Farmers Management Services managed gross earned premium margin 2 6.8% 7.3% (0.5 pts)
Our key market segments Zurich holds strong market positions in personal, commercial and corporate insurance on both sides of the Atlantic, and strengthening positions in Asia, Russia, Latin America and key emerging markets.
Continuing a tradition that has marked our development over 135 years, we are committed to thought leadership in our industry. One of our priorities is to gather insights into a variety of risks so that we can provide innovative and relevant answers to today’s and tomorrow’s challenges. Our continued adaptation to change reflects our determination to help our customers better understand and manage their risks and to provide practical help in a fast-changing world.
Alternative energy is expected to account for 10–20 percent of global energy production within the next decade. Zurich Global Energy is committed to supporting customers and prospects in this market segment. We already underwrite substantial alternative energy premiums, most notably in hydro, wind and biofuels. Now Global Energy has developed a dedicated team to help brokers and customers grow their business.
Available Financial Resources compared to Risk-Based Capital (USD billions as of January 1)
We model at the local and Group level to assess and aggregate our exposures. We centrally oversee our modeling for consistency in approach and for a global perspective on our accumulations. We have technical centers embedded within the business, which helps improve the overall quality of our data. We constantly seek to improve our modeling and increase the granularity of our data collection in order to increase the accuracy and utility of our information. In 2007, for example, we undertook a special effort to add details for municipal policies in the United Kingdom, resulting in an increase in the number of location details from 700,000 to three million. We also added georisk peril regions (Germany, Switzerland, Austria, Belgium, Turkey, Greece, China, India, New Zealand, Guam and Colombia) and climate-induced peril regions (Norway and Guam).
Zurich’s experience in monitoring potential exposures from natural catastrophes is also applicable to threats posed by man-made catastrophes, particularly terrorism. Due to the high degree of uncertainty about what events might actually occur, our accumulation monitoring and analyses contain a number of assumptions about the potential characteristics of the threat. We review and aggregate workers’ injury and property exposures to identify areas of significant concentration. The resulting data allows our underwriters, particularly in North America, to evaluate how insuring a particular customer’s risk might affect Zurich’s overall exposure. For other areas, our analysis has shown that our exposures are significantly lower, due in large part to government-provided pools. We periodically monitor accumulation limits for those areas.
To increase the positive impact to society, we plan to bring greater focus and consistency to our Group corporate giving and foundation work. This will also ensure that our Group corporate giving is in line with and supportive of our overall corporate responsibility strategy. An important element of corporate giving will be the active engagement and involvement of employees.
• Global Life pursues a customer-focused strategy with market-leading propositions in unit-linked and protection products and multi-channel distribution to develop leadership positions in our chosen segments and superior returns for our shareholders.
Nominal value reduction of each share from CHF 2.50 to CHF 0.10 on July 3, 2006 (346,956,612.00) 144,565,255 –
Don Nicolaisen American 63 Member of the Audit Committee 2006 2009
Vernon Louis Sankey graduated with a MA degree from Oriel College, Oxford and joined Reckitt and Colman in the UK in 1971, subsequently working in France, Denmark, the UK and the US. He was appointed to the board of directors in 1989 and was chief executive officer of that company from 1991 to 1999. From 2000 until September 2007 he was chairman of Photo-Me International plc. From 2001 until June 2007 he was a director of Cofra AG, Switzerland, and from 2004 until July 2007 of Taylor Woodrow plc. He has been a director of Vividas Group plc since 2005. As of January 1, 2006, he has been a member of the supervisory board of Atos Origin SA, Paris, and since October 10, 2006 of Firmenich SA, Geneva. He was chairman of Thomson Travel Group plc until August 2000, of Gala Group Holdings plc until February 2003 and of The Really Effective Development Company Ltd until March 2006. He also was a director of Pearson plc until April 2006 and is a former board member of the UK’s Food Standards Agency. In addition to his board roles, he is an advisor to a number of other companies.
The GEC is headed by the CEO. As of December 31, 2007 members of the GEC included the Chief Financial Officer, the Chief Investment Officer, the Chief Growth Officer and the heads of the business segments – General Insurance, Global Life and Farmers Management Services. In addition, the heads of the following businesses are members of the GEC: North America Commercial, Global Corporate and Europe General Insurance. As per March 1, 2007, the newly created function of Chief Growth Officer became part of the GEC. Following the retirement of the Chief Operating Officer at the end of February 2007, this function is no longer represented in the GEC. Furthermore, as from October 1, 2007, the Designated CEO Global Life also became a member of the GEC.
On February 28, 2007 Peter Eckert, the Chief Operating Officer stepped down from all his functions, as he reached retirement age. Effective March 1, 2007, Patrick O’Sullivan, the former Group Finance Director, assumed the new positions of Vice-Chairman of the Group Management Board and Chief Growth Officer. In his function as Chief Growth Officer he remained a member of the GEC. Dieter Wemmer, the former CEO of Europe General Insurance, succeeded Patrick O’Sullivan as the Group’s Chief Financial Officer as from March 1, 2007. As from the same date, Annette Court took over as CEO of Europe General Insurance and became a member of the GEC. Mario Greco joined the Group and the GEC on October 1, 2007 as Designated CEO Global Life and will eventually succeed Paul van de Geijn as the CEO Global Life in 2008, when Paul van de Geijn reaches his planned retirement date.
The current annual fee for the Vice Chairman is USD 330,000, of which an amount of USD 68,500 is allocated to sales-restricted Zurich Financial Services shares. The annual fee for the Chairman of the Board of Zurich Financial Services and Zurich Insurance Company during 2007 was USD 580,000 and one-third of the total amount, i.e. USD 193,500 is allocated to sales-restricted Zurich Financial Services shares. Following a review of fee levels, the annual fee for the Chairman was increased to USD 700,000 with effect from
No benefits (or waiver of claims) have been provided to former members of the Boards during the year
5 The share and share option grants will vest in the future according to achievement of defined performance conditions. The value of the share and share options assumes that the grant will vest in the future at 100% of the target level with the valuation of the options based on the Black Scholes methodology as set out in Note 23 to the consolidated financial statements, the valuation of the target performance share grants based on the share price at the day prior to the grants (CHF 355.75) and the valuation of the restricted share grants based on the share price at the date of the grants.
6 In line with applicable laws where the executives are employed, Zurich paid the company related portion of contributions to social security systems, which amounted to USD 2.6 million in 2007. Since the contributions are based on full earnings, whereas benefits are capped, there is not a direct correlation between the costs paid to the social security system and the benefits received by the executives.
3 Includes employee benefits, expatriate allowances, perquisites, benefits-in-kind and any other payments due under the employment contract. Benefits-in-kind have been valued using market rates.
Termination arrangements for members of the GEC who gave up their functions during the year
• Farmers Management Services business operating profit increased by USD 46 million, which represents the net result from increased management fees, resulting from strategic and operational growth initiatives, including the acquisition of Bristol West, as well as increased expenses to support the implementation of these initiatives.
Business operating profit decreased by USD 287 million, or 16 percent, to USD 1.5 billion, attributable to the lower net underwriting result following the catastrophe losses of USD 677 million from Winter storm Kyrill and the UK floods in June and July. Net investment income increased across Europe by USD 247 million, driven by higher interest rates throughout most of the year and a higher average invested asset base, in particular in the UK.
Total investment result, net of investment expenses 1 7,435 7,879 (6%)
Net cash used in operating activities was USD 1.6 billion for the year ended December 31, 2007, with the variance over last year predominantly driven by a lower proportion of cash in total investments. Net cash used in investing activities was USD 617 million for the year ended December 31, 2007, mainly attributable to the Bristol West and Nasta transactions. Net cash used in financing activities was USD 2.7 billion, driven by the dividends paid in April 2007 and treasury share transactions, offset by a net positive contribution of USD 322 million from the issuance of hybrid debt in May 2007, exceeding the early redemption of subordinated debt.
The income statements are translated at average exchange rates where the weakening of the US dollar during the year ended December 31, 2007, compared with 2006, resulted in an increase to most line items.
Net changes in debt for capital markets and banking activities (279) (219)
Reinsurance assets are assessed for impairment on a regular basis for any events that may trigger impairment. Triggering events may include legal disputes with third parties, changes in capital and surplus levels, change in credit ratings of a counterparty and historic experience regarding collectibility from specific reinsurers.
The Group’s main valuation techniques incorporate all factors that market participants would consider and are based on observable market data. The fair value of a unit-linked financial liability is determined using the current unit values that reflect the fair values of the financial assets contained within the Group’s unitized investment funds linked to the financial liability, multiplied by the number of units attributed to the contract holder at the balance sheet date.
• national or local economic conditions that correlate with defaults on the assets in that group.
m) Interest expense Interest expense for all financial instruments except for those classified as held for trading or designated at fair value is recognized in income using the effective interest method.
Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary/associate at the acquisition date. Goodwill on acquisition of subsidiaries is included in intangible assets. Goodwill on acquisition of associates is included in investments in associates and is tested for impairment as part of the overall measurement of the carrying amount of those investments.
Book value of net assets prior to acquisition (32) 45 44 58
Identifiable intangible assets, net of deferred tax – 28 95 123
Investment in USD millions, for the years ended December 31 result for Group investments
Realized capital gains on Group investments 1,261 1,141 482 345 1,743 1,487
Maturity schedule in USD millions, as of December 31 of collateralized loans
Various debt instruments payable in more than 1 year 1 1
USD 815 million adjustment relates to Zurich Financial Services EUB Holdings Limited notes and loans payable, while USD 150 million adjustment contains USD 100 million of non-recourse debt and the USD 50 million drawn under the abovementioned Leschi credit facility.
The Group operates a number of retirement benefit arrangements for employees, the majority of whom belong to defined benefit plans. Other employees participate in defined contribution plans, which provide benefits equal to amounts contributed by both the employer and the employee plus investment returns.
For the defined benefit pension plans, total contributions to funded pension plans and benefit payments by the Group are currently expected to be about USD 470 million in 2008.
Fair value of plan assets as of December 31 13,285 11,071 5 10
The actual returns on defined benefit pension plan assets for the years ended December 31, 2007 and 2006 were USD 889 million and USD 1,022 million, respectively. The actual returns on other defined post-employment plan assets was USD 1 million for the year ended December 31, 2006.
Movement in in USD millions liability for funded and unfunded plans
The actuarial assumptions of the healthcare cost trends rates have an impact on the amounts recognized. A one percentage point change in the health care cost trend rate would have the following effects on amounts recognized in 2007: Table 22.11
UK Sharesave Plan The plan is open to employees in the UK. Participants enter into a savings contract with a bank for the accumulation of contributions of between GBP 5 and GBP 250 per month for a period of three or five years. An interest bonus is credited at the end of the savings period. Participants are granted options to acquire Zurich Financial Services shares at a pre-determined price, which is not less than 80 percent of the market price prior to grant. Options under the plan can normally be exercised for a period of six months after the end of the savings period. Early exercise, limited to the value of shares that can be acquired with accrued savings, is permitted in certain circumstances. There were a total of 3 and 569 participants in this plan as of December 31, 2007 and 2006, respectively. There have been no new grants under this plan since 2002.
Other commitments and contingent liabilities 40 36 1 Guarantee features embedded in life insurance products are not included. For such guarantee features refer to note 8 on insurance reserves.
Contractual 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, private equity funds, emerging market funds and hedge funds. Included in the remaining commitments is USD 133 million to Capital Z Investments II, L.P. and USD 61 million to Capital Z Investments, L.P. Part of these commitments may be called at any time and in any amount, based on various criteria.
Financial guarantees and letters of credit The Group knows of no event of default that would require it to satisfy financial guarantees. Irrevocable letters of credit have been issued to secure certain reinsurance contracts.
Direct written ended December 31, 2006 premiums and policy fees by line of business and by region
The main risks in each line of business are as follows: • Individual annuity includes, but is not limited to, longevity and interest rate risks arising on personal annuity insurance contracts. Individual life includes, but is not limited to, mortality, morbidity and interest rate risks arising on personal life insurance contracts.
The overall average rating of the Group’s debt securities portfolio is AA+. As of December 31, 2007 the largest concentration in the Group’s debt securities portfolio is in government and supranational debt securities at 40.4%. A total of USD 42,522 million or 57.7% of the non-government and non-supranational debt securities are secured. As of December 31, 2006, 39.7% of the Group’s debt portfolio was invested in governments and supranationals and a total of USD 44,641 million or 58.6% of the non-government and non-supranational debt securities were secured.
The average credit quality of the reinsurance assets (including receivables, but after deduction of collateral) was ‘A’ as of December 31, 2007 (2006: ‘A-’). For credit risk assessment purposes collateral has been taken into account at nominal value as an approximation for fair value.
Life insurance death and other benefits, net of reinsurance 50 47 10,385 10,034
DA Deutsche Allgemeine Versicherung Aktiengesellschaft Oberursel General Insurance 100 100 EUR 24.5
Zurich Life Insurance Italia S.p.A. Milan Life Insurance 100 100 EUR 25.9
Zurich Insurance Company South Africa Limited 4 Bryanston General Insurance 73.61 73.61 ZAR 3
Zurich Holding Company of America, Inc. Dover, DE Corporate Functions 100 100 USD 0.6 5 This entity is a LLC that has no share capital.
Zurich Financial Services Group (the Group) has reported Embedded Value (EV) in respect of the twelve months ended December 31, 2007 together with comparative figures for the twelve months ended December 31 2006 in line with the European Embedded Value Principles issued by the CFO Forum, for the companies and business reported in its Global Life segment (covered business). Certain other life businesses are included in Other Businesses segment and have been excluded from the EV. This report primarily relates to Global Life, but information relating to the Other Businesses is given in section 2.h below.
• Operating variance, after tax is the difference between actual experience during the period and that expected based on the operating assumptions. It also includes the impact of changes in assumptions in respect of future operating experience.
The Group has estimated the EV of these businesses based on the same principles as the covered business, including deductions for time value of options and guarantees, frictional costs and cost of non market risks, but using more approximate models. The results are set out as follows: Table 2.13
Certainty equivalent value of business in-force 2,207 2,832 1,079 1,795 2,105 686 10,705
• In International Businesses, the time value of options and guarantees has increased slightly. The time value of options and guarantees relates mostly to business in Hong Kong, where the decrease in risk free rates and the increase in interest rate implied volatilities resulted in increased costs attached to the maturity guarantees provided. The unit linked and protection products written in this region have no significant time value of options and guarantees.
Frictional costs reflect a deduction for the cost of holding shareholder capital. Under the Group’s market consistent framework, these frictional costs represent tax in respect of future investment income on total available capital plus investment management costs. In Germany, they also include the policyholders’ share of investment income on the capital.
Projections of future shareholder cash flows expected to emerge from covered business are determined using best estimate operating assumptions. These assumptions, including mortality, morbidity, persistency and expenses, reflect recent experience and are actively reviewed. Allowance is made for future improvements in annuitant mortality based on experience and externally published data. Favorable changes in operating experience are not anticipated until the improvement has been observed – in particular for expenses.
Risk free yield as of September 30, 2007 curves – Annualized spot rates 1 Year 2 Year 5 Year 10 Year 20 Year 40 Year
New business margin, after tax (as % of APE) 18.3% 21.2%
Its principal activity is the holding of subsidiaries. Revenues consist mainly of dividends and interest. The net income of Zurich Financial Services was CHF 1,973,433,008 for 2007 (CHF 1,187,995,724 for 2006).
We have changed our presentation for rounding numbers. All amounts in the notes are shown in Swiss franc thousands, rounded to the nearest thousand unless otherwise stated.
9. Reserve for treasury shares This reserve fund corresponds to the purchase value of all Zurich Financial Services shares held by Group companies of Zurich Financial Services as shown in the table below.
Remuneration of Directors The following table sets out the total fees paid to the Directors of Zurich Financial Services. All the Directors are also Directors of the Zurich Insurance Company and with effect from January 1, 2007 the fees paid for their work in connection with Zurich Financial Services and the Zurich Insurance Company were combined into a single fee. Further, in 2007 a fixed portion of the total fee was allocated towards the provision of sales-restricted Zurich Financial Services shares. The portion for the Chairman was set at USD 193,500 (CHF 234,616) and the portion for the other members at USD 68,500 (CHF 83,055). The overall fees are set out in the following table: Directors’ fees 2007 2
1.2422) as of June 15, 2007, were adopted to calculate the number of shares based on the fixed portion of the fee allocated in shares for the respective members. Where the value of the allocated shares did not equal the value of the portion of the fee to be allocated in shares, the difference was paid in cash. The amounts shown in the table above reflect the equivalents in Swiss francs of the fixed amounts in USD of the portions of the fees to be allocated in shares, calculated based on the average exchange rate as set out in footnote 1 above.
Business Segment We have primary and secondary segments. Our primary segments are General Insurance, Global Life, Farmers Management Services, Other Businesses and Corporate Functions. Our secondary segments are geographic: North America, Europe, International Businesses and Central Region.
Printed end of February 2008 by St Ives Westerham Press Ltd., England.