We are an insurance-based fi nancial serices provider with a global network of subsidiaries and offi ces in North America and Europe as well as in Asia Pacifi c, Latin America and other markets. Founded in 1872, our Group is headquartered in Zurich, Switzerland. We employ approximately 60,000 people serving customers in more than 170 countries.
Provides property casualty products and services for individual and commercial customers.
#3 personal lines property casualty group based on direct premiums written 2007 Source: A.M . Best – State Line reporting 6835_p004-017.indd 56835_p004-017.indd 5 27/2/09 13:13:0927/2/09 13:13:09
It is with pride that we announce another successful year taking into consideration the global fi nancial and economic turbulence. While the heightened fi nancial pressures of 2008 impacted Zurich’s full-year and quarterly results in the second half of the year, the Group’s disciplined approach to operational and risk management issues generated resilient operating results across our businesses, as well as a positive investment return. As a result, our net income exceeded USD 3 billion, our business operating profi t topped USD 5.2 billion and our business operating profi t aftertax return on equity of 16.8 percent continued to remain above our mid-term target of 16 percent.
Our aim is to be the leading insurer in our chosen markets. That means ensuring that shareholders, customers and markets feel comfortable relying on Zurich’s fi nancial strength. That means delivering on customers’ needs, reliably and consistently across market cycles. That means attracting and motivating talented people, and giving them the tools and freedom to fl ourish. And – if we truly are striving to be the best – that means continually sharpening our ability to execute so that we control what is within our power to control, maintaining a fi rm grip on our own destiny, and providing useful solutions for our customers.
From an internal point of view, we maintained a differentiated focus across our global portfolio of businesses in 2008, enhancing margin where market conditions allowed, while strengthening market share positions in personal lines and fee-income related businesses, like at Farmers and Global Life. We aim to reach more customers by further developing our existing positions, pushing deeper into attractive high growth markets organically and inorganically, and expanding and strengthening our global distribution network. Throughout our Group, we remain committed to aligning our resources and strategic priorities for the benefi t of all of our stakeholders.
Relations between our Board and our Management are structured to support both groups in fulfi lling their commitment to deliver. This structure establishes checks and balances and is designed to provide for institutional independence of the Board of Directors from the Chief Executive Offi cer (CEO) and the Group Executive Committee (GEC).
On February 14, 2008, it was announced that a repurchase of CHF 2.2 billion worth of shares of Zurich Financial Services over the course of 2008 was authorized by the Board of Directors. As of December 31, 2008, 3,750,500 shares have been repurchased (amounting to CHF 1.1 billion).
Susan Bies American 61 Director Member of the Risk Committee 2008 2010
Fred Kindle Swiss 49 Director Member of the Audit Committee 2006 2011
Susan Bies graduated with a BS degree from the State University College at Buffalo, New York, and with a MA degree from Northwestern University, Evanston, Illinois, where she later gained a PhD. She began her career in 1970 as regional and banking structure economist with the Federal Reserve Bank of St. Louis, Missouri, and two years later became assistant professor of economics at Wayne State University, Detroit, Michigan. In 1977 she moved to Rhodes College, Memphis, Tennessee in a similar role, and in 1979 joined First Tennessee National Corporation in Memphis, where she remained until 2001. During the early years, her areas of responsibility included tactical planning and corporate development. In 1984 she became chief fi nancial offi cer and chairman of the asset/liability committee. In 1995, she became executive vice president of risk management, and auditor and chairman of the executive risk management committee, as well as continuing her duties with the asset/liability committee. From 2001 until 2007, she was a member of the Board of Governors of the Federal Reserve System. Between 1996 and 2001, Ms. Bies was a member of the Emerging Issues Task Force of the Financial Accounting Standards Board. From 2007 to 2008 she was a member of the Securities and Exchange Commission’s advisory committee on improving fi nancial reporting, and chairman of its substantive complexity sub-committee.
Victor L.L. Chu graduated with a LL.B from the University College London in 1979. He is admitted to practice law in England and Hong Kong. Since 1982 he has practiced in the fi eld of corporate, commercial and securities laws, with special emphasis on China and regional investment transactions. From 1995 to 2000, Mr. Chu was deputy secretarygeneral of the International Bar Association. Since 1988 he has served as chairman of First Eastern Investment Group, a leading direct investment fi rm focusing on China. He is also chairman of First Eastern Investment Bank Limited and FE Securities Limited. Over the past 20 years he has served at various times as director and council member of the Hong Kong Stock Exchange, a member of the Hong Kong Takeovers and Mergers Panel, a member of the Hong Kong Securities and Futures Commission’s advisory committee and a part-time member of the Hong Kong Government’s Central Policy Unit. He is currently a foundation board member of the World Economic Forum and co-chairs the Forum’s International Business Council. He is also an executive board member of the International Chamber of Commerce, for which he chairs the Commission on Financial Services and Insurance. Mr. Chu is a trustee of Asia House in London and the WWF in Hong Kong. Over the last three years, he has also served as a member of the dean’s council 6836_p018-043.indd 266836_p018-043.indd 26 25/2/09 14:26:0825/2/09 14:26:08
Elections and terms of office The Articles of Incorporation require that the Board shall consist of not fewer than seven and not more than 13 members. The ordinary term of offi ce is three years. On the expiration of their terms of offi ce, Directors may be re-elected immediately. The Articles of Incorporation require elections to be organized in such a way as to ensure that no more than four Directors complete their term of offi ce at any one general shareholders’ meeting. The election of a member of the Board is effected on an individual basis. Directors are elected by a majority of the votes cast. Zurich Financial Services’ Organizational Rules provide that no individual of 70 years of age or older shall be nominated or stay in offi ce as a Director, though exceptions may be made under special circumstances.
The Remuneration Committee comprises four members of the Board. The Remuneration Committee evaluates and proposes to the Board the principles for remuneration for the Group and the Board. It also proposes the Directors’ remuneration to the Board for approval. Based on the remuneration principles, it negotiates the terms and conditions of employment of the CEO and reviews those of the members of the GEC – as negotiated by the CEO – before submitting them to the Board for approval. The Remuneration Committee approves the employment arrangements for additional members of the GMB as negotiated by the CEO and liaises with him on other important employment, salary and benefi t matters. It also reviews the performance relating to the senior management’s short-term and long-term incentive plans. To assist in the review of the compensation structures and practices, the Remuneration Committee has retained its own independent advisor, Hewitt Associates. The Remuneration Committee met fi ve times (once together with the Governance and Nominations Committee) in 2008, with attendance of 100 percent. Details of the Group’s remuneration principles are given in the Remuneration report on pages 44 to 60.
The Audit Committee also reviews the annual, half-year and quarterly fi nancial results of the Group before submission to the Board. Private sessions with external auditors and internal audit are scheduled at most of the Audit Committee meetings to enable discussions without Management present.
Mario Greco earned an undergraduate degree in Economics from the University of Rome and completed a Master in International Economics and Monetary Theory at Rochester University, New York (USA). Mr. Greco started his professional career in management consulting, working with McKinsey & Company’s Milan offi ce from 1986 until 1994, becoming a partner in 1992 and a partner leader in the insurance segment. In 1995, he joined RAS (Allianz Group) in Milan as head of Claims Division. He became general manager in charge of the insurance business the following year, and in 1998 was appointed managing director. In 2000, he became the company’s chief executive 6836_p018-043.indd 346836_p018-043.indd 34 25/2/09 14:26:1225/2/09 14:26:12
The Audit Committee proposes to the Board the external auditors for election by shareholders and is responsible for approving the audit fees. A proposal for fees for audit services is submitted by PwC to and validated by Management, before it is submitted to the Audit Committee for approval. Such a proposal is mainly based on an analysis of existing reporting units and expected changes to the legal and operational structure during the year.
3 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 25.
11 Mr. de Swaan became Chairman of the Risk Committee on April 3, 2008. He received a pro rata fee for being Chair. 12 In addition to the fees he received as a Director of Zurich Financial Services and Zurich Insurance Company, Mr. de Swaan earned a pro rata fee of USD 28,111 for his membership on the board of Zurich Insurance plc since April 17, 2008 (based on an annual fee of USD 40,000). He additionally also earned a pro rata fee of USD 2,056 for being Chair of the audit committee of Zurich Insurance plc since October 16, 2008 (based on an annual fee of USD 10,000).
2 The distribution of the vested options according to the grants identifi ed in the tables “Summary of outstanding options” is shown in the table below. 3 Includes an amount of 3,800 shares for 2008 and of 2,000 shares for 2007 for Mr. Schiro, which are held by family run charitable foundations. 4 Joined the Group on January 15, 2007. 5 Joined the GEC on January 1, 2008, but joined the Group on September 1, 2006.
Gross written premiums and policy fees 7,888 7,597 4% Net underwriting result (602) 185 nm Business operating profi t 47 738 (94%) Loss ratio 92.2% 76.7% (15.5 pts) Expense ratio 20.2% 19.5% (0.7 pts) Combined ratio 112.4% 96.2% (16.2 pts)
Business operating profi t 1 ZIS results in 2008 exclude USD 7 million of development costs that were incurred centrally.
Net headquarter expenses improved by USD 78 million to USD 90 million driven by lower gross expense levels, as well as higher allocations to the operating businesses.
1 After deducting investment expenses of USD 261 million and USD 247 million for the years ended December 31, 2008 and 2007, respectively 2 Excluding average cash received as collateral for securities lending of USD 1.0 billion and USD 2.8 billion as of December 31, 2008 and 2007, respectively
Similarly, the CRO Forum (an organization composed of the chief risk offi cers of major European insurance companies and fi nancial conglomerates), which focuses on developing and promoting industry best practices in risk management, issued a series of important reports including papers on the market valuation of liabilities in insurance and on best practice in liquidity risk management.
1% decrease in the interest rate yield curves Group Investments 1,800 2,461 Net income before tax – – Net assets 1,458 1,853 10% decline in stock markets Group Investments (437) (534) Net income before tax (49) (2) Net assets (354) (402)
Please refer to notes 16 and 21 of the consolidated fi nancial statements for information on the maturities of collateralized loans and total debt issued, respectively. For more information on the Group’s other fi nancial liabilities please refer to note 19 of the consolidated fi nancial statements. Please refer to note 6 of the consolidated fi nancial statements for information on the maturity of our debt securities for total investments.
Our objectives for purchasing reinsurance are to provide market-leading capacity for our customers while protecting the balance sheet and optimizing the Group’s capital effi ciency. We maintain a centralized purchasing strategy for both General Insurance and Life Insurance, and continue to bundle programs where appropriate to benefi t from diversifi cation and economies of scale. We continue to review and use traditional reinsurance markets and other alternatives, such as catastrophe bonds, to protect Zurich against extreme single events and increased frequency of events falling within our retention. We are able to use our global reach in particular for catastrophe protection, where we have in place an innovative world-wide aggregate layer and a global top layer. These contracts do not just protect our business per event and by region, but for multiple events and across regions. This helps to reduce our risks for the frequency of catastrophes, as well as their severity. Due to our improved underwriting processes, and the fl exibility afforded by our strong balance sheet, we have been able to restructure and realign our reinsurance programs to achieve an optimum risk/reward ratio.
Generally, all business activities contain some aspect of operational risk. The Zurich Way initiatives help us manage operational risks through standardization of processes. In addition, we work to identify key operational risks more precisely, by applying a common approach across the Group, and by leveraging information from other sources of risk information such as internal controls and Total Risk Profi ling®.
Within these defi ned principles, the Group manages its capital using a number of different capital models taking into account regulatory, economic and rating agency constraints. Our capital and solvency position is monitored and reported on a regular basis. Based on the results of the capital models and the defi ned standards and principles, Group Treasury and Capital Management have a set of measures and tools available to manage capital within the defi ned constraints. This tool set is referred to as the capital management program.
Zurich Financial Services is not subject to legal restrictions on the amount of dividends it may pay to its shareholders other than under the Swiss Code of Obligations. The Swiss Code of Obligations provides that dividends may only be paid out of freely distributable reserves or retained earnings and that 5 percent of annual retained earnings must be allocated to a general legal reserve until such reserve in the aggregate has reached 20 percent of the paid-in share capital and therefore the earnings allocated to those reserves are restricted. As of December 31, 2008, the amount of the general legal reserve exceeded 20 percent of the paid-in share capital of the Group. Similarly, the company laws in many countries in which the Group’s subsidiaries operate may restrict the amount of dividends payable by those subsidiaries to their parent companies.
We use RBC to assess the economic capital consumption of our business on a one-balance sheet approach. The RBC framework is an integral part of how we manage the Group. It is embedded in our organization and decision making, and is used in capital allocation, business performance management, pricing, reinsurance purchasing, transaction evaluation, risk optimization, and regulatory and rating agency communication.
Cash and cash equivalents 11,965 13,943 Equity securities 14,242 20,416 Debt securities 118,103 123,762 Real estate held for investment 7,524 7,563 Mortgage loans 12,820 12,718 Other loans 12,531 12,936 Investments in associates 220 238 Other investments 2,165 2,024
Other intangible assets 18 6,464 2,906 Total assets 327,944 389,342 1 In 2007, reinsurers’ share of reserves for insurance contracts included USD 7.1 billion related to the reinsurance of a UK annuity portfolio. Subsequent to the approval from the UK High Court, effective on June 30, 2008, the underlying contracts were transferred to the reinsurer, resulting in a reduction of reinsurers’ share of reserves for insurance contracts.
USD per foreign currency unit, as of or for the year ended December 31Principal exchange rates
Significant transactions and events Transfer of UK annuity business The Group entered into a reinsurance agreement to transfer the risk associated with a signifi cant annuities portfolio effective as of January 1, 2007. In 2007 premiums ceded to reinsurers and ceded insurance benefi ts and losses increased by USD 7.3 billion and USD 7.0 billion, respectively. The transaction resulted in a net loss after tax of USD 59 million. In the consolidated balance sheets, total investments and associated other assets decreased by USD 7.4 billion and reinsurer’s share of reserves for insurance contracts increased by USD 7.1 billion. In April 2008, the UK High Court approved as a second step of this transaction the collective novation of all policies of this signifi cant annuity portfolio, which became effective as of June 30, 2008. As a result the underlying contracts have been transferred to the reinsurer. This had no further impact on the income statement, but resulted in a reduction of reinsurers’ share of reserves for insurance contracts of USD 7.1 billion and a corresponding reduction in the reserves for insurance contracts.
Global Life pursues a customer-focused strategy with market-leading propositions in unit-linked and protection products through global distribution and proposition pillars to develop leadership positions in its chosen segments.
Liability adequacy tests Liability adequacy testing is performed by portfolio of contracts at each reporting date, in accordance with the Group’s manner of acquiring, servicing and measuring the profi tability of its insurance contracts. Net unearned premiums are tested to determine whether they are suffi cient to cover related expected claims, loss adjustment expenses, policyholder dividends, commission, amortization and maintenance expenses using current assumptions. If a premium defi ciency is identifi ed, the DAC asset is written down by the amount of the defi ciency. If, after writing down the DAC asset to nil (for the respective portfolio of contracts), a premium defi ciency still exists, then a premium defi ciency reserve is recorded to provide for the defi ciency in excess of the DAC asset written down.
Real estate held for investment is initially recorded at cost (including transaction costs) and is subsequently measured at fair value with changes in fair value recognized in current period income. No depreciation is recorded for real estate held for investment. The gain or loss on disposal of real estate held for investment is based on the difference between the proceeds received and the carrying value of the investment and is recognized in income when the disposal is completed.
o) 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 6841_p126-169.indd 1576841_p126-169.indd 157 27/2/09 18:38:2427/2/09 18:38:24
v) Foreign currency translation and transactions Foreign currency translation In view of the international nature of the Group, there are many individual entities with different functional currencies. A functional currency is the currency of the primary economic environment in which the entity operates. Therefore, a common presentation currency is required. Due to the Group’s economic exposure to the US dollar (USD), the presentation currency of the Group has been determined to be the USD. Assets and liabilities of Group companies with functional currencies other than USD are translated into the presentation currency at end-of-period exchange rates, while income statements are translated at average exchange rates for the period. The resulting translation differences are recorded directly in shareholders’ equity as cumulative translation adjustments.
In 2007, the Group recorded a gain on divestments before tax of USD 118 million. This gain included an amount of USD 32 million for a purchase price adjustment related to contractually agreed profi t participation from the sale of Zurich Atrium BV in the Netherlands in 2004. Total cash and net assets divested in 2007 were USD 64 million and USD 52 million, respectively. The total consideration received in 2007, net of transaction costs of USD 9 million, amounted to USD 175 million.
Table 6.1b in USD millions, for the years ended December 31Investment result for Group investments 6842_p170-207.indd 1706842_p170-207.indd 170 25/2/09 14:12:4325/2/09 14:12:43
Cash and investments with a carrying value of USD 5,235 million and USD 4,617 million were deposited on behalf of regulatory authorities as of December 31, 2008 and 2007, respectively.
Total equity of which: trading debt securities in capital markets and banking
Table 6.11 in USD millions, as of December 31Investments in associates 6842_p170-207.indd 1786842_p170-207.indd 178 25/2/09 14:12:4925/2/09 14:12:49
Total cash fl ow hedges 4,487 4,487 4,344 272 211 of which: liabilities – –
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 and 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.
Table 16 in USD millions, as of December 31Maturity schedule of collateralized loans 6842_p170-207.indd 1946842_p170-207.indd 194 25/2/09 14:13:0125/2/09 14:13:01
Gross carrying value as of January 1, 2008 393 1,577 436 765 615 3,787
Gross carrying value as of January 1, 2008 1,754 2,392 2,787 1,025 7,957 Less: accumulated
Table 18.4 in USD millions, as of December 31, 2007Intangible assets by segment – prior period 6842_p170-207.indd 1976842_p170-207.indd 197 25/2/09 14:13:0325/2/09 14:13:03
Table 22.3 number of shares, as of December 31Treasury shares 6843_p208-233.indd 2106843_p208-233.indd 210 25/2/09 14:09:3225/2/09 14:09:32
Change in liability due to asset ceiling 51 (56) – – Actuarial gain/(loss) passed through other comprehensive income (1,805) 697 3 3 Effects of business combinations and other transfers (6) (58) (9) 21 Foreign currency translation effects 148 (113) 11 (29)
b) Share-based compensation plans for employees and executives The Group encourages employees to own shares of Zurich Financial Services 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.
Certain plan participants elected in 2002 to take their option award in the form of Share Appreciation Rights (SAR). Included in table 24.2 and 24.3 are 61,318 SAR as of both December 31, 2008 and 2007, which will be settled through cash payments rather than through delivery of shares. The fair value of the SAR at grant date is determined using the Black-Scholes option pricing model. The model inputs were the same as used for calculating the value of the share options.
Effective January 1, 2004, Farmers Re assumes annually USD 200 million and ZIC assumes USD 800 million of gross written premiums under an Auto Physical Damage (APD) Quota Share reinsurance 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 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.
For the year ended December 31, 2008, assumed premiums by Group companies under the All Lines Quota Share reinsurance treaty were USD 2,380.8 million with a combined ratio of 97.7 percent and an underwriting gain of USD 31.1 million. For the year ended December 31, 2007, assumed premiums under the All Lines Quota Share reinsurance treaty were USD 731 million with a combined ratio of 95.1 percent and an underwriting gain of USD 38.0 million.
Financial information c) North America Commercial Small Business Solutions (SBS) On June 13, 2008, the Group completed the sale of the rights to access renewals of its North America Commercial Small Business Solutions (SBS) book of business to Truck Insurance Exchange (TIE), one of the Farmers Exchanges, which the Group manages but does not own. As part of the transaction, the Group has entered into a 100 percent quota share reinsurance agreement for the in-force business as of June 1, 2008. This resulted in the Group paying TIE the balance of unearned premium reserve related to the business ceded to TIE of USD 425 million and TIE compensating the Group for its deferred acquisition cost balance as of the effective date of the transaction by paying a ceding commission of USD 120 million. In addition, the management of the in-force SBS book of business has been transferred together with certain assets and liabilities to Farmers Group, Inc. This transaction had no impact on the scope of consolidation.
Net investment income on Group investments 3,712 3,662 4,496 4,226 Net capital gains/(losses) and impairments on Group investments (1,260) 250 (1,237) 514
Liabilities for investment contracts – – 36,230 54,736 Reserves for losses and loss adjustment expenses, gross 61,396 63,383 9 6 Reserves for unearned premiums, gross 14,874 15,428 210 157 Future life policyholders’ benefi ts, gross 95 97 72,699 77,422 Policyholders’ contract deposits and other funds, gross 1,102 1,024 12,611 14,173 Reserves for unit-linked contracts, gross – – 35,069 54,337 Reserves for insurance contracts, gross 1 77,468 79,932 120,598 146,096 Debt related to capital markets and banking activities – – – –
Management Services Other Businesses Corporate Functions Eliminations Total 6843_p208-233.indd 2316843_p208-233.indd 231 25/2/09 14:09:4725/2/09 14:09:47
Eagle Star Insurance Company Limited Fareham, England Other Businesses 100 100 GBP 50.0
Farmers New World Life Insurance Company Mercer Island, WA Life Insurance 98.28 100 USD 6.6
Table 1.5 in USD millions, for the years ended December 31New business value, after tax gross of minority interests
i) Dividends, 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.
A 10 percent increase in implied risk free volatilities means that, for example 15 percent p.a. would increase to 25 percent p.a.
Certainty equivalent value of business in-force (0.6) 1.0 Frictional costs (0.0) (0.0) Time value of fi nancial options and guarantees (0.0) (0.3) Cost of non-market risk (0.4) (0.4)
Table 2.2 in USD millions, for the year ended December 31, 2007
In Germany, the contribution from new business was particulary good, with strong sales in state funded pension products and an increase in the allowance for tax deductible contributions for these products. Germany benefi ted also from a change in profi t sharing rules which implies higher shareholder transfers.
In Spain, the overall new business value increased in 2008 due to the acquisitions in line with Zurich’s growth strategy.
Table 2.8 in USD millions, for the year ended December 31, 2008Return on opening EV, after tax
New business premiums including deposits, of which: 1,088 1,457 100 180
Auditor’s report on Embedded value 6846_p240-271.indd 2706846_p240-271.indd 270 27/2/09 23:22:1427/2/09 23:22:14
All interests are benefi cial and include Zurich Financial Services shares or share options held by parties related to the GEC members. One vested option gives the right to one share with normal voting and dividend rights. Further details on the overall number of share options allocated under the Group’s Long-Term Incentive Plan and the terms of the options are set out in the tables “Summary of outstanding options”.
Corporate Responsibility Group Government and Industry Affairs Zurich Financial Services, Switzerland