Zurich Insurance Group Ltd · SIX:ZURN

Zurich Insurance — Zurich Financial Services — Investor Presentation (July 2006)

45 slides from Zurich Insurance's investor presentation, Jul 6, 2006

  1. Slide 1: European Embedded Value as of December 31, 2005 – Improving the management of our life business

    European Embedded Value as of December 31, 2005 – Improving the management of our life business Analysts’ presentation Zurich, July 6, 2006

  2. Slide 2: Disclaimer and cautionary statement

    Disclaimer and cautionary statement Certain statements in this document are forward-looking statements, including, but not limited to, statements that are predications of or indicate future events, trends, plans or objectives. Forward-looking statements include statements regarding future economic p

  3. Slide 3: Agenda

    Agenda • Introduction • Zurich’s approach to European Embedded Value • Methodology • Results • EEV as management tool for the Life Business © Zurich Financial Services - EEV 2005 Analysts' Presentation, July 6, 2006 3

  4. Slide 4: Our financials have improved significantly over the past 5 years

    Our financials have improved significantly over the past 5 years New business APE New business margin (NBM) in USD millions in percent CAGR Up 10 3% points 2,403 2,303 1 14 2,134 11 2,008 2,082 9 6 4 Q1 2006 2001 2002 2003 2004 2005 2001 2002 2003 2004 2005 • APE +16% • NBV +90% New business value (

  5. Slide 5: Innovation, focus and discipline have driven this transformation

    Innovation, focus and discipline have driven this transformation Innovation Focus Disciplined Execution • Changing the • Geography • Global Life business models • Products – moving • Metrics • Implementing new to unit linked and • TZW initiatives products protection • Managing distribution Transform

  6. Slide 6: We innovated the Business Model in multiple markets

    We innovated the Business Model in multiple markets UK Germany Switzerland Zurich Internat.1 • Consolidation of • Service Company • Change of • Business five legal model business model worldwide entities • Restructuring for the group written on a • Separation of balance sheet pension business single

  7. Slide 7: The story so far – two thirds of business in targeted niches and products

    The story so far – two thirds of business in targeted niches and products Overall Niche Contribution of market market niche to Zurich’s share1 share1 new business2 USA 1.4% Farmers customers 15% 100% Unit linked bonds 10% UK 4.3% 68% ISA’s/PEP’s3 11% Germany 6.1% Unit linked 16.5% 63% Spain 4.2% Uni

  8. Slide 8: We execute applying The Zurich Way discipline through tight governance

    We execute applying The Zurich Way discipline through tight governance… Global Life Governance • Established Global Life Team • Move from local to central governance • Establish Program Office to coordinate and drive local projects • Implemented common metrics “The Zurich Way” Life Product Service M

  9. Slide 9: The next phase is growth

    The next phase is growth FY ‘05 vs. FY ‘04 APE growth in % 175% Q1 ‘06 vs. Q1 ‘05 (in local currency) 100% 80% 60% 40% 16% 20% 0% -7% -20% -40% USA UK Germany Switzer- Italy Spain Ireland Isle of Internat. Total land Man Businesses Global Life © Zurich Financial Services - EEV 2005 Analysts' Present

  10. Slide 10: Immediate growth underpinned by Zurich Way initiatives

    Immediate growth underpinned by 23 Zurich Way initiatives Contribution to Growth Optimize existing distribution 35% (7 initiatives) Develop new distribution opportunities 20% (4 initiatives) Develop new products and enter new segments 20% (5 initiatives) Improve efficiency, processes and sales effec

  11. Slide 11: Other recent developments add to growth momentum

    Other recent developments add to growth momentum • UK: TALA launch • UK: IFA protection launch • Switzerland: Swisscanto bancassurance deal (Swiss cantonal banks) • Switzerland: VITA foundation • Zurich International Solutions: Opening of Singapore branch • Farmers: focus on Hispanic market • Farmer

  12. Slide 12: EEV has confirmed our strategic direction and given us new insights

    EEV has confirmed our strategic direction and given us new insights • Confirmed strategy of focus on unit-linked and protection • Validated decision to implement new business model in Swiss group pensions • Validated withdrawal from with profits products and annuities in UK • New insights into cost

  13. Slide 13: Agenda

    Agenda • Introduction • Zurich’s approach to European Embedded Value • Methodology • Results • EEV as management tool for the Life Business © Zurich Financial Services - EEV 2005 Analysts' Presentation, July 6, 2006 13

  14. Slide 14: Zurich's approach to European Embedded Value (EEV)

    Zurich’s approach to European Embedded Value (EEV) • “Bottom up” market consistent allowance for risk - Asset and liability cash flows are valued consistently with market prices - Options and guarantees are valued by reference to market prices • Explicit allowance for non market risk • Frictional co

  15. Slide 15: Zurich has chosen the market consistent approach to manage its Life Business

    Zurich has chosen the market consistent approach to manage its Life Business • Objective approach to allow for market risk (no subjective setting of risk discount rates) • Profitability information at product level • Enhanced risk management analysis • Improved transparency for investors Consistent

  16. Slide 16: Small reduction from Traditional EV and strong performance in 2005

    Small reduction from Traditional EV and strong performance in 2005 European Traditional Change in USD millions Embedded Embedded as of December 31, 2005 Value Value1 Shareholders’ net assets 6,053 6,010 0.7% Value business in-force 5,627 5,872 -4.2% Total embedded value 11,680 11,882 -1.7% EEV opera

  17. Slide 17: Change to EEV varies by country

    Change to EEV varies by country Overall reduction of USD 202 million from Traditional EV to EEV in USD millions as of December 31, 2005 UK Germany USA +167 Switzerland -268 +147 Rest of International Europe Businesses -248 -25 +25 • Positive effects from US protection and UK unit linked business • O

  18. Slide 18: Higher new business profit under EEV reflects lower new business risk profile

    Higher new business profit under EEV reflects lower new business risk profile European Traditional Change in USD millions Embedded Embedded for the year ended December 31, 2005 Value Value1 New business profit, after tax 4062 333 21.9% New business profit margin – as % of APE3 17.7% 14.5% 3.2pts New

  19. Slide 19: New business profitability by country

    New business profitability by country New business New business New business profit1 profit margin1 profit margin1 for the year ended December 31, 2005 (in USD millions) (% of APE) (% of PVNBP) United States 71 64.4% 6.7% United Kingdom 116 11.4% 1.4% Germany 86 16.5% 2.1% Switzerland 6 5.8% 0.6% It

  20. Slide 20: EEV for the Life business outside the Global Life segment

    EEV for the Life business outside the Global Life segment in USD billions Estimated as of December 31, 2005 EEV Shareholders’ net assets 1.2 Value of business in force 0.1 Time value of options and guarantees -0.3 Cost of non market risk -0.3 Total EEV 0.7 • These businesses are not in the managemen

  21. Slide 21: Agenda

    Agenda • Introduction • Zurich’s approach to European Embedded Value • Methodology • Results • EEV as management tool for the Life Business © Zurich Financial Services - EEV 2005 Analysts' Presentation, July 6, 2006 21

  22. Slide 22: Our market consistent EEV is the sum of five components

    Our market consistent EEV is the sum of five components in USD millions Time Value as of December 31, 2005 of Options & 7,701 Guarantees Certainty Frictional Equiva- -917 Costs lent Cost of Non VBF -620 Market Risk -537 11,680 EEV 6,053 Share- holders’ Net Assets © Zurich Financial Services - EEV 20

  23. Slide 23: Shareholders' net assets show small differences from Traditional EV

    Shareholders’ net assets show small differences from Traditional EV Based on local statutory accounting reflecting shareholders’ interests in the market value of net assets Differences in Shareholders’ net assets between EEV and Traditional EV due to the following: • Under Traditional EV, some share

  24. Slide 24: Certainty equivalent value of business in force is the first step to market consistency

    Certainty equivalent value of business in force is the first step to market consistency Calculated consistently with the valuation of cash flows in the capital markets, ignoring the optionality in the cash flows • Future investment returns on all assets, adjusted for risk, are equal to risk-free rat

  25. Slide 25: Time Value of Options & Guarantees (TVOG) is a major improvement of methodology

    Time Value of Options & Guarantees (TVOG) is a major improvement of methodology • Based on stochastic scenarios, using dynamic assumptions • Calibrated to observable market data and implied volatilities TVOG in USD millions, as of December 31, 2005 Switzerland Profit sharing with minimum interest ra

  26. Slide 26: Economic scenarios and implied volatilities are calibrated to market prices

    Economic scenarios and implied volatilities are calibrated to market prices • Interest rates for 4 major economies modelled using Libor market model • Equity and other assets assumed on average to earn the risk free rate At-the-money-forward equity volatilities implied in our economic scenarios (e.g

  27. Slide 27: Management and policyholder behaviour is modelled dynamically and prudently

    Management and policyholder behaviour is modelled dynamically and prudently • Policyholders’ behaviour is modelled dynamically relative to interest rate scenarios, and • Takes into account crediting strategies determined by management rules Dynamic lapse illustration: When crediting rates fall signi

  28. Slide 28: Frictional Costs (FC) are reflected more comprehensively and objectively

    Frictional Costs (FC) are reflected more comprehensively and objectively • FC are applied to total Shareholders’ Net Assets corresponding to 200% of minimum solvency margin • FC relate to tax on future investment income and investment management costs • FC for new business are calculated on minimum

  29. Slide 29: Cost of non market risk (CNMR) is explicit and measurable

    Cost of non market risk (CNMR) is explicit and measurable • Insurance, business and operational risks are in theory diversifiable • In practice, asymmetries in shareholder value exist, e.g. expenses, longevity • Therefore, an explicit allowance for these risks is made Zurich’s approach for the cost

  30. Slide 30: Additional key aspects of the methodology make EEV more refined and detailed

    Additional key aspects of the methodology make EEV more refined and detailed Corporate Center costs • Global Life segment portion of these costs is included in our expense assumptions “Look through” principle • EEV and new business profit include the profits and/or losses arising from the service co

  31. Slide 31: Additional remarks on disclosure

    Additional remarks on disclosure • Deloitte have reviewed our results - Methodology and assumptions are appropriate - Assumptions taken together are reasonable - Compliant with the EEV Principles set out by the CFO Forum - EEV and value of new business have been properly compiled • Tillinghast provi

  32. Slide 32: Agenda

    Agenda • Introduction • Zurich’s approach to European Embedded Value • Methodology • Results • EEV as management tool for the Life Business © Zurich Financial Services - EEV 2005 Analysts' Presentation, July 6, 2006 32

  33. Slide 33: Focus on three areas

    Focus on three areas Useful to understand how subjective RDR in Bridging from Traditional EV traditional EV would reconcile to objective to EEV allowance for risk under EEV EEV profit under EEV, enhanced disclosure with Analysis of EEV shareholders’ net assets and value of business in profit force s

  34. Slide 34: Equivalent Risk Discount Rates (RDR) demonstrate the effect of de-risking

    Equivalent Risk Discount Rates (RDR) demonstrate the effect of de-risking in USD millions as of December 31, 2005 and for the year ended December 31, 2005, respectively In-force: Small reduction for EEV is New business profit: mirrored in 0.2% RDR increase Lower risk profile than in-force reflected

  35. Slide 35: US businesses improve as EEV gives credit for low risks

    US businesses improve as EEV gives credit for low risks in USD millions as of December 31, 2005 and for the year ended December 31, 2005, respectively In-force New business profit 2,500 80 71 2,020 2,167 2,000 60 47 1,500 40 1,000 24 20 500 147 0 0 Traditional EEV Diff. Traditional European Diff. EV

  36. Slide 36: UK businesses also improve due to credit for low risks

    UK businesses also improve due to credit for low risks in USD millions as of December 31, 2005 and for the year ended December 31, 2005, respectively In-force New business profit 6,000 140 4,957 5,124 116 120 5,000 100 90 4,000 80 3,000 60 2,000 40 26 1,000 167 20 0 0 Traditional EEV Diff. Tradition

  37. Slide 37: Appropriate reflection of additional risks affects our German businesses

    Appropriate reflection of additional risks affects our German businesses… in USD millions as of December 31, 2005 and for the year ended December 31, 2005, respectively In-force New business profit 1,500 100 87 86 1,114 80 1,000 846 60 40 500 20 -268 -1 0 0 Traditional EEV Diff. -20 Traditional Euro

  38. Slide 38: …as well as our Swiss businesses

    …as well as our Swiss businesses in USD millions as of December 31, 2005 and for the year ended December 31, 2005, respectively In-force New business profit 1,500 20 1,293 16 1,045 1,000 10 6 500 -10 0 -248 Traditional European Diff. 0 Traditional EEV Diff. -10 -500 EV Risk Free Rate Market Risk TVO

  39. Slide 39: EEV profit is shown for shareholders' net assets and value of in force separately

    EEV profit is shown for shareholders’ net assets and value of in force separately in USD millions Shareholders’ Value of Total for the year ended December 31, 2005 Net Assets in-force Opening European Embedded Value 7,030 5,515 12,545 Expected return on in-force business and net 291 524 815 assets,

  40. Slide 40: Total EEV operating performance in 2005 higher than Traditional EV

    Total EEV operating performance in 2005 higher than Traditional EV European Traditional Change in USD millions Embedded Embedded for the year ended December 31, 2005 Value Value1 USA 341 267 27.7% UK 601 375 60.3% Germany 81 148 -45.3% Switzerland 250 224 12.1% Other 284 330 -13.9% Total operating p

  41. Slide 41: Sensitivities of EEV and new business profit in the Global Life segment

    Sensitivities of EEV and new business profit in the Global Life segment Impacts on EEV by 1% interest rate increase/decrease in USD millions USA Rest Total for the year ended December 31, 2005 +1% interest rates -205 237 32 -1% interest rates 185 -934 -749 25% fall in equity and property market • EE

  42. Slide 42: Agenda

    Agenda • Introduction • Zurich’s approach to European Embedded Value • Methodology • Results • EEV as management tool for the Life Business © Zurich Financial Services - EEV 2005 Analysts' Presentation, July 6, 2006 42

  43. Slide 43: We use EEV to improve the management of our life businesses and to increase shareholder value

    We use EEV to improve the management of our life businesses and to increase shareholder value Product Management and Pricing EEV Risk and Capital Asset & Liability Holistic Management Management Models Performance Management and Planning © Zurich Financial Services - EEV 2005 Analysts' Presentation,

  44. Slide 44: Summary

    Summary • Zurich implemented European Embedded Value (EEV) based on a “market consistent” approach, now recognized as best practice • 2005 year end EEV is 1.7% lower than traditional EV, reflecting the mix of the business across all the countries • Value of New Business written in 2005 is 21% higher

  45. Slide 45: Q&A

    Q&A © Zurich Financial Services - EEV 2005 Analysts' Presentation, July 6, 2006 45

Zurich Financial Services — Investor Presentation (July 2006) on 6ix