2 Total Group business volumes comprises gross written premiums, policy fees, insurance deposits and management fees generated within General Insurance, Global Life and Farmers. 3 Calculated on average Group investments.
By closely monitoring technological trends and sharing the insights we develop with our customers, Zurich will benefit by managing emerging risks and winning business through new products, services and solutions.
Business environment regulation and also to ensure the effective use of its capital, Zurich supports a consolidated group-level approach to regulation, such as the ComFrame initiative.
Our people Our people play a key role in helping us to be the best global insurer. In turn, we must provide a working environment where they can be at their best so that we can deliver on our strategy and attract and retain the talented people we need.
Zurich Insurance Group With about 55,000 employees worldwide, Zurich delivers insurance products and services through its General Insurance and Global Life segments, and through Farmers.1 1 The Farmers Exchanges are owned by their policyholders. Farmers Group, Inc., a wholly-owned subsidiary of the Group, provides certain non-claims administrative and management services to the Farmers Exchanges as attorney-in-fact and receives fees for its services.
Managing other businesses for value Generating the most value from Global Life in-force books; capturing value from profitable, smaller General Insurance markets; turning around or exiting under-performing businesses.
Brazil Brazil is the largest market for extended warranty insurance in Latin America, an important service for newly-affluent consumers who want to protect their possessions. In 2014 we signed an exclusive agreement with Brazilian retailer Via Varejo, the country’s largest retail conglomerate. For a small additional fee, customers buying appliances, furniture and other items from two large retail chains owned by Via Varejo – Casas Bahia and Ponto Frio –
We have appointed three new members to the Group Executive Committee: Robert Dickie, George Quinn and Isabelle Welton. They have already made important contributions to the delivery of Zurich’s strategy. The appointment of Isabelle Welton to the GEC highlights the importance we attach to our Human Resources function and the vital role that our people play in the delivery of Zurich’s strategy.
In 2014, an initiative was carried out to streamline certain group processes in order to achieve more effective decision making, and to clearly allocate the duties and responsibilities of certain positions, corporate bodies and functions. In particular a new management committee structure and three distinct decision-making models for Group functions were established.
For the purpose of discussing financial performance the Group considers General Insurance, Global Life and Farmers to be its core segments. The other business segments are: • Other Operating Businesses predominantly consist of the Group’s headquarter and Holding and Financing activities. In addition, certain alternative investment positions not allocated to business operating segments are included within Holding and Financing.
There are special provisions relating to the registration and exercise of rights attached to shares by The Bank of New York Mellon Corporation in connection with the Zurich Insurance Group Ltd ADR program.
Art. 33, para. 1, of the Articles of Incorporation sets forth the following, generally applicable, maximum limits: Board of
The Board is required to meet at least six times each year. During 2014 it held ten meetings (of which six were partly attended by tele-/videoconference and five were held over two days). One meeting was fully dedicated to the discussion of strategy. Five meetings lasted four or more hours during the course of a day, two meetings took about three hours on average and three meetings lasted less than three hours. In addition, the Board approved one circular resolution.
Key tasks and responsibilities: In general, the Remuneration Committee: • regularly evaluates the Group’s remuneration system and Zurich’s remuneration rules and proposes amendments to the Board which is responsible for the design, implementation and monitoring of the Group’s remuneration architecture; Further details of the Group’s remuneration framework, including the remuneration philosophy and the remuneration governance are set out in the Remuneration report on pages 62 to 95: • reviews and proposes to the Board on an annual basis the terms of remuneration of the members of the Board; • based on Zurich’s Remuneration Rules, reviews and proposes to the Board the terms and conditions of employment of the CEO and reviews those of other members of the GEC, as negotiated by the CEO, before submitting them to the Board for approval; • liaises with the CEO on other important employment, salary and benefit matters; • reviews and proposes to the Board the total variable remuneration pool and reviews the performance relating to short-term and long-term incentive plans, and also makes a qualitative assessment of the performance, e.g. taking into account a risk review carried out by the Chief Risk Officer, reviews and makes proposals to the Board for submission to the General Meeting on the approval of the Board’s and GEC’s remuneration; • and prepares the remuneration report annually in accordance with applicable laws and regulations.
Key tasks and responsibilities: • acts as a cross-functional body for financial and risk management matters in the context of the strategy and the overall business activity of the Group; • oversees financial implications of business decisions and the effective management of the Group’s overall risk profile, including risks related to insurance, financial markets, asset/liability management, credit and operational risks and the interaction among these risks; and
External appointments Ms. Reyes has been a member of the advisory board of the Department of Banking and Finance at the University of Zurich since 2011. In 2014 she became a member of the Board of Governors of the Asian Institute of Management.
External Audit is responsible for auditing the Group’s financial statements and for auditing Zurich’s compliance with specific regulatory requirements. The Audit Committee regularly meets with the External Auditors.
We are well on the way to execute our strategic targets for 2014 to 2016. In 2014, the business delivered excellent shareholder returns with strong cash generation resulting in a high economic solvency position at year end. With regard to profitability, net income attributable to shareholders for 2014 was USD 3.90 billion (2013: USD 4.03 billion) and the business operating profit was USD 4.64 billion (2013: USD 4.68 billion), respectively 3 percent and 1 percent below the previous year. Based on the overall results, the Board proposes a dividend payment of CHF 17 per share for approval by shareholders at the Annual General Meeting (AGM) in 2015, the same level as last year.
For 2014, the remuneration amounts were as follows: Remuneration amounts in USD million, for the years ended December 31 Base salary/
Legal and regulatory requirements This Remuneration report provides all the information that is outlined in chapter 5 of the Directive on Information Relating to Corporate Governance of the SIX Exchange Regulation as amended with effect from September 1, 2014 (SIX Directive), the Swiss Code of Best Practice for Corporate Governance published on September 29, 2014 (Swiss Code of Best Practice) and Articles 14 –16 of the Ordinance AEC (replacing the information in the notes to the consolidated financial statements according to Article 663bbis of the Swiss Code of Obligations). This information s now subject to an audit of the respective sections in the Remuneration report instead of being audited in the notes to the financial statements of Zurich Insurance Group Ltd. Also included in the audited section of the Remuneration report is all the information as required by article 663c para 3 of the Swiss Code of Obligations. Finally, all details with regard to the Circular 2010/1 on minimum standards for remuneration schemes of financial institutions, issued by the Swiss Financial Market Supervisory Authority FINMA on October 21, 2009 and further guidance issued on January 19, 2011 (FINMA Circular on Remuneration Schemes) are also included in the Report. The structure of the Remuneration report is aligned with the requirements of the SIX Directive. All other information to be disclosed according to the SIX Directive is included in the Corporate governance report preceding this Remuneration report.
Remuneration Committee and Risk Committee based on proposal by the CEO
Remuneration report Remuneration Committee Board and consultative, non-binding vote by the shareholders
Transition Allocation LTIP participants (excl GEC) Allocation in 2014 1/3 rd vest 1/3 rd vest 1/3 rd vest Transition Allocation GEC (excl CEO) 1/2 Allocation in 2014 1/6 th vest 1/6 th vest 1/6 th vest 1/2 Allocation in 2015 1/6 th vest 1/6 th vest 1/6 th vest Transition Allocation CEO 1/3 Allocation in 2014 1/9 th vest 1/9 th vest 1/9 th vest 1/3 Allocation in 2015 1/9 th vest 1/9 th vest 1/9 th vest 1/3 Allocation in 2016 1/9 th vest 1/9 th vest 1/9 th vest 1 One half of all vested shares is subject to a three year sales restriction. For members of the GEC, this means that the last restriction on the transition allocation will lapse in 2021 and for the CEO in 2022.
9 At the AGM on April 2, 2014, Mr. Chu and Mr. Watter retired from the Board and Mr. Franz was elected to the Board. 10 At the AGM on April 4, 2013, Mr. Meyer retired from the Board and Ms. Mächler was elected to the Board. In August 2013, Mr. Ackermann resigned from the Board.
Mr. de Swaan was appointed Chairman and Mr. Kindle Vice-Chairman of the Board as of September 11, 2013. 11 As of June 16, 2013, Mr. Ackermann was allocated 1,384 shares, Mr. de Swaan was allocated 518 shares, and the other Board members were allocated 332 shares.
None of the Directors had outstanding loans, advances or credits as of December 31, 2014. As of December 31, 2013 and unrelated to his Board membership and on the terms and conditions available to other customers, Mr. Watter had a collateralized policy loan in the amount of CHF 2.5 million outstanding1. The annual interest rate charged on the loan being 4 percent.
The total amount of base salaries for all members of the GEC paid in 2014 was USD 12.0m compared to USD 11.6m in 2013.
The individual STIP award is determined in a similar way to all employees by the financial performance, the resulting STIP award structure, and by the individual performance.
Based on these figures, the value of the total remuneration for all members of the GEC comprises 36 percent (38 percent in 2013) in fixed remuneration (comprising base salaries, service costs for pension benefits and other remuneration including employee benefits) and 64 percent (62 percent in 2013) in performance related elements (comprising the cash incentive awards under the STIP and the value of the target share allocations under the LTIP). The emphasis within variable remuneration lies on the deferred part, with 61 percent represented by target performance shares under the LTIP and 39 percent as cash incentive awards under the STIP.
2 The share allocations will vest in the future according to achievement of defined performance conditions. The value of the shares assumes that the allocation will vest in the future at 100 percent of the target level with the valuation of the target share allocations based on the share price on the day prior to the allocations (CHF 274.30 for 2014 and CHF 267.30 for 2013). The value of target share allocations does not include dividend equivalent target shares. As described in the section Remuneration elements the vesting level can range between 0 percent and 200 percent of the target.
2 As of 2014 dividend equivalents target shares are credited. At the vesting date, the original number of target shares plus the dividend equivalent target shares will in aggregate be assessed for vesting based on the performance achievements against the vesting grid. No dividends will accrue on the dividend equivalent target shares.
Fixed remuneration Fixed remuneration comprises base salaries, other remuneration including employee benefits and service costs for pension benefits.
Further, according to the Ordinance AEC, Payments in Advance and Severance Payments, are prohibited to be paid to members of the Board and to members of the GEC including the CEO. Therefore, no such payments have been made to the members of the Board or to members of the GEC. Any Replacement Payments for members of the GEC including the CEO have to be approved by the Board based on a proposal by the Remuneration Committee.
• Global Life gross written premiums, policy fees and insurance deposits increased by USD 4.8 billion to USD 31.9 billion, or by 18 percent in both U.S. dollar terms and on a local currency basis. Improvements occurred predominantly in Europe, driven by growth in Corporate Life and Pensions and individual savings business within Bank Distribution.
Gross written premiums and policy fees increased by USD 100 million to USD 12.6 billion, or by 1 percent in U.S. dollar terms, but remained flat on a local currency basis. On a local currency basis, there was solid growth in the UK, Germany and in the personal lines business in Switzerland. This positive impact was offset by decreased premiums written in markets where the focus has been on improving profitability and the impact of the decision to exit the Russian retail market. Premiums also decreased in Italy as the overall personal motor market continued to decline. Overall rates increased by 2 percent in 2014.
2 Assets under management comprise Group and unit-linked investments that are included in the Global Life balance sheet plus assets that are managed by third parties, on which fees are earned.
In Other, the decrease in new business value was driven by unusual volumes of Corporate Life and Pensions business in 2013, as well as the withdrawal in 2014 from certain private banking products in Luxembourg which resulted in the increase in new business margin.
Business operating profit increased by USD 65 million to USD 190 million, primarily due to an improvement in the net underwriting result.
Business operating profit: Centrally managed businesses (124) 27 nm Other run-off (18) 46 nm Total business operating profit (142) 73 nm
Analysis by risk type 127 Insurance risk 127 Market risk 134 Credit risk 140 Operational risk 147 Liquidity risk 149 Strategic risk and risks to the Group’s reputation 152
Group’s Risk Tolerance 120-140% Consider increased risk taking or remedial actions
The directive on Solvency II was adopted on November 25, 2009. The complete framework will be introduced on January 1, 2016. Solvency II is designed to be more risk-sensitive and sophisticated in its approach than Solvency I. Solvency II capital requirements also take into account all material risks and how these interact. Under Solvency II, every insurance and reinsurance entity will be required to conduct its own risk and solvency assessment, including taking into account specific risk profiles. Under disclosure provisions, companies will have to publicly report their solvency and financial condition.
• Policyholder behavior risk – policyholders’ behavior in discontinuing and reducing contributions or withdrawing benefits prior to the maturity of contracts is worse than expected. Poor persistency rates may lead to fewer policies remaining on the books to defray future fixed expenses and therefore reduce the future positive cash flows from the business written, potentially affecting Zurich’s ability to recover deferred acquisition expenses.
Risk from interest rate and credit spread Interest rate risk is the risk of loss resulting from changes in interest rates, including changes in the shape of yield curves. The Group is exposed to interest rate risk including from debt securities, reserves for insurance contracts, liabilities for investment contracts, employee benefit plans and loans and receivables.
Analysis of economic sensitivities for equity risk Table 6 shows the estimated impacts from a 10 percent decline in stock markets, after consideration of hedges in place, as of December 31, 2014 and 2013, respectively.
Analysis of economic sensitivities for credit spread risk Table 7 shows the estimated impacts from a 100 basis points increase in corporate credit spreads, as of December 31, 2014 and 2013, respectively. The sensitivities apply to all fixed income instruments, excluding government, supranational and similar debt securities.
Credit risk is the risk associated with a loss or potential loss from counterparties failing to fulfill their financial obligations. The Group’s exposure to credit risk is derived from the following main categories of assets: • Cash and cash equivalents • Debt securities • Reinsurance assets • Mortgage loans • Other loans • Receivables • Derivatives
AUDITED Credit risk related to reinsurance assets The Group’s Corporate Reinsurance Security Committee manages the credit quality of cessions and reinsurance assets. The Group typically cedes new business to authorized reinsurers with a minimum rating of “A–.” 56 percent and 59 percent of the business ceded to reinsurers that fall below “A–” or are not rated is collateralized, as of December 31, 2014 and 2013 respectively. Of the business ceded to reinsurers that fall below “A–” or are not rated, 50 percent and 55 percent were ceded to captive insurance companies, in 2014 and 2013, respectively.
For additional information on reserves for insurance contracts, see note 8 of the consolidated financial statements.
The Group has committed to contribute capital to subsidiaries and third parties that engage in making investments in direct private equity and private equity funds. Commitments may be called by the counterparty over the term of the investment (generally three to five years) and must be funded by the Group on a timely basis. See note 23 of the consolidated financial statements.
Investments for unit-linked contracts 134,416 134,267 Total investments 339,276 341,547 Reinsurers’ share of reserves for insurance contracts 8 16,550 17,978 Deposits made under assumed reinsurance contracts 2,203 2,645 Deferred policy acquisition costs 12 17,750 18,724 Deferred origination costs 12 595 724 Accrued investment income 1 1,912 2,321 Receivables and other assets 16 16,946 18,499 Deferred tax assets 18 1,561 2,020 Assets held for sale 2 48 223 Property and equipment 14 1,273 1,494
Liabilities and equity in USD millions, as of December 31 Notes 2014 2013
General information The Consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) and comply with Swiss law. Where IFRS does not contain clear guidance governing the accounting treatment of certain transactions, including those that are specific to insurance and reinsurance products, IFRS permits reference to another comprehensive body of accounting principles that uses a similar conceptual framework. The Group’s accounting policies for insurance and reinsurance contracts are therefore based on those developed by the Group before the adoption of IFRS 4 in areas where IFRS 4 did not include specific requirements. Before the time of adoption, the Group typically applied U.S. GAAP pronouncements issued by the Financial Accounting Standards Board (FASB) on insurance and reinsurance contracts. Any subsequent changes to such pronouncements are not reflected in the Group’s accounting policies. In case of business combinations, the Group may decide to maintain the local statutory treatment if this does not distort the fair presentation of the financial position of the Group. If significant, the impact of such cases is described elsewhere in the notes to these Consolidated financial statements.
Standards, amendments and interpretations issued that are not yet effective nor yet adopted by the Group Table 2.2 shows new accounting standards or amendments to and interpretations of standards relevant to the Group, which are not yet effective and are not expected to have a material impact on the Group’s financial position or performance, unless stated otherwise. In addition to the standards and amendments listed in table 2.2 the Group will also have to incorporate amendments resulting from the IASB annual improvements project, which relate primarily to disclosure enhancements.
Policyholders’ contract deposits represent the estimated policy benefits for investment type insurance contracts invested in non unit-linked funds. This liability comprises the accumulation of premiums received, less charges, plus declared policyholder dividends.
h) Derecognition of financial assets and liabilities Financial assets are derecognized when the right to receive cash flows from the assets has expired, or when the Group has transferred the financial asset and substantially all the risks and rewards of ownership.
Fin an cial info rm atio n c) Impairment of assets Financial assets A financial asset is considered impaired if there is objective evidence of impairment as a result of one or more occurred loss events that have an impact on the estimated future cash flows of the financial asset.
Discount and perpetual growth rates for goodwill and AIF for major CGUs as of the date of valuation
Sensitivity tests have been performed on goodwill and AIF, and typically comprised of an analysis for either a decrease in cash flows of up to 30 percent, a decrease in the perpetual growth rate of up to 1.0 percentage point or an increase in the discount rate of up to 3.5 percentage points in order to capture potential future variations in market conditions. Applying the value-in-use methodology, an increase of approximately 1.1 percentage points in the discount rate or a decrease of approximately 1.2 percentage points in the perpetual growth rate of the Global Life Germany CGU would result in the recoverable amount being close to the carrying value. No such reasonably possible changes of key assumptions were identified for the remaining CGUs.
Fin an cial info rm atio n d) Deferred taxes Deferred tax assets are recognized if sufficient future taxable income, including income from the reversal of existing taxable temporary differences and available tax planning strategies, is available for realization. The utilization of deferred tax assets arising from temporary differences depends on the generation of sufficient taxable profits in the period in which the underlying asset or liability is recovered or settled. The utilization of deferred tax assets arising from unused tax losses or tax credits depends on the generation of sufficient taxable profits before the unused tax losses or tax credits expire. As of each balance sheet date, management evaluates the recoverability of deferred tax assets and if it is considered probable, that all or a portion of the deferred tax asset will not be utilized, then a valuation allowance is recognized.
Net reserves re-estimated as of December 31: Seven years later 45,353 47,668 51,497 Eight years later 45,513 47,969 Nine years later 45,771
Development of policyholders’ contract deposits and other funds in USD millions Gross Ceded Net
Intangible assets by segment – prior period in USD millions, as of December 31, 2013
Financial assets Group derivative assets 1,230 1,142 Unit-linked derivative assets 19 45 Receivables from policyholders 3,561 3,711 Receivables from insurance companies, agents and intermediaries 5,227 5,506 Receivables arising from ceded reinsurance 872 1,094 Reverse repurchase agreements 290 678 Amounts due from investment brokers 604 758 Other receivables 2,211 2,238 Allowance for impairments 1 (266) (297)
Non-financial assets Current tax receivables 737 1,084 Accrued premiums 720 731 Prepaid expenses 317 319 Prepaid insurance benefits 327 344 Other assets 401 377 Total receivables and other assets 16,946 18,499 1 December 31, 2014 and 2013 includes USD 35 million and USD 45 million, respectively, for receivables arising from ceded reinsurance. 2 December 31, 2014 and 2013 includes investments managed on a fiduciary and ring-fenced basis on behalf of Banco Santander S.A. amounting to USD 552 million and
Income tax expense – current/deferred split in USD millions, for the years ended December 31 2014 2013
Table 21.4 shows the key financial assumptions used to calculate the Group’s post-employment defined benefit obligations and the Group’s post-employment benefit expenses.
Share Incentive Plan for employees in Switzerland Under this plan, employees have the option to acquire sales-restricted shares at a 30 percent discount to the market value. The maximum permitted investment in shares is equivalent to CHF 3,500 per employee per annum. During 2014, 4,764 employees were eligible to participate in the share incentive plan, compared with 4,533 in 2013. For the years ended December 31, 2014 and 2013, 1,574 and 1,506 employees, respectively, purchased shares under the 2013 and 2012 share plans.
Indemnity agreements The Group, through certain of its subsidiaries, has agreed to arrangements that cap Converium’s (now Scor Holding (Switzerland) AG) and its successor companies’ net exposure for losses arising out of the September 11, 2001 World Trade Center event in New York. As of December 31, 2014 the Group has recorded provisions of USD 38 million, for losses in excess of USD 289 million.
Reserves for insurance contracts fair value option 2 – – (3,306) (3,306)
Non-Core Businesses include insurance and reinsurance businesses that the Group does not consider core to its operations and that are therefore mostly managed to achieve a beneficial run-off. In addition, Non-Core Businesses includes the Group’s management of property loans and banking activities. Non-core businesses are mainly situated in the U.S., Bermuda, the UK and Ireland.
Business operating profit The segment information includes the Group’s internal performance measure, business operating profit (BOP). This measure is the basis on which the Group manages all of its business units. It indicates the underlying performance of the Group’s business units, after non-controlling interests, by eliminating the impact of financial market volatility and other non-operational variables. BOP reflects adjustments for shareholders’ taxes, net capital gains/(losses) and impairments on investments (except for the capital markets and property lending/banking operations included in Non-Core Businesses, investments in hedge funds, certain securities held for specific economic hedging purposes and policyholders’ share of investment results for the life businesses) and non-operational foreign exchange movements. Significant items arising from special circumstances, including restructuring charges, charges for litigation outside the ordinary course of business, gains and losses on divestments of businesses, impairments of goodwill and the change n estimates of earn-out liabilities (with the exception of experience adjustments, which remain in BOP) are also excluded from BOP.
Net written premiums and policy fees 30,859 30,479 13,919 13,223 3,428 4,045 (2) 54 475 502 – – 48,680 48,303 Net change in reserves for unearned premiums (837) (710) (53) (371) 528 54 – – 3 1 – – (359) (1,025)
Italy Zurich Investments Life S.p.A. Milan Global Life 100 100 EUR 164.0 Luxembourg Zurich Eurolife S.A. Bertrange Global Life 100 100 EUR 16.5 Malaysia
Other Operating Businesses. 4 The results of the operating activities are included in the Global Life segment, whereas the headquarter’s activities are included in Other Operating Businesses. 5 The ownership percentages in Farmers Group, Inc. and its fully owned subsidiaries have been calculated based on the participation rights of Zurich Insurance Group in a situation of liquidation, dissolution or winding up of Farmers Group, Inc.
Table 28.3 shows the summarized financial information for each subsidiary that has non-controlling interests that are material to the Group.
1 APE is measured as new annual premiums plus 10 percent of new single premiums. 2 PVNBP is measured as new single premiums plus the present value of new annual premiums. 3 Premiums, APE and PVNBP are reported gross of non-controlling interests. 4 New business value and new business margin are reported net of non-controlling interests.
(% SM) 1 Free surplus Free surplus of which: Asia-Pacific and Middle East 1,240 947 139% 292 334 1 SM is the shareholder portion of the local minimum solvency margin.
Other non-operating variances increased embedded value by USD 166 million, mainly driven by positive impacts in North America as a result of an updated change to the internal capital model, and from FX in the Isle of Man, partially offset in Italy by the impact on guaranteed costs of higher equities.
Fin an cial info rm atio n 7. Dividends, injections and other movements
Goodwill (0.3) Deferred policy acquisition costs and deferred origination costs (14.2) Other intangibles and present value of future profits (3.6) Deferred front-end fees 5.5
Embedded value results Global Life, by region in USD millions, for the years ended December 31 North America Latin America of which Zurich Santander Europe Asia-Pacific and Middle East Other Global Life
Embedded value results Europe in USD millions, for the years ended December 31 Europe
Expected contribution from in-force 61 61 106 54 149 139 31 19 39 66 19 20 19 32
Income statements 293 Balance sheets 294 Notes to the financial statements 295 Proposed appropriation of available earnings and capital contribution reserve 300 Report of the statutory auditor 302
3. Interest income Interest income is earned mainly on the Company’s subordinated loan of CHF 4,832 million with its subsidiary Zurich Insurance Company Ltd.
Embedded value (EV) principles is a methodology using a “bottom-up” market consistent approach, which explicitly allows for market risk. In particular, asset and liability cash flows are valued using risk discount rates consistent with those applied to similar cash flows in the capital markets. A liquidity premium, which increases risk discount rates, has been applied to certain lines of business consistent with the CFO Forum principles. Options and guarantees are valued using market consistent models calibrated to observable market prices.
Zurich Insurance Group Mythenquai 2 8002 Zurich, Switzerland Phone +41 (0) 44 625 25 25 www.zurich.com 48559–1502