We want the contact our customers have with us to be the real differentiating factor, truly setting us apart, and building on the recent successful efforts of the Farmers Exchanges.1 1 The Farmers Exchanges are owned by their policyholders. Farmers Group, Inc., a wholly owned subsidiary of Zurich Insurance Group, provides certain non-claims administrative and management services to the Farmers Exchanges as attorney-in-fact and receives fees for its services.
We will focus on our core retail customer segments and strengthen our digital capabilities across the value chain to better address the needs of target customers. In addition, we plan to introduce and track new customer metrics to enhance our understanding of their needs. And we will continue to focus on bank distribution and ‘affinity’ markets.
Insurers and their customers can benefit from the opportunities presented by technological advances. They also need to be mindful of risks. The examples here, taken from the Global Risks Report 2017, outline some key developments that could profoundly affect the world in future.
Space technologies Developments allowing for greater access to and exploration of space, including microsatellites, advanced telescopes, reusable rockets and integrated rocket- jet engines.
Helping businesses to find the best life and pensions solutions Zurich’s Corporate Life & Pensions (CLP) provides employee benefits solutions to domestic and multinational corporations. In 2016, CLP contributed positively to Zurich’s business operating profit, writing USD 1.8 billion annual premium equivalent (APE), equal to over 37 percent of all our life insurance APE in 2016.
“We are investing about USD 700 million over the next three years to make savings sustainable. These savings will be enabled by structural investments related to operations. Investments will be concentrated predominantly on our main markets, with particular focus on data, automation and application consolidation,” says Kristof Terryn, Group Chief Operating Officer.
We seek to ensure our investments reflect our views on sound environmental and social practices and good governance by keeping these factors in mind in our investment process. One way we do this is by meeting regularly with our asset managers to discuss the sustainability performance of our portfolios.
Working together to reduce flood risk Floods affect more people globally than any other natural hazard. Addressing the underlying problems related to floods is more efficient and cost effective than simply providing relief after floods have occurred. Zurich’s global flood resilience program takes a collaborative approach to supporting communities at risk of floods. Together with members of the Zurich flood resilience alliance, we use our in-house expertise as an insurer to help communities reduce flood risk.
Latin America 0.1 0.0 Rest of the World 4.4 13.6 1 of registered shareholders.
The current composition as of December 31, 2016 in terms of length of tenure and gender representation is as follows: Board by length of tenure %, as of December 31, 2016
External appointments She is a member of the board of Sirius XM Satellite Radio, where she chairs the audit committee. In addition, she is a member of the board and the audit committee at Booz Allen Hamilton. In January 2015, Ms. Amble was appointed to the Public Company Accounting Oversight Board’s Standing Advisory Group, which advises on the development of auditing and professional practice standards. Since October 2016, Ms. Amble has been an adviser to the Risk Committee of the Executive Committee of the U. S. affiliate of Société Générale S.A., a French multinational banking and financial services company. She is also involved in several organizations focused on the development of women in business, including chair emeritus and co-founder of W.O.M.E.N in America Inc.
Skills and experience Mr. Hayman began his career as a claims representative in the property and casualty department of Travelers Companies in the U.S. in 1983, where he later held several positions. In 1998 he joined AIG as regional vice president, personal lines at AIU Far East in Japan. Beginning in 2003, he held various leadership positions within AIG, including as chairman of AIU Insurance Company in Japan and president and CEO of AIU Far East Holdings, Japan and Korea. From 2009 to 2011, Mr. Hayman served as senior vice president and chief administrative officer, and from 2011 to 2013 as executive vice president and CEO, Global Consumer Insurance, at AIG. In 2013 he served as president of international insurance operations at Starr Companies. He then became an independent consultant and advisor. He has been a member of the boards of Zurich Insurance Group Ltd and of urich Insurance Company Ltd since March 2016.
The Group Risk Committee (GRC) Members: Group CRO (Chairperson), Group CFO, Group CIO, Group COO, Group General Counsel. The Head of Group Audit is invited ex officio, but is not a voting member. The Head of Group Compliance attends ex officio on the request of the Group General Counsel without voting right.
Skills and experience Cecilia Reyes has over 20 years’ experience in international financial markets. Ms. Reyes worked from 1990 until 1995 for Credit Suisse in Zurich in various roles in asset management, global treasury and securities trading. In 1995, she started working with ING Barings in London and in 1997 she became a director and head of quantitative risk analysis. She moved to Amsterdam in 2000 as the Head of Risk Analytics for ING Asset Management to develop risk management methods for the asset management operation. Ms. Reyes joined Zurich in 2001 as Head of Group Investments for North America and became Head of Group Investments for Europe/International Businesses in 2004. From March 2006 until March 2010 she was Head of Investment Strategy Implementation. Ms. Reyes was appointed Chief Investment Officer and member of the Executive Committee effective April 2010. In July 2015 she assumed her current role as Group Chief Risk Officer.
Dear Shareholder Following the Annual General Meeting (AGM) in March 2016, I took over the role as Chairman of the Remuneration Committee of the Board of Directors (Remuneration Committee) from Thomas Escher. I would like to take the opportunity to thank Thomas on behalf of the Committee for his leadership during his time as Chairman, Dame Alison Carnwath and Rafael del Pino for their contributions to the Remuneration Committee and welcome Fred Kindle and Kishore Mahbubani as new members.
We look forward to receiving your support for the remuneration votes at the AGM on March 29, 2017.
Individual performance assessments are calibrated across relevant populations within the pool.
LTIP performance objectives: The LTIP vesting grid has been reviewed and cash remittance has been recalibrated in order to align with the targets set out at the Investor Day in November 2016. This applies to LTIP allocations made in 2017 and thereafter. Details on the adjusted vesting grid can be found under LTIP performance objectives 2017 – 2019 cycle on page 108.
Overall remuneration architecture Remuneration Committee and Risk and Investment Committee based on proposal by the Group CEO.
kk Group CEO: vested awards at the level of five times base salary.
At year-end the key financial figures are evaluated in relation to the business plan which has been approved by the Board in the December prior to the relevant performance year. A qualitative assessment of the financial performance takes place to ensure a holistic evaluation of performance including the remuneration review by the Group CRO. The ultimate size of the STIP pools can vary between 0 percent and 175 percent of target, but typically the STIP pools vary in size in the range of 80 percent to 120 percent of target.
9 At the AGM on March 30, 2016, Jeffrey Hayman and David Nish were elected to the Board, and Rafael del Pino, Thomas Escher and Don Nicolaisen retired from the Board. Fred Kindle and Kishore Mahbubani were elected as members of the Remuneration Committee.
Elements and amounts of remuneration for the ExCo The individual remuneration elements and the corresponding amounts are described in more detail below (the amounts for the highest-paid executive and comparative figures for 2015 are also included).
The total value of pension benefits accruing to members of the ExCo during 2016, calculated on the basis of the service costs for the company as assessed under IAS 19 accounting principles, was USD 3.5 million (compared to USD 3.9 million in 2015). Service costs value the amount of the pension benefits accruing during the year and for defined contribution plans take the amount of the company contribution paid during the year.
As of December 31, 2016 and 2015, there were no loans, advances or credits outstanding for members of the ExCo.
Audited Remuneration and personal loans for former members of the ExCo Former members of the ExCo are eligible to continue their mortgage loans following retirement on similar terms to those when they were employed, in line with the terms available to employees in Switzerland. As of December 31, 2016 and 2015, no former member of the ExCo had any outstanding loans, advances or credits.
M. Greco, Group CEO 3 – – n.a. n.a. U. Angehrn, Group Chief Investment Officer 3,811 6,272 4,211 6,272 J. Dailey, CEO of Farmers Group, Inc. 7,216 9,231 7,216 12,515 R. Dickie, former Chief Operations and Technology Officer 4 n.a. n.a. 1,909 – C. Dill, CEO Latin America 10,258 – n.a. n.a. M. Foley, CEO North America 5 12,188 23,601 12,188 23,601 Y. Hausmann, Group General Counsel 4 n.a. n.a. 10,712 10,193 J. Howell, CEO Asia Pacific – – n.a. n.a. G. Quinn, Group Chief Financial Officer 12,855 – 6,623 – C. Reyes, Group Chief Risk Officer 15,421 – 15,401 21,716 J. Shea, CEO Commercial Insurance – – n.a. n.a. G. Shaughnessy, CEO EMEA 5 8,259 – n.a. n.a. K. Terryn, Group Chief Operating Officer 5 8,778 8,781 8,778 13,570 I. Welton, former Chief Human Resources Officer 4 n.a. n.a. 3,916 –
The Zurich Risk Policy is the Group’s main risk governance document; it specifies the Group’s risk tolerance, risk limits and authorities, reporting requirements, procedures to approve any exceptions and procedures for referring risk issues to senior management and the Board of Directors. Limits are specified per risk type. Ongoing assessments verify that requirements are met.
The chart below shows the development of the Group’s Z-ECM available financial resources, Z-ECM capital required and Z-ECM ratio over time. As of December 31, 2016, the Z-ECM ratio was estimated at 122%, with an error margin of +/– 5 percentage points.
The chart below shows an analysis of the composition of the Group’s Z-ECM available financial resources as of July 1, 2016.
Regulatory requirements in Asia Pacific, Latin America, and Middle East and Africa Every country has a capital standard for insurance companies. Some jurisdictions, including Japan, Mexico, Chile, and Brazil, are implementing, reviewing or will review their economic capital requirements, considering similar approaches to Solvency II.
Insurance risk is the inherent uncertainty regarding the occurrence, amount or timing of insurance liabilities. The profitability of insurance business is also susceptible to business risk in the form of unexpected changes in expenses, policyholders’ behavior, and fluctuations in new business volumes. The exposure is transferred to Zurich through the underwriting process. Zurich actively seeks to write those risks it understands and that provide a reasonable opportunity to earn an acceptable profit. Zurich manages the customer risks it assumes, and minimizes unintended underwriting risks, through such means as: kk Establishing limits for underwriting authority kk Requiring specific approvals for transactions above established limits or new products kk Using a variety of reserving and modeling methods kk Ceding insurance risk through external proportional or non-proportional reinsurance treaties and facultative single-risk placement. The Group centrally manages reinsurance treaties.
Tables 1.a and 1.b show the Group’s concentration of risk within the General Insurance business by region and line of business based on direct written premiums before reinsurance. The increase in direct written premiums and policy fees for Special lines in North America is primarily the result of Zurich’s acquisition of crop insurer Rural Community Insurance Services. General Insurance premiums ceded to reinsurers (including retrocessions) amounted to USD 7.0 billion and USD 5.6 billion for the years ended December 31, 2016 and 2015, respectively. Reinsurance programs are managed on a global basis, and therefore, net premium after reinsurance is monitored on an aggregated basis.
All cat losses exceeding USD 25 million Global aggregate cat treaty Combined global cat treaty1
– The sensitivity analysis is based on economic net assets, and not on shareholders’ equity or net income as set out in the consolidated financial statements. – The sensitivity analysis is calculated after tax; the Group effective tax rate is 30.7 percent for 2016 and 36.6 percent for 2015. – The equity market scenarios assume a concurrent movement of all stock markets. – The sensitivity analysis does not take into account actions that might be taken to mitigate losses. Actions may involve changing the asset allocation, for example through selling and buying assets.
Other loans by rating of issuer as of December 31 2016 2015
The Group limits the percentage of the investment portfolio that is not readily realizable and regularly monitors exposures to take action if necessary to maintain an appropriate level of asset liquidity. During 2016, the Group was within its limits for asset liquidity.
The information contained within the operating and financial review is unaudited and is based on the consolidated results of the Group for the years ended December 31, 2016 and 2015. All amounts are shown in U.S. dollars and rounded to the nearest million unless otherwise stated, with the consequence that the rounded amounts may not always add up to the rounded total. All ratios and variances are calculated using the underlying amounts rather than the rounded amounts. This document should be read in conjunction with the annual results 2016 of the Group and, in particular, with its consolidated financial statements and embedded value report for the year ended December 31, 2016.
Gross written premiums and policy fees 1,587 2,145 (26%) Net underwriting result (51) (26) (93%) Business operating profit 42 61 (32%) Loss ratio 71.3% 70.1% (1.2 pts) Expense ratio 32.0% 31.1% (0.9 pts) Combined ratio 103.3% 101.2% (2.2 pts)
Gross earned premiums in the Farmers Exchanges increased by USD 643 million to USD 19.5 billion, or by 3 percent.
Liabilities and equity in USD millions, as of December 31 Notes 2016 2015
Cash flows from operating activities Net income attributable to shareholders 3,211 1,842 Adjustments for: Net (gain)/loss on divestments of businesses 89 (10)
Cash and cash equivalents comprise the following: Cash at bank and in hand 5,511 7,037 Cash equivalents 2,437 2,156 1 Includes cash and cash equivalents for unit-linked contracts of USD 751 million and USD 1,034 million as of December 31, 2016 and 2015, respectively.
Premiums General insurance Premiums from the sale of short-duration general insurance products are generally recorded when written and are normally recognized as revenue in relation to the insurance coverage provided. The unearned premium reserve represents the portion of the premiums written relating to the unexpired coverage period.
The reserves for life benefits for participating traditional life insurance policies are calculated using a net level premium valuation method based on actuarial assumptions taking into account guaranteed mortality benefits and interest rates.
The time required to learn of and settle claims is an important consideration in establishing the Group’s reserves. Short-tail claims, such as those for automobile and property damage, are normally reported soon after the incident and are generally settled within months of the incident. Long-tail claims, such as bodily injury, pollution, asbestos and product liability, can take years to develop and additional time to settle. For these claims, information concerning the event, such as the required medical treatment for bodily injury claims and the required measures to clean up pollution, may not be readily available. Accordingly, the reserving analysis of long-tail lines of business is generally more difficult and subject to greater uncertainties than for short-tail claims.
Discount and perpetual growth rates for goodwill and AIF for major CGUs
The final purchase price amounted to USD 692 million. Based on the initial purchase accounting, the fair value of net tangible assets acquired amounted to USD 238 million and identifiable intangible assets estimated at USD 101 million which mainly consists of the valuation of agent relationships. Residual goodwill amounted to USD 354 million, which will be deductible for tax purposes. It represents the value of the RCIS workforce and management, the capabilities and related know-how of RCIS to participate in the federal crop insurance program and future growth opportunities. A 25 percent quota share reinsurance contract was in place between RCIS and the Group prior to completion of the transaction. The Group has assessed the fair value and the classification of assets and liabilities. Certain balances are presented net in receivables and other assets, as these balances will be settled on a net basis.
The Group uses derivative financial instruments mainly for economic hedging purposes in order to mitigate risks. Such risks result from changes in interest rates, equity prices and exchange rates. Derivative financial instruments with a positive fair value are reported in receivables and other assets (see note 15) and those with a negative fair value are reported in other liabilities (see note 16).
Development of reserves for losses and loss adjustment expenses for asbestos in USD millions 2016 2015
As a result of the acquisition of RCIS intangible assets increased by USD 454 million of which USD 354 million related to goodwill and USD 101 million to other intangible assets. As a result of the Australian Macquarie Life insurance business acquisition, goodwill and PVFP increased by USD 148 million and USD 70 million, respectively. The Group completed the acquisition of MAA Takakful Berhad, resulting in an increase of goodwill of USD 62 million and of PVFP of USD 36 million. An additional increase of goodwill of USD 13 million relates to the acquisition of Kono Insurance Limited. For further details to these acquisitions, please refer to note 5.
Financial assets Group derivative assets 968 1,120 Unit-linked derivative assets 26 7 Receivables from policyholders 3,139 3,035 Receivables from insurance companies, agents and intermediaries 4,860 4,877 Receivables arising from ceded reinsurance 1,432 926 Reverse repurchase agreements 970 193 Amounts due from investment brokers 562 328 Other receivables 2,053 1,918 Allowance for impairments1 (230) (249) Other assets 86 140 Non-financial assets Current tax receivables 640 742 Accrued premiums 826 953 Prepaid expenses 432 276 Prepaid insurance benefits 331 327 Other assets 339 337 Total receivables and other assets 16,434 14,930 1 December 31, 2016 and 2015 include USD 30 million and USD 38 million, respectively, for receivables arising from ceded reinsurance.
During the year ended December 31, 2016, restructuring programs were initiated with estimated costs of USD 257 million impacting General Insurance, Other Operating Businesses and Global Life. In addition, net adjustments were made of USD 57 million to provisions for restructuring programs initiated in prior years.
As of January 1 149 (98) Net unrealized gains/(losses) on available-for-sale investments (38) 397 Cash flow hedges (23) (15) Revaluation reserve (2) (2) Net actuarial gains/(losses) on pension plans 272 (162) Foreign currency translation effects (44) 29 As of December 31 313 149
For which deferred tax assets have not been recognized, expiring > 20 years or with no time limitation 1,247 1,310
Authorized, contingent and issued share capital a) Authorized share capital Until March 30, 2018, the Board of Zurich Insurance Group Ltd is authorized to increase the share capital by an amount not exceeding CHF 1,000,000 by issuing up to 10,000,000 fully paid registered shares with a nominal value of CHF 0.10 each. An increase in partial amounts is permitted. The Board would determine the date of issue of any such new shares, the issue price, type of payment, conditions for exercising pre-emptive rights, and the commencement of entitlement to dividends.
The pension plans typically expose the company to risks such as interest rate, price inflation, longevity and salary risks. To the extent that pension plans are funded, the assets held mitigate some of the liability risk but introduce investment risk.
Net post-employment benefit (expense)/income: Current service cost (287) – – (287) Interest (expense)/income (526) 442 – (85) Settlements gains/(losses) 3 – – 3 Past service (cost)/credit 88 – – 88
Fair value of assets held in funded defined benefit pension plans in USD millions, as of December 31 2016 2015
Maturity profile of future benefit payments for major plans as of December 31 2016 2015
While at this stage in the process, it is unclear whether the Group will have any liability related to these matters, 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.
Fair values of liabilities related to investment contracts and investment contracts with DPF are determined using discounted cash flow models. Such instruments are categorized within level 3 due to the unobservability of certain inputs used in the valuation.
Realized gains/(losses) recognized in income1 – – (4) Unrealized gains/(losses) recognized in income1 11 (1) (89)
Inter-relationship analysis of level 3 investments to changes in key assumptions – prior period as of December 31, 2015 Key assumptions Increase/decrease in reported fair value
Tables 24.2a and 24.2b show how the allowances for impairments of financial assets in tables 24.1a and 24.1b developed during the periods ended December 31, 2016 and 2015, respectively.
c) Farmers management fees and other related revenues FGI through its attorney-in-fact (AIF) contracts with the Farmers Exchanges, which are managed but not owned by Farmers Group, Inc., a wholly owned subsidiary of the Group, is permitted by policyholders to receive a management fee of up to 20 percent (up to 25 percent in the case of the Fire Insurance Exchange) of the gross premiums earned by the Farmers Exchanges.
General Insurance is managed based on market-facing businesses, including: kk Global Corporate kk North America Commercial kk Europe, Middle East & Africa (EMEA)
Losses and loss adjustment expenses, net 17,396 20,157 – – 1,085 1,588 – – 54 118 – – 18,534 21,862 Life insurance death and other benefits, net (2) (4) 11,510 8,612 – – – – 448 276 – – 11,957 8,884
kk Performed independent re-projections on selected product lines, particularly focusing on the largest and most uncertain general insurance reserves. For these product lines our actuarial specialists compared their re-projected reserves to those recorded by the Group, and sought to understand any significant differences.
Refer to Notes 3, 4 and 14 to the consolidated financial statements.
Current assets Cash and cash equivalents 337,786 1,645,111 Accrued income and prepaid expenses from subsidiaries 207,521 396 Derivatives with subsidiaries 931 170 Total current assets 546,238 1,645,677 Non-current assets Subordinated loans to subsidiaries 10 4,832,405 4,876,704 Investments in subsidiaries 11 11,368,069 11,430,069 Total non-current assets 16,200,474 16,306,773 Total assets 16,746,712 17,952,450
5. Other operating expenses Other operating expenses include directors’ fees of CHF 4.6 million and CHF 4.7 million for the years ended December 31, 2016, and December 31, 2015, respectively. Overhead expenses decreased by CHF 5.8 million to CHF 4.2 million in 2016. In addition, fees paid to the Swiss Financial Market Supervisory Authority of CHF 3.7 million and CHF 5.3 million are included for the years ended December 31, 2016, and December 31, 2015.
Management assesses whether there are any losses in the carrying value of the investments in subsidiaries. As a first step the Company compares the carrying value to the net asset value of the subsidiary as at December 31. If the net asset value is below the carrying value, then the Company may perform a valuation of the subsidiary by using a discounted cash flow analysis. If this valuation still indicates a need for a write-down, the Company reduces the carrying value of the investment in subsidiary accordingly.
On the conditional capital increase to the Board of Directors of Zurich Insurance Group Ltd, Zurich