AA-/stable Standard & Poor’s financial strength rating of Zurich Insurance Company Ltd as of December 31, 2018 1 Business operating profit (BOP) indicates the underlying performance of the Group’s business units by eliminating the impact of financial market volatility and other non-operational variables.
Our cover: National Trust senior building surveyor Phyllis Bayley and Zurich risk engineer Gary Howe on site at an historic mill at Quarry Bank in Styal, Cheshire near Manchester in the UK.
Conclusion Zurich embraces this customer-driven world. We have demonstrated our ability to improve our core business while creating new opportunities. We have positioned customer feedback as a key source of learning. We have energized our people around a clear purpose. And we have recognized the greater societal impact we can and must have to truly deliver sustainable value to all stakeholders. This is the path we have chosen, and it is one we believe will serve as our strength not just in today’s insurance environment, but also in tomorrow’s.
Acting on ideas Through Make the Difference, we have already introduced real changes to make Zurich more flexible, agile and faster. Acting on some of the over 400 recommendations employees submitted in 2018, we have significantly simplified internal processes, and are also making changes that include working to make the language we use in policies more customer-friendly.
Financial Our investors provide the financial capital that sustains our business.
Read more about how we create value for our customers on pages 14–15.
A balanced business Our business is balanced between Europe and North America. The Latin American contribution is growing and the business in Asia Pacific is expanding. Our portfolio is healthy and balanced between Property & Casualty, and Life. Both are sustainable and profitable businesses. Farmers provides stable income. This diversification positions us well to weather economic and market volatility, and gives us a strong presence across customer segments and product lines.
We are listening to customers through our NPS program and acting on their suggestions.
“ We believe that fire safety, and preserving the integrity of historical buildings, can go hand-in-hand if done in a sensitive and smart way.” Gary Howe Zurich risk engineer
Finding the right skills As we move into the digital era, we must develop our workforce to succeed in a world demanding more from an insurer, whether that means ‘reskilling’ existing talent or targeting new skills, so that they are empowered rather than estranged by technology.
Hiring talent for today and tomorrow We aim to recruit talent and raise awareness of opportunities in insurance. That includes meeting prospective employees at events like ‘hackathons’. We recognize that skills and talent including in new areas of expertise will shape our business not only today, but also tomorrow.
Our Responsibilities Our responsibility is to form an independent conclusion based on our limited assurance procedures on whether anything has come to our attention to indicate that the non-financial indicators are not stated, in all material respects, in accordance with the reporting criteria.
We have announced our intention to stop providing services to new thermal coal mines, potential clients earning more than half their revenue from mining thermal coal, and utility companies generating more than half their energy from coal.
Key governance developments in 2018 – at a glance as of December 31, 2018
Individual shareholders 95.9 26.1 Legal entities 3.9 30.3 Nominees, fiduciaries 0.2 43.6 1 of registered shareholders.
Changes to share capital during 2017 During 2017, a total of 732,445 shares were issued to employees out of contingent share capital. As a result, on December 31, 2017, the share capital amounted to CHF 15,133,985.10 (151,339,851 shares) and the authorized share capital (Art. 5bis 1) amounted to CHF 4,500,000 (45,000,000 shares). The contingent share capital for financial instruments (Art. 5ter 1a) amounted to CHF 3,000,000 (30,000,000 shares) and the other contingent share capital for employees (Art. 5ter 2a) amounted to CHF 495,540.80 (4,955,408 shares).
Activities 2018: In 2018, the Board specifically focused on the following: 33 succession of Board members 33 ExCo succession 33 strategy implementation 33 customer trends, structural industry changes and new technologies 33 merger and acquisition transactions 33 Board self-assessment and resulting recommendations
Key tasks and responsibilities: In general, the Governance, Nominations & Sustainability Committee: 33 supports the Board, in line with the Group’s commitment to good corporate governance, sustainable business conduct and value creation, by establishing best practices in corporate governance across the Group with a view to ensuring that the shareholders’ and other important stakeholders’ rights are fully protected 33 assists the Board in setting an appropriate tone at the top to promote key values and behaviors, and to ensure a sound and open culture throughout the organization 33 develops and proposes guidelines to the Board for corporate governance and reviews them 33 ensures compliance with corporate governance disclosure requirements and legal and regulatory requirements 33 is entrusted with succession planning for the Board, the Group CEO and members of the ExCo. It proposes the principles for the nomination and ongoing qualification of members of the Board and makes proposals to the Board on the composition of the Board, the appointment of the Chairman, the Vice-Chairman, the Group CEO and members of the ExCo. Final decisions for nominations and appointments are made by the Board, subject to shareholder approval, where required. When identifying and proposing candidates as new Board members, preserving and increasing of the Board’s diversity is a key consideration. This includes diversity in many respects, and goes beyond gender, to include culture, technical and interpersonal skills, education and viewpoints, experience, nationality and a variety of backgrounds, which should enable the Board to meet the Group’s current and future challenges. Apart from specific qualifications, every candidate should possess integrity, be of good standing, and be capable and available to fulfill his or her duty of care by serving, in close collaboration with the other Board members, the best interests of the Group’s stakeholders 33 reviews the system for management development and supervises progress made in succession planning 33 reviews and approves the Group’s sustainability strategy and objectives 33 reviews and proposes to the Board for approval targets on matters related to environmental, social and governance (ESG) that have a material impact on business strategy, underwriting or business performance
Information and control instruments vis-à-vis the Executive Committee The Board supervises management and monitors its performance through reporting and controlling processes. The Group CEO and other executives provide information and updates through regular reports to the Board. These include reports on key performance indicators and other Group-relevant financial data, existing and emerging risks, and updates on developments in important markets and on industry peers and other significant events. During 2018, the Chairman of the Board regularly met with the Group CEO. The Chairman meets from time to time with other ExCo members and management outside regular Board meetings. The other members of the Board do so as well, meeting with the Group CFO and the Group CRO in particular.
Educational background Mr. Quinn holds a degree in engineering from the University of Strathclyde. He is also a member of the Institute of Chartered Accountants in England and Wales.
Group Compliance performs its activities according to the global annual compliance plan and reports on progress against plan, outcomes and insights to management, the Audit Committee of the Board or to the regional and local equivalent body.
You can find details on the binding remuneration votes of the Board and of the ExCo included in the 2019 Board of Directors Report of Zurich Insurance Group Ltd (Board of Directors Report), which accompanies the invitation to the AGM 2019 (www.zurich.com/en/investorrelations /shareholder-area/annual- generalmeeting ). We also welcome your feedback on this report.
33 The total amount of sign-on payments 1 committed in 2018, regardless of when the payments are due, for people taking up their employment in 2018.
5 Actual, gross and for cash amounts based on the accrual principle. 6 Includes the remuneration for members of the ExCo. The ‘other remuneration’ of all employees also includes sign-on and severance payments committed in cash and/or in shares for comparison reasons.
1 Zurich defines payments (whether paid immediately or over time) that are agreed on the execution of an employment contract. Sign-on payments may include compensation made prior to a person joining the company and providing any services (payments in advance) or compensation for benefits foregone with a previous employer (replacement payments). Payments in advance are not paid to members of the Board or the ExCo.
Outlook summary for 2019 33 Performance and incentive architecture: Adjustments are proposed following engagement and syndication across the organization, including discussions with the ExCo, the Remuneration Committee and the Board. With employee experience, simplicity and flexibility in mind, certain changes are proposed to the performance assessment and incentive framework effective in 2019. The enhancements, which are outlined in more detail in the outlook section of this report, ensure that the key principles of differentiation and meritocracy are maintained and continue to support the achievement of the Group’s strategic goals and consider the interests of shareholders, customers, employees and other stakeholders.
Total remuneration for an individual employee and its composition is influenced by factors including the scope and complexity of the role, level of responsibility, risk exposure, business performance and affordability, individual performance, internal relativities, external competitiveness, geographic location and legal requirements. Target opportunities are benchmarked to median levels in clearly defined markets and take into account the internal remuneration structures. Depending on the role, the relevant market can be global, regional or local, and reflect practices in either insurance, financial services or general industry. Remuneration is delivered through an overall framework overseen by the Remuneration Committee and the Board.
In addition, Zurich has a clearly defined global performance management process which supports the achievement of the overall business strategy and operating plans, and links individual pay with business and individual performance. Actions of Zurich employees continue to be guided by the Group’s Code of Conduct and its purpose and values (www.zurich.com/en/about-us/corporate-governance/code-of-conduct). Performance management objectives are therefore assessed not only in terms of what has been achieved, but also in terms of how they have been achieved according to the behaviors underlying the Group’s Code of Conduct and its purpose and values.
The individual STIP award, as determined by the relevant business performance, resulting STIP award levels and individual performance, is paid in cash and capped at 200 percent of the individual STIP target.
A detailed description of the STIP design for 2018 is laid out below: Vehicle and target award STIP awards are paid in cash. Each participant has a STIP target established for the performance year at a maximum of 100 percent of the base salary at the end of the performance year (unless otherwise approved by the Board). The participant is allocated to one of the STIP pools within the overall STIP pool architecture for 2018: 33 Group pools: covering the leadership team, control functions, Group and regional employees.
In alignment with the Group’s risk profile and business strategy and taking into account best practice principles among insurance companies, views from proxy advisers and shareholders, long-term incentives are provided with a deferral element that takes into account material risks and their time horizon. Such deferred remuneration is structured to promote the risk awareness of participants and to encourage participants to operate the business in a sustainable manner. An overview of the LTIP for the performance period 2018 to 2020 is set out below.
The performance criteria for the LTIP have been approved by the Board to support the key strategic targets and foster long-term value generation. The NIAS ROE is a key measure for shareholders and supports the alignment of LTIP participants with shareholder interests. The NIAS ROE goals for the LTIP are also aligned to the targets in the financial plan. Ensuring Zurich generates sufficient cash is another key component of Zurich’s financial targets and demonstrates the commitment to creating liquidity for the business and shareholder requirements, hence the inclusion of the cash remittance measure in the LTIP. Finally, the relative TSR measure ensures that an external market industry view is taken by considering Zurich’s performance in comparison to its peers.
Dividend equivalent target shares To further align plan participants with the interests of shareholders, target shares may be credited with dividend equivalent target shares. The number of dividend equivalent target shares takes into account the actual dividends paid to shareholders prior to vesting (vesting period). Each year during the vesting period, the dividend amount is calculated on the number of target shares provided at the date of allocation and this amount is subsequently converted into dividend equivalent target shares based on the closing share price on the day prior to the dividend payment. No dividend equivalent target shares are credited in the year of allocation if the allocation is made after the ex-dividend date. At the vesting date, the number of target shares plus the dividend equivalent target shares will in aggregate be assessed for vesting against the performance criteria as per the LTIP vesting grid. In this way only the number of shares vesting from the target shares will be eligible for accrual of dividend equivalent target shares. Further, no dividends will accrue on the dividend equivalent target shares. The vested dividend equivalent target shares are subject to the same sales restriction periods as the vested target shares.
The amount of LTIP included in the total of CHF 8.8 million above is the value of the target share allocation of CHF 3.6 million allocated in 2018 and assumed to vest at 100 percent of target in 2021. In 2019, Mario Greco will receive the first vesting of shares since joining Zurich in 2016. The value of shares vesting in 2019 from the 2016 LTIP allocation (performance period ending December 31, 2018), made on a pro rata basis, is estimated to be CHF 8.2 million. This considers the vesting level of 149 percent for all LTIP participants (no discretion has been applied to the calculated vesting level), includes the associated dividend equivalent shares that have accrued during the performance period, and uses the 2018 year-end share price of CHF 293.10 (compared to CHF 203.20 which was the share price on the second working day in April 2016 used to determine the initial number of target shares allocated). As a result, the value of actual earned total remuneration for the period ending December 31, 2018, is estimated to be CHF 13.4 million compared to the total remuneration of CHF 8.8 million shown above.
M. Greco, Group CEO 2,000 2,000 U. Angehrn, Group Chief Investment Officer 7,289 6,117 A. Blanc, CEO EMEA 2 – n.a. J. Dailey, CEO of Farmers Group, Inc. 12,055 10,211 C. Dill, CEO Latin America 13,865 12,509 J. Howell, CEO Asia Pacific 5,046 2,316 A. Martin, Group Chief Risk Officer 3 2,487 – G. Quinn, Group Chief Financial Officer 31,779 24,598 K. Savio, CEO North America 3 4,723 4,028 G. Shaughnessy, former CEO EMEA 2 10,033 9,540 J. Shea, CEO Commercial Insurance – – K. Terryn, Group Chief Operating Officer 14,136 17,170 1 None of the members of the ExCo, together with parties related to them, held more than 0.5 percent of the voting rights as of December 31, 2018 or 2017. 2 Amanda Blanc was appointed CEO EMEA as an external appointment effective October 5, 2018. Gary Shaughnessy stepped down as CEO EMEA effective
Remuneration of all employees Please refer to the remuneration framework section on page 90 for the key elements of remuneration and the benchmarking approach for all employees. Note that the benchmarking analysis is mainly carried out and approved at a local level. The Group had 52,267 full-time equivalent employees as of December 31, 2018 (51,633 in 2017).
Focus on climate risk Identifying risks and opportunities in our dynamic environment enables us to support sustainable and relevant solutions for our customers.
Managing security risks, including cyber risk, remains a key focus for Zurich. We introduced a dedicated framework to measure exposure to this risk. We enhanced our capabilities by increasing the emphasis on risk types resulting from digital transformation, notably focusing on information security, emerging technologies, and innovation.
The Group identifies plausible threat scenarios and quantifies their potential impact on financial resources, or capital required, or both. Depending on the outcome, we develop, implement and monitor appropriate actions.
Property & Casualty business – Direct written premiums and policy fees by line of business – prior period in USD millions, for the year ended December 31, 2017 Motor Property Liability
Market risk is the risk associated with the Group’s balance sheet positions where the value or cash flow depends on financial markets. Risk factors include: 33 Equity market prices 33 Real estate market prices 33 Interest-rate risk 33 Credit and swap spread changes 33 Defaults of issuers 33 Currency exchange rates
Cash and cash equivalents amounted to USD 8.6 billion as of December 31, 2018 and USD 8.2 billion as of December 31, 2017. The risk-weighted average rating of the overall cash portfolio was ‘A–’ as of December 31, 2018 and December 31, 2017. The ten largest global banks represent 77 percent of the total, whose risk-weighted average rating was ‘A+’ as of December 31, 2018 and ‘A’ as of December 31, 2017.
2 Full year 2018 Z-ECM reflects midpoint estimate with an error margin of +/–5 percentage points.
The Farmers Exchanges ,3 which are owned by their policyholders, showed continued progress in both customer metrics and underwriting performance over the year, resulting in gross written premiums growth from continuing operations of 3.7 percent and a 1.7 percentage points reduction in the overall combined ratio to 99.9 percent. Growth was also supported by the continued successful expansion of the Farmers Exchanges into the eastern U.S. and growth in the commercial rideshare. Growth in the Farmers Exchanges continued to drive growth at Farmers Management Services, while Farmers Life showed a strong new business value increase.
The Asia Pacific region remained stable on an underlying level, with less favorable prior year reserves development accounting for the increase in the reported combined ratio.
Life new business APE increased 11 percent on a like-for-like basis after adjusting for currency, acquisitions and the disposal of the UK workplace savings business, with a reduction of 5 percent on a reported basis.
During the year the Group saw net remittances of USD 3.8 billion, a level consistent with the Group’s target for remittances to exceed USD 9.5 billion over the 2017 – 2019 period. The level of remittances has been driven both by operational earnings and capital released as a result of the Group’s efforts to extract capital from non-core businesses.
Deferred tax liabilities 17 3,915 4,357 Liabilities held for sale 1 5 25,539 29,271
in USD millions, for the years ended December 31 2018 2017
Cash and cash equivalents in USD millions, as of December 31 2018 2017
Issuance of share capital – 198 – – – – – – 198 – 198
Net income – – – – – – – 3,716 3,716 Net unrealized gains/(losses) on available-for-sale investments – – – (2,428) – – – – (2,428) Cash flow hedges – – – – (47) – – – (47) Cumulative foreign currency translation adjustment – – – – – (914) – – (914) Revaluation reserve – – – – – – (17) – (17) Net actuarial gains/(losses) on pension plans – – – – – – – 582 582
The accounting policies applied by the reportable segments are the same as those applied by the Group. The Group accounts for inter-segment revenues and transfers as if the transactions were with third parties at current market prices. Dividends, realized capital gains and losses as well as gains and losses on the transfer of net assets, are eliminated within the segment, whereas all other intercompany gains and losses are eliminated at Group level. In the consolidated financial statements, inter-segment revenues and transfers are eliminated.
Defined benefit plan obligations and contributions are determined annually by qualified actuaries using the projected unit credit method. The Group’s expense related to these plans is accrued over the employees’ service periods based on the actuarially determined cost for the period. Net interest and service costs are determined using the spot rate approach. Actuarial gains and losses are recognized, in full in the period in which they occur, in OCI. Past service costs, which result from plan amendments and curtailments, are recognized in income when the plan amendment or curtailment occurs (which is the date from which the plan change is irrevocable) and the date on which a constructive obligation arises. Settlement gains or losses are recognized in income when the settlement occurs.
Travel Ace and Universal Assistance On March 12, 2018, the Group announced the acquisition of Travel Ace and Universal Assistance, the leading providers of traveler assistance in Latin America for approximately USD 82 million. The transaction encompassed 19 legal entities operating throughout Latin America, most notably in Argentina, Brazil, Chile, Colombia and Mexico. Based on the initial purchase price accounting, goodwill amounted to USD 94 million.
The Group uses foreign exchange swaps and forwards to protect against the exposure of the variability of future cash outflows related to reinsurance transactions. The effective portion of the gains and losses are initially recognized in OCI and will be recycled to profit or loss within underwriting and policy acquisition costs using the same pattern as the hedged item.
The reserve development in EMEA and Non-Core Businesses was impacted by the February 2017 change in the Ogden rate, the industry-wide discount rate used for calculating personal injury and accident claims in the UK, resulting in an increase in prior year reserves of USD 229 million.
Expected maturity profile for reserves for insurance contracts, net of reinsurance – prior period in USD millions, as of December 31, 2017 Reserves for losses and loss adjustment expenses
Unit-linked investment contracts issued by the Group are recorded at a value reflecting the returns on investment funds which include selected equities, debt securities and derivative financial instruments. Policyholders bear the full risk of the returns on these investments.
Net carrying value as of December 31, 2017 155 250 147 82 327 961
Gross carrying value as of December 31, 2018 1,025 2,911 2,539 4,254 4,840 303 15,871 1 Amortization of distribution agreements is included within underwriting and policy acquisition costs.
Receivables and other assets in USD millions, as of December 31 2018 2017
Zurich Finance (UK) plc 6.625% GBP 450 million perpetual notes, first callable October 2022 1 570 604
While the process remains ongoing, the Group does not currently believe this matter will have a material adverse effect on the Group’s business or the Group’s consolidated financial condition.
Liabilities for insurance contracts fair value option 2 – – (2,436) (2,436)
Fair value hierarchy – unit-linked – current period in USD millions, as of December 31, 2018 Level 1 Level 2 Level 3 Total
Net unrealized gains/(losses) on debt securities available for sale that are not SPPI amounted to USD (143) million and USD 152 million for the years ended December 31, 2018 and 2017, respectively. The carrying value on held-to-maturity debt securities, mortgage loans, other loans, and receivables include impairment allowances of USD 249 million and USD 277 million of the years ended December 31, 2018 and 2017, respectively.
In the event of a significant increase in credit risk (SICR) since initial recognition, IFRS 9 requires the ECL allowance to be measured at an amount equal to lifetime expected credit losses resulting from all possible default events over the expected life of the financial instrument (lifetime ECL). Such instruments are referred to as Stage 2.
The Group has elected to apply the simplified approach for receivables from policyholders and other receivables that are allocated to ‘Stage 2’ unless individually impaired. Financial assets that have become credit-impaired are allocated to stage 3 based on similar principles as are applied under IAS 39 to determine whether credit loss has been incurred.
Related party transactions – key personnel in USD millions, for the years ended December 31 2018 2017
FGI has historically charged a lower management fee than the amount allowed by policyholders. The range of fees has varied by line of business over time and from year to year. The gross earned premiums of the Farmers Exchanges were USD 20.2 billion and USD 19.8 billion for the years ended December 31, 2018 and 2017, respectively.
Gross written premiums and policy fees 33,505 33,024 14,754 14,070 1,095 1,871 5 48 140 202 (14) (102) 49,485 49,114 Less premiums ceded to reinsurers (7,041) (6,492) (1,038) (1,128) (179) (195) – (42) (11) (222) 14 102 (8,255) (7,977)
Reserves for losses and loss adjustment expenses, gross 58,835 60,080 – – 467 809 23 22 1,649 4,508 (61) (50) 60,913 65,368 Reserves for unearned premiums, gross 16,620 16,976 1 – 79 79 2 3 14 8 (2) (5) 16,714 17,060 Future life policyholder benefits, gross 32 36 69,420 71,828 2,151 2,073 2 2 3,348 3,596 (4) (6) 74,950 77,529 Policyholder contract deposits and other funds, gross 30 23 18,284 18,880 3,882 3,915 – – 2,071 2,126 – – 24,266 24,944 Reserves for unit-linked insurance contracts, gross 1 – – 64,168 70,371 746 807 – – 3,852 4,235 – – 68,766 75,413
Investments for unit-linked contracts 1 – – 104,695 115,659 746 807 – – 3,852 4,233 – – 109,294 120,699
In our opinion, the consolidated financial statements (pages 166 to 275 and the audited sections of the risk review on pages 120 to 149) give a true and fair view of the consolidated financial position of the Group as at December 31, 2018 and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with the International Financial Reporting Standards (IFRS) and comply with Swiss law.
Other information in the annual report The Board of Directors is responsible for the other information in the annual report. The other information comprises all information included in the annual report, but does not include the consolidated financial statements, the stand-alone financial statements of Zurich Insurance Group Ltd, the audited sections of the risk review on pages 120 to 149, the Remuneration report of Zurich Insurance Group Ltd and our auditor’s reports thereon. Our opinion on the consolidated financial statements does not cover the other information in the annual report and we do not express any form of assurance conclusion thereon.
Income statements in CHF thousands, for the years ended December 31 Notes 2018 2017
Dividend income – 2,300,000 Interest income 91,469 97,269 Other financial income 80 4,366
5. Financial income Financial income for the year 2018 mainly consists of interest income of CHF 91.4 million (2017: CHF 97.3 million) on the subordinated loan received from the Company’s subsidiary ZIC. This interest income is recognized when Zurich Insurance Company Ltd declares its intention to pay a dividend to the Company. In 2017, the dividend income of CHF 2,300 million received from the Company’s subsidiary ZIC was shown as part of the financial income.
The Board of Directors proposes to the shareholders at the Annual General Meeting on April 3, 2019, to pay a dividend of CHF 2,876 million out of available earnings and to carry forward retained earnings of CHF 9,854 million as shown in the above table.
We agreed with the Audit Committee that we would report to them misstatements above CHF 13.5 million identified during our audit as well as any misstatements below that amount which, in our view, warranted reporting for qualitative reasons.
Annual Report 2018 The Annual Report provides information about our strategy and business activities, governance and executive bodies, remuneration and financial and non-financial performance. It is available in English and German, with the financial statements in English only.
Annual Review 2018 The Annual Review provides information about our strategy and business activities. It includes examples of how we are delivering on our strategy, related in narratives and through imagery. It is available in English and German.