Financial information Consolidated financial statements 164 Embedded value report 288 Holding company 326 Shareholder information 348 Contact information 351 Glossary 352
• Zurich Santander and Zurich Insurance Malaysia Berhad contributed to Global Life and General Insurance premium growth
Latin America Our joint venture with Banco Santander S.A., entered into in 2011, strengthened our presence in Latin America.
The 2012–2020 Insurance Plan announced by the Argentinian Ministry of the Economy stipulates that insurers doing business in Argentina must allocate up to 30 percent of their investment portfolios to instruments financing productive and long-term projects in Argentina. In Brazil, a regulation issued in 2011 requires that 40 percent of each reinsurance placement is placed with a local reinsurer and restricts cessions to foreign affiliates to 20 percent on each placement.
Zurich Basics together with our commitment to the United Nations Global Compact are the foundation of our CR strategy. We focus on areas related to our core business so that we can apply our insurance and risk management expertise to enhance our contribution to society. These areas are: • Enhancing community flood resilience • Investing our Group assets responsibly • Working with our corporate customers to help them better understand and manage their CR risks • Community investment through the Z Zurich
• Continue to increase market share for the Farmers Exchanges • Improve retention by 3 points to close the gap relative to top-tier U.S. personal lines competitors
Key governance developments in 2012 – at a glance as of December 31, 2012 1Elected by the Board 2Elected by the Shareholders’ Meeting
- integrated specific areas of that office’s responsibilities into other functions
• Global Life pursues a strategy with market-leading propositions in unit-linked, protection and corporate products through global distribution and proposition pillars to develop leadership positions in its chosen markets.
The announcements related to these notifications can be found via the search facility on the SIX Disclosure Office’s platform: Zurich Insurance Group Ltd is not aware of any person or institution which, as of December 31, 2012, directly or indirectly, alone or with others, exercised or was a party to any arrangements to exercise control over Zurich Insurance Group Ltd.
Convertible bonds and options Zurich Insurance Group Ltd had no public convertibles or options outstanding as of December 31, 2012. For information on employee share option plans, see the audited Consolidated financial statements, note 24 on pages 245 to 247.
Members of the Board of Directors, as of December 31, 2012
• reviews the system for management development and supervises progress made in respect of succession planning.
Activities 2012: During 2012, the Risk Committee met seven times – average attendance at meetings was 96 percent. From an enterprise risk management perspective, it particularly discussed the following topics: • the results of the Group’s risk profile assessment and the development and assessment of the Group’s economic and regulatory capital; • the results of the Group’s total risk profile assessment including an update regarding risk ownership and mitigation actions; • the results and developments of the economic and statutory capital; • the annual review of the Zurich Risk Policy (ZRP) including the endorsement of new and changed chapters; • current risk matters such as discussions related to the significant important financial institutions topic; • credit risks and controls including a report on derivatives; • operational risks and controls such as an update on the data security initiative and the risk framework for sourcing/ off-shoring; and,
Information and control instruments vis-à-vis the Group Executive Committee The Board supervises Management and monitors its performance through reporting and controlling processes. Regular reporting by the CEO and other executives to the Board provides for appropriate information and updates, including key data for the core businesses, financial information, existing and upcoming risks and updates on developments in important markets and with regard to major competitors and other significant events. The Chairman of the Board regularly meets with the CEO. He also meets from time to time with all other GEC members and executives outside regular Board meetings. The other members of the Board do so as well, especially with the Chief Financial Officer and the Chief Risk Officer.
Our Management strives to help us meet our Ambition to become the best global insurer as measured by our shareholders, customers and employees.
• oversees all main levers of the balance sheet, including but not limited to, capital management, reinsurance, asset/liability management, dividend and share buyback policy, liquidity, leverage, rating agencies and other balance sheet-related matters and topics as measured among others by the internal Zurich Economic Capital Model; The Group Finance and Risk Committee (GFRC) Members: Chief Financial Officer (Chair), Chief Risk Officer (Deputy Chair), Chief Investment Officer, Group General Counsel, Head of Mergers & Acquisitions. In February 2013, the Group Head of Operations was appointed to the GFRC whereas the Head of Mergers & Acquisitions will cease to be a member of the GFRC.
The Group Pension Committee, chaired by the Chief Executive Officer, Global Life, is responsible for developing and executing a governance framework including the relevant policies and processes for pension related matters. It provides oversight and guidance over all the Group’s pension and funded benefit plans for accounting, benefit design, funding and investment and provides recommendations to the GBSC in terms of pension related matters.
Kerner was Global Chief Underwriting Officer for General Insurance and Head of Group Strategy in Zurich. Prior to his current role, he was Chief Executive Officer for Zurich Global Corporate in North America. External appointments: None Educational background: Mr. Kerner holds a Bachelor of Science in Mathematics and Economics from the State University of New York at Binghamton. Mr. Kerner is a Fellow of the Casualty Actuarial Society and a member of the American Academy of Actuaries.
Cecilia Reyes (1959), Swiss and Philippines Citizen Chief Investment Officer Skills and experience: Ms. Reyes has over 20 years’ experience in the international financial markets. Ms. Reyes worked from 1990 until 1995 for Credit Suisse in Zurich in various roles in Credit Suisse Asset Management, Global Treasury and Securities Trading. In 1995, she joined ING Barings in London and in 1997, she became a Director and Head of Trading Risk Analytics. She moved to Amsterdam in 2000 as Head of Risk Analytics for ING Asset Management to develop risk management methods for the asset management operation. Ms. Reyes joined Zurich in 2001 as Regional Manager for Group
Geoffrey Riddell (1956), British Citizen Regional Chairman of Asia-Pacific and Middle East Skills and experience: Mr. Riddell started his career with Price Waterhouse in 1978 and four years later moved to AIG, where he held various roles, including country manager for Hong Kong, Belgium and France. While in Hong Kong, he set up the first foreign general insurance company in China. He joined Zurich in 2000 as managing director of Zurich Commercial in the UK, becoming managing director of the UK Corporate and Government businesses. In 2002, he was appointed Chief Executive Officer of General Insurance in the UK, Ireland and Southern Africa. Mr. Riddell assumed the position of CEO of Global Corporate in April 2004, becoming a member of the Group Executive Committee in October 2004. In 2009, he took on the roles of CEO of Asia-Pacific & Middle East (APME) – responsible for both Life and General Insurance in the APME region – and of Chairman of Global Corporate. In 2010, he assumed the newly created role of Regional Chairman of Asia-Pacific & Middle East. Mr. Riddell is a former member of the General
Information Policy As of December 31, 2012 Zurich Insurance Group Ltd has approximately 125,000 shareholders registered in its share register, ranging from private individuals to large institutional investors (for details see page 349). Each registered shareholder receives an invitation to a shareholders’ meeting. Letter to shareholders provide a quarterly overview of the Group’s activities as the year progresses and outline its financial performance. A more comprehensive Annual Review, the Annual Report and half-year reports are available on Zurich’s website www.zurich.com ( investors/shareholderinformation/) and are also available in printed form upon request. Information on the quarterly results reporting is also available for all shareholders on Zurich’s website.
For addresses and further upcoming important dates, see Shareholder Information starting on page 348 (Financial Calendar on page 350).
• In the review of performance measures, it was decided that business performance for the Group STIP in General Insurance would be better assessed by normalizing the impact of catastrophe losses. Farmers also made a change whereby the STIP assessment now takes into account the business performance of the Farmers Exchanges 1. With regard to the Group LTIP, it was decided to keep the underlying performance matrix which covers the relative total shareholder return (TSR 2) and absolute return on common shareholders’ equity (ROE) achievements, but a right was introduced for the Board to reflect the Group’s performance achievements in the light of the economic environment over the three year performance period. An adjustment of +/–25 percent may be applied to the calculated level with discretionary adjustments being positive or negative depending on extraordinary market circumstances for example with regard to interest rates, exchange rates etc.
Guiding principles of the remuneration philosophy The guiding principles for the remuneration philosophy as set out in the Remuneration Rules are as follows: • The Group’s remuneration architecture is simple, transparent and implementable. For those individuals considered to be KRTs for the Group, it is oriented towards the long-term.
The number of share awards that vested in 2012 to members of the GEC serving in 2012 from the performance share grants made in 2009, 2010 and 2011 was 30,526. This represented a basic vesting level of 110 percent of target given the actual ROE and TSR performance achievements relating to the LTIP vesting matrix on page 67. One-half of the shares that vest under the plan are sales restricted for three years from the date of vesting.
Non-Core Businesses reported a business operating profit of USD 128 million compared with a loss of USD 8 million in 2011. This improvement came mainly from an increased profit from other run-off businesses.
Business operating profit improved by USD 322 million to USD 166 million, driven mainly by significantly reduced levels of catastrophe and weather-related losses. An increase in investment income was generated by a higher asset base reflecting portfolio growth across Latin America, Asia-Pacific, and Middle East and Africa.
in USD millions, for the years ended December 31 in USD millions, for the years ended December 31Profit by source 1
New business value (excluding the recent acquisitions) declined by USD 90 million to USD 890 million, or by 9 percent in U.S. dollar terms and 5 percent on a local currency basis. The transitional impact of the methodology refinement for corporate protection renewals of USD 68 million for 2012 was USD 58 million lower than in 2011. Excluding this refinement, new business value on a local currency basis remained flat. In Germany, the impact of the continued reduction in interest rates resulted in new business value of USD 37 million compared with USD 171 million in 2011. This reduction was offset by increases in North America, Latin America, the UK and Switzerland.
Management fees and other related revenues 2,846 2,767 3% Management and other related expenses (1,467) (1,434) (2%) Gross management result 1,378 1,333 3%
Unit-linked investments increased by USD 11.0 billion to USD 125.2 billion, or by 10 percent in U.S. dollar terms and 7 percent on a local currency basis, mostly benefiting from favorable market movements in Europe.
Gross reserves for losses and loss adjustment expenses 67,762 1 68,274 64,311 1 64,030
As of December 31 1 Includes reserves for unit-linked contracts, the net amounts of which were USD 62.2 billion and USD 57.3 billion, and liabilities for investment contracts, the net amounts of which were USD 58.1 billion and USD 51 billion as of December 31, 2012 and 2011, respectively 2 Includes reserves for future life policyholders’ benefits, the net amounts of which were USD 76.7 billion and USD 73.4 billion and policyholders’ contract deposits and other funds, the net amounts of which were USD 17.6 billion and USD 14.3 billion as of December 31, 2012 and 2011, respectively 3 Restated as set out in note 1 of the Consolidated financial statements.
At a Group level the management committees dealing with risks are: • Group Balance Sheet Committee (GBSC) – acts as a cross-functional body whose main function is to control the activities that materially affect the balance sheets of the Group and its subsidiaries. The GBSC is charged with setting the annual capital and balance sheet plans for the Group based on the Group’s strategy and financial plans, as well as recommending specific transactions or unplanned business changes to the Group’s balance sheet. The GBSC has oversight of all main levers of the balance sheet, including capital management, reinsurance, asset/liability management, and liquidity. The GBSC reviews and recommends the Group’s overall risk tolerance. It is chaired by the CEO.
General Insurance – Direct written premiums and policy fees by line of business and by region – prior period
The Group reviews and aggregates worker injury and property exposures to identify areas of significant concentration. The Group also assesses other lines of business, such as liability and auto, although the potential exposure is not as significant. The resulting data allows underwriters to evaluate how insuring a particular customer’s risk might affect Zurich’s overall exposure. In North America, Zurich uses a vendor-provided catastrophe model to evaluate potential exposures in every major U.S. city. The Group undertakes more detailed and frequent analytics for cities in which Zurich has greater exposure.
In addition, changes in the economic, legal and regulatory environment in Germany have been reflected in the modeling and contributed to the significant reduction in interest rate exposures from the German life business. These changes are driving the movements in the interest rate and credit spread sensitivities from the euro (EUR) in tables 5.a, 5.b, 11.a and 11.b.
• The sensitivities show the effects of a change of certain risk factors, while other assumptions remain unchanged. • The interest rate scenarios assume a parallel shift of all interest rates in the respective currencies. They do not take into account the possibility that interest rate changes might differ by rating class; these are disclosed separately as credit spread risk sensitivities.
• The equity market scenarios assume a concurrent movement of all stoarkets. • The sensitivities do not indicate a probability of such events occurring in the future. They do not necessarily represent the Group’s view of expected future market changes. In addition to the sensitivities, management uses stress scenarios to assess the impact of more severe market movements on the Group’s financial condition. For more information on stress scenarios, see table “Sensivities for the Z-ECM ratio (unaudited)” on page 159.
• The sensitivity analysis is based on economic net assets, and not on IFRS equity or on IFRS profit and loss. • The sensitivity analysis is calculated after tax; the Group effective tax rate is assumed to be 24.7 percent for 2012.
Other currencies Total 100 basis points increase in the interest rate yield curves Total impact on Embedded Value (130) (165) (98) 142 (100) (350)
Credit risk related to cash and cash equivalents The Group has significant exposure to cash and cash equivalents across the globe. In order to mitigate concentration, settlement and operational risks related to cash and cash equivalents, the Group limits the maximum cash amount that can be deposited with a single counterparty. In addition, the Group maintains an authorized list of acceptable cash counterparties based on current ratings and outlook, taking the analysis of fundamentals and market indicators into account.
As of December 31, 2012, investment grade securities comprise 98.1 percent of the Group’s debt securities, and 31.2 percent were rated “AAA.” The downgrades of several Eurozone governments and related entities caused breaches of internal rating category limits, which were managed as circumstances allowed. As of December 31, 2011, investment grade securities comprised 97.9 percent of debt securities, and 38.0 percent were rated “AAA.” The Group’s investment policy prohibits speculative grade investments, unless specifically authorized and under exceptional circumstances. Where the Group identifies investments expected to be downgraded to below investment grade, it implements appropriate corrective actions.
Past due but not impaired financial assets – 543 7 1 1,848 2,399
Insurance Financial Strength Rating The Group maintains interactive relationships with three global rating agencies: Standard and Poor’s, Moody’s and A.M. Best. The Insurance Financial Strength Rating (IFSR) of the Group’s main operating entity is an important element of Zurich’s competitive position. Moreover, the Group’s credit ratings derived from the financial strength ratings affect the cost of capital.
Analysis of the Group’s Z-ECM available financial resources in USD billions as of July 1, 2012
Z-ECM capital required for operational risk split by risk scenarios (as of July 1, 2012)
Scenario 1: Peripheral2 EU sovereign debt restructured and subordinated debt written off • Write-down of all peripheral EU sovereign debt to achieve debt/GDP ratios of 80% • 100% write-down of all peripheral EU subordinated financial debt
As of June 30, 2012, the Group had a Zurich Economic Capital Model (Z-ECM) ratio of 110%, and was well above the Swiss Solvency Test requirements with a ratio of 178%. As of December 31, 2012, the Group’s Solvency I ratio was 278%.
attributable to policyholders 20 (194) 242 attributable to shareholders 20 (1,301) (1,204)
Reserves for insurance contracts, gross 5,727 (1,162) Reinsurers’ share of reserves for insurance contracts 80 (730) Liabilities for investment contracts 5,328 167 Deferred policy acquisition costs (960) (867) Deferred origination costs 89 34 Deposits made under assumed reinsurance contracts 125 133 Deposits received under ceded reinsurance contracts (31) 199
Attorney-in-fact relationships (AIF) The AIF reflects the ability of the Group to generate future revenues based on the Group’s relationship with the Farmers Exchanges, which are managed but not owned by Farmers Group Inc. (FGI), a wholly owned subsidiary of the Group. In determining that these relationships have an indefinite useful life, the Group considered the organizational structure of inter-insurance exchanges, under which subscribers exchange contracts with each other and appoint an attorney-in-fact to provide non-claims management services, and the historical AIF between FGI and the Farmers Exchanges. The AIF is reviewed for impairment at least annually.
m) Other revenue recognition Farmers management fees FGI provides non-claims related management services to the Farmers Exchanges, including risk selection, preparation and mailing of policy forms and invoices, premium collection, management of the investment portfolios and certain other administrative and managerial functions. Fees for these management services are primarily determined as a percentage of gross premiums earned by the Farmers Exchanges.
f) Employee benefits The Group provides defined benefit 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. Discount rates for significant plans are 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 outflows approximate the estimated payouts of the defined benefit 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.
Divestments and loss of control The Group lost control over one of its subsidiaries and consequently derecognized the assets and liabilities at their carrying value and recognized its retained investment in this entity as an equity security classified as available-for-sale as of September 30, 2012. A USD 38 million pre-tax loss has been recorded within net gain/(loss) on divestments of businesses.
Table 5.1 shows the main balance sheet line items as of the acquisition dates, representing the fair value of the Zurich Santander companies acquired.
Non-controlling interests (1,183) Total acquisition costs 1,231 Cash consideration 1,156 Fair value of contingent consideration 99 Preliminary purchase price adjustment (23)
Investments held under unit-linked investments contracts are classified as securities designated at fair value through profit or loss.
Mortgage and asset-backed securities: < 1 year – – 540 866 26 41
Consolidated financial statements continued 7. Derivative financial instruments and hedge accounting
Total Group derivative financial instruments 24,120 8,582 9,955 42,656 920 (494) 36,200 1,290 (616) Total unit-linked derivative financial instruments 1,180 879 54 2,113 62 (5) 1,886 65 (37)
A loss of USD 7 million and USD 13 million for the years ended December 31, 2012 and 2011, respectively, was recognized in net capital gains/(losses) and impairments due to hedge ineffectiveness.
Table 8.2 shows the development of reserves for losses and loss adjustment expenses during the years 2012 and 2011.
FGI has historically charged a lower management fee than the amount allowed by contract. The range of fees has varied by line of business over time and from year to year. The gross earned premiums of the Farmers Exchanges were USD 18,703 million and USD 18,149 million for the years ended December 31, 2012 and 2011, respectively.
Deutscher Herold had previously sold these loans to credit institutions while retaining the related credit and interest risk. Therefore the loans had not been derecognized from the consolidated balance sheets and the transaction was reflected as a collateralized borrowing. Accordingly, the loans were recorded as mortgage loans given as collateral and the liability to credit institutions as collateralized loans.
Table 15 in USD millions, as of December 31Maturity schedule – collateralized loans
Extensions of existing distribution agreements also resulted in net additions of USD 28 million in the Global Life insurance operations in Italy, USD 14 million in the General Insurance operations in Turkey and USD 5 million in the Global Life insurance operations in Spain. New distribution agreements to gain access to the mass consumer market in Brazil added a further USD 28 million.
Net income before income taxes 5,462 4,738 less: income tax (expense)/benefit attributable to policyholders (194) 242 Net income before income taxes attributable to shareholders 5,268 4,979 Expected income tax expense attributable to shareholders computed at the Swiss statutory tax rate 22.0% 1,159 22.0% 1,095 Increase/(reduction) in taxes resulting from: Tax rate differential in foreign jurisdictions 239 260 Tax exempt and lower taxed income (133) (82) Non-deductible expenses 85 75 Tax losses previously unrecognized or no longer recognized (12) 5 Prior year adjustments and other (37) (149)
Actual income tax expense attributable to shareholders 24.7% 1,301 24.2% 1,204 plus: income tax expense/(benefit) attributable to policyholders 194 (242) Actual income tax expense 27.4% 1,496 20.3% 963
ZFS Finance (USA) Trust II Series II 6.45% USD 700 million Trust Preferred Securities (ECAPS), due December 2065 676 674
1 Reset rate of interest is equal to the gross redemption yield on the benchmark five-year Gilt as determined by the Calculation Bank. 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
Debt maturities reflect original contractual dates without taking early redemption options into account. For call/ redemption dates, see table 21.3. The total notional amount of debt due in each period is not materially different from the total carrying value disclosed in table 21.4. Undiscounted cash flows include interest and principal cash flows on debt outstanding as of December 31, 2012 and December 31, 2011. All debt is assumed to mature within 20 years of the balance sheet date without refinancing. Floating interest rates are assumed to remain constant as of December 31, 2012 and December 31, 2011. The aggregated cash flows are translated into U.S. dollars at end-of-period rates.
Table 21.5 in USD millions, for the years ended December 31Interest expense on debt
Present value of unfunded obligations (307) (289) (260) (230) (210) (315) (301) (295) (205) (183)
The principal financial assumptions used to calculate the Group’s major defined benefit pension and defined postemployment benefit obligations and the Group’s pension expenses are in table 23.10.
The shares granted during the year are the target allocations made under the Group’s Long-Term Incentive Plan. Whether these grants vest or not will depend on whether the performance metrics are achieved. If the performance metrics change from the initial assumptions, the expense is adjusted.
Table 24.4 in CHF, as of December 31Range of exercise prices for options outstanding
Commitments under investment agreements 4,225 4,037 Less funded commitments (3,690) (3,586) Remaining commitments under investment agreements 535 451 Guarantees and letters of credit 1 10,565 10,387 Future operating lease commitments 1,085 1,169 Undrawn loan commitments 20 57 Other commitments and contingent liabilities 41 7 1 Guarantee features embedded in life insurance products are not included.
Cash and cash equivalents 1,261 1,280 1,261 1,280 Investments at FV through profit or loss Designated at FV
Realized gains/(losses) recognized in income 1 402 Unrealized gains/(losses) recognized in income 6 (93) Purchases – 27 Sales / redemptions (14) (2,194) Transfers into level 3 – 4 Transfers out of level 3 (38) (11) Foreign currency translation effects 5 2
Realized gains/(losses) recognized in income 2 46 Unrealized gains/(losses) recognized in income – 218
Table 27.1 in USD millionsRelated party transactions included in the Consolidated financial statements
The General Insurance segment is managed based on market-facing businesses, including: • Global Corporate
Net income/(expense) on intercompany loans 1 (21) (49) (2) (14) – – 23 65 – – – 2
Benefits, losses and expenses Insurance benefits and losses, net 1 350 339 1,404 447 7,480 8,455 293 216 64 47 – – 9,592 9,503 Policyholder dividends and participation in profits, net 48 (24) 1,196 (13) 8,478 (1,920) 919 (801) 139 (69) – – 10,781 (2,826) Income tax expense/(benefit) attributable to policyholders – – – – 170 (255) 25 14 – – – – 194 (242) Underwriting and policy acquisition costs, net 97 123 964 132 1,401 1,507 204 156 138 111 – 1 2,804 2,029 Administrative and other operating expense (excl. depreciation / amortization) 140 129 365 142 1,419 1,562 327 340 291 225 (6) (5) 2,536 2,394 Interest credited to policyholders and other interest 147 137 36 5 192 224 27 28 1 – – – 403 395 Restructuring provisions and other items not included in BOP (1) 1 7 3 (114) (127) 7 (7) (13) – – – (113) (130) Total BOP benefits, losses and expenses 781 704 3,972 717 19,025 9,446 1,802 (53) 622 314 (6) (4) 26,196 11,123 Business operating profit (before interest, depreciation and amortization) 258 256 498 61 1,101 1,327 141 131 9 6 – – 2,007 1,781 Depreciation and impairments of property and equipment 1 1 3 2 21 23 6 4 – – – – 32 30 Amortization and impairments of intangible assets 9 26 223 2 242 279 1 3 7 4 – – 483 315
Zurich Life Insurance Company Ltd 7 Zurich Other Operating Businesses 100 100 CHF 60.0
1 A refinement in methodology for calculating new business value for corporate protection business was introduced in 2011, see embedded value assumptions Section 13 b). This has a transitional impact over two years from the implementation date relating to renewals of business in force at the date of the change. The renewed business contributed USD 68 million of new business value in 2012, compared with USD 126 million in 2011.
In Spain, volume as measured by APE, decreased due to lower sales of savings products, although sales of protection business were stable. As the business mix shifted from savings business to more profitable protection business, margins increased. In total, new business value reduced by USD 13 million or 5 percent on a local currency basis compared with 2011.
Operating experience variances Operating experience variances measure the difference between actual experience during the period and that implied by the operating assumptions. Experience variations occur in the normal course of business as short-term experience fluctuates around long-term assumptions.
1 Base for sensitivities is without liquidity premium. Changes in embedded value and new business value are calculated on the basis of no liquidity premium and end of period assumptions. This reduces the above embedded value by USD 792 million and new business value by USD 91 million.
Inflation Inflation assumptions have been derived from the yields on index linked government bonds relative to the corresponding nominal government yield curve, where such index linked government bonds exist. Where appropriate, allowance has been made for expense inflation to exceed the assumed level of price inflation reflecting the contribution of salary related expenses to life company expenses. In Switzerland, reference has been made to FINMA’s published rate.
For equity assets for units where there is a substantial equity allocation, the investment return assumption is based on the long term “real world” expected return. For equity assets for units without a material equity allocation the investment return assumption is based on the one year swap rate at the start of period plus a margin to reflect the additional risk associated with investment in this asset class.
Taxation Current tax legislation and rates have been assumed to continue unaltered, except where changes in future tax rates or practices have been announced.
3 The amounts reflect the total value of pension benefits, 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 benefits accruing during the year and for defined contribution plans takes the amount of the company contribution paid during the year. Service costs do not include the interest costs on accrued benefits, adjustments for actuarial gains and losses, nor the expected return on any assets held.
2 The distribution of the vested options according to the grants identified in the tables “Summary of outstanding options” is shown in the table below. 3 Mr. Dailey was appointed to the GEC as of January 1, 2012.
The Board of Directors proposes to the shareholders at the Annual General Meeting on April 4, 2013, to carry forward retained earnings of CHF 5,321,406,484 as shown in the above table.
Report on other legal requirements We confirm that we meet the legal requirements on licensing according to the Auditor Oversight Act (AOA) and independence (article 728 CO) and that there are no circumstances incompatible with our independence.
On your instructions, we have audited in accordance with Art. 653f, paragraph 1 Swiss Code of Obligations the issuance of new shares, which took place during the period of January 1, 2012, to December 31, 2012, according to the resolution of the general meeting of March 30, 2010.
Richard Burger Peter Bieri Audit expert Audit expert Auditor in charge
New business value, after tax is a measure that reflects the value added by new business written during the period, including allowing for frictional costs, time value of options and guarantees, and the cost of non-market risk, and is valued at the point of sale. It is calculated as the present value of the projected after-tax profit from life insurance contracts sold during the period using a valuation methodology consistent with the EV principles.