General Insurance – in %, for the combined ratio years ended December 31
Zurich Financial Services Group · Annual Report 2006 · Financial Report 4 Financial Review
Gross written premiums and policy fees increased by 4 percent to USD 7.4 billion. A combination of higher retention levels and disciplined growth in areas with attractive rates, such as our North American property and Global Energy lines, drove the increase. Partially offsetting these factors were competitive environments in other areas, particularly in North American Casualty and the UK.
Business operating profit increased by USD 885 million to USD 1.2 billion for the year ended December 31, 2006. The nearly threefold improvement in operating results was largely driven by a USD 860 million increase in underwriting performance, due to a disciplined approach to pricing, exposure accumulation management and the comparatively benign catastrophe experience in 2006. In addition, net investment income increased by 29 percent due to rising interest rates, as well as a higher average invested asset base compared with the prior year.
Underwriting and policy acquisition costs, net of reinsurance (1,448) (1,561) 7%
Business operating profit decreased by USD 43 million, or 18 percent, to USD 193 million for the year ended December 31, 2006, due to the curtailment gain in 2005 related to changes in our pension plan and the continued transfer of group life contracts to independent foundations. In addition, the smaller average invested asset base following the transfer of these group life contracts led to a decrease in net investment income in
New business margin, after tax (as % of APE) 21.4% 19.3% 2.1 pts
in USD millions, for the three months ended 12/31/06 09/30/06 06/30/06 03/31/06
in USD millions, for the years ended December 31 2006 2005
Cash and cash equivalents comprise the following: Cash at bank and in hand 7,815 5,075
Investment contracts are those contracts that transfer financial risk with no significant insurance risk.
Dividend income is recognized when the right to receive payment is established; usually this is the ex-dividend date.
Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments”.
Net loss on in USD millions, for the years ended December 31 divestments
Derivative financial instruments The Group uses derivative financial instruments to manage risks related to its capital, assets and liabilities and its commitments to third parties. The Group uses derivative financial instruments to mitigate the risks posed by changes in foreign currency rates, interest rates and credit quality. The Group addresses the risks posed by derivatives through a stringent policy that requires approval of a derivative program before transactions are initiated, and by monitoring open positions. If the Group were required to settle outstanding derivative positions, the sum of gains and losses would not be material to the Group as of December 31, 2006.
The ranges for the liabilities for investment contracts and future policyholder benefit reserves represent the weighted average of the minimum and maximum effective interest rate across the Group’s life business.
Liabilities for unit-linked investment contracts: fair values for financial liabilities for unit-linked contracts are determined based on the fair value of the financial investments held for such products.
Total return equity swaps – – – – 37 (2) (13)
Insurance benefits in USD millions, for the years ended December 31 and losses
Uncertainties also arise out of changes or potential changes in various laws or the interpretation of laws. While the Group believes that it has made adequate provision for these claims, it is possible that future adverse development could have a material effect on the Group’s results of operations, cash flows and financial position. The net reserve amounts related to the above claims were USD 3,508 million and USD 2,907 million as of December 31, 2006 and 2005, respectively.
Zurich Financial Services Group · Annual Report 2006 · Financial Report 80 Consolidated Financial Statements
• decrease of USD 25 million resulting from acquisitions, divestments and other movements.
Deferred tax in USD millions, as of December 31 assets/(liabilities) breakdown by category
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 fire insurance value of the Group’s own-use real estate, investment real estate and other fixed assets totaled USD 8,900 million and USD 8,252 million as of December 31, 2006 and 2005, respectively.
Zurich Finance (USA), Inc. 5.75% EUR 500 bond, due October 2023 651 583
6.15% payable semiannually Redeemable in whole Series I 6.15% until December 15, 2010 At any time on or in part at par plus USD 600 ECAPS, and then reset quarterly to or after any accumulated and due December 2065 the Adjustable Rate plus 1.75% 2 December 15, 2010 unpaid distributions.
Dunbar Bank has access to various committed credit facilities totaling GBP 430 million. No borrowings were outstanding under these facilities as of December 31, 2006.
Share capital and number of shares, as of December 31 treasury shares
The Group also operates post-employment plans, mainly in the United States, which provide employees with certain defined post-employment benefits other than pensions.
To ensure appropriate governance and oversight of the Group’s pension and post-employment benefit plans, the Group Pension Committee was established during 2006 to provide oversight of the Group’s benefits policy.
Net actuarial losses recognized in the year (134) (162) (1) (1)
The actual returns on defined benefit pension plan assets for the years ended December 31, 2006 and 2005 were USD 1,022 million and USD 1,027 million, respectively. The actual returns on other defined postemployment plan assets were USD 1 million for both years ended December 31, 2006 and 2005.
Expenses in USD millions, for the years ended December 31 recognized in the income statements
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% and 150% of the original number of shares and/or options granted, depends on the performance of the Group during the previous calendar year. 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 defined percentage of annual salary in the year of allocation. There were a total of 174 and 170 participants in this plan as of December 31, 2006 and 2005, respectively.
Life insurance death and other benefits, net of reinsurance 71 99 10,034 9,781
Zurich Financial Services Group · Annual Report 2006 · Financial Report 110 Consolidated Financial Statements
B G Investments Ltd. Hamilton Corporate Functions 100.00 100.00 USD 0.3
Frictional costs applied to 150% of minimum solvency margin 266 (16)
Zurich Financial Services Group · Annual Report 2006 · Financial Report 128 Embedded Value Report
• In Rest of Europe, the increase reflects higher volumes of business in-force which was partially offset by the impact of better economic conditions.
• In the UK, operating profit includes a significant contribution from new business value. The operating profit was reduced by expenses incurred in the development of a new administration system, variations in charges and benefits on policies and an increase in expense assumptions. This was partly offset by favorable mortality experience. The economic variance reflects the impact of changes in legislation and regulation and the increase in the risk free yield curve over the year partly offset by the impact of strong unit growth.
l) Consolidation adjustments Where a reassurance arrangement exists between two life companies in Global Life, the value of the reassurance is shown in the EV of the ceding company. This has no material impact on the reported results.
o) Employee pension schemes No allowance has been made in the EV for any past service surplus or deficit in the Group’s employee pension schemes. Details of surplus/deficit are disclosed in the Group’s annual financial statements on an IAS 19 basis.
The following table shows the risk free yield curves, expressed as annualized spot rates, used at various terms for the main economies covered by the EV. These have been derived from interest rate swaps, and extrapolated where necessary.
For fixed 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 reflect the change over the year implied in the yield curve assumptions.
Zurich Financial Services Group · Annual Report 2006 · Financial Report 150 Zurich Financial Services Holding Company – Financial Statements
Employee participation: Following the decision of the Board of Directors of Zurich Financial Services of February 15, 2006 to issue up to a maximum of 1,000,000 dividend-paying shares with a nominal value of CHF 0.10 each out of the 1,500,000 shares available for employees, until December 31, 2006, 742,444 shares of this contingent share capital have been issued. Consequently, as of the same date, the share capital may be increased by an amount not exceeding CHF 75,755.60 by issuing the remaining 757,556 fully paid registered shares with a nominal value of CHF 0.10 each to employees of Zurich Financial Services and Group companies. The pre-emptive rights of the shareholders, as well as the right for advance subscription, are excluded. The issuance of shares or respective option rights to employees shall be subject to one or more regulations to be issued by the Board of Directors and shall take into account performance, functions, levels of responsibility and criteria of profitability. Shares or option rights may be issued to the employees at a price lower than that quoted on the stock exchange.
Media Inquiries Corporate Communications Media and Public Relations Zurich Financial Services, Switzerland
Key Performance Indicators (KPIs) Quantifiable measurements that reflect the critical success factors of an organization. They help define and measure progress toward organizational goals. Some of our KPIs are: return on equity, combined ratio and business operating profit for our General Insurance operations, new business profit margins, embedded value operating returns after tax, and business operating profit for our Global Life operations.