1 Business operating profit indicates the underlying performance of the Group’s business units by eliminating the impact of financial market volatility and other non-operational variables.
Corporate responsibility Through acting responsibly, we believe we can create sustainable value for all our stakeholders. Reflecting our efforts, in 2015, Zurich achieved its highest score since joining the Dow Jones Sustainability Index (DJSI), outperforming 99 percent of companies in the insurance industry group in the Index. We also reached over USD 1 billion in overall impact investments in 2015, and our flood resilience alliance extended its work with at-risk communities.
Our key priorities in 2016 will be turning around our General Insurance business and continuing actions to position the group for 2017 and beyond, including enhancing efficiency and sharpening the group’s retail footprint. I am convinced that with the strength of our global franchise, the breadth of talent within our organization and our strong brand, we have everything we need for future success. We thank you for your continued support.
Retail insurance customers expect technology to make their lives easier, which means that insurers must fully adopt digital platforms while continuously improving standards of service. They want products that are tailored to their needs, making modular insurance solutions increasingly important. They often look to friends and social media for advice and are open to sharing products with others – including insurance. And because their lives are changing fast, they want flexibility.
We are acquiring a major U.S. crop insurer, Rural Community Insurance Services (RCIS). Through a combined approach, Global Corporate and Corporate Life & Pensions increased the number of large corporations they jointly serve. Our bank distribution networks saw continued growth, capitalizing on our access to millions of customers in 15 countries.
Natural hazard tool Reducing risks in Switzerland relationships with them, allowing us to retain more of these customers. Starting in 2016, customers using the My Zurich platform will also be able to see the results of risk assessments done on our Zurich Risk Advisor tool.
Our Corporate business is helping multinational customers manage international insurance programs through our award-winning online platform, My Zurich. This not only helps them to manage their insurance needs centrally, it also strengthens our
GOT is also consolidating the number of data centers we rely on, which improves efficiency and means we need less space and less power to run our businesses. We are reducing the number of own-use properties and renegotiating leases to better utilize our office space. In addition, we have focused our telecoms and network suppliers on one global strategic provider.
Through our Zurich Way of Working (ZWoW), we are implementing fundamental changes to become a more efficient organization in our staff training process, our business organization, and the way we manage individual performance; all the while placing greater emphasis on customer service delivery and higher employee engagement.
Our ‘post-event review capability’ or ‘PERC’ methodology also aims to address flood risks through in-depth studies of past flood events. In 2015, together with the Institute for Social and Environmental Transition (ISET), we published a PERC study about the deadly floods in Nepal in August 2014. Also, in conjunction with non-governmental organization Targa-AIDE, we published a similar study about devastating floods in Morocco in November 2014.
The Group pursues a customer-centric strategy and is managed on a matrix basis, reflecting both lines of business and geography. The GEC is headed by the CEO. The CEOs of the business segments General Insurance, Global Life and Farmers as well as the Chief Financial Officer (CFO), the Chief Investment Officer (CIO), the Chief Risk Officer (CRO), the Chief Operations and Technology Officer, the Group General Counsel and the Chief Human Resources Officer, are members of the GEC. From October 1, 2015, to December 31, 2015, the CEO General Insurance was also CEO ad interim for Global Life. The geographic regions of North America, Latin America and Asia-Pacific, as well as Europe, Middle East and Africa are represented on the GEC by Regional Chairmen who focus on stakeholder management and strategic business development in the respective regions. For further information on the GEC see pages 50 to 59.
Skills and experience Fred Kindle worked at Hilti AG in Liechtenstein from 1984 until 1986. From 1988 until 1992 he was a consultant with McKinsey & Company in New York and Zurich. He then joined Sulzer AG in Switzerland, where he held several management positions. In 1999 he was appointed CEO of Sulzer Industries and in 2001 he became CEO of Sulzer AG. After joining ABB Ltd in 2004, Mr. Kindle was appointed CEO of ABB Group, a position he held until 2008. He then became a partner of Clayton, Dubilier & Rice LLP, a private equity firm based in New York and London. He has been a member of the boards of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd since April 2006. He was elected vice-chairman in September 2013.
External appointments Mr. del Pino maintains contact with the academic world through his memberships on the MIT Corporation, the International Advisory Board of IESE and the European Advisory Board of Harvard Business School and of MIT Sloan School of Management.
External Mandates In line with the Ordinance AEC, art. 33 of Zurich’s Articles of Incorporation, contains rules regarding the number of mandates members of the Board and of the GEC are permitted to hold, as shown in the table below. Board and GEC members’ individual mandates, which are in line with those rules, are shown in their respective biographies.
Mr. Kishore Mahbubani. • As independent voting rights representative: Mr. lic. iur. Andreas G. Keller, Attorney at Law
The Risk Committee meets at least six times a year. In 2015 it met seven times.
The Group’s compliance function, which consists of compliance professionals around the world, is overseen by the Group Compliance Officer, who reports to the Group General Counsel and regularly provides reports to the Group’s Audit Committee. The Group Compliance Officer has an additional reporting line to the Chairman of the Audit Committee and appropriate access to the Chairman of the Board.
I am pleased to present the report of the Remuneration Committee (Remuneration Report) for the business year 2015. During the year, the Remuneration Committee was active in reviewing key aspects of the Zurich Insurance Group Ltd’s (Group or Zurich) remuneration system, the remuneration rules and the remuneration structures of the Board of Directors (Board) and the Group Executive Committee (GEC). In terms of adherence to the Ordinance Against Excessive Compensation (Ordinance AEC), the employment agreements of the GEC were reviewed, adjusted to ensure alignment and a clawback framework for all members of the GEC was introduced. We also formally adopted the prohibition of the hedging of share-based remuneration for all participants in the long-term incentive plan (LTIP) and we continue to review and make amendments to the Remuneration Report with the aim of increasing transparency and enhancing understanding and readability.
In 2015, the Board of Directors continued to oversee and take decisions on the design and implementation of the remuneration principles, rules and architecture, which reflect international best practices in terms of governance, plan design and disclosure. The Group’s remuneration architecture is simple, transparent and market competitive, promotes a high performance culture, supports the employer brand, is aligned with our risk management principles and has an orientation toward the long-term for the most senior roles, including positions (and the respective incumbents) who have a significant influence on the risk profile of the company (considered as key risk takers).
Remuneration report continued 2015 remuneration in light of the business results Expenditure on remuneration should be considered in the context of Zurich‘s overall revenues, capital base and profitability. As can be seen from the metrics in the following table relative to Zurich’s overall revenues and shareholders’ equity, expenditure on variable remuneration remained relatively small, also in relation to the dividends payable to shareholders. The key financial figures reflect data for 2015 and 2014 and show the decrease in the total variable remuneration pool in 2015 compared to 2014, as an outcome of the decrease in overall business profitability.
Gross written premiums and fees1 53,784 57,572 Business operating profit (BOP) 2,916 4,638 Net income attributable to shareholders (NIAS) 1,842 3,949 Shareholders’ equity 31,178 34,735 Return on common shareholders’ equity (ROE) 6.4% 13.0% Dividends paid to shareholders 2 2,705 2,837 Total variable remuneration pool for all employees gross before tax 3 505 652 – as a percentage of gross written premiums and fees 1% 1% – as a percentage of shareholders’ equity 2% 2% – as a percentage of dividends paid to shareholders 19% 23%
Zurich’s approach to implementing the requirements of the Ordinance AEC The Ordinance AEC came into effect on January 1, 2014 with a two year transition period. During this time Zurich has amended its Articles of Incorporation as approved by shareholders at the AGM in 2014, adjusted Zurich’s Remuneration Rules (see Governance framework) and in 2015, reviewed and amended the existing employment agreements of members of the GEC. At the AGM in 2015, shareholders also voted on and approved the maximum total amount of remuneration for the Board for the one year period from the AGM in 2015 to the AGM in 2016 (95.6 percent) and the maximum total amount of remuneration for the GEC for the financial year 2016 (89.9 percent). The Group’s shareholders also approved the 2014 Remuneration Report through a consultative non-binding vote (86.9 percent). The shareholders will be invited to vote on similar resolutions at the AGM in 2016.
As of December 31, 2015, Directors held 44,642 shares and members of the GEC held 135,361 vested shares and 158,785 vested options. At the end of 2015, all Directors and members of the GEC who have served at least five years on the Board or the Group Executive Committee respectively, have met the required share ownership level.
May include scope and complexity of the role, level of responsibility and geographic location.
– Individual performance on personal objectives and behavior in line with Zurich’s basic values as assessed through the performance management process.
Vesting is determined based on (i) the position of the TSR compared with an international peer group of insurance companies derived from the Dow Jones Titan Insurance Index, (ii) the NIAS ROE and (iii) cash remittance 3
Duration n / a 1 year 3 – 6 years (target shares subject to three year cliff vesting and one-half of the vested shares are salesrestricted for an additional three years)
2 Includes target share allocations from transition arrangements, however note that with regard to the total variable remuneration pool, such allocations are excluded. The new performance criteria and overall vesting grid are being phased in.
The 2014 LTIP allocation will vest one third after two years (i.e. 2016), and two-thirds after three years (i.e. 2017). From the 2015 LTIP allocations onwards, three-year cliff vesting for the complete allocation will apply.
For the first quarter in 2015, payments were made in accordance with the former fee structure.
The following tables set out the actual fees paid to the Directors for 2015 and 2014 in Swiss francs. In 2015, nine members served for the full year and two members served for part of the year. In 2014, eight members served for the full year and three members served for part of the year.
2 Members of a committee receive a cash fee of CHF 60,000 (CHF 50,000 in 2014) for all committees on which they serve, irrespective of the number, effective April 1, 2015. The committees on which the Directors serve are set out in the Corporate Governance Report.
Members of the GEC participate in the pension plan arrangements of the entities where they are employed. The Group’s philosophy is to provide pension benefits through cash balance and/or defined contribution plans where funds are accumulated throughout a career to provide retirement benefits. The majority of members of the GEC participate in such plans and over time, all future members of the GEC will participate in such plans. The remaining members of the GEC participate in defined benefit plans that provide retirement benefits based on final pensionable earnings and the number of years of service. Normal retirement ages vary from 60 to 65.
Members of the GEC received other remuneration in 2015 in relation to employee benefits, expatriate allowances, perquisites, benefits-in-kind and any other payments due under each member’s employment contract.
For the GEC, the key financial metric is the NIAS performance during the year. In evaluating the NIAS performance, an overall qualitative assessment of the results is carried out to determine the STIP award structure. NIAS for 2015 was slightly under USD 1.85 billion reflecting a 53% percent decrease compared to 2014. With regard to individual performance, each member defines and agrees individual objectives relating to the execution of the strategy in the following key areas: positioning the business for long-term profitable growth, reducing complexity, improving profitability, investing in people, capabilities and brand, and implementing the Zurich Commitment. For competitive reasons, Zurich does not disclose more detail on the individual objectives of members of its GEC. In a rigorous process, the Remuneration Committee reviews the individual performance achievements of each member of the GEC, considering a number of factors including the performance of the business segment or function being managed, and the achievement of the strategic objectives across the defined areas. The Remuneration Committee and the Board also reviews the performance of the CEO using a similar process at the year-end. As a result of this rigorous process, individual STIP awards for each member of the GEC are determined and approved by the Board. Given the assessment of the overall financial and individual results for 2015, significantly lower overall cash incentives have been allocated to the GEC for 2015 than in the previous year reflecting the reduction in profitability.
No Replacement Payments were made in 2015, compared to a value of USD 8.8 million in replacement payments in 2014.
Value of target share allocations from transition arrangements for the GEC As set out on page 84, transition arrangements were put in place for all plan participants in connection with the move from annual tranche vesting to three-year cliff vesting under the LTIP. For members of the GEC, the value of the transition allocation made in 2015 was USD 5.7 million with the allocations being assessed for vesting in equal tranches in 2016, 2017 and 2018.
A summary of the unvested target share allocations as at December 31, 2015 under the LTIP, the transition arrangement and the Replacement Payments is set out in the following table: Summary of unvested target share allocations for the GEC as of December 31
2 As of 2014, dividend equivalent target shares are credited within the regular LTIP. At the vesting date, the original number of target shares plus the dividend equivalent target shares will be assessed for vesting in aggregate based on the performance achievements against the vesting grid. No dividends will accrue on the dividend equivalent target shares.
In addition, Zurich will continue to engage in a dialogue with key stakeholders on remuneration related matters to exchange views and to better understand and respond to any particular areas of concern regarding the Group’s remuneration architecture. As in 2015, shareholders will receive the Board of Directors Report 2016. This includes information regarding the two remuneration votes on the total maximum amounts of remuneration for the Board and for the GEC, which will take place at the AGM on March 30, 2016. The votes allow shareholders to have a say on the prospective remuneration for the Board and for the GEC arising from Zurich’s remuneration policies. Shareholders will also be given the opportunity to express their opinion on our Remuneration Report, through a consultative, non-binding vote at the AGM on the Remuneration Report 2015.
An audit involves performing procedures to obtain audit evidence on the disclosures made in the Remuneration Report with regard to compensation, loans and credits in accordance with articles 14 – 16 of the Ordinance AEC. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatements in the Remuneration Report, whether due to fraud or error. This audit also includes evaluating the reasonableness of the methods applied to value components of remuneration, as well as assessing the overall presentation of the Remuneration Report.
Return on common shareholders’ equity (ROE) 6 6.4% 13.0% (6.6 pts) Business operating profit (after tax) return on common shareholders’ equity (BOPAT ROE) 6 6.4% 11.2% (4.7 pts)
Net income attributable to shareholders of USD 1.8 billion decreased by USD 2.1 billion, or 53 percent in U.S dollar terms and 54 percent on a local currency basis, primarily due to the decrease of USD 1.7 billion in business operating profit and lower net gains on investments of USD 508 million. Higher restructuring provisions and impairments of goodwill were more than offset by the absence of a loss on the divestment of a business in 2014 and the lower consequential tax expense attributable to shareholders.
• Global Life business operating profit increased by USD 27 million to USD 1.3 billion, or 2 percent in U.S. dollar terms and 16 percent on a local currency basis. The weakening of Latin American and European currencies against the U.S. dollar compared with 2014 had a significant impact on the reported results translated into U.S. dollars. On a local currency basis, business operating profit improved in all regions with the largest increases occurring in loadings and fees and the technical margin, as a result of the ongoing focus on fee-based and protection business.
Business operating profit increased by USD 42 million to USD 82 million. The increase resulted from an improvement in the net underwriting result and lower non-technical expenses in Latin America, partly offset by a lower net investment result, mainly in Australia.
Acquisition costs decreased by USD 347 million, or by 10 percent in U.S dollar terms, but increased by 4 percent on a local currency basis. The increase on a local currency basis reflected higher volumes of business in EMEA, Asia Pacific and Zurich Santander, partly offset by decreasing volumes in the Independent Financial Adviser (IFA) business in North America. The contribution from the impact of deferrals reduced by USD 70 million, or by 16 percent in U.S. dollar terms and 5 percent on a local currency basis. The positive effect of higher volumes in Asia Pacific and Zurich Santander was more than offset by North America due to decreasing volumes and EMEA, where in spite of higher volumes of business the impact of deferrals reduced due to business mix and higher policy surrenders.
Other net income 22 48 (54%) Business operating profit 1,360 1,383 (2%) Managed gross earned premium margin 7.1% 7.2% (0.1 pts)
Other Operating Businesses in USD millions, for the years ended December 31 2015 2014 Change
The Group uses reinsurance to manage risk related to unusually severe or frequent events, through the main in-force reinsurance covers. The chart below shows the covers for catastrophe events as of December 31, 2015.
For additional information on equity securities and investment property, see note 6 of the consolidated financial statements.
Analysis of economic sensitivities for interest rate risk Table 4 shows the estimated impacts of a 100 basis point increase/decrease in yield curves after consideration of hedges in place, as of December 31, 2015 and 2014, respectively.
The risk-weighted average issuer credit rating of the Group’s debt securities portfolio was ‘BBB’ in 2015 and ‘BBB+’ in 2014.
Rest of Eurozone 794 1,128 Eurozone supranationals and similar 665 1,094
Other loans by rating of issuer as of December 31 2015 2014
Table 10 shows the total IFRS equity’s sensitivity to changes in exchange rates for the main functional currencies to which the Group is exposed. Positive values represent an increase in the value of the Group’s total equity. See notes 1, 3 and 7 of the consolidated financial statements for additional information on foreign currency translation and transactions.
• Documents and reviews loss events exceeding a threshold determined by the Zurich Risk Policy. Remedial action is taken to avoid a recurrence of such operational loss events.
Risk management and internal controls The Group considers controls to be key instruments for monitoring and managing operational risk. The Board has overall responsibility for the Group’s risk management and internal controls, in particular for their adequacy and integrity. The Group’s internal control system increases the reliability of Zurich’s financial reporting, makes operations more effective, and aims to ensure legal and regulatory compliance. The internal controls system is designed to manage rather than eliminate the material risk that business objectives might not be achieved. It can provide only reasonable, not absolute, assurance against material financial misstatement or loss.
The Group’s Disclosure Committee, led by the Group Controller, assesses the content, accuracy and integrity of the disclosures and the effectiveness of the internal controls over financial reporting. The conclusions are reported to the Group Executive Committee and the Board Audit Committee, which may provide further challenge. The Board reviews and approves results announcements and the annual report. This ensures that both the Board and management have sufficient opportunity to review and challenge the Group’s financial statements and other significant disclosures before they are made public.
Risks to the Group’s reputation Risks include acts or omissions by the Group or any of its employees that could damage the Group’s reputation or lead to a loss of trust among its stakeholders. Every risk type has potential consequences for Zurich’s reputation. Effectively managing each type of risk helps reduce threats to Zurich’s reputation.
Basic earnings per share 20 12.36 26.68 Diluted earnings per share 20 12.33 26.44 in CHF
Cash flows from operating activities Net income attributable to shareholders 1,842 3,949 Adjustments for: Net (gain)/loss on divestments of businesses (10) 259
Restatements and reclassifications Effective January 1, 2015, the Group changed its accounting policy relating to recognition of cumulative foreign currency translation adjustment (CTA), moving from an absolute to a proportionate ownership interest method, as a CTA release method based on proportionate ownership interest will lead to more relevant financial information. The impact was a reclassification of USD 54 million from retained earnings to CTA as of December 31, 2014. It also positively impacted the net investment result on Group investments and administrative and other operating expense in 2014 by USD 54 million, as well as basic earnings per share by USD 0.37 and diluted earnings per share by USD 0.36.
Foreign currency transactions and balances Foreign currency transactions are translated into the functional currency using the spot exchange rate at the date of the transaction or, for practical reasons, a weighted average rate, if exchange rates do not fluctuate significantly. Foreign currency monetary items and foreign currency non-monetary items that are carried at fair value, are translated at end-of-period exchange rates. The resulting foreign currency translation differences are recorded in income, except for the following: • Foreign currency translation differences that are recognized in OCI in conjunction with the recognition of unrealized gains or losses on available-for-sale investments; and
Reinsurance assets are assessed for impairment on a regular basis and impairment losses, if any, are recorded in the same manner as for loans and receivables.
The accounting treatment of a qualifying hedge relationship is further described in note 7.
Retirement benefits Contributions to defined contribution plans are recorded as an expense in the period in which the economic benefit from the employees’ service was received.
2 Rental operating expenses for investment property included in investment expenses for Group investments amounted to USD 81 million and USD 85 million for the years ended December 31, 2015 and 2014, respectively.
Cash flow hedges: Net investment hedges: Fair value hedges Designated fair value hedges consist of interest rate swaps used to protect the Group against changes in interest rate exposure and foreign currency exposure of debt issued by the Group.
1 The 2015 net movement relates to USD 381 million reclassified from future life policyholder benefits (see note 1).
Intangible assets – current period in USD millions Attorneyin -fact relationships Goodwill PVFP
Gross carrying value as of January 1, 2015 1,025 1,778 2,701 4,480 4,588 186 14,760
Net carrying value as of December 31, 2015 1,025 1,289 466 2,752 1,505 43 7,080
As of January 1 (98) 456 Net unrealized gains/(losses) on available-for-sale investments 397 (704) Cash flow hedges (15) (65) Revaluation reserve (2) (8) Net actuarial gains/(losses) on pension plans (162) 190 Foreign currency translation effects 29 33 As of December 31 149 (98)
Remeasurement effects included in other comprehensive income (3,130) 2,260 (870) Employer contributions – 536 536 Employer contributions paid to meet benefits directly 37 – 37 Plan participants’ contributions (56) 56 – Payments from the plan (incl. settlements) 703 (703) – Foreign currency translation effects 1,611 (1,351) 260
Employee share plans Share Incentive Plan for employees in the UK The Group established an Inland Revenue approved Share Incentive Plan and launched the Partnership Shares element of this plan in 2003, which enabled participating employees to make monthly purchases of Zurich Insurance Group Ltd shares at the prevailing market price from their gross earnings. This plan was terminated in 2007. There were 99 and 112 participants in the plan as of December 31, 2015 and 2014, respectively.
Fair value hierarchy – unit-linked – current period in USD millions, as of December 31, 2015 Level 1 Level 2 Level 3 Total
Transfers out of level 3 – (108) – – – – –
1 The 2015 net movement mainly relates to buy-back transactions of certain annuity contracts in the U.S.
From January 1, 2015, the Global Life business changed its regional structure by establishing the regions Europe, Middle East & Africa (EMEA) and Asia Pacific. EMEA includes the European business units, Zurich International Life and Luxembourg. This change had no impact on total Global Life or the Group. Comparative figures have been restated to reflect this change.
Gross written premiums and policy fees 34,020 36,333 14,446 14,594 2,145 3,428 47 45 437 491 (98) (110) 50,998 54,781 Less premiums ceded to reinsurers 2 (5,634) (5,473) (2,489) (675) – – (41) (47) (11) (16) 98 110 (8,078) (6,101)
Revenues/(expenses) not included in BOP: Net capital gains/(losses) on investments and impairments, net of policyholder allocation 466 871 240 485 20 34 152 1 8 4 887 1,395 Net gain/(loss) on divestments of businesses1 – (245) – – – – 10 (2) – (13) 10 (259)
Zurich Minas Brasil Seguros S.A. Belo Horizonte General Insurance/ Global Life 100 100 BRL 2,809.6
Zurich Employment Services Limited Cheltenham, England Global Life 100 100 GBP 125.3
12. Commitments and contingencies Zurich Insurance Group Ltd has provided unlimited guarantees in support of entities belonging to the Zurich Capital Markets group of companies. The Company has also entered into support agreements and guarantees for the benefit of certain of its subsidiaries. They amounted to CHF 3,150 million as of December 31, 2015, and CHF 12,136 million as of December 31, 2014. The decrease is mainly due to expired guarantees in the aggregate amount of GBP 5,595 million provided to a fully owned subsidiary and certain of its directors in connection with the restructuring of the Group’s top holding structure which resulted in the merger of Zurich Group Holding into Zurich Insurance Group Ltd (formerly known as Zurich Financial Services Ltd) in December 2009. Furthermore, Zurich Insurance Group Ltd has issued an unlimited guarantee in favor of the Institute of London Underwriters in relation to business transferred to Zurich Insurance plc from a Group company which no longer has insurance licenses.
We have audited the issue of new shares by Zurich Insurance Group Ltd in the period from January 1, 2015, to December 31, 2015, pursuant to the resolution of the general meeting of March 30, 2010, in accordance with article 653f para. 1 Code of Obligations (CO).