Financial review
Balance sheet highlights
| in USD millions, as of | 12/31/06 | 12/31/05 | Change |
|---|---|---|---|
| Group investments | 195,676 | 183,455 | 7% |
| Investments for unit-linked products | 114,327 | 93,838 | 22% |
| Total investments | 310,003 | 277,293 | 12% |
| Reserves for losses and loss adjustment expenses | 64,535 | 60,425 | 7% |
| Reserves for unearned premiums | 14,668 | 13,531 | 8% |
| Other reserves for insurance contracts, excluding unit-linked products | 95,437 | 90,277 | 6% |
| Reserves for unit-linked contracts | 66,008 | 55,691 | 19% |
| Reserves for insurance contracts | 240,648 | 219,924 | 9% |
| Liabilities for investment contracts (primarily unit-linked) | 50,705 | 40,999 | 24% |
| Financial debt | 7,713 | 7,540 | 2% |
| Total equity | 27,056 | 23,240 | 16% |
| Total financial debt and equity | 34,769 | 30,780 | 13% |
Total investments increased by USD 32.7 billion, while on a local currency basis they increased by USD 8.2 billion, or 3 percent. Similarly, total reserves for insurance contracts increased by 9 percent, but on a local currency basis by 2 percent. Liabilities for investment contracts increased by 24 percent in reporting currency and 10 percent on a local currency basis. As of December 31, 2006, financial debt remained flat on a local currency basis compared with December 31, 2005, while total equity increased by 16 percent primarily due to the contribution of net income after taxes.
Investments
Total investments as presented in the consolidated balance sheets include Group investments, where we bear part or all of the investment risk, and investments for unit-linked products, where policyholders bear the investment risk. Investments for unit-linked products include investments held for liabilities related to insurance and investment contracts except for investment policies with discretionary participation features where the investments are managed as part of Group investments.
Breakdown of Investments
| in USD millions, as of | 12/31/06 | 12/31/05 | ||
| Group investments | Unit-linked investments | Group investments | Unit-linked investments | |
|---|---|---|---|---|
| Cash and cash equivalents | 17,438 | 5,684 | 18,723 | 4,759 |
| Equity securities: | 18,339 | 90,666 | 15,550 | 74,764 |
| Common stocks, including equity unit trusts | 11,461 | 84,824 | 9,413 | 69,898 |
| Unit trusts (debt securities, real estate and short-term investments) | 3,014 | 5,842 | 2,420 | 4,866 |
| Common stock portfolios backing participating with-profit policyholder contracts | 1,604 | – | 1,691 | – |
| Trading equity portfolios in capital markets and banking activities | 2,260 | – | 2,026 | – |
| Debt securities | 126,435 | 8,922 | 118,011 | 7,286 |
| Real estate held for investment | 6,921 | 8,360 | 6,314 | 6,388 |
| Mortgage loans | 10,806 | – | 9,307 | – |
| Policyholders' collateral and other loans | 12,634 | 2 | 11,984 | 3 |
| Investments in associates | 153 | – | 580 | – |
| Other investments | 2,950 | 693 | 2,986 | 638 |
| Subtotal | 195,676 | 114,327 | 183,455 | 93,838 |
| Total investments | 310,003 | 277,293 | ||
Total investments increased by USD 32.7 billion, or 12 percent, to USD 310.0 billion as of December 31, 2006. After adjusting for foreign currency translation effects, total investments increased by USD 8.2 billion as a result of increased inflows of funds into investments and positive revaluations of equities and real estate held for investment. These effects were partially offset by negative revaluations on our debt securities due to higher interest rates compared with 2005.
Net purchases of debt securities of USD 2.6 billion for the year ended December 31, 2006, were mostly offset by negative revaluations resulting in a net increase of USD 809 million after adjusting for foreign currency movements of USD 9.3 billion.
The total increase of equity securities of USD 18.7 billion was attributable to net purchases of USD 147 million, value appreciation in local currency and foreign currency movements of USD 9.8 billion.
All other positions remained broadly flat or slightly increased after adjusting for foreign currency movements.
Development of Reserves for Losses and Loss Adjustment Expenses
We establish reserves for losses and loss adjustment expenses, which are estimates of future payments of reported and unreported claims for losses and related expenses, with respect to insured events that have occurred. These estimates are based on assumptions regarding the development of reserved claims, which may be different from the actual development of claims over time. Any changes in estimates are reflected in the income statement of the period in which estimates are changed.
| in USD millions | 2006 | 2005 | Change |
|---|---|---|---|
| As of January 1 | |||
| Gross reserves for losses and loss adjustment expenses | 60,425 | 57,765 | |
| Reinsurers' share | (14,231) | (14,278) | |
| Net reserves for losses and loss adjustment expenses | 46,194 | 43,487 | |
| Net losses and loss adjustment expenses incurred | |||
| Current period | 21,447 | 22,465 | (5%) |
| Prior years | (218) | 141 | nm |
| Total | 21,229 | 22,606 | (6%) |
| Total net losses and loss adjustment expenses paid | (18,907) | (17,200) | 10% |
| Divestments of companies and businesses, including transfer to liabilities held for sale | (66) | (37) | nm |
| Currency translation effects | 2,363 | (2,662) | nm |
| As of December 31 | |||
| Net reserves for losses and loss adjustment expenses | 50,813 | 46,194 | |
| Reinsurers' share | (13,722) | (14,231) | |
| Gross reserves for losses and loss adjustment expenses | 64,535 | 60,425 |
The gross reserves for losses and loss adjustment expenses balance includes the Group’s loss reserves, the majority of which are included within the General Insurance segment.
Gross reserves for losses and loss adjustment expenses increased by USD 4.1 billion, and 2 percent on a local currency basis from January 1, 2006, to December 31, 2006. Net losses and loss adjustment expenses incurred in the current period declined predominantly due to lower catastrophe losses in 2006 compared with 2005. Overall, prior accident year loss development was favorable at USD 218 million. Payments in 2006 were impacted by the large catastrophes which occurred in 2005.
Development of cumulative net loss ratios
| 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | |
|---|---|---|---|---|---|---|
| In the year | 81.4% | 70.6% | 67.1% | 68.3% | 73.3% | 69.6% |
| One year later | 85.7% | 72.0% | 66.1% | 64.2% | 68.1% | |
| Two years later | 85.8% | 72.3% | 65.4% | 63.5% | ||
| Three years later | 87.4% | 74.5% | 65.5% | |||
| Four years later | 88.5% | 74.7% | ||||
| Five years later | 90.2% |
The loss ratios within the triangle reflect both a steady improvement in underwriting quality and the more conservative reserving position.
Development of Reserves for Life Insurance Contracts
| in USD millions | Future life policyholders’ benefits | Policyholders’ contract deposits and other funds | Reserves for unit-linked contracts | |||
| 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | |
|---|---|---|---|---|---|---|
| As of January 1 | ||||||
| Gross reserves | 71,292 | 81,350 | 18,985 | 22,763 | 55,691 | 51,920 |
| Reinsurers' share | (1,305) | (1,418) | (3,504) | (3,594) | – | – |
| Net reserves | 69,987 | 79,932 | 15,481 | 19,169 | 55,691 | 51,920 |
| Premiums and claims | (4,763) | (3,952) | (1,164) | (4,009) | (382) | 913 |
| Interest and bonuses credited to policyholders | 2,973 | 2,708 | 876 | 1,217 | 6,184 | 6,897 |
| Change in assumptions | 293 | 585 | (4) | (4) | (17) | 7 |
| Acquisitions/(divestments) | (37) | (150) | – | 4 | – | 43 |
| (Decrease)/increase recorded in shareholders' equity | (494) | 30 | (622) | 422 | – | – |
| Foreign currency translation effects | 7,059 | (9,166) | 1,109 | (1,318) | 4,532 | (4,089) |
| As of December 31 | ||||||
| Net reserves | 75,018 | 69,987 | 15,676 | 15,481 | 66,008 | 55,691 |
| Reinsurers' share | 1,485 | 1,305 | 3,258 | 3,504 | – | – |
| Gross reserves | 76,503 | 71,292 | 18,934 | 18,985 | 66,008 | 55,691 |
Net reserves for future life policyholders’ benefits increased by 7 percent from January 1, 2006, primarily due to foreign currency translation; however, after adjusting for this effect, they decreased by 3 percent due to the transfer of group life contracts to independent foundations in Switzerland and maturities of traditional products in Germany.
After adjusting for foreign currency translation effects, net reserves for policyholders’ contract deposits and other funds decreased by 4 percent primarily due to the continued decline of endowments in Germany as those products are no longer tax deductible. In addition, net unrealized gains on investments charged to shareholders’ equity decreased.
After adjusting for foreign currency translation effects, our unit-linked contracts reserves increased by 8 percent due to an increase in unit-linked business, as well as gains on unit-linked investments being credited to policyholders, particularly in the UK due to the strength of the equity market.
Liabilities for Investment Contracts
| in USD millions | 2006 | 2005 |
|---|---|---|
| As of January 1 | 40,999 | 39,260 |
| Premiums and claims | (595) | (296) |
| Interest and bonuses credited to policyholders | 5,115 | 5,832 |
| Change in assumptions | – | (1) |
| Divestments/transfers | (4) | – |
| Increase/(decrease) recorded in shareholders' equity | (31) | 8 |
| Foreign currency translation effects | 5,221 | (3,804) |
| As of December 31 | 50,705 | 40,999 |
Liabilities for investment contracts have increased on a local currency basis by 10 percent as of December 31, 2006, mainly due to the growth of the business, especially in Ireland, the Isle of Man and the UK, but also as a result of equity market increases, particularly in the UK.
Capitalization and Indebtedness
| in USD millions, as of | 12/31/06 | 12/31/05 | Change |
|---|---|---|---|
| Collateralized loans | 2,427 | 3,056 | (21%) |
| Debt related to capital markets and banking activities | 1,889 | 2,139 | (12%) |
| Obligation to repurchase securities | 6,144 | 5,295 | 16% |
| Total operational debt | 10,460 | 10,490 | (0%) |
| Senior debt | 2,905 | 2,933 | (1%) |
| Subordinated debt | 4,808 | 4,607 | 4% |
| Total financial debt | 7,713 | 7,540 | 2% |
| Shareholders' equity | 26,531 | 22,426 | 18% |
| Minority interests | 525 | 814 | (36%) |
| Total equity | 27,056 | 23,240 | 16% |
| Total financial debt and equity | 34,769 | 30,780 | 13% |
Total operational debt remained flat at USD 10.5 billion. The decrease in our collateralized loans balance resulted from maturities of the mortgage loans securing them. In addition, debt related to capital markets and banking activities decreased by USD 250 million. These decreases offset the USD 849 million increase in our obligation to repurchase securities related to investment management activities in our UK businesses.
The Group’s Euro Medium Term Note (EMTN) Programme allows for the potential issuance of up to USD 6 billion of senior and subordinated notes, of which USD 3.7 billion was issued as of December 31, 2006 and 2005.
The Group has access to a syndicated revolving credit facility of USD 3 billion that terminates in 2011. Zurich Group Holding, together with Zurich Insurance Company and Farmers Group, Inc., are guarantors of the facility and can draw up to USD 1.25 billion, USD 1.5 billion and USD 250 million, respectively. No borrowings were outstanding under this facility as of December 31, 2006.
Dunbar Bank has access to various committed credit facilities totaling GBP 430 million. No borrowings were outstanding under these facilities as of December 31, 2006.
Total Equity
| in USD millions | Shareholders' equity | Minority interests | Total equity |
|---|---|---|---|
| As of December 31, 2005 | 22,426 | 814 | 23,240 |
| Change in net unrealized gains on investments excluding translation adjustments | (415) | (6) | (421) |
| Change in currency translation adjustments | 1,029 | 23 | 1,052 |
| Issuance of share capital | 104 | – | 104 |
| Distributions to shareholders | (745) | (6) | (751) |
| Nominal value reduction of share capital | (177) | – | (177) |
| Dividends | (568) | (6) | (574) |
| Redemption of preferred securities | (425) | (355) | (780) |
| Share-based payment transactions | 29 | – | 29 |
| Treasury share transactions | 1 | – | 1 |
| Net income after taxes | 4,527 | 98 | 4,625 |
| Net changes in capitalization and minority interests | – | (43) | (43) |
| As of December 31, 2006 | 26,531 | 525 | 27,056 |
Total equity increased primarily as a result of net income after taxes of USD 4.6 billion, which more than offset redemptions of preferred securities, distributions to shareholders and net reductions of unrealized gains caused by higher interest rates.
Distributions to shareholders totaled USD 745 million, of which USD 701 million was distributed to common shareholders and USD 44 million to preferred shareholders. The distributions to common shareholders of CHF 7.00 per share comprised a gross dividend of CHF 4.60 per share and a payout of CHF 2.40 per share in the form of the nominal value reduction of each registered share. The total payout of CHF 7.00 per share was approved at the Annual General Meeting on April 20, 2006, and was paid to shareholders on July 4, 2006. The nominal value reduction was subject to the fulfillment of the necessary requirements and the registration of the share capital reduction in the Commercial Registrar of the Canton of Zurich. The nominal value of each registered share reduced from CHF 2.50 to CHF 0.10.
On March 30, 2006, and April 11, 2006, we redeemed the Series I and Series III of Trust Capital Securities (Zurich RegCaPS), respectively. The liquidation amounts totaled USD 425 million in aggregate.
On March 16, 2006, we redeemed 12,000,000 Series A Preference Shares issued by Zurich Financial Services (Jersey) Ltd., with a par value of EUR 25 per security for a total of USD 355 million, reducing minority interests.
In March 2006 we listed one million shares of contingent capital on the SWX Swiss Exchange (742,444 of which were issued as of December 31, 2006) to fulfill obligations under employee share and option plans. Proceeds from shares issued as of December 31, 2006 totaled USD 104 million.
For the year ended December 31, 2006, we recorded net unrealized losses on investments of USD 421 million, excluding translation adjustments, in total equity driven by lower values of debt securities due to an overall increase in interest rates in 2006 compared with 2005.
