• Diversification into higher growth markets on schedule in Global Life
We deliver what matters when it matters through three core business segments – General Insurance, Global Life, and Farmers. Their individual businesses, geographies, market segments and distribution channels are described below.
In the eyes of some, yesterday’s certainties might be preferable to tomorrow’s uncertainties. Negative factors such as high unemployment, widespread debt reduction, and a general uneasiness about institutions, regulations and growth can darken one’s perspective on the prospects for our future.
Connectivity and community The first megatrend concerns the rise of online platforms and the advances in hardware and software underlying their use. Computers, tablets and smartphones offer alternative spaces to conduct interactions – and to create communities – that previously have only been viable in such traditional settings as lunchrooms, schools and shopping malls. While many will adapt to online platforms without disruption, others may find that they bring a complete transformation in their way of life. Many
Global Life • Top 5 European-based global insurer by New Business Value (NBV)
In 2011 we delivered a good result for our shareholders by executing on our underwriting strategies, improving our customer orientation and protecting our strong capital position.
Room to grow We executed on our strategy and built platforms for future growth through transactions like our acquisition of composite insurer Malaysian Allied Assurance Berhad.
Rolf Watter Swiss 1958 Director Member of the Audit Committee 1 Mr Sankey was a member of several boards of the Group holding structure that was established in 1998 with the merger between B.A.T. Financial Services and Zurich Insurance Company. The Group holding structure originally consisting of Zurich Group Holding (then called Zurich Financial Services), Allied Zurich p.l.c. and Zurich Allied AG was reorganized in October 2000. Since this reorganisation he has served on the Board of Zurich Financial Services Ltd.
Armin Meyer, born 1949, graduated with a PhD in electrical engineering from the Swiss Federal Institute of Technology (ETH) and joined BBC Brown Boveri Ltd. in 1976 as a development engineer. In 1980, he became head of research and development for industrial motors, and in 1984, he took over as head of the international business unit for electrical power generators. In 1988, Mr. Meyer became president of ABB Drives Ltd. and in 1992, president of ABB Power Generation Ltd. From 1995 until 2000, he was executive vice president of ABB Ltd. and a member of that group’s executive committee. In 1997, he became a member of the board of directors of Ciba Specialty Chemicals at the time of its spin-off from Novartis. He became chairman of the board of Ciba Specialty Chemicals in autumn 2000 and served in that role until April 2009. From January 1, 2001 until December 31, 2007, in addition, he also acted as chief executive officer. In April 2010, Mr. Meyer became a member of the board of directors of Amcor Limited in Melbourne, Australia. Mr. Meyer was a member of the executive committee and the foundation board of the international Institute for Management Development, IMD, in Lausanne, Switzerland until December 2011. From 2001 to 2008, he was a member of the European Chemical Industry Council (Cefic) in Brussels, Belgium.
Vernon Louis Sankey, born 1949, 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 U.S. 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. Between 2005 and 2008 he served as a director of Vividas Group plc. As of January 1, 2006, he has been a member of the supervisory board of Atos Origin SA, Paris, and since October, 2006 of Firmenich SA, Geneva, where he became chairman in October 2008. 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
The Remuneration Committee comprises four members of the Board. The Remuneration Committee regularly evaluates the Group’s remuneration system and the Remuneration Rules and, if appropriate, proposes respective amendments to the Board which is responsible for the design, implementation and monitoring of the Group’s remuneration architecture. It also proposes the Directors’ remuneration to the Board for approval. Based on the Remuneration Rules, it negotiates the terms and conditions of employment of the CEO and reviews those of other members of the GEC, as negotiated by the CEO, before submitting them to the Board for approval and liaises with the CEO on other important employment, salary and benefit matters. It also reviews performance relating to the senior management’s short-term and long-term incentive plans. In order to ensure the risk-alignment of remuneration, Group Risk Management provides a review of risk factors to consider when overall performance for incentives is assessed, and the Chief Risk Officer is available to discuss these findings with the Remuneration Committee and the Board of Directors. To assist in the review of the remuneration structures and practices, the Remuneration Committee has retained its own independent advisors, Meridian and Aon Hewitt. The Remuneration Committee met five times in 2011 (one meeting took place together with the Risk Committee to jointly review the remuneration architecture particularly in the light of the FINMA Circular on Remuneration Schemes). Average attendance at meetings of the Remuneration Committee was 95 percent. Further details of the Group’s remuneration governance and the Remuneration Rules are given in the Remuneration Report on pages 48 to 73.
The Group has an information and financial reporting system in place. The annual plan for the Group, which includes a summary of financial and operational metrics, is reviewed by the GEC in detail and approved by the Board. Monthly updates are prepared to compare actual performance to the plan. Full-year forecasts are revised if necessary to reflect changes in sensitivities and risks that may impact the results of the Group. Action is taken, where appropriate, when variances arise. This information is reviewed by the GEC on a monthly basis and by the Board on a quarterly basis.
Jeff Dailey, born 1957, graduated from the University of Wisconsin-Madison with a bachelor’s degree in economics and the University of Wisconsin-Milwaukee with a master’s degree in business administration. In 1980, Mr. Dailey began his insurance career with Mutual Service Insurance Company and early in his career he also worked for Progressive Insurance Company. Mr. Dailey went on to form Reliant Insurance Company, an auto insurance start-up owned by Reliance Group Holdings, which was sold to Bristol West Holdings Inc. in 2001. From 2001 until 2004, Mr. Dailey was COO of Bristol West and, in 2004, he was named President of Bristol West, consistent with the firm’s successful IPO on the New York Stock Exchange. In 2006, he became CEO of Bristol West. Mr. Dailey joined Farmers in 2007 as President of Personal Lines for Farmers when Farmers acquired Bristol West where he served as Bristol West CEO. In January 2011, he was promoted to the position of President and Chief Operating Officer (COO) of Farmers Group, Inc. He became a member to the Board of Farmers Group, Inc. in February 2011. Mr Dailey was appointed to his current role of CEO of Farmers Group, Inc. and became a member of the GEC effective January 1, 2012.
Employees The Group is committed to provide equal opportunities when recruiting and promoting people, whereby ability, experience, skills, knowledge, integrity and diversity are the guiding principles. The Group actively encourages employee involvement in its activities via printed and online publications, team briefings and regular meetings with employees’ representatives. For further information on the Group’s people management activities, see the Annual Review starting on page 25, also available on Zurich’s website www.zurich.com ( main/SiteCollectionDocuments/financial-reports/annual-review-2011-en.pdf).
PwC assumes all auditing functions which are required by law and by the Articles of Incorporation of Zurich Financial Services Ltd. They are elected by the shareholders of Zurich Financial Services Ltd on an annual basis. At the Annual General Meeting of shareholders on March 31, 2011, PwC was re-elected by the shareholders of Zurich Financial Services Ltd. The Board of Directors proposes that PwC be re-elected at the upcoming Annual General Meeting as external auditors for the business year 2012. PwC fulfils all necessary requirements under the new Swiss Federal Act on the Admission and Oversight of Auditors and has been admitted as a registered auditing company by the Federal Audit Oversight Authority under this Act.
Mr. Richard Burger of PricewaterhouseCoopers AG has been the lead auditor, responsible since the beginning of 2011 and to the end of the business year 2012. He has been the auditor-in-charge for regulatory and statutory audit work since 2008. The Group requires rotation of the main auditors in charge after they have served Zurich for five years. As in the previous year, Mr. Patrick Shouvlin will co-sign the auditors’ report 2011 as global relationship partner.
Total non-audit fees 4.6 5.8 – Tax advice 0.5 0.5 – Legal advice 0.0 0.0 – Transaction consulting incl. due diligence 0.1 0.6 – Audit-related advice 2.3 2.3 1 Adjusted for foreign exchange rate movements audit fees amounted to USD 36.3 million in 2010.
The Board Audit Committee and the CEO are regularly informed of important findings, including ineffective opinions, mitigation actions and attention provided by Management. Group Audit has unrestricted access to all accounts, records and documents and must be provided with all data and information needed in order to fulfil its duties. Group Audit works in close cooperation with the external auditors, sharing risk assessments, work plans, audit reports and updates on audit actions. Group Audit and the external auditors meet regularly at all levels of the organization to optimize assurance provision and efficiency. The Head of Group Audit attends each meeting of the Audit Committee.
Corporate governance report continued committees that oversee subsidiaries in Latin America, Asia-Pacific, Middle East and parts of Europe. The subsidiary board audit committees comprise directors of the legal entities concerned, including in some instances, independent non-executive directors. The regional oversight committees include a majority of independent members from Group executive management who do not have a direct or indirect operating responsibility for the business carried out by the relevant subsidiary. In addition, assurance providers participate as attendees. The results of such reviews are reported to the Group CEO, the Risk Committee of the Board, the Audit Committee and the Group Board, as appropriate.
The reports relate to matters such as a) significant changes in risks, the business and the external environment; b) management’s monitoring of risks and control systems; c) risk and control monitoring communications; d) significant control issues, if any; and e) the effectiveness of the Group’s external reporting process.
• With regard to the operational implementation of the remuneration architecture across the Group, Group Audit carried out an assessment to include a review of the overall design effectiveness of the processes and controls related to the remuneration scheme as well as governance.
Vesting is determined based on the Group’s relative total shareholder return (TSR) and return on common shareholders equity (ROE) achievements over the three calendar years prior to the vesting date
Short-term incentives are delivered through a Group plan and through local country plans. The Group plan is utilized across the organization and, in many countries covers all employees in the respective country who are selected to participate. In other countries only the most senior individuals participate in the Group plan. Local country plans, following broadly the same principles as the Group plan, may be utilized for other employees.
Value of other remuneration paid in 2011 Members of the GEC received other remuneration in 2011 in relation to employee benefits, expatriate allowances, perquisites, benefits-in-kind and any other payments due under each member’s employment contract. The total value of other remuneration in 2011 was USD 3.4 million. Benefits-in-kind have been valued using market rates.
Based on these figures, the value of the total remuneration for all members comprises 39 percent (prior year 40 percent) in fixed remuneration elements (comprising base salaries, service costs for pension benefits and other remuneration) and 61 percent (prior year 60 percent) in performance related components (comprising the cash incentive awards under the Short-Term Incentive Plan together with the value of the target performance share grants, restricted share grants and share option grants).
2 Includes sign-on payments in shares. 3 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 percent of the target level with the valuation of the options based on the Black-Scholes option pricing model as set out in Note 24 to the consolidated financial statements, the valuation of the target performance share grants based on the share price on the day prior to the grants (CHF 243.60 for 2011 and CHF 259.90 for 2010). The charges in the financial statements may be calculated on different vesting basis.
As part of the establishment of the 51 percent participation in the Latin American insurance operations of Banco Santander SA (Santander), the Group has appointed senior management and completed acquisitions in Brazil, Mexico, Chile, Argentina and Uruguay in October and November 2011. In September 2011, the Group closed the acquisition of the composite insurer Malaysian Assurance Alliance Berhad (MAA).
The net underwriting result decreased by USD 230 million to USD 342 million, reflected in the deterioration of 0.9 percentage points in the combined ratio to 98.8 percent. The underlying loss ratio continued to improve as the rate and re-underwriting strategies maintain the Group’s profit margin. This improvement partially compensated for the impact of the exceptional frequency and severity of loss events arising from major catastrophes, amounting to USD 1.0 billion, including the floods in Australia, earthquakes in New Zealand, the earthquake and subsequent tsunami in Japan, Hurricane Irene in the U.S. and the floods in Thailand, as well as weather-related events across all regions during 2011. The total estimate for catastrophe and weather-related loss events triggered the Group’s aggregate catastrophe reinsurance cover with recoveries of USD 175 million recorded in the Group Reinsurance result, forming an integral part of the overall General Insurance result. The expense ratio remained flat at 26.9 percent as an improvement in the other underwriting expense ratio was offset by a slightly increased commission ratio mainly triggered by a change in business mix. Absolute net technical expenses remained flat on a local currency basis as continued focus on expenses maintained the balance between investments in emerging markets and expense management actions.
Gross written premiums and policy fees increased by USD 325 million to USD 7.9 billion, or by 4 percent in U.S. dollar terms but remained flat on a local currency basis. The focus has remained on specific growth initiatives, such as international program business, and on underwriting and pricing discipline. Average rates increased by 3 percent on business written across all regions and higher retention levels have been achieved despite the very competitive market environment. Customer insured exposures have increased in North America, while they have decreased in Europe due to the worsening economic environment in some countries. Premiums in Asia-Pacific and Middle East continued to increase, although from a small base, reflecting the strategy to expand the Group’s presence in those markets.
The net underwriting result increased by USD 91 million to USD 379 million, reflected in the improvement of the combined ratio of 0.7 percentage points to 97.0 percent. Improvements in the underwriting result arising from the continued focus on underwriting strategies, including rate increases and improvements in the underlying loss ratio, were partially offset by increased weather-related losses, such as the severe hailstorms in Switzerland and Germany which amounted to USD 136 million in total, floods in Ireland, and by riots in the UK, as well as lower favorable development of reserves established in prior years. In Germany, the underwriting result was impacted by the strengthening of loss reserves and changes in assumptions on unearned premium reserves. Corrective actions on personal motor lines in the UK, Italy and Russia improved the overall result. The expense ratio increased by 0.8 percentage points due to higher commissions, reflecting business mix changes and upward pressure on commissions, increases in bad debt provisions as well as the impact of lower net earned premiums.
Global Life continues to make progress toward its strategic objective of diversifying into the higher growth markets of Latin America and Asia-Pacific and Middle East. The new business annual premium equivalent (APE) and new business value (NBV) generated by growth in these regions largely mitigated challenging market conditions in individual life business in Europe. In Spain and Ireland, pricing behavior in the market on certain lines of business was on terms considered uneconomic by the Group, and the single premium market in Germany has contracted compared with 2010. Protection products, which generate higher margins, contributed to growth in new business value across all regions except North America where new business value on protection business declined, despite increasing volumes, as a result of a change in persistency assumptions.
New business annual premium equivalent was USD 4.0 billion, an increase of USD 293 million, or by 8 percent in U.S. dollar terms and 3 percent on a local currency basis. Growth in Latin America arose from increased sales of individual protection business and Corporate Life & Pensions business in Brazil and Mexico. Growth in Asia-Pacific and Middle East was driven by strong sales of corporate savings business and growth in sales from the International/ Expats pillar. In Europe, growth in the Private Banking Client Solutions and Corporate Life & Pensions business in the UK was largely offset by reduced volumes in Germany, Ireland and Spain due to the challenging market conditions in those countries.
Farmers business operating profit decreased by USD 200 million to USD 1.5 billion, or by 12 percent. This reduction reflects the reduced participation in the All Lines agreement in Farmers Re and an increase in losses compared with 2010, offset in part by slightly higher business operating profit in Farmers Management Services due to reduced integration expenses between years.
Real estate held for investment 8,468 8,274 3,898 4,081 Mortgage loans 11,058 11,851 – –
Net investment income 7,185 7,092 1% Net capital gains/(losses) on investments and impairments 2,182 898 nm of which: net capital gains/(losses) on investments and impairments attributable to shareholders 1,515 279 nm
Gross reserves for losses and loss adjustment expenses 67,525 68,107 64,074 63,864
Risk management Mission and objectives of risk management 104 Risk management framework 104 External perspectives 105 Risk governance and risk management organization 106
• Global Underwriting Committee (GUC) – acts as a focal point for underwriting policy and related risk controls for General Insurance and is chaired by the Global Chief Underwriting Officer for General Insurance.
Reinsurance for natural catastrophes – unusually severe natural catastrophe events (in USD millions, as of December 31, 2011)
Losses retained Amount of reinsurance secured under catastrophe treaties International top layer catastrophe cover
In 2011, the Group reduced its stake in New China Life Insurance Company Ltd.
Table 6.a in USD millions, as of December 31, 2011Economic interest rate sensitivities for the rest of the businesses – current period
Table 11.b in USD millions, as of December 31, 2010Economic credit spread sensitivities for the Global Life business – prior period
See notes 1 and 3 of the Consolidated financial statements for additional information on foreign currency translation and transactions.
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 into account analysis of fundamentals and market indicators.
As of December 31, 2011, investment grade securities comprise 97.7 percent of the Group’s debt securities, and 37.9 percent were rated “AAA”. In 2011, mostly because of their high debt levels compared to GDP, a few sovereigns in developed economies, including the U.S. and Japan, and related financial institutions, were downgraded. Therefore, the rating distribution of the fixed income portfolio deteriorated slightly, driven mainly by the August 2011 downgrade of the U.S. sovereign debt and related credits from “AAA” to “AA+”, resulting in a decline in “AAA” debt exposure of USD 22.3 billion, offset by an increase of USD 2.3 billion in “AAA” Eurozone sovereign debt exposures. In addition, the downgrades of some Eurozone government and similar entities caused breaches of internal rating category limits, which were actively managed as circumstances allowed. Aggregate debt exposures above applicable limits amounted to USD 775 million (less than 1 percent of the Group’s debt securities) as of December 31, 2011. Debt securities rated “BBB” and below are within the limits of the Group’s risk policy. As of December 31, 2010, investment grade securities comprised 98.5 percent of debt securities, and 52.5 percent were rated “AAA”. The Group’s investment policy prohibits speculative grade investments, unless specifically authorized and under exceptional circumstances. The Group identifies investments expected to be downgraded to below investment grade and implements appropriate corrective actions.
The Group’s largest mortgage loan portfolios are in Germany (USD 5.2 billion, including mortgage loans given as collateral) and in Switzerland (USD 4.2 billion); these are predominantly secured against residential property. In Switzerland, the underlying properties of individual loans are revalued every 10 years. In Germany, the property valuation is not generally reassessed after the granting of the mortgage loan. A less frequent or no revaluation of the underlying property means that reported loan-to-value (LTV) ratios will be higher (lower) than they would be if property prices have risen (fallen) since their valuation. To ensure LTV ratios are not understated and to identify potentially higher LTV loans, the Group has undertaken to review, and revalue when necessary, mortgage loans in locations where property prices may have fallen since their valuation and to be conservative in valuing or revaluing property in locations where prices have substantially risen.
The next largest portfolio comprises loans granted by Zurich Bank (including the UK property loans of Dunbar Bank) of USD 1.4 billion (after provisions) in the UK and Ireland. They consist of residential and commercial property development financing or investment loans, secured as either property under development or completed developments. In 2010, the banks ceased originating new business in this market following the significant deterioration in economic conditions and the drop in property values in the UK and Ireland. Provisions at Zurich Bank now stand at a significant USD 631 million (USD 576 million in 2010) or 31 percent of the portfolio as of December 31, 2011; this accordingly
Credit risk related to other loans The credit risk arising from other loans is assessed and monitored together with the fixed income securities portfolio. 74.1 percent of the reported loans are to municipalities or government or supranational institutions, of which 74.0 percent are to the German Central Government or the German Federal States. The table below shows the composition of the loan portfolio by rating class. As of December 31, 2011, a total of USD 7.6 billion or 72.9 percent of loans are secured. As of December 31, 2010, a total of USD 9.8 billion or 75.4 percent of loans were secured.
In addition to its overall framework, the Group has specific processes and systems in place to focus on high priority operational matters such as information security, managing business continuity, and combating fraud.
Swiss Solvency Test requirement Since January 1, 2011, the Swiss Solvency Test (SST) capital requirements are binding in Switzerland. The Group uses an adaptation of its internal Risk-Based Capital (RBC) model to comply with the SST requirements and runs a full SST calculation twice a year. The model is still subject to FINMA approval. For more details about RBC, see the “Internal Model Capital Adequacy (unaudited)” section in the Risk Review. For more details about the SST model approval process see the “Regulatory Requirements in Europe” section in the Risk Review.
2 Amount for dividend reflects the proposed dividend pro-rata for the financial year 2011, not yet approved by the Annual General Meeting.
Cash flows from operating activities Net income attributable to shareholders 3,766 3,428 Adjustments for: Net (gain)/loss on divestments of businesses (6) (38) Income from equity method accounted investments (12) (17) Depreciation, amortization and impairments of fixed and intangible assets 996 1,086 Other non-cash items 123 789
Cash flows from investing activities Sales of property and equipment 49 117 Purchases of property and equipment (199) (182) Disposal of equity method accounted investments, net 42 2 Acquisitions of companies, net of cash acquired (1,090) (48) Divestments of companies, net of cash balances 20 (27) Dividends from equity method accounted investments 3 3 Net cash used in investing activities (1,176) (135) Cash flows from financing activities Dividends paid (2,835) (2,220) Issuance of share capital 83 95 Net movement in treasury shares and preferred securities 7 (61) Redemption of preferred securities and repayments to non-controlling interests (476) – Issuance of debt 2,645 1,120 Repayments of debt outstanding (1,863) (982) Net cash provided by/(used in) financing activities (2,439) (2,049) Foreign currency translation effects on cash and cash equivalents 48 (383) Change in cash and cash equivalents excluding change in cash held as collateral for securities lending 322 (1,023) Cash and cash equivalents as of January 1, excluding cash held as collateral for securities lending 9,726 10,749 Cash and cash equivalents as of December 31, excluding cash held as collateral for securities lending 10,048 9,726 Change in cash held as collateral for securities lending – (493) Cash and cash equivalents as of January 1, including cash held as collateral for securities lending 9,726 11,242 Cash and cash equivalents as of December 31, including cash held as collateral for securities lending 10,048 9,726 of which: – cash and cash equivalents – Group investments 8,768 8,182 – cash and cash equivalents – unit linked 1,280 1,544
Cash and cash equivalents comprise the following: Cash at bank and in hand 5,297 5,956 Cash equivalents 4,751 3,770 in USD millions, for the years ended December 31 in USD millions, as of December 31Cash and cash equivalents
Net changes in capitalization of non-controlling interests – – – – – – – – – – 1,141 1,141 1 The number of common shares issued as of December 31, 2011 was 147,385,822 (December 31, 2010: 146,586,896, December 31, 2009: 147,473,068). 2 As approved by the Annual General Meeting on March 31, 2011, the dividend of CHF 17 per share was paid out of the capital contribution reserve. The difference of USD 795 million between the dividend at transaction day exchange rates amounting to USD 2,706 million and the dividend at historical exchange rates amounting to USD 1,912 million is reflected in the cumulative foreign currency translation adjustment.
When there is objective evidence that an available-for-sale equity security is impaired, the cumulative loss that had been recognized directly in OCI, including any portion attributable to foreign currency changes, is recognized in income as an impairment loss. The impairment loss is the difference between the weighted-average acquisition cost (less any impairment loss on that security previously recognized in income) and the current fair value. Impairment losses on equity securities are not reversed through income, instead, when the fair value of a previously impaired equity security increases, the resulting unrealized gains will be recognized through OCI. Any further decrease in fair value recorded subsequent to recognition of an impairment loss is also reclassified from OCI to income as impairment losses, together with any portion attributable to foreign currency changes, until the equity security is derecognized.
h) Offsetting financial assets and financial liabilities Financial assets and financial liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or to settle the asset and settle the liability simultaneously.
The Group establishes IBNR reserves, generally on an undiscounted basis, to recognize the estimated cost of losses for events which have already occurred but which have not yet been notified. These reserves are established to recognize the estimated costs required to bring such claims to final settlement. As these losses have not yet been reported, the Group relies upon historical information and statistical models, based on product line, type and extent of coverage, to estimate its IBNR liability. The Group also uses reported claim trends, claim severities, exposure growth, and other factors in estimating its IBNR reserves. These reserves are revised as additional information becomes available and as claims are actually reported.
Refer to notes 6, 7 and 26 for further information on the fair value of financial assets and liabilities.
Divestments On January 12, 2012, the Group sold all of its shares in La Boliviana Ciacruz de Seguros y Reaseguros S.A. and Zurich Boliviana de Seguros Personales S.A. based in Bolivia, general and life insurance companies. As of December 31, 2011 the operations were classified as held for sale and the resulting loss on divestment of businesses amounted to USD 13 million.
The Group lost control from an accounting perspective in CaixaSabadell Vida, S.A. de Seguros y Reaseguros and CaixaSabadell Compagnia d’Assegurances Generals, S.A. as of September 30, 2010, following the merger of the bank distribution partner Caixa d’Estalvis de Sabadell (Caixa Sabadell) together with two other Spanish savings banks to form Caixa d’Estalvis Unió de Caixes de Manlleu, Sabadell i Terrassa (Unnim) on July 1, 2010. Subsequently, on November 16, 2010 the Group entered into a definitive agreement to sell back to Unnim its 50 percent stakes in the life and general insurance bancassurance companies, CaixaSabadell Vida, S.A. de Seguros y Reaseguros and CaixaSabadell Companyia d’Assegurances Generals, S.A., respectively, jointly owned with Unnim (the Unnim Jointly Owned Companies). The Group derecognized the assets and liabilities at their carrying amount and recognized its retained investment in the Unnim Jointly Owned Companies as an equity security classified as available-for-sale as of September 30, 2010. USD 52 million was recorded within net gain on divestments of businesses in 2010. Following approval by the relevant regulatory authorities, the transaction was closed on February 28, 2011. Unnim paid a cash consideration of USD 393 million (EUR 285 million) to the Group in exchange for the Group’s Unnim Jointly Owned Companies stakes, which the Group acquired in 2008 from Caixa Sabadell.
Investments in associates and joint ventures 12 17 (45) (37) (33) (20)
Cash and cash equivalents 8,768 4.5 8,182 4.2 Equity securities: Fair value through profit or loss 3,253 1.7 3,931 2.0 of which: Trading securities 438 0.2 473 0.2 Securities designated at fair value through profit or loss 2,816 1.4 3,458 1.8
Interest rate contracts Interest rate contracts are used to hedge risks from changes in interest rates and to manage asset liability mismatches. Whenever possible the Group enters into exchange traded contracts, which are standardized and regulated. Furthermore, because of the structure of the Exchanges, exchange traded contracts are not considered to carry counterparty risk. Over the counter (OTC) contracts are otherwise applied and comprise swaps and swaptions.
Consolidated financial statements 8. Reserves for insurance contracts and reinsurers’ share of reserves for insurance contracts
Reserves for losses and loss adjustment expenses 67,525 68,107 (12,401) (12,093) 55,124 56,014
Increase/(decrease) recorded in other comprehensive income (6) (35) Foreign currency translation effects (712) (1,590) As of December 31 50,661 50,667 1 The 2011 movement mainly included USD 259 million transferred from reserves for unit-linked contracts to liabilities for investment contracts, USD 246 million transferred from other liabilities to liabilities for investment contracts, USD 137 million transferred from non-technical provisions and USD 27 million transferred from future life policyholders’ benefits to liabilities for investment contracts, partly offset by USD (119) million transferred from liabilities for investment contracts to reserves for unit-linked contracts (see note 1). The 2010 movement mainly included a decrease of net USD (884) million related to the net transfer to and from reserves for insurance contracts.
Gross carrying value as of December 31, 2010 2,241 2,528 2,607 1,025 3,967 195 12,563 1 The reduction in Goodwill is a result of a revised earn-out calculation within one of the Group’s Spanish General Insurance operations and the impact of loss of control in Futuro de Bolivia S.A. Administradora de Fondos de Pensiones (see note 5). The decreases in PVFP and distributions agreements represent the impact of loss of control in Ciaxa Sabadell (see note 5).
As of January 1 (2,487) (1,990) Net change recognized in the income statement 134 (227) Net change recognized in equity 376 (488) Net changes due to acquisitions/(divestments) (19) 198 Foreign currency translation effects 23 20 As of December 31 (1,973) (2,487)
The net deferred tax liabilities related to non-controlling interests amounted to USD 324 million and USD 348 million for the years ended December 31, 2011 and 2010, respectively.
Gross deferred tax Deferred acquisition and origination costs 24 (655) 26 (618) Depreciable and amortizable assets 30 (73) 33 (38) Life policyholders’ benefits and deposits 1 96 (49) 34 (13) Unrealized (gains)/losses on available-for-sale investments and cash flow hedges 410 (522) 328 (452)
For which deferred tax assets have been recognized, expiring < 5 years 170 358 > 20 years or with no time limitation 1,010 203
b) Authorized share capital Until March 30, 2012, the Board of Zurich Financial Services Ltd is authorized to increase the share capital by an amount not exceeding CHF 1,000,000 by issuing up to 10,000,000 fully paid registered shares with a nominal value of CHF 0.10 each. An increase in partial amounts is permitted. The Board would determine the date of issue of any such new shares, the issue price, type of payment, conditions for exercising pre-emptive rights, and the commencement of entitlement to dividends.
In February 2001, the Group placed six series of Trust Capital Securities (Zurich RegCaPS) for a total amount of USD 1,125 million (USD 1,096 million net of issuance costs) with a limited number of qualified institutional and corporate U.S. investors. The securities, which were issued under Rule 144A in the U.S., were perpetual, non-cumulative and had a par value of USD 1,000 each. They had no voting rights, except in certain specified circumstances and were linked to Farmers Group, Inc. Class C shares.
Most of the Group’s defined benefit pension plans are funded through contributions by the Group, and in some cases the employee, to trusts or foundations independent of the Group’s finances. In these cases, the annual funding requirements are determined in accordance with local funding and actuarial cost methods. Where plans are not funded, a liability for the accrued pension obligations is recognized in the Group’s balance sheet.
Fair value of plan assets as of January 1 13,791 12,622 – – Expected return on plan assets 756 722 – – Actuarial gain/(loss) included in other comprehensive income 560 388 – –
The movements in actuarial gains and losses due to differences between actual and expected experience on the Group’s plan assets and defined benefit obligations, together with the impact of changes in actuarial assumptions to reflect economic conditions at the year end are summarized below: Actuarial gain/(loss) as of January 1 (2,914) (2,672) (2,907) (1,308) (1,870) Experience adjustments on plan liabilities (190) 205 (37) (147) (118) Experience adjustments on plan assets 560 388 318 (1,485) 188 Changes due to discount rate assumptions (1,602) (742) (103) 223 975 Changes due to other actuarial assumptions (105) (65) 144 (392) (345)
a) Cash incentive plans Various businesses throughout the Group operate short-term incentive programs for executives, management and, in some cases, for employees of that business. Awards are made in cash, based on the accomplishment of both organizational and individual performance objectives. The expense recognized for these cash incentive plans amounted to USD 487 million and USD 422 million for the years ended December 31, 2011 and 2010, respectively.
The shares granted during the year are the target allocations made under the performance share plans together with any restricted share awards granted during the year. Whether these grants become vested 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 of options outstanding
Zurich Financial Services (now Zurich Financial Services Ltd, ZFS) is a defendant in putative class-action securities lawsuits relating to its divestiture of its interest in Converium (now Scor Holding (Switzerland) AG). On July 25, 2008, ZFS and the class-action plaintiffs entered into an amended stipulation of settlement that called for a payment of USD 28 million to settle the case in two parts on behalf of all persons and entities who had purchased Converium securities between January 7, 2002 and September 2, 2004: one settlement in the U.S. court, covering all U.S. persons and entities, and all other persons who had purchased Converium securities on U.S. markets, and another settlement in the Amsterdam Court of Appeal, in the Netherlands, covering all non-U.S. persons and entities who had purchased Converium securities on non-U.S. markets. The U.S. and Dutch settlements are both subject to court approval and are independent of each other. The U.S. court approved the U.S. settlement on December 12, 2008, and the ruling became final in June 2009. On January 17, 2012, the Amsterdam Court of Appeal approved the non-U.S. settlement. Under Dutch law, only the parties jointly can appeal, and ZFS will not join in an appeal.
Total securities at FV through profit or loss 11,274 10,799 11,274 10,799
Table 26.6b in USD millionsRoll forward analysis for financial assets classified under Level 3 – prior period
Remuneration of key personnel of the Group Cash compensation, current benefits and fees 33 30 Post-employment benefits 3 3 Share-based compensation 19 20 Termination benefits – 2 Total remuneration of key personnel 55 55
Add back: Business operating profit attributable to non-controlling interests (1) 22 26 42 – – – (1) 1 1 26 64 Net income before shareholders’ taxes 2,547 2,668 1,672 1,384 1,464 1,074 (716) (622) 31 (104) 4,998 4,401 Income tax expense/(benefit) attributable to policyholders – – (242) 462 – – – – – – (242) 462
Net investment income on Group investments 330 342 134 120 3,562 3,353 107 66 13 12 – – 4,146 3,892 Net capital gains/(losses) and impairments on Group investments – 4 – – 396 492 33 3 – – – – 429 498
Gross written premiums and policy fees 594 531 Net earned premiums and policy fees (108) 502 Insurance benefits and losses, net 475 769 Policyholder dividends and participation in profits, net 133 496 Total net technical expenses 76 57 Net underwriting result (792) (821) Net investment income 47 208 Net capital gains/(losses) and impairments on investments 944 624 Net non-technical result (excl. items not included in BOP) (206) (168) Business operating profit before non-controlling interests (7) (157) Non-controlling interests 1 1 Business operating profit (8) (157)
Malaysian Assurance Alliance Berhad Kuala Lumpur Global Life / General Insurance 100 100 MYR 579.0
ZS Insurance America, S.L. 5 Madrid Global Life / General Insurance 51 51 EUR 177.0
This report describes the development of the embedded value of the Zurich Financial Services Group (the Group) for the twelve months ended December 31, 2011.
New business net of non-controlling interests (138) 1 (622) (760) 1,686 926 Expected contribution at reference rate 16 83 100 105 205 Expected contribution in excess of reference rate 28 (33) (5) 540 535
Movement in embedded value, after tax in USD millions, for the year ended December 31, 2011
When the MCEV reporting is implemented locally in the business units, the value of these units will be included in the covered business and thus the base MCEV value. In line with embedded value methodology, see section 12, the value of the acquisition will reduce the Group MCEV by the allocated intangibles.
In the Other region, a number of capital movements resulted in a net release of USD 3 million.
The key assumption changes represented by each of these sensitivities are given in section 12(r).
Germany has followed an approach where liability model points were set up in advance, using the structure of a previous run, and then projected to valuation date values by scaling to match the expected balance sheet figures. The new business model points are set up quarterly. For each quarter new business model points are scaled to the expected APE quarter discrete.
1 Of this amount CHF 2,045 thousands may not qualify for Swiss withholding tax exempt payments to shareholders according to the current treatment of issuance stamp tax by the Federal tax administration.
8 Neither the Chairman nor the Vice Chairman receive any additional fees for their Committee work. 9 In addition to the fees received as Directors of Zurich Financial Services Ltd and Zurich Insurance Company Ltd, Mrs Bies, Mr Nicolaisen and Mr de Swaan earned fees for their board memberships of the following Zurich Financial Services Group companies: – In 2011, Mrs Bies and Mr Nicolaisen earned CHF 50,000 for their membership of the board of Zurich Holding Company of America (ZHCA). In 2010, both received an annual fee of USD 40,000 as well as a US Residence Fee of USD 10,000. – In 2011, Mr de Swaan earned CHF 50,000 p.a. for the first 6 months and CHF 75,000 p.a. for the second 6 months (each pro-rated) for his membership of the board of Zurich Insurance plc and of the board of Zurich Life Assurance plc. He also earned an annual fee of CHF 10,000 for being chair of the audit committees of these two companies. In 2010, he received an annual fee of USD 40,000 for his membership of the board and an annual fee of USD 10,000 for being chair of the audit committees of these two companies.
Except for Mr Watter none of the Directors had outstanding loans, advances or credits as of December 31, 2011 or 2010. Unrelated to his Board membership and on terms and conditions available to other customers, Mr. Watter had a collateralized policy loan of CHF 2.5 million outstanding as of December 31, 2011 and 2010. The annual interest rate charged on the loan is 4 percent.
Securities Custody Service Zurich Financial Services Ltd Custody Accounts c/o SIX SAG Ltd P.O. Box, 4601 Olten, Switzerland Telephone: +41 (0)58 399 61 45 Fax: +41 (0)58 499 61 91