Benefi ts from initiatives in 2009 exceeded • the after-tax operational improvement target under The Zurich Way initiatives of USD 900 million after tax
The following table presents the summarized consolidated results of the Group for the years ended December 31, 2009 and 2008, respectively. All amounts are shown in USD millions and rounded to the nearest million unless otherwise stated with the consequence that the rounded amounts may not add to the rounded total in all cases. All ratios and variances are calculated using the underlying amount rather than the rounded amount. This document should be read in conjunction with the Financial Report 2009 for the Zurich Financial Services Group and with its audited Consolidated Financial Statements as of December 31, 2009. Certain comparatives including segment disclosures have been restated for changes in presentation and for reclassifi cations as set out in notes 1 and 30 of the audited Consolidated Financial Statements to conform to the 2009 presentation. The reclassifi cations have no impact on previously reported business operating profi t, net income or shareholders’ equity.
Global Life business operating profi t 1,477 1,490 (1%) Global Life new business annual premium equivalent (APE) 3,667 3,261 12% Global Life new business margin, after tax (as % of APE) 21.3% 23.1% (1.8 pts) Global Life new business value, after tax 782 753 4%
Global Life – new business margin, after tax (as % of APE)
Operating performances were strong across all our core businesses. In General Insurance, profi tability continued to be our primary focus, and through disciplined underwriting, portfolio management and successful rate actions we were able to achieve a business operating profi t of USD 3.5 billion and improve our combined ratio to 96.8 percent. This, despite lower investment yields and lower volumes. Lower volumes were attributable to both the economic environment and the lost business we could not provide because it did not meet our rigorous underwriting standards. Issues of concern have emerged in the motor markets of certain European countries. To address them we have already taken signifi cant rate actions, as well as other appropriate measures, and anticipate marked improvements in those businesses in the second half of 2010.
While the urgency of crisis faded somewhat over 2009, the fog of uncertainty remained. At Zurich we advanced on our objectives undeterred, thanks to an unbroken focus on discipline, execution, and a whole-hearted embrace of our responsibility as an insurer.
(including regional/segment/division Chief Risk Offi cers and Local Risk Offi cers)
The Zurich Risk Policy was strengthened in asset/liability management, life insurance, reinsurance, and operational risk, with additional important changes in the way we respond to threats to information security and manage the potential risks associated with post-merger integration. In 2009 we again paid close attention to looming sources of operational risk, enhancing the testing standard for business continuity management and launching a global anti-fraud initiative. Such measures are appropriate responses to a growing threat of pandemic, and the generally observed increase in claims and non-claims fraud in recessionary periods.
All our efforts are united by our code of conduct, the Zurich Basics. It is the backbone of what we do and sets the framework for how we deliver on our business goals. Our basic values of integrity, sustainability, customer centricity, excellence and teamwork guide our actions, and we expect all employees to live up to them in both letter and spirit.
For more detailed information on the Group’s segments and its geographic structure please refer to note 30 to the Consolidated fi nancial statements, starting on page 139. A detailed review of the respective business segment and division results during 2009 can be found in the Financial Review starting on page 68. Furthermore, an overview of the Group’s business strengths and activities is contained in the Business Review, available on Zurich’s Web site www.zurich.com (
Fritz Gerber is the Honorary Chairman of Zurich Financial Services Ltd. He was chairman of Zurich Insurance Company between 1977 and 1995 and its chief executive offi cer between 1977 and 1991. In recognition of his leadership and services to that company, he was appointed Honorary Chairman. Such designation does not confer Board membership or any Director’s duties or rights, nor does it entitle him to any Director’s fees.
The Swiss banking and insurance regulator FINMA published its Circular on remuneration in November 2009. Zurich is currently assessing in detail whether any changes will have to be made to the current remuneration system for 2011. First impressions indicate that the current system is largely in line with the principles outlined in the Circular and the additional remuneration disclosures will be prepared for inclusion in the 2010 Remuneration report.
in USDDirectors’ fees 2009 in USDDirectors’ fees 2008 05_Remuneration_Report_7416_Eng.indd 5505_Remuneration_Report_7416_Eng.indd 55 24/2/10 20:06:2624/2/10 20:06:26
13 Mr Nicolaisen became Chairman of the Audit Committee on April 3, 2008 following the retirement of Mr Schulmeyer. He received a pro rata fee for being Chair. Prior to that he was Chairman of the Risk Committee.
The total value for 2009 comprises the following elements (the comparative fi gures for 2008 are shown in the table on total remuneration for all GEC members): Base compensation and annual cash incentives paid for 2009 The total amount of base compensation and annual cash incentive awards earned under the Short-Term Incentive Plan for 2009 was USD 26.1 million. This comprised USD 11.1 million in base compensation and USD 15.0 million in annual cash incentive awards, which refl ect the amounts to be paid in 2010 for 2009 performance. The annual cash incentive awards are determined individually and are performance based. Overall funding for the incentives is based on overall profi t performance in 2009 and funds are allocated to individuals based on a combination of factors, including the results of the business that the Group Executive Committee member is responsible for, the accomplishment of growth initiatives and their individual contribution to the accomplishment of strategic objectives during the year. For members of the Group Executive Committee the target levels under the Short-Term Incentive Plan for 2009 were set at 100 percent of the base compensation, except for the Chief Executive Offi cer where the target was set at 150 percent of the base compensation. The maximum award for all GEC members (including the CEO) is 200 percent of the target level.
The following tables show how the totals of the vested share options owned by the Group Executive Committee members are distributed according to the grants identifi ed in the tables “Summary of outstanding options” as of December 31, 2009 and 2008, respectively.
The net underwriting result, which improved by USD 833 million to a profi t of USD 231 million, refl ects a 17.3 percentage point improvement in the combined ratio. This is driven entirely by improved loss experience, with the loss ratio decreasing by 17.5 percentage points to 74.7 percent compared with prior year. This includes a signifi cant improvement in the attritional loss ratio as a result of the actions taken to increase rates, improve risk selection, and accept lapses of business not meeting our pricing hurdles. The loss ratio trend is also favorably impacted by signifi cantly lower levels of natural catastrophe losses compared with 2008 as well as favorable development on reserves established in prior years. The expense ratio was 0.2 percentage points higher compared with the prior year, which refl ects slightly higher commissions driven by business mix. Other technical expenses remained broadly fl at relative to net earned premiums which refl ects the Group’s expense discipline, compensating for strategic investments such as expansion into the Middle East.
Embedded value – highlights New business annual premium equivalent (APE) 3,667 3,261 12% Present value of new business premiums (PVNBP) 29,515 25,883 14% New business margin, after tax (as % of APE) 21.3% 23.1% (1.8 pts) New business margin, after tax (as % of PVNBP) 2.6% 2.9% (0.3 pts) New business value, after tax 782 753 4%
in USD millions, as of December 31Breakdown of investments 06_Financial_Review_8212_Eng.indd 8606_Financial_Review_8212_Eng.indd 86 25/2/10 19:36:5125/2/10 19:36:51
Total net capital losses on investments and impairments were USD 1.4 billion, comprising net realized losses of USD 91 million, impairments of USD 1.4 billion and net positive revaluations of USD 62 million. The impairments arose mainly from USD 590 million attributable to equity securities, USD 573 million attributable to debt securities and USD 233 million attributable to mortgages and other investments. Net positive revaluations on securities booked as fair value through profi t and loss added gains of USD 60 million, driven by gains on equity securities of USD 476 million, on real estate of USD 130 million and on debt securities of USD 5 million, which were mostly offset by losses from derivatives of USD 543 million.
Decreases recorded in shareholders’ equity 28 9 909 177 937 187
Cash and cash equivalents as of January 1 1 16,711 15,251 Cash and cash equivalents as of December 31 1 16,978 16,711
An important element of our sound risk culture is a well-balanced and effectively managed compensation program. This includes a Group-wide compensation philosophy, robust short-and long-term incentive compensation plans, strong governance and links to the business planning and risk policies of the Group. By defi ning the remuneration principles, the Board establishes the structure and design of the compensation arrangements so that they do not encourage risk taking that could jeopardize the fi nancial position of the Group. For more information on our remuneration system, refer to the Remuneration Report (unaudited).
Through these processes, responsibilities and policies, we embed a culture of disciplined risk taking across the Group. We continue to consciously take risks for which we expect an adequate return. This approach requires sound judgment and an acceptance that certain risks can and will materialize in the future.
The Group Risk Management organization consists of central functions at Corporate Center and a decentralized risk management network at regional, segment, business division, business unit and functional levels.
General Insurance risk General Insurance risk includes the reasonable possibility of signifi cant loss due to uncertainty in the frequency of the occurrence of the insured events as well as in the severity of the resulting claims. The following provides an overview of the Group’s main lines of business: Motor includes automobile physical damage, loss of the insured vehicle and automobile third party liability insurance.• Property includes fi re risks (for example fi re, explosion and business interruption), natural perils (for example • earthquake, windstorm and fl ood), engineering lines (for example boiler explosion, machinery breakdown and construction) and marine (cargo and hull). Liability includes general/public and product liability, excess and umbrella liability, professional liability including • medical malpractice, directors and offi cers liability and errors and omissions liability.
The equity market scenarios assume a concurrent movement of all stock markets. • The sensitivities are reasonably possible as of the balance sheet date, but do not indicate a probability of such events • occurring in the future. They do not necessarily represent our 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 fi nancial condition.
Table 11 as of December 31Debt securities by rating of issuer 07_Risk_Review_7446_Eng.indd 11907_Risk_Review_7446_Eng.indd 119 24/2/10 20:10:5624/2/10 20:10:56
Past due but not impaired fi nancial assets. Past due by: 1 to 90 days – 137 – 1 1,188 1,325
Refer to notes 16 and 22 of the Consolidated Financial 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, refer to note 20 of the Consolidated Financial Statements. Refer to note 6 of the Consolidated Financial Statements for information on the maturity of our debt securities for total investments.
Expected maturity profi le for liabilities for investment contracts 07_Risk_Review_7446_Eng.indd 12707_Risk_Review_7446_Eng.indd 127 24/2/10 20:11:0224/2/10 20:11:02
Generally, all business activities contain some aspect of operational risk. Therefore, ongoing initiatives such as The Zurich Way and Operational Transformation help us manage operational risks through standardization of processes. Projects with an expected budget over a defi ned threshold undergo a risk assessment.
Cash fl ows from operating activities Net income attributable to shareholders 3,215 3,039 Adjustments for: Net (gain)/loss on divestments of businesses 5 (16) Income from equity method accounted investments (4) (8) Depreciation, amortization and impairments of fi xed and intangible assets 892 654 Other non-cash items 554 1,377
USD 169 million as of December 31, 2008, was erroneously presented under “Goodwill” but in substance comparable to distribution agreement intangible assets is now reported under “Other intangible assets”. This is a change in presentation with no effect on the previously reported net income or shareholders’ equity. Comparative amounts have been amended accordingly in the consolidated balance sheets and note 18.
The treatment of the elimination of inter-segment transactions has been changed to eliminate gross up effects on certain intercompany clearing accounts. This change results in an increase/(decrease) on the inter-segment revenue line for the year ended December 31, 2008 as follows: USD 724 million in General Insurance, USD (131) million in Global Life, USD (11) million in Farmers, USD (627) million in Other Operating Businesses and USD 45 million in Non-Core Businesses. The change has no impact on either segmental Business Operating Profi t (BOP) or net income of the Group.
Total revenues 32,349 32,349 Benefi ts, losses and expenses Insurance benefi ts and losses, gross of reinsurance 31,387 31,387 Less ceded insurance benefi ts and losses 3,425 3,425 Insurance benefi ts and losses, net of reinsurance 34,811 34,811 Policyholder dividends and participation in profi ts, net of reinsurance (21,514) (21,514) Underwriting and policy acquisition costs, net of reinsurance 8,287 8,287 Administrative and other operating expense 6,729 6,729 Interest expense on debt 599 599 Interest credited to policyholders and other interest 773 773 Total benefi ts, losses and expenses 29,685 29,685 Net income before income taxes 2,663 2,663 Income tax expense 452 452 attributable to policyholders 1,184 1,184 attributable to shareholders (732) (732)
Equity Shareholders’ equity 22,103 – 22,103 Non-controlling interests 1,678 – 1,678 Total equity 23,781 – 23,781 Total liabilities and equity 327,944 – 327,944
In March 2009, the IASB issued amendments to IFRIC 9 and IAS 39 “Embedded Derivatives”. The amendments are effective for reporting periods ending on or after June 30, 2009. The amendments clarify the accounting for embedded derivatives in the case of a reclassifi cation of a fi nancial asset out of the ‘fair value through profi t or loss’ category as permitted by the October 2008 amendments to IAS 39 "Financial Instruments: Recognition and Measurement".
In November 2009, the IASB issued IFRS 9 “Financial Instruments” which reconsiders the classifi cation and measurement of fi nancial assets. These requirements are effective for reporting periods beginning on or after January 1, 2013, with earlier adoption permitted. Under the new guidance the classifi cation of fi nancial assets is based on how the reporting entity manages these assets (business model) and on the contractual cash fl ow characteristics of the specifi c fi nancial assets. The measurement of fi nancial assets will be either amortized costs or fair value through profi t or loss, whereby for equity instruments an irrevocable election can be made on an instrument-by-instrument basis to record fair value through Other Comprehensive Income (OCI). The Group plans to assess the impact of this standard on its fi nancial statements in conjunction with the revised standard on IFRS 4 "Insurance Contracts" which is expected to be released in 2011 effective for reporting periods beginning on or after January 1, 2013. Changes to the IFRS timetable may have an impact on this approach.
Cash fl ows from certain universal life-type contracts in our Spanish operations are recognized as gross written premiums and insurance benefi ts and losses instead of deposits.
i) Offsetting of financial assets and financial liabilities Financial assets and fi nancial 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 recoverable amount of a CGU is the higher of its fair value less costs to sell and its value-in-use. Fair value less costs to sell is based on the best information available to refl ect the amount that the Group could obtain, as of the balance sheet date, from the disposal of the CGU on an arm’s length basis between knowledgeable, willing parties, after deducting the costs of disposal. Impairment losses on goodwill are not reversed.
q) Employee benefits Retirement benefi ts The operating companies in the Group provide employee retirement benefi ts through both defi ned benefi t plans and defi ned contribution plans. The assets of these plans are generally held separately from the Group’s general assets in trustee-administered funds. Defi ned benefi t plan obligations and contributions are determined annually by qualifi ed actuaries using the projected unit credit method. The Group’s expense relating to these plans is accrued over the employees’ service periods based upon the actuarially determined cost for the period.
Assets that have an indefi nite useful life, for example land, are not subject to amortization and are tested regularly for impairment. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the carrying value of the asset exceeds its expected recoverable amount. The recoverable amount is the higher of fair value less costs to sell and value-in-use. Assets are grouped on a CGU level if the recoverable amount cannot be separately determined.
Financial Information t) Finance and operating leases Agreements which transfer to counterparties substantially all the risks and rewards incidental to the ownership of assets, but not necessarily legal title, are classifi ed as fi nance leases. Leases in which a signifi cant portion of the risks and rewards of ownership are retained by the lessor are classifi ed as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to income on a straight-line basis over the period of the lease, unless another systematic basis is representative of the time pattern of the user’s benefi t even if the payments are not on that basis.
Fair values of debt instruments issued by the Group are estimated using discounted cash fl ow models based upon the Group’s current incremental borrowing rates for similar types of borrowings, with maturities consistent with those remaining for the debt instruments being valued.
1 Including net capital gains/(losses) on derivative fi nancial instruments of USD 45 million and USD (111) million for the years ended December 31, 2009 and 2008, respectively.
1 Including impairments on held-to-maturity securities of USD 63 million and USD 69 million for the years ended December 31, 2009 and 2008, respectively.
Signifi cant delays may occur in the notifi cation and settlement of claims, and a substantial measure of experience and judgment is involved in assessing outstanding liabilities, the ultimate cost of which cannot be known with certainty as of the balance sheet date. The reserves for losses and loss adjustment expenses are determined on the basis of information currently available; however, it is inherent in the nature of the business written that the ultimate liabilities may vary as a result of subsequent developments.
the difference between the initial net reserve estimate and the last entry of the diagonal. Conditions and trends that have affected the development of our reserves for losses and loss adjustment expenses in the past may or may not necessarily occur in the future, and accordingly, conclusions about future results may not be derived from the information presented in table 8.3.
The table below shows the maturity schedule of collateralized loans as of December 31, 2009 and 2008, respectively.
In 2008, the Group’s North America Commercial business division also entered into an operational transformation program. The impact is predominantly headcount related, with costs approximating USD 24 million. A further USD 32 million restructuring charge was recorded in 2008, to cover costs associated with the sale of Zurich American Insurance Company’s Commercial Small Business Solutions book of business to Truck Insurance Exchange, one of the Farmers Exchanges. The costs are mainly related to IT infrastructure but also include severance payments.
Table 20.2 in USD millions, as of December 31Maturity schedule – other fi nancial liabilities1
The Group is required to record taxes on policyholder earnings for life insurance policyholders in certain jurisdictions. Accordingly, the income tax expense or benefi t attributable to these life insurance policyholder earnings is included in income tax expense. In certain jurisdictions an accrual for future policy fees that will cover the tax charge is included in insurance benefi ts and losses.
On July 24, 2009, Zurich Insurance Company Ltd issued EUR 425 million (USD 603 million) of subordinated notes under the EMTN Programme. These subordinated bonds carry a fi xed coupon of 7.5%, are fi rst callable in 2019 and mature in 2039.
Effect of a change in health care cost trends on other defi ned post-employment benefi ts 10_Financial_Statements_Part3_7444_Eng.indd 22710_Financial_Statements_Part3_7444_Eng.indd 227 24/2/10 20:23:4224/2/10 20:23:42
Share price, in CHF 1 198 337 Exercise price, in CHF 198 337 Assumed volatility 42.95% 29.50% Risk-free interest rate 2.21% 3.21% Expected dividend rate 4.07% 4.50% Contracted option life 7 years 7 years 1 Share price as at date of grant.
In common with other groups writing life assurance business in the UK, the Group remains exposed to a number of Conduct of Business issues. While provisions are maintained which refl ect management’s best evolving estimate of the probable costs and expenses of resolving these matters, signifi cant uncertainty regarding the ultimate cost remains. The main area of uncertainty concerns sales advice related complaints. The key assumptions used to derive the complaint provision are the volume of complaints, both those already recorded and an assumption as to the level of future complaints, the percentage of complaints which will be successful (the uphold rate), the average redress payable per complaint and the expenses of reviewing each case or complaint. The assumptions used to set the provision have been based on actual recent experience.
Total securities at FV through profi t or loss 11,860 12,287 11,860 12,287
Table 27.3 in USD millionsRoll forward analysis for fi nancial instruments classifi ed under Level 3 10_Financial_Statements_Part3_7444_Eng.indd 23710_Financial_Statements_Part3_7444_Eng.indd 237 25/2/10 17:49:2025/2/10 17:49:20
Net capital gains/(losses) and impairments on investments 35 (29) 52 (37) Net non-technical result (excl. items not included in BOP) (79) (10) (216) (222) Business operating profi t before non-controlling interests 787 47 1,243 1,237 Non-controlling interests – – – –
Americas United States 216 244 Rest of North America 6 3 Latin America 164 46
New business value was USD 782 million. This was 4 percent higher than the prior period in U.S. dollar terms and 9 percent higher in local currency terms. The increase was partly attributable to the fast growing joint ventures in Spain whose growth exceeded expectations and from which we benefi ted from a full year’s contribution this year compared to only one quarter last year. The good performance was also driven by Latin America, Emerging Markets in Asia and the Rest of the World, supported by the development of the newly operational private banking client solutions hub in Luxembourg which was able to deliver successful client propositions. This was partially offset by the effect of lower interest rates in many European countries.
Embedded value development 2009 (in USD millions, for the year ended December 31)
operating earnings 1 ZIS is Zurich International Solutions, the international business based in the Isle of Man in USD millions, for the year ended
For certain smaller companies, no embedded value has been calculated but these companies have been included in the embedded value at their shareholders’ equity value, as calculated in accordance with IFRS. The contribution from these companies to the embedded value is approximately 1.9% percent.
The shareholders’ net assets are based on local statutory and regulatory accounting. Adjustments are made to the embedded value where appropriate, for example in respect of any unrealized gains attributable to shareholders. Any such adjustments are made consistently with the calculation of the value of business in force.
Cost of non market risk (CNMR), the previous method that applied to the embedded value calculations in the reporting periods prior to June 30, 2009, was an explicit additional deduction from the value of in-force business, over and above the frictional costs, refl ecting an allowance for the impact on shareholder value of variability in insurance, business and operational risks.
The mortality, morbidity, persistency and expense assumptions used to calculate the value of business in force and new business value were best estimates based on recent past experience.
h) Economic Scenario Generator All operations use actual yield curves observable as of December 31, 2009 for the calculation of the certainty equivalent value of business in force.
Expense assumptions Management expenses have been analyzed between expenses related to acquisition of new business, the maintenance of in force business and, where appropriate, one-off project costs. Future expense assumptions allow for expected levels of maintenance expenses. In addition, Corporate Center expenses relating to covered business have been allocated to business units and are refl ected in assumed future expenses.
The maintenance expense assumptions allow for the expected cost of providing future service benefi ts in respect of the Group staff pension schemes. An adjustment to the embedded value is noted in Section 10.n for pension scheme liabilities under IAS 19 and no allowance is made in the expense assumptions for any contributions as a result of past service benefi ts.
9. Commitments and contingencies Zurich Financial Services Ltd has provided unlimited guarantees in support of various entities belonging to the Zurich Capital Markets group of companies. In addition, Zurich Financial Services Ltd has agreed with the Superintendent of Financial Institutions, Canada, to provide additional capital in case the applicable capital adequacy tests for the Canadian business are not met and to provide assistance in case of liquidity issues.
Information required by art. 663c paragraph 3 of the Swiss Code of Obligations on the share and option holdings of the members of the Board of Directors and the members of the Group Executive Committee are disclosed in note 15.
Base compensation 1.60 1.60 Cash incentive awards earned for the year 4.20 2.40 Service Costs for pension benefi ts 3 1.00 0.90 Value of other remuneration 4 0.95 0.50 Value of target performance share and restricted share grants 5 2.55 2.30 Value of target performance option grants 5 2.55 2.30 Total in CHF million 12.85 10.00 Total in USD million as shown in the Remuneration Report 11.85 9.55 1 The fi gures have been translated from U.S. dollars into Swiss francs using the relevant exchange rates throughout the year. 2 The remuneration shown in the table does not include any business related expenses incurred in the performance of the CEO’s services. 3 The amounts refl ect the total value of pension benefi ts, calculated on the basis of the Service Costs for the company as assessed under IAS 19 accounting principles. Service
The following tables show how the totals of vested share options owned by GEC members as of December 31, 2009 and 2008, are distributed according to the grants identifi ed in the tables “Summary of outstanding options.”
2 These fi gures are based on the issued share capital as of December 31, 2009. They may change following a resolution of the Board of Directors dated February 14, 2007, according to which the remaining contingent capital shares for employees may be issued (as described in note 10). Treasury shares are not entitled to dividends.
The capital increase report is the responsibility of the Board of Directors. Our responsibility is to perform an audit on the completeness and accuracy of your report. We confi rm that we meet the legal requirements concerning professional qualifi cation and independence.
Confirmation in respect of the contingent capital increase According to your engagement, we have audited the issuance of new shares during the period from January 1, 2009 to December 31, 2009 based on the resolutions of the general meetings as of October 16, 2000 and April 3, 2007 in accordance with the provisions of the Swiss Code of Obligations (CO), article 653f. para 1.