2017 also saw Zurich complete a number of acquisitions. These will expand our service offering across an even broader range of segments. They include the planned purchase of ANZ’s Australian life insurance arm OnePath Life, pending regulatory approval. This will see Zurich become the largest retail life insurer in Australia, protecting 1.5 million Australians, while retaining our focus on capital-light protection and unit-linked business. It includes a 20-year distribution agreement with ANZ in Australia to distribute life insurance products through its bank channels.
We are in the midst of a revolution affecting every aspect of our business. New competitors are entering the market, digital technology is reshaping how we do even the simplest tasks, and technological advances hold potential for innovative new service offerings.
Creating sustainable value We aim to create sustainable value for all our stakeholders: our customers, employees, shareholders and the communities in which we live and work.
An early mover in insuring electric cars Zurich was one of the first companies to introduce electric vehicle insurance in Europe, offering what we believe to be the world’s first customized ‘EV’ insurance proposition in Ireland in 2011. We were also a first-mover in providing specialist EV insurance in Germany, Spain and Austria, and an early mover in Switzerland. Zurich was also the first insurer to develop a global EV insurance initiative.
Zurich Insurance Group Annual Report 2017 Group overview Governance Risk review Financial review15
Watch video about how we are working with young tech start-ups to make the world safer for everyone: www.zurich.com/safer-lives
What Cover-More calls its ‘customer value proposition’ is really about being there when it matters.
On October 1, 2017, Alison Martin and Kathleen Savio took up the roles of Group Chief Risk Officer-Designate and CEODesignate North America, respectively and became members of the Executive Committee (ExCo). Cecilia Reyes, Group Chief Risk Officer, and Mike Foley, CEO North America, decided to step down from their roles as of January 1, 2018. To ensure a smooth transition, Cecilia Reyes and Mike Foley will retire from the ExCo as of March 1, 2018.
Catherine Bessant, elected as a new member (as of March 29, 2017)
• Property and casualty is the business through which the Group provides a variety of motor, home and commercial products and services for individuals, as well as small, mid-sized and large businesses.
Latin America 0.1 0.0 Rest of the World 4.5 12.5 1 of registered shareholders.
Changes to share capital during 2016 During 2016, a total of 202,442 shares were issued to employees out of contingent share capital. As a result, on December 31, 2016, the share capital amounted to CHF 15,060,740.60 (150,607,406 shares) and both the authorized share capital (Art. 5bis 1) and the contingent share capital (Art. 5ter 1a) amounted to CHF 1,000,000 (10,000,000 shares) and the other contingent share capital for employees (Art. 5ter 2a) amounted to CHF 68,785.30 (687,853 shares).
Convertible bonds and options Zurich Insurance Group Ltd had no public convertibles or options outstanding as of December 31, 2017. For information on employee share plans, see the audited consolidated financial statements, note 21 on pages 243 to 244.
Committee membership Governance, Nominations and Corporate Responsibility Committee (chairman), Remuneration Committee
The roles of Chairman and CEO were separate prior to December 1, 2015 and were once again separate starting March 7, 2016, when Mario Greco took over the role of Group Chief Executive Officer. For the interim period during which the Chairman of the Board, Tom de Swaan, served as Chief Executive Officer ad interim, Fred Kindle, Vice-Chairman of the Board, took on certain additional responsibilities to ensure continued good governance. The Board, except for this period, has consisted entirely of non-executive members and there is no requirement for a lead director to be appointed under the Swiss Code of Best Practice.
Size of Board and tenure The Articles of Association require that the Board shall consist of not less than seven and not more than thirteen members. According to the Group’s internal guidelines, in general, the maximum tenure of Board members may not exceed 12 years and no individual of 72 years of age or older shall be nominated or stay in office as a Director, although exceptions may be made under special circumstances.
2 Between March 29 and June 26, 2017 the Audit Committee had 5 and the Risk & Investment Committee 6 members. 3 Elected at AGM March 29, 2017. 4 Joined Committee on March 29, 2017. 5 Joined or left Committee as of June 26, 2017.
Remuneration Committee Composition and membership: Zurich Insurance Group Ltd’s Organizational Rules require the Remuneration Committee to consist of at least three independent non-executive Board members. Currently, the committee comprises Christoph Franz (Chairman), Tom de Swaan, Fred Kindle and Kishore Mahbubani.
Key tasks and responsibilities: The GRC’s main function is to review, and provide recommendations to the Group CEO on activities related to the Group’s overall risk profile, including insurance, financial markets, credit, operational and strategic risks.
External appointments Mr. Foley is a member of the Board of the American Insurance Association.
Educational background Cecilia Reyes holds a Ph.D. in finance from the London Business School, an MBA in finance from the University of Hawaii and a Bachelor of Science in management/industrial engineering from the Ateneo de Manila University.
External appointments In June 2017 Mr. Shaughnessy was appointed councilor of the British-Swiss Chamber of Commerce.
Registrations in the share register With a view to ensuring an orderly process, shortly before the AGM the Board determines the date on which a shareholder needs to be registered in the share register in order to exercise his or her participation rights by attending the shareholders’ meeting. That date is published, together with the invitation to the shareholders’ meeting, in the Swiss Official Gazette of Commerce.
Zurich Insurance Group Ltd will hold its Annual General Meeting on April 4, 2018. The meeting will be conducted in the Hallenstadion in Zurich-Oerlikon. An invitation setting out the agenda for this meeting and an explanation of the proposed resolutions is issued to shareholders at least 20 days before the meeting.
Total non-audit fees 8.9 9.3 – Tax advice 0.9 1.7 – Audit-related, including MCEV 7.0 6.9
Zurich operates a balanced and effectively managed remuneration system. The remuneration report provides details on this, as well as the link between business performance and variable pay decisions for 2017.
In determining the funding of the STIP, the Committee assessed the overall performance in light of the positive business achievements and the financial position of the Group. The assessment led to an average award under the Group STIP of 106 percent of target relative to an average award of 109 percent of target for the performance in 2016.
3 Dividend at transaction day exchange rate in 2017 and 2016, respectively.
While reviewing the remuneration structures and practices on a regular basis, the Remuneration Committee and the Board receive independent advice from the executive compensation practices at Meridian Compensation Partners LLC (Meridian) and New Bridge Street, part of Aon Corporation (Aon Hewitt). The Remuneration Committee reviews the mandates and fees, and evaluates ongoing performance. Both Meridian and New Bridge Street provide advice to the Board, with the lead consultant employed by Meridian. Meridian does not provide any other services to the Group. Although certain practice areas within Aon Hewitt – a large, international brokerage and human resources firm – undertake work for the Group from time to time, the Remuneration Committee does not consider that the independence and integrity of the advice it receives from New Bridge Street is compromised by these separate assignments.
Eligibility All employees. Country specific (more than 37,150 plan participants in 2017).
Each performance metric is assessed independently over a three-year period starting at the beginning of the calendar year when the target shares are allocated. Each metric has an equal weighting of one-third. The vesting level is defined according to the vesting grid.
Base salaries 11.3 10.0 Cash incentive awards earned for the year 14.4 12.8 Value of target performance share allocations 16.7 17.2 Service costs for pension benefits 3.2 3.5 Value of other remuneration 4 1.5 1.4 Total in USD 5 47.1 44.9 Total in CHF 5,6 46.4 44.2 in USD million, for the years ended December 31 2017 1, 2 2016 1, 3
Key risk takers The following definition and principles for Sign-on and Severance Payments apply.
Zurich Insurance Group Annual Report 2017 Group overview Governance Risk review Financial review119 Risk review
The Group assesses risks systematically and from a strategic perspective through its proprietary Total Risk Profiling™ (TRP) process, which allows Zurich to identify and evaluate the probability and severity of a risk scenario. The Group then develops, implements and monitors improvements. The TRP process is integral to how Zurich deals with change, and is particularly suited to evaluate strategic risks, as well as risks to Zurich’s reputation. At Group level, this process is ongoing, with regular reviews with senior management.
Tables 1.a and 1.b show the Group’s concentration of risk within the Property & Casualty business by region and line of business based on direct written premiums before reinsurance. Property & Casualty premiums ceded to reinsurers (including retrocessions) amounted to USD 6.5 billion and USD 7.0 billion for the years ended December 31, 2017 and 2016, respectively. Reinsurance programs are managed on a global basis, and therefore, net premium after reinsurance is monitored on an aggregated basis.
The Group has a dynamic hedging strategy to reduce the investment risk associated with the closed book of variable annuities written by its U.S. subsidiary Zurich American Life Insurance Company (ZALICO). This exposure has fallen substantially as a result of several policy buy-back programs since 2015.
To complement existing treaties, the Group purchases catastrophe reinsurance specific to life insurance for its exposure to natural and man-made catastrophes.
Group investments sensitivities The economic market risk sensitivities for the fair value for Group investments before tax as of 2017 is USD (10.7) billion (USD (10.4) billion as of 2016) for a 100-basis-point increase in interest rate. For a 100-basis-point decrease in interest rate, the sensitivity is USD 12.0 billion (USD 11.9 billion as of 2016). For a 10% decline in equity market, Group investments drop in value by USD 1.2 billion compared to USD 1.1 billion as of 2016. A 100-basis-point increase in credit spreads results in a decrease of USD 5.4 billion compared to USD 5.2 billion as of 2016.
Zurich Insurance Group Annual Report 2017 Group overview Governance Risk review Financial review145
kk Documents and reviews loss events exceeding a threshold determined per Zurich’s risk policy manuals. Remedial action is taken to avoid a recurrence of such operational loss events.
The Group aims to preserve its reputation by adhering to applicable laws and regulations, and by following the core values and principles of the Group’s code of conduct, which promotes integrity and good business practice. The Group centrally manages certain aspects of reputation risk, for example, communications, through functions with the appropriate expertise.
Climate change is perhaps the most complex risk facing society today: it is inter-generational, international and interdependent. As a global insurer, Zurich faces risks from climate change. In 2017, Zurich conducted its first Group-wide analysis of climate change-related risks and identified a set of actions to address them.
Zurich Insurance Group Annual Report 2017 Group overview Governance Risk review Financial review157 Financial review
Business operating profit after tax return on equity (BOPAT ROE) was 12.1 percent 1, 2 for the year, in line with the targeted 12 percent and growing over the 2017 – 2019 period.
In addition to the figures stated in accordance with International Financial Reporting Standards (IFRS), the Group uses business operating profit (BOP), new business metrics and other performance indicators to enhance the understanding of its results. Details of these additional measures are set out in the separately published glossary. These should be viewed as complementary to, and not as substitutes for the IFRS figures. For a reconciliation of BOP to net income attributable to shareholders (NIAS), see note 27 (table 27.4) of the audited consolidated financial statements.
These factors also drove an increase in the total liabilities for the Group to USD 387 billion from USD 350 billion in 2016.
Treasury management The Group’s balance sheet remains very strong, as demonstrated by the Zurich Insurance Company Ltd financial strength ratings with S&P and Moody’s, of AA- and Aa3 respectively, both with stable outlook. In addition, as of December 31, 2017, the Group’s estimated Z-ECM ratio increased to 132 percent, with an error margin of +/–5 percentage points.
Being a responsible taxpayer Our commitment to being a responsible corporate citizen influences both our day-to-day decisions and our long-term planning. That is why Zurich considers effective and efficient tax compliance as a key activity. We are dedicated to managing our tax affairs in a sustainable, well-governed and transparent manner.
to USD 8 billion, allowing us to lock in illiquidity premia and relative value, despite increased competition for assets.
Gross written premiums and policy fees remained broadly flat in U.S. dollar terms and on a local currency basis. Excluding businesses exited in South Africa, Morocco, Taiwan and the Middle East over the last eighteen months, gross written premiums and policy fees increased by 1 percent on a local currency basis. Growth in Latin America was mainly driven by the mass-consumer business in Brazil and motor insurance in Mexico. In Asia Pacific the acquisition of Cover-More contributed to the growth. EMEA and North America’s large commercial book showed decreases, impacted by soft market conditions. Overall, rates rose by around 2 percent in 2017.
Farmers business operating profit decreased by USD 31 million to USD 1.7 billion, or by 2 percent. Farmers Management Services business operating profit decreased by USD 64 million to USD 1.4 billion. Higher revenues from premium growth at the Farmer Exchanges 1 in 2017 partly offset a one-time USD 86 million favorable impact in 2016 from a pension curtailment gain related to changes in the Farmers pension plan. Farmers Life business operating profit increased by USD 17 million to USD 220 million, primarily due to the impact of updated actuarial assumptions to industry mortality tables, partly offset by the 2016 pension curtailment gain of USD 10 million. Farmers Re business operating profit increased by USD 15 million to USD 57 million, driven by an improved underwriting result, partially offset by lower investment income.
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.
Liabilities Liabilities for investment contracts 9 55,627 69,113 Deposits received under ceded reinsurance contracts 512 568 Deferred front-end fees 5,429 4,872 Liabilities for insurance contracts 8 261,335 239,369 Obligations to repurchase securities 1,394 1,280
Reclassification of unwind of discounted reserves for losses and loss adjustment expenses The Group has changed its presentation of the unwind of discount and changes in discount rates. As a consequence there was a shift of USD 50 million within BOP between losses and loss adjustment expenses and interest credited to policyholders and other interest (included in the non-technical result) for the period ended December 31, 2016. Prior year comparative figures have been revised accordingly.
For long duration life insurance contracts, IFRS 17 is expected to have a significant impact on actuarial modeling as granular cash flow projections and regular updates of all assumptions will be required resulting in either profit or loss volatility or affecting ‘contractual service margin,’ a separate component of the insurance liability representing unearned profits from in-force contracts. Further, IFRS 17 introduces different measurement approaches for the insurance contract liabilities reflecting a different extent of policyholder participation in investment or insurance entity performance (non-participating, indirect participating, direct participating). Due to the strong interaction between underlying assets held and the measurement of direct participating insurance contracts, the Group decided to use the option to defer the full implementation of IFRS 9 until IFRS 17 becomes effective on January 1, 2021.
IFRS 15 ‘Revenue from Contracts with Customers’ and other standards IFRS 15 ‘Revenue from Contracts with Customers’ will not have a significant impact on the Group’s financial position or performance. Other standards, amendments and interpretations shown in table 2.2 not explicitly addressed above are expected to have no or only an insignificant impact on the Group’s financial position or performance.
a) Consolidation principles The Group’s consolidated financial statements include the assets, liabilities, equity, revenues, expenses and cash flows of Zurich Insurance Group Ltd and its subsidiaries. A subsidiary is an entity that Zurich Insurance Group Ltd either directly or indirectly controls. The results of subsidiaries acquired are included in the consolidated financial statements from the date of acquisition. The results of subsidiaries that have been divested during the year are included up to the date control ceased. All intra-Group balances, profits and transactions are eliminated in full.
Derivative financial instruments that qualify for hedge accounting Derivative financial instruments are used by the Group to economically hedge risks. In limited circumstances derivative financial instruments are designated as hedging instruments for accounting purposes in: kk Fair value hedges which are hedges of the exposure to changes in the fair value of a recognized asset or liability kk Cash flow hedges, which are hedges of the exposure to variability in cash flows attributable to a particular risk either associated with a recognized asset or liability, or a highly probable forecast transaction that could affect profit or loss kk Net investment hedges, which are hedges of a net investment in a foreign operation
In addition, the Group incurred transaction-related costs of approximately USD 10 million in non-technical expenses in BOP. The majority has been incurred in 2017.
Middle East operations On June 19, 2017, the Group closed the sale of its P&C insurance operations in the Middle East to Cigna International Corporation for a sales price of approximately USD 48 million subject to a purchase price adjustment. A pre-tax gain of USD 10 million has been recorded within net gains/(losses) on divestment of businesses.
The final purchase price amounted to USD 692 million. Based on the purchase accounting, the fair value of net tangible assets acquired amounted to USD 241 million and identifiable intangible assets estimated at USD 101 million which mainly consists of the valuation of agent relationships. Residual goodwill amounted to USD 350 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.
Cash and cash equivalents 183 Reinsurers’ share of liabilities for insurance contracts 235 Receivables and other assets 1 2,131 Deferred tax assets 11 Property and equipment 12 Goodwill 350 Other intangible assets 101 Assets acquired 3,021
Loss of control On February 12, 2016, the Group entered into a forward sale agreement for its controlling interest of a UK-based distributor of the Life business, for a fixed sales price of USD 1 to be completed by March 1, 2020 at the latest. Therefore, the Group is deemed to have lost control of this business from an accounting perspective and has derecognized the assets and liabilities at their carrying amount. A USD 47 million gain has been recorded within net gains/(losses) on divestment of businesses.
As of December 31, 2017, there were no debt issuances designated as hedged items in a cash flow hedge relationship (see note 18).
A nil amount for the years ended December 31, 2017 and 2016, respectively, was recognized in net capital gains/ (losses) and impairments due to hedge ineffectiveness.
The Group has also designated certain debt issuances as hedging instruments on a non-derivative net investment hedge relationship. The notional amount of these financial instruments was USD 4.7 billion and 4.2 billion for the years ended December 31, 2017 and 2016, respectively. The net gains/(losses) deferred in OCI were USD (168) million and USD (16) million before tax for the years ended December 31, 2017 and 2016, respectively.
Development of reserves for losses and loss adjustment expenses in USD millions Gross Ceded Net
Cumulative incurred: Seven years later (2,973) (2,629) (2,107) Eight years later (2,883) (2,603) Nine years later (2,823)
Expected maturity profile for liabilities for investment contracts – prior period in USD millions, as of December 31, 2016
Amortization (charged)/ credited to other comprehensive income – – 46 (43) 13 3 59 (40)
3 Farmers New World Life Insurance Company entered into a retrospective reinsurance agreement to transfer the risk of certain annuity portfolios with effect from April 1, 2017, which resulted in deferred policy acquisition costs impairment of USD 55 million. 4 In 2017 Property & Casualty reclassified USD 4 million to assets held for sale based on agreement to sell business in the UK (see note 5). The 2016 Property & Casualty movement of USD 24 million includes USD 12 million related to the sale of businesses in South Africa and Morocco, USD 9 million reclassified to assets held for sale (see note 5) and a portfolio transfer of USD 3 million to Non-Core Businesses. The 2016 Life movement of USD 16 million related to the portfolio transfer of Zurich Life Insurance Singapore Pte Ltd to Non-Core Businesses.
As of January 1 426 506 Origination costs deferred 59 44
Administrative and other operating expenses 7,212 7,478 Other underwriting and policy acquisition costs 1 2,188 2,291 Claims handling expenses 2 1,261 1,343 Other investment expenses 3 218 134 of which: Personnel and other related costs 5,448 5,445 Amortization and impairments of intangible assets 570 416 Depreciation and impairments of property and equipment 152 174 Building and infrastructure costs 539 553 Brand and marketing expenses 344 401 Life recurring commission 431 398 Asset and other non-income taxes 38 82 IT expenses 1,394 1,439 Restructuring costs (excl. impairments) 293 309 Outsourcing and professional services 879 876 Foreign currency translation (71) (118)
Intangible assets by business – current period in USD millions, as of December 31, 2017
During the year ended December 31, 2017, the Group incurred total restructuring costs of USD 355 million, of which USD 206 million was due to net increases in restructuring provisions, affecting mainly Property & Casualty in Europe, Middle East & Africa and North America.
Other Various debt instruments – 16 Subordinated debt 6,938 7,050 Total senior and subordinated debt 10,784 11,212 1 Issued under the Group’s Euro Medium Term Note Programme (EMTN Programme).
e) Dividends The dividend of CHF 17 per share was partially paid out of the capital contribution reserve and partially out of the available earnings on April 4, 2017, as approved at the Annual General Meeting on March 29, 2017. The difference between the respective amounts of the dividend at transaction day exchange rates amounting to USD 2.6 billion and at historical exchange rates are reflected in the cumulative foreign currency translation adjustment.
Remeasurement effects included in other comprehensive income 411 582 (86) 907 Employer contributions – 513 – 513 Employer contributions paid to meet benefits directly 37 – – 37 Plan participants’ contributions (57) 57 – – Payments from the plan (incl. settlements) 734 (734) – – Foreign currency translation effects (1,578) 1,284 – (294)
Fair value of assets held in funded defined benefit pension plans in USD millions, as of December 31 2017 2016
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 55 and 75 participants in the plan as of December 31, 2017 and 2016, respectively.
Total available-for-sale securities 154,430 144,515 154,430 144,515 Fair value through profit or loss securities
Increase/(decrease) in allowance for impairments – (8) 70 Amounts written-off (47) – (49) Acquisitions and divestments – – (1) Foreign currency translation effects 2 – 8
Table 25 summarizes related-party transactions with key personnel reflected in the consolidated financial statements. Key personnel includes members of the Board of Directors of Zurich Insurance Group Ltd and Zurich Insurance Company Ltd and members of the Executive Committee.
Net investment result on Group investments 681 749 1,121 972 60 76 161 144 15 15 – 1 2,038 1,958
Losses and loss adjustment expenses, net 8,479 8,603 7,917 6,947 1,055 964 805 739 (259) 94 – – 17,997 17,346 Life insurance death and other benefits, net (1) (2) – – – – – – – – – – (1) (2)
Audit materiality The scope of our audit was influenced by our application of materiality. Our audit opinion aims to provide reasonable assurance that the consolidated financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the consolidated financial statements.
Specifically, long-tail lines of business, which often have low frequency, high severity claims settlements, are generally more difficult to project and subject to greater uncertainties than short-tail, high frequency claims. Further, not all catastrophic events can be modeled using actuarial methodologies, which increases the degree of judgment needed in estimating property and casualty loss reserves.
As of January 1 1,154,003 3,645,548 Transfer to free reserve (adjustment capital contribution reserve) (1,960) (458) Dividend payment out of capital contribution reserve (855,656) (2,537,305) Agio on share-based payment transactions 197,987 46,218 As of December 31 494,374 1,154,003 14. Reserve for treasury shares This reserve corresponds to the purchase value of all Zurich Insurance Group Ltd shares held by companies of the Zurich Insurance Group as shown in the table below. The Company itself does not hold any treasury shares.
The Board of Directors proposes to the shareholders at the Annual General Meeting on April 4, 2018, to pay a dividend of CHF 2,512 million out of available earnings and to carry forward retained earnings of CHF 13,017 million as shown in the above table.
Zurich Insurance Group Annual Report 2017 Group overview Governance Risk review Financial review
We further confirm that the proposed appropriation of available earnings complies with Swiss law and the Company’s articles of association. We recommend that the financial statements submitted to you be approved.
Source of earnings (SOE) reporting presents the key drivers of Life BOP identifying specific profit sources. This information provides the shareholders’ view of earnings, thereby the components attributable to policyholders and non-controlling interests are included in each line item and are not separately identified.
Operating and funding costs include administrative and operating expenses, interest expense on debt, depreciation and amortization of fixed assets and nonacquisition related intangible assets. Acquisition expenses include commissions and other new business expenses, as well as costs related to business combinations, including amortization of acquisition related intangible assets. The impact of deferrals is the net effect of deferral and amortization of policy acquisition and origination costs and front-end fees, which may be affected by movements in financial markets and changes in assumptions as well.