• Global Life executes growth strategy and exploits efficient operations, with new Latin America and Asia hubs planned
Global Life is a key growth engine for our Group. We help our customers feel confident about their financial future by offering leading life insurance, savings, investment and pensions solutions.
Global Life Farmers We continue to focus on simplifying our business structure to realize operational and structural synergies while freeing our business segments to focus on what they do best: helping our customers understand and protect themselves from risk.
Zurich has been among the first to move on this change. At the onset of the crisis we began adjusting for the low interest rates that we foresaw as a condition of recovery – a condition which, given the scale of the crisis, we expect to persist for some time to come. Our focus on hiring and developing the best people in the industry – people with critical strengths in core areas such as underwriting and claims management – strengthens our hand.
Sustainable value creation To create and sustain value for our customers, our shareholders, our people and society. To maintain a culture of precision, stability and reliability that instills confidence and trust in our commitment to deliver when it matters – now and in the future.
Under this unique structure Farmers intends to maintain its position in the top quartile for growth among U.S. peers, focusing on targeted customer retention measures, continuous improvements in distribution, and geographic expansion into the Eastern United States.
A list of the Group’s significant subsidiaries including additional information on significant subsidiaries that are listed can be found in this Annual Report on pages 256 to 258. For further information on the share listing of Zurich Financial Services Ltd, please refer to the Shareholder Information on pages 312 to 316.
Capital reduction by canceling shares that have been bought back under the share buy-back program announced on February 13, 2008 183,640.40 1,836,404 0.10 Newly issued shares from contingent capital 95,023.20 950,232 0.10
Fred Kindle Swiss 1959 Director Member of the Audit Committee 2006 2011
Furthermore, the Group has adopted and implemented a coordinated, formalized and consistent approach to risk management and control. Information concerning the Group’s risk management processes is included in the Risk Review starting on page 95.
More technical committees include the Asset/Liability Management Investment Committee, chaired by the Chief Investment Officer, the Group Reinsurance Committee, chaired by the Head of Group Reinsurance, the Global Underwriting Committee, chaired by the Global Chief Underwriting Officer and the Group Pension Committee, chaired by the CEO Global Life.
General Insurance. He assumed his current role as Group Head of Operations and member of the GEC as of July 2010.
Employees The Group is committed to provide equal opportunities when recruiting and promoting people, whereby ability, experience, skills, knowledge and diversity are the guiding principles. The Group actively encourages employee involvement in its activities via print and online publications, team briefings and regular meetings with employees’ representatives. For further information on the Group’s People Management activities, please refer to the Annual Review on pages 20 and 21, also available on Zurich’s Web site www.zurich.com ( zurich.com/main/reports/annual_review_2010_en.pdf).
Additional fees Total fees (including expenses and value added taxes) in the year 2010 for additional services (e.g., tax and legal services, transaction consulting services or special audits
The internal control system focuses on key financial, operational and compliance controls. The system encompasses the policies, processes and activities that contribute to the reliability of financial reporting, the effectiveness and efficiency of operations and the compliance with laws and regulations. In 2010, further progress was made to develop and improve the Group’s control system while maintaining the focus on the effectiveness of the overall internal control environment.
Remuneration philosophy Directors Recognizing that Zurich is a global insurance-based financial services organization, the level of Directors’ fees has been established to ensure the Group’s ability to attract and retain high caliber individuals.
The 1st tranche is assessed for vesting in the year following the year of grant, the 2nd tranche in the following year and 3rd tranche in the year after that
8 Neither the Chairman nor the Vice Chairman receives any additional fees for their Committee work. 9 At the Annual General Meeting on March 30, 2010 Mr Pidoux retired from the Board and Mr Ackermann was elected to the Board and was appointed Vice Chairman.
The individual remuneration elements are described in more detail below (the amounts for the highest paid executive are also included): Value of total remuneration The total value of the various remuneration elements earned by the members of the GEC in 2010 was USD 45.8 million. This compares with an equivalent figure of USD 47.8 million earned in 2009 calculated on the same basis. The value of the aggregate remuneration for the GEC members declined by USD 2.0 million compared with the amount for 2009. This was due to a number of factors. There were significant changes in the membership with the new CEO taking up his position on January 1, 2010 and the fact that only eight of the members were in position for the full year in 2010. The expenditure on cash bonuses also reduced during the year, both as a result of the aggregate target awards being lower and the fact that the actual awards as a percentage of the target was also reduced. Given the changes in population, the value of the target performance shares and options granted in 2010 was also lower as was the overall expenditure on pension benefits. Partially offsetting this decrease was the weakened U.S. dollar against the Swiss Franc and the fact that the remuneration in 2010 included the value of a termination payment, where none had been recorded in 2009.
Equity grants made to the Group Executive Committee under the Long-Term Incentive Plan in 2010 As described above, GEC members under the Long-Term Incentive Plan received in 2010 an annual grant of performance shares and performance options. In extraordinary circumstances, restricted share grants may also be made. For members of the GEC, including the
4 The share and share option grants will vest in the future according to the achievement of defined performance conditions. The value of the share and share options assumes that the grant will vest in the future at 100% of the target level with the valuation of the options based on the Black-Scholes option pricing model as set out in Note 25 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 259.90 for 2010 and CHF 198.10 for 2009).
Highest total remuneration for Group Executive Committee members The highest paid remuneration for the GEC members was USD 7.0 million for Mr Martin Senn, the Group’s CEO. This amount reflects his 2010 base salary, the cash incentive earned for 2010, the value of pension benefits, other remuneration and the value of the target performance shares and share options granted in 2010. This compares with an amount of USD 11.85 million for Mr James J. Schiro in 2009.
Disciplined asset liability management and the Group’s risk management approach have resulted in a continued strong Group capital and solvency position with further improvements to both during the year. The Solvency I position has increased by 48 percentage points since December 31, 2009, to 243 percent, and shareholders’ equity has increased by USD 2.7 billion to USD 32.0 billion after deducting USD 2.2 billion for dividends paid in 2010. Business operating profit (after tax) return on common shareholders’ equity (BOPAT ROE) for the year ended December 31, 2010, was 12.9 percent. The Group’s continued sustained profitability and strong balance sheet have enabled the Board of Directors to propose a dividend of CHF 17.00 per share demonstrating the Group’s commitment to shareholder value. As the dividend payment is being planned from the newly created capital contribution reserve, it will be exempt from Swiss withholding tax.
Gross written premiums and policy fees 9,728 9,864 (1%) Net underwriting result 217 257 (16%) Business operating profit 1,118 1,243 (10%) Loss ratio 67.3% 68.5% 1.2 pts Expense ratio 29.8% 28.4% (1.5 pts) Combined ratio 97.1% 96.9% (0.2 pts)
IFA/Brokers increased new business value by USD 29 million to USD 197 million or by 18 percent in U.S. dollar terms and 19 percent on a local currency basis. This growth was fuelled by substantially increased business into Italy manufactured from the European hub in Ireland, improved margins in Germany, and increased sales in Australia.
International/Expats decreased new business value by USD 9 million to USD 73 million or by 11 percent in U.S. dollar terms and 9 percent on a local currency basis. Improved sales of investment products, reflecting the recovery of financial markets in 2010 and higher protection business sales were offset by lower margins.
Management fees and other related revenues increased by USD 88 million to USD 2.8 billion or by 3 percent driven by a 2 percent increase in gross earned premiums in the Farmers Exchanges. 21st Century generated an increase of USD 130 million in fees and revenue in the first full year after its acquisition. This contribution was partly offset by a reduction in management fees from the auto line of business, reflecting the continuing economic pressures in the U.S.
As of December 31, 2010, the Group net reserves for loss and loss adjustment expenses were USD 56.0 billion, an increase of USD 73 million since December 31, 2009. This increase was mainly due to a USD 380 million increase in underlying reserves mostly offset by divestments of USD 12 million and the effects of foreign currency translation of USD 296 million. Prior year favorable development amounted to USD 1.4 billion. Further details of reserve developments are shown in note 8 of the audited Consolidated financial statements.
Change in cash and cash equivalents excluding change in cash received as collateral for securities lending (668) 1,380
The balance sheets are translated at end-of-period rates. The U.S. dollar has strengthened against the euro and British pound, but has significantly weakened against the Swiss franc as of December 31, 2010, compared with December 31, 2009, resulting in a decrease in U.S. dollar terms in most balance sheet line items.
variance over the prior period, for the year ended December 31, 2010Selected Group income statement line items variance over December 31, 2009, as of December 31, 2010Selected Group balance sheet line items
To facilitate information exchange between the Audit Committee of the Board and the Risk Committee of the Board, the chairperson of the Audit Committee is a
• Global Underwriting Committee (GUC) – acts as a focal point for underwriting policy and related risk controls for General Insurance and is chaired by the Chief Underwriting Officer General Insurance.
At Group level there are two centers of expertise: risk analytics and risk operations. The risk analytics department quantitatively assesses insurance, financial market and asset/liability, credit and operational risks and is the Group’s center of excellence for risk quantification and modeling. The risk operations department comprises operational risk management and the Internal Control Framework. It serves as the link between the risk management network (segments, regions, business units and functions) and risk management at Group level. At the end of 2010, the risk management organization was realigned with the new Group structure. Information risk management and Business Continuity Management and Disaster Recovery were reassigned to the risk management function within the newly formed Group Operations segment. Chief Risk Officers were appointed for the Group Operations, General Insurance and Global Life segments.
risk depends on the fair value of the underlying investments. For certain contracts these risks are mitigated by explicit mortality and morbidity charges.
Table 7 in USD millions, as of December 31Economic equity price sensitivities for the General Insurance business
Because the Group has chosen the U.S. dollar as its presentation currency, differences arise when functional currencies are translated into the presentation currency. The Group does not hedge movements of the Currency Translation Adjustment, or take speculative positions on foreign currency market movements. Using constant exchange rates from one year to the next, the Group’s 2010 net income attributable to shareholders would have been higher by USD 50 million (applying 2009 exchange rates to the 2010 result). In 2009 the result would have been higher by USD 14 million (applying 2008 exchange rates to the 2009 results).
Table 11 as of December 31Debt securities by rating of issuer
Past due but not impaired financial assets – 757 4 1 2,226 2,988
See note 22 of the Consolidated financial statements for additional information on debt obligation maturities and on credit facilities and to note 26 of the Consolidated financial statements for information on commitments and guarantees.
Capital management program The Group’s capital management program comprises various actions to optimize shareholders’ total return and to meet capital needs, while enabling Zurich to take advantage of growth opportunities as they arise. Such actions are performed as and when required and include dividends, share buy-backs, issuances of shares, issuance of senior and hybrid debt, securitization and purchase of reinsurance.
The Group seeks to maintain the balance between higher returns for shareholders on equity held, which may be possible with higher levels of borrowing, and the security provided by a sound capital position. The payment of dividends, share buy-backs, and issuances and redemption of debt have an important influence on the capital levels.
Table 19 in USD millions, as of December 31The Group’s Solvency I composition as of December 31
General Insurance reserves, partially offset by the increase of shareholders’ equity. AFR includes a deduction for the proposed dividend for the respective financial year, not yet approved by the Annual General Meeting. The increase in RBC is due primarily to the effect of lower interest rates on Market/ALM risk as well as higher equity risk, driven by the revaluation of New China Life.
Basic earnings per share 23 24.57 30.09 Diluted earnings per share 23 24.38 29.88 in USD millions, for the years ended December 31
Premium taxes erroneously reported under Administrative and other operating expense amounting to USD 149 million as of December 31, 2009, are now presented under Underwriting and policy acquisition costs in order to ensure consistency with the treatment of other related items.
Unamortized DAC associated with internally replaced contracts that are, in substance, contract modifications continues to be deferred and amortized. Unamortized DAC associated with internally replaced contracts that are, in substance, new contracts is written down at the time of replacement.
Available-for-sale financial assets Available-for-sale financial assets are non-derivative financial assets that are either designated as such or are not classified in any of the other categories.
Held-to-maturity investments are carried at amortized cost using the effective interest rate method, less any charges for impairment.
Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and are not classified in any of the other categories. Loans and receivables include loans where money is provided directly to the borrower, such as mortgage loans, policyholder loans and other loans.
Where hedge accounting is applied, the Group formally documents all relationships between hedging instruments and hedged items, including the risk management objectives and strategy for undertaking hedge transactions.
Fair values of liabilities related to unit-linked investment contracts are determined by reference to the fair value of the financial assets backing these liabilities. Fair values of liabilities related to other investment contracts are determined using discounted cash flow models, that incorporate a variety of factors, including credit risk, embedded derivatives (such as unit-linking features), volatility factors (including contract holder behavior), servicing costs and surrenders.
See note 12 for further information on deferred policy acquisition costs.
Cash and cash equivalents acquired – 47 47 1 The 21st Century purchase price allocation comprises the purchase price adjustment completed during 2010.
Total net capital gains/(losses) and impairments 8,467 10,536 1,500 (301) 9,967 10,235 1 2010 gain arises entirely from the reversal of impairments. 2009 loss included impairments of USD 63 million.
Cash and investments with a carrying value of USD 5,176 million and USD 4,908 million were deposited on behalf of regulatory authorities as of December 31, 2010 and 2009, respectively.
Mortgage and asset-backed securities 23,617 22,787 865 556 (398) (1,053) 24,084 22,290 1 Net of impairments (see table 6.2).
• 100 percent of EUR 600 million 6.5 percent senior bond due October 2015 issued by Zurich Finance (USA), Inc. entered on April 14, 2009 ending October 15, 2015.
Fee income and other expenses (1,496) (1,171) (1) 1 (1,497) (1,170) Interest and bonuses credited/(charged) to policyholders 5,395 6,616 – – 5,395 6,616
Amortization of deferred acquisition costs 5,365 5,153 (449) (394) 4,916 4,759 Amortization of deferred origination costs 119 110 – – 119 110 Commissions and other underwriting and acquisition expenses 1 3,859 3,863 (258) (328) 3,601 3,534 Total underwriting and policy acquisition costs 9,343 9,125 (707) (723) 8,636 8,403 1 Net of additions related to deferred acquisition and origination costs.
Wages and salaries 2,918 2,908 Other employee benefits 522 566 Amortization and impairments of intangible assets 882 647 Depreciation and impairments of property and equipment 205 231 Rent, leasing and maintenance 457 398 Marketing costs 213 315 Life renewal commission 348 318 Asset and other non-income taxes 44 34 IT costs 701 734 Litigation and settlement costs 646 60 Restructuring costs 111 97 Foreign currency translation (159) 49
Other financial assets: Derivative assets 1,777 1,338 Other assets 137 199 Other non-financial assets: Accrued premiums 748 785 Prepaid expenses 254 286 Prepaid insurance benefits 441 369 Other assets 385 350 Total other assets 3,741 3,327
The cumulative amount of deferred tax credited to shareholders’ equity, net of foreign currency translation effects, amounted to USD 28 million and USD 516 million for the years ended December 31, 2010 and 2009, respectively.
On February 13, 2008, the Board of Zurich Financial Services Ltd authorized a share buy-back program for the repurchase of up to CHF 2.2 billion worth of shares over the course of 2008. As of December 31, 2008, 3,750,500 fully paid shares, with a nominal value of CHF 0.10, had been bought back at an average price of CHF 293 per share, at a total cost of CHF 1.1 billion. In March 2009, the Board of Directors decided not to propose the destruction of these shares to the Annual General Meeting of shareholders but to keep the shares as treasury shares for use in connection with the funding of potential acquisitions or for employee share-based compensation. This re-dedication was approved by the Swiss Takeover Board.
Table 24.1 in USD millions, as of December 31Status of funded defined benefit plans
Actuarial gain/(loss) included in other comprehensive income (598) 12 (4) (7)
Fair value of plan assets as of January 1 12,622 10,879 – – Expected return on plan assets 722 619 – – Actuarial gain/(loss) included in other comprehensive income 388 318 – –
b) Defined contribution pension plans Certain of the Group’s companies sponsor defined contribution pension plans. Eligibility for participation in such plans is either based on completion of a specified period of continuous service or the date of commencement of employment. The plans provide for voluntary contributions by employees and contributions by the employer which typically range from 2 percent to 10 percent of annual pensionable salary, depending on a number of factors. The Group’s contributions under these plans amounted to USD 108 million and USD 99 million in 2010 and 2009, respectively.
The Group has adopted various share-based compensation and cash incentive plans to attract, retain and motivate executives and employees. The plans are designed to reward employees for their contribution to the performance of the Group and to encourage employee share ownership. Share-based compensation plans include plans under which shares and options to purchase shares, based on the performance of the businesses, are awarded. Share-based compensation plans are based on the provision of the Group’s shares.
Effective December 31, 2010, the All Lines agreement was modified and the participation ratio was decreased by 13.0 percent to 12.0 percent. In addition to this change, the provisional ceding commission for acquisition expenses was increased by 1.0 percent from 25.7 percent to 26.7 percent, while the Farmers Exchanges’ catastrophe losses were changed from USD 1.0 billion to a maximum of USD 1.2 billion. Unearned premiums totaling USD 693 million were transferred from Farmers Re Co and ZIC to the Farmers Exchanges as a result of their decreased participation in the All Lines agreement effective December 31, 2010. In addition, the Farmers Exchanges remitted USD 185 million of reinsurance commissions to Farmers Re Co and ZIC for acquisition expenses due to the decreased participation in the All Lines agreement.
Equity Common shareholders’ equity 31,509 28,743 Preferred securities 475 561 Shareholders’ equity 31,984 29,304 Non-controlling interests 1,337 1,800 Total equity 33,321 31,104 Total liabilities and equity 375,661 369,202 1 The General Insurance segment, includes assets held for sale of USD 67 million as of December 31, 2009, related to land and buildings formerly classified as held for own use.
Business operating profit before non-controlling interests 322 462 351 261 339 334 244 237 49 37 56 13 73 64 83 84 – – 1,516 1,492
Taiwan Zurich Insurance (Taiwan) Ltd. Taipei General Insurance 99.73 99.73 TWD 2,000.0 Turkey Zurich Sigorta A.S. Fındıklı, Istanbul General Insurance 100 100 TRY 83.5 United Kingdom
Embedded value development 2010 in USD millions, for the year ended December 31
Value of business in force Total 1 SM is the local minimum solvency margin. 2 CE is the certainty equivalent value of business in force. 3 FC is the frictional cost.
2 For non-covered business this is set equal to the change in Net Income After Tax (NIAT) over the period. 3 For non-covered business this is set equal to the change in Other Comprehensive Income (OCI) excluding the currency translation adjustment over the period. 4 Closing adjustments refer to dividend and capital movements, non-controlling interests and foreign currency translation effects.
i) Corporate Center costs Corporate Center costs that relate to covered business have been allocated to the relevant countries and included in the projected expenses.
In the UK, a multi-tie distribution company (Openwork) is included in the embedded value on a “look through” basis. After allowance for certain one-off expenses, profits and losses are attributed to new business value. Certain future revenue streams, mainly renewal commissions on business sold, are discounted and contribute to the new business value and to the value of business in force.
o) Employee share options The costs of share options granted to employees are not included in the embedded value, other than to the extent that they are allowed for in the local statutory accounts upon which the shareholders’ net assets are based. Further information on the costs of share options is given in the Group’s Consolidated financial statements.
A 5 percent improvement in mortality assumptions for annuities means that, for example, if the base mortality assumption for annuities was 90 percent of a particular table, this would decrease to 85.5 percent.
a) Economic assumptions Market consistent framework The Group has adopted a computational method known as “risk neutral.” With this method the key economic assumptions are: • risk free rates; • implied volatilities of different assets; and,
Choice of “risk free yield curve” The risk free yield curve is derived from mid-market swap rates applicable to each economy as of December 31, 2010. These curves were used to extract forward reinvestment yields that are used for all asset classes. The yield curves are consistent with the assumptions used by investment banks to derive their option prices and their use ensures consistency with the derivation of implied volatilities. They also have the advantage of being available for most of the markets in which the Group operates. Domestic yield curves are used by businesses in other countries, except Hong Kong and Argentina which use the U.S. dollar, as their liabilities are principally U.S. dollar-dominated.
“Expected return” for the analysis of movement – investment return assumptions The expected return for the analysis of movement is based on a projection from beginning of period to end of period. This requires assumptions regarding the investment returns expected to be achieved over the period on different asset classes. The investment return assumptions (for this purpose only) are based on the “real world” returns expected by the Group. The use of real world investment assumptions gives a more realistic basis for the expected return calculation and allows for the risk underlying each asset. Any under or over performance will be reported through economic variance.
New business margin (as % of APE) 69.8% 102.5% 25.9% 22.1% 40.2% 52.4% 26.5% 24.7% 7.1% 21.4% n / a n / a 24.0% 24.2% 16.6% 20.1% 27.9% 24.1% 22.3% 22.4% New business margin (as % of PVNBP) 7.2% 9.8% 5.3% 4.6% 6.2% 7.6% 5.8% 4.9% 1.8% 5.6% n / a n / a 5.4% 5.0% 1.7% 2.0% 2.8% 2.5% 2.3% 2.3%
Except for Mr Watter none of the Directors had outstanding loans, advances or credits as of December 31, 2010 or 2009. 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, 2010 and 2009. The annual interest rate charged on the loan is 4 percent.
As statutory auditor, we have audited the financial statements of Zurich Financial Services Ltd, which comprise the income statement, balance sheet and notes (pages 293 to 306), for the year ended December 31, 2010.
Registered share data 314 Financial calendar 316 Contact information 317 Glossary 318
Annual Report 2010 The Annual Report contains detailed information about Zurich’s financial performance, its structure, executive bodies, risk management, corporate governance and remuneration. It is available in German, French and English, with the financials in English only.
Media Relations Zurich Financial Services Ltd, Switzerland Telephone: +41 (0)44 625 21 00 E-mail: media@zurich.com
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 Web site: www.six-sag.com
Managed gross earned premium margin is a performance measure calculated as gross operating profit of Farmers Management Services divided by the gross earned premiums of the Farmers Exchanges, which we manage but do not own.