The Group’s capital management strategy is to maximize long term shareholder value by optimizing capital allocation while managing the balance sheet at “AA” level and in accordance with regulatory, solvency and rating agency requirements. In particular, the Group endeavors to manage its capital such that the Group and all of its regulated entities are adequately capitalized in compliance with the relevant regulatory capital adequacy requirements.
Further, Zurich strives to simplify the Group’s legal entity structure in order to reduce complexity and increase fungibility of capital. The Group also wants to minimize constraints to capital fungibility by pooling risk, capital and liquidity centrally as much as possible.
The Group manages capital and solvency through an integrated and comprehensive framework. The Group Balance Sheet Committee defines the capital management strategy and sets the principles, standards and policies for the execution of the strategy. Group Treasury and Capital Management is responsible for the execution of the capital management strategy within the mandate set by the Group Balance Sheet Committee.
The Group seeks to maintain the balance between higher returns for shareholders on equity held, which may be possible with higher levels of borrowing, and the security provided by a sound capital position. The payment of dividends, share buy-backs, and issuances and redemption of debt have an important influence on capital levels. In 2013, the Group paid a dividend out of the capital contribution reserve, and replaced maturing senior debt and callable hybrid debt with new senior and hybrid debt.
Zurich Insurance Group Ltd is not subject to legal restrictions on the amount of dividends it may pay to its shareholders other than under the Swiss Code of Obligations. The Swiss Code of Obligations provides that dividends may only be paid out of freely distributable reserves or retained earnings and that 5 percent of annual retained earnings must be allocated to a general legal reserve until such reserve in the aggregate has reached 20 percent of the paid-in share capital; therefore the earnings allocated to those reserves are restricted. As of December 31, 2013, the amount of the general legal reserve exceeded 20 percent of the paid-in share capital of the Group. Similarly, company laws in many countries in which the Group’s subsidiaries operate may restrict the amount of dividends payable by those subsidiaries to their parent companies.
Insurance Financial Strength Rating The Group maintains interactive relationships with three global rating agencies: Standard & Poor’s, Moody’s and A.M. Best. The Insurance Financial Strength Rating (IFSR) of the Group’s main operating entity is an important element of Zurich’s competitive position. Moreover, the Group’s credit ratings derived from the financial strength ratings affect the cost of capital.
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 and South Africa, have started to review their economical capital requirements, considering similar approaches to Solvency II.
Solvency I requirements at Group level The Group continues to be subject to Solvency I requirements based on the Swiss Insurance Supervisory Law. Table 22 sets out the Solvency I position as drafted for filing with the Swiss regulator for 2013 and a restated position for 2012. See Note 1 of the Consolidated financial statements for more information.
Eligible equity Total equity 34,734 36,874 Net of intangibles and other assets (7,996) (8,501) Free reserves for policyholder dividends 4,954 5,238
Total eligible equity 31,460 33,500 Total required solvency capital 12,201 12,031 Excess margin 19,259 21,470 Solvency I ratio 258% 278%
As of December 31, 2013 and 2012 respectively, the Group and its material, regulated subsidiaries complied with the applicable regulatory minimum capital requirements.
The following chart shows the estimated impact on the Group’s solvency position of a one percentage point increase/ decrease in yield curves, a separate 20 percent rise/decline in all stock markets, after consideration of hedges in place and a separate one percentage point change in credit spreads, as of December 31, 2013. The sensitivities are considered separate but instantaneous scenarios.
Limitations of the analysis: • The sensitivity analysis does not take into account actions that might be taken to mitigate losses. The Group uses an active strategy to manage these risks, which may involve changing the asset allocation, for example, through selling and buying assets.
U.S. dollar- and euro- denominated assets and liabilities. The sensitivities do not indicate a probability of such events and do not necessarily represent the Group’s view of expected future market changes. Debt securities are primarily exposed to interest rate risk, while equity securities are primarily exposed to equity market risk. Debt securities can be affected also by spread widening due to changes in credit quality.
Zurich Insurance GroupAnnual Report 2013Group performance review168 1 The credit spread sensitivity is applied to corporate debt, mortgages and euro currency government debt (excluding Germany).
The Group has filed with FINMA an SST ratio of 206 percent as of July 1, 2013.
The following chart shows the estimated impact on the Group’s SST ratio of a one percentage point increase/decrease in yield curves, a separate 25 percent rise/decline in all stock markets, after consideration of hedges in place and a separate one percentage point change in credit spreads, as of July 1, 2013. The sensitivities are considered separate but instantaneous scenarios.
<90% Z-ECM ratio below Group risk tolerance level, requiring appropriate remedial actions and implementation of de-risking measures
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 October 1, 2013, the Z-ECM ratio was 120 percent.
The chart below shows an analysis of the composition of the Group’s Z-ECM available financial resources as of July 1, 2013.
The chart below shows a split of the Z-ECM capital required split by risk type as of July 1 and as of January 1, 2013 respectively. As of July 1, 2013, the largest proportion of Z-ECM capital required arises from Market/ALM risk which comprises 36 percent of the total. Premium & Reserve risk is the second largest, comprising 21 percent.
Z-ECM capital required split by risk type (%, as of July 1 and January 1, 2013)
The following chart shows a split of the Z-ECM capital required allocated to the segments as of July 1 and as of January 1, 2013. As of July 1, 2013, the largest proportion of Z-ECM capital required is allocated to General Insurance, which comprises 51 percent of the total, followed by Global Life with 31 percent of the total. Total allocated capital as of July 1, 2013 equals USD 35 billion Z-ECM capital required plus USD 2 billion direct allocation to Farmers.
Outsourcing: This risk cluster relates to poor quality or disruption in services provided by third parties as a result of failure to manage global or local outsourcing agreements effectively or financial failure (e.g. insolvency) of a major supplier.
Market Abuse, Mis-selling and Conduct of Business: This risk cluster relates to the possibility that staff, processes or systems may operate in ways that lead to inappropriate conduct of business in relation to the customer. It includes the possibility of investigations, sanctions and fines imposed on Zurich as a company or any member of staff as a result of market abuse, mis-selling practices leading to regulatory breach or increased compensation.
Z-ECM capital required for operational risk, split by risk scenario clusters (as of July 1, 2013)
Total capital allocated, by segment (%, as of July 1 and January 1, 2013)
The chart below shows the estimated impact on the Group’s Z-ECM ratio of: • A one percentage point increase/decrease in yield curves • A 25 percent rise/decline in all stock markets, after consideration of hedges in place • A one percentage point change in credit spreads
Scenario 1: Peripheral2 EU bank debt restructured • 100% write-off of subordinated bank debt • 30% write-off of senior unsecured bank debt issued in the Peripheral Euro countries
Scenario 2: Additional financial market impact • Scenario 1 • Write down on holding values of all Peripheral2 EU sovereign & sub-sovereign debt to achieve net debt/GDP ratios of 80% after adding 50% of outstanding domestic bank debt
As of July 1, 2013, insurance-related and business risks contributes to 48% of the Z-ECM capital required. 51% of the total capital allocated to the segments goes to General Insurance, 31% to Global Life and 8% to Farmers.
Regulatory regimes, such as the Swiss Solvency Test and the regulatory principles of Solvency II, emphasize a risk-based and economic approach, based on comprehensive quantitative and qualitative assessments and reports. In 2013, the timeline for the roll-out of Solvency II was further specified.
To address the topic of systemic risks, the Financial Stability Board announced a list of Global Systemically Important Insurers, Zurich not being among them.
In 2013, Zurich continued to strengthen its risk culture. Risk transparency was enhanced by including in-depth risk insights into topics such as the development of new global capital standards, politcal risks in Latin America, and emerging risks.
The Zurich Risk Policy articulates the Group’s approach to risk and its control, and sets standards for effective risk management throughout the Group.
As of January 1, 2014, Zurich Insurance Company Ltd was rated AA– by Standard and Poor’s, with a stable outlook.
Zurich assesses the impact of severe events that, while occurring at a very small probability, may have a substantial negative affect on the Group’s Z-ECM available financial resources when realized. Depending on the results, the Group develops, implements and monitors improvement actions.
Large write-offs on the peripheral EU debt exposure, combined with adverse financial market impact, is one of the worst-case scenarios the Group assessed. If the scenario were realized, the Z-ECM ratio would remain well within the “AA” target range.
Revenues Gross written premiums 51,965 51,285 Policy fees 2,884 2,692 Gross written premiums and policy fees 54,849 53,977 Less premiums ceded to reinsurers (6,546) (6,481) Net written premiums and policy fees 48,303 47,496 Net change in reserves for unearned premiums 11 (1,025) (741) Net earned premiums and policy fees 47,277 46,755 Farmers management fees and other related revenues 14 2,810 2,846 Net investment result on Group investments 6 7,398 8,983
Net investment result on unit-linked investments 6 12,805 10,193 Net gain/(loss) on divestments of businesses (1) (34) Other income 1,757 1,669 Total revenues 72,045 70,411 Benefits, losses and expenses Insurance benefits and losses, gross of reinsurance 11 35,256 37,271 Less ceded insurance benefits and losses 11 (3,058) (3,519) Insurance benefits and losses, net of reinsurance 11 32,198 33,752 Policyholder dividends and participation in profits, net of reinsurance 11 13,946 11,405 Underwriting and policy acquisition costs, net of reinsurance 11 10,041 10,014 Administrative and other operating expense 13 8,804 8,654 Interest expense on debt 20 586 570 Interest credited to policyholders and other interest 510 545 Total benefits, losses and expenses 66,086 64,939 Net income before income taxes 5,960 5,472 Income tax expense 19 (1,701) (1,496)
attributable to policyholders 19 (285) (194) attributable to shareholders 19 (1,415) (1,302)
Basic earnings per share 21 25.33 24.84 Diluted earnings per share 21 25.23 24.72 in USD millions, for the years ended December 31
Total comprehensive income 2012 Comprehensive income for the period, as restated 3,887 1,724 6 (441) 1,289 – (459) (459) 830 4,717 138 4,855 Details of movements during the period
Change (before reclassification, tax and foreign currency translation effects and after allocation to policyholders) 3,875 32 (485) 3,422 – (485) (485) 2,937 Reclassification to income statement (before tax and foreign currency translation effects and after allocation to policyholders) (1,724) (35) 44 (1,715) – – – (1,715) Deferred income tax (before foreign currency translation effects) (514) 4 – (511) – 104 104 (407) Foreign currency translation effects 87 6 – 93 – (77) (77) 16 2013 Comprehensive income for the period 4,028 (2,794) (133) (986) (3,912) 15 (367) (352) (4,265) (237) 122 (115) Details of movements during the period
Reinsurers’ share of reserves for insurance contracts 8 17,978 19,753 19,592 Deposits made under assumed reinsurance contracts 2,645 2,588 2,711 Deferred policy acquisition costs 12 18,724 18,346 17,420
Assets held for sale 1 223 102 54 1 December 31, 2013 included assets relating to a subsidiary of Centre Group Holdings Limited amounting to USD 100 million (see note 5) and land and buildings formerly classified as real estate held for investment amounting to USD 123 million. December 31, 2012 included land and buildings formerly classified as real estate held for investment and held for own use amounting to USD 91 million and USD 10 million, respectively. January 1, 2012 included assets relating to the sale of a company in Bolivia (see note 5 of the Consolidated financial statements 2012).
Liabilities Reserve for premium refunds 571 706 611 Liabilities for investment contracts 9 67,113 57,437 50,309 Deposits received under ceded reinsurance contracts 1,245 1,558 1,560 Deferred front-end fees 5,791 6,073 5,720 Reserves for insurance contracts 8 265,440 265,233 253,207 Obligations to repurchase securities 1,685 1,539 1,794
Total liabilities and equity 415,053 408,831 385,481 1 December 31, 2013 included liabilities relating to a subsidiary of Centre Group Holdings Limited amounting to USD 49 million (see note 5). January 1, 2012 included liabilities relating to the sale of a company in Bolivia (see note 5 of the Consolidated financial statements 2012).
Reserves for insurance contracts, gross (727) 5,727 Reinsurers’ share of reserves for insurance contracts 1,787 80 Liabilities for investment contracts 7,984 5,283 Deferred policy acquisition costs (578) (960) Deferred origination costs 62 89 Deposits made under assumed reinsurance contracts (58) 125 Deposits received under ceded reinsurance contracts (327) (31)
Net capital (gains)/losses on total investments and impairments (12,245) (10,574) Net change in trading securities and derivatives 15 (169) Net change in money market investments 1,578 341 Sales and maturities
Proceeds from sale and repurchase agreements 117 (332) Movements in receivables and payables (1,260) (953) Net changes in other operational assets and liabilities (252) 351 Deferred income tax, net 228 461 Net cash provided by/(used in) operating activities 1,443 2,868 in USD millions, for the years ended December 31
Cash flows from investing activities Sales of property and equipment 66 95 Purchases of property and equipment (282) (226) (Acquisitions)/disposals of equity method accounted investments, net (24) 3 Acquisitions of companies, net of cash acquired – (97) Divestments of companies, net of cash balances – (14) Dividends from equity method accounted investments 1 6 Net cash provided by/(used in) investing activities (239) (233) Cash flows from financing activities Dividends paid (2,889) (2,704) Issuance of share capital 44 96 Net movement in treasury shares 15 30 Issuance of debt 1,545 1,575 Repayment of debt (1,948) (1,315) Net cash provided by/(used in) financing activities (3,233) (2,318) Foreign currency translation effects on cash and cash equivalents (17) 187 Change in cash and cash equivalents (2,046) 503 Cash and cash equivalents as of January 1 10,208 9,705 Cash and cash equivalents as of December 31 8,162 10,208 of which: – cash and cash equivalents – Group investments 7,181 9,098 – cash and cash equivalents – unit linked 982 1,110
Change in ownership interests with no loss of control – – – – – – (5) (5) – (5) Total comprehensive income for the period, net of tax – – 1,724 6 (441) – 3,428 4,717 138 4,855
Net income – – – – – – 3,887 3,887 Net unrealized gains/(losses) on available-for-sale investments – – 1,724 – – – – 1,724 Cash flow hedges – – – 6 – – – 6 Cumulative foreign currency translation adjustment – – – – (441) – – (441) Revaluation reserve – – – – – – – – Net actuarial gains/(losses) on pension plans – – – – – – (459) (459)
Reclassification from revaluation reserves – – – – – – 6 6 – 6 Total comprehensive income for the period, net of tax – – (2,794) (133) (986) 15 3,661 (237) 122 (115)
1 The number of common shares issued as of December 31, 2013 was 148,903,222 (December 31, 2012: 148,300,123, December 31, 2011: 147,385,822). 2 As approved by the Annual General Meeting on March 29, 2012, the dividend of CHF 17 per share was paid out of the capital contribution reserve. The difference of
The notes to the Consolidated financial statements are an integral part of these Consolidated financial statements.
Balance as of December 31, 2011, as previously reported 10 9,907 2,800 232 (2,581) 180 20,936 31,484 2,489 33,973 Total adjustments due to restatement – – – – – – 15 15 1 16 Balance as of December 31, 2011, as restated 10 9,907 2,800 232 (2,581) 180 20,951 31,499 2,490 33,989 Issuance of share capital 1 – 221 – – – – – 221 – 221
3 As approved by the Annual General Meeting on April 4, 2013, the dividend of CHF 17 per share was paid out of the capital contribution reserve. The difference of USD 718 million between the dividend at transaction day exchange rates amounting to USD 2,651 million and the dividend at historical exchange rates amounting to USD 1,933 million is reflected in the cumulative foreign currency translation adjustment.
4 The number of treasury shares deducted from equity as of December 31, 2013 amounted to 1,320,652 (December 31, 2012: 1,348,395, December 31, 2011: 1,373,392).
On February 12, 2014 the Board of Directors of Zurich Insurance Group Ltd authorized these Consolidated financial statements for issue. These financial statements will be submitted for approval to the Annual General Meeting of Shareholders to be held on April 2, 2014.
The accounting policies applied by the reportable segments are the same as those applied by the Group. The Group accounts for inter-segment revenues and transfers as if the transactions were with third parties at current market prices, with the exception of dividends, realized capital gains and losses as well as gains and losses on transfer of net assets, which are eliminated against equity. In the Consolidated financial statements inter-segment revenues and transfers are eliminated.
The following balances are mixed in nature (including both current and non-current portions): debt securities, mortgage loans, other loans, reinsurers’ share of reserves for insurance contracts, deposits made under assumed reinsurance contracts, deferred origination costs, other assets, mortgage loans given as collateral, reserves and investments for unit-linked contracts, liabilities for investment contracts, deposits received under ceded reinsurance
Maturity tables have been provided for the following balances: reserves for insurance contracts (tables 20a and 20b in the Risk review), liabilities for investment contracts (tables 21a and 21b in the Risk review), debt securities (table 6.4), derivative assets and derivative liabilities (tables 7.1 and 7.2), other financial liabilities (table 18.2) and outstanding debt (table 20.4).
Restatements and reclassifications Tables 1.2 and 1.3 show the impacts of the restatement as a result of implementing IAS 19 “Employee Benefits” and IFRS 10 “Consolidated Financial Statements” on the consolidated income statement for the year ended December 31, 2012 and the consolidated balance sheet as of December 31, 2012. Consolidated income statements, consolidated balance sheets, consolidated statements of comprehensive income, consolidated statements of changes in equity, consolidated statements of cash flows and notes 6, 9, 11, 13, 17, 18, 19, 21, 22, 25, 26, 28 and 29 have been restated accordingly.
Net investment result on unit-linked investments 10,268 – (74) 10,193 Net gain/(loss) on divestments of businesses (34) – – (34) Other income 1,669 – – 1,669
Benefits, losses and expenses Insurance benefits and losses, gross of reinsurance 37,271 – – 37,271 Less ceded insurance benefits and losses (3,519) – – (3,519) Insurance benefits and losses, net of reinsurance 33,752 – – 33,752 Policyholder dividends and participation in profits, net of reinsurance 11,479 – (74) 11,405 Underwriting and policy acquisition costs, net of reinsurance 10,014 – – 10,014 Administrative and other operating expense 8,661 (9) 2 8,654 Interest expense on debt 570 – – 570 Interest credited to policyholders and other interest 475 – 69 545 Total benefits, losses and expenses 64,951 (9) (3) 64,939 Net income before income taxes 5,462 9 – 5,472 Income tax expense (1,496) – – (1,496)
attributable to policyholders (194) – – (194) attributable to shareholders (1,301) – – (1,302)
Net income after taxes 3,967 9 – 3,975 attributable to non-controlling interests 89 – – 89 attributable to shareholders 3,878 9 – 3,887 in USD
Basic earnings per share 24.79 0.06 – 24.84 Diluted earnings per share 24.66 0.06 – 24.72
Cash and cash equivalents 9,098 – – 9,098 Equity securities 12,341 – – 12,341 Debt securities 155,594 – – 155,594 Real estate held for investment 8,561 – – 8,561 Mortgage loans 10,519 – – 10,519
Deferred tax liabilities 5,238 6 – 5,244 Senior debt 6,660 – – 6,660 Subordinated debt 5,861 – – 5,861
Equity Share capital 11 – – 11 Additional paid-in capital 8,172 – – 8,172 Net unrealized gains/(losses) on available-for-sale investments 4,523 – – 4,523 Cash flow hedges 238 – – 238 Cumulative translation adjustment (3,022) – – (3,022) Revaluation reserve 180 – – 180
Standards, amendments and interpretations effective or early adopted as of January 1, 2013 and relevant for the Group’s operations The following amendments to accounting standards and interpretations of standards relevant to the Group have been implemented for the financial year beginning January 1, 2013. The impact of adoption on the Group’s Consolidated financial statements is disclosed in table 2.1.
IAS 19 Employee Benefits 4 January 1, 2013 IAS 27 Separate Financial Statements 1 January 1, 2013 IAS 28 Investments in Associates and Joint Ventures 1 January 1, 2013
IFRS 7 Disclosures – Offsetting Financial Assets and Financial Liabilities 1 January 1, 2013 1 Adoption has no significant impact on the Consolidated financial statements. 2 Resulted in an immaterial net deconsolidation impact following the additional consolidation of certain structured entities that were previously accounted for as associates and the deconsolidation of silo-structures and funds.
Standards, amendments and interpretations issued that are not yet effective nor yet adopted by the Group The following standards, amendments and interpretations of existing published standards are not yet effective but are relevant to the Group’s operations. The expected impact of these standards, amendments, and interpretations on the Group’s Consolidated financial statements are disclosed in table 2.2. 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.
Amended standards IAS 32 Offsetting Financial Assets and Financial Liabilities 1 January 1, 2014
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 which 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 significant intercompany balances, profits and transactions are eliminated in full.
Investments in associates where the Group has the ability to exercise significant influence but not control, as well as joint ventures where there is joint control, are accounted for using the equity method. Significant influence is presumed to exist when the Group owns, directly or indirectly, between 20 percent and 50 percent of the voting rights. Under the equity method of accounting, these investments are initially recognized at cost, including attributable goodwill, and adjusted thereafter for post-acquisition changes in the Group’s share of the net assets of the investment.
b) Foreign currency translation and transactions Foreign currency translation Due to the Group’s economic exposure to the U.S. dollar (USD), the presentation currency of the Group’s consolidated financial statements is USD. Many Group companies use a different functional currency, being the currency of the respective primary economic environment in which these companies operate. Assets and liabilities are translated into the presentation currency at end-of-period exchange rates, while income statements and statements of cash flows are translated at average exchange rates for the period. The resulting foreign currency translation differences are recorded directly in other comprehensive income (OCI) as cumulative foreign currency translation adjustment.
Zurich Insurance GroupAnnual Report 2013Financial information196 c) Insurance contracts and investment contracts with discretionary participating features (DPF) Classification Contracts issued under which the Group accepts significant insurance risk and obligations arising from investment contracts with DPF are accounted for as insurance contracts.
Life insurance Premiums from traditional life insurance contracts, including participating contracts and annuity policies with life contingencies, are recognized as revenue when due from the policyholder. For single premium and limited pay contracts, premiums are recognized in income when due with any excess profit deferred and recognized in income in a constant relationship to the insurance in-force or, for annuities, the amount of expected benefit payments.
Available-for-sale financial assets Available-for-sale financial assets are financial assets that are either designated as such or are not classified in any of the other categories. Available-for-sale financial assets are carried at fair value, with changes in fair value recognized in OCI, until the securities are either sold or impaired.
Held-to-maturity investments Held-to-maturity investments are financial assets with fixed or determinable payments and fixed maturities other than those that meet the definition of loans and receivables, and for which the Group has the positive intention and ability to hold to maturity.
Other items Cash and cash equivalents comprise cash on hand, deposits held at call with banks and other short-term highly liquid investments that are readily convertible into cash and are subject to an insignificant risk of change in fair value, for example, short-term investments with maturities of three months or less from the date of acquisition. Cash and cash equivalents also include cash received as collateral for securities lending. Cash and cash equivalents are stated at face value.
Objective evidence of impairment exists if it is probable that the Group will not be able to collect principal and/or interest due according to the contractual terms of the instrument. When impairment is determined to have occurred, the carrying amount of held-to-maturity investments and loans and receivables is reduced through the use of an allowance account, and the movement in the impairment allowance is recognized in income as impairment loss. The impairment allowance of financial assets carried at amortized cost is measured as the difference between the carrying amount of the assets and the present value of estimated future cash flows, calculated using the original effective interest rate, for fixed rate financial assets, or current effective interest rate, for variable rate financial assets. If the amount of the impairment loss decreases and the decrease relates objectively to an event occurring after the impairment loss was recognized, the impairment loss is reversed through income. The amount of reversal is limited so that it does not result in a carrying amount exceeding the amortized cost that would have been calculated at the date of reversal had an impairment loss not been previously recognized.
f) Derivative financial instruments and hedge accounting Derivative financial instruments, except those designated under a qualifying hedge relationship are classified as held for trading assets or liabilities and carried at fair value on the balance sheet with changes in fair value recognized in income.
All hedge relationships are formally documented, including the risk management objectives and strategy for undertaking the hedge. At inception of a hedge and on an ongoing basis, the hedge relationship is formally assessed in order to determine whether the hedging instruments are expected (prospective assessment) and have been (retrospective assessment) highly effective in offsetting changes in fair values or cash flows of hedged items attributable to the hedged risk. Where the hedge accounting criteria are fulfilled, the accounting treatment is as follows: Fair value hedges The hedged item is remeasured for fair value changes attributable to the risk being hedged and such fair value changes are recognized in the same line item of the consolidated income statement as the offsetting gains or losses from re-measuring the hedging derivatives at fair value through profit or loss.
Net investment hedges Measurement of hedge effectiveness is based on changes in forward rates. Gains and losses on the designated hedging derivative relating to the effective portion of the hedge are recognized in OCI, whereas the ineffective portion is immediately recognized in income. The accumulated gains and losses in OCI on the hedging instrument are reclassified to income on disposal or partial disposal of the foreign operation.
Securities lending Certain entities within the Group participate in securities lending arrangements whereby specific securities are loaned to other institutions, primarily banks and brokerage firms, for short periods of time. Under the terms of the securities lending agreements, the Group retains substantially all the risks and rewards of ownership of these loaned securities, and also retains contractual rights to the cash flows therefrom. These securities are therefore not derecognized from the Group’s balance sheet. Cash received as collateral for loaned securities is recorded as an asset, and a corresponding liability is established.
Goodwill Goodwill arises on the acquisition of subsidiaries, associates and joint ventures and represents the excess of the cost of acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired entity at the acquisition date.
Goodwill on the acquisition of subsidiaries is capitalized as a separate line and reviewed for impairment annually, or more frequently if impairment indicators are observed. For the purpose of impairment testing, goodwill is allocated to cash generating units (CGUs) based on the level at which management monitors operations and makes decisions relating to the continuation or disposal of assets and operations. On this basis, for the General Insurance segment, CGUs are aggregated predominantly on the segment level. Within the segments Global Life and Farmers, CGUs are identified at either business unit level or individual reporting entity level.
l) Treasury shares Zurich Insurance Group Ltd shares held by the Group are classified as treasury shares and are deducted from shareholders’ equity, net of transaction costs and tax. The nominal value of treasury shares is deducted from share capital. The difference between the nominal value and the amount paid to acquire the treasury shares, is allocated between additional paid-in capital and retained earnings. No gain or loss is recognized in income on the purchase, sale, issue or cancellation of treasury shares.
Zurich Insurance GroupAnnual Report 2013Financial information204 m) Other revenue recognition Farmers management fees FGI provides non-claims related management services to the Farmers Exchanges, including risk selection, preparation and mailing of policy documents and invoices, premium collection, management of the investment portfolios and certain other administrative and managerial functions. Fees for these management services are primarily determined as a percentage of gross premiums earned by the Farmers Exchanges.
For Group investments, interest income is recognized using the effective interest method. Dividend income is recognized when the right to receive payment is established, which is usually the ex-dividend date.
o) Employee benefits Share-based compensation and cash incentive plans The Group operates long-term incentive plans which comprise the allocation of a target number of shares.
Under the Group’s equity-settled share-based compensation plans, the fair value of the employee services received in exchange for the grant is determined by reference to the fair value of the shares previously granted and is recognized as an expense in income over the vesting period, with a corresponding amount recorded in additional paid-in capital.
p) Leases Payments made under operating leases (net of any incentives received from the lessor) are normally charged to income on a straight-line basis over the period of the lease.
q) Income taxes The Group provides current tax expense according to the tax laws of each jurisdiction in which it operates. Deferred income taxes are recognized using the asset and liability method. Deferred income taxes are recorded for temporary differences, which are based on the difference between financial statement carrying amounts and income tax bases of assets and liabilities using enacted or substantively enacted local tax rates applicable in the respective tax jurisdiction. Deferred tax assets are recognized for taxable losses to the extent it is probable that they can be utilized against future taxable income in the respective jurisdictions.
Deferred policy acquisition costs are deferred only to the extent that they are recoverable from future policy income. Recoverability is tested at contract inception and subsequently on a regular basis with reference to current expectations of future profits or margins.
Zurich Insurance GroupAnnual Report 2013Financial information208 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.
For the General Insurance segment, CGUs are aggregated predominantly on the segment level. Within the Global Life and Farmers segments, CGUs are identified at either business unit level or individual reporting entity level.
The discount rates used in the recoverable amount calculations for developed markets are based on a capital asset pricing model and consider government bond rates which are further adjusted for equity risk premium, appropriate beta and leverage ratio. In emerging markets, discount rates are based on the U.S. dollar discount rate taking into account inflation differential expectations and country risks. All input factors to the discount rates are based on observable market data.
Transactions in 2013 Assets/liabilities held for sale As of December 31, 2013, a subsidiary of Centre Group Holdings Limited, Centre Insurance Company, which is a general insurance and reinsurance company based in the United States of America, with total assets of USD 100 million and total liabilities of USD 49 million, was classified as held for sale.
Real estate held for investment 757 816 272 (331) 1,030 485
Investments in associates and joint ventures 11 12 1 1 12 13 1 Net capital losses on derivative financial instruments attributable to cash flow hedge ineffectiveness amounted to USD 9 million and USD 7 million for the years ended December 31, 2013 and 2012, respectively.
Real estate held for investment 486 506 186 12 671 517
Investment result, gross, for Group investments 6,496 7,034 1,157 2,201 7,653 9,235 Investment expenses for Group investments (256) (252) – – (256) (252) Investment result, net, for Group investments 6,240 6,782 1,157 2,201 7,398 8,983 1 Net capital losses on derivative financial instruments attributable to cash flow hedge ineffectiveness amounted to USD 9 million and USD 7 million for the years ended December 31, 2013 and 2012, respectively.
Investment result, gross, for unit-linked contracts 2,292 2,327 11,088 8,373 13,380 10,701 Investment expenses for unit-linked contracts (575) (508) – – (575) (508) Investment result, net, for unit-linked contracts 1,717 1,820 11,088 8,373 12,805 10,193
Realized capital gains on Group investments 1,292 552 1,008 2,120 2,299 2,672 Realized capital losses on Group investments (103) (163) (433) (480) (536) (643)
Table 6.1c in USD millions, for the years ended December 31Net investment result for unit-linked contracts
Cash and cash equivalents 7,181 3.5 9,098 4.3 Equity securities: Fair value through profit or loss 3,425 1.7 3,545 1.7
Debt securities: Fair value through profit or loss 7,121 3.4 8,985 4.3
Accrued investment income on unit-linked investments disclosed as accrued investment income amounted to USD 230 million and USD 255 million as of December 31, 2013 and December 31, 2012, respectively.
Debt securities Swiss federal and cantonal governments 4,093 3,925 210 466 (81) (3) 4,222 4,388
Mortgage and asset-backed securities 19,201 18,838 363 730 (311) (87) 19,253 19,481 1 Net of impairments (see table 6.2).
millions of which: common stock portfolios backing participating with profit policyholder contracts 558 5.3 534 4.3 – – 558 534
Mortgage and asset- backed securities 679 6.4 763 6.1 177 225 856 988
Market value revaluation 162 (206) Transfer from assets held for own use 81 – Transfer to assets held for sale (87) (89) Foreign currency translation effects 287 353 As of December 31 12,406 11,962
Gross unrealized gains/(losses) on Group investments 5,988 10,658 Less: amount of unrealized gains/(losses) on investments attributable to: Life policyholder dividends and other policyholder liabilities (2,948) (3,918) Life deferred acquisition costs and present value of future profits (460) (571) Deferred income taxes (738) (1,385) Non-controlling interests (6) (23)
Fin an cial info rm atio n 7. Derivative financial instruments and hedge accounting
Foreign exchange contracts: OTC Cross currency swaps – – – – – – 444 – (45)
The decrease in the notional amount between December 31, 2012 and December 31, 2013 was mainly due to reductions in interest rate swaps to hedge a closed book of variable annuities products within the U.S. life business and a decrease in swaptions, to protect European life insurance books against falling interest rates.
Equity contracts Equity contracts are entered into, either on a portfolio or on a macro level to protect equity investments against a decline in equity market prices or to manage the risk return profile of equity exposures. Most equity contracts are purchased put options.
The majority of positions are for hedging purposes. For short positions, call options are used in collar structures to mitigate the hedging costs for some life portfolios and the written put positions are fully backed by long put positions and relate only to legacy positions.
Fair value hedges: Cross currency interest rate swaps 244 330 – 574 108 – 1,530 252 –
Cash flow hedges: Options on interest rate swaps – 949 2,347 3,296 282 – 3,207 438 –
Information on debt issuances designated as hedged items in cash flow hedge relationships is set out in note 20.
The net gains/(losses) deferred in other comprehensive income on derivative financial instruments designated as cash flow hedges were USD (94) million and USD 32 million before tax for the years ended December 31, 2013 and 2012, respectively.
Net investment hedges In 2012, the Group started to apply net investment hedge accounting in order to hedge against the effects of changes in exchange rates in its net investments in foreign operations. A net hedge relationship through a foreign exchange forward with a notional amount of USD 275 million and USD 273 million was in place as of December 31, 2013 and 2012, respectively.
Table 7.4 in USD millions, as of December 31, 2013Derivative financial instruments subject to enforceable master netting arrangements and collateral agreements – current period
Table 7.5 in USD millions, as of December 31, 2012Derivative financial instruments subject to enforceable master netting arrangements and collateral agreements – prior period
Policyholders’ contract deposits and other funds 20,162 20,024 (2,036) (2,106) 18,126 17,917 Reserves for unit-linked contracts 74,873 74,117 – – 74,873 74,117 Total reserves for insurance contracts 1 265,440 265,233 (18,107) (19,880) 247,333 245,353 1 The total reserves for insurance contracts ceded are gross of allowances for uncollected amounts of USD 129 million and USD 127 million as of December 31, 2013 and December 31, 2012, respectively.
Losses and loss adjustment expenses incurred: Current year 26,936 27,612 (3,050) (3,273) 23,885 24,340
Table 8.2 shows the development of reserves for losses and loss adjustment expenses during the years 2013 and 2012.
• The personal and commercial business in Europe reported favorable prior year development of USD 412 million, mostly driven by USD 326 million within motor liability in Switzerland and a reduction of large property claims of USD 46 million within the UK; • In Global Corporate, favorable development of USD 355 million was driven by lower estimates of large property claims in Switzerland, the UK and Global Energy and lower estimates for the Thai floods.
Gross reserves for losses and loss adjustment expenses 57,765 60,425 64,535 67,890 65,218 68,126 68,274 67,762 69,986 68,312
Initial net reserves for losses and loss adjustment expenses 43,486 46,194 50,814 54,712 52,986 55,944 56,180 55,341 57,385 57,319
Losses and loss adjustment expenses incurred 47 53 51 37 Losses and loss adjustment expenses paid (267) (104) (134) (110) Acquisitions/(divestments) and transfers 1 – – – (127) Foreign currency translation effects 41 41 132 112 1 The 2012 net movement relates to a reinsurance agreement which transferred the benefits and risks of some of the Group’s general insurance portfolio to RiverStone Insurance (UK) Limited.
In 2012, following an in-depth review of asbestos, pollution and health (APH) book of business in the U.S., gross and net reserves were strengthened. Despite these increases, the total net reserves have decreased due to a reinsurance agreement which transferred the benefits and risks of a general insurance portfolio to RiverStone Insurance (UK) Limited.
Table 8.4 in USD millionsDevelopment of reserves for losses and loss adjustment expenses for asbestos
Fee income and other expenses (1,898) (1,789) 176 182 (1,722) (1,608) Interest and bonuses credited to policyholders 2,017 2,649 (8) (75) 2,009 2,575
Acquisitions/(divestments) and transfers 1 – 1,065 – (14) – 1,051 (Decreases)/increases recorded in other comprehensive income (122) 167 – – (122) 167 1 The 2012 net movement includes USD 937 million transferred from reserves for unearned premiums, USD 66 million transferred from policyholders’ contract deposits and other funds, USD 33 million transferred from loss reserves (see note 1 of the Consolidated financial statements 2012) and USD 15 million from the acquisition of Zurich Insurance Malaysia Berhad (ZIMB, see note 5 of the Consolidated financial statements 2012).
Interest rates (134) 223 Investment return 37 (51) Changes in modeling 27 (58)
Universal life and other contracts 12,833 12,219 Policyholder dividends 7,329 7,804
Fee income and other expenses (285) (230) (12) (60) (297) (290) Interest and bonuses credited to policyholders 1,217 708 (80) (81) 1,137 627 Acquisitions/(divestments) and transfers 1 – (1,308) – 32 – (1,276) (Decrease)/increase recorded in other comprehensive income (1,041) 2,313 – – (1,041) 2,313 1 The 2012 net movement includes USD (1,224) million transferred to loss reserves and loss adjustment expenses and USD (66) million transferred to future life policyholders’ benefits (see note 1 of the Consolidated financial statements 2012).
Fee income and other expenses (594) (607) Interest and bonuses credited/(charged) to policyholders 6,800 4,906 Acquisitions/(divestments) and transfers 1 – (150) Increase/(decrease) recorded in other comprehensive income 94 4 Foreign currency translation effects 1,598 1,991 As of December 31 67,113 57,437 1 The 2012 movement includes USD (151) million transferred to reserves for unit-linked contracts (see note 1 of the Consolidated financial statements 2012).
As of January 1 2,560 1,488 Net unrealized gains/(losses) on investments (196) 557 Current period profit/(loss) (96) 476 Foreign currency translation effects 70 39 As of December 31 2,338 2,560
Zurich Insurance GroupAnnual Report 2013Financial information232 11. Gross and ceded insurance revenues and expenses
Losses and loss adjustment expenses 25,749 26,936 (2,621) (3,168) 23,128 23,769 Life insurance death and other benefits 9,507 10,334 (437) (351) 9,070 9,983 Total insurance benefits and losses 35,256 37,271 (3,058) (3,519) 32,198 33,752
Amortization (charged)/ credited to other comprehensive income – – 102 (314) – – 102 (314)
1 Net of eliminations from inter-segment transactions. 2 The 2013 Global Life movement relates to a transfer to deferred front-end fees of USD (438) million and a transfer from receivables and other assets of USD 126 million
Impairments (4) – Acquisitions/(divestments) and transfers 1 – 5 Foreign currency translation effects 16 29 As of December 31 724 770 1 The 2012 movement relates to USD 5 million transferred from deferred policy acquisition costs (see note 1 of the Consolidated financial statements 2012).
1 Included within commissions and other underwriting and acquisition expenses (see table 11.3). 2 Included within losses and loss adjustment expenses (see table 11.1). 3 Excludes expenses arising from rental of real estate held for investment within investment expenses for Group investments (see table 6.1b).
Table 13 in USD millions, for the years ended December 31Expenses
Farmers Group, Inc. and its subsidiaries (FGI) through its attorney-in-fact (AIF) relationship with the Farmers Exchanges, which are owned by their policyholders and managed by Farmers Group, Inc., a wholly owned subsidiary of the Group, is contractually permitted to receive a management fee of 20 percent (25 percent in the case of the Fire Insurance Exchange) of the gross premiums earned by the Farmers Exchanges.
FGI has historically charged a lower management fee than the amount allowed by contract. The range of fees has varied by line of business over time and from year to year. The gross earned premiums of the Farmers Exchanges were USD 18,757 million and USD 18,703 million for the years ended December 31, 2013 and 2012, respectively.
Net carrying value as of January 1, 2013 313 682 158 79 299 1,530
The fire insurance value of the Group’s own-use property and equipment totaled USD 2,919 million and USD 3,036 million as of December 31, 2013 and 2012, respectively.
Net carrying value as of December 31, 2013 1,852 729 3,553 1,025 1,640 81 8,880
Following the revised Global Life strategy, certain IT assets will no longer be required, and therefore resulted in an impairment of USD 37 million. Additionally, a review of existing IT platforms in General Insurance in Latin America identified software, which was not utilized as originally expected, resulting in a USD 21 million impairment.
Other Operating Businesses – – – – 268 – 268 Net carrying value as of December 31, 2013 1,852 729 3,553 1,025 1,640 81 8,880
Additions to goodwill of USD 14 million related to the acquisition of Zurich Insurance Malaysia Berhad (ZIMB) in 2011, resulting from an increase in the anticipated purchase price adjustment and finalization of the purchase accounting (see note 5 of the Consolidated financial statements 2012) and an increase of USD 8 million relating to the increase of an earn out liability in Brazil.
Other Operating Businesses – – – – 300 – 300 Non-Core Businesses – – – – 1 – 1 Net carrying value as of December 31, 2012 2,107 844 3,815 1,025 1,670 94 9,555
Fin an cial info rm atio n 17. Receivables and other assets
Financial assets Derivative assets 1,187 1,813 Receivables from policyholders 3,711 3,514 Receivables from insurance companies, agents and intermediaries 5,506 5,884 Receivables arising from ceded reinsurance 1,094 1,117 Reverse repurchase agreements 678 988 Amounts due from investment brokers 758 493 Other receivables 2,238 1,974 Allowance for impairments 1 (297) (327)
Non-financial assets Current tax receivables 1,084 1,198 Accrued premiums 731 688 Prepaid expenses 319 277 Prepaid insurance benefits 344 333 Other assets 377 340 Total receivables and other assets 18,499 18,425 1 Allowance for impairments includes USD 45 million and USD 79 million as of December 31, 2013 and 2012, respectively, for receivables arising from ceded reinsurance. 2 December 31, 2013 included investments managed on a fiduciary and ring-fenced basis on behalf of Banco Santander S.A. amounting to USD 603 million, carried at fair value through profit or loss.
As of January 1 297 254 Provisions made during the period 62 174 Increase of provisions set up in prior years 34 43 Provisions used during the period (154) (170) Provisions reversed during the period (55) (6) Foreign currency translation effects 5 5 As of December 31 188 297
During the year ended December 31, 2012, restructuring programs primarily impacted several European countries within the General Insurance and Global Life operations with estimated costs of USD 174 million for restructuring programs announced in 2012 and USD 43 million for increases of provisions for restructuring which had been initiated in prior years. In addition, software impairments amounting to USD 11 million were made as part of the restructuring decisions of Global Life operations.
Actual income tax expense attributable to shareholders 24.9% 1,415 24.7% 1,302 plus: income tax expense/(benefit) attributable to policyholders 285 194 Actual income tax expense 28.5% 1,701 27.3% 1,496
Table 19.3 sets out the factors that cause the actual income tax expense to differ from the expected expense computed by applying the Swiss statutory tax rate of 22.0 percent, which is the rate applicable in the jurisdiction where the ultimate parent company is resident.
Table 19.1 in USD millions, for the years ended December 31Income tax expense – current / deferred split
Table 19.2 in USD millions, for the years ended December 31Income tax expense – policyholder/ shareholder attribution
Table 19.4 in USD millions, as of December 31Current tax receivables and payables
Table 19.5 in USD millions, as of December 31Deferred tax assets and liabilities
Table 19.7 in USD millions, as of December 31Deferred taxes – policyholder/ shareholder attribution
Gross deferred tax Deferred acquisition and origination costs 20 (773) 35 (677) Depreciable and amortizable assets 49 (65) 45 (63) Life policyholders’ benefits and deposits 1 32 (13) 13 (15) Unrealized (gains)/losses on available-for-sale investments and cash flow hedges 368 (443) 251 (511) Accruals and deferred income 185 (1) 158 (1) Reserves for losses and loss adjustment expenses 614 (192) 434 (132) Reserves for unearned premiums 728 (37) 765 (59) Pensions and other employee benefits 604 – 544 –
Deferred acquisition and origination costs 90 (2,560) 89 (2,662) Depreciable and amortizable assets 373 (2,566) 247 (2,585) Life policyholders’ benefits and deposits 1 1,229 (940) 1,162 (961) Unrealized (gains)/losses on available-for-sale investments and cash flow hedges 172 (888) 209 (1,364) Accruals and deferred income 112 (136) 116 (94) Reserves for losses and loss adjustment expenses 159 (111) 149 (82) Reserves for unearned premiums 46 (84) 50 (72) Deferred front-end fees 551 – 616 – Pensions and other employee benefits 369 (42) 482 (40)
As of December 31, 2013 and 2012, the aggregate amount of temporary differences associated with investments in subsidiaries, branches and associates and interests in joint ventures, for which deferred tax liabilities have not been recognized amount to approximately USD 20 billion and USD 22 billion, respectively. In the remote scenario in which these temporary differences were to reverse simultaneously, the resulting tax liabilities would be very limited due to participation exemption rules.
Table 19.8 in USD millions, as of December 31Deferred tax assets/(liabilities) analysis by source
For which deferred tax assets have been recognized, expiring < 5 years 71 105 > 20 years or with no time limitation 1,395 1,002
The tax rates applicable to tax losses for which a deferred tax asset has not been recognized are 18.3 percent and 18.6 percent for the years 2013 and 2012, respectively.
Management assesses the recoverability of the deferred tax asset carrying values based on future years taxable income projections and believes that the carrying values of the deferred tax assets as of December 31, 2013, are recoverable.
Zurich Finance (USA), Inc. USD 400 million Euro Commercial Paper Notes, due in less than 1 year 400 400 4.50% EUR 1 billion notes, due September 2014 1,5,6 1,384 1,333 6.50% EUR 600 million notes, due October 2015 2,5,6 825 790 Zurich Santander Insurance America S.L. 7.5% EUR 152 million loan, due December 2035 210 220 Other Various debt instruments 113 113 Senior debt 6,044 6,660 Subordinated debt
Zurich Finance (USA), Inc. 5.75% EUR 500 million notes, due October 2023, first callable October 2013 5 – 652 4.5% EUR 269 million notes, due June 2025, first callable June 2015 4,5,6 385 705
Trust V, are called before 2047, the Group will issue a replacement debt instrument with terms and provisions that will be as or more equity-like than the replaced notes. 4 These bonds are part of qualifying fair value hedges (100 percent).
i) Senior debt Senior debt amounted to USD 6,044 million and USD 6,660 million as of December 31, 2013 and December 31, 2012, respectively.
Senior debt Subordinated debt Total 1 Operational senior debt included USD 750 million in senior debt issued under the Group’s EMTN Programme by Zurich Finance (Luxembourg) S.A. in September 2009, which was loaned directly to the Group’s banking activities, matured in September 2013. This issue had been recognized as operational debt by Moody’s but not by Standard & Poor’s.
Series II 6.45% USD 700 million Fixed/Adjustable Trust Preferred Securities (ECAPS), due December 2065 6.45% payable semi-annually until June 15, 2016 and then reset quarterly to the adjustable rate plus 2.00%. 2 Quarterly on or after June 15, 2016
Series V 6.5% USD 1 billion Fixed / Floating Trust Preferred Securities, due May 2067 6.5% payable semi-annually until May 9, 2017 and then reset quarterly to 3-month LIBOR plus 2.285%. Quarterly on or after May 9, 2017 8.25% USD 500 million perpetual capital notes 8.25% per annum payable quarterly until January 18, 2018. Resets to the 6-Year USD mid swap rate plus 6.84% until January 18, 2024. Resets thereafter every 6 years to the 6-Year USD mid swap rate plus 7.84%. Quarterly on or after January 18, 2018 4.625% CHF 500 million perpetual notes 4.625% payable annually up to May 16, 2018 and then reset to the prevailing 7 year CHF mid swap rate plus 2.691%. Annually on or after May 16, 2018 7.5% EUR 425 million notes, due July 2039 7.5% payable annually up to July 24, 2019 and then reset quarterly to 3-month EURIBOR plus 5.85%. Quarterly on or after July 24, 2019 6.625% GBP 450 million perpetual notes 6.625% payable annually up to October 2, 2022 and then reset every 5 years to the reset rate of interest plus 2.85%. 1
Every five years on or after October 2, 2022 4.25% EUR 1 billion notes, due October 2043 4.25% payable annually up to October 02, 2023 and then reset quarterly to 3-month EURIBOR plus 3.45%. Quarterly on or after October 2, 2023 1 Reset rate of interest is equal to the gross redemption yield on the benchmark five-year gilt as determined by the calculation bank. 2 Adjustable rate is equal to the higher of (i) the 3-month LIBOR Rate; (ii) the 10-year Treasury CMT (Constant Maturity Treasury) Rate; and (iii) the 30-year Treasury CMT Rate, subject to a maximum under (ii) and (iii) of 13% for Series II.
The lower interest expense on senior debt was mainly due to the maturity of the 4.875% EUR 800 million notes in April 2012. This reduction was partially offset by the issuance of two new senior notes under the EMTN Programme in June 2012.
The increase in the interest expense on subordinated debt was mainly due to the issuance of 4.25% EUR 1 billion notes in March and July 2013. This was partially offset by the reduction in 4.5% EUR 500 million notes as investors could switch part or all of their holdings against the new issue or, with regard to the notes issued in July 2013, against cash. A further reduction resulted from the repayment of 5.875% USD 500 million Trust Preferred Securities in June 2012.
Credit facilities The Group has access to a multicurrency revolving credit facility of USD 3.2 billion that terminates in 2018 at the latest. It is guaranteed by Zurich Insurance Company Ltd.
In addition, the Group has access to four other revolving credit facilities totaling USD 441 million, of which USD 366 million will expire in 2014 and USD 75 million in 2015. No borrowings were outstanding under any of these facilities as of December 31, 2013 or 2012.
Table 20.4 in USD millions, as of December 31Maturity schedule of outstanding debt
b) Authorized share capital Until March 29, 2014, 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.
Employee participation During 2013 and 2012, 603,099 shares and 914,301 shares, respectively, were issued to employees from contingent share capital as outlined in note 23. As a result, on December 31, 2013 and 2012, respectively, the remaining contingent share capital, which can be issued to employees of Zurich Insurance Group Ltd and its subsidiaries, amounted to CHF 239,203.70 and CHF 299,513.60 or 2,392,037 and 2,995,136 fully paid registered shares, respectively, with a nominal value of CHF 0.10 each. Pre-emptive rights of the shareholders, as well as the right for advance subscription, are excluded. The issuance of shares or respective option rights to employees is subject to one or more regulations to be issued by the Board of Directors and takes into account performance, functions, levels of responsibility and criteria of profitability. Shares or option rights may be issued to employees at a price lower than that quoted on the stock exchange.
Effect of potentially dilutive shares related to share-based compensation plans 568,876 (0.11) (0.10) Diluted earnings per share 4,028 147,973,499 27.22 25.23
Effect of potentially dilutive shares related to share-based compensation plans 728,444 (0.13) (0.12) Diluted earnings per share 3,887 147,369,717 26.37 24.72 1 The translation from USD to CHF is shown for information purposes only and has been calculated at the Group’s average exchange rates for the years ended December 31, 2013 and 2012, respectively.
The Group had 55,102 and 55,312 employees (full-time equivalents) as of December 31, 2013 and 2012, respectively. Personnel and other related costs incurred for the years ended December 31, 2013 and 2012, were USD 6,054 million and USD 6,100 million, including wages and salaries of USD 4,803 million and USD 4,861 million, respectively.
The Group operates a number of retirement benefit arrangements for employees, with the majority of employees belonging to defined benefit plans. Other employees participate in defined contribution plans, which provide benefits equal to the amounts contributed by both the employer and the employee plus investment returns.
For post-employment defined benefit plans, total contributions to funded plans and benefits paid directly by the Group were USD 491 million for 2013 compared with USD 491 million for 2012. The estimated total for 2014 is USD 523 million (actual amount may differ), not taking into account the plan amendment becoming effective January 1, 2014, as outlined in Swiss pension plans.
Actuarial valuations are completed regularly and if the plans become underfunded under local regulations, options for dealing with this include the Group paying additional contributions into the plan and/or reducing future benefits. At present, the plans are sufficiently funded, meaning that it is not expected for additional contributions into the plans to be required in the next year. The investment strategy of the Swiss plans is constrained by Swiss pension law including regulations relating to diversification of plan assets. Under IAS 19, volatility arises in the Swiss pension plan net liability because the fair value of the plan assets is not directly correlated to movements in the value of the plan’s defined benefit obligation in the short-term.
UK pension plan The major UK pension plan is a final salary plan and accrued benefits increase in line with salary increases. Normal retirement age for the plan is 60. The plan is split into distinct sections and the two defined benefit sections are closed to new entrants, who instead can participate in a defined contribution section within the same trust. The notes that follow consider only the defined benefit sections. There is a UK Pension Trustee Board, which is responsible for the governance of the plan. The employer contributions are determined based on regular triennial actuarial valuations which are conducted using assumptions agreed by the Trustee Board and the sponsoring company. A valuation was carried out during 2013 and the results are yet to be finalized. In the event of any under-funding, the sponsoring company must agree a deficit recovery plan with the Trustee Board within the statutory deadlines. The ongoing funding of the plan is closely monitored by the Trustee Board and a dedicated funding committee is made up of representatives from the Trustee Board and the Group. The plan rules and UK pension legislation set out maximum levels of inflationary increases applied to plan benefits. The plan assets are invested in diversified classes of assets and a portion are invested in inflation-linked debt securities, to provide a partial hedge against inflation. The Trustees have also implemented an interest rate swap contract which will provide partial protection against volatility in interest rates.
German pension plans There are a number of legacy defined benefit plans in Germany, most of which were set up under works council agreements. In 2007, a contractual trust arrangement was set up to support all pension commitments of the employing companies in Germany. No contributions or assets have been added to the contractual trust arrangements since 2007. A separate arrangement was also established in 2007 to provide for retirement obligations that were in payment at that time. Consideration is given from time to time based on the fiscal efficiency of adding recent retirees to this arrangement and to adding assets to the contractual trust. There is currently no plan to pay any further contributions to the contractual trust arrangement.
These defined benefit plans provide benefits on either a final salary, career average salary or a cash balance basis. These plans are now closed to new entrants, who instead participate in a new cash balance arrangement, which has the characteristics of a defined contribution arrangement with a capital guarantee on members’ balances, which mirrors the capital guarantee given in a conventional life insurance arrangement in Germany.
Tables 22.1a and 22.1b set out the reconciliation of the defined benefit obligation and plan assets for the total of the Group’s post-employment defined benefit plans.
Net post-employment benefit (expense)/income: Current service cost (370) – – (370) Interest (expense)/income (701) 575 – (126) Past service (cost)/credit 19 – – 19 Net post-employment benefit (expense)/income (1,052) 575 – (477) Remeasurement effects included in other comprehensive income: Return on plan assets excluding interest income – (31) – (31) Experience gains/(losses) 101 – – 101 Actuarial gains/(losses) arising from changes in demographic assumptions (70) – – (70) Actuarial gains/(losses) arising from changes in financial assumptions (182) – – (182) Remeasurement effects included in other comprehensive income (151) (31) – (182) Employer contributions – 458 – 458 Employer contributions paid to meet benefits directly 40 – – 40 Plan participants’ contributions (53) 53 – – Payments from the plan 648 (648) – – Foreign currency translation effects (449) 344 – (105)
Table 22.1a in USD millionsMovement in defined benefit obligation and fair value of assets – current period
Table 22.2 provides a breakdown of plan assets by asset class.
Tables 22.3a and 22.3b provide a breakdown of the key information included in tables 22.1a and 22.1b for the main countries for the years ended December 31, 2013 and 2012 respectively.
Fair value of plan assets 4,250 7,847 2,286 975 910 16,268 Net defined benefit asset/(liability) (524) (1,296) (1,016) (285) (280) (3,400) Net post-employment benefit (expense)/income (133) (167) (90) (29) (17) (436)
Table 22.4 shows the key financial assumptions used to calculate the Group’s post-employment defined benefit obligations and the Group’s post-employment benefit expenses.
Table 22.6 shows the expected benefits to be paid under the Group’s major plans in the future. It should be noted that actual amounts may vary from expected amounts. Therefore future benefit payments may differ from the amounts shown in table 22.6.
Duration of the defined benefit obligation 15.6 20.7 14.1 14.2 14.7 20.5 13.8 14.4
Discount rate + 50 bps 1,621 Discount rate – 50 bps (1,855) Salary increase rate + 50 bps (149) Salary decrease rate – 50 bps 144 Price inflation increase rate + 50 bps (1,001) Price inflation decrease rate – 50 bps 901 Cash balance interest credit rate + 50 bps (112) Cash balance interest credit rate – 50 bps 109 Mortality 10% increase in life expectancy (1,498) Mortality 10% decrease in life expectancy 1,419 1 A negative number indicates an increase in DBO, a positive number a decrease in DBO, respectively.
Table 22.7 in USD millions, as of December 31, 2013Sensitivity analysis of significant actuarial assumptions
The Group has adopted various share-based compensation and cash incentive plans to attract, retain and motivate executives and employees. The plans are designed to reward employees for their contribution to the performance of the Group and to encourage employee share ownership. Share-based compensation plans include plans under which shares and options to purchase shares, based on the performance of the businesses, are awarded. Share-based compensation plans are based on the provision of the Zurich Insurance Group Ltd shares.
a) Cash incentive plans Various businesses throughout the Group operate short-term incentive programs for executives, management and, in some cases, for employees of that business. Awards are made in cash, based on the accomplishment of both organizational and individual performance objectives. The expense recognized for these cash incentive plans amounted to USD 472 million and USD 490 million for the years ended December 31, 2013 and 2012, respectively.
The Group Long-Term Incentive Plan Participants in this plan are granted a target number of performance shares in shares of Zurich Insurance Group Ltd in April each year, such that the economic value is a defined percentage of the annual salary of each participant in the year of grant. Performance shares vest on an annual basis over the subsequent three year period, with the actual level of vesting being between 0 percent and 175 percent of the original shares granted, with an additional discretion to increase vesting to a maximum of 200 percent, depending on the performance of the Group over the previous three calendar years. Performance metrics used to determine the level of vesting are the Group’s return on equity and the position of its total annual relative shareholder return measured against an international peer group of insurance companies. One half of the shares that actually vest are sales-restricted for a further three years. As of December 31, 2013 and 2012 there were 1,138 and 1,129 participants in the plan, respectively.
The shares granted during the year are the target allocations made under the Group’s Long-Term Incentive Plan. Whether these grants vest or not will depend on whether the performance metrics are achieved. If the vesting level turns out to be different to the target, the expense is adjusted accordingly.
Table 23.4 in CHF, as of December 31Range of exercise prices for options outstanding
Zurich Insurance GroupAnnual Report 2013Financial information262 24. Contingent liabilities, contractual commitments and financial guarantees
Commitments under investment agreements 4,509 4,225 Less funded commitments (3,824) (3,690) Remaining commitments under investment agreements 685 535 Guarantees and letters of credit 1 10,283 10,565 Future operating lease commitments 884 1,085 Undrawn loan commitments 8 20 Other commitments and contingent liabilities 72 41 1 Guarantee features embedded in life insurance products are not included.
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, 2013 the Group has recorded provisions of USD 38 million, for losses in excess of USD 289 million.
The Group has commitments to provide collateral on certain contracts in the event of a financial strength downgrading for Zurich Insurance Company Ltd from the current AA– by Standard & Poor’s. Should the rating by Standard & Poor’s fall to A+, then the additional collateral based on information available as of December 31, 2013 and 2012 is estimated to amount to approximately USD 88 million and USD 71 million, respectively.
In common with other insurance companies in Europe, the Group is faced with the continued trend towards enhanced consumer protection. Significant uncertainty exists regarding the ultimate cost of these consumer protection trends. The main areas of uncertainty concern court decisions as well as the volume of potential customer complaints related to sales activities and withdrawal rights and their respective individual assessment.
Table 24.2 in USD millions, as of December 31Future payments under non-cancelable operating leases with terms in excess of one year
The plaintiffs further allege that the defendants should be held responsible for Home’s alleged obligations under their Home policies. The trial judge designated the plaintiffs’ claims for constructive fraudulent transfer for adjudication before all other claims; he subsequently ordered an initial bench trial on certain threshold elements of those fraudulent transfer claims and on certain of defendants’ affirmative defenses. The trial commenced on November 1, 2010. Closing arguments were heard on February 22 and 23, 2012.
The court set a second phase for hearing on March 6 and 7, 2014, which will consider the effect of the initial decision on the remaining claims. The Group maintains that the Fuller-Austin Case is without merit and intends to continue to defend itself vigorously.
The Group carries certain assets and liabilities at fair value and discloses the fair value of most other assets and liabilities.
Investment accounting, operations and process functions, are independent from those responsible for buying and selling the assets, and are responsible for receiving, challenging and verifying values provided by third party pricing providers to ensure that fair values are reliable, as well as ensuring compliance with applicable accounting and valuation policies. The quality control procedures used depend on the nature and complexity of the invested assets. They include regular reviews of valuation techniques and inputs used by pricing providers (for example, default rates of collateral for asset-backed securities), variance and stale price analysis, and comparisons with fair values of similar instruments and with alternative values obtained from asset managers and brokers.
The Group gives the highest priority to quoted and unadjusted prices in active markets to measure fair value. In the absence of quoted prices, fair values are calculated through valuation techniques, making the maximum use of relevant observable market data inputs. Whenever observable parameters are not available, the inputs used to derive the fair value are based on common market assumptions that market participants would use when pricing assets and liabilities. Depending on the observability of prices and inputs to valuation techniques, the Group classifies instruments measured at fair value within the following three levels (the fair value hierarchy): Level 1 – includes assets and liabilities for which fair values are determined directly from unadjusted current quoted prices resulting from orderly transactions in active markets for identical assets/liabilities.
Level 3 – includes assets and liabilities for which fair values are determined using valuation techniques with at least one significant input not being based on observable market data. This approach is used only in circumstances when there is little, if any, market activity for a certain instrument, and the Group is required to develop internal valuation inputs based on the best information available about the assumptions that market participants would use when pricing the asset or liability.
Tables 25.1a and 25.1b compare the fair value of financial assets and financial liabilities with their carrying value. Certain financial instruments are not included within these tables as their carrying value is a reasonable approximation of their fair value. Such instruments include cash and cash equivalents, obligations to repurchase securities, deposits made under assumed reinsurance contracts and deposits received under ceded reinsurance contracts and other financial assets and liabilities.
Total fair value through profit or loss securities 10,546 12,530 10,546 12,530
Total financial liabilities held at amortized cost (20,565) (20,763) (20,030) (19,729)
1 Included within reinsurers’ share of reserves for insurance contracts. 2 Included within reserves for insurance contracts.
Liabilities related to unit-linked investment contracts – (59,469) – (59,469) Derivative liabilities – (4) – (4)
Within level 2, the Group has classified government and corporate bonds, investments in unit trusts, and investments in agency-backed and senior tranches of asset-backed securities where quotes are obtained from independent pricing providers. The fair value received from these pricing providers may be based on quoted prices in an active market for similar assets, alternative pricing methods such as matrix pricing or an income approach employing discounted cash flow models. If such quoted prices are not available, then fair values are estimated on the basis of information from external pricing providers or internal pricing models (for example, discounted cash flow models or other recognized valuation techniques). Upon adoption of IFRS 13, the Group elected to classify certain government and corporate debt within level 2, which were previously within level 1. While these debt securities may qualify for level 1 classification based on ordinary transactions in identical instruments, it has been assumed, as a practical expedient, that such instruments would predominantly be valued based on a mix of observable inputs.
Table 25.2b in USD millions, as of December 31, 2013Fair value hierarchy – unit-linked
Within level 3, the Group has classified: • Unlisted stocks, private equity funds and certain hedge funds that are not actively traded. Such instruments are obtained from net asset value information and audited financial statements provided by the issuing hedge funds and private equity funds. Performance of these investments and determination of their fair value are monitored and reviewed closely by the Group’s in-house investment professionals and may be adjusted based on their understanding of the circumstances of individual investments.
• Asset-backed securities (ABSs) for which very limited market activity is currently observed. These ABSs include non-agency backed securities for which the Group’s external pricing providers are required to make internal valuation assumptions due to the limited observable market activity. To determine the fair value of these investments, pricing providers use valuation models that are based on an expected present value technique using unobservable inputs such as prepayment rates.
• Certain real estate properties. Fair value of real estate held for investment is based on valuations performed annually by internal valuation specialists and generally on a rotation basis at least once every three years by an independent qualified appraiser. The valuation methods applied are income capitalization, discounted cash flow analysis, and market comparables taking into account the actual letting status and observable market data. The majority of such investments have been categorized within level 3 because the valuation techniques used include significant adjustments to observable data of similar properties. Some of these investments have been categorized within level 2, where there are active and transparent markets and no significant adjustments to the observable data are required.
For the year ended December 31, 2013, no material transfers between level 1 and level 2 occurred.
Realized gains/(losses) recognized in income 1 71 30 (18) (2) – (37) 99 Unrealized gains/(losses) recognized in income 1, 2 (5) (18) 252 4 (78) 41 26 Unrealized gains/(losses) recognized in other comprehensive income 53 (23) – – – – 15
1 Presented as net capital gains/(losses) and impairments on Group investments in the consolidated income statements. 2 Unrealized gains/(losses) recognized in income for available-for-sale securities relate to impairments. Unrealized gains/(losses) recognized in income for fair value through profit or loss securities relate to net capital gains/(losses) and impairments.
Transfers into Level 3 5 2 – Transfers out of Level 3 (2,489) – – Foreign currency translation effects 2 – 74 1 Presented as net investment result on unit-linked investments in the consolidated income statements.
Key assumptions Equity levels –20% (647) +20% 647 Discount rates +20% (85) –20% 87 Spread rates +20% (70) –20% 70 Prepayment rates –20% (3) +20% 2
Scenarios Equity levels +10% +10.0% +1.2% +1.2% +1.2% 311 Equity levels –10% –10.0% –1.2% –1.3% –1.3% (312) Discount rates +10% –1.0% +10.0% +12.2% –2.0% (69) Discount rates –10% +1.0% –10.0% –6.9% +2.0% 60 Spread rates +10% +0.1% +7.0% +10.0% +0.2% (68)
Within level 3, the Group also classified: • Real estate held for investment amounting to USD 6,734 million and USD 3,661 million for Group investments and investments for unit-linked contracts, respectively, as of December 31, 2013. A large portion of this portfolio is valued using an internal income capitalization model. The model is asset specific and capitalizes the sustainable investment income of a property with its risk specific cap rate. This cap rate is an “all risk yield” with components such as asset class yield for core assets (lowest risk) plus additional premiums for additional risks, for example second tier location or deterioration risk. All cap rate components (risk premiums) are reviewed and, if necessary, adjusted annually before revaluations are performed. The model takes into consideration external factors such as interest rate, market rent and vacancy rate. The significant unobservable inputs which are outside this model, are estimated rental value, rental growth, long term vacancy rate and discount rate. Significant increases/(decreases) in rental value and rental growth, in isolation, would result in a significantly higher/(lower) fair value measurement. Significant increases/(decreases) in the long term vacancy rate and discount rate, in isolation, would result in a significantly lower/(higher) fair value measurement.
Table 25.5 as of December 31, 2013Inter-relationship analysis of level 3 investments to changes in key assumptions
Table 26.1 sets out related party transactions with equity method accounted investments, reflected in the consolidated income statements and consolidated balance sheets.
as of December 31 2013 2012 Other loans 15 18 Deposits made under assumed reinsurance contracts 1 4 Receivables and other assets 2 5 Reserves for insurance contracts (9) (11) Other liabilities (1) (1)
Remuneration of key personnel of the Group Cash compensation, current benefits and fees 30 31 Post-employment benefits 3 3 Share-based compensation 15 14 Total remuneration of key personnel 48 48
As of December 31, 2013 and 2012 there were no loans, advances or credits outstanding from members of the Group Executive Committee. Outstanding loans and guarantees granted to members of the Board of Directors amounted to USD 3 million for both the years ended December 31, 2013 and December 31, 2012. The terms “members of the Board of Directors” and “members of the Group Executive Committee” in this context include the individual as well as members of their respective households. The figures in table 26.2 include the fees paid to members of the Board of Directors of Zurich Insurance Group Ltd and Zurich Insurance Company Ltd, which were USD 5 million for both the years ended December 31, 2013 and December 31, 2012.
Information required by art. 663bbis and art. 663c paragraph 3 of the Swiss Code of Obligation is disclosed in the Financial statements of the holding company.
Table 26.1 in USD millionsRelated party transactions included in the Consolidated financial statements
a) Certificates of contribution issued by the Farmers Exchanges As of December 31, 2013 and 2012, FGI and other Group companies held the following certificates of contribution issued by the Farmers Exchanges. Originally these were purchased by FGI in order to supplement the policyholders’ surplus of the Farmers Exchanges.
Conditions governing payment of interest and repayment of principal are outlined in the certificates of contribution. Generally, repayment of principal and payment of interest may be made only when the issuer has an appropriate amount of surplus, and then only after approval is granted by the appropriate state insurance regulatory department in the U.S. Additionally, the approval by the issuer’s governing board is needed for repayment of principal.
Farmers Exchanges’ share of ceded premiums amounted to USD 1 billion for both the years ended December 31, 2013 and 2012. Ceded incurred losses and loss adjustment expenses totaled USD 703 million and USD 723 million for the years ended December 31, 2013 and 2012, respectively. Farmers Exchanges’ share of the total commission income was USD 291 million and USD 290 million for the years ended December 31, 2013 and 2012, respectively.
Effective December 31, 2012, the All Lines agreement was amended such that Farmers Re Co assumes a 2.5 percent quota share. The remaining 1.5 percent quota share is assumed by a third party on the same terms as Farmers Re Co and ZIC. Unearned premiums totaling USD 102 million were transferred from Farmers Re Co to the Farmers Exchanges as a result of its decreased participation in the All Lines agreement effective December 31, 2012. In addition, the Farmers Exchanges remitted USD 27 million of reinsurance commissions to Farmers Re Co for acquisition expenses due to the decreased participation in the All Lines agreement.
Effective December 31, 2013, the All Lines agreement was amended such that Farmers Re Co assumes a 2.0 percent quota share. The remaining 2.0 percent quota share is assumed by a third party on the same terms as Farmers Re Co and ZIC. Unearned premiums totaling USD 34 million were transferred from Farmers Re Co to the Farmers Exchanges as a result of its decreased participation in the All Lines agreement effective December 31, 2013. In addition, the Farmers Exchanges remitted USD 9.0 million of reinsurance commissions to Farmers Re Co for acquisition expenses due to the decreased participation in the All Lines agreement.
Farmers, through Farmers Group, Inc. and its subsidiaries (FGI), provides non-claims related management services to the Farmers Exchanges. FGI receives fee income for the provision of services to the Farmers Exchanges, which are owned by their policyholders and managed by Farmers Group, Inc., a wholly owned subsidiary of the Group. This segment also includes all reinsurance assumed from the Farmers Exchanges by the Group. Farmers Exchanges are prominent writers of personal and small commercial lines of business in the U.S.
Other Operating Businesses predominantly consist of the Group´s Headquarters and Holding and Financing activities. Certain alternative investment positions not allocated to business operating segments are included within Holding and Financing.
The Group decided that from January 1, 2014, the General Insurance business will manage Middle East and Africa together with Europe to form a single market-facing business called Europe, Middle East & Africa (EMEA). This change has no impact on total General Insurance or the Group.
Net written premiums and policy fees 30,479 29,736 13,223 12,880 4,045 4,361 54 66 502 454 – – 48,303 47,496 Net change in reserves for unearned premiums (710) (540) (371) (259) 54 56 – – 1 1 – – (1,025) (741)
Policyholder dividends and participation in profits, net 6 4 13,820 10,706 – – – – 121 694 – – 13,946 11,405 Income tax expense/(benefit) attributable to policyholders – – 285 194 – – – – – – – – 285 194 Underwriting and policy acquisition costs, net 5,756 5,833 3,003 2,804 1,285 1,383 – – 6 2 (10) (9) 10,041 10,014 Administrative and other operating expense (excl. depreciation / amortization) 3,604 3,878 2,653 2,523 1,343 1,346 993 1,155 132 150 (1,119) (1,483) 7,607 7,570 Interest credited to policyholders and other interest 19 18 420 403 – – 4 6 91 121 (23) (3) 510 545 Restructuring provisions and other items not included in BOP (276) (113) (88) (113) (12) 3 (63) (24) 2 (1) – – (437) (248) Total BOP benefits, losses and expenses (before interest, depreciation and amortization) 29,429 30,147 29,261 26,109 5,440 5,931 984 1,193 189 1,346 (1,151) (1,495) 64,151 63,231 Business operating profit (before interest, depreciation and amortization) 3,554 2,627 1,968 2,020 1,655 1,558 115 200 93 175 (634) (678) 6,752 5,902 Depreciation and impairments of property and equipment 90 110 38 32 48 53 10 15 1 1 – – 186 210 Amortization and impairments of intangible assets 394 211 405 483 91 100 121 79 – 1 – – 1,011 874
Business operating profit before non-controlling interests 2,932 2,165 1,504 1,484 1,516 1,402 (1,056) (932) 72 129 – – 4,968 4,248 1 The Global Life segment includes approximately USD 521 million and USD 603 million of gross written premiums and future life policyholders‘ benefits for certain universal life-type contracts in the Group’s Spanish operations for the years ended December 31, 2013 and 2012, respectively (see note 3).
Table 28.1 in USD millions, for the years ended December 31Business operating profit by business segment
Gross written premiums and policy fees 36,438 35,610 13,916 13,590 4,045 4,361 109 116 535 475 (194) (175) 54,849 53,977 Less premiums ceded to reinsurers (5,959) (5,874) (693) (710) – – (55) (50) (33) (21) 194 175 (6,546) (6,481)
Net earned premiums and policy fees 29,769 29,195 12,852 12,621 4,099 4,418 54 66 504 455 – – 47,277 46,755 Farmers management fees and other related revenues – – – – 2,810 2,846 – – – – – – 2,810 2,846 Net investment result on Group investments 2,384 2,587 4,489 4,833 107 124 315 396 (439) 390 (602) (658) 6,254 7,671
Net investment result on unit-linked investments – – 12,731 9,629 – – – – 73 565 – – 12,805 10,193 of which: inter-segment revenues (389) (510) (362) (367) (64) (69) (919) (1,171) (51) (56) 1,785 2,173 – – Benefits, losses and expenses Insurance benefits and losses, net 1 20,321 20,527 9,167 9,592 2,823 3,198 49 56 (162) 380 – – 32,198 33,752
Losses and loss adjustment expenses, net 20,323 20,547 – – 2,823 3,198 – (1) (18) 27 – (3) 23,128 23,769 Life insurance death and other benefits, net 1 (1) (20) 9,167 9,592 – – 49 56 (144) 353 – 3 9,070 9,983
Table 28.3 in USD millions, as of December 31Assets and liabilities by business segment
Net capital gains/(losses) and impairments on investments 48 17 114 44 5 1 – 9 – – – – 167 71 Net non-technical result (excl. items not included in BOP) (140) (142) (139) (199) (351) (414) (69) (110) (99) (37) (1) – (799) (901) Business operating profit before non-controlling interests 878 497 970 699 1,018 697 180 223 (116) 49 – – 2,932 2,165
Rest of Latin America 1 5 Latin America 534 561 Asia-Pacific Australia 58 74 Hong Kong 14 13
Rest of Asia-Pacific 3 4 Asia-Pacific 113 128 Middle East 53 43 Africa South Africa 11 15
Net investment income on Group investments 288 312 278 254 3,176 3,225 140 188 13 11 (1) – 3,895 3,991 Net capital gains/(losses) and impairments on Group investments – – 12 272 563 552 20 18 – – – – 595 842
Net investment result on Group investments 288 312 290 526 3,739 3,778 160 206 13 11 (1) – 4,489 4,833 Net investment income on unit-linked investments (29) (34) 14 9 1,943 2,009 71 79 29 32 – – 2,027 2,095 Net capital gains/(losses) and impairments on unit-linked investments 100 59 577 1,166 9,310 5,529 655 682 61 98 – – 10,704 7,534
Gross written premiums and policy fees 858 823 3,307 3,005 8,597 8,748 959 912 306 142 (111) (40) 13,916 13,590 Net earned premiums and policy fees 652 611 2,920 2,686 8,204 8,405 825 786 251 133 – – 12,852 12,621
Benefits, losses and expenses Insurance benefits and losses, net 1 390 350 1,307 1,404 7,055 7,480 248 293 167 64 – – 9,167 9,592 Policyholder dividends and participation in profits, net 93 48 611 1,196 12,158 8,404 869 919 88 139 – – 13,820 10,706 Income tax expense/(benefit) attributable to policyholders – – – – 270 170 16 25 – – – – 285 194 Underwriting and policy acquisition costs, net 104 97 996 964 1,542 1,401 197 204 164 138 – – 3,003 2,804 Administrative and other operating expense (excl. depreciation / amortization) 154 141 458 365 1,274 1,404 470 328 303 292 (4) (6) 2,653 2,523 Interest credited to policyholders and other interest 152 147 9 36 235 192 23 27 1 1 – – 420 403 Restructuring provisions and other items not included in BOP (2) (1) 31 7 (47) (114) (8) 7 (63) (13) – – (88) (113) Total BOP benefits, losses and expenses 891 783 3,413 3,972 22,485 18,936 1,815 1,802 661 622 (4) (6) 29,261 26,109 Business operating profit (before interest, depreciation and amortization) 207 257 582 498 1,079 1,115 98 141 2 9 – – 1,968 2,020 Depreciation and impairments of property and equipment 1 1 4 3 27 21 6 6 – – – – 38 32 Amortization and impairments of intangible assets 31 9 124 223 234 242 11 1 6 7 – – 405 483
Table 28.8 in USD millions, for the years ended December 31Global Life – Revenues by region
Zurich International Life 17 20 Asia-Pacific and Middle East 84 158 1 Includes assets relating to business written under freedom of services and freedom of establishment in Europe.
Gross written premiums and policy fees 102 108 7 8 – – 109 116 Net earned premiums and policy fees 47 58 8 8 – – 54 66
Business operating profit before non-controlling interests (859) (757) (196) (175) – – (1,056) (932)
Zurich Insurance Company Ltd 6 Zurich Other Operating Businesses 100 100 CHF 825.0
Taiwan Zurich Insurance (Taiwan) Ltd. Taipei General Insurance 99.73 99.73 TWD 2,000.0 Turkey Zurich Sigorta A.S. Istanbul General Insurance 100 100 TRY 168.9 United Kingdom
Group. 4 In addition, buyout options exist which allow the minority shareholders to sell 15.17 percent of the shares of Deutscher Herold Aktiengesellschaft to the Zurich Insurance
In accordance with article 728a paragraph 1 item 3 CO and Swiss Auditing Standard 890, we confirm that an internal control system exists which has been designed for the preparation of Consolidated financial statements according to the instructions of the Board of Directors.
Embedded value report – executive summary 305 1. Analysis of embedded value earnings 306 2. Free surplus 308 3. Analysis of free surplus generation 309 4. New business 310 5. Expected contribution and expected transfer to shareholders’ net assets 314 6. Operating, economic and other non-operating variances 315 7. Dividends and capital and other movements and other adjustments 319 8. Value of business in-force 320 9. Reconciliation of shareholders’ equity to embedded value 321 11. Group MCEV 323 12. Embedded value methodology 324 13. Embedded value assumptions 330 Appendix: Embedded value tables 334 Statement by Directors 338 Auditor’s report on embedded value 339
Opening embedded value 18,861 15,846 3,016 Closing embedded value 19,499 18,861 638 Embedded value operating earnings 2 855 1,739 (883)
2 Embedded value operating earnings and embedded value earnings are gross of new business value non-controlling interests. Net of new business value non-controlling interests, embedded value operating earnings is reduced to USD 665 million and USD 1,693 million in 2013 and 2012, respectively, and embedded value earnings is reduced to USD 1,049 million and USD 2,104 million in 2013 and 2012, respectively. New business value non-controlling interests was USD 190 million and USD 46 million in 2013 and 2012, respectively.
Zurich Insurance GroupAnnual Report 2013Financial information306 1. Analysis of embedded value earnings
Embedded value development in USD millions, for the year ended December 31, 2013
Dividends in the first six months of the year 1 – (465) (465) – (465) (534) Capital and other movements in the first six months of the year 1 (56) 259 204 (88) 116 New business value 2 851 (1,626) (776) 2,026 1,251 890
New business value net of non-controlling interests 677 (1,400) (723) 1,783 1,060 844 Expected contribution at reference rate 22 102 124 75 199 274 Expected contribution in excess of reference rate 22 156 178 312 491 680 Expected transfer to shareholders’ net assets (419) 1,674 1,254 (1,254) – –
1 In 2012 dividends included capital and other movements. 2 Embedded value operating earnings and embedded value earnings are gross of new business value non-controlling interests. Net of new business value non-controlling interests, embedded value operating earnings is reduced to USD 665 million and USD 1,693 million in 2013 and 2012, respectively, and embedded value earnings is reduced to USD 1,049 million and USD 2,104 million in 2013 and 2012, respectively. New business value non-controlling interests was USD 190 million and USD 46 million in 2013 and 2012, respectively.
In the UK, embedded value increased by USD 63 million, with contributions from new business value being partially offset by negative economic variances.
In Germany, embedded value increased by USD 457 million mainly driven by modeling changes, profits from companies outside the main life insurance entity, exchange rate impacts and other economic impacts.
In Ireland, a stable new business value, positive economic variances and exchange rate impacts were the main contributors to the increase in embedded value of USD 124 million.
In Spain, embedded value increased by USD 252 million as a result of continued strong new business performance and positive economic variances.
In the Rest of Europe, embedded value increased by USD 191 million, mainly from positive economic variances in Italy partially offset by dividend payments.
In Other, embedded value decreased by USD 513 million, mainly as a result of management changes to expense methodology. Of this reduction, USD 173 million resulted from expenses charged against the shareholders’ net assets of Global Life’s central unit during the year ended December 31, 2013, and USD 347 million from the capitalized value of certain central overhead expenses now treated as a recurring maintenance expense, charged against the value of business in-force in Global Life’s central unit.
In Latin America, free surplus decreased by USD 120 million mainly as a result of dividend payments.
In Germany, expected transfer of profits from business in-force was more than offset by adverse development of assets held outside the main life insurance entities and, in total, free surplus decreased by USD 87 million.
In Switzerland, expected transfer of profits from business in-force and improved economic conditions increased free surplus by USD 437 million, which were offset by dividend payments and other variances.
In Ireland, free surplus increased by USD 38 million as a result of the expected transfer of profits from business in-force exceeding the strain of writing new business.
In Spain, free surplus increased mainly due to positive economic variances and expected contribution from in-force, partially offset by dividend payments.
In Rest of Europe, free surplus decreased by USD 14 million. The main drivers were dividend payments, offset by positive economic variances.
Fin an cial info rm atio n 3. Analysis of free surplus generation
Free surplus development in USD millions, for the year ended December 31, 2013
Foreign currency translation effects increased the U.S. dollar free surplus by USD 30 million.
New business value in USD millions 1 New business for 2012 did not include Zurich Santander or Zurich Insurance Malaysia Berhad (ZIMB). The new business value from Zurich Santander and ZIMB for 2012 was USD 195 million.
New business margin (% of APE) 31.9% 30.3% 25.0% 26.6% 28.3% 21.4% 26.0% 17.9% 24.1% 22.1% New business margin (% of PVNBP) 3.7% 3.4% 2.4% 3.1% 3.1% 2.4% 2.9% 2.5% 2.4% 2.5%
1 New business for 2012 did not include Zurich Santander or Zurich Insurance Malaysia Berhad (ZIMB). The new business value from Zurich Santander and ZIMB for 2012 was USD 195 million.
North America increased APE by USD 36 million or 29 percent, driven by increased sales of individual protection business. Changes in the mix of business resulted in reduced margins. New business value increased by USD 8 million or 7 percent.
Zurich Santander delivered strong APE of USD 821 million. Strong sales of protection business were the result of an incentive campaign in Brazil. With strong margins, Zurich Santander delivered new business value of USD 268 million.
In the rest of Zurich’s businesses in Latin America, APE decreased by USD 399 million or 50 percent on a local currency basis. This was the result of the successful participation in the Social Security biennial bid process in Chile in 2012. New business value was stable.
In Germany, APE decreased by USD 90 million or 22 percent on a local currency basis, mainly driven by lower sales of savings business. However, new business value increased by USD 6 million or 12 percent on a local currency basis as a result of improved margins on saving business more than offsetting the APE decrease.
In Switzerland, APE increased by USD 5 million or 1 percent on a local currency basis. As a result of increased profitability on individual life due to re-pricing and a change in the mix of business, new business value increased by USD 35 million.
In Ireland, APE increased by USD 65 million or 15 percent on a local currency basis benefitting from cross-border sales, mainly to Italy. The effect on new business value from this increased volume was offset by reduced margins on domestic Irish business. In total, new business value was increased by USD 2 million.
In Spain, APE increased by USD 5 million, while new business value increased by USD 23 million or 20 percent on a local currency basis as a consequence of increased sales of highly profitable protection business.
Expected contribution in excess of reference rate The expected contribution in excess of reference rate is the additional embedded value expected to be created if “real world” expected investment returns applicable at the start of the year were to emerge. The expected contribution in excess of reference rate was USD 491 million.
• Mortality and morbidity experience increased embedded value by USD 87 million. The main positive experience variance of USD 56 million arose in Chile from the disability and survival business.
• Expenses experience increased embedded value by USD 3 million. Following management changes to expense methodology introduced during 2013, an expense variance resulting from costs exceeding long-term expense assumptions for start-up businesses, reported as “expenses” in the operating experience variance in the Half Year Report 2013, is reported as “development expenses” included in other operating variances in this report.
• Other operating experience variances reduced embedded value by USD 19 million.
Embedded value split of operating experience variance in USD millions, for the year ended December 31, 2013
Embedded value split of other operating variances in USD millions, for the year ended December 31, 2013
Other development expenses were predominantly for platform developments, expansion and other projects in the UK and Ireland.
• One-off expenses reduced embedded value by USD 65 million, mainly driven by the costs of implementing efficiency improvements and other projects in Switzerland and Ireland.
• Other operating variances had a positive impact on embedded value of USD 333 million. The main contribution arose in Germany where profits from companies outside the main life insurance entity and other experience variances increased embedded value.
Economic variances Economic variances arise from the difference between actual economic experience during the year and the expected experience implied by the economic assumptions at the start of the year. Economic variances also include the impact of changes in assumptions in respect of future economic experience at the end of the year. In total, economic variances increased embedded value by USD 537 million in 2013.
In 2013, risk free rates increased for each major currency and in particular for the U.S. dollar and the pound sterling, while the liquidity premium spread decreased for each major currency, particularly for the pound sterling. Yields on sovereign debt were volatile across Europe, but spreads have reduced during the year. These movements are most significant for spread business and traditional participating business and as a result investment performance was positive in Switzerland, Italy, Germany and Spain. Outside Europe, increased interest rates negatively affected the economic variance on protection business in Asia-Pacific and Middle East.
Other non-operating variances decreased embedded value by USD 153 million, mainly driven by a reduction in the value of business in-force in the UK in the light of new regulation, which will be effective from April 2014, on payments to platform service providers, and USD 40 million in Germany.
Fin an cial info rm atio n 7. Dividends and capital and other movements and other adjustments
Dividends and capital and other movements Dividends and capital and other movements reflect dividends paid by Global Life to the Group, shown as a negative number in the table below, net of capital and other movements received from the Group, shown as a positive number in the table. Capital and other movements can also relate to the value of business in-force in respect of acquisitions and disposals, or corporate restructuring.
In Latin America, the net dividends and capital movements reduced embedded value by USD 173 million.
In Europe, the net dividends and capital movements were USD 388 million. The main contributions to this were a dividend payment by Switzerland of USD 163 million and dividend payments by Rest of Europe of USD 153 million. In the UK, the main drivers of capital movements of USD 55 million were a change in the treatment of an internal reinsurance treaty which increased embedded value by USD 113 million, with equal and offsetting impacts in other segments of the Group, and a non-life insurance entity which was reclassified and excluded from entities covered by MCEV valuation principles reducing embedded value by USD 88 million, with equal impact on Group MCEV.
In Asia Pacific and Middle East, capital injections amounted to USD 104 million.
Other adjustments The adjustment to embedded value to remove non-controlling interests from new business value is shown separately and it largely arose from the interests of non-controlling shareholders in Zurich Santander and Spain.
Zurich Insurance GroupAnnual Report 2013Financial information320 8. Value of business in-force
The VIF maturity profile shows that 35 percent of the VIF should emerge as free surplus over the next five years and 61 percent over the next ten years.
in USD millions, as of December 31Components of value of business in-force in USD millions, as of December 31Maturity profile of value of business in-force
Goodwill (0.4) Deferred policy acquisition costs and deferred origination costs (15.3) Other intangibles and present value of future profits (4.0) Deferred front-end fees 5.8
Pension scheme liabilities 2 1.1 Less non-controlling interests 3 0.1 Other adjustments 4 1.6 Embedded value shareholders’ net assets 8.4 Value of business in-force 11.1 Embedded value 19.5 1 Shareholders’ equity is the Global Life share of total shareholders’ equity as reported in the Consolidated financial statements prepared on the basis of the Group’s accounting policies set out in note 3 of the Consolidated financial statements.
Reported embedded value and new business value 1 19,499 1,251 Base embedded value and base new business value 1 19,113 904 Operating sensitivities 10% increase in initial expenses n / a (5%) 10% decrease in maintenance expenses 3% 7% 10% increase in voluntary discontinuance rates (3%) (12%) 10% decrease in voluntary discontinuance rates 4% 14% 5% improvement in mortality and morbidity for assurances 2% 10% 5% improvement in mortality for annuities (1%) (1%) Required capital set equal to minimum solvency capital – 1%
The key assumption changes represented by each of these sensitivities are given in section 12 q).
The Group MCEV is presented in the following table as the Global Life covered business valued using MCEV Principles and the non-covered businesses which are valued at the unadjusted shareholders’ equity. Non-covered businesses include the life businesses in Non-Core Businesses managed outside Global Life and all other Group businesses including General Insurance and Farmers.
For certain smaller companies in Global Life, no embedded value has been calculated but these companies have been included in embedded value at shareholders’ equity, as calculated in accordance with the Group’s accounting policies. The contribution from these companies to embedded value is less than 5 percent.
b) Reporting of embedded value In line with MCEV Principles, embedded value is split between shareholders’ net assets, including free surplus and required capital, and the value of business in-force.
Frictional costs (FC) reflect a deduction for the cost of holding the required capital. Under the Group’s market consistent framework, the FC represents tax in respect of the future investment return on required capital together with the cost of future investment management expenses on required capital. In Germany, the policyholders’ share of investment income on the required capital is also included.
For the purpose of these calculations, required capital is assumed to run off in line with existing business.
The allowance for FC is included both in the value of business in-force and in new business value. For new business value, FC is applied to the minimum solvency capital required to be held in respect of that business.
The cost of residual non-hedgeable risk (CRNHR) is an explicit deduction for non-hedgeable financial risks (nonhedgeable asset/liability management risks and reinsurance credit risk), and non-financial risks (mortality, persistency, expenses and operational risk). The CE value allows for best estimate shareholder cashflows. The CRNHR is largely an allowance for uncertainty in shareholder cashflows, and for risks which are not already considered in the CE value or the TVFOG, such as operational risk. Most residual non-hedgeable risks have a symmetric impact on embedded value apart from operational risk.
The capital is projected over the lifetime of the business using appropriate risk drivers for each risk type. The present value of the risk capital is calculated by applying the swap curve as of the valuation date. The CRNHR allows for diversification across risk types and across geographical segments. This approach complies with MCEV Principles except
Guidance 9.7 which does not allow for diversification benefits between covered and non-covered business. The Embedded value report does allow for diversification benefits between covered and non-covered business, which is consistent with the management view of the business and adds an estimated USD 545 million to embedded value.
e) New business New business covers new contracts sold during the reporting period and includes recurring single premiums, new premiums written during the period on existing contracts and variations to premiums on existing contracts where these premiums and variations have not previously been assumed to be part of business in-force. Where recurring single premiums are projected over time to derive the corresponding new business value, they are treated as annual premium for the volume definition. Group Life business valued with a contract renewal assumption is treated as annual premium.
New business is valued at the point of sale. Explicit allowance is made for FC, TVFOG, and CRNHR. New business value is valued using actual new business volumes, except in Germany. See section 12 f).
In certain profit sharing funds, the new business written can affect the TVFOG for business written in prior years. This effect is taken into account in the new business value by valuing the new business on a marginal approach, the difference between embedded value with and without the new business. This captures the effect of cross-subsidies between business in-force and new business due to, for example, different interest rate guarantees operating in a shared common pool of assets.
f) Asset and liability data The majority of the Group’s embedded value has been calculated using a “hard close” approach, such that all asset and liability data reflect the actual position as of the valuation date.
In practice, the Group has applied a computational method known as a “risk neutral” approach. This involves projecting the assets and liabilities using a distribution of asset returns where all asset types, on average, earn the same risk free rate.
The calculations of the TVFOG are based on stochastic simulations using an economic scenario generator provided by Barrie & Hibbert. The outputs (“simulations”) have been calibrated to conform to the economic parameters specified by the Group.
Simulations are produced for the economies in the U.S., the UK, Switzerland and the eurozone. In each economic area, risk free nominal interest rates are modeled using a LIBOR market model. The excess return on other asset classes relative to the total returns on risk free assets are then modeled using a multi-factor lognormal model. Hong Kong uses U.S. dollar simulations because their principal liabilities are U.S. dollar-denominated. Chile uses closed form solutions rather than simulations. Other operations, not mentioned above, have no significant options and guarantees. Further details are set out under “Economic assumptions” in section 13.
In 2013, management changes have been made to the methodology for allocating expenses between those which are included in unit costs and those which are charged as expenses in operating experience variances or as development expenses or one-off expenses in other operating variances.
Business units allocate expenses incurred by them between those expenses that form the unit cost base for assumption setting, and those that are excluded from the unit cost base. Any expense excluded from the unit cost base requires approval from the Global Life Chief Financial Officer.
Zurich Insurance GroupAnnual Report 2013Financial information328 is included as a negative value of business in-force for region Other. The impact of this change at December 31, 2013 is USD 347 million and is reported as a development expense.
j) Holding companies Holding companies allocated to Global Life have been consolidated in embedded value at their shareholders’ equity. Related expenses have been included in the projection assumptions. Holding companies outside Global Life are not included in embedded value of the covered business.
k) Consolidation adjustments Where a reinsurance arrangement exists between two life companies within Global Life, the value of the reinsurance is shown in embedded value of the region to which the ceding company belongs.
Embedded value is shown net of non-controlling interests. Where the Group has a controlling interest in a subsidiary company, the new business value and the premium information are shown gross of non-controlling interests. The non-controlled share of new business value is eliminated through “new business value non-controlling interests”.
m) “Look through” principle – service companies There are some companies within Global Life that provide administration and distribution services. These are valued on a “look through” basis. The results do not include any Group service companies outside Global Life.
In Germany, the majority of distribution and administration is provided by service companies. These are valued on a “look through” basis. These companies also provide limited services to companies outside Global Life. The value of business in-force and new business value reflect the services provided to companies within Global Life. The shareholders’ net assets of Global Life include, however, the full shareholders’ net assets of these service companies.
n) Employee pension schemes In the Group’s Consolidated financial statements, actuarial gains and losses arising from defined benefit pension and other defined benefit post-retirement plans are recognized in full in the period in which they occur and are presented on a separate line in the statement of comprehensive income, with a liability recognized for employee benefit deficits under IAS 19. This adjustment has not been made in the detailed embedded value described in this Embedded value report. If the adjustment had been made embedded value as of the valuation date would have been lower by USD 1,099 million. The actuarial and economic assumptions used for this adjustment are consistent with those used for the equivalent allowance made in the Group’s Consolidated financial statements.
p) Translation to Group presentation currency To align embedded value reporting with the Group’s Consolidated financial statements, relevant results have been translated to the Group presentation currency, U.S. dollar, using average exchange rates for the period. This applies to new business value and new business volumes (APE and PVNBP) for the current period and comparative figures. This approach has also been applied to the analysis of movement. Valuations as at a specified date are translated at end-of-period exchange rates.
The rates can be found in note 1 of the audited Consolidated financial statements as of December 31, 2013.
A 10 percent decrease in maintenance expenses means that, for example, a base assumption of USD 30 per annum would decrease to USD 27 per annum.
A 100 basis points increase and decrease was applied to the risk free forward yield curve across all durations. For the 100 basis points decrease sensitivity, if a risk free forward annual yield at a given duration is less than 100 basis points, the decrease is to zero at that duration, not to a negative rate.
A 10 percent fall in equity and property market values was assessed for embedded value only.
c) Dynamic decisions To reflect more realistically the outcome of stochastic simulations, the assumptions for each simulation make allowance for the behavior of policyholders and management actions in response to the investment conditions modeled.
North America Latin America of which Zurich Santander Europe Asia-Pacific and Middle East Other Global Life
Dividends in the last six months of the year 1 (68) (127) (182) 869 (146) 833 (77) (59) (15) 371 – 6 (342) 1,059 Capital and other movements in the last six months of the year 1 145 53 – (7) 11 6 208 New business value non-controlling interests – – (133) (2) (131) – (56) (44) (1) – – – (190) (46)
New business information: Annual premiums 154 110 855 704 561 – 1,398 1,374 483 403 90 86 2,981 2,677
Present value of new business premiums (PVNBP) 1,406 1,227 6,158 2,458 4,381 – 27,751 26,998 3,368 3,058 1,903 1,554 40,586 35,296
Expected contribution from in-force 159 171 42 31 32 – 392 658 94 93 2 2 689 954
New business margin (% of APE) 72.4% 87.1% 31.2% 13.2% 32.6% – 20.6% 17.9% 33.5% 26.9% 57.4% 70.1% 28.3% 22.1% New business margin (% of PVNBP) 8.3% 8.9% 6.0% 4.0% 6.1% – 1.8% 1.7% 5.3% 4.1% 5.2% 6.6% 3.1% 2.5%
in USD millions, for the years ended December 31Embedded value results Global Life, by region
1 In 2012 dividends included capital and other movements. 2 Embedded value operating earnings and embedded value earnings are gross of new business value non-controlling interests.
Dividends in the last six months of the year 1 – 13 (77) (34) – (10) – – – (29) – – (77) (59) Capital and other movements in the last six months of the year 1 – – (2) – (4) – (7) New business value non-controlling interests – – (1) (1) – – – – (55) (43) – – (56) (44)
Auditor’s Responsibility Our responsibility is to express an opinion on whether the Embedded value report has been properly prepared in accordance with the MCEV Principles and Guidance. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the Embedded value report is free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the Embedded value report. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the Embedded value report, whether due to fraud or error. In making those risk assessments, the auditor considers internal controls relevant to the entity’s preparation of the Embedded value report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal controls. An audit also includes evaluating the appropriateness of the principles used and the reasonableness of significant estimates made, as well as evaluating the adequacy of the overall presentation of the Embedded value report.
The Annual General Meeting on April 4, 2013, approved a gross dividend of CHF 17.00 per share to be paid free of Swiss withholding tax to the shareholders out of the capital contribution reserve.
Shareholders’ equity decreased by CHF 36 million to CHF 16,662 million as of December 31, 2013, from CHF 16,699 million as of December 31, 2012, as a result of the dividend paid in 2013, partially offset by the net income after taxes for the year and capital contributed through the issuance of new shares to employees out of the contingent capital. The Board will propose a dividend from the capital contribution reserve of CHF 17.00 per share for the year 2013 for approval at the Annual General Meeting to be held on April 2, 2014.
Total expenses (245,370) (216,629) Net income after taxes 2,327,038 2,382,137 in CHF thousands, for the years ended December 31
Non-current assets Investments in subsidiaries 9 11,619,569 11,779,569 Subordinated loans to subsidiaries 10 4,876,670 4,877,074 Total non-current assets 16,496,239 16,656,643 Current assets Cash and cash equivalents 767 12,786 Loans to subsidiaries 260,314 646,367 Receivables from subsidiaries 466,229 – Receivables from third parties 99 808 Accrued income from subsidiaries 298 306 Accrued income from third parties 14 14 Total current assets 727,721 660,281 Total assets 17,223,960 17,316,924
General legal reserve 341,140 341,140 Free reserve: As of January 1 332,986 332,986 Transfer from capital contribution reserve 5,457 2,494,314 Dividends paid – (2,494,314) 2
Free reserve, as of December 31 338,443 332,986 Retained earnings: As of January 1 5,321,406 2,939,269 Net income after taxes 2,327,038 2,382,137
Retained earnings, as of December 31 7,648,444 5,321,406 Total shareholders’ equity (before appropriation of available earnings) 16,662,421 16,698,774 Total liabilities and shareholders’ equity 17,223,960 17,316,924 1 Dividends paid in the year, out of capital contribution reserve in respect of the 2012 result, amounting to CHF 2,507,249 2 Dividends paid in the year, in respect of the 2011 result in CHF thousands, as of December 31Assets
Notes to the financial statements 1. Basis of Presentation Zurich Insurance Group Ltd (the Company) presents its financial statements in accordance with Swiss law. The latest changes within the Swiss Code of Obligations effective January 1, 2013, were not yet adopted due to the transitional period.
5. Other income Other income for 2013 mainly represents the partial release of CHF 18.4 million (prior year CHF 18.7 million) of the irrevocable commitment made by the Company on behalf of the Zurich Insurance Group to the Z Zurich Foundation in 2011, as another Group company made the 2013 and 2012 payments.
6. Administrative expense Administrative expense includes directors’ fees of CHF 4.0 million for the year ended December 31, 2013 and CHF 4.1 million for the previous year as well as overhead expenses of CHF 10.0 million for both the years ended December 31, 2013 and 2012. Fees paid to the Swiss Financial Market Supervisory Authority slightly increased by CHF 0.1 million to CHF 3.5 million for 2013.
7. Other financial expense Other financial expense includes impairments on investments in subsidiaries of CHF 160 million in 2013 and CHF 75 million in the previous year.
8. Tax expense The tax expense consists of income, capital and other taxes.
b) Authorized share capital Until March 29, 2014, 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 such new shares, the issue price, type of payment, conditions for exercising pre-emptive rights, and the commencement of entitlement to dividends.
During 2013 and 2012, 603,099 shares and 914,301 shares, respectively, were issued to employees out of the contingent share capital. Of the total 603,099 registered shares issued to employees during the year 2013, 479,377 shares were issued in the period from January 1, 2013 to March 31, 2013 and 123,722 registered shares were issued as from April 1, 2013, to December 31, 2013. As a result, on December 31, 2013 and 2012, respectively, the remaining contingent share capital, which can be issued to employees of Zurich Insurance Group Ltd and its subsidiaries, amounted to CHF 239,203.70 and CHF 299,513.60 or 2,392,037 and 2,995,136 fully paid registered shares, respectively, with a nominal value of CHF 0.10 each. Pre-emptive rights of the shareholders, as well as the right for advance subscription, are excluded. The issuance of shares to employees is subject to one or more regulations to be issued by the Board and take into account performance, functions, levels of responsibility and criteria of profitability. Shares or option rights may be issued to the employees at a price lower than the price quoted on the SIX Swiss Exchange.
Information required by art. 663c paragraph 3 of the Swiss Code of Obligations on the share and option holdings of the members of the Board of Directors and the members of the Group Executive Committee are disclosed in note 18.
Fin an cial info rm atio n 16. Information on the risk assessment process Refer to the disclosures in the Risk review on pages 127 to 168 of this Annual Report.
17. Remuneration of the Board of Directors and the Group Executive Committee This note sets out details of the remuneration of the Board and of the members of the Group Executive Committee (GEC) in accordance with the information required by articles 663bbis and 663c paragraph 3 of the Swiss Code of Obligations. This information should be read in connection with the unaudited Remuneration report, set out on pages 70 to 99 in which additional details of the remuneration principles and architecture can be found.
A fixed portion of the fee continues to be allocated towards the provision of three-year sales-restricted Zurich Insurance Group Ltd shares. The portion for the Chairman was set at CHF 333,500 for both years ended December 31, 2013 and 2012, the portion for the Vice-Chairman was set at CHF 125,000 for both years ended December 31, 2013 and 2012 and the portion for the other members of the Board at CHF 80,000 for both years ended December 31, 2013 and 2012. The overall fees are set out in the following tables: Basic fee
10 At the Annual General Meeting 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 of Directors as of September 11, 2013.
Except for Mr. Watter none of the Directors had outstanding loans, advances or credits as of December 31, 2013 or 2012. Unrelated to his Board membership and on terms and conditions available to other customers, Mr. Watter had a collateralized policy loan of CHF 2.5 million outstanding as of December 31, 2013 and 2012. The annual interest rate charged on the loan is 4 percent.
No benefits (or waiver of claims) have been provided to former members of the Board during the year 2013 or during the year 2012. Neither had any former member of the Board outstanding loans, advances or credits as of December 31, 2013 or 2012.
No benefits (or waiver of claims) have been provided to related parties of the Directors or related parties of former members of the Board during the year 2013, nor during the year 2012. Neither had any related party of the Directors or of former members of the Board outstanding loans, advances or credits as of December 31, 2013 or 2012.
2 On the basis of 11 GEC members, of whom 9 served during the full year 2013. Included in the figures are the relevant compensation amounts for the 2 individuals who were acting “ad interim” in the positions Chief Financial Officer and Group Head of Operations during the year.
8 The amounts have been translated to US dollars at the relevant exchange rates throughout the year and the cash incentive to be paid in 2014 has been translated at the year-end rate in 2013.
in CHF million1 , for the years ended December 31All GEC members (incl. the highest paid)
Base salary 1.60 1.60 Cash incentive awards earned for the year 2.00 2.00 Value of target performance share grants 2 3.60 3.60 Service costs for pension benefits 3 0.30 0.30 Value of other remuneration 4 0.10 0.10 Total in CHF million 7.60 7.60 Total in USD million 5 8.10 8.30 1 The remuneration shown in the table is gross, based on the accrual principle and does not include any business related expenses incurred in the performance of the CEO’s services.
4 Includes employee benefits, perquisites, benefits-in-kind and any other payments due under the employment contract. Benefits-in-kind have been valued using market rates. 5 Mr. Senn’s remuneration is paid in Swiss francs. The amounts have been translated from Swiss francs to US dollars at the relevant exchange rates throughout the year and the cash incentive to be paid in 2014 has been translated at the year-end rate in 2013.
As of December 31, 2013 and 2012, there were no loans, advances or credits outstanding from GEC members.
No benefits (or waiver of claims) have been provided to related parties of GEC members or related parties of former members of the GEC during the year 2013 or 2012. Neither had any related party of GEC members or of former members of the GEC outstanding loans, advances or credits as of December 31, 2013 or 2012.
18. Shareholdings of the Board of Directors and the Group Executive Committee Share and share option holdings of the Directors and of the members of the GEC, who held office as of December 31, 2013 and 2012, are set out below in accordance with the information required by article 663c paragraph 3 of the Swiss Code of Obligations. This information is also included in the unaudited Remuneration report, set out on pages 70 to 99 of the Annual Report in which additional details can be found.
T. de Swaan, Chairman 2,597 2,079 J. Ackermann, Former Chairman n / a 23,271 F. Kindle, Vice Chairman 17,247 16,915 S. Bies, Member 1,964 1,632 A. Carnwath, Member 624 292 V.L.L. Chu, Member 1,964 1,632 R. del Pino, Member 624 292 Th. Escher, Member 9,802 9,470 A. Meyer, Member n / a 3,239 M. Mächler, Member 247 n / a D. Nicolaisen, Member 2,247 1,915 R. Watter, Member 5,215 4,883 1 None of the Directors together with parties related to them held more than 0.5 percent of the voting rights of Zurich Insurance Group Ltd shares as of December 31, 2013 or 2012, respectively.
None of the Directors, nor any related party of a Director, held any share options or conversion rights over Zurich Insurance Group Ltd shares as of December 31, 2013 or 2012.
He is formally not a member of the GEC. 5 Mr. Sharma, currently Group Controller assumed responsibility for Group Finance on an ad interim basis succeeding Mr. Wauthier effective August 26, 2013. He is formally not a member of the GEC. 6 Mr. Wauthier died on August 26, 2013.
The following tables show how the totals of vested share options owned by members of the GEC as of December 31, 2013 and 2012, are distributed according to the grants identified in the tables “Summary of outstanding options.”
3 Mr. Terryn, former Group Head of Operations, was appointed to CEO Global Life effective August 14, 2013. 4 Mr. Wauthier died on August 26, 2013.
Year of grant Total 1 Mr. Dailey was appointed to the GEC as of January 1, 2012. 2 Mr. Hausmann was appointed to the GEC as of July 1, 2012. 3 Mr. Kerner was appointed to the GEC as of September 1, 2012.
The following tables set out additional details of the options outstanding for members of the GEC as at December 31, 2013 and 2012, respectively. Further details can be found in the unaudited Remuneration report, pages 70 to 99.
Appropriation of capital contribution reserve Balance at January 1, 2014 (incl. reserve for treasury shares) 8,319,504 Dividend payment out of capital contribution reserve (2,531,355) 1
Balance carried forward 5,788,149 1 1 These figures are based on the issued share capital as of December 31, 2013. They may change following the issuance of shares out of contingent capital for employees after the balance sheet date (see note 12). Treasury shares are not entitled to dividends.
The Board of Directors proposes to the Annual General Meeting on April 2, 2014, to pay out a dividend of CHF 2,531 million from the capital contribution reserve.
Opinion In our opinion, the financial statements for the year ended December 31, 2013, comply with Swiss law and the Company’s articles of incorporation.
The shares registered in the share ledger as of December 31, 2013 were owned by 127,922 shareholders of which 122,403 were private individuals holding 26.2% of the shares (or 16.3% of all outstanding shares), 2,046 were foundations and pension funds holding 6.9% of the shares (or 4.3% of all outstanding shares), and 3,543 were other legal entities holding 66.9% of the shares (or 41.5% of all outstanding shares).
Annual Report 2013 The Annual Report contains detailed information about Zurich’s financial performance, executive bodies, risk management, corporate governance and remuneration in 2013. It is available in English, German and French, with the financial statements in English only.
Share Register Services Zurich Insurance Group Ltd, Switzerland Telephone: +41 (0)44 625 22 55 Email: shareholder.services@zurich.com Website: www.zurich.com/investors/ shareholderinformation/
Business operating profit (BOP) is a measure that 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 on investments and impairments (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 in estimates of earn-out liabilities (with the exception of experience adjustments, which remain within BOP) are also excluded from BOP. Business operating profit before interest, depreciation and amortization (BOPBIDA) is BOP before interest expense on debt, depreciation of property and equipment and amortization and impairment of goodwill and other intangibles, but including amortization of DAC and DOC. Adjusted business operating profit is adjusted for notional investment income on the difference between the average actual International Financial Reporting Standards (IFRS) equity and the average allocated IFRS equity using one global swap rate. Allocated IFRS equity is equal to a segment’s share of the Group’s total IFRS equity allocated based on the segment’s proportion of the Group’s total risk-based capital (RBC) at each period end.
Total net technical expenses includes underwriting and policy acquisition costs, as well as the technical elements of administrative and other operating expenses, amortization of intangible assets, interest credited to policyholders and other interest, and other income.
Loss ratio is a performance measure that indicates the level of claims during the period relative to earned premiums and policy fees. It is calculated as insurance benefits and losses, which include paid claims, claims incurred but not reported (IBNR) and claims handling costs, divided by earned premiums and policy fees.
Disclaimer and cautionary statement Certain statements in this document are forward-looking statements, including, but not limited to, statements that are predications of or indicate future events, trends, plans or objectives of Zurich Insurance Group Ltd or the Zurich Insurance Group (the Group). Forward-looking statements include statements regarding the Group’s targeted profit, return on equity targets, expenses, pricing conditions, dividend policy and underwriting and claims results, as well as statements regarding the Group’s understanding of general economic, financial and insurance market conditions and expected developments. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties and can be affected by other factors that could cause actual results and plans and objectives of Zurich Insurance Group Ltd or the Group to differ materially from those expressed or implied in the forward-looking statements (or from past results). Factors such as (i) general economic conditions and competitive factors, particularly in key markets; (ii) the risk of a global economic downturn; (iii) performance of financial markets; (iv) levels of interest rates and currency exchange rates; (v) frequency, severity and development of insured claims events; (vi) mortality and morbidity experience; (vii) policy renewal and lapse rates; and (viii) changes in laws and regulations and in the policies of regulators may have a direct bearing on the results of operations of Zurich Insurance Group Ltd and its Group and on whether the targets will be achieved. Zurich Insurance Group Ltd undertakes no obligation to publicly update or revise any of these forward-looking statements, whether to reflect new information, future events or circumstances or otherwise.
All references to 'Farmers Exchanges' mean Farmers Insurance Exchange, Fire Insurance Exchange, Truck Insurance Exchange and their subsidiaries and affiliates. The three Exchanges are California domiciled interinsurance exchanges owned by their policyholders with governance oversight by their Boards of Governors. Farmers Group, Inc. and its subsidiaries are appointed as the attorneys-in-fact for the Farmers Exchanges and in that capacity provide certain non-claims administrative and management services to the Farmers Exchanges. Neither Farmers Group, Inc., nor its parent companies, Zurich Insurance Company Ltd and Zurich Insurance Group Ltd, have any ownership interest in the Farmers Exchanges. Financial information about the Farmers Exchanges is proprietary to the Farmers Exchanges, but is provided to support an understanding of the performance of Farmers Group, Inc. and Farmers Reinsurance Company.
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