied methodology and the assumptions used and for such internal controls as determined necessary to enable the preparation of the EV Report that is free from material misstatement, whether due to fraud or error.
Auditor’s responsibility Our responsibility is to express an opinion on whether the EV Report has been properly prepared in accordance with the MCEV Principles and Guidance. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the EV Report is free from material misstatement.
Zurich Insurance Group Ltd was incorporated on April 26, 2000, and is the holding company for the Zurich Insurance Group with a principal activity of holding subsidiary companies. The company is listed on the SIX Swiss Exchange.
Shareholders’ equity increased by CHF 89 million to CHF 16,699 million as of December 31, 2012, from CHF 16,610 million as of December 31, 2011, as a result of the net income after taxes for the year and capital contributed through the issuance of new shares to employees out of the contingent capital, which was partially offset by the dividend paid in 2012. The Board will propose a dividend from the capital contribution reserve of CHF 17.00 per share in respect of the year 2012 for approval at the Annual General Meeting to be held on April 4, 2013.
Total revenues 2,598,766 1,863,417 Expenses Administrative expense 6 (19,365) (94,927) Other financial expense 7 (190,330) (800,204)
Total long-term liabilities 535,096 565,842 Total liabilities 618,150 838,130 Shareholders’ equity (before appropriation of available earnings) Share capital 12 14,830 14,739 Legal reserves: 11,029,552 13,322,807
General legal reserve 341,140 341,140 Free reserve: As of January 1 332,986 332,986 Transfer from capital contribution reserve 2,494,314 2,479,883
Adjusted for appropriations 2,939,269 1,978,583 Net income after taxes 2,382,137 960,686 Retained earnings, as of December 31 5,321,406 2,939,269 Total shareholders’ equity (before appropriation of available earnings) 16,698,774 16,609,801 Total liabilities and shareholders’ equity 17,316,924 17,447,931 1 Dividends paid in the year, proposed in respect of the 2011 result 2 Dividends paid in the year, proposed in respect of the 2010 result in CHF thousands, as of December 31Assets
2. Summary of significant accounting policies a) Exchange rates Unless otherwise stated, assets and liabilities expressed in currencies other than Swiss francs are translated at year end exchange rates. Revenues and expenses are translated using the exchange rate at the date of the transaction. Unrealized exchange losses are recorded in the income statements and unrealized exchange gains are deferred until realized.
b) Investments in subsidiaries Investments in subsidiaries are equity interests, held on a long-term basis for the purpose of the holding company’s business activities. They are carried at cost less adjustments for impairment.
d) Derivatives Derivatives are carried at market value with changes in the market value recorded in the income statements.
7. Other financial expense Other financial expense includes impairments on investments in subsidiaries of CHF 75 million in 2012 and CHF 256 million in 2011. Additionally, 2011 expense includes a loss of CHF 435 million related to the redemption of the three remaining series of Trust Capital Securities issued through the Zurich RegCaPS Funding Trusts. After the redemption, the trusts that issued these securities and the related limited partnerships and limited liability companies were liquidated.
10. Subordinated loans to subsidiaries Subordinated loans have remained unchaged in local currency compared with 2011, and mainly include loans to Zurich Insurance Company Ltd of CHF 4,832 million as of December 31, 2012 and 2011.
11. Commitments and contingencies Zurich Insurance Group Ltd has provided unlimited guarantees in support of various entities belonging to the Zurich Capital Markets group of companies. The Company has also entered into various support agreements and guarantees for the benefit of certain of its subsidiaries and their directors. These contingencies and commitments amounted to CHF 11,587 million as of December 31, 2012, and CHF 11,894 million as of December 31, 2011. CHF 8,331 million out of the total CHF 11,587 million relate to guarantees in the aggregate of GBP 5,595 million provided to a fully owned subsidiary and certain of its directors in connection with the rationalization of the Group’s top legal holding structure which resulted in the merger of Zurich Group Holding into Zurich Insurance Group Ltd (formerly known as Zurich Financial Services Ltd) in December 2009. These guarantees will expire in August 2015. Furthermore, the Zurich Insurance Group Ltd has issued an unlimited guarantee in favor of the Institute of London Underwriters in relation to business transferred to Zurich Insurance plc from a group company which no longer has insurance licenses.
During the years 2012 and 2011, a total of 914,301 shares and 798,926 shares, respectively, were issued to employees out of the contingent capital.
The Board of Directors is authorized, when issuing bonds or similar debt instruments connected with conversion and/or option rights, to restrict or withdraw the right of shareholders for advance subscription in cases where such bonds are issued for the financing or re-financing of a takeover of an enterprise, of parts of an enterprise, or of participations. If the right for advance subscription is withdrawn by the Board of Directors, the convertible bond or warrant issues are to be offered at market conditions (including standard dilution protection provisions in accordance with market practice) and the new shares are issued at the current convertible bond or warrant issue conditions. The conversion rights may be exercisable during a maximum of ten years and option rights for a maximum of seven years from the time of the respective issue. The conversion or option price or its calculation methodology shall be determined in accordance with market conditions, whereby for shares of Zurich Insurance Group Ltd the quoted share price is to be used as a basis.
Transfer from retained earnings – 1,275,702 Transfer to free reserve for dividend payment (2,494,314) (2,479,883)
Agio on share-based payment transactions 200,631 185,848 Subscription rights out of capital increase 2002 428 –
Average purchase price of additions, in CHF 155 199 Average selling price, in CHF 229 256 1 in CHF thousands 15. Shareholders The shares registered in the share ledger as of December 31, 2012, were owned by 124,847 shareholders of which 119,238 were private individuals holding 24.7 percent of the shares (or 15.3 percent of all outstanding shares), 2,015 were foundations and pension funds holding 7.2 percent of the shares (or 4.5 percent of all outstanding shares), and 3,594 were other legal entities holding 68.1 percent of the shares (or 42.3 percent of all outstanding shares).
According to the information available on December 31, 2012, Zurich Insurance Group Ltd is not aware of any person or institution, other than BlackRock, Inc., New York, and Norges Bank, Oslo, which, directly or indirectly, had an interest as a beneficial owner in shares, option rights and/or conversion rights relating to shares of Zurich Insurance Group Ltd representing three percent or more of its issued shares.
Zurich Insurance Group Annual Report 2012 333Holding company 16. Information on the risk assessment process Refer to the disclosures in the Risk review on pages 111 to 161 of this Annual Report.
Remuneration of Directors The following tables set out the total fees paid to Directors of Zurich Insurance Group Ltd. All the Directors are also Directors of Zurich Insurance Company Ltd. The Directors receive a combined fee for their work in connection with Zurich Insurance Group Ltd and Zurich Insurance Company Ltd. In addition, Mr. de Swaan is a member of the Board of both ZIP and ZLAP and Mrs. Bies and Mr. Nicolaisen are members of the Board in ZHCA. The fee structure for Directors was reviewed and no changes were made for 2012. The fees are set out in the Remuneration report on page 69.
Of which allocated in shares 4, 11 1 The remuneration shown in the tables is gross, based on the accrual principle and does not include any business-related expenses incurred in the performance of the Directors’ services.
Except for Mr. Watter none of the Directors had outstanding loans, advances or credits as of December 31, 2012 or 2011. Unrelated to his Board membership and on terms and conditions available to other customers, Mr. Watter had a collateralized policy loan of CHF 2.5 million outstanding as of December 31, 2012 and 2011. The annual interest rate charged on the loan is 4 percent.
No benefits (or waiver of claims) have been provided to related parties of the Directors or related parties of former members of the Board during the year 2012, nor during the year 2011. Neither had any related party of the Directors or of former members of the Board outstanding loans, advances or credits as of December 31, 2012 or 2011.
7 In line with applicable laws where the executives are employed, Zurich Insurance Group Ltd paid the company-related portion of contributions to social security systems, which amounted to USD 1.7 million in 2012 and USD 2.2 million in 2011. Since the contributions are based on full earnings, whereas benefits are capped, there is not a direct correlation between the costs paid to the social security system and the benefits received by the executives.
2 The share grants will vest in the future according to the achievement of defined performance conditions. The value of the shares assumes that the grant will vest in the future at 100 percent of the target level with the valuation of the target performance share grants based on the share price on the day prior to the grants (CHF 225.90 for 2012 and CHF 243.60 for 2011).
4 Includes employee benefits, perquisites, benefits-in-kind and any other payments due under the employment contract. Benefits-in-kind have been valued using market rates. 5 Mr. Senn’s remuneration is paid in Swiss francs. The amounts have been translated from Swiss francs to US dollars at the relevant exchange rates throughout the year and the cash incentive to be paid in 2013 has been translated at the year-end rate in 2012.
in CHF millions 1, for the year ended December 31Highest paid executive, Chief Executive Officer, Martin Senn
None of the Directors, nor any related party of a Director, hold any share options or conversion rights over Zurich Insurance Group Ltd shares as of December 31, 2012 or 2011.
Number of Zurich Insurance Group Ltd shares 1, as of December 31Shareholdings of Directors
M. Senn, Chief Executive Officer 29,719 103,447 20,936 81,362 J. Dailey, CEO of Farmers Group, Inc. 3 2,373 14,987 n / a n / a M. Foley, Chief Executive Officer North America Commercial and Regional Chairman of the Americas 9,306 52,710 9,726 41,348 M. Greco, Chief Executive Officer General Insurance 4 n / a n / a 7,847 36,885 Y. Hausmann, Group General Councel 5 3,728 7,301 n / a n / a K. Hogan, Chief Executive Officer Global Life 3,080 13,032 1,466 8,185 M. Kerner, CEO General Insurance 6 8,469 24,432 n / a n / a A. Lehmann, Chief Risk Officer and Regional Chairman of Europe 23,128 84,640 18,671 86,713 C. Orator, Chief Administrative Officer 7 n / a n / a 5,868 12,987 C. Reyes, Chief Investment Officer 4,823 22,012 2,555 15,123 G. Riddell, Regional Chairman of Asia-Pacific & Middle East 25,002 73,136 22,182 62,685 K. Terryn, Group Head of Operations 4,324 20,540 2,239 16,391 P. Wauthier, Chief Financial Officer 4,947 23,283 3,936 25,061 1 None of the GEC members together with parties related to them held more than 0.5 percent of the voting rights of Zurich Insurance Group Ltd shares as of December 31, 2012 or 2011, respectively, either directly or through share options.
The following tables set out additional details of the options outstanding for members of the GEC as at December 31, 2012 and 2011, respectively. Further details can be found in the unaudited Remuneration report, pages 56 to 81.
Year of expiry as of December 31, 2012Summary of outstanding options, 2012 as of December 31, 2011Summary of outstanding options, 2011
Appropriation of available earnings as proposed by the Board of Directors Net income after taxes 2,382,137 960,686 Balance brought forward 2,939,269 1,978,583 Retained earnings 5,321,406 2,939,269 Balance carried forward 5,321,406 2,939,269
Balance carried forward 8,167,310 1 1 These figures are based on the issued share capital as of December 31, 2012. They may change following the issuance of shares out of contingent capital for employees after the balance sheet date (see note 12). Treasury shares are not entitled to dividends.
If this proposal is approved, a payment of CHF 17.00 per share exempt from Swiss withholding tax is expected to be paid starting from April 11, 2013.
To the Board of Directors of Zurich Insurance Group Ltd, Zurich
Number of shares issued 148,300,123 147,385,822 Number of dividend-bearing shares 1 148,300,123 147,385,822 Market capitalization (in CHF millions at end of period) 36,096 31,319 Authorized capital, number of shares 10,000,000 10,000,000 Contingent capital, number of shares 12,995,136 13,909,437 1 Treasury shares are not entitled to dividends.
Dividend / nominal value reduction 2005 7.00 July 4, 2006 Nominal value reduction 2004 4.00 July 4, 2005 Nominal value reduction 2003 2.50 July 1, 2004 Nominal value reduction 2002 1.00 July 15, 2003 1 Proposed dividend, subject to approval by shareholders at the Annual General Meeting 2013; expected payment date as from April 11, 2013.
Zurch Insurance Group Ltd is not aware of any person or institution which, as of December 31, 2012, directly or indirectly, alone or with others, exercised or was a party to any arrangements to exercise control over Zurich Insurance Group Ltd.
Zurich offers its shareholders the opportunity to deposit Zurich Insurance Group Ltd registered shares free of charge at SIX SAG Ltd in Switzerland. The securities deposit regulations as well as the application form for a securities custody account can be downloaded from our website: www.zurich.com/investors/shareholderinformation
Annual Review 2012 The Annual Review contains information about Zurich’s businesses, its strategy and its performance over 2012. It is available in German, French and English.
Registered Office Zurich Insurance Group Ltd Mythenquai 2 8002 Zurich, Switzerland
Investor Relations Zurich Insurance Group Ltd, Switzerland Telephone: +41 (0)44 625 22 99 E-mail: investor.relations@zurich.com
Share Register Services Zurich Insurance Group Ltd, Switzerland Telephone: +41 (0)44 625 22 55 E-mail: shareholder.services@zurich.com www.zurich.com/investors/ shareholderinformation/
Corporate Responsibility Zurich Insurance Group Ltd, Switzerland Telephone: +41 (0)44 625 24 04 E-mail: corporate.responsibility@zurich.com
Investments Total investments in the consolidated balance sheets includes Group investments and investments for unit-linked products. Group investments are those for which the Group bears part or all of the investment risk. They also include investments related to investment contracts with discretionary participation features. Average invested assets exclude cash collateral received for securities lending. The Group manages its diversified investments portfolio to optimize benefits for both shareholders and policyholders while ensuring compliance with local regulatory and business requirements under the guidance of the Group’s Asset/Liability Management and Investment Committee. Investments for unitlinked products include such investments where the policyholder bears the investment risk, and are held for liabilities related to unit-linked investment contracts and reserves for unit-linked insurance contracts. They are managed in accordance with the investment objectives of each unit-linked fund. The investment result for unit-linked products is passed to policyholders through a charge to policyholder dividends and participation in profits.
Profit by source is the analysis of the Global Life BOP into components in a consistent and intuitive way to show profit sources. The net expense margin includes fund and non-fund based fees, policy acquisition costs, maintenance expenses and surrender charges. The net risk margin shows the mortality, morbidity, and longevity premiums less benefits to the policyholder together with the reinsurance result. The investment margin is the spread between investment income and interest credited to the policyholder plus the return on free surplus. All margins are net of any related policyholder bonuses. BOP before deferrals is a measure of profit excluding i) the net effect of deferral and amortization of policy acquisition costs and front-end fees, which may be affected by movements in financial markets and changes in assumptions; ii) interest expense on debt, depreciation of property and equipment, amortization and impairment of goodwill and other intangibles; and iii) special operating items. Special operating items are material non-recurring items that could lead to distortions in underlying margins and trends.