1 ROE is based on net income attributable to common shareholders.
General Insurance – in %, for the years combined ratio ended December 31
As of December 31, 2005 and 2004, cash and cash equivalents restricted as to use were USD 331 million and USD 908 million, respectively. Cash and cash equivalents held for the benefit of policyholders in connection with unit-linked products amounted to USD 4,758 million and USD 3,507 million as of December 31, 2005 and 2004, respectively. Cash received as collateral for securities lending was USD 4,571 million and USD 5,197 million as of December 31, 2005 and 2004, respectively.
All amounts in the notes are shown in USD millions, rounded to the nearest million unless otherwise stated.
Deferred origination costs The costs of acquiring new investment contracts with investment management services, including commissions and other incremental expenses directly related to the issuance of each new contract are amortized in line with revenue generated by the investment management service. The deferred origination costs (DOC) are tested for recoverability at each reporting date.
g) Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and offset by bank overdrafts. Cash and cash equivalents also includes cash received as collateral for securities lending. Cash and cash equivalents are stated at face value, with holdings of foreign notes and coins valued at year end closing prices.
On April 4, 2005, the Group announced the sale of Universal Underwriters Group (UUG) to an investor group led by Hellman and Friedman LLC. The assets and liabilities of UUG were classified as held for sale in accordance with IFRS 5. However, on January 16, 2006 the Group announced the mutual cessation of negotiations to complete the sale and its intention to integrate UUG into the North America Commercial business. As a result, the assets and liabilities of UUG are no longer classified as held for sale.
b) Future life policyholders’ benefits and policyholders’ contract deposits The future life policyholders’ benefits 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’ benefits 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 benefit 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 significant exposure to mortality risk.
The Group issues a number of investment contracts that are recorded at fair value through profit or loss. These financial instruments are not quoted in active markets, and their fair values are determined by using valuation techniques. A variety of factors are considered in the Group’s valuation techniques, including credit risk (both own and counterparty), embedded derivatives (such as unit-linking features), volatility factors (including contract holder behavior), servicing costs and surrenders of similar instruments.
The table below shows the Group’s concentration of risk within the General Insurance segment by region based on direct written premiums. The Group’s exposure to general insurance risks varies significantly by geographic region and may change over time.
As well as the specific risks insured, all these lines expose the Group to lapse, surrender and expense risks.
Equity securities (including trading equity portfolios in capital markets and banking activities): Fair value through profit or loss 78,692 28.4% 73,930 26.2%
As of December 31, 2005 and 2004, respectively, debt securities with a carrying value of USD 5,295 million and USD 5,009 million have been sold to financial institutions under short-term sale and repurchase agreements. These securities continue to be recognized as investments in the balance sheets and an obligation to repurchase them is included in liabilities in the balance sheets at that date.
The cumulative deficiency of reserves shown in the table above reflects the progressive strengthening that the Group has made to its reserves as issues have been identified. This included reassessments of exposure to asbestos, the run off of operations at Centre and the refinement of the Group’s reserving process commenced in 2004.
As of December 31, 2005 (closing balance) 71,292 81,350 (1,305) (1,418) 69,987 79,932
As of December 31, 2005 (closing balance) 18,985 22,763 (3,504) (3,594) 15,481 19,169
The Group’s exposure after reinsurance recoveries under these policies at the balance sheet date as of December 31, 2005 would be USD 443 million (USD 451 million as of December 31, 2004). The Group believes that ultimately the realization of such liability is not likely.
3 Amortization recorded directly to common shareholders’ equity for Life Insurance was USD 29 million and USD 105 million for the years ended December 31, 2005 and 2004, respectively.
As part of the Deutscher Herold transaction in the year 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 reflected as a collateralized borrowing. Accordingly, the loans are recorded as “Mortgage loans given as collateral” and the liability to credit institutions as “Collateralized loans”.
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 into a single taxpayer only when permitted by local legislation and when deemed appropriate.
The Zurich Holding Company of America taxpayer group of companies (excluding Farmers Group, Inc., Centre and Zurich Capital Markets Inc.) has reported tax losses in the past few years due to a number of catastrophes, as well as prior year development, creating a net operating loss carryforward of approximately USD 2,310 million, which is utilizable over a 15 year period. Management is undertaking a number of actions to efficiently utilize the net operating loss carryforwards. Based on the current taxable income projections for the North America taxpayer group of companies, management believes that the carrying values of the deferred tax assets as of December 31, 2005 are recoverable.
Net carrying value as of January 1 (opening balance) 744 779
Zurich Capital Trust I 8.376% USD Capital Securities, due June 2037 1 1,000 1,000
Expected long-term rate of return on assets 5.9% 6.1% 5.0% 5.0%
7. Effective January 1, 2005, in the USA there was a transfer of capital of USD 512 million from Life Insurance to Farmers Management Services, including USD 490 million of surplus notes. The embedded value operating profit includes a net benefit of USD 60 million due to the reduction in cost of capital associated with the transfer of these surplus notes.
American Depositary Receipts Zurich Financial Services has an American Depositary Receipt program with The Bank of New York (BNY).