In a reverse repurchase agreement, the securities received are not recognized on the balance sheet, as long as the risk and rewards of ownership have not been obtained by the Group. The cash delivered is derecognized and a corresponding receivable is recorded. Interest income is recognized in income using the effective interest rate method over the life of the agreement.
l) Borrowings Borrowings (debt issued) are recognized initially at fair value of the consideration received, net of transaction costs incurred. Borrowings are subsequently carried at amortized cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognized in income over the period of the borrowings using the effective interest rate method.
Preference shares, which are mandatory redeemable on a specifi c date are classifi ed as liabilities. The dividends on these preference shares are recognized in the income statement as interest expense.
When fair value hedge accounting is applied to borrowings, the carrying value of borrowings are adjusted for changes in fair values related to the hedged exposure.
Indications that goodwill related to a CGU may be impaired include events or changes in circumstances that may have a signifi cant negative impact on the operations of the CGU, or material adverse changes in the assumptions used in determining its recoverable amount.
management intends to complete the software product and to use it; •
Costs associated with research and maintenance of computer software are expensed as incurred.
The useful lives of customer relationships and contracts, affi nity partnerships and distribution agreements extend up to 30 years and are estimated based on the period of time over which they are expected to provide economic benefi ts and taking into account all relevant economic and legal factors such as usage of the assets, typical product life cycles, potential obsolescence, stability of the industry, competitive position and the period of control over the assets.
The useful lives of computer software licenses and capitalized software development costs generally do not exceed fi ve years. In some exceptional circumstances, capitalized software development costs may be amortized over a period of up to ten years, taking into account the effects of obsolescence, technology, competition and other economic and legal factors.
p) Income taxes The Group provides current tax expense according to the tax laws of each jurisdiction in which it operates. Deferred income taxes are recognized using the asset and liability method. Deferred income taxes are recorded for temporary differences, which are based on the difference between fi nancial statement carrying amounts and income tax bases of assets and liabilities using enacted income tax rates and laws. Losses for tax purposes are treated as deferred tax assets to the extent it is probable that the losses can offset future taxable income in the respective jurisdiction.
Taxes paid by certain of our life insurance businesses are based on the investment result less allowable expenses. To the extent these taxes exceed the amount that would have been payable in relation to the shareholders’ share of taxable profi ts, it is normal practice for certain of our businesses to recover this portion from policyholders. While the relevant company has the contractual right to charge policyholders for the taxes attributable to their share of the investment result less expenses, the obligation to pay the tax authority rests with the company and therefore, the full amount of tax including the portion attributable to policyholders is accounted for as income tax. Income tax expense therefore includes an element attributable to policyholders. In addition, deferred tax on unrealized gains on investment contracts with DPF related to certain unit-linked contracts is included as income tax expense and an accrual for future policy fees to recover the tax charge is included in gross written premiums as policy fee revenue.
r) Share-based compensation and cash incentive plans Under the Group’s equity-settled share-based compensation plan, the fair value of the employee services received in exchange for the grant of shares and/or options is recognized as an expense in income over the vesting period, with a corresponding amount recorded in additional paid-in capital.
The total amount to be expensed over the vesting period is determined by reference to the fair value of the shares and/ or options granted. Non-market vesting conditions (for example, profi tability and premium income growth targets) are included in assumptions about the number of shares and/or options that are expected to be issued or become exercisable. At each balance sheet date, the Group revises its estimates of the number of shares and/or options that are expected to be issued or become exercisable. It recognizes the impact of the revision to original estimates, if any, in income with a corresponding adjustment to equity. However, no subsequent adjustment to total equity is made after the vesting date.
u) Provisions Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event, it is more likely than not that an outfl ow of resources embodying economic benefi ts will be required to settle the obligation and a reliable estimate can be made of the amount of such an obligation. Provisions are discounted when the effect of the time value of money is considered material.
v) Treasury shares Zurich Financial Services Ltd shares held by the Group are classifi ed as treasury shares and are deducted from share capital at nominal value. The difference between the nominal value and the amount paid to acquire, or received for the disposal of treasury shares, is recorded as an adjustment to additional paid-in capital, net of transaction costs and tax effects.
Foreign currency transactions and balances Foreign currency transactions are translated into the functional currency using the spot exchange rate at the date of the transaction or, for practical reasons, a weighted average rate, if exchange rates do not fl uctuate signifi cantly.
a) Reserves for losses and loss adjustment expenses The Group is required to establish reserves for payment of losses and loss adjustment expenses that arise from the Group’s general insurance products and the run-off of its former third party reinsurance operations. These reserves represent the expected ultimate cost to settle claims occurring prior to, but still outstanding as of, the balance sheet date. The Group establishes its reserves by product line, type and extent of coverage and year of occurrence. Loss reserves fall into two categories: reserves for reported losses and reserves for IBNR losses. Additionally, reserves are held for loss adjustment expenses, which contain the estimated legal and other expenses expected to be incurred to fi nalize the settlement of the losses.
Short-tail claims, such as those for automobile and property damage, are normally reported soon after the incident and are generally settled within months following the reported incident. Long-tail claims, such as bodily injury, pollution, asbestos and product liability, can take years to develop and additional time to settle. For long-tail claims, information 08_Financial_Statements_Part1_7442_Eng.indd 17208_Financial_Statements_Part1_7442_Eng.indd 172 24/2/10 20:16:5424/2/10 20:16:54
Financial Information concerning the event, such as the required medical treatment for bodily injury claims and the measures and costs required to clean up pollution, may not be readily available. Accordingly, the reserving analysis of long-tail lines of business is generally more diffi cult and subject to greater uncertainties than for short-tail claims.
b) Future life policyholders’ benefits and policyholders’ contract deposits The future life policyholders’ benefi ts and policyholders’ contract deposits liabilities contain a number of assumptions regarding mortality (or longevity), lapses, surrenders, expenses and investment returns. These assumptions are determined with reference to past experience adjusted for new trends, current market conditions and future expectations. As such the liabilities for future life policyholders’ benefi ts and policyholders’ contract deposits may not represent the ultimate amounts paid out to policyholders. For example: The estimated number of deaths determines the value of the benefi t payments. The main source of uncertainty • arises because of the potential for pandemics and wide-ranging lifestyle changes, such as changes in eating, smoking and exercise habits, which could result in earlier deaths for age groups in which the Group has signifi cant exposure to mortality risk.
Under certain contracts, the Group has offered product guarantees (or options to take up product guarantees), • including fi xed minimum interest rate or mortality rate returns. In determining the value of these options and/or benefi ts, estimates have been made as to the percentage of contract holders that may exercise them. Changes in investment conditions could result in signifi cantly more contract holders exercising their options and/or benefi ts than has been assumed.
The determination of fair value for fi nancial assets and liabilities is based generally on quoted market prices or broker/ dealer price quotations. If prices are not readily available, fair value is based on either internal valuation models (for example, discounted cash fl ow models) or management estimates of amounts that could be realized under current market conditions.
In cases where signifi cant reliance is placed on an independent price provider, the Group has engaged with that price provider to confi rm that the control environment conforms to the high standards that the Group expects. In addition, the Group ensures that independently sourced prices are determined based on valuation techniques that incorporate all factors that market participants would consider in setting a price and are consistent with best practice methodologies for pricing fi nancial instruments. Such models make maximum use of market inputs such as benchmark yields, reported trades and broker/dealer quotes. The Group holds certain asset classes that are not actively traded, in particular hedge funds and private equity investments. Fair values of such instruments are based on regular reports from the issuing hedge funds and private equity funds. Performance of these investments and determination of their fair value are monitored closely by the Group’s in-house investment professionals.
A fi nancial asset is considered impaired if there is objective evidence of impairment as a result of a loss event that has an impact on the estimated future cash fl ows of the fi nancial asset.
For held-to-maturity fi nancial assets and loans and receivables, the recoverable amount is determined by reference to the present value of the estimated future cash fl ows. The carrying amount of mortgage loans and receivables is reduced through an allowance account, and the allowance is determined using an analytical method based on knowledge of each loan group or receivable. The method is normally based on historical statistics, adjusted for known or anticipated trends in the group of fi nancial assets or individual accounts. As judgement is involved in the process of evaluating the impairment of such assets, actual outcomes could vary signifi cantly from the forecasted future cash fl ows.
For goodwill the recoverable amount is the higher of its fair value less costs to sell and its value-in-use. Fair value of CGUs is determined, considering quoted market prices, current share values in the market place for similar publicly traded entities, and recent sale transactions of similar businesses. Value-in-use is determined using the present value of estimated future cash fl ows expected to be generated from or used by the CGU. Cash fl ow projections are based on fi nancial budgets, which are approved by management, typically covering a three-to-fi ve-year period or if appropriate, a longer period. Cash fl ows beyond this period are extrapolated using amongst others estimated growth rates. The discount rates applied refl ect the respective risk fee interest rate adjusted for the relevant risk factors to the extent not already considered in the underlying cash fl ows.
e) Fair values of assets and liabilities attributable to business combinations Acquired businesses are accounted for using the purchase method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. Fair values of fi nancial assets and liabilities and insurance liabilities are determined as described in the respective sections above.
Fair values of identifi able intangible assets are based on market-participant assumptions and applicable valuation techniques, depending on the nature of the assets valued. For customer relationship and contract intangibles, including banc-assurance agreements, the multi-period excess earnings or cash fl ow method is applied, using pre-tax future cash-fl ows expected to be generated from such assets and discounting at applicable market rates. For brand intangibles the relief from royalty method is generally applied and resulting cash-fl ows are discounted at applicable market rates. For information technology intangibles the replacement cost method is generally applied.
Refer to note 5 for further information on the fair value of assets and liabilities attributable to business combinations.
g) Deferred taxes Deferred tax assets are recognized if suffi cient future taxable income, including income from the reversal of existing taxable temporary differences and available tax planning strategies, are available for realization. The utilization of deferred tax assets arising from temporary differences depends on the generation of suffi cient taxable profi ts in the period in which the underlying asset or liability is recovered or settled. As of each balance sheet date, management evaluates the recoverability of deferred tax assets and if it is considered probable, that all or a portion of the deferred tax asset will not be utilized, then a valuation allowance would be recognized.
The Group provides defi ned benefi t pension plans and other post-employment plans. In assessing the Group’s liability for these plans, critical judgments include estimates of mortality rates, rates of employment turnover, disability, early retirement, discount rates, expected long-term rates of return on plan assets, future salary increases, future pension increases and increases in long-term healthcare costs. The discount rate for the signifi cant plans is based on a yield curve approach. The Group sets the discount rate by creating a hypothetical portfolio of high quality corporate bonds for which the timing and amount of cash outfl ows approximate the estimated payouts of the defi ned benefi t plan. These assumptions may differ from actual results due to changing economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. These differences may result in variability of pension income or expense recorded in future years.
i) Share-based compensation and cash incentive plans The Group has adopted various share-based compensation and cash incentive plans to attract, retain and motivate executives and employees. Share-based compensation plans include plans under which shares and options to purchase shares, based on the performance of the businesses, are awarded. The fair value of options granted is estimated using the Black-Scholes option pricing model. The key factors involve, but are not limited to, the expected share price 08_Financial_Statements_Part1_7442_Eng.indd 17608_Financial_Statements_Part1_7442_Eng.indd 176 24/2/10 20:16:5624/2/10 20:16:56
Refer to note 25 for further information on share-based compensation and cash incentives plans.
On December 3, 2009, the Group reached an agreement with Royal Bafokeng Finance (Pty) Limited (RBF), an investment company based in South Africa and wholly owned by Royal Bafokeng Holdings (Pty) Limited, based in South Africa and responsible for the management and development of the commercial assets of the Royal Bafokeng Nation, to increase the RBF share holding in Zurich Insurance Company South Africa Limited, of which the Group owns 73.6 percent, by 15.1 percent from 10 percent to 25.1 percent with option rights to increase up to 50.1 percent or sell the entire stake back to the Group. Regulatory approval has been granted and the parties are preparing to close the transaction in February 2010.
On July 1, 2009, the Group completed the acquisition of 100 percent of the U.S. Personal Auto Group, primarily comprising the direct platform of 21st Century and consequently named “21st Century” going forward, from American International Group, Inc. The purchase price amounted to USD 1,893 million, of which USD 1,692 million was paid in cash and USD 201 million was met through the issue of Euro denominated Subordinated Capital Notes. As part of the transaction, the Group contemporaneously sold the regulated insurance businesses and certain other related net assets to the Farmers Exchanges, which the Group manages but does not own, for USD 1,372 million in cash, resulting in a net purchase price of USD 521 million for the management services business retained by the Group. Up to December 31, 2009, the Group has incurred transaction costs directly attributable to the business combination of USD 18 million, which are included in the total acquisition costs of USD 539 million. Based on the provisional purchase price allocation, net tangible assets of USD 8 million and capitalized software of USD 91 million were acquired. The residual goodwill of USD 440 million refl ects the economic benefi t of the retained management services business. Total revenues and
Table 5.1 in USD millionsBusiness combinations – current period 08_Financial_Statements_Part1_7442_Eng.indd 17708_Financial_Statements_Part1_7442_Eng.indd 177 24/2/10 20:16:5624/2/10 20:16:56
business operating profi t of the retained management services business for the six months starting July 1, 2009 and ending December 31, 2009 were USD 214 million and USD 81 million, respectively. The book value of net assets prior to acquisition amounted to USD 147 million. The purchase price allocation will be fi nalized in 2010.
Transactions in 2008 Acquisitions During 2008, the Group completed several acquisitions that were accounted for as business combinations. The acquisitions indicated in the following table were individually signifi cant to the Group and are therefore presented separately. The other acquisitions are presented in aggregate. The purchase price allocation has been fi nalized for all acquisitions completed during 2008.
Book value of net assets prior to acquisition 22 140 179 104 445 Fair value of net tangible assets acquired 35 140 167 102 444 Identifi able intangible assets, net of deferred tax 76 548 1,931 219 2,775
“TEB Sigorta” sets out the acquisition of 100 percent of TEB Sigorta A.Ş., a general insurer based in Turkey, from TEB Mali Yatırımlar A.Ş. (TEB Mali), which the Group completed on March 31, 2008. Total acquisition costs amounted to USD 364 million and included net tangible assets acquired of USD 35 million and identifi able intangible assets, net of deferred tax, of USD 76 million (USD 94 million before tax, mainly relating to distribution arrangements with TEB Mali subsidiaries including Türk Ekonomi Bankası A.Ş. (TEB) for the distribution of general insurance products in Turkey on an exclusive basis). The residual goodwill of USD 253 million represented expected growth opportunities from the banc-assurance partnership with TEB and the expansion of other sales channels.
“Caixa Sabadell” sets out the acquisition of 50 percent of both the life and general insurance companies CaixaSabadell Vida, S.A. de Seguros y Reaseguros (CSV) and CaixaSabadell Companyia d’Assegurances Generals, S.A. (CSG), both of which are based in Spain, from Caixa d’Estalvis de Sabadell (Caixa Sabadell), which the Group completed on August 14, 2008. Total acquisition costs for CSV amounted to USD 300 million and included net tangible assets acquired of USD 128 million and identifi able intangible assets, net of deferred tax, of USD 472 million (USD 674 million before tax, mainly relating to the life insurance distribution agreement with Caixa Sabadell of USD 552 million and to the present value of profi ts of acquired insurance contracts of USD 122 million). Total acquisition costs for CSG amounted to USD 45 million and included net tangible assets acquired of USD 13 million and identifi able intangible assets, net of deferred tax, of USD 77 million (USD 109 million before tax, relating to the general insurance distribution agreement with Caixa Sabadell). 50 percent of net tangible assets acquired and of identifi able intangible assets, net of deferred tax, refl ecting non-controlling interests in CSV and CSG, amounted in total to USD 344 million. The Group has management control of the jointly owned companies and fully consolidates them.
“Banco Sabadell” sets out the acquisition of 50 percent of life insurance, pension and general insurance operations of Banco Sabadell S.A. (Banco Sabadell), all based in Spain, which the Group completed on September 18, 2008. Following price adjustments during 2009 in accordance with the purchase agreement, total acquisition costs for BanSabadell Vida S.A. de Seguros y Reaseguros (BSV) and BanSabadell Pensiones E.G.F.P., S.A. (BSP) amounted to USD 905 million (initially USD 832 million) and included net tangible assets acquired of USD 157 million (initially USD 181 million) and identifi able intangible assets, net of deferred tax, of USD 1,652 million (initially USD 1,483 million). Identifi able intangible assets before tax amounted to USD 2,358 million (initially USD 2,117 million), mainly relating to the life insurance and pension distribution agreement with Banco Sabadell of USD 1,918 million (initially
USD 1,665 million) and the present value of profi ts of acquired insurance contracts of USD 437 million (initially USD 449 million). Total acquisition costs for BanSabadell Seguros Generales, S.A. de Seguros y Reaseguros (BSG) amounted to USD 145 million and included net tangible assets acquired of USD 10 million and identifi able intangible assets, net of deferred tax, of USD 280 million (USD 396 million before tax, mainly relating to the general insurance distribution agreement with Banco Sabadell). 50 percent of net tangible assets acquired and of identifi able intangible assets, net of deferred tax, refl ecting non-controlling interests in BSV, BSP and BSG, amounted in total to USD 1,049 million (initially USD 976 million). The Group has management control of the three jointly owned companies and fully consolidates them.
Total acquisition costs for Can Soluciones amounted to USD 133 million, including the present value of an expected earn-out payment of USD 55 million, and included net tangible assets acquired of USD 14 million and identifi able intangible assets, net of deferred tax, of USD 140 million (USD 199 million before tax, relating to a distribution agreement with Caja de Ahorros y Monte de Piedad de Navarra). The residual goodwill of USD 56 million represented expected synergies from the effi ciencies gained through a service level agreement with Can Soluciones relating to the management and administration of the business. 50 percent of net tangible assets acquired and of identifi able intangible assets, net of deferred tax, refl ecting non-controlling interests in Can Soluciones, amounted to USD 77 million. The Group has management control of the jointly-owned company, which is therefore fully consolidated.
The impact of the acquisitions on the income statement of the year ended December 31, 2008 was immaterial.
1 Including net capital gains/(losses) on derivative fi nancial instruments of USD (499) million and USD 1,241 million for the years ended December 31, 2009 and 2008, respectively, of which net capital gains/(losses) on derivatives attributable to cash fl ow hedge ineffectiveness amounted to USD 33 million and USD 5 million for the years ended December 31, 2009 and 2008, respectively.
Rental operating expenses for real estate held for investment included in investment expenses for total investments amounted to USD 144 million and USD 179 million for the years ended December 31, 2009 and 2008, respectively.
Real estate held for investment 464 491 131 210 594 700
Table 6.1b in USD millions, for the years ended December 31Investment result for Group investments 08_Financial_Statements_Part1_7442_Eng.indd 18108_Financial_Statements_Part1_7442_Eng.indd 181 24/2/10 20:16:5924/2/10 20:16:59
For the years ended December 31, 2009 and 2008, respectively, impairment charges on Group investments included in net capital losses amounted to USD 1,394 million and USD 2,457 million, of which impairment charges on mortgage loans and other investments comprised USD 231 million and USD 49 million, respectively. For the year 2009 impairment charges on mortgage loans are primarily attributable to the Group’s banking activities.
Investment result, gross for unit-linked contracts 2,064 3,766 10,837 (24,916) 12,901 (21,150) Investment expenses for unit-linked contracts (426) (581) – – (426) (581) Investment result, net unit-linked contracts 1,638 3,185 10,837 (24,916) 12,475 (21,731)
Securities at fair value through profi t or loss: 11,273 (23,672) 392 (548) 11,666 (24,221) Net capital gains/(losses) on Group investments
Table 6.2 in USD millions, for the years ended December 31Net capital gains, losses and impairments on equity and debt securities on total investments 08_Financial_Statements_Part1_7442_Eng.indd 18208_Financial_Statements_Part1_7442_Eng.indd 182 24/2/10 20:17:0024/2/10 20:17:00
Debt securities: Fair value through profi t or loss 6,843 3.5 7,291 4.1
Cash and investments with a carrying value of USD 4,908 million and USD 5,235 million were deposited on behalf of regulatory authorities as of December 31, 2009 and 2008, respectively.
As of December 31, 2009 and 2008, respectively, debt securities with a carrying value of USD 3,938 million and USD 3,608 million have been sold to fi nancial institutions under short-term sale and repurchase agreements. These securities continue to be recognized as investments in the balance sheets. Obligations to repurchase these securities comprised USD 3,976 million and USD 3,608 million as of December 31, 2009 and 2008, respectively. The Group retains the rights to the risks and rewards of ownership of loaned securities and securities under short-term sale and repurchase agreements. These risks and rewards include changes in market values and income earned.
Table 6.3b as of December 31Details of Group investments by category 08_Financial_Statements_Part1_7442_Eng.indd 18408_Financial_Statements_Part1_7442_Eng.indd 184 24/2/10 20:17:0224/2/10 20:17:02
Investments held under unit-linked investments contracts are classifi ed as designated at fair value through profi t or loss.
Mortgage and asset-backed securities: < 1 year – – 1,288 759 69 68
Debt securities Swiss federal and cantonal governments 2,788 3,657 199 212 (2) (1) 2,986 3,868 United Kingdom
Mortgage and asset-backed securities 22,787 24,412 556 310 (1,053) (2,692) 22,290 22,030 Redeemable 1 Net of impairments (see table 6.2).
millions of which: trading equity portfolios in capital markets of which: common stock portfolios backing participating
Table 6.7 as of December 31Held-to-maturity debt securities 08_Financial_Statements_Part1_7442_Eng.indd 18708_Financial_Statements_Part1_7442_Eng.indd 187 24/2/10 20:17:0524/2/10 20:17:05
Associates: DKN Financial Group Limited 60 50 (3) 2 30.99% 31.84%
Less: amount of net unrealized gains/(losses) on investments attributable to: Life policyholder dividends and other policyholder liabilities (665) 236 Life deferred acquisition costs (98) 256 Deferred income taxes (287) 837 Non-controlling interests (15) (18)
Table 6.9 in USD millions, as of December 31Equity method accounted investments
Table 7.1 in USD millions, as of December 31Maturity profi le of notional amounts and fair values of derivative fi nancial instruments 09_Financial_Statements_Part2_7443_Eng.indd 18909_Financial_Statements_Part2_7443_Eng.indd 189 24/2/10 20:18:0224/2/10 20:18:02
Interest rate contracts Interest rate contracts are used to hedge risks from changes in interest rates and to manage asset/liability mismatches. Whenever possible the Group uses exchange traded contracts, which are standardized and liquid and are not considered to carry counterparty risk. Over the counter (OTC) contracts are otherwise applied and comprise swaps, swaptions and caps. In terms of notional amounts, the major OTC positions are swaptions that are mostly long receiver swaptions to hedge against the risk of a fall in interest rates.
Equity contracts Equity contracts are entered into mostly on a portfolio level to protect equity investments against a decline in equity market prices and to manage the risk return profi le of equity exposures. Most equity contracts are purchased put options. The change in the notional amounts of put options between December 31, 2009 and December 31, 2008 was mainly driven by entering into new long equity put options. Most of the equity call options are used in collar structures to mitigate the overall hedging costs or to hedge equity risks embedded in guaranteed equity bonds. Written put positions are mostly hedged by long put positions or backed by cash collateral.
Credit contracts Credit default swaps offer protection to the owner in case a credit event occurs. The Group is very selective in its purchase of credit default swaps. As of both December 31, 2009, and 2008 these related to reinsurance receivables.
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 tax-exempt investment returns linked to the performance of the underlying investments. The policies are long duration contracts providing charges and benefi ts over a policy life that can be greater than 45 years. SVOs reduce the volatility of the policyholders’ investment returns. In the event that a policy is surrendered, the policyholder would be entitled to recover the excess of the notional SVO derived value over the market value of the underlying investments. Certain policy features as well as certain regulations provide disincentives for surrender. We monitor the risk of surrender on an ongoing basis and consider the likelihood of surrender the one input factor to the model to determine the fair value of the SVOs. During 2009, one policyholder surrendered the contract, resulting in a net loss of USD 5 million after applicable reductions. Another policyholder elected to eliminate certain certifi cates under the policies. No losses were incurred on this transaction. The fair value of the derivative liability recognized in respect of the SVOs, included in written put options, was USD 37 million and USD 23 million as of December 31, 2009 and 2008, respectively. The difference between the notional SVO derived value and market value of the underlying investments for BOLI/COLI policies was USD 1,043 million and USD 929 million as of December 31, 2009 and 2008, respectively, representing the total net market value loss after surrender charges in the unlikely event that all policies would have been surrendered on those dates.
Fair value hedges: Cross currency interest rate swaps – 244 614 858 204 – 975 141 –
Cash fl ow hedges: Options on interest rate swaps – – 3,474 3,474 171 – 3,373 209 –
Fair value hedges Designated fair value hedges consist of cross currency interest rate swaps used to protect the Group against changes in foreign currency exposure and interest rate exposure of Euro-denominated debt issued by the Group. A fair value hedge relationship on the EUR 500 million 4.5 percent subordinated bond due for repayment in June 2025 issued by Zurich Finance (USA), Inc. (see note 21), was entered into at the issuance of the debt instrument in 2005 and will end on June 15, 2015.
A fair value hedge relationship on 20 percent of the EUR 1 billion 4.5 percent senior debt due for repayment in 2014 issued by Zurich Finance (USA), Inc. (see note 21), was entered into on January 1, 2007 and will end at maturity of the underlying debt instrument in 2014.
Table 7.2 in USD millions, as of December 31Maturity profi le of notional amounts and fair values of derivative fi nancial instruments
The Group also uses currency swaps for cash fl ow hedging to protect against exposures to variability of cash fl ows. The change in the fair value of the hedging instrument is recognized directly in comprehensive income. The ineffective portion of the change in fair value is recognized directly in income within administrative and other operating expense. The effective portion, related to spot rate changes in fair value of the hedging instrument, is reclassifi ed to income within administrative and other operating expense as an offset to foreign currency revaluation on the underlying hedged debt.
100 percent of EUR 600 million 6.5 percent senior bond due October 2015 issued by Zurich Finance (USA), Inc. • entered on April 14, 2009 ending October 15, 2015.
The net gains deferred in shareholders’ equity on derivatives designated as cash fl ow hedges were USD 23 million and USD 107 million before tax for the years ended December 31, 2009 and 2008, respectively.
A net gain of USD 32 million and USD 2 million for the years ended December 31, 2009 and 2008, respectively, was recognized in net capital gains/(losses) and impairments due to a hedge ineffectiveness.
Gross Reserves for losses and loss adjustment expenses 68,086 65,218 Reserves for unearned premiums 17,676 16,399 Future life policyholders’ benefi ts 78,589 76,218 Policyholders’ contract deposits and other funds 18,857 17,047 Reserves for unit-linked contracts 58,204 47,297 Total reserves for insurance contracts, gross 241,412 222,179
Losses and loss adjustment expenses incurred: Current year 28,308 28,296 (2,610) (2,879) 25,698 25,416
Losses and loss adjustment expenses paid: Current year (11,178) (10,190) 536 591 (10,642) (9,599)
Table 8.2 in USD millionsDevelopment of reserves for losses and loss adjustment expenses 09_Financial_Statements_Part2_7443_Eng.indd 19309_Financial_Statements_Part2_7443_Eng.indd 193 24/2/10 20:18:0424/2/10 20:18:04
The Group establishes loss reserves, which are estimates of future payments of reported and unreported claims for losses and related expenses, with respect to insured events that have occurred. Reserving is a complex process dealing with uncertainty, requiring the use of informed estimates and judgments. Any changes in estimates or judgments are refl ected in the results of operations in the period in which estimates and judgments are changed.
Table 8.2 shows the development of reserves for losses and loss adjustment expenses during the year. The increase in the total net reserves during the year included USD 1,059 million favorable development emerging from reserves established in prior years, after allowing for asbestos charges of USD 539 million. This favorable development is primarily attributable to our General Insurance business and breaks down into many individual movements by Business Division, country, line of business, and accident year. In the Global Corporate segment, favorable development of USD 257 million was approximately equally shared between North America and the rest of the world. North America Commercial favorable development of USD 146 million arose mostly from program and surety business. Europe General Insurance favorable development of USD 487 million arose from several European countries besides Italy where we had a negative development of USD 100 million. The remaining favorable development came from Group Reinsurance, International Markets, and the assumed business from Farmers Re; this was somewhat offset by adverse development at Centre.
Gross reserves re-estimated as of December 31, 2009 52,433 56,977 59,655 61,197 60,379 61,815 65,565 64,285 Cumulative (defi ciency)/
Table 8.3 presents changes in the historical non-life reserves, net of reinsurance, that the Group established in 2001 and subsequent years. Reserves are presented by fi nancial year, not by accident year. The reserves (and the development thereon) are for all accident years in that fi nancial year. The top line of the table shows the estimated gross reserves for unpaid losses and loss adjustment expenses as of each balance sheet date, which represents the estimated amount of future payments for losses incurred in that year and in prior years. The cumulative paid portion of the table presents the cumulative amounts paid through each subsequent year in respect of the reserves established at each year end. The net reserves re-estimated portion of the table shows the re-estimation of the initially recorded reserve as of each succeeding year end. Reserve development is shown in each column. Changes to estimates are made as more information becomes known about the actual losses for which the initial reserves were established. The cumulative defi ciency or redundancy is equal to the initial net reserves less the liability re-estimated as of December 31, 2009. It is
Table 8.3 in USD millions, as of December 31Development of insurance losses, net 09_Financial_Statements_Part2_7443_Eng.indd 19509_Financial_Statements_Part2_7443_Eng.indd 195 24/2/10 20:18:0624/2/10 20:18:06
Management has considered asbestos, environmental and latent injury claims and claims expenses in establishing the reserves for losses and loss adjustment expenses. The Group continues to be advised of claims asserting injuries from toxic waste, hazardous materials and other environmental pollutants, alleged damages to cover the clean-up costs of hazardous waste dump sites relating to policies written in prior years and indemnity claims asserting injuries from asbestos. Coverage and claim settlement issues, such as determination that coverage exists and the defi nition of an occurrence, together with increased medical diagnostic capabilities and awareness have often caused actual loss development to exhibit more variation than in other lines. Such claims require specialized reserving techniques and the uncertainty of the ultimate cost of these types of claims has tended to be greater than the uncertainty relating to standard lines of business. Reserves for asbestos increased by USD 603 million gross and USD 475 million net during 2009. This increase was almost entirely driven by strengthening of UK asbestos reserves in respect of mesothelioma claims. This follows the annual review of UK Disease claims, taking account of emerging experience and developments in external benchmarks, including the publication of revised projections of population deaths by the UK Health and Safety Executive. For this class of claims, the Group’s methodology, consistent with industry practice, relies on three key assumptions: the total future population deaths, the number of claims per number of deaths ratio, and the Group’s share of market claims. Estimates of all three drivers increased in 2009, based on the Group’s own experience and published revised industry experience, and this has been refl ected in the increase in reserves.
(Decreases)/increases recorded in shareholders’ equity 85 (11) – – 85 (11)
Long-duration contract liabilities included in future life policyholders’ benefi ts result primarily from traditional participating and non-participating life insurance products. Short-duration contract liabilities are primarily accident and health insurance products.
The impact of changes in assumptions on net future life policyholders’ benefi ts was USD 201 million and USD 5 million for the years ended December 31, 2009 and 2008, respectively. The net changes include the following signifi cant movements: interest rate assumptions increased the benefi ts by USD 11 million in 2009 and by USD 229 million in 2008;•
longevity assumptions reduced the benefi ts by USD 12 million in 2009 and increased them by USD 85 million • in 2008; morbidity assumptions increased the benefi ts by USD 23 million in 2009 and reduced them by USD 192 million • in 2008; investment return assumptions reduced the benefi ts by USD 133 million in 2009 and by USD 118 million in 2008.•
modelling assumptions reduced the benefi ts by USD 118 million in 2009 and by nil in 2008.•
Universal life and other contracts 10,801 10,365 Policyholder dividends 5,297 4,289
(Decrease)/increase recorded in shareholders’ equity 825 188 – – 825 188
Interest and bonuses credited/(charged) to policyholders 6,616 (12,223) – – 6,616 (12,223)
1 2009 includes USD 497 million of transfers from future life policyholders‘ benefi ts (see note 1 for further details).
Guarantees arising from minimum death benefi ts (GMDB) and retirement income benefi ts (GRIB) Certain products for which policyholders bear in full the credit and market risks associated with the underlying invested funds selected by them contain guarantees for which liabilities have been recorded for additional benefi ts and minimum guarantees. These arise primarily in the subsidiary Kemper Investors Life Insurance Company which has written variable annuity contracts that provide policyholders with certain guarantees related to minimum death and income benefi ts. The determination of these liabilities is based on models that involve a range of scenarios and assumptions, including those regarding expected market rates of return and volatility, contract surrender rates, annuitization elections and mortality experience. After 2001 the Group no longer issued new variable annuity contracts that provide policyholders with minimum death and retirement income benefi t guarantees.
Amount at risk from minimum death benefi ts (GMDB) Gross 1,182 1,744
Table 8.9 in USD millions (except average attained age), as ofInformation on guaranteed liabilities 09_Financial_Statements_Part2_7443_Eng.indd 19909_Financial_Statements_Part2_7443_Eng.indd 199 24/2/10 20:18:0824/2/10 20:18:08
Losses and loss adjustment expenses 27,375 26,942 (2,736) (2,796) 24,639 24,145 Life insurance death and other benefi ts 11,816 11,315 (460) (778) 11,356 10,538 Change in future life policyholders’ benefi ts 330 (6,870) (64) 6,999 266 128 Total insurance benefi ts and losses 1 39,522 31,387 (3,261) 3,425 36,261 34,811 1 Effective June 30, 2008, the underlying contracts relating to a UK annuity portfolio reinsured in 2007 were transferred to the reinsurer. This transaction had no net impact on the consolidated income statement in 2008, but impacted both gross and ceded change in the future life policyholders’ benefi ts in 2008.
Total policyholder dividends and participation in profi ts 12,859 (21,554) – 40 12,859 (21,514)
Amortization of deferred acquisition costs 5,153 4,689 (394) (458) 4,759 4,231 Amortization of deferred origination costs 110 122 – – 110 122 Commissions and other underwriting and acquisition expenses 1 3,713 4,474 (328) (540) 3,385 3,934 Total underwriting and policy acquisition costs 8,976 9,285 (723) (998) 8,254 8,287 1 Net of additions related to deferred acquisition and origination costs.
Table 11.2 in USD millions, for the years ended December 31Policyholder dividends and participation in profi ts
1 Net of eliminations from inter-segment transactions. 2 The 2009 movement represents the reclassifi cation from insurance contracts to investment contracts (see note 1 for further details).
As of January 1 770 1,003 Origination costs deferred 96 119
Table 13 in USD millions, for the years ended December 31Administrative and other operating expenses 09_Financial_Statements_Part2_7443_Eng.indd 20209_Financial_Statements_Part2_7443_Eng.indd 202 24/2/10 20:18:1024/2/10 20:18:10
Farmers Group, Inc. (FGI) through its attorney-in-fact (AIF) relationship with the Farmers Exchanges, which the Group manages but does not own, is contractually permitted to receive a management fee of up to 20% (25% in the case of the Fire Insurance Exchange) of the gross premiums earned by the Farmers Exchanges for non-claims related services. To enable the Farmers Exchanges to maintain appropriate capital and surplus while offering competitive insurance rates, FGI has historically charged a lower management fee than the maximum allowed. The range of fees has varied by line of business over time and from year to year. During the past fi ve years, aggregate management fees have averaged between 12% and 13% of gross premiums earned by the Farmers Exchanges. The gross earned premiums of the Farmers Exchanges were USD 17,884 million and USD 16,541 million for the years ended December 31, 2009 and 2008, respectively.
Financial instruments Receivables from policyholders 3,415 3,107 Receivables from insurance companies, agents, brokers and intermediaries 5,803 6,348 Receivables arising from ceded reinsurance 1,092 1,166 Other receivables 2,671 2,445 Allowance for impairments 1 (437) (457) Non-fi nancial instruments Tax receivables 638 621 1 Allowance for impairments includes USD 181 million and USD 206 million as of December 31, 2009, and 2008, respectively, for receivables arising from ceded reinsurance.
As part of the Deutscher Herold transaction in 2002, the Group acquired various mortgage loans. Deutscher Herold had previously sold these loans to credit institutions while retaining the related credit and interest risk. Therefore the loans have not been derecognized from the balance sheet and the transaction is refl ected as a collateralized borrowing. Accordingly, the loans are recorded as “Mortgage loans given as collateral” and the liability to credit institutions as “Collateralized loans”.
Undiscounted cash fl ow 2 1 Allocation to the time bands is based on the expected maturity date. 2 Allocation to the time bands is based on the earliest contractual maturity.
Table 16 in USD millions, as of December 31Maturity schedule – collateralized loans 09_Financial_Statements_Part2_7443_Eng.indd 20409_Financial_Statements_Part2_7443_Eng.indd 204 24/2/10 20:18:1124/2/10 20:18:11
Gross carrying value as of December 31, 2009 364 1,249 475 871 794 3,754
Table 17.2 in USD millionsProperty and equipment – prior period 09_Financial_Statements_Part2_7443_Eng.indd 20509_Financial_Statements_Part2_7443_Eng.indd 205 24/2/10 20:18:1224/2/10 20:18:12
Gross carrying value as of January 1, 2009 1,696 2,617 6,112 1,025 11,451 Less: accumulated amortization / impairments (20) (1,364) (1,757) – (3,142) Net carrying value as of January 1, 2009 1,677 1,252 4,355 1,025 8,310
The Group has management control of certain Spanish insurance companies, where it has a 50 percent share and which are therefore fully consolidated. As of December 31, 2009, USD 224 million of the present value of profi ts of acquired insurance contracts (PVFP) and USD 1,492 million of other intangible assets related to non-controlling interests. In comparison, as of December 31, 2008, USD 267 million of the PVFP and USD 1,387 million of other intangible assets related to non-controlling interests. The increase compared with December 31, 2008 is related to the fi nalization of the purchase price allocation for Banco Sabadell.
Impairment charges of USD 94 million were recorded in income comprising impairments on PVFP of USD 30 million in the Spanish Life operations, goodwill impairments of USD 12 million mainly related to the Spanish General Insurance operations and USD 52 million of impairments of other intangible assets primarily related to other intangible assets with defi nite life in the Italian Life operations, as well as software in the Banking operations.
Other Operating Businesses 5 – 219 – 223 Non-Core Businesses – – 9 – 9 Net carrying value as of December 31, 2009 2,297 1,137 4,882 1,025 9,342
Foreign currency translation effects (198) (97) (252) – (548) Net carrying value as of December 31, 2008 1,677 1,252 4,355 1 1,025 8,310 Plus: accumulated amortization / impairments 20 1,364 1,757 – 3,142 Gross carrying value as of December 31, 2008 1,697 2,617 6,112 1,025 11,451 1 Other intangible assets include software of USD 1,156 million and distribution agreements of USD 3,052 million.
In 2008 impairment charges of USD 83 million were recorded in income comprising impairment of PVFP of USD 64 million in the UK and German Life operations, impairment of goodwill of USD 14 million as a result of updated cash fl ow assumptions in the German Life operations and other intangible assets of USD 5 million relating to impairments on capitalized software.
Other Operating Businesses 5 – 185 – 190 Non-Core Businesses – – 13 – 13 Net carrying value as of December 31, 2008 1,677 1,252 4,355 1,025 8,310
Other fi nancial assets: Derivative assets 1,338 1,724 Other assets 199 133 Other non-fi nancial assets: Accrued premiums 785 900 Prepaid expenses 286 315 Prepaid insurance benefi ts 369 392 Other assets 350 630 Total other assets 3,327 4,095
The undiscounted amounts of the fi nancial assets as of December 31, 2009 and 2008 are not materially different from the carrying amounts.
As of January 1 88 162 Provisions made during the period 101 141 Provisions used during the period (86) (200) Provisions reversed during the period (3) (2) Foreign currency translation effects 4 (10) Net changes due to acquisitions / divestments 17 – Other changes (1) (2) As of December 31 119 88
Table 20.3 in USD millionsRestructuring provisions 09_Financial_Statements_Part2_7443_Eng.indd 20909_Financial_Statements_Part2_7443_Eng.indd 209 24/2/10 20:18:1524/2/10 20:18:15
Table 21.3 in USD millions, for the years ended December 31Expected and actual income tax expense 10_Financial_Statements_Part3_7444_Eng.indd 21010_Financial_Statements_Part3_7444_Eng.indd 210 24/2/10 20:23:3224/2/10 20:23:32
Current tax receivables 638 621 Current tax payables (983) (1,025) Net current tax payables (345) (404)
Deferred tax assets 2,257 2,901 Deferred tax liabilities (4,464) (3,485) Net deferred tax liabilities (2,207) (583)
The cumulative amount of deferred tax credited to shareholders’ equity, net of foreign currency translation effects, amounted to USD 531 million and USD 1,720 million for the years ended December 31, 2009 and 2008, respectively.
USD 1,029 million increase in deferred tax liabilities resulted from the acquisitions in 2008 as disclosed in note 5, of which USD 485 million relates to non-controlling interests.
Net deferred tax assets/(liabilities) attributable to policyholders (74) 544 Net deferred tax assets/(liabilities) attributable to shareholders (2,133) (1,128) Net deferred tax liabilities (2,207) (583)
Tax loss carryforwards 475 – 691 – Gross deferred tax assets/(liabilities)
Reserves for losses and loss adjustment expenses 339 (478) 268 (575) Reserves for unearned premiums 156 (64) 201 (53) Deferred front-end fees 747 – 629 – Pensions and other employee benefi ts 366 (29) 435 (21)
Table 21.8 in USD millions, as of December 31Deferred tax assets/(liabilities) analysis by source 10_Financial_Statements_Part3_7444_Eng.indd 21210_Financial_Statements_Part3_7444_Eng.indd 212 24/2/10 20:23:3324/2/10 20:23:33
The Group’s deferred tax assets and liabilities are recorded in the tax paying entities throughout the world, which may include several legal entities within each tax jurisdiction. Legal entities are grouped as a single taxpayer only when permitted by local legislation and when deemed appropriate. The fi rst part of the table above includes single taxpayers with a net deferred tax asset position and the second part includes single taxpayers with a net deferred tax liability position.
For which deferred tax assets have been recognized, expiring < 5 years 160 42 > 20 years or with no time limitation 1,095 1,715
The tax rates applicable to tax losses for which a deferred tax asset has not been recognized are 24 percent and 35 percent for the years 2009 and 2008, respectively.
The recoverability of the deferred tax asset for each taxpayer is based on the taxpayer’s ability to utilize the deferred tax asset over a reasonable period of time. This analysis considers the projected taxable income to be generated by the taxpayer, as well as its ability to offset deferred tax asset with deferred tax liabilities.
Debt related to capital markets and banking activities Zurich Capital Markets Various debt instruments payable within 1 year 25 2,079 Zurich Financial Services EUB Holdings Limited Various debt instruments payable within 1 year 813 447 Various debt instruments payable in more than 1 year 1 1 Debt related to capital markets and banking activities 839 2,527 Senior debt Zurich Finance (USA), Inc. 3.50% CHF 300 bond, due November 2011 1, 6 291 283
Zurich Finance (Luxembourg) S.A. 3.25% USD 750 bond, due September 2013 1, 6 747 – Kemper Corporation Various debt instruments, due within 1 year – 23 Zurich Insurance Company Ltd 3.875% CHF 1,000 bond, due July 2011 965 938
ZFS Finance (USA) Trust I Series I 6.15% USD 600 ECAPS, due December 2065 567 569 ZFS Finance (USA) Trust II Series II 6.45% USD 700 ECAPS, due December 2065 672 672
ZFS Finance (USA) Trust V Series V 6.5% USD 1,000 Trust Preferred Securities,
Other Various debt instruments payable in more than 1 year 22 21 Subordinated debt 5,167 5,096 Total senior and subordinated debt 11,444 8,455 Total debt 12,283 10,981 1 The bond is economically hedged, but hedge accounting treatment has not been applied. 2 The bond is part of a qualifying cash fl ow hedge (80% of the total) and fair value hedge (20% of the total). 3 The bond is part of a qualifying cash fl ow hedge.
(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 equitylike than the replaced notes.
None of the debt instruments listed above were in default as of December 31, 2009 and 2008.
Table 22.1 in USD millions, as ofDebt 10_Financial_Statements_Part3_7444_Eng.indd 21410_Financial_Statements_Part3_7444_Eng.indd 214 24/2/10 20:23:3524/2/10 20:23:35
On April 14, 2009, Zurich Finance (USA), Inc. issued EUR 800 million (USD 1,143 million) and EUR 600 million (USD 857 million) of senior debt under its EMTN Programme. These bonds carry a fi xed annual coupon of 4.875% and 6.50% and mature in April 2012 and in October 2015, respectively.
ii) Subordinated debt Subordinated debt increased slightly from USD 5.1 billion as of December 31, 2008 to USD 5.2 billion as of December 31, 2009, due to issuances of approximately USD 806 million under the EMTN Programme and foreign currency revaluation of GBP and EUR bonds, partially offset by the repurchase of USD 866 million of previously issued subordinated debt.
Subordinated debt securities are obligations of the Group which, in case of liquidation, rank junior to all present and future senior indebtedness and certain other obligations of the Group.
On March 31, 2009, Zurich Holding Company of America (ZHCA), a subsidiary of the Group, repurchased USD 9 million Enhanced Capital Advantaged Preferred Securities (ECAPS) and USD 85 million Trust Preferred Securities. On May 20, 2009, ZHCA repurchased USD 50 million of ECAPS. These repurchases resulted in a total pre-tax gain of USD 74 million.
Series II 6.45% Fixed / Adjustable Rate USD 700 ECAPS, due December 2065 6.45% payable semi-annually until June 15, 2016 and then reset quarterly to the adjustable rate plus 2.00%. 2
1 Reset rate of interest is equal to the gross redemption yield on the benchmark fi ve-year Gilt as determined by the Calculation Bank, plus 2.85% per annum. 2 Adjustable Rate is equal to the greatest of (i) the 3-month LIBOR rate; (ii) the 10-year Treasury CMT (Constant Maturity Treasury) Rate; and (iii) the 30-year Treasury CMT
Table 22.2 in USD millionsDescription and features of signifi cant subordinated debt 10_Financial_Statements_Part3_7444_Eng.indd 21610_Financial_Statements_Part3_7444_Eng.indd 216 24/2/10 20:23:3624/2/10 20:23:36
Debt related to capital markets and banking activities 66 127 Senior debt 215 141 Subordinated debt 305 331
Table 22.4 in USD millions, for the years ended December 31Interest expense on debt 10_Financial_Statements_Part3_7444_Eng.indd 21710_Financial_Statements_Part3_7444_Eng.indd 217 24/2/10 20:23:3624/2/10 20:23:36
The USD 814 million capital markets and banking activities adjustment relates to notes and loans payable held by Zurich Financial Services EUB Holdings Limited.
Issued share capital As of December 31, 2007 14,554,682 145,546,820 0.10 Capital reduction by canceling shares bought back under the share buy-back program announced in 2007 (343,250) (3,432,500) 0.10 New shares issued from contingent capital in 2008 830 8,300 0.10
New shares issued from authorized capital in 2009 480,000 4,800,000 0.10 New shares issued from contingent capital in 2009 55,045 550,448 0.10
At the Annual General Meeting on April 3, 2008, the shareholders approved a share capital reduction of CHF 343,250 from CHF 14,554,682 to CHF 14,211,432 by cancelling 3,432,500 registered shares that were bought back under the share buy-back program announced on February 15, 2007. The effective date of the capital reduction was June 27, 2008. During the year 2008, a total of 8,300 shares were issued to employees out of the contingent capital.
1 The amount is gross of issuance costs of USD 14 million as of December 31, 2009 and 2008 and of USD 29 million as of December 31, 2007.
Table 23.3 number of shares, as of December 31Treasury shares 10_Financial_Statements_Part3_7444_Eng.indd 22110_Financial_Statements_Part3_7444_Eng.indd 221 24/2/10 20:23:3824/2/10 20:23:38
On April 17, 2009, Zurich Financial Services Ltd placed 1,914,096 treasury shares, bought back in 2008 under the share buy-back program, with institutional investors with the proceeds applied to the 21st Century acquisition completed on July 1, 2009.
Effect of potentially dilutive shares related to share-based compensation plans 1,049,425 (0.16) (0.18) Diluted earnings per share 3,007 138,992,643 21.63 23.35 1 The translation from USD to CHF is shown for information purposes only and has been calculated at the Group's average exchange rates for the years ended December 31, 2009 and 2008, respectively.
Basic earnings per share is computed by dividing net income attributable to 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 refl ects the effect of potentially dilutive shares.
Table 23.4 for the years ended December 31Earnings per share 10_Financial_Statements_Part3_7444_Eng.indd 22210_Financial_Statements_Part3_7444_Eng.indd 222 24/2/10 20:23:3824/2/10 20:23:38
The Group operates a number of retirement benefi t arrangements for employees, the majority of employees belong to defi ned benefi t plans. Other employees participate in defi ned contribution plans, which provide benefi ts equal to amounts contributed by both the employer and the employee plus investment returns.
The Group also operates post-employment plans, mainly in the U.S., which provide employees with certain defi ned post-employment benefi ts such as medical care and life insurance.
To ensure appropriate governance of the Group’s pension and post-employment benefi t plans, the Group Pension Committee provides oversight of the Group’s benefi ts policy.
a) Defined benefit plans Defi ned benefi t pension plans Employees of the Group’s companies are covered by various pension plans, the largest of which are in the UK, U.S., Germany and Switzerland. Certain companies provide defi ned benefi t plans, some of which provide benefi ts related to employees’ service periods and fi nal pensionable earnings. Others provide cash balance plans where the participants receive the benefi t of the accumulated employer and employee contributions together with additional cash credits in line with the rules of the plan. Eligibility for participation in the various plans is either based on completion of a specifi ed period of continuous service or from the date of commencement of employment.
Most of the Group’s defi ned benefi t pension plans are funded through contributions by the Group, and in some cases the employee, to trusts or foundations independent of the Group’s fi nances. 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 balance sheet.
The tables below show the funded status of the Group’s plans; this being the pension plans’ assets at fair value less the pension plans’ liabilities based on the present value of the obligations. Plans that are wholly unfunded are shown separately from plans that are wholly or partly funded.
Present value of unfunded obligations (230) (210) (207) (985) (205) (183) (208) (196) Unrecognized past service cost – – – – (28) (1) (2) (1)
Table 24.2 in USD millions, as of December 31Status of unfunded defi ned benefi t plans
Mortgage loans 396 409 – – Cash and cash equivalents 181 130 – – Equity securities 3,598 2,847 – – Debt securities 7,740 6,816 – – Real estate 701 671 – –
Benefi t obligation as of January 1 (12,890) (13,860) (275) (274)
Effects of business combinations and other transfers (53) (47) (12) (11) Foreign currency translation effects (771) 1,894 (7) 13 Benefi t obligation as of December 31 (14,196) (12,890) (275) (275)
Effect of curtailments or settlements (13) – – – Effects of business combinations and other transfers 61 52 – – Foreign currency translation effects 713 (1,763) – – Fair value of plan assets as of December 31 12,622 10,879 – –
Table 24.5 in USD millions, as of December 31Fair value of assets held in funded defi ned benefi t plans
Table 24.7 in USD millionsMovement in fair value of plan assets – funded plans 10_Financial_Statements_Part3_7444_Eng.indd 22510_Financial_Statements_Part3_7444_Eng.indd 225 24/2/10 20:23:4024/2/10 20:23:40
The actual returns on defi ned benefi t pension plan assets for the years ended December 31, 2009 and 2008 were gains of USD 937 million and losses of USD 758 million, respectively.
Change in liability due to asset ceiling (7) 51 – – Actuarial gain/(loss) passed through other comprehensive income 329 (1,805) (7) 3 Effects of business combinations and other transfers (1) (6) 2 (9) Foreign currency translation effects (51) 148 (21) 11
Current average life expectancy for a 65 year old male 19.8 22.3 19.4 18.1 19.8 22.2 19.3 18.0
b) Share-based compensation plans for employees and executives The Group encourages employees to own shares of Zurich Financial Services Ltd and has set up a framework based on the implementation of either share options and/or performance share programs. Actual plans are tailored to meet local market requirements.
Total option-based expenses 42 35 Total share-based expenses 119 139 Total expenses 161 174
Employee share plans Share Incentive Plan for employees in the UK The Group established an Inland Revenue approved Share Incentive Plan and launched the partnership shares element of this plan in 2003, which enabled participating employees to make monthly purchases of Zurich Financial Services Ltd shares at the prevailing market price out of their gross earnings. There were 374 and 420 participants in the plan as of December 31, 2009 and 2008, respectively. The Group also operates the profi t-sharing element of the Share Incentive Plan (reward shares) which was launched in 2004 with annual share allocations being made in May each year subject to business performance. The awards are based on the participating employee’s business unit’s Business Operating Profi t (BOP) after tax for the year, subject to a maximum individual award of 5 percent of participant’s base salary (before any fl exible benefi t adjustments) or GBP 3,000. The total number of participating employees in the reward share element of the plans as of December 31, 2009 and 2008 was 5,569 and 6,269 respectively.
Share Incentive Plans 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 CHF 3,500 per employee. During 2009, 6,053 employees participated in the Employee Incentive Plan compared with 6,282 in 2008. For the year ended December 31, 2009, 1,579 employees received shares under the 2008 employee performance share plan. For the year ended December 31, 2008, 1,909 employees received shares under the 2007 employee performance share plan.
Table 25.1 in USD millions, as of December 31Expenses recognized in income 10_Financial_Statements_Part3_7444_Eng.indd 22810_Financial_Statements_Part3_7444_Eng.indd 228 24/2/10 20:23:4224/2/10 20:23:42
Share-based compensation plans for executives The Group operates long-term incentive plans for selected executives. These plans comprise the allocation of a target number of share grants and/or share option grants with the vesting of these share and option grants being subject to the achievement of specifi c fi nancial performance goals, such as net income after tax and BOP. The Group can also make restricted share grants to selected employees, which provide share awards if the individual remains employed with the Group on selected dates in the future.
Senior Executive long-term incentive plans Each year, Senior Executives are granted performance shares and performance options, which vest on an annual basis over the subsequent three year period. The actual level of vesting, which can be between 0 percent and 175 percent, with an additional discretion to increase vesting to a maximum of 200 percent, of the original number of shares and/or options granted, depends on the performance of the Group during the previous calendar year. For 2009 and future grants we are looking back to a three year performance period. The current performance metrics are the Group’s return on equity (ROE) and the position of its total annual relative shareholder return measured against an international peer group of insurance companies. One half of the shares that actually vest are sales-restricted for a further period of three years. The options have a seven year term from the date of grant. Grants under the plan are made annually each April. The actual number of performance shares and performance options granted is determined such that the economic value is a defi ned percentage of annual salary in the year of allocation. There were a total of 175 and 170 participants in this plan as of December 31, 2009 and 2008, respectively.
Table 25.4 in CHF, as of December 31, 2009Range of exercise prices of options outstanding 10_Financial_Statements_Part3_7444_Eng.indd 23010_Financial_Statements_Part3_7444_Eng.indd 230 24/2/10 20:23:4324/2/10 20:23:43
Shares granted during the period 543,698 271,374 198 337 Options granted during the period 1 1,175,774 855,214 62 67 1 Number of options granted is shown as the number of shares under option granted during the period.
The risk-free interest rate was determined by using the seven year CHF swap rate applicable in 2009 and 2008. The implied volatility was determined based on the average of a number of several independent quotes.
Black-Scholes assumptions for fair value of options 10_Financial_Statements_Part3_7444_Eng.indd 23110_Financial_Statements_Part3_7444_Eng.indd 231 24/2/10 20:23:4424/2/10 20:23:44
Commitments under investment agreements The Group has committed to contribute capital to subsidiaries and third parties that engage in making investments in direct private equity and private equity funds. Commitments may be called by the counterparty over the term of the investment (generally three to fi ve years) and must be funded by the Group on a timely basis.
Guarantees and letters of credit USD 9,044 million of the USD 9,911 million for fi nancial guarantees and letter of credit in 2009 relate to guarantees in the aggregate amount of GBP 5,595,189,729 provided to the directors of a fully owned subsidiary in connection with the rationalization of the Group’s top legal holding structure which resulted in the merger of Zurich Group Holding into Zurich Financial Services Ltd in December 2009.
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 event at USD 289 million. As of December 31, 2009, and 2008 respectively, the Group has recorded in this respect provisions of USD 44 million and USD 54 million.
Pledged assets The majority of assets pledged to secure the Group’s liabilities relates to debt securities pledged under short-term sale and repurchase agreements. The total amount of pledged fi nancial assets including the securities under short-term sale and repurchase agreements amounted to USD 9,288 million and USD 6,564 million as of December 31, 2009 and 2008, respectively.
The Group has commitments to provide collateral on certain contracts in the event of Zurich Insurance Company Ltd’s fi nancial strength downgrading from currently AA- by Standard & Poor’s. Should the rating fall to A+ by Standard & Poor’s, the additional collateral based on information available on December 31, 2009 is estimated to amount to approximately USD 182 million.
Zurich Financial Services (now Zurich Financial Services Ltd) was a defendant in putative class-action securities lawsuits relating to its divestiture of its interest in Converium (now Scor Holding (Switzerland) AG). On July 25, 2008, Zurich Financial Services Ltd and the class-action plaintiffs entered into an amended stipulation of settlement that called for a payment of USD 28 million to settle the case in two parts on behalf of all persons and entities who purchased Converium securities between January 7, 2002 and September 2, 2004: one settlement in the U.S. court, covering all U.S. persons and entities, and all other persons who purchased Converium securities on U.S. markets, and another settlement in the Amsterdam Court of Appeal, in the Netherlands, covering all non-U.S. persons and entities who purchased Converium securities on non-U.S. markets. The U.S. and Dutch settlements are both subject to court approval and are independent of each other. The U.S. court approved the U.S. settlement on December 12, 2008, but a notice of appeal was fi led. The appeal, however, was dismissed by stipulation of the parties on June 25, 2009 and the U.S. settlement is now considered fi nal. The proposed Dutch settlement has not yet been presented to the Dutch court.
Total available-for-sale securities 131,790 115,059 131,790 115,059 Securities at FV through profi t or loss Trading
Deposits made under assumed reinsurance contracts 3,854 2,391 3,861 2,397 Mortgage loans given as collateral 1,130 1,313 1,102 1,233
Liabilities related to investment contracts (254) (122) (254) (122) Liabilities related to investment contracts with DPF (5,306) (5,314) (5,728) (5,461)
Table 27.1a in USD millions, as of December 31Fair value (FV) and carrying value of Group investments and other Non-unit linked fi nancial instruments 10_Financial_Statements_Part3_7444_Eng.indd 23510_Financial_Statements_Part3_7444_Eng.indd 235 24/2/10 20:23:4524/2/10 20:23:45
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 derivatives traded overthe -counter. 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 and obligations to repurchase securities.
Table 27.1b in USD millions, as of December 31Fair value (FV) and carrying value of unit-linked fi nancial instruments 10_Financial_Statements_Part3_7444_Eng.indd 23610_Financial_Statements_Part3_7444_Eng.indd 236 24/2/10 20:23:4624/2/10 20:23:46
Total securities at FV through profi t or loss 3,486 5,006 3,369 11,860
Realized gains/(losses) recognized in income 1 (43) 1 (8) 1 42 – (5) Unrealized gains/(losses) recognized in income 1 (303) (134) 64 13 150 (50) (15) Unrealized gains/(losses) recognized in shareholders’ equity 511 (183) – – – – –
Table 27.2 in USD millions, as of December 31, 2009Fair value hierarchy
The key assumptions driving the valuation of these investments include discount margins and prepayment, recovery and default rates. 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 table 27.4. While the table below illustrates the overall effect of changing the values of the unobservable inputs by a set percentage, the signifi cance of the impact and the range of reasonably possible alternative assumptions, may differ signifi cantly between investments, given their different terms and circumstances.
The sensitivity analysis is intended to refl ect the uncertainty inherent in the valuation of these investments, under the current market conditions, and its results cannot be extrapolated due to non-linear effects that changes in valuation assumptions may have on the fair value of the investments. Furthermore, the analysis does not indicate a probability of such changes occurring and it does not necessarily represent the Group’s view of expected future changes in fair value of these investments. Any management actions that may be taken to mitigate the inherent risks are not refl ected in this analysis.
The Group has also classifi ed under Level 3 a total amount of USD 3.3 billion of investments in hedge funds and private equity funds that are valued based on regular reports from the issuing funds. Fair values of such investments 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 signifi cant effect on the fair value of these investments, when considered individually, the impact of changing them to reasonably possible alternative values would not be signifi cant.
Investments at FV through profi t or loss Designated at FV
Table 27.5 in USD millions, as of December 31, 2009Fair Value Hierarchy 10_Financial_Statements_Part3_7444_Eng.indd 23810_Financial_Statements_Part3_7444_Eng.indd 238 24/2/10 20:23:4824/2/10 20:23:48
Consolidated income statements for the years ended December 31 Net earned premiums and policy fees 10 10 Net investment income 3 9 Net investment expense (1) – Other income/(expense) – 11 Losses and loss adjustment expenses (11) (8) Administrative and other operating expenses (6) (2)
Table 27.6 in USD millionsRoll forward analysis for fi nancial assets classifi ed under Level 3
Table 28.2 summarizes related party transactions with key personnel refl ected in the Consolidated Financial Statements. Key personnel includes Directors of Zurich Financial Services Ltd and Zurich Insurance Company Ltd and the Members of the Group Executive Committee.
Outstanding loans and guarantees granted to Members of the Group Executive Committee amounted to USD 1 million for both the years ended December 31, 2009 and 2008. Outstanding loans and guarantees granted to Members of the Board of Directors amounted to USD 2 million for the years ended December 31, 2009 and 2008. The terms “Directors” and “Members of the Group Executive Committee” in this context include the individual as well as members of their respective households. The above fi gures include the fees paid to members of the Board of Directors of Zurich Financial Services Ltd and Zurich Insurance Company Ltd, which were USD 3 million, for the years ended December 31, 2009 and 2008.
6.15% surplus note, due December 2013 88 88 6.15% certifi cates of contribution, due December 2013 523 523 6.15% certifi cates of contribution, due August 2014 296 296 10.30% certifi cates of contribution, due December 2013 300 300 Various other certifi cates of contribution 23 23
Conditions governing payment of interest and repayment of principal are outlined in the surplus note and certifi cates 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.
Auto Physical Damage Quota Share reinsurance agreement Effective January 1, 2004, annually, Farmers Re assumes USD 200 million and ZIC assumes USD 800 million of gross written premiums under an Auto Physical Damage (APD) Quota Share reinsurance agreement (APD agreement) with the Farmers Exchanges. In addition, Farmers Re and ZIC assume a quota share percentage of ultimate net losses sustained by the Farmers Exchanges in their APD lines of business. The APD agreement, which can be terminated after 30 days notice by any of the parties, also provides for the Farmers Exchanges to receive a ceding commission of 18.0 percent of premiums, with additional experience commissions that depend on loss experience. This experience commission arrangement limits Farmers Re and ZIC’s potential underwriting gain on the assumed business to 2.5 percent of premiums assumed. The APD agreement was initially entered into on April 1, 2001, which replaced a January 1, 1998 reinsurance agreement.
Table 29 in USD millions, as of December 31Surplus Notes 10_Financial_Statements_Part3_7444_Eng.indd 24110_Financial_Statements_Part3_7444_Eng.indd 241 24/2/10 20:23:4924/2/10 20:23:49
Farmers Exchanges’ share of ceded premiums amounted to USD 1 billion for both the years ended December 31, 2009 and 2008. Ceded incurred losses and loss adjustment expenses totaled USD 667 million and USD 678 million for the years ended December 31, 2009 and 2008, respectively. Farmers Exchanges’ share of the total experience commission income was USD 299 million and USD 294 million for the years ended December 31, 2009 and 2008, respectively.
All Lines Quota Share reinsurance agreement Effective December 31, 2002, certain of the Farmers Exchanges began participating in a 10.0 percent All Lines Quota Share reinsurance agreement (All Lines agreement) with Farmers Re and ZIC which has been amended over the years. 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. Loss recoveries are subjected to a maximum ratio. In addition, under this treaty the Farmers Exchanges’ catastrophe losses are subject to a maximum of USD 800 million. The All Lines agreement also provided for the Farmers Exchanges to receive a provisional ceding commission of 22.0 percent of premiums for acquisition expenses which are recognized as ceded premiums are written, and 8.8 percent of premiums for unallocated loss adjustment expenses and 5.3 percent of premiums for other expenses which are both recognized as premiums are earned, with additional experience commissions potentially payable depending on loss experience.
Effective December 31, 2009, the All Lines quota share reinsurance agreement was modifi ed and the participation • ratio was decreased by 2.5 percent to 35 percent. In addition to this chance, the provisional ceding commission for acquisition expenses was increased from 25.0 percent to 25.7 percent, and the ceding commission for unallocated loss adjustment expense increased from 8.8 percent to 9.0 percent.
The Group pursues a customer-centric strategy and is managed on a matrix basis, refl ecting both businesses and geography. The Group’s operating segments have been identifi ed on the basis of the businesses operated by the Group and how these are strategically managed to offer different products and services to specifi c customer groups. Segment information is presented accordingly. The Group’s reportable segments are as follows: General Insurance serves the property-casualty insurance needs of a wide range of customers, from individuals to small and medium-size businesses, commercial enterprises and major multinational corporations.
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 the Group manages, but does not own, and to their customers. This segment also includes the Farmers Re business, which includes all reinsurance assumed from the Farmers Exchanges by the Group. Farmers Exchanges are prominent writers of personal lines and small commercial lines business in the U.S.
Other Operating Businesses predominantly consist of the Group’s Headquarter and Holding & Financing activities. In addition, certain alternative investment positions not allocated to core operating segments are carried in this segment.
Throughout 2009, the structured alignment of the Group’s segment information compared with 2008 necessitated the following major transfers between the old 2008 and the new 2009 segments: Farmers Re from the previously reported Other Businesses to Farmers•
Centrally Managed Businesses from the previously reported Other Businesses to Non-Core Businesses•
The segment information includes the Groups’ internal performance measure, Business Operating Profi t (BOP). This measure is the basis on which business units are managed. It indicates the underlying performance of the business units by eliminating the impact of fi nancial market volatility and other non-operational variables. BOP refl ects adjustments for shareholders’ taxes, net capital gains on investments and impairments (except for the capital markets and banking operations included in Other Operating Businesses and investments in hedge funds and certain securities held for specifi c economic hedging purposes), policyholders’ share of investment results for the life businesses, non-operational foreign exchange movements, and signifi cant items arising from special circumstances, including restructuring charges and gains and losses on divestments of businesses.
Net earned premiums and policy fees 29,071 30,922 11,677 10,053 Farmers management fees and other related revenues – – – – Net investment result on Group investments 3,181 3,623 4,032 3,688
of which: inter-segment revenues (385) (520) (294) (202) Benefi ts, losses and expenses Insurance benefi ts and losses, net 20,622 22,441 10,594 9,229
Losses and loss adjustment expenses, net 20,590 22,388 53 29 Life insurance death and other benefi ts, net 40 53 10,577 9,888 (Decrease)/increase in future life policyholders’ benefi ts, net 1 (8) – (36) (688)
Policyholder dividends and participation in profi ts, net 15 16 12,018 (18,942) Income tax expense/(benefi t) attributable to policyholders – – 387 (1,184) Underwriting and policy acquisition costs, net 5,375 5,679 1,116 1,887 Administrative and other operating expense
Interest credited to policyholders and other interest 32 195 444 521 Restructuring provisions and other items not included in BOP (170) (246) (119) 423 Total BOP benefi ts, losses and expenses (before interest, depreciation and amortization) 29,177 31,277 26,296 (5,929) Business operating profi t (before interest, depreciation and amortization) 3,927 4,004 1,965 1,826 Depreciation and impairments of property and equipment 80 77 34 42 Amortization and impairments of intangible assets 177 133 346 224 Interest expense on debt 209 235 93 45 Business operating profi t before non-controlling interests 3,460 3,559 1,492 1,516
Supplementary information Additions and capital improvements to property, equipment and intangible assets 474 1,614 407 3,127 1 The Global Life segment includes approximately USD 2,698 million and USD 1,250 million of gross written premiums and future life policyholders‘ benefi ts for certain universal life-type contracts in our Spanish operations for the years ended December 31, 2009 and 2008, respectively (see note 3).
Table 30.1 in USD millions, for the years ended December 31Business operating profi t by business segment 10_Financial_Statements_Part3_7444_Eng.indd 24610_Financial_Statements_Part3_7444_Eng.indd 246 24/2/10 20:23:5224/2/10 20:23:52
Revenues/(expenses) not included in BOP: Net capital gains/(losses) on investments and impairments, net of policyholder allocation (674) (1,172) (441) (411) Net gain/(loss) on divestments of businesses (2) 14 – 4 Restructuring provisions and other (170) (246) (119) 423
Reserves for losses and loss adjustment expenses 63,476 61,396 35 18 Reserves for unearned premiums 15,191 14,874 302 226 Future life policyholders’ benefi ts 98 95 74,760 72,782 Policyholders’ contract deposits and other funds 1,135 1,102 14,691 12,611 Reserves for unit-linked contracts – – 46,468 35,069
Equity Common shareholders’ equity Preferred securities Shareholders’ equity Non-controlling interests Total equity Total liabilities and equity 1 As of December 31, 2009, for the General Insurance segment, other assets include USD 67 million related to land and buildings held for own use reclassifi ed in March and December 2009 as assets held for sale.
Table 30.4 in USD millions, for the years ended December 31General Insurance – Customer segment overview 10_Financial_Statements_Part3_7444_Eng.indd 25210_Financial_Statements_Part3_7444_Eng.indd 252 24/2/10 20:24:0324/2/10 20:24:03
GI Global Functions including Group Reinsurance Eliminations Total 10_Financial_Statements_Part3_7444_Eng.indd 25310_Financial_Statements_Part3_7444_Eng.indd 253 24/2/10 20:24:0424/2/10 20:24:04
Table 30.5 in USD millions, for the years ended December 31General Insurance – Revenues by region 10_Financial_Statements_Part3_7444_Eng.indd 25410_Financial_Statements_Part3_7444_Eng.indd 254 24/2/10 20:24:0624/2/10 20:24:06
Asia-Pacifi c & Middle East Asia-Pacifi c Mature Markets 93 68 China & South East Asia 24 23
Table 30.6 in USD millions, as of December 31General Insurance – Assets by region 10_Financial_Statements_Part3_7444_Eng.indd 25510_Financial_Statements_Part3_7444_Eng.indd 255 24/2/10 20:24:0624/2/10 20:24:06
Gross written premiums and policy fees 1 1,257 1,087 1,096 1,094 3,431 3,906 Net earned premiums and policy fees 982 841 923 931 3,323 3,797
Net investment result on Group investments 446 407 346 384 1,608 1,500 Net investment income on unit-linked investments (15) 20 1,500 2,360 107 128 Net capital gains/(losses) and impairments on
Benefi ts, losses and expenses Insurance benefi ts and losses, net 1 646 557 365 598 3,604 3,891 Policyholder dividends and participation in profi ts, net 150 (261) 6,472 (10,721) 1,948 (3,556) Income tax expense/(benefi t) attributable to policyholders – – 311 (1,300) 50 180 Underwriting and policy acquisition costs, net 46 123 249 861 317 407 Administrative and other operating expense
Interest credited to policyholders and other interest 169 171 11 64 160 216 Restructuring provisions and other items not included in BOP 1 1 (56) 43 – 450 Total BOP benefi ts, losses and expenses 1,233 784 7,764 (9,998) 6,414 2,166 Business operating profi t (before
Depreciation and impairments of property and equipment 2 2 10 12 12 14 Amortization and impairments of intangible assets (8) 1 30 109 41 57 Interest expense on debt 3 2 11 3 – – Business operating profi t before non-controlling interests 462 292 261 429 334 348
Table 30.7 in USD millions, for the years ended December 31Global Life – Overview 10_Financial_Statements_Part3_7444_Eng.indd 25610_Financial_Statements_Part3_7444_Eng.indd 256 24/2/10 20:24:0724/2/10 20:24:07
Emerging Markets in Asia Rest of the World Eliminations Total 10_Financial_Statements_Part3_7444_Eng.indd 25710_Financial_Statements_Part3_7444_Eng.indd 257 24/2/10 20:24:1024/2/10 20:24:10
Supplementary information Property, equipment and intangible assets 1 2,541 1,811 1 As of December 31, 2009 and 2008, respectively.
Gross written premiums and policy fees 700 652 Net earned premiums and policy fees 666 638 Insurance benefi ts and losses, net 1,055 1,344 Policyholder dividends and participation in profi ts, net 826 (2,588) Total net technical expenses (33) 96 Net underwriting result (1,182) 1,786 Net investment income 316 938 Net capital gains/(losses) and impairments on investments 795 (3,162) Net non-technical result (excl. items not included in BOP) (219) 15 Business operating profi t before non-controlling interests (290) (423) Non-controlling interests 1 – Business operating profi t (290) (423)
As statutory auditor, we have audited the consolidated fi nancial statements of Zurich Financial Services Ltd, which comprise the consolidated income statement, consolidated statement of comprehensive income, consolidated balance sheet, consolidated statement of cash fl ows, consolidated statement of changes in equity, and notes (pages 139 to 262 and 98 to 134), for the year ended December 31, 2009.
Auditor’s responsibility Our responsibility is to express an opinion on these consolidated fi nancial statements based on our audit. We conducted our audit in accordance with Swiss law and Swiss Auditing Standards as well as the International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the consolidated fi nancial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated fi nancial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated fi nancial statements, whether due to fraud or error. In making those risk assessments, the auditor considers the internal control system relevant to the entity’s preparation and fair presentation of the consolidated fi nancial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control system. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made, as well as evaluating the overall presentation of the consolidated fi nancial statements. We believe that the audit evidence we have obtained is suffi cient and appropriate to provide a basis for our audit opinion.
Opinion In our opinion, the consolidated fi nancial statements for the year ended December 31, 2009 give a true and fair view of the fi nancial position, the results of operations and the cash fl ows in accordance with the International Financial Reporting Standards (IFRS) and comply with Swiss law.
We confi rm that we meet the legal requirements on licensing according to the Auditor Oversight Act (AOA) and independence (article 728 CO and article 11 AOA) and that there are no circumstances incompatible with our independence.
Patrick Shouvlin Ray Kunz Audit expert Audit expert Auditor in charge
Australia Zurich Australia Limited Sydney Global Life 100 100 AUD 0.5 Zurich Australian Insurance Limited Sydney General Insurance 100 100 AUD 6.6 Austria Zürich Versicherungs-Aktiengesellschaft Vienna General Insurance 99.98 99.98 EUR 12.0 Bermuda Centre Group Holdings Limited Hamilton Non-Core Businesses 100 100 USD 0.3 CMSH Limited Hamilton Non-Core Businesses 100 100 USD 0.3 ZCM Holdings (Bermuda) Limited Hamilton Non-Core Businesses 100 100 USD 137.0
ZG Investments III Ltd. Hamilton Other Operating Businesses 100 100 USD 0.01
ZG Investments IV Ltd. Hamilton Other Operating Businesses 100 100 USD 0.01
Zurich Finance (Bermuda) Ltd. Hamilton Other Operating Businesses 100 100 USD 0.01
Zurich International (Bermuda) Ltd. Hamilton Non-Core Businesses 100 100 USD 9.9 Brazil Companhia de Seguros Minas Brasil Belo Horizonte General Insurance 100 100 BRL 60.0
Zurich Participações e Representações Ltda. Sao Paulo Other Operating Businesses 100 100 BRL 446.0
Zurichpar Participações Ltda. Sao Paulo Other Operating Businesses 100 100 BRL 447.5
Chile Chilena Consolidada Seguros de Vida S.A. Santiago Global Life 98.95 98.95 CLP 24,484.0 Cyprus Zurich Insurance Holding (Cyprus) Ltd 2 Nicosia General Insurance 100 100 RUB 2.0 Germany DA Deutsche Allgemeine Versicherung Aktiengesellschaft Oberursel General Insurance 100 100 EUR 24.5 Deutscher Herold Aktiengesellschaft 3 Bonn Global Life 79.33 79.33 EUR 18.4 Zürich Beteiligungs-Aktiengesellschaft (Deutschland) Frankfurt / Main General Insurance 100 100 EUR 152.9 Zurich Deutscher Herold Lebensversicherung Aktiengesellschaft Bonn Global Life 86.03 86.03 EUR 68.5 Zurich Versicherung Aktiengesellschaft (Deutschland) Frankfurt / Main General Insurance 95.50 95.50 EUR 142.2 1 The segments are defi ned in the notes to the Consolidated Financial Statements, note 30, Segment information. 2 Zurich Insurance Holding (Cyprus) Ltd holds 99.9% of Zurich Insurance Company Ltd. in Russia which is a fully owned subsidiary of the Group. 3 In addition buy out options exist which allow the minority shareholders to sell another 15.67 percent of the shares of Deutscher Herold Aktiengesellschaft to the Group.
Zurich Group Funding Luxembourg S.A. Howald Other Operating Businesses 100 100 EUR 0.03
5 Listed on the Johannesburg Stock Exchange. On December 31, 2009, the company had a market capitalization of ZAR 2.2 billion (ISIN Number 000094496). 6 "Zurich España, Compañia de Seguros y Reaseguros, S.A" (a public limited liability company incorporated and existing under the laws of Spain) merged into Zurich Insurance plc (a public limited liability company incorporated in Ireland) by way of transfer en bloc with effect from 1 January 2010.
Switzerland Genevoise Real Estate Company Ltd Geneva Global Life 100 100 CHF 17.0
Zurich Life Insurance Company Ltd Zurich Other Operating Businesses 100 100 CHF 60.0
Farmers New World Life Insurance Company Mercer Island, WA Global Life 98.28 100 USD 6.6
Farmers Reinsurance Company Los Angeles, CA Farmers 98.28 100 USD 5.0 Farmers Services LLC 7 Wilmington, DE Farmers 100 100 USD – Kemper Corporation Schaumburg, IL Non-Core Businesses 100 100 USD 220.0 Kemper Investors Life Insurance Company Bellevue, WA Non-Core Businesses 100 100 USD 2.5
Contents 1. Analysis of Embedded Value Earnings 272 2. New Business 276 3. Expected Contribution and Transfer to Free Surplus 279 4. Operating, Non Operating and Economic Variance 280 5. Closing Adjustments 283 6. Reconciliation of IFRS Net Assets to Embedded Value 284 8. Life Business Included in Non-Core Businesses 286 9. Group MCEV 287 10. Embedded Value Methodology 288 11. Embedded Value Assumptions 295 Appendix: Embedded Value Tables 298
The majority of this report, Sections 1 to 7, relates to Global Life, but summary information relating to the Non-Core Business is given in Section 8 and to the total Group in Section 9.
Key results (in USD millions, for the years ended December 31)
Closing embedded value New business value EV operating earnings Embedded value earnings
The Global Life segment continued to execute on its strategy delivering strong results with profi table growth in a diffi cult market environment and performed well on all key embedded value metrics. The growth was driven through the strong new business performance as well as a strong focus on in-force management resulting in a positive operating variance. Progress was made on developing the industrial business model, that aims to centralise operational functions, decreasing our unit costs and supporting an increase in cross-border sales. We achieved a return of 24% on opening embedded value, also sustained by a positive economic variance of USD 1.3 billion. The new business value increased in each successive quarter of 2009 underpinned by effi ciency gains and focused efforts to shift the new business mix towards protection products to increase profi tability.
Dividends & capital movements start of period 546 (503) 44 28 72 New business value Global Life 390 (1,171) (781) 1,563 782
Dividends & capital movements end of period (95) (62) (157) 116 (41)
Analysis of embedded value earnings, 2009 12_Embedded_Value_Report_8065_Eng.indd 27212_Embedded_Value_Report_8065_Eng.indd 272 24/2/10 20:27:1524/2/10 20:27:15
Value of business in force Total 1 SM is the local minimum solvency margin 2 CE is the certainty equivalent value of business in force 3 FC is the frictional cost (which in 2009 was applied to only required capital in accordance with the MCEV Principles) 4 TVFOG is the time value of fi nancial options and guarantees 5 CRNHR is the cost of residual non-hedgeable risk (see Section 10 for further details) 6 ZIS is Zurich International Solutions, the international business based in the Isle of Man
Value of business in force Total 1 TVFOG is the time value of fi nancial options and guarantees 2 CNMR is the cost of non-market risk (see Section 10 for further details) 3 ZIS is Zurich International Solutions, the international business based in the Isle of Man in USD millions, as of December 31, 2009
Embedded value by territory in USD millions, as of December 31, 2008Embedded value by territory 12_Embedded_Value_Report_8065_Eng.indd 27412_Embedded_Value_Report_8065_Eng.indd 274 25/2/10 17:56:4925/2/10 17:56:49
Closing embedded value 1 ZIS is Zurich International Solutions, the international business based in the Isle of Man
Movement in embedded value, after tax in USD millions, for the year ended December 31, 2009EV operating earnings 12_Embedded_Value_Report_8065_Eng.indd 27512_Embedded_Value_Report_8065_Eng.indd 275 24/2/10 20:27:1924/2/10 20:27:19
Americas United Kingdom Germany Switzerland Ireland Spain Emerging Markets in Asia
Q1 Q2 Q3 Q4 for the years ended December 31 12_Embedded_Value_Report_8065_Eng.indd 27612_Embedded_Value_Report_8065_Eng.indd 276 24/2/10 20:27:2024/2/10 20:27:20
Present value of new business premiums (PVNBP) 2 5,912 6,363 6,449 10,791 29,515 5,857 6,366 5,360 8,301 25,883
New business value has improved in each successive quarter this year. This has been mainly due to expense effi ciency programs in many countries driving up margins and improved management of the new business mix with a focus on selling higher margin protection business. Premium volumes grew strongly, particularly during the fourth quarter.
Agents distribution volumes reduced slightly. Sales in many countries proved resilient to the fi nancial crisis mainly as a result of several customer and distributor focused programs. Growth continues in Latin America, Germany, Switzerland and Italy. These positive developments were offset by a decline in unit-linked sales in the Hong Kong domestic market, particularly in the fi rst half of 2009.
The International/Expats pillar APE decreased by USD 65 million. The lower sales, predominantly of investment products, refl ected reduced consumer confi dence caused by the market conditions earlier in the year.
The Private banking pillar delivered successful client propositions this year in the UK and from its new hub in Luxembourg, achieving an APE of USD 0.2 billion.
The Americas’ new business value grew strongly. In the U.S. business volumes remained stable but margins increased due to the lower interest rate environment. In Latin America, Global Life successfully tendered to become one of the preferred providers in the reformed social security system in Chile. This was the key driver behind the 20% value increase.
The Rest of the World saw a strong improvement in new business value coming from the renegotiation of reinsurance terms, lower interest rates that improved the value of protection business and the strong start of the new private banking insurance hub in Luxembourg.
Financial Information 3. Expected Contribution and Transfer to Free Surplus a) Expected Contribution The expected contribution is the projected change in the embedded value over the period using expected “real world” investment returns.
Operating experience variance Mortality / morbidity (1) (3) 21 17 34
Operating variances occur in the normal course of business as short-term experience fl uctuates around the long-term assumptions. The variances described below are immaterial compared to the total embedded value.
Persistency experience was negative in the fi rst three quarters of the year, but stabilised or even improved in some countries in the fi nal quarter as a result of the recovery in the economic outlook, giving an overall negative variance of USD (82) million for the year. Revisions to persistency assumptions mainly made in the third quarter refl ected the management view that persistency will revert to normal long-term levels in the future. These assumption changes led to a mixture of positive and negative impacts, giving an overall positive variance of USD 24 million.
Other assumption changes included a benefi t from a change in management rules on policyholder profi t sharing rules in Switzerland, a refi nement of premium assumptions for protection products of USD 41 million and a benefi t of USD 31 million following the renegotiation of rebates to ZIS from fund managers.
in USD millions, for the year ended December 31, 2009Operating variance 12_Embedded_Value_Report_8065_Eng.indd 28112_Embedded_Value_Report_8065_Eng.indd 281 24/2/10 20:27:2524/2/10 20:27:25
Economic Variance Economic variance is the difference between actual experience during the period and that implied by the economic assumptions and also includes the impact of changes in assumptions in respect of future economic experience.
The economic variance of USD 1.3 billion was due to the recovery in equity markets in many countries during the second half of the year and in addition, interest rates have generally increased since the start of the year, which has reduced the time value of options and guarantees in many countries.
Other Non Operating Variances Other non operating variance includes the impact of legal, tax and regulatory changes in the period.
Financial Information 5. Closing Adjustments a) Non-controlling Interests In 2009, the adjustment to embedded value to remove non-controlling interests from the new business value is shown in “Dividends & capital movements”, and was mainly due to the joint ventures in Spain. In 2008, the adjustment of USD (23) million was included within operating variance.
b) Dividends and Capital Movements Dividends and capital movements refl ect dividends paid by Global Life to the Group and capital received from the Group. Capital movements can also relate to the value of business in force in respect of acquisitions and disposals, or corporate restructuring.
c) 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 the Euro, Swiss Franc and British Pound during 2009 had a positive impact on embedded value.
IFRS shareholders’ net assets 1 14.0 11.9 Less non-controlling interests 2 (1.3) (1.2) IFRS shareholders’ equity net of joint ventures and non-controlling interests 12.7 10.7
In each sensitivity calculation, all other assumptions remain unchanged except where they are directly affected by the revised conditions. The results include any impact of the assumption changes on the time value of fi nancial options and guarantees.
We have also estimated the effect on the embedded value of allowing for a liquidity premium of 10 basis points. The estimated impact is USD 26 million and has been derived from linear interpolation of the “100 basis points increase in risk free yield” sensitivity on the individual savings and annuity lines of business.
The Group has estimated the embedded value of these businesses based on the same principles as for the Global Life business, including deductions for the time value of fi nancial options and guarantees, frictional costs and the cost of residual non-hedgeable risk, but using more approximate models. The results are set out in the following table.
Zurich Financial Services Group (the Group) has applied the Market Consistent Embedded Value Principles issued by the CFO Forum in October 2009, for its Embedded Value (EV) Report for the companies and business in its Global Life segment (the covered business) for the year ended December 31, 2009. This report primarily relates to Global Life, but information relating to the Non-Core Businesses is given in Section 8 and to the total Group in Section 9. 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 fl ows are valued using risk discount rates consistent with those applied to similar cash fl ows • 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.
The free surplus comprises the market value of shareholders’ net assets allocated to the covered business in excess of the assets backing the required capital.
d) Value of Business in Force The value of business in force is the present value of future projected profi ts, distributable after tax to shareholders from the covered business. It is defi ned as the certainty equivalent value of business in force less frictional costs, the time value of fi nancial options and guarantees, and the cost of residual non-hedgeable risk. These components are explained below.
The estimated impact of the change in frictional cost methodology at December 31, 2008 would have been to increase embedded value by USD 78 million.
Time value of fi nancial options and guarantees represents additional costs in excess of the intrinsic value of options and guarantees which are already allowed for in the certainty equivalent value. These are based on the variability of investment returns which need to be allowed for explicitly under the Market Consistent Embedded Value Principles. The time value has been calculated on a market consistent basis using stochastic modeling techniques, and making allowance for expected management and policyholder behavior.
For products with signifi cant guarantees, the time value has been calculated on a market consistent basis by deducting the average present value of shareholder cash fl ows using at least 1,000 stochastic economic simulations from the certainty equivalent value (both for the value of business in force and separately for new business value).
The Cost of Residual Non-Hedgeable Risk (CRNHR) has replaced, for reporting of embedded value from June 30, 2009, the previous allowance for the Cost of Non Market Risk. This is an explicit deduction for non hedgeable fi nancial risks (non-hedgeable ALM risks, reinsurance credit risk), and non-fi nancial risks (mortality, persistency, expenses and operational risk). The certainty equivalent value allows for the best estimate shareholder cashfl ows. The Cost of Residual Non-Hedgeable Risk is largely an allowance for uncertainty in shareholder cashfl ows, and for risks which are not already considered in the certainty equivalent value or time value of fi nancial options and guarantees, such as operational risk. Most residual non-hedgeable risks have a symmetric impact on embedded value apart from operational risk.
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 at the valuation date. The Cost of Residual NonHedgeable Risk allows for diversifi cation across risk types and across geographical segments. It complies with all areas of the MCEV Principles except Guidance 9.7. This is because it allows for diversifi cation between covered and non-covered business, which is consistent with the management view of the business and adds an estimated USD 179 million to embedded value.
The estimated impact of introducing CRNHR at December 31, 2008 would have been to increase embedded value by USD 87 million.
To the extent that the impact on shareholder value of variations in experience around the best estimate were symmetrical (for example, where the loss on a 10 percent increase in expenses was equal and opposite to the profi t on a 10 percent reduction), and not correlated with investment markets, no further allowance for non market risk would be required. In such circumstances, the risk was considered to be diversifi able, and fi nancial markets do not charge a risk premium for diversifi able risks.
e) New Business New business covers new contracts sold during the reporting period and includes recurring single premiums; new premiums written during the period on existing contracts; and variations to premiums on existing contracts where these premiums and variations have not previously been assumed as part of business in-force. Where recurring single premiums are projected over time to derive the corresponding new business value, they are treated as annual premium for the volume defi nition. Group Life business which is valued with a renewal assumption of the contracts is treated as annual premium.
The new business is valued as at point of sale. Explicit allowance is made for frictional costs, time value of fi nancial options and guarantees, and cost of non residual non-hedgeable risk. New business value is valued using actual new business volumes.
In certain profi t sharing funds, the new business written can affect the time value of fi nancial options and guarantees for business written in prior years. This effect is taken into account in the new business value by valuing on a marginal approach, the difference between embedded value with and without new business. This captures the effect of cross-subsidies between in-force and new business due to, for example, different interest rate guarantees operating in a shared common pool of assets.
f) Asset and Liability Data The majority of the Group’s embedded value, has been calculated using a “hard close” approach. This means that all asset and liability data refl ect the actual position as of the valuation date.
Germany has followed an approach where liability model points were set up in advance, using the structure of a previous run, and then projected to December 31, 2009 values, by scaling to match the expected balance sheet fi gures. The new business model points were set up at November 30, 2009, and scaled along the expected development of the APE.
g) Market Consistent Discounting The Group has adopted a “bottom-up” market consistent approach for the projection and discounting of future cash fl ows in the calculation of the embedded value. As a result, the risks inherent in the cash fl ows are allowed for in a way that is consistent with the way the market is expected to allow for such risks.
In principle, this method values each cash fl ow using a discount rate consistent with that applied to such a cash fl ow in the capital markets. For example, an equity cash fl ow is valued using an equity risk discount rate, and a bond cash fl ow is valued using a bond discount rate. If a higher return is assumed for equities, the equity cash fl ow is discounted at this higher rate.
The risk free yield curve assumptions are based on the swap curve in each major currency (U.S. dollars, Euros, 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.
i) Corporate Center Costs Corporate Center costs that relate to covered business have been allocated to the relevant countries and included in the projected expenses.
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, profi ts 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 refl ect the services provided to companies within Global Life. Net asset value consists, however, of the full statutory equity of these service companies.
n) Employee Pension Schemes Actuarial gains and losses arising from defi ned benefi t pension and other defi ned benefi t post-retirement plans are recognized in full in the period in which they occur and are presented on a separate line in the statement of comprehensive income. In the Group’s consolidated IFRS fi nancial statements, a liability is recognized for IAS 19 Employee Benefi t defi cits. This adjustment has not been made in the detailed embedded value described in this embedded value report. If the adjustment had been made the embedded value as of December 31, 2009 would have been lower by USD 305 million. The actuarial and economic assumptions used for this adjustment are consistent with those used for the equivalent allowance made in the Group’s consolidated IFRS fi nancial statements.
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 IFRS fi nancial statements.
r) Sensitivities The key assumption changes represented by each of the sensitivities in Section 7 are as follows: Operating Sensitivities
A 100 basis points increase and decrease (subject to a minimum of zero percent) was applied to the risk free yield curve across all durations.
A 100 basis points increase in the discount rates means that, for example, a discount rate of 6 percent p.a. would increase to 7 percent p.a.
Details of the economic assumptions for the major economies in which Zurich Global Life carries out business can be downloaded in a spreadsheet from the Investors section at www.zurich.com.
Choice of “Risk Free Yield Curve” The risk free yield curve is derived from mid-market swap rates applicable to each economy as of December 31, 2009. These curves were used to extract forward reinvestment yields that are used for all asset classes. The yield curves are consistent with the assumptions used by investment banks to derive their option prices and their use ensures consistency with the derivation of implied volatilities. They also have the advantage of being available for most of the markets in which the Group operates. Domestic yield curves are used by businesses in other countries, except Hong Kong and Argentina which use US dollar, as their liabilities are principally US dollar dominated.
The Group did not believe that the market in the fourth quarter of 2008 represented a deep and liquid market and so chose to base its volatility assumptions for the twelve months ended 2008 on 12 month averages. For interest rate instruments, for the USD, GBP and EUR economies, the average was based on end-of-month volatilities from 2008. For the CHF interest rate volatility and equity derivatives in all economies, the average was based on end-of quarter data.
Risk Discount Rate Under the “risk neutral” approach, risk discount rates are based on the same risk free yield curves as those used to project the investment return.
Liquidity Premiums The CFO Forum continues to develop suitable methodology to quantify the liquidity premium. In advance of completion of this work, the Group has chosen to continue its previous market-consistent approach with a liquidity premium of zero.
“Expected Return” for the Analysis of Movement – Investment Return Assumptions The expected return for the analysis of movement is based on a projection from beginning of period to end-of-period. This requires assumptions regarding the investment returns expected to be achieved over the period on different asset classes. The investment return assumptions (for this purpose only) are based on the “real world” returns expected by the Group. The use of real world investment assumptions gives a more realistic basis for the expected return calculation and allows for the risk underlying each asset. Any under or over performance will be reported through economic variance.
For fi xed interest assets, the “real world” investment return assumptions are based on the gross redemption yield on the assets, less an allowance for defaults where appropriate, together with an adjustment to refl ect the change over the year implied in the yield curve assumptions.
For equity and property assets, the investment return assumptions are based on the 1 year swap rate at the beginning of period plus a margin to refl ect the additional risk associated with investment in these asset classes.
Participating Business Rates of future bonus or crediting rates have been set at levels consistent with the risk neutral investment return assumptions and current bonus plans. In the UK, bonus rates have been set so as to exhaust any remaining assets in the relevant long-term funds. In certain scenarios shareholder injections may be required to meet existing guaranteed benefi ts and this additional cost is included in the TVOG.
None of the life companies included in the embedded value is considered to be in a “start-up” situation and so no allowance has been made for future development expenses.
Where service companies have been valued on a look through basis, the value of profi ts or losses arising from these services have been included in the embedded value and new business value.
Dividends & capital movements end of period (7) (98) 147 (171) Foreign currency translation effects 49 (63) 321 (1,097)
New business value Global Life 100 91 36 30 136 121
New business margin (as % of APE) 102.5% 90.4% 22.1% 24.6% 52.4% 54.3% New business margin (as % of PVNBP) 9.8% 9.6% 4.6% 4.5% 7.6% 7.5%
1 In the 2008 embedded value report ZIS new business value included USD 7 million of development costs that were incurred centrally, these are now shown separately in Emerging Markets in Asia under Other.
We have audited the Embedded Value Report (“EV Report”) for the companies and business reported in Zurich Financial Services Ltd’s Global Life segment included in pages 265 to 296 of the Financial Report 2009 for the year ended December 31, 2009. The embedded value information included in the EV Report has been prepared in accordance with the Market Consistent Embedded Value (“MCEV”) Principles and Guidance issued by the European Insurance CFO Forum, as described on pages 282 to 288.
We conducted our audit in accordance with Swiss Auditing Standards as well as the International Standards on Auditing. Those standards require that we plan and perform the audit to obtain rea-sonable assurance about whether the EV Report is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the EV Report. An audit also includes assessing the principles used and signifi cant estimates made by the Board of Directors, as well as evaluating the adequacy of the overall presentation of the EV Report. We believe that our audit provides a reasonable basis for our opinion.
In December 2009, Zurich Financial Services Group completed an important step in the rationalization of its Group holding legal structure. As part of the overall legal restructuring Zurich Group Holding (ZGH), the Group’s penultimate holding company has been merged with Zurich Financial Services Ltd. To enable this transaction, Allied Zurich Limited, a 100% owned subsidiary of Zurich Financial Services Ltd, sold its 42.3% share in ZGH to Zurich Financial Services Ltd on August 19, 2009. With the removal of these holding companies from the structure, Zurich Financial Services Ltd is now the immediate holding company of Zurich Insurance Company Ltd, the Group’s main operating company. These transactions resulted in a net gain of CHF 2,642 million, which is included in other fi nancial income.
The Annual General Meeting on April 2, 2009, approved a gross dividend of CHF 11.00 per share. This gross dividend has been recognized through shareholders’ equity.
Revenues Interest income 249,729 244,463 Dividend income 1,500,594 2,708,654 Other fi nancial income 3 2,704,381 46,162 Total revenues 4,454,704 2,999,279 Expenses
Short-term liabilities Loans from subsidiaries 2,086,058 1,653,549 Other liabilities to third parties 35,632 14,828 Other liabilities to shareholders 239 199 Accrued liabilities to subsidiaries 15,179 – Accrued liabilities to third parties 400 730 Derivatives with subsidiaries 3,585 – Total short-term liabilities 2,141,093 1,669,306 Long-term liabilities Long-term loans from subsidiaries 542,555 – Provisions 31,092 – Total long-term liabilities 573,647 – Total liabilities 2,714,740 1,669,306 Shareholders’ equity (before appropriation of available earnings)
Notes to the fi nancial statements 1. Basis of Presentation Zurich Financial Services Ltd (the Company) presents its fi nancial statements in accordance with Swiss law.
4. Administrative expense Administrative expense includes directors’ fees of CHF 3.6 million for 2009 and CHF 3.5 million for 2008, see note 14 page 311, and overhead fees of CHF 10 million for 2009 and CHF 7 million for 2008.
6. Taxes The tax expense consists of income, capital and other taxes.
Zurich Group Holding – 0.00 6,354,746 57.70 Other investments in subsidiaries 35,878 – – –
Financial Information in the future or for employee share-based compensation. This rededication of the shares has been approved by the Swiss Takeover Board.
c) Contingent share capital Capital market instruments and option rights to shareholders The share capital of Zurich Financial Services Ltd may be increased by an amount not exceeding CHF 1,000,000.00 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 of conversion and/or option rights which are granted in connection with the issuance of bonds or similar debt instruments by Zurich Financial Services Ltd or one of its Group companies in national or international capital markets; and/or (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.
Average purchase price of additions, in CHF 243 293 Average selling price, in CHF 212 264 1 in CHF thousands
12. Shareholders The shares registered in the share ledger as of December 31, 2009, were owned by 117,331 shareholders of which 111,529 were private individuals holding 21.0% of the shares (or 12.8% of all outstanding shares), 2,047 were foundations and pension funds holding 7.9% of the shares (or 4.8% of all outstanding shares), and 3,755 were other legal entities holding 71.1% of the shares (or 43.3% of all outstanding shares).
According to the information available on December 31, 2009, no shareholder of Zurich Financial Services Ltd held more than 5% of the voting rights of the issued share capital.
The compensation paid to the Directors for their Board membership of Zurich Financial Services Ltd, the holding company of the Group, and Zurich Insurance Company Ltd is paid entirely by Zurich Financial Services Ltd. The fees for Mr de Swaan’s additional Board membership in Zurich Insurance plc and for the additional Board memberships of Mrs Bies and Mr Nicolaisen in Zurich Holding Company of America (ZHCA) are paid by the respective companies. Compensation paid to the members of the GEC is not paid by Zurich Financial Services Ltd, but by the Group entities where they are employed. The compensation shown below includes the compensation that the members of the Board and the GEC received for all their functions in the Group. As the fi nancial statements of the holding company are presented in Swiss francs, all fi gures are shown in Swiss francs, despite the fact that the fees paid by Zurich Financial Services Ltd to the Directors are defi ned in U.S. dollars. To be consistent with the fi gures in the unaudited Remuneration Report the totals of the remuneration paid to the members of the Board and the GEC are also presented in U.S. dollars, as set out in that report. Year-on-year comparison in Swiss francs is affected by the actual exchange rates during the year.
Of which allocated in Shares 7,8 in CHF 1Directors’ fees 2009 13_Holding_Company_7415_Eng.indd 31213_Holding_Company_7415_Eng.indd 312 24/2/10 20:30:2324/2/10 20:30:23
Of which allocated in Shares 7,12 1 The total fees (including the portion allocated in shares) provided to Directors by Zurich Financial Services Ltd amounted to CHF 3,705,042 for 2009 and to CHF 3,536,465 for 2008, calculated on the basis of the exchange rates at the dates of payment. These amounts, except for the fees earned by Mr de Swaan for his Board membership in Zurich Insurance plc and for the additional Board memberships of Mrs Bies and Mr Nicolaisen in Zurich Holding Company of America (ZHCA), are refl ected in the income statement of the holding company. As the fees of the Directors are actually defi ned in U.S. dollars and the total of fees in U.S. dollars amounts to USD 3,395,000 for 2009 and to USD 3,291,875 for 2008, the average exchange rates were USD / CHF 1.0913 for 2009 and USD / CHF 1.0743 for 2008. All fi gures shown in Swiss francs in the above table have been translated from US dollars using the relevant average exchange rate.
4 Committee chairs receive an annual fee of USD 20,000 and the chair of the Audit Committee receives an additional USD 10,000. The Committees on which the Board members serve and the chairs are set out in the Corporate Governance Report on page 29.
11 In line with applicable laws, Zurich paid the company-related portion of contributions to social security systems, which amounted to USD 80,670 (CHF 87,371) in 2009. The corresponding contributions amounted to USD 69,305 (CHF 74,454) in 2008. Any personal contributions of the Directors to social security systems are included in the amounts shown in the table above.
13 The following Board membership changes occurred in 2008: – Mrs Bies and Mr Chu joined the Board on April 3, 2008 and received pro rata fees in cash and shares for their Board work from that date. – Mr Schulmeyer retired from the Board on April 3, 2008 and received a pro rata fee in cash for his Board work up to that date.
The Directors’ fees are not pensionable. None of the Directors received any benefi ts-in-kind or any other compensation other than those set out in the tables above.
Except for Mr Watter none of the Directors had outstanding loans, advances or credits as of December 31, 2009 or 2008. 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, 2009 and 2008. The annual interest rate charged on the loan is 4%.
No benefi ts (or waiver of claims) have been provided to former members of the Board during the year 2009, or during the year 2008. Neither had any former member of the Board outstanding loans, advances or credits as of December 31, 2009 or 2008.
Remuneration of Group Executive Committee The total remuneration of the members of the GEC for 2009 comprised the value of cash compensation, pensions, other remuneration and the value of the target equity grants made under the Group’s Long-Term Incentive Plan in 2009 and is calculated on the same basis as in 2008. Overall compensation of the GEC members in total and the overall compensation of the highest paid executive are set out in the following tables: Base compensation 12.00 14.50 Cash incentive awards earned for the year 15.50 14.40 Service Costs for pension benefi ts 5 3.90 4.80 Value of other remuneration 6 2.30 3.10 Value of target performance share and restricted share grants 7 9.10 9.90 Value of target performance option grants 7 9.10 9.90 Total in CHF million 8 51.90 56.60 Total in USD million as shown in the Remuneration Report 47.80 53.90 1 The fi gures have been translated from U.S. dollars into Swiss francs using the relevant exchange rates throughout the year. 2 The remuneration shown in the table does not include any business related expenses incurred in the performance of the GEC members’ services. 3 On the basis of 11 GEC members of whom 10 served during the full year 2009.
4 On the basis of 12 GEC members, all of whom served during the full year 2008. 5 The amounts refl ect the total value of pension benefi ts accruing to members of the GEC during 2009 and 2008, respectively, calculated on the basis of the Service Costs for the company as assessed under IAS 19 accounting principles. Service Costs value the amount of the pension benefi ts accruing during the year and for defi ned contribution plans takes the amount of the company contribution paid during the year. Service Costs do not include the interest cost on accrued benefi ts, adjustments for actuarial gains and losses, nor the expected return on any assets held.
6 Includes employee benefi ts, expatriate allowances, perquisites, benefi ts-in-kind and any other payments due under employment contracts. Benefi ts-in-kind have been valued using market rates.
Costs value the amount of the pension benefi ts accruing during the year and for defi ned contribution plans takes the amount of the company contribution paid during the year. Service Costs do not include the interest cost on accrued benefi ts, adjustments for actuarial gains and losses, nor the expected return on any assets held.
No benefi ts (or waiver of claims) have been provided to related parties of GEC members or related parties of former members of the GEC during the year 2009 or 2008. Neither had any related party of GEC members or of former members of the GEC outstanding loans, advances or credits as of December 31, 2009 or 2008.
15. Shareholdings of the Board of Directors and the Group Executive Committee Share and share option holdings of the Directors and of the members of the Group Executive Committee (GEC), who held offi ce at December 31, 2009 and 2008, are set out below in accordance with the information required by article 663c paragraph 3 of the Swiss Code of Obligations. This information is also included in the unaudited Remuneration report, set out on pages 50 to 67 of the Financial Report in which additional details can be found.
None of the Directors, nor any related party of a Director, hold any share options or conversion rights over Zurich Financial Services Ltd shares as of December 31, 2009 or 2008.
Number of Zurich Financial Services Ltd shares1, as of December 31Directors’ shareholdings 13_Holding_Company_7415_Eng.indd 31613_Holding_Company_7415_Eng.indd 316 25/2/10 17:54:3925/2/10 17:54:39
J.J. Schiro, Chief Executive Offi cer 3 97,426 286,165 85,726 230,415 J. Amore, Chief Executive Offi cer General Insurance 19,264 82,522 19,606 76,096 A. Court, Chief Executive Offi cer Europe General Insurance 6,722 16,515 3,062 5,696 M. Foley, Chief Executive Offi cer North America Commercial 6,696 11,696 4,107 3,857 M. Greco, Chief Executive Offi cer Global Life 2,403 5,076 492 – P. Hopkins, Chairman of the Board of Farmers Group, Inc. & Chief Executive Offi cer Americas 5,932 33,662 6,678 21,184 A. Lehmann, Group Chief Risk Offi cer 15,174 56,257 13,066 49,871
1 Retired from the GEC on April 30, 2009. 2 Retired from the GEC on December 31, 2008.
Appropriation of available earnings as proposed by the Board of Directors Net income 4,082,406 2,658,037 Balance brought forward 1,420,180 272,144 Retained earnings 5,502,586 2,930,181 1 These fi gures are based on the issued share capital on April 7, 2009. The proposed dividend published in the Annual Report 2008 was CHF 1,563,349 thousand resulting in a balance carried forward of CHF 1,366,832 thousand. The difference is due to the purchase of treasury shares and a resolution of the Board of Directors on February 14, 2007, according to which, contingent capital shares for employees have been issued (as described in note 10). Treasury shares are not entitled to dividends.
The Board of Directors proposes a dividend of CHF 16 per share to the Annual General Meeting on March 30, 2010.
If this proposal is approved, a payment of CHF 10.40 per share, after deduction of 35% Swiss withholding tax, is expected to be paid starting from April 8, 2010, free of charge and in accordance with dividend payment instructions.
Manfred Gentz as of December 31 in CHF thousands 13_Holding_Company_7415_Eng.indd 32013_Holding_Company_7415_Eng.indd 320 24/2/10 20:30:2824/2/10 20:30:28
Opinion In our opinion, the fi nancial statements for the year ended December 31, 2009 comply with Swiss law and the company’s articles of incorporation.
In accordance with article 728a paragraph 1 item 3 CO and Swiss Auditing Standard 890, we confi rm that an internal control system exists which has been designed for the preparation of fi nancial statements according to the instructions of the Board of Directors.
To the Board of Directors of Zurich Financial Services Ltd Zurich
In our opinion the report on the capital increase is complete and accurate.
In our opinion the issuance of total 550,448 registered shares of a nominal value of CHF 0.10 per share and total amount of CHF 55,044.80 was in accordance with the provisions of the Swiss law and the articles of association.
Zurich share performance (indexed) over the last ten years in %
Zurich Financial Services Ltd Swiss Market Index DJ Stoxx 600 Insurance Index Source: Thomson Datastream
The shares registered in the share ledger as of December 31, 2009, were owned by 117,331 shareholders of whom 111,529 were private individuals holding 21% of the registered shares (13% of all issued shares), 2,047 were foundations and pension funds holding 8% of the registered shares (or 5% of all issued shares), and 3,755 were other legal entities holding 71% of the registered shares (or 43% of all issued shares).
Financial Report 2009 The Financial Report contains detailed information about Zurich’s fi nancial performance, its structure, executive bodies, risk management, corporate governance and remuneration. It is available in English, German and French with the fi nancials in English only.
Securities Custody Service Zurich Financial Services Ltd Custody Accounts c/o SIX SAG Ltd P.O. Box, 4601 Olten, Switzerland
American Depositary Receipts Zurich Financial Services Ltd has an American Depositary Receipt program with The Bank of New York Mellon (BNY). For information relating to an ADR account, please call BNY Mellon’s Shareowner Services in the USA on +1-888-BNY-ADRs (1-888-269-2377) or outside the USA on +1-201-680-6825.
Business operating profit (after-tax) return on common shareholders’ equity indicates the level of business operating profit or loss relative to resources provided by common shareholders. It is calculated as business operating profit or loss, annualized on a linear basis and adjusted for preferred shareholder dividends and taxes, divided by the average value of common share holders’ equity on a simple basis using the value at the beginning and end of the period. Adjusted business operating profit return on common shareholders’ equity is based on average IFRS Group equity and is allocated to each segment based on its share of risk-based capital.
Investments for unit-linked 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 unitlinked 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.
Net non-technical result includes the non-technical elements of administrative and other operating expenses, amortization of intangible assets, interest credited to policyholders and other interest, other income, as well as net gains and losses on divestments of businesses and interest expense on debt.
Our customers know that we are there when they need us, around the world or around the corner, to help them manage their risks in an uncertain world. With 60,000 employees able to serve customers in more than 170 countries, help is on the way.
Disclaimer & Cautionary Statement Certain statements in this document are forward-looking statements, including, but not limited to, statements that are predications of or indicate future events, trends, plans or objectives. Forward-looking statements include statements regarding our targeted profit improvement, return on equity targets, expense reductions, pricing conditions, dividend policy and underwriting claims improvements, as well as statements regarding our understanding of general economic, financial and insurance market conditions and expected developments. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties and can be affected by other factors that could cause actual results and plans and objectives of Zurich Financial Services Ltd or the Zurich Financial Services Group (the “Group”) to differ materially from those expressed or implied in the forward looking statements (or from past results). Factors such as (i) general economic conditions and competitive factors, particularly in our key markets; (ii) the risk of the global economic downturn and a downturn in the financial services industries in particular; (iii) performance of financial markets; (iv) levels of interest rates and currency exchange rates; (v) frequency, severity and development of insured claims events; (vi) mortality and morbidity experience; (vii) policy renewal and lapse rates; and (viii) changes in laws and regulations and in the policies of regulators may have a direct bearing on the results of operations of Zurich Financial Services Ltd and its Group and on whether the targets will be achieved. Zurich Financial Services Ltd undertakes no obligation to publicly update or revise any of these forward-looking statements, whether to reflect new information, future events or circumstances or otherwise