We are a leader in sustainability and implemented measures to be a more sustainable business, recognized through our ranking in the top percentile of industry peers in the Dow Jones Sustainability Index. Our focus includes climate change, which affects all of us, including our customers and the communities in which we live and work.
To learn more about how our employees are making a difference at Zurich, see page 17
We have successfully simplified our business and operations, to make better use of our resources.
We cut the number of data centers from over 70 to 13 and the number of network providers from over 140 to one; and we reduced the number of IT applications by about 20 percent.
Und er w rit e an d m an ag e ri sk
More on page 20 More on page 22 More on page 24 More on page 26
Manage claims In 2019, we paid out more than USD 24 billion in claims. To ensure that we provide a positive experience to customers who do business with us, we are systematically listening to customers through our Net Promoter System (NPS), not only as part of our claims process but throughout all customer touchpoints.
9.9 m In 2019, our Property & Casualty and Life businesses handled 9.9 million claims on behalf of our customers.
Providing leadership on global warming In 2019 we signed up as the first insurer to the ‘Business Ambition for 1.5°C Pledge,’ which requires companies to set sciencebased targets aligned with limiting global temperature rise to 1.5 degrees Celsius (2.7 degrees Fahrenheit) above pre-industrial levels. We also have joined the UN’s NetZero Asset Owner Alliance as a founding member, committing to a zero-emissions portfolio of investments by 2050.
Disengaging and divesting from thermal coal, oil sands and oil shale Fossil fuels emit carbon dioxide (CO2) when burned and extracting them can harm the environment. We are working with customers and companies in which we invest that have more than 30 percent exposure to thermal coal, oil sands and oil shales to help them to reduce their use and exposure to these fuels. Zurich will also generally no longer underwrite or invest in companies generating more than 30 percent of their revenue from mining or more than 30 percent of their electricity from thermal coal.
Investing for the future Our impact investment portfolio grew from USD 3.8 billion in 2018 to USD 4.6 billion in 2019, helping to avoid 2.8 million tons of CO2-equivalent emissions, and improve the lives of 4.2 million people annually. Green bonds in the impact portfolio, the largest single category, exceed USD 3 billion. Other asset classes are social and sustainability bonds. We have also invested in seven private equity funds active in areas like financial inclusion to give as many people as possible access to financial products and services, and clean technology. We are also financing impact infrastructure via our private debt portfolio, such as wind and solar farms.
AR 48 102-25 Conflicts of interest AR 54 and 74 to 78 102-26 Role of highest governance body in setting purpose, values, and strategy
102-35 Remuneration policies AR 97 to 100 102-36 Process for determining remuneration
CDP CDP submission 2019 Link to Zurich Insurance Group website * The Sustainability Highlights 2019 report includes the United Nations Global Compact communication on progress and our progress in implementing the UN Environment Programme Finance Initiative Principles for Sustainable Insurance. For more information see www.zurich.com/en/sustainability
The shares of Zurich Insurance Group Ltd are listed on the SIX Swiss Exchange. Certain Group companies have listed debt issued under its Euro Medium Term Note Programme and other financial instruments.
Amanda Blanc, CEO EMEA and Bank Distribution (as of July 2, 2019)
External appointments Ms. Bessant is on the advisory board of the Ross School of Business at the University of Michigan and a member of the President’s Council of Advisors on Science and Technology in the U.S. She previously served 16 years on the board of directors of Florida Blue, formerly Blue Cross Blue Shield of Florida, including serving as lead independent director.
Based on the recommendation of the Governance, Nominations and Sustainability Committee the Board determined that, as of February 12, 2020, the Board consisted entirely of Directors who were non-executive, independent from the management and who – except for Ms. Mächler – had never held an executive position in the Group. Ms. Mächler held an executive position until 2006 and was elected in 2013 as a non-executive Board member. According to the guidelines of the Swiss Code of Best Practice, she is considered independent. For further information on the Group’s independence policy, please see art. 16.6 of the Annex to the Organizational Rules (www.zurich.com/en/about-us/corporategovernance /corporate-documents).
In 2019, average attendance at Board meetings was 94.21 percent. In fulfillment of their duties, the members of the Board spent additional time participating in Board committee meetings and preparing for meetings.
Activities 2019: During 2019, the following topics were in particular focus in the Committee’s discussions: 33 succession of Board members 33 Board committee composition and succession 33 ExCo succession 33 review of corporate governance documents and recommendation of changes to the Board implementation of sustainability goals and initiatives, such as work sustainability, climate change and confidence in a digital society, with regular updates 33 developments affecting corporate governance, including changes to Swiss and international laws and regulations.
• oversee the Group’s investment process 33 In particular, the responsibilities of Risk and Investment Committee include: • Risk tolerance and risk governance framework: – overseeing the Group’s risk tolerance, including agreed limits that the Board regards as acceptable for Zurich, the aggregation of agreed limits across the Group, the measurement of adherence to agreed risk limits and the Group’s risk tolerance in relation to anticipated capital levels
• reviewing and proposing to the Board for approval the Group ORSA report as well as the Group Recovery Plan 33 Investments: • overseeing the investment process
The Disclosure Committee, chaired by the Head of Group Financial Accounting and Reporting (FAR), is responsible for reviewing all external communications and disclosures that contain information material to the financial position and/or performance of the Group. In particular, it reviews half-year and year-end IFRS financial results as well as the updates for the first three and nine months of the Group and related documents, e.g., related news releases and analysts’ information. It reviews other external communications that contain material information as to the financial position and performance of the Group, proposals from Group Compliance regarding projects that have an impact on the Group and respective dealing restrictions as well as controls and procedures regarding the effectiveness of the Group’s internal controls over financial reporting. It makes recommendations to the Group CFO.
Skills and experience Kathleen Savio is Chief Executive Officer for Zurich North America, a position she has held since January 2018. She became a member of the Executive Committee in October 2017. She has more than 25 years of experience working across several disciplines at Zurich. From 2012 through 2017, she served as Zurich North America’s Head of Alternative Markets, which delivers products and services to customers through multiple distribution channels, including direct, program administrators, crop agents, captive consultants and brokers. Prior to that appointment, Ms. Savio held the position of Chief Administrative Officer for North America Commercial. Before assuming that role, she led Corporate Marketing and Communications for North America Commercial, as well as Strategic Initiatives for Marketing and Distribution. She also has held roles in product underwriting and corporate marketing and within key business units. She joined Zurich in 1991.
External Audit 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.
Zurich Insurance Group Ltd may under certain circumstances authorize the beneficial owners of shares that are legally held by professional persons as nominees (such as a trust company, bank, professional asset manager, clearing organization, investment fund or another entity recognized by Zurich Insurance Group Ltd) to attend shareholders’ meetings and exercise votes as proxy of the relevant nominee. For further details, see page 87 of this report.
Registrations in the share register With a view to ensuring an orderly process, the Board determines the date on which a shareholder needs to be registered in the share register in order to exercise their 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.
Financial inclusion 4 Insurance protection: Blue Marble Microinsurance 2 Latin America/
Renewable energy 14 Construction insurance US/South Africa/Israel 15 Construction insurance Italy/Germany/Switzerland 16 Zurich4Power Italy 17 Zurich SOLARplus Germany 18 Renewable Energy Generating Equipment Insurance
33 ambitious impact targets through which we aim to help make 2 million people more resilient to flooding and to support generation of USD 1 billion in additional funding to flood resilience by 2023 33 the award-winning post-event review capability (PERC) – comprising research and independent reviews of large flood events to identify best practices and opportunities based on understanding how a hazard event becomes a disaster and how resilience might be achieved.
Each performance criteria has an equal weighting and no discretionary adjustment has been made to the calculated vesting level. Based on the achievements under the predefined performance criteria, the calculated vesting level is higher compared with the vesting level in 2019.
33 Swiss Code of Best Practice for Corporate Governance (Swiss Code of Best Practice), issued in 2002 by economiesuisse, as amended in October 2007 and in August 2014.
1 No new shares were issued during 2019 and only a relatively small number of shares were issued in 2018 as the LTIP and other employee share plans continued to be funded predominantly by shares bought back from the market, as well as by treasury-owned shares. Moving forward, Zurich intends to continue purchasing shares on the market instead of issuing new shares to fund the LTIP and other employee share plans.
33 The Group’s STIP and LTIP, used for variable remuneration, are linked to appropriate performance criteria and the overall expenditure on variable pay is considered in connection with the Group’s long-term economic performance.
Key financial and customer metrics, where relevant, determine the STIP pool achievement level.
Details of the LTIP relevant for the 2020 vesting decision following the performance period from 2017–2019, can be found in the remuneration report 2017. For the next performance period, 2020–2022, an overview of the updates to the LTIP vesting grid reflecting the targets for the next strategic cycle, can be found in the outlook section of this report.
Each participant has an annual LTIP target amount determined as a percentage of the annual base salary. The number of target shares to be allocated on the third working day in April, is calculated by dividing the target amount by the closing share price on the day prior to the allocation. To further align plan participants with the interests of shareholders, target shares may be credited with dividend equivalent units (DEUs)1 during the vesting period.
The committees on which the Directors serve are set out in the corporate governance report on page 48. In 2019, the Board consisted entirely of non-executive Directors independent from management.
None of the members of the ExCo received any remuneration from the Group or from any of the Group’s companies in 2019 or 2018 other than as set out in the tables above.
Market risk The Group’s market risk portfolio remained well diversified across risk drivers and geographies in 2019. Interest-rate risk has increased, driven by falling interest rates, mainly in our German Life business.
Operational risk Our frameworks support the identification, assessment, management, monitoring and reporting of operational risk within the Group.
The Group regularly reports on its risk profile at local and Group levels. The Group has procedures to refer risk topics to senior management and the Board of Directors in a timely way. To foster transparency about risk, the Board receives quarterly risk reports and risk updates. In 2019, reporting was supplemented with in-depth risk insights into topics such as information security management, accumulation risk, long-tail Life risk, credit risk and country risk.
As of December 31, 2019, shareholders’ equity of USD 35.0 billion, subordinated debt of USD 6.9 billion and senior financial debt of USD 3.2 billion, excluding net new issued senior debt since the second quarter of 2018, were part of the capital available in the Group’s economic framework. Further adjustments usually include items such as intangible assets, deferred tax assets and liabilities, allowing for discounting of liabilities and the value of in-force business, or inclusion of market value margin and expected profit over the next 12 months. For more information, see analysis of the ‘Group’s Z-ECM available financial resources’ (unaudited).
The Group’s capital management program comprises various actions to optimize shareholders’ total return and to meet capital needs, while enabling Zurich to take advantage of growth opportunities. Such actions include paying and receiving dividends, capital repayments, share buy-backs, issuance of shares, issuance of senior and hybrid debt, securitization and purchase of reinsurance.
The total allocated capital as of July 1, 2019 equaled USD 34.6 billion. As of July 1, 2019 the largest proportions of Z-ECM capital required were allocated to Life with 49 percent and Property and Casualty with 43 percent of the total. The following chart shows the Z-ECM capital required allocated to the businesses as of July 1, 2019 and January 1, 2019.
Regulatory requirements in Switzerland Under the Swiss Solvency Test (SST), insurance companies and insurance groups can apply to use company-specific internal models to calculate risk-bearing and target capital, as well as the SST ratio. The SST ratio has to be calculated as per January 1 and must be submitted to the Swiss Financial Market Supervisory Authority (FINMA). Zurich filed with FINMA an SST ratio of 221 percent (unaudited) as of January 1, 2019.
In 2019, Zurich continued to enhance its internal model, completed the approval process with FINMA, and received approval for the outstanding modules of its internal model. Accordingly, the Group’s SST Internal Model is now fully approved.
Property and casualty insurance risk Property and casualty insurance risk arises from coverage provided for motor, property, liability, special lines and worker injury. It comprises premium and reserve risk, catastrophe risk, and business risk. Premium and reserve risk covers uncertainties in the frequency of the occurrence of the insured events as well as in the severity of the resulting claims. Catastrophe risk predominantly relates to uncertainty around natural catastrophes. Business risk for property and casualty predominantly relates to unexpected increases in the expenses relating to claims handling, underwriting, and administration.
Zurich’s emerging risk group, with cross-functional expertise from core insurance functions such as underwriting, claims and risk management, identifies, assesses and recommends actions for emerging risks.
Tables 1.a and 1.b show the Group’s concentration of risk within the P&C business by region and line of business based on direct written premiums before reinsurance. P&C premiums ceded to reinsurers (including retrocessions) amounted to USD 7.8 billion and USD 7.0 billion for the years ended December 31, 2019 and 2018, respectively. Reinsurance programs are managed on a global basis, and therefore, the net premium after reinsurance is monitored on an aggregated basis.
On local balance sheets a currency mismatch may cause a balance sheet’s net asset value to fluctuate, either through income or directly through equity. The Group manages this risk by matching foreign currency positions on local balance sheets within prescribed limits. Residual local mismatches are reported centrally to make use of the netting effect across the Group. Zurich hedges these residual local mismatches within an established limit through a central balance sheet. For information on net gains/losses on foreign currency transactions included in the consolidated income statements, see note 1 of the consolidated financial statements. The monetary currency risk exposure on local balance sheets is considered immaterial.
The Group promotes risk awareness and understanding of controls through communication and training. Risk management and internal control systems are designed at Group level and implemented Group-wide.
This is a three step process: 33 Issue identification: identify relevant issues, by monitoring channels such as media and social media, as well as information from non-government organizations (NGOs), Zurich’s businesses, and identify issues to be taken up within the risk assessment process.
Over the short term, natural climate variability will have a greater impact on natural catastrophe losses than long-term climate-change trends. Regional variations will be large, however, areas that are particularly exposed are likely to experience such changes earlier. To accommodate the evolving nature of climate risk, Zurich considers both near-term (three to five year) and long-term (five to 10 year) time horizons, with the long-term view used as a basis to develop mitigating actions. Overall the Group considers its near-term (less than five years) climate-change-related risks to be manageable and foreseeable, whereas long-term risks to be elevated and highly uncertain.
Achieving a transition to a low-carbon economy requires fundamental changes to all parts of the economy. While limiting climate change to 2°C or below will lower physical climate risk, the technological and policy changes required to achieve this create their own sets of risks. Independent of the precise pathway, the transition could be disruptive, as significant asset price moves are required to shift resources to low-carbon technology on a global scale. Changes in public perception and the regulatory landscape could reshape legal and reputational risks. Transition risks are considered to be more uncertain than physical risks. Zurich uses a climate scorecard to measure transition-risk-related indicators, with Zurich’s assessment indicating that a physical risk path currently is significantly more likely than a transition path. However, transition risks and physical risks are not mutually exclusive and can potentially co-exist, depending on the timing, speed and effectiveness of the path followed.
2 Full year 2019 Z-ECM reflects midpoint estimate with an error margin of +/–5 percentage points.
Well positioned for the future Together with the Group’s customer-focused strategy and simplified operating model, the results position the Group well to take advantage of ongoing changes within the global insurance industry and to deliver further value to shareholders.
The information contained within the financial review is unaudited and is based on the consolidated results of the Group for the years ended December 31, 2019 and 2018. 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 2019 of the Group and in particular with its consolidated financial statements and embedded value report for the year ended December 31, 2019.
In May 2019 the Group completed the acquisition of 100 percent of the Australian life and consumer credit insurance business (OnePath Life and OnePath General Insurance) of Australia and New Zealand Banking Group Limited (ANZ) for USD 1.4 billion, making Zurich one of the largest Life insurance players in Australia. As part of the transaction, Zurich will enter into a 20-year strategic alliance agreement with ANZ in Australia to distribute life insurance products through ANZ bank channels.
Focus on portfolio quality and investment discipline We aim to generate superior risk-adjusted investment returns relative to liabilities. To achieve this, disciplined risk-taking and a focus on portfolio quality are key imperatives. Zurich’s fixed income portfolio remains of a very high quality with investment-grade securities making up 95 percent of the total. Our credit portfolio is well-diversified across investment segments and issuers: more than 93 percent of this portfolio consists of investment grade securities and 61 percent of the portfolio has a credit rating of at least ‘A.’
We are disciplined in growing our private debt portfolio by, for instance, investing in well-diversified senior corporate loans, AAA-rated tranches of collateralized loan obligations, and infrastructure debt investments. In 2019 our allocation to this asset class comprised slightly more than 5 percent of Zurich’s total investment portfolio. Our high-quality real estate portfolio expanded to USD 14.8 billion 2 and now constitutes 7.2 percent of our investment assets.
Consolidated statements of changes in equity 186 1. Basis of presentation 188 2. New accounting standards and amendments to published accounting standards 190 3. Summary of significant accounting policies 194 4. Critical accounting judgments and estimates 201 5. Acquisitions and divestments 205 6. Group investments 208 7. Group derivative financial instruments and hedge accounting 211 8. Liabilities for insurance contracts and reinsurers’ share of liabilities for insurance contracts 215 9. Liabilities for investment contracts 221 10. Gross and ceded insurance revenues and expenses 223 11. Deferred policy acquisition costs and deferred origination costs 224 13. Property and equipment 226 14. Attorney-in-fact contracts, goodwill and other intangible assets 229 15. Receivables and other assets 231 16. Other liabilities 232 17. Income taxes 234 18. Senior and subordinated debt 237 19. Shareholders’ equity, dividends and earnings per share 239 20. Employee benefits 242 21. Share-based compensation and cash incentive plans 250 22. Commitments and contingencies, legal proceedings and regulatory investigations 252 23. Fair value measurement 255 24. Analysis of financial assets 263 25. Related-party transactions 267 26. Relationship with the Farmers Exchanges 268 27. Segment information 270 28. Interest in subsidiaries 285 29. Events after the balance sheet date 289
Cash flows from investing activities Additions to tangible and intangible assets (752) (1,152) Disposals of tangible and intangible assets 114 292 (Acquisitions)/disposals of equity method accounted investments, net (5) (17) Acquisitions of companies, net of cash acquired (1,672) (465) Divestments of companies, net of cash divested 108 (13) Dividends from equity method accounted investments 1 1 Net cash provided by/(used in) investing activities (2,206) (1,352) Cash flows from financing activities Dividends paid (3,036) (3,015) Issuance of share capital – 2 Net movement in treasury shares (101) (957) Issuance of debt 1,398 3,079 Repayment of debt (1,367) (1,566) Lease principal repayments (196) – Net cash provided by/(used in) financing activities (3,302) (2,457) Foreign currency translation effects on cash and cash equivalents 41 (319) Change in cash and cash equivalents (583) 260 Cash and cash equivalents as of January 1 9,110 8,850 Total cash and cash equivalents as of December 31 8,527 9,110 of which: Cash and cash equivalents 7,880 8,649 of which: Unit-linked 647 461
Balance as of January 1, 2019 after the adoption of IFRS 16 and IAS 29 11 1,180 649 363 (9,561) 211 37,256 30,109 1,626 31,735 Issuance of share capital – – – – – – – – – –
j) Employee benefits Share-based compensation and cash incentive plans The Group operates long-term incentive plans that are accounted for as equity-settled share-based compensation plans. The fair value of these incentive plans is determined at the grant date and is recognized as an expense in income over the vesting period, with a corresponding increase recorded in additional paid-in capital.
Table 5.2 shows the main balance sheet line items, including post-acquisition adjustments, representing the fair value of acquired QBE Latin America’s net tangible assets, intangible assets and goodwill, based on purchase price accounting.
Securities lending agreements Securities lent under securities lending agreements 1 156 599 Collateral received for securities lending 190 676 of which: Cash collateral 56 47 of which: Non-cash collateral 2 134 629 Liabilities for cash collateral received for securities lending 56 47 Repurchase agreements Securities sold under repurchase agreements 3 978 1,318 Obligations to repurchase securities 977 1,316 Reverse repurchase agreements Securities purchased under reverse repurchase agreements 4 57 48 Receivables under reverse repurchase agreements 56 47 1 The Group’s counterparties had the right to sell or repledge, in the absence of default, assets pledged as collateral with a fair value of USD 150 million and USD 599 million as of December 31, 2019 and 2018, respectively. The majority of these assets were debt securities.
Credit default swaps – – – – – – 4,000 – (31) Total credit contracts – – – – – – 4,000 – (31) Other contracts: OTC
Equity contracts Equity contracts are entered into, either on a portfolio or on a macro level, to protect the fair value of equity investments against a decline in equity market prices or to manage the risk return profile of equity exposures. The majority of positions are for economic hedging purposes. Short positions are always covered and sometimes used to mitigate hedging costs.
Foreign exchange contracts Swaps and forward contracts are used to hedge the Group’s foreign currency exposures and to manage balance sheet mismatches.
Credit contracts Credit contracts are credit default swaps entered into either on a portfolio or on a macro level to limit market risks arising from the investment portfolios against a change in credit spreads or to manage the risk return profile of the credit exposures.
Net reserves for losses and loss adjustment expenses for asbestos amounted to USD 123 million and USD 384 million for the years ended December 31, 2019 and 2018, respectively.
The right-of-use asset is measured at cost less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of the lease liability. The right-of-use asset is depreciated over the shorter of the leased asset’s useful life or the lease term on a straight-line basis.
As of January 1 258 269 Provisions made during the period 53 191 Increase of provisions set up in prior years 65 45 Provisions used during the period (192) (226) Provisions reversed during the period (8) (13) Foreign currency translation effects – (8) Other changes 1 (69) – As of December 31 106 258 1 Other changes relate to the adjustment of right-of-use assets following the implementation of IFRS 16 ’Leases.’
Development of deferred income taxes included in equity in USD millions 2019 2018
U.S. pension plans There are two major pension plans in the U.S., the Zurich North America (ZNA) plan and the Farmers Group, Inc. (FGI) pension plan. Both plans are funded entirely by the participating employers. The ZNA plan is a cash balance and the FGI pension plan utilizes a cash balance pension formula for benefits accruing after January 1, 2009, except with respect to certain grandfathered participants who retained a final average pay formula. Under a cash balance pension formula, an amount is credited to the cash balance account each quarter, determined by an employee’s age, service and their level of earnings up to and above the social security taxable wage base. The minimum annual interest credited on the account balance is 5 percent. The cash balance account is available from age 65, or age 55 with five years of service. The benefit can be taken as a monthly annuity or as a lump sum. Both the ZNA plan and the FGI pension plan have fiduciaries as required under local pension laws. The fiduciaries are responsible for the governance of the plans. Actuarial valuations are completed regularly. The annual employer minimum required contributions are equal to the present value of benefits accrued each year, plus a rolling amortization of any prior underfunding.
Net post-employment benefit (expense)/income: Current service cost (252) – – (252) Interest (expense)/income (429) 350 – (78) Settlements gains/(losses) 169 (149) – 20 Past service (cost)/credit (28) – – (28)
b) Defined contribution pension plans Certain of the Group’s companies sponsor defined contribution pension plans. Eligibility for participation in such plans is either immediate on commencement of employment or based on completion of a specified period of continuous service. The plans provide for voluntary contributions by employees and contributions by the employer which typically range from 2 percent to 12 percent of annual pensionable salary, depending on a number of factors. The Group’s contributions under these plans amounted to USD 283 million and USD 184 million for the years ended December 31, 2019 and 2018, respectively.
Target shares allocated in 2019 will vest after a period of three years following the year of allocation (three year cliff vesting), with the actual level of vesting between 0 percent and 200 percent of the target shares allocated, depending on the achievement of pre-defined performance criteria. The performance criteria used to determine the level of vesting are the Group’s return on shareholders’ equity (ROE), the position of its relative total shareholder return (TSR) measured against an international peer group of insurance companies, and the achievement of cash remittance targets. The three pre-defined performance criteria are each assessed over a period of three consecutive financial years starting in the year of allocation and have an equal weighting. One half of the shares that actually vest are salesrestricted for a further three years for members of the Executive Committee. To further align the participants with the interests of the shareholders, effective from January 1, 2014, the target shares are credited with dividend equivalent shares during the vesting period to compensate participants in LTIP for dividends paid to shareholders. As of December 31, 2019 and 2018 there were 1,133 and 1,031 participants in this plan, respectively.
Legal, compliance and regulatory developments In recent years there has been an increase in the number of legislative initiatives that require information gathering and tax reporting regarding the Group’s customers and their contracts, including the U.S. Foreign Account Tax Compliance Act (FATCA) and the expected introduction of other automatic tax information exchange regimes based on the Common Reporting Standard (CRS). The Group’s compliance activities in this area could result in higher compliance costs, remedial actions and other related expenses for its life insurance, savings and pension business. There has also been increased scrutiny by various tax and law enforcement officials regarding cross-border business activities, including in particular by U.S. government authorities looking into activities of U.S. taxpayers with investments held outside the U.S. and activities of non-U.S. financial institutions that hold such investments.
33 Reinsurers’ share of liabilities and liabilities for insurance contracts fair value option. The fair values are determined using discounted cash flow models. The discount factors used are based on derived rates for LIBOR swap forwards, spreads to U.S. Treasuries and spreads to U.S. corporate A or higher rated bond segments for financials, industrials and utilities. The liability-projected cash flows use contractual information for premiums, benefits and agent commissions, administrative expenses under third party administrative service agreements and best estimate parameters for policy decrements. The primary unobservable inputs are the policy decrement assumptions used in projecting cash flows. These include disability claim parameters for incidence and termination (whether for recovery or death) and lapse rates. Significant increases/(decreases) in claim incidence rates and significant decreases/ (increases) in claim termination rates would result in a significantly higher/(lower) fair value measurement.
For the year ended December 31, 2019, the Group transferred USD 619 million of available-for-sale debt securities out of level 3 into level 2 and USD 34 million out of level 2 into level 3. The transfers were mainly driven by a pricing provider change for a significant portfolio of syndicated loans receiving market quotes on a regular basis as a result of orderly market transactions and a rating upgrading of none-agency asset backed securities to ‘AAA.’
Development of assets and liabilities classified within level 3 – non-unitlinked – prior period in USD millions Available-for-sale securities
Realized gains/(losses) recognized in income 1 4 – (55) Unrealized gains/(losses) recognized in income 1 61 – 20
2 Include a reduction of USD 293 million compared to 2018, due to a reassessment resulting in those assets not being classified as SPPI.
Net investment income on Group investments 1,961 1,932 2,915 3,035 204 213 196 198 197 222 (174) (212) 5,298 5,387 Net capital gains/(losses) and impairments on Group investments 211 (48) 906 338 3 (1) – – 128 (109) – – 1,248 181
of which: inter-business revenues (601) (141) (195) (141) (39) (51) (261) (282) 473 (21) 623 636 – – Benefits, losses and expenses
Centre Group Holdings (U.S.) Limited Wilmington, DE 100 100 USD 0.00001 ZCM (U.S.) Limited Wilmington, DE 100 100 USD 0.00001 Zurich Capital Markets Inc. Wilmington, DE 100 100 USD 0.00001 Zurich Structured Finance, Inc. Wilmington, DE 100 100 USD 0.012 1 Entities 100% owned by a ZIG subsidiary which is 51% owned by ZIG.
– Involving our actuarial experts to independently test management’s property and casualty loss reserve studies and evaluate the reasonableness of the methodology and assumptions used against recognized actuarial practices and industry standards.
– Engaging our internal valuation experts to assist in the testing of key assumptions and inputs.
Business operating profit (after-tax) return on shareholders’ equity (BOPAT ROE) indicates the level of BOP relative to resources provided by shareholders. It is calculated as BOP, annualized on a linear basis and adjusted for taxes, divided by the average value of shareholders’ equity, adjusted for net unrealized gains/ (losses) on available-for-sale investments and cash flow hedges, using the value at the beginning and end of each quarter within the period. The average shareholders’ equity for each quarter is then added together and divided by the number of quarters. If the dividend is approved at the Annual General Meeting within the first ten working days in April, then the dividend is deducted from the second quarter opening shareholders’ equity. Please refer to the ‘supplementary information (unaudited)/ROE, EPS and BVPS’ for further information.