Geography United States 1 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.
in USD millions, for the years ended December 31, unless otherwise stated 2013 2012 1 Change 2
Business operating profit 4,680 4,084 15% Net income attributable to shareholders 4,028 3,887 4%
General Insurance business operating profit 2,859 2,112 35% General Insurance combined ratio 95.5% 98.4% 2.9 pts
Diluted earnings per share (in CHF) 25.23 24.72 2% Book value per share (in CHF) 196.14 214.86 (9%)
Return on shareholders’ equity (ROE) 12.0% 11.8% 0.2 pts Business operating profit (after tax) return on shareholders’ equity (BOPAT ROE) 10.5% 9.3% 1.2 pts 1 December 31, 2012 has been restated as set out in note 1 of the Consolidated financial statements. 2 Parentheses around numbers represent an adverse variance. 3 New business amounts are calculated on embedded value principles before the effect of non-controlling interests. See Embedded value report for details of these principles. New business amounts for the year ended December 31, 2012 do not include
40,0005,000 1 The Zurich Economic Capital Model (Z-ECM) is an internal measure of capital adequacy, which also forms the basis of Zurich’s Swiss Solvency Test (SST) model. As of July 1, 2013, the Group’s SST ratio was 206%. 2 All amounts are shown in U.S. dollars and rounded to the nearest million unless otherwise stated, with the consequence that the rounded percentages may not add to 100 percent in all cases. All ratios and variances are calculated using the underlying amounts rather than the rounded amounts.
• In General Insurance, the underlying loss ratio improved in 2013 through disciplined underwriting and cost efficiencies, while also benefitting from a lower level of severe catastrophes than in 2012.
• Farmers showed robust profit growth due to an improved underwriting result at Farmers Re, partly offset by lower business operating profit in Farmers Management Services.
We are pleased to present our financial results for 2013. We delivered a solid operating profit in all core businesses, experiencing good growth in priority markets in both General Insurance and Global Life. Farmers is focusing on implementing its new consumer strategy, while at the same time delivering resilient margins.
Setting our course for 2014 – 2016 In 2010, we set ambitious targets for the three years to 2013, some of which we did not achieve. However, we have made good progress in many areas. We reduced costs in mature markets and delivered strong growth in our priority developing markets. But the environment in which we operate has changed and we must change with it.
G ro u p overview segmentation within three retail markets, where we believe our brand strength and market position give us a competitive edge.
During the 2014–2016 period, our objective is to deliver an attractive total return to our shareholders. To help us achieve this, we have set new targets. We aim to generate a BOP after tax return on equity of 12 to 14 percent 2; maintain a strong capital position, with a Zurich Economic Capital Model 3 ratio of 100 to 120 percent; and achieve high levels of free cash flow, with net cash remittances to the Group in excess of USD 9 billion 4. We will be reporting on our progress against these targets at the half- and full-year.
Progress in corporate responsibility initiatives During 2013, we also made significant progress in our two leading corporate responsibility initiatives. We announced a flood resilience program, a five-year commitment that includes an initial investment of USD 36 million. The program taps into our insurance expertise and employs a new approach to cross-sector collaboration. The International Federation of Red Cross and Red Crescent Societies (IFRC) and the international non-governmental organization Practical Action are part of an 2 Excluding net unrealized gains and losses.
alliance that links research, community-based programs and risk expertise. Work has begun in Mexico and Indonesia, which will serve as models for future efforts. We also announced that we plan to invest up to USD 1 billion in ‘green bonds’ issued by borrowers such as the World Bank, International Finance Corporation and other development finance institutions. These bonds have the same rating as standard bonds from their issuers and earn returns fully compensating for the risk. The proceeds are used exclusively to help communities mitigate or adapt to the consequences of climate change.
Economic outlook Despite a more challenging environment for emerging markets, the global economy continues to strengthen, led by better activity in developed regions and supported by stabilization in China. U.S. growth is expected to rise above trend in 2014, leading an acceleration in global activity. The outlook for Europe is also more positive. Emerging markets will face capital outflows and tighter domestic policy, while political uncertainty is also high in many regions. Stronger activity in developed markets should support exports, however. Asian economies are expected to see steady, if unspectacular, growth. In Latin America, Chile and Mexico are set to do well, while growth in Brazil will probably slow.
Delivering on our targets This is a year in which we are taking firm actions in relation to each of the three cornerstones of our strategy. We expect some of the benefits of these actions will start to be visible this year, as we lay a strong foundation for the delivery of our strategic targets for 2014 to 2016.
We would like to thank all our stakeholders – our customers, our people, our shareholders and the communities in which we live and work – for their support. We look forward to updating you on the progress we are making toward our strategic goals in the months ahead.
We believe that a number of factors – the steadily improving economic environment, accelerating globalization, and the evolving technological landscape – favor us because Zurich is a global and composite insurer.
An improving global economic environment There are clear signs that a number of the mature markets in which Zurich has a strong competitive position are starting to recover, while we expect developing markets to continue delivering solid growth. The more positive outlook compared to the period 2010–2013 means that we can be more assertive in our quest for growth, though we need to remain vigilant as there are still downside risks, and we do not intend to compromise the discipline and focus that served us well in recent years.
For corporate and commercial customers, these trends translate into an increasing need for complex bespoke international solutions, which can best be crafted by focused insurers with strong skills and global reach. We strongly believe that this plays to Zurich’s strengths, particularly our global capabilities and technical expertise.
Zurich’s strategy for 2014 – 2016 is underpinned by market developments in the global economy, technology and customer buying behavior.
Life insurance in particular faces challenges from increased regulatory oversight and a stronger focus on customer protection that has put pressure on commissions. But demand for company-sponsored and individual protection and savings solutions is increasing as governments and corporations look to reduce the costs associated with providing pensions for aging populations. In developing countries, too, individual life coverage has often failed to keep pace with rising incomes, which could raise demand.
Zurich well positioned to capitalize on these opportunities Zurich is a global and composite insurer. We can realize economies of scale within our business, and have the capital resources to stay at the forefront of technology and innovation. Our global scope allows us to offer a more holistic service to our increasingly globalized customers and provides intermediaries with more integrated solutions that generate greater value for customers. It also gives Zurich an edge in the battle for talent, because we can make use of our global capabilities across regions to offer our employees far richer career opportunities.
We have strong positions in select retail markets and will focus our investments to strengthen our presence where we can develop and sustain distinctive positions.
Tension between new global and national regulations During the financial crisis, the existing regulatory and supervisory framework struggled to deal with risks presented by large, multi-national financial institutions. As a result, policymakers have called for improved financial stability through stronger global regulatory standards. Insurance, as a key contributor to the global financial economy, is one of many sectors affected by this evolution.
A more focused Financial Stability Board has mandated the International Association of Insurance Supervisors (IAIS) to identify systemically-relevant insurers and to develop new capital and governance standards for the insurance industry. Zurich is not part of the initial round of insurance-related systemic risk (‘too big to fail’) designations made by the IAIS because the company conducts very little non-traditional and non-insurance business. However, the underlying concepts are likely to be exported to Zurich due to its status as a large internationally-active insurer. Enhanced group supervision through the ComFrame initiative, a broader group supervisory role for FINMA, and the development of new capital standards aimed at globally-active insurers are anticipated over time.
Despite the emphasis on supra-national approaches to systemic risk, standards for multinational insurance groups, group supervision concepts and a trend toward a risk-based capital approach, local prudential regulation is and will remain fractured. For example, the European Union (EU) and Switzerland focus more on a consolidated view looking at the total balance sheet, while the U.S. and other regulators favor a bottom-up view looking at balance sheets at legal-entity level.
Since the financial crisis, regulatory change has become a key driver for the insurance industry. At Zurich, we have identified five regulatory trends which are relevant to our business from a strategic perspective.
Governmental challenges to the global management of insurance capital are growing.”
For Zurich, the impact of increased consumer protection will be felt mostly in our personal lines business, although some spillover into commercial business is likely. This will require the alignment of our distribution strategies with emerging regulatory influences, which will differ by jurisdiction and product. Greater transparency could also affect product configuration. We will need to make information disclosures to customers while mitigating legal and administrative challenges arising from errors and disputes.
Zurich expects regulation of data privacy and data use to remain unsettled. Regulations may develop unevenly over time and in conflict with technological advances. This could affect the industry’s ability to apply new data sources for risk selection. Movement of personal data of customers across borders can be constrained. Companies can be required to maintain data for the benefit of the data subject as much as for themselves as data custodians.
Working together as One Zurich, we aim to offer corporate, commercial mid-market and retail customers a superior service and products tailored to their requirements. We are doing this by striving to understand their needs, investing in the capabilities required, increasing our visibility through advertising, measuring our success and using the knowledge we have gained across the business.
The Zurich brand is bringing us closer to our individual and business customers, positioning Zurich as the intelligent choice for those who wish to protect the people and things they truly love. And in line with our strategy, we are doing business responsibly.
Who we are Founded in Switzerland in 1872, Zurich is one of the world’s most experienced insurers. Our customers choose Zurich to protect the people and things they love because they value our knowledge, expertise and stability.
At Zurich, we are in business to help our customers understand and protect themselves from risk. Risk is part of everyone’s life. Individuals, families, businesses and communities can prosper only when they are protected against critical risks. We help our customers to manage the risks they face, making their lives more secure and helping them to grow their businesses.
We care about our customers, employees, shareholders and the communities in which we live and work. We need the trust and support of these stakeholders to achieve our goals. We want them to see Zurich as the best insurer so that we can grow profitably, attract talented people, retain the support of our investors and build our reputation as a responsible company. We believe that our values make us a stronger business. That is why we emphasize integrity, customer centricity, excellence, sustainable value creation and teamwork in all that we do.
Zurich’s culture keeps us focused on the execution of our strategy while upholding our values and the commitment we have made to our stakeholders.
Retail sector: Retail markets are mainly locally-concentrated and highly competitive. As a result, new technology, regulation and changing customer expectations are forcing a re-evaluation of traditional business models.
Zurich needs to be lean, efficient and profitable to deliver on our strategy. That means reducing complexity and improving operating margins. Our shared operational services support these goals.
Our digital and IT strategies will enable us to analyze market opportunities, serve our customers in the way they prefer and make use of social media. The Zurich Way program aids efficiency by creating a common way of working, based on global capabilities.
The performance in the core businesses was achieved through a continued focus on profitability, underpinned by the sustained execution of the Group’s product, underwriting and pricing strategies.
Net income attributable to shareholders increased by USD 141 million to USD 4.0 billion, or 4 percent. The increase in business operating profit was partly offset by lower net capital gains on investments and by several non-recurring costs relating to the restructuring of business operations.
Business volumes for the core business segments, comprising gross written premiums, policy fees, insurance deposits and management fees, decreased by USD 2.7 billion to USD 70.4 billion, or by 4 percent.
Gross written premiums, policy fees and insurance deposits decreased by USD 3.2 billion to USD 27.1 billion, or by 10 percent. Growth in gross written premiums in the higher-margin protection business was more than offset by an expected reduction in insurance deposits in the UK, due to discontinuation of low-margin single premium products in Private Banking Client Solutions.
Farmers Farmers business operating profit increased by USD 114 million to USD 1.5 billion, or by 8 percent. This was due to an improved underwriting result in Farmers Re, which benefited from rate increases and the re-underwriting of business in the Farmers Exchanges, which are owned by their policyholders and managed by Farmers Group Inc., a wholly owned subsidiary of the Group.
Farmers Management Services business operating profit decreased by USD 38 million to USD 1.4 billion, mainly due to a decrease in management fees and other related revenues, as well as lower investment income. This decrease was more than offset by the improved underwriting result in Farmers Re, where business operating profit improved by USD 152 million to USD 125 million. Farmers Management Services management fees and other related revenues decreased by USD 36 million to USD 2.8 billion, or by 1 percent. Farmers Re gross written premiums and policy fees decreased by USD 316 million to USD 4.0 billion, or by 7 percent.
USD 4.7 bn Business operating profit (2012: USD 4.1bn) USD 4.0 bn Net income attributable to shareholders (2012: USD 3.9bn)
Corporate responsibility and our business strategy Corporate responsibility is integrated within Zurich’s strategy 2014–2016 (see pages 10–11). As part of our strategy, we are focusing on our strengths as a business, and on key enablers of success – actions we need to take to achieve our strategic objectives. We think about corporate responsibility in the same way. For Zurich, corporate responsibility is about focusing on what we do best and on the enablers of business success.
We pursue other corporate responsibility initiatives because they are key enablers of success. That includes community investment, which brings us closer to the communities in which we live and work and provides unique development opportunities for our people. Our environmental activities help us economize on resources and cut costs while protecting the environment. Health & safety practices protect our employees at work. And
At Zurich, we aim to create sustainable value for all our stakeholders, in line with our values, as set out in Zurich Basics, our code of conduct, and with The Zurich Commitment, our statement of purpose.
We play an important social and economic role through our core insurance business. Insurance allows people and businesses to protect themselves from risk, helping them to become prosperous, resilient and stable. The premiums we invest in the capital markets help to finance businesses and socially-important projects. Thus insurance creates social and economic value. This means that our wider contribution to society is not separable from our business. It is part of how we do business.
Our wider contribution to society is not separable from our business. It is part of how we do business.”
Corporate responsibility Enhancing community flood resilience Purpose: Floods affect more people globally than any other type of natural disaster and cause some of the largest economic, social and humanitarian losses. By using our risk expertise as a global insurer, we can help customers and communities to reduce the devastating impacts of floods. Zurich’s program to increase flood resilience represents a new approach to cross-sector collaboration, based on an innovative alliance linking flood research, community-based programs and risk expertise. The collaboration includes the International Federation of Red Cross and Red Crescent Societies (IFRC), with its 187 national societies; Practical Action, a UK-based international non-governmental organization; and two research institutes – the International Institute for Applied Systems Analysis (IIASA) and the Wharton Risk Management and Decision Processes Center. The research carried out with these institutions will generate new ideas to enable more effective decision-making, while examining the role of government and insurance related to floods. All members of the collaboration share a common vision of enhancing communities’ well-being by making them more resilient to floods. We seek to demonstrate the benefits of pre-event risk reduction over post-event disaster relief, and to improve public dialogue around flood resilience.
The Z Zurich Foundation plays an important role in our flood resilience program, bringing together key participants through long-term strategic alliances. This close alignment with one of Zurich’s focus areas allows it to increase its impact on issues of global concern.
During the year, Zurich and the IFRC took the initial steps toward implementing flood resilience programs in Mexico, as the first priority country, starting in the Tabasco region. After an assessment by the Mexican Red Cross, Zurich and the IFRC, work has started on the ground to establish the required relationships and define a detailed action plan. In 2013 we also started working in Indonesia with the Indonesian Red Cross, where a detailed action plan is being developed. These programs in Mexico and Indonesia will serve as models for future efforts that build on our risk engineering and analytical skills, and complement the on-the-ground knowledge and experience of the IFRC. In these countries we are also testing ways to measure community flood resilience against key indicators.
As a further part of this flood resilience program, Zurich also collaborates with development organization Practical Action, which focuses on providing innovative and sustainable solutions to poverty. In September 2013, as a further strategic commitment to build flood resilience, we enhanced our cooperation with Practical Action by agreeing to invest up to USD 9.7 million over five years. The collaboration will include projects in Nepal, where we will be working on early-warning systems that can make communities better prepared for flash floods. It also includes seeking ways to build flood resilience in an urban environment in Peru, and looking at how the El Niño phenomenon affects flood risks. In Bangladesh, the alliance is helping communities and individuals to better cope with recurring floods.
Investing our Group assets responsibly Purpose: Zurich manages its portfolio of over USD 200 billion in assets in a way that aims to generate superior risk-adjusted returns, while making a positive impact on the environment, communities and society. In 2012, we developed a comprehensive program for responsible investment and became a signatory of the Principles for Responsible Investment (PRI). Zurich believes that environmental, social and governance (ESG) factors can have a material impact on investment risk and opportunity, and has formulated a three-pillar approach to support its responsible investment aims. These three areas of focus cover all aspects of our responsible investing. We seek to integrate ESG factors into the investment process across asset classes and alongside traditional financial metrics. We invest in assets that generate a targeted and measurable positive impact, and a return commensurate with risk. Through these ‘impact investments,’ we seek to incorporate our aims of supporting sustainable economic development and making communities more resilient. We also devote resources and engage in collaborative initiatives that support the advancement of responsible investment practices, encouraging their adoption within the mainstream.
Programs: In 2013, Zurich piloted an ESG integration approach with four of its largest in-house asset management teams. We have also fully integrated an assessment of responsible investment practices into our asset manager selection process for external mandates. In 2012, we established a target to reduce greenhouse gas emissions from our Swiss real estate investment portfolio – which accounts for over half of the Group’s real estate assets – by 20 percent by 2020 (compared with 2010). As part of the impact investing strategy, we announced in November 2013 a mandate, to be managed by BlackRock, to invest up to USD 1 billion in green bonds issued by the World Bank, International Finance Corporation and other development finance institutions. The proceeds of these bonds are used exclusively for projects that mitigate climate change or help communities to adapt to the consequences of climate change.
Together with PSI, a global non-government organization dedicated to improving the health of people in the developing world, we launched and funded a project to determine what role return-seeking capital could play in helping NGOs to achieve more impact, and what opportunities this could present for impact investors. Zurich also became one of the founding members of the Investment Leaders Group (ILG). The ILG brings together 12 leading asset owners and asset managers in a three-year project led by the University of Cambridge Programme for Sustainability Leadership, with the objective of helping to shift the investment chain toward responsible, long-term value creation. Zurich has also continued its active involvement as a member of the Green Growth Action Alliance, the ClimateWise low-carbon investment collaboration group, and the PRI’s environmental- and social-themed investments working group.
CR in business transactions Purpose: Zurich works with its customers, brokers and other distribution partners to ensure responsible and sustainable business practices and to protect reputations, while promoting best practices in managing environmental, social and governance risks. Our aim is to promote international best practice standards that help ensure that potentially adverse social, environmental and economic impacts are adequately managed. By doing this, we integrate our commitment to corporate responsibility and the UN Global Compact in our underwriting and business decisions.
Programs: In 2013, Zurich developed and implemented a three-step approach that systematically detects, assesses, and mitigates major environmental, social and ethical risks that are inherent in specific business transactions. Using our proprietary risk-profiling methodology, we have prioritized four key areas of concern: banned cluster munitions and anti-personnel land mines; and governance, human rights and environmental risks in dam construction, mining, and oil and gas activities. For each area of concern, we have drawn up a corporate responsibility issue brief that sets out our position and best practices. We also provide guidance and training for underwriters and other relevant stakeholder groups, and implemented corporate responsibility risk assessment and referral processes. In 2013, we also started to engage with brokers and corporate customers to promote best practices in corporate responsibility.
External asset managers who are signatories to PRI (%) 58.3% 50.0% 8.3 pts Group assets managed by PRI signatories (%) 1 95.1% 92.2% 3.0 pts Total amount of impact investments (USD millions) 2 236 25 851% Total Group investments (USD millions) 207,280 209,582 (1%) 1 Including assets managed by Zurich.
2 Impact investments consist of 100 percent green bonds in 2012 and 2013. Green bonds investment target: up to USD 1 billion.
1 Scope includes real estate investments in Switzerland (61% of global direct real estate investment value). Buildings in the real estate investment portfolio are largely not used by Zurich. The environmental footprint of Zurich's own-use real estate is reported in Zurich's environmental section. 2 Impact of real estate investment data 2013 will be available in Q2 2014.
Zurich also provided support to communities through its second Global Community Week in June 2013. Employees volunteered approximately 28,000 business hours, nearly triple the hours in 2012, and raised almost USD 1 million in cash and in-kind contributions (including Z Zurich Foundation matching). Participation in activities to benefit local communities doubled to 24 percent of all employees in 2013 from 12 percent in 2012. Employees based in 43 countries took part in 700 unique projects, increasing from 34 countries and 278 projects in 2012. Many Zurich offices are considering how to build on Global Community Week activities and form long-term alliances with their local communities to provide positive benefits throughout the year.
We are developing highly energy-efficient office buildings, and are installing technology
Employees in 43 countries took part in Global Community Week 2013.”
Responsible sourcing & procurement Purpose: Zurich, due to the nature of its business, is predominantly a consumer of services, and not products or raw materials. Compared with other industry sectors such as manufacturing, the risks associated with the environmental, social and governance impact of Zurich’s supply chain are low. Nonetheless, we are committed to effectively managing such issues within our supply chain. We aim to work with suppliers who share our values, and we expect high standards of business conduct from those who represent us or do business with us.
At the end of 2012, Zurich exceeded its carbon reduction target.”
Group overview Zurich’s people management practices support our ambition to be the best global insurer as measured by our customers, employees and shareholders, while making a positive contribution to the communities in which we live and work. Our approach to managing our people is designed to benefit our business, helping us adapt to a changing market environment and meet customers’ needs, while supporting the organization and our people through change. Effective people management will help ensure that we have the skills and talent we need to achieve our business objectives and position us as an employer of choice within the insurance industry.
At Zurich, we are working to create a leaner and more efficient organization with clear accountability for delivering results. As part of Zurich’s strategy for 2014–2016, our focus will increasingly shift toward customer centricity and growth. To ensure we attract and retain the right talent for our strategy, we are continuing to build an approach to talent acquisition and talent management that ensures we are able to deliver talent where it is needed, at the right time, place, and in the right role with robust talent pipelines and succession planning practices. As part of our talent-building efforts, diversity and inclusion (D&I) is critical to our success. Our Group-wide diversity and inclusion strategy is anchored in the business, and aims to ensure that our employees reflect the diversity of the customers we serve in the different communities in which we operate. This is part of our identity, helping to position Zurich as an employer of choice, while encouraging different perspectives to promote innovation and learning for all.
Our diversity and inclusion strategy aims to ensure that our employees reflect our customer base.”
Total number of employees – Headcount 56,565 56,781 (0%) Total number of employees – Full Time Employees 55,102 55,312 (0%) Employee turnover rate (%) 12.3% 12.7% (0.4 pts) Average tenure (years) 9 9 n.m.
In 2013, as part of efforts to establish a global approach to talent management, we commissioned a global recruitment management system. This included an internal global job board that provides transparency of international career opportunities to employees across the globe, helping to foster greater international mobility. Deployment of the global platform started in 2013 within Europe and will continue throughout 2014, with deployments scheduled for Latin America, and Middle East and Africa.
Driving HR Performance Purpose: We use centrally-managed HR technology and ‘master data’ to underpin our people practices More than 95 percent of our global employee population has access to HR technology which enables employees and line managers to undertake a number of ‘selfservice ’ transactions. Efficient, centralized HR processes are key to helping Zurich deliver on the HR aspects of its strategy.
Female workforce participation (%) 52.6% 52.6% n.m. Female participation in Leadership Team (%) 16.0% 16.0% n.m.
Building a high-performance working environment Purpose: We foster an organization in which employees are challenged, motivated and proud to be part of Zurich. We want to create a work environment in which everyone can perform to his or her full potential. Our aim is to foster a customer-oriented mindset, and embed this in people management processes and practices. We believe this is not only critical to our business success. It also allows us to make best use of our resources by employing people in roles that best suit their skills and ambitions and enables us to draw on a global pool of talent. We encourage an environment in which performance is openly discussed. Living up to our Zurich Commitment is an important part of fostering engagement and ultimately business results. We manage performance aligned with our principles, grounded in the Zurich Basics, our Group’s code of conduct, and our strategic goals. To help us do this, our leaders listen to employees and act on their feedback. Zurich is a global business, and adapting to the changing global marketplace is key to maintaining competitive advantage. While we focus on attracting and retaining talent, our people practices must also help to change the organization so that it will remain a market leader, and one where our customers’ interests are our priority.
Employees with active Individual Development Plan (%) 75.5% 74.1% 1.4 pts 1 Employees who have taken at least one course during the year reported.
As part of our efforts to ensure we have the best people in the right jobs, we have continued to progress the consistent evaluation of all roles within the organization with a view to establishing global consistency in role structures and the rewards framework. The benefits of global role evaluation for employees and the organization include the provision of a consistent global approach to roles and hierarchies, ultimately helping us to ensure we have people in place with the necessary skills at the right place and time.
We are addressing the need to put our customers at the heart of all we do by further building our change management capabilities, as well as embedding a customer perspective into our people activities to attract and manage talent, and in our leadership development programs.
We also use Global Employee Engagement Surveys (GEES), anonymous voluntary online surveys conducted globally every two years, to help shape the company’s future. These allow us to track progress based on our employees’ perceptions of how well we are doing in delivering on our strategy and priorities. The GEES 2013 received responses from 74 percent of Zurich’s employees. The insights afforded by the survey results will be used by leaders and managers to plan interventions to further improve employee engagement and commitment throughout 2014.
Global engagement survey participation rate (%) 74.0% 78.0%1 (4.0 pts) Employee engagement score (%) 65.0% 66.0%1 (1.0 pts) High performer retention rate (%) 2 94.8% 94.6%) 0.3 pts Low performer turnover rate (%) 3 43.5% 42.4%) 1.2 pts 1 The Global Employee Engagement Survey (GEES) is carried out every other year, therefore the prior year data is 2011 and not 2012. 2 ‘High Performer’ group is defined as employees with performance ratings 4 and 5 (out of 5) during 2 consecutive years. 3 ‘Low Performer’ group is defined as employees with performance ratings 1 and 2 (out of 5) during 1 year.
Zurich experienced a difficult summer in 2013 following the death of our Chief Financial Officer and the resignation of our former Chairman. Employees, the management team and the Board of Directors stayed focused during this challenging time. Zurich‘s corporate governance framework proved its ability to absorb tests of this nature, providing us with sound procedures that helped us take decisive action.
During this time I assumed the role of Chairman of the Board of Directors to lead the efforts to help maintain the confidence of our stakeholders in Zurich’s strength and resilience.
We have progressed well toward this goal. As announced on December 16, 2013, George Quinn has been appointed as Group Chief Financial Officer and member of the Group Executive Board (GEC), effective 1 May 2014. Also, on January 8, 2014 we announced the appointment of Robert Dickie as Chief Operations and Technology Officer and member of the GEC, effective March 17, 2014. Both have a proven track record in their fields and the Board is assured that the GEC will benefit greatly from their skills and experience, especially with regard to their contribution to the delivery of Zurich’s strategy.
When I was appointed I promised you that my focus would be on ensuring the continued stability of the company and that a strong management team was our top priority.”
Introduction 29 Group structure and shareholders 30 Capital structure 33 Board of Directors 36 Group Executive Committee 54 Shareholders’ participation rights 62 Information Policy 63 Employees 63 Changes of control and defense measures 63 Assurance at Zurich Insurance Group 64 External Auditors 65 Group Audit 66 Group Compliance 67 Risk Management and Internal Control Statement 67 Going concern 68
This report describes the Group’s approach to corporate governance and illustrates the key elements of corporate governance within the Group. It includes the information required by the following rules, with which Zurich comply: • Directive on Information Relating to Corporate Governance of the SIX Swiss Exchange (as of October 29, 2008, effective July 1, 2009).
• The Group continues to publish a Risk Management and Internal Control Statement (see pages 67 and 68) in accordance with the Internal Control: Revised Guidance to Directors on the UK Corporate Governance Code (formerly known as UK Turnbull Guidance) as of October 2005.
Zurich Insurance Group Ltd is listed on the SIX Swiss Exchange. Certain Group companies have listed debt issued under its Euro Medium Term Note Program and other financial instruments.
The Zurich Insurance Group is subject to insurance group supervision by the Swiss Financial Market Supervisory Authority (FINMA). As set out in its decree of December 28, 2011, FINMA stated that Zurich is subject to insurance group supervision according to art. 64 et seq. of the Swiss Insurance Supervision Law (ISL) and no longer qualifies as a conglomerate. The Joint Committee of the European Supervisory Authorities has also designated the Group as an insurance group and not as an insurance conglomerate because of the small size of its non-insurance activities. The (ISL) requires Swiss insurance companies and groups to establish and maintain strong governance and risk management systems as well as effective internal control systems that are appropriate to their business activities. It prescribes the calculation of a risk-based solvency margin on a Group wide basis and at legal entity level, pursuant to the Swiss Solvency Test (SST) and also a Solvency I margin. All major intra-group transactions must be reported to FINMA. In addition to the group supervision exercised by FINMA and its supervision of the legal entities Zurich Insurance Company Ltd and Zurich Life Insurance Company Ltd, the insurance subsidiaries and remaining financial services entities of the Group are supervised by relevant regional and local supervisory authorities.
The principles of corporate governance and the standards described above are incorporated and are reflected in a number of corporate documents, in particular in the articles of incorporation, the Organizational Rules and the Charters of the Board Committees. The Governance and Nominations Committee, which is responsible for governance in the Group, regularly reviews the Group’s corporate governance against best practice standards and ensures compliance with corporate governance requirements.
An effective structure is in place providing for cooperation between the Board of Directors of Zurich Insurance Group Ltd (Board), management and internal control functions. This structure establishes checks and balances and is designed to provide for institutional independence of the Board from the Group Chief Executive Officer (CEO) and the Group Executive Committee (GEC) who together are responsible for managing the Group on a day-to-day basis. The Board is composed entirely of non-executive members independent from the management. The roles of Chairman of the Board and CEO are separated, thus providing for separation of powers between the functions and ensuring the autonomy of the Board.
Key governance developments in 2013 – at a glance as of December 31, 2013 1Elected by the Board 2Elected by the Shareholders’ Meeting 3Not members of the GEC
Group structure and shareholders Operational Group structure Zurich Insurance Group Ltd, the Group’s holding company, is a Swiss corporation organized in accordance with the laws of Switzerland. In recent years, Zurich has streamlined its business portfolio to concentrate on insurance.
• Farmers provides, through Farmers Group, Inc. and its subsidiaries (FGI), 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.
At a secondary level, the General Insurance segment is managed based on market-facing businesses, including: Global Corporate, North America Commercial, Europe, Latin America and Asia-Pacific, Middle East and Africa.
A list of the Group’s significant subsidiaries, including additional information on significant subsidiaries that are listed, can be found on pages 297 to 299. For further information on the share listing of Zurich Insurance Group Ltd, see the Shareholder Information on page 362 to 364.
The announcements related to these notifications can be found via the search facility on the SIX Disclosure Office’s platform: Zurich Insurance Group Ltd is not aware of any person or institution which, as of December 31, 2013, directly or indirectly, alone or with others, exercised or was a party to any arrangements to exercise control over Zurich Insurance Group Ltd.
Individual shareholders 95.6 26.2 Legal entities 3.7 23.9 Nominees, fiduciaries 0.7 49.9
Latin America 0.1 – Rest of the World 4.1 14.1 as of December 31, 2013Number of shares held as of December 31, 2013Registered shareholders by type as of December 31, 2013Registered shareholders by geography
Cross-shareholdings Zurich Insurance Group Ltd has no interest in any other company exceeding five percent of the voting rights of that other company, where such other company has an interest in Zurich Insurance Group Ltd exceeding five percent of the voting rights in Zurich Insurance Group Ltd.
Authorized and contingent share capital As of December 31, 2013, as specified in Article 5bis(1) of the Articles of Incorporation, the Board is authorized to increase share capital by up to CHF 1,000,000 representing 10,000,000 fully paid registered shares with a nominal value of CHF 0.10 each until March 29, 2014. The contingent share capital of Zurich Insurance Group Ltd, as specified in Article 5ter(1a) of the articles of incorporation, may be increased 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 by exercising conversion and/or option rights which are granted in connection with the issuance of bonds or similar debt instruments by Zurich Insurance Group Ltd or one of its Group companies in national or international capital markets and/or option rights which are granted to the shareholders. Moreover, there is an additional contingent share capital of CHF 239,203.70 as specified in Article 5ter(2a) of the articles of incorporation, representing 2,392,037 fully paid registered shares with a nominal value of CHF 0.10 each, which may be issued to employees of the Group. For further information on the capital structure and the authorized and contingent share capital, see the audited Consolidated financial statements, note 21 on pages 249 and 250.
Some interests in shares are held by investors in the form of American Depositary Receipts (ADRs) 1. As of December 31, 2013, investors held 27,931,150 ADRs (representing 2,793,115 Zurich Insurance Group Ltd shares).
Profit sharing certificates Zurich Insurance Group Ltd has not issued any profit-sharing certificates.
Limitations on transferability and nominee registrations The articles of incorporation do not provide for any limitations on transferability except for the following: Registration as a shareholder requires a declaration that the shareholder has acquired the shares in his or her own name and for his or her own account. Nominees holding Zurich Insurance Group Ltd shares may for the benefit of, or as nominee for, another person be registered for up to 200,000 shares with voting rights notwithstanding that the nominee does not disclose the identity of the beneficial owner. A nominee, however, is entitled to be registered as a shareholder with voting rights of more than 200,000 shares if the nominee undertakes to disclose the identity of each beneficial owner and to inform the beneficial owners about corporate actions, to consult as to the exercise of voting rights and pre-emptive rights, to transfer dividends and to act in the interests of and in accordance with the instructions of the beneficial owner.
The Ordinance AEC requires that the term of office of a board member ends after completion of the next AGM. As a consequence, each member of the Board will have to be re-elected at the AGM each year, commencing with the AGM in 2014.
Chairman of the Board Chairperson of the Governance and Nominations Committee Member of the Remuneration Committee 2006 2014
Victor L.L. Chu British 1957 Director Member of the Governance and Nominations Committee 2008 2014
Director Member of the Governance and Nominations Committee Member of the Remuneration Committee 2012 2014
Director Chairperson of the Audit Committee Member of the Risk Committee 2006 2014
Rolf Watter Swiss 1958 Director Member of the Audit Committee 2002 2014 1 As per Ordinance AEC, in force since January 1, 2014, the term of office of a Board member ends after completion of the next ordinary shareholders’ meeting. Members of the Board will have to be re-elected annually. According to the transitional provisions of the Ordinance AEC, members of the Board will have to stand for re-election at the next AGM on April 2, 2014. Except for Victor L.L. Chu and Rolf Watter, who will not stand for re-election, all current members of the Board are proposed for re-election.
Members of the Board of Directors, as of December 31, 2013
Board Composition Diversity is a key success factor in today’s fast changing global environment. Zurich’s Board consists of individuals with wide-ranging relevant backgrounds, experiences, skills and knowledge resulting in a favorable balance that enables the Board as a group to exercise its tasks and responsibilities while fully taking into account contemporary business needs.
The current composition as of December 31, 2013 in terms of length of tenure and gender representation is as follows: More than 10 years
Tom de Swaan (1946), Dutch Citizen Chairman of the Board Skills and experience: Mr. de Swaan has served in the banking industry of The Netherlands for over 40 years. He joined De Nederlandsche Bank N.V. in 1972 and from 1986 until 1998 was a member of the governing board. In January 1999, he became a member of the managing board and chief financial officer of ABN AMRO Bank. He retired from ABN AMRO in May 2006, but continued as an advisor to the managing board until June 2007. Between 1987 and 1988, Mr. de Swaan was chairman of the Amsterdam Financial Center and from 1995 to 1997 chairman of the banking supervisory sub-committee of the European Monetary Institute. He was also a member of the Basel Committee on Banking Supervision from 1991 to 1996, its chairman from 1997 to 1998 and a non-executive director on the board of the UK’s Financial Services Authority from January 2001 until the end of 2006. He has been a member of the Boards of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd since April 2006. In March 2012 he was elected ViceChairman, acting as Chairman from August 2013 on. He was elected Chairman of the Board in September 2013.
Committee membership: Governance and Nominations Committee (Chairperson), Remuneration Committee Other directorships within the Group: Zurich Insurance Company Ltd, Zurich Insurance plc External appointments: Mr. de Swaan has been a non-executive member of the board of GlaxoSmithKline Plc since 2006. He has been a member of the supervisory board of Royal DSM, a Netherlands-based nutrition group, since 2006 and chairman of the supervisory board of Van Lanschot NV, the holding company of F. van Lanschot Bankiers, an independent Dutch bank, since 2008. In addition Mr. de Swaan is chairman of the board of the Netherlands Cancer Institute, chairman of the board of trustees of the Van Leer Jerusalem Institute and acts as director of certain other non-profit organizations. He is also a member of the advisory board of China Banking Regulatory Committee in Beijing and a member of the International Advisory Board of the National Bank of Kuwait since 2007. Educational background: Mr. de Swaan graduated from the University of Amsterdam with a master’s degree in economics.
Fred Kindle (1959), Citizen of Fürstentum Liechtenstein and Switzerland Vice-Chairman of the Board Skills and experience: Mr. Kindle began working as a marketing project manager with Hilti AG in Liechtenstein from 1984. From 1988 until 1992, he was a consultant with McKinsey & Company in New York and Zurich. He then joined Sulzer Chemtech AG in Switzerland as the head of the Mass Transfer Department and in 1996 became the head of the Product Division. In 1999, he was appointed CEO of Sulzer Industries, one of the two operating groups of Sulzer AG. Two years later he became CEO of Sulzer AG, where he also served as a board member. After joining ABB Ltd. in 2004, Mr. Kindle was appointed CEO of ABB Group in January 2005, a position he held until February 2008. He then became a partner of Clayton, Dubilier & Rice LLP, a private equity firm based in New York and London. He has been a member of the Boards of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd since April 2006. He was elected Vice-Chairman in September 2013. Committee membership: Governance and Nominations Committee, Audit Committee Other directorships within the Group: Zurich Insurance Company Ltd External appointments: In his capacity as a partner of Clayton, Dubilier & Rice, Mr. Kindle has served as a chairman of Exova Ltd., Scotland since 2008 and as a chairman of BCA Group, United Kingdom since 2010. He has also been on the board of VZ Holding Ltd., Zurich since 2002 and Stadler Rail AG, Bussnang since 2008. Educational background: Mr. Kindle graduated from the Swiss Federal Institute of Technology (ETH) in Zurich with a master’s degree in engineering and holds an MBA from Northwestern University, Evanston, United States
Dame Alison Carnwath (1953), British Citizen Member of the Board Skills and experience: Dame Alison Carnwath has substantial financial industry experience. She began her career with Peat Marwick Mitchell, now KPMG, in 1975 to 1980 and practiced as a chartered accountant. From 1980 to 1982, she worked as a corporate financier for Lloyds Bank International. From 1982 to 1993, she was Assistant Director, then Director at J. Henry Schroder Wagg & Co in London and New York. From 1993 to 1997, Dame Alison Carnwath was a Senior Partner at the financial advisory firm Phoenix Partnership. The firm was taken over by Donaldson Lufkin Jenrette (DLJ) in late 1997; Dame Alison Carnwath continued working for DLJ until 2000. Dame Alison Carnwath has held several board offices. From 2000 to 2005, she was the Chairman of the board of Vitec Group plc, from 2001 to 2006 a director of Welsh Water, from 2004 to 2007 of Friends Provident plc, from 2004 to 2007 of Gallaher Group and from 2007 to 2010, she was the independent Chairman of MF Global Inc. She also served on the boards of directors of Barclays from 2010 to 2012, and of Man
Group plc from 2001 to 2013. She has been a member of the Boards of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd since March 2012. She was awarded a Dame of the British Empire (DBE) in the 2014 New Years Honours List in the UK. Committee membership: Remuneration Committee, Risk Committee Other directorships within the Group: Zurich Insurance Company Ltd External appointments: Dame Alison Carnwath has been a Senior Advisor of Evercore Partners since 2011 and an independent Chairman of ISIS Equity Partners LLP since 2000. She has been a Chairman of the Board of Land Securities Group plc since 2008 and a member of the board of PACCAR Inc. since 2005. Dame Alison Carnwath is also a Trustee of the British Library. In September 2013, she was appointed to the advisory council of the St George’s Society in New York. Educational background: Dame Alison Carnwath graduated in economics and German from the University of Reading. She was also awarded an honorary doctorate (LLB) from the University of Reading.
Rafael del Pino (1958), Spanish Citizen Member of the Board Skills and experience: Mr. del Pino possesses more than 30 years of international management experience. From 1992 to 1999, he was CEO of Grupo Ferrovial and in 1999, he was appointed executive vice-chairman. In 2000, Mr. del Pino assumed the position of executive chairman and managing director of Ferrovial S.A. During his career at Ferrovial he has transformed the company from a mostly domestic construction company to a leading provider of infrastructure services around the world. In addition, Mr. del Pino was a member of the board of Banesto (Banco Español de Crédito S.A.) from 2003 to 2012. He has been a member of the Boards of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd since March 2012.
Victor L.L. Chu (1957), British Citizen Member of the Board Skills and experience: Mr. Chu has expertise in the field of corporate, commercial and securities laws spanning 30 years, with special emphasis on China and regional investment transactions. From 1995 to 2000, Mr. Chu was deputy secretary-general of the International Bar Association. Over the past 25 years he has served at various times as director and council member of the Hong Kong Stock Exchange, a member of the Hong Kong Takeovers and Mergers Panel, a member of the Hong Kong Securities and Futures Commission’s advisory committee and a part-time member of the Hong Kong Government’s Central Policy Unit. He is admitted to practice law in England and Hong Kong. He has been a member of the Boards of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd since April 2008. Committee membership: Governance and Nominations Committee
Thomas K. Escher (1949), Swiss Citizen Member of the Board Skills and experience: Mr. Escher has extensive experience in the fields of information technology and banking. He joined IBM in 1974 and had managerial responsibility for several international markets. In 1996, Mr. Escher joined Swiss Bank Corporation as a member of the executive board and was CEO for the major market region in Switzerland and for the information technology organization. Following the merger of Swiss Bank Corporation and Union Bank of Switzerland to form UBS AG in 1998, he headed the IT business area of the wealth management and business banking division until mid-2005 as a member of the group managing board. Mr. Escher assumed the function of vice-chairman in the Business Group Global Wealth Management & Swiss
Group Ltd and of Zurich Insurance Company Ltd since April 2006. Committee membership: Audit Committee (Chairperson), Risk Committee Other directorships within the Group: Zurich Insurance Company Ltd, Zurich Holding Company of America, Inc. External appointments: Mr. Nicolaisen has been a member of the board of directors of Verizon Communications Inc. since 2005, Morgan Stanley since 2006 and MGIC Investment Corporation since 2006. In addition, he serves on the board of advisors for the University of Southern California Leventhal School of Accounting. Educational background: Mr. Nicolaisen graduated from the University of Wisconsin-Whitewater with a BBA degree.
Rolf Urs Watter (1958), Swiss Citizen Member of the Board Skills and experience: Mr. Watter possesses extensive experience in the field of corporate law, particularly complex cross-border transactions and corporate governance questions and has been a partner at Bär & Karrer AG in Zurich since 1994. He was a member of its executive board from 2000 and an executive director upon the incorporation of Bär & Karrer AG in 2007 until September 2009. Mr. Watter serves as a part-time professor at the Law School of the University of Zurich. He was formerly a non-executive chairman of Cablecom Holding AG from 2004 to 2008. Mr. Watter was also a non-executive director of Syngenta AG from 2000 to 2012, of Centerpulse AG from 2002 to 2003, of Forbo Holding AG from 1999 to 2005 and of Feldschlösschen Getränke AG from 2001 to 2004. He has been a member of the Boards of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd since May 2002.
The election of a member of the Board is effected on an individual basis. Directors are elected by a majority of the votes cast.
As required by the Ordinance AEC, shareholders also have to elect a member of the Board of Directors as the Chairman, the members of the Remuneration Committee, and the independent voting rights representative at the AGM on April 2, 2014. The board proposes the following: • As Chairman: Mr. Tom de Swaan
• As independent voting rights representative: Mr. lic. iur. Andreas G. Keller, Attorney at Law
A self-assessment of the full Board is carried out once a year. In 2013, this assessment was carried out through an independent review by an external consultant. The review considered three key aspects of board effectiveness: the Board environment (culture and composition), the work of the Board (strategy, risk and control, and performance management), and the use of time and process (planning and allocation). A detailed report on the findings and recommendations was produced. The recommendations included consideration of further strengthening of the Board’s experience in the insurance sector and in emerging markets, enhancement of cross-membership in the Board’s committees and an increase in the time allowed for informal discussions and training sessions. The Board considered the report, and its recommendations are currently being implemented.
In the past, the Board elected the Chairman and the Vice-Chairman from its members. With the coming into force of the Ordinance AEC on January 1, 2014, in the future the Chairman of the Board will be elected by the shareholders’ meeting each year, commencing with the AGM on April 2, 2014. The Board appoints its Secretary.
The Board is required to meet at least six times each year. During 2013 it held 18 meetings (of which 14 were partly attended by tele-/videoconference and five were held over two days). One meeting was fully dedicated to the discussion of strategic topics. Six meetings lasted four or more hours during the course of a day, three meetings took about three hours on average and nine meetings lasted less than three hours. In addition, the Board approved one circular resolution.
In 2013, the Board specifically focused on the following topics: • Strategy review 2014 – 2016 including capital planning performance improvement, growth and structural improvement, the consequences of the persistent low interest environment on e.g. the product mix in the Global Life businesses and investment management; • developments with regard to corporate governance and remuneration-related matters and their implication for the Group, in particular due to the popular say-on-pay initiatives (‘inititative against excessive management remuneration’ and ‘1:12 initiative’); • the Board efficiency assessment, supported by an external consultant
The Board may establish committees for specific topics and terms of reference and rules with respect to delegated tasks and responsibilities and reporting to the Board. Except for the Remuneration Committee, the Board constitutes such committees from among its members at its own discretion. From the introduction of the Ordinance AEC on January 1, 2014, the members of the Remuneration Committee will be elected by the shareholders’ meeting. The committees assist the Board in performing its duties. They discuss and propose matters to the Board to take appropriate actions and pass resolutions unless they are authorized to take resolutions in specific areas on their own. In 2013, committee meetings lasted two hours on average.
Activities 2013: During 2013, in particular the following topics were discussed: • developments with regard to corporate governance related matters, including the implementation of legislative and regulatory change regarding the granting of shareholder rights and say-on-pay regimes; • Board succession planning
• reviews performance relating to senior management’s short-term and long-term incentive plans. In addition, in order to help align remuneration with the Group’s risk-taking capacity, Group Risk Management consults with other governance, control and assurance functions to provide a review of risk factors for consideration when overall performance for annual incentives is assessed. The Chief Risk Officer is available to discuss these findings with the Remuneration Committee and the Board.
• in the annual joint meeting with the Risk Committee, risk management aspects of the Group’s remuneration architecture; • in its annual review, the Remuneration Report, the Remuneration Rules and the Remuneration Committee rules; these documents were approved; • in its annual review, the Board and GEC compensation; • understanding the requirements of the ‘Minder’ initiative, and of the Ordinance AEC, and
Audit Committee Composition and membership: Zurich Insurance Group Ltd’s Organizational Rules require the Audit Committee to consist of at least four non-executive Board members independent from the Management. Currently, Don Nicolaisen (Chairperson), Fred Kindle, Rolf Watter and Susan Bies, all of whom meet the relevant requirements for independence and qualification, serve on this committee.
• reviews the annual, half-year and quarterly financial reporting of the Group before submission to the Board.
Activities 2013: During 2013, in particular the following topics were discussed: • accounting policy changes (for example IFRS 10 which has been adopted in 2013); • quarterly reporting with a strong focus on accounting and reserving matters; • the effectiveness of the internal control framework; • Group Audit work plans, Group Audit findings and management implementation of remediation actions; • the work of the external auditors, the terms of their engagement and the external auditor’s findings on key judgments and estimates in financial statements; and,
• the annual Group Compliance Plan, which it approved and against which it monitored progress during the year. The Audit Committee also discussed compliance issues and trends, such as the evolving regulatory expectations with regard to the compliance function.
Risk Committee Composition and membership: Zurich Insurance Group Ltd’s Organizational Rules require the Risk Committee to consist of at least four non-executive Board members independent from the Management. Currently, Susan Bies (Chairperson), Dame Alison Carnwath, Monica Mächler and Don Nicolaisen serve on this committee.
To facilitate an ongoing exchange of information between the Risk Committee and the Audit Committee, the Chairperson of the Audit Committee is a member of the Risk Committee and a member of the Risk Committee (currently Susan Bies) is a member of the Audit Committee. The Chairman of the Board regularly participates in both the Audit and Risk Committee meetings as a guest.
Activities 2013: During 2013, the Risk Committee met six times. From an enterprise risk management perspective, the Risk Committee particularly discussed the following topics: • the results of the Group’s risk profile assessment, and the development and assessment of the Group’s economic and regulatory capital; • the results of the Group Total Risk Profiling™ (TRP) assessment including an update regarding risk ownership and mitigation actions; • Zurich Risk Policy (ZRP) including the annual review and approval of new and changed chapters; • market and credit risks and controls including a report on derivatives; • implementation of a new market-specific risk and valuation model in Global Life, including updated assumptions to the current economic environment; • operational risks and controls; • in the annual joint meeting with the Remuneration Committee, risk management aspects of the Group’s remuneration architecture.
Moreover, from a segment and regional risk perspective, the Risk Committee discussed: • General Insurance risks and controls, including emerging risks, catastrophe risk, accumulation management, underwriting reviews and reinsurance; • Global Life risks and controls, including product approval process; • investment and asset/liability management risks and controls; and
Areas of responsibility of the Board and management The Board determines the overall strategy of the Group, supervises senior management and addresses key matters in the area of strategy, finance, structure and organization and business development. Particularly, the Board approves the Group’s strategic plan and the annual financial plans developed by management and reviews and approves the annual, half-year and quarterly financial statements of Zurich Insurance Group Ltd and the Group. For more details with regard to the responsibilities of the Board see page 47 to 48.
The Group has an information and financial reporting system. The annual plan for the Group, which includes a summary of financial and operational metrics, is reviewed by the GEC in detail and approved by the Board. Monthly updates are prepared to compare actual performance to the plan. Full-year forecasts are revised if necessary to reflect changes in sensitivities and risks that may affect the results of the Group. Action is taken, where appropriate, when variances arise. This information is reviewed monthly by the GEC and quarterly by the Board.
The internal audit function, the external auditors and the compliance function also assist the Board in exercising its controlling and supervisory duties. Information on major areas of activities of these functions is set out on pages 65 to 67.
Chief Financial Officer ad interim, Group Controller 1 Assumed role of Chief Executive Officer Global Life on August 14, 2013 2 Not members of the GEC
The GEC is headed by the CEO. As of December 31, 2013, members of the GEC included the Chief Investment Officer, the Chief Risk Officer, and the Group General Counsel; in order to reflect both, lines of business and geography, the CEOs of the business segments General Insurance, Global Life and Farmers, as well as the CEO of North America Commercial are also members of the GEC. Further, members of the GEC also act as the Regional Chairmen of Europe, North America and Asia-Pacific and Middle East. Furthermore as of December 31, 2013, there were the ad interim function holders Group CFO and Group Head of Operations, which were both not members of the GEC.
Key tasks and responsibilities: • acting as a cross-functional advisory body whose main function is to review, and provide recommendations relating to activities that materially affect the balance sheets of the Group or its subsidiaries; • setting the annual capital and balance sheet plans for the Group based on Group strategy or financial plan, as well as recommending specific transactions or unplanned business changes to the Group’s balance sheet; • overseeing all of the main levers of the balance sheet, including but not limited to, capital management, reinsurance, asset/liability management, dividend and share buyback policy, liquidity, leverage, rating agencies and other balance sheet related matters and topics as measured among others by Zurich Insurance Group’s Zurich Economic Capital Model (Z-ECM).
Technical Committees In addition to the Management Committees the Group governance structure provides for committees of a more technical nature to support Zurich’s business activities in various aspects.
The General Insurance Global Underwriting Committee, chaired by the Chief Underwriting Officer, General Insurance, is the focal point for the underwriting function within General Insurance. In particular, it approves underwriting and related control policy, develops and agrees the Group’s underwriting strategy, monitors the accumulation control and approves mitigation plans, when necessary. The Committee is also responsible for approving new captive transactions (or renewals) and new products. Finally, it also oversees and monitors technical underwriting reviews.
Regional Chairman of North America Yannick Hausmann Swiss 1967 Group General Counsel Michael Kerner American 1965 Chief Executive Officer General Insurance Axel Lehmann Swiss 1959 Chief Risk Officer and Regional Chairman of Europe Cecilia Reyes Swiss / Philippines 1959 Chief Investment Officer Geoff Riddell British 1956 Regional Chairman of Asia-Pacific and Middle East Kristof Terryn Belgian 1967 Chief Executive Officer Global Life
All current members of the GEC served on the GEC throughout 2013.
Kristof Terryn, the former Group Head of Operations and incumbent GEC member was appointed Chief Executive Officer Global Life succeeding Kevin Hogan who resigned from his position as the Chief Executive Officer Global Life and from the GEC effective August 14, 2013.
Effective August 26, 2013, Vibhu Sharma, currently Group Controller assumed the responsibility for Group Finance on an ad interim basis succeeding Pierre Wauthier, the former Chief Financial Officer.
Jeff Dailey (1957), U.S. Citizen CEO of Farmers Group, Inc. Skills and experience: Mr. Dailey began his career with Mutual Service Insurance Company in 1980. He also worked for Progressive Insurance Company. He went on to form Reliant Insurance Company, an auto insurance start-up owned by Reliance Group Holdings, which was sold to Bristol West Holdings Inc. in 2001. From 2001 until 2004, Mr. Dailey was COO of Bristol West and, in 2004, he was named President of Bristol West, following the firm’s IPO on the New York Stock Exchange. In 2006, he became CEO of Bristol West. Mr. Dailey joined Farmers in 2007 as President of Personal Lines for Farmers when
Farmers acquired Bristol West, where he served as Bristol West CEO. In January 2011, he was promoted to the position of President and Chief Operating Officer (COO) of Farmers Group, Inc. He became a member of the Board of Farmers Group, Inc. in February 2011. Mr Dailey was appointed to his current role of CEO of Farmers Group, Inc. and became a member of the GEC in January 2012. External appointments: None Educational background: Mr. Dailey graduated from the University of Wisconsin-Madison with a bachelor’s degree in Economics and has an MBA from the University of Wisconsin-Milwaukee.
He joined Zurich in 2006 as Chief Operating Officer of its North America Commercial business division and in January 2008 was appointed CEO of that division and a member of the GEC. Mr. Foley is also the Regional Chairman of North America and Chairman of the Board of Zurich Holding Company of America, Inc. (ZHCA). External appointments: Mr. Foley is a member of the Board of the American Insurance Association Educational background: Mr. Foley graduated with a Bachelor of Science from Fairfield University, in Fairfield, Connecticut in 1984 and a Masters degree from the JL Kellogg Graduate School of Management at Northwestern University in Evanston, Illinois in 1989.
Michael Kerner (1965), U.S. Citizen CEO General Insurance Skills and experience: Mr. Kerner joined Zurich in 1992 from the Continental Insurance Company and since then he has held a number of senior executive positions. These include Chief Operations Officer for Zurich North America Specialties and Head of Ceded Reinsurance for Zurich North America from 2002 to 2005. From January 2006 to June 2007, he served as the Global Head of Group Reinsurance and between 2007 and 2009,
Axel P. Lehmann (1959), Swiss Citizen Chief Risk Officer and Regional Chairman of Europe Skills and experience: Mr. Lehmann worked as a project manager and research associate at the Institute for Insurance Economics at the University of St. Gallen. In 1989, he was appointed as a lecturer in business administration at the University of St. Gallen and in 1990 as vice-president and head of Consulting and Management Development at the Institute for Insurance Economics and the European Center. In 1994, he served as a visiting professor at the Bocconi University in Milan, Italy before assuming the position of head of Corporate Planning and Corporate Controlling at Swiss Life in Zurich. Mr. Lehmann joined Zurich in 1996 as a member of the Executive Management team of Zurich Switzerland and subsequently acted as head of corporate development and head of commercial lines. Mr. Lehmann became a member of the Group Management Board responsible for business development functions in November 2000. In September 2001, he took over responsibility as CEO for Northern, Central and Eastern Europe and subsequently was appointed CEO of the Zurich Group Germany. Mr. Lehmann became a member of the Group Executive Committee and CEO of the Continental Europe Business Division in March 2002. In 2004, he was in charge of the consolidation of the United Kingdom, Ireland and South
Geoffrey Riddell (1956), British Citizen Regional Chairman of Asia-Pacific and Middle East Skills and experience: Mr. Riddell started his career with Price Waterhouse in 1978 and four years later moved to AIG, where he held various roles, including country manager for Hong Kong, Belgium and France. While in Hong Kong, he set up the first foreign general insurance company in China. He joined Zurich in 2000 as managing director of Zurich Commercial in the UK, becoming managing director of the UK Corporate and Government businesses. In 2002, he was appointed Chief Executive Officer of General Insurance in the UK, Ireland and Southern Africa. Mr. Riddell assumed the position of CEO of Global Corporate in April 2004, becoming a member of the Group Executive Committee in October 2004. In 2009, he took on the roles of CEO of Asia-Pacific & Middle East (APME) – responsible for both Life and General Insurance in the APME region – and Chairman of Global Corporate. In 2010, he assumed the newly created role of Regional Chairman of Asia-Pacific & Middle East. Mr. Riddell is a former member of the General Insurance
Markus Nordlin (1963), Finnish and US citizen Group Head of Operations ad interim, Chief Information Technology Officer Skills and experience: Mr. Nordlin began his career in 1988 with Andersen Consulting (later to become Accenture) where he worked in the financial services area. He later joined Andersen Consulting’s Global Investment Management Excellence Team as a founding member, serving the needs of leading retail and institutional investment managers. Mr. Nordlin joined Zurich at Farmers Insurance Group in 1999, where he held various senior positions in information technology (IT). In August 2004, he assumed the role of Chief Information Officer of Zurich’s wholly owned subsidiary Farmers Group, Inc. and was promoted to Senior Vice President in 2005. In addition to his lead role at Farmers, Mr. Nordlin has also led several global IT efforts including the global outsourcing of Zurich’s IT infrastructure. He was appointed to his current role as Zurich’s Group Chief Information Technology Officer in 2010. In August 2013, Mr. Nordlin assumed temporary responsibility for Group Operations, which includes Global Business Services, Sourcing & Procurement, Internal Consulting and the Group Project Management Office in addition to Group IT. External appointments: None Educational background: Mr. Nordlin holds a Bachelor of Science in Civil Engineering from the Brigham Young University and a Master of Business Administration from the University of California, Los Angeles.
Accounting and Reporting, Planning and Performance Management along with related functions such as certain finance shared services, and global finance transformation. He was named Chief Financial Officer ad interim in August 2013. External appointments: Mr. Sharma is a member of the European Insurance CFO Forum. Educational background: Vibhu Sharma earned a bachelor’s degree in accounting from Southern Methodist University and received a Distinguished Service Award from the Edwin L. Cox School of Business. He is a member of the American Institute of Certified Public Accountants and the Minnesota Society of Certified Public Accountants.
Changes to the GEC after January 1, 2014 On 16 December, 2013, George Quinn was appointed as Chief Financial Officer and member of the GEC, effective 1 May, 2014. On January 8, 2014 , Robert Dickie was appointed as Chief Operations and Technology Officer and member of the GEC, effective March 17, 2014.
Zurich Insurance Group Ltd may under certain circumstances authorize the beneficial owners of the shares that are held by professional persons as nominees (such as a trust company, bank, professional asset manager, clearing organization, investment fund or another entity recognized by Zurich Insurance Group Ltd) to attend the shareholders’ meetings and exercise votes as proxy of the relevant nominee. For further details, see page 34.
Zurich Insurance Group Ltd provided electronic voting devices to its shareholders for all the resolutions taken at the AGM on April 4, 2013. In accordance with Swiss law and practice, Zurich Insurance Group Ltd informs all shareholders at the beginning of the shareholders’ meeting of the aggregate number of proxy votes received.
Information Policy As of December 31, 2013, Zurich Insurance Group Ltd had approximately 128,000 shareholders registered in its share register, ranging from private individuals to large institutional investors (see page 363). Each registered shareholder receives an invitation to a shareholders’ meeting. A Letter to Shareholders provides an overview of the Group’s activities as the year progresses and outlines its financial performance. A more comprehensive Annual Review, the Annual Report and half-year reports are available on Zurich’s website www.zurich.com ( shareholderinformation/) and are also available in printed form on request. Information on the quarterly results reporting is also available for all shareholders on Zurich’s website.
For addresses and further upcoming important dates, see Shareholder Information starting on page 362 (Financial Calendar on page 364).
Employees The Group is committed to provide equal opportunities when recruiting and promoting people, whereby ability, experience, skills, knowledge, integrity and diversity are guiding principles. The Group actively encourages employee involvement in its activities through printed and online publications, team briefings and regular meetings with employees’ representatives. Further, the Group is party to a voluntary agreement with employee representatives of the Group’s companies in Europe. For further information on the Group’s people management activities, see the Annual Report starting on page 20.
Changes of control and defense measures Duty to make an offer The articles of incorporation of Zurich Insurance Group Ltd do not provide for opting out or opting up in the meaning of articles 22 and 32 of the Federal Act on Stock Exchanges and Securities Trading. Therefore, mandatory offers have to be submitted when a shareholder or a group of shareholders acting in concert exceed 331⁄3 percent of the issued and outstanding share capital of Zurich Insurance Group Ltd.
The Group’s share-based compensation programs include regulations regarding the impact of a change of control. These regulations provide that in the case of a change of control, the Plan Administrator (the Remuneration Committee or the CEO, as applicable) has the right to roll over the existing share obligations into new share rights or to provide consideration for such obligations that are not rolled over. Participants who lose their employment as a result of
PwC assumes all auditing functions which are required by law and by the Articles of Incorporation of Zurich Insurance Group Ltd. The external auditors are appointed by the shareholders of Zurich Insurance Group Ltd annually. At the Annual General Meeting on April 4, 2013, PwC was re-elected by the shareholders of Zurich Insurance Group Ltd. The Board proposes that PwC be re-elected at the Annual General Meeting on April 2, 2014 as external auditors for the business year 2014. PwC fulfills all necessary requirements under the Swiss Federal Act on the Admission and Oversight of Auditors and has been admitted as a registered auditing company by the Federal Audit Oversight Authority.
PwC and its predecessor organizations, Coopers & Lybrand and Schweizerische Treuhandgesellschaft AG, have served as external auditors of Zurich Insurance Group Ltd and its predecessor organizations since May 11, 1983. In 2000 and 2007, the Group conducted tender processes, inviting all major auditing firms to submit their work program and tender offers. After a thorough review, on both occasions the Board came to the conclusion that PwC’s work program and offer prevailed and therefore proposed PwC for re-election.
Mr. Richard Burger of PwC has been the lead auditor, responsible since the beginning of 2011 and to the end of the business year 2013. He has been the auditor-in-charge for regulatory and statutory audit work since 2008. The Group requires rotation of the lead auditors after they have served Zurich for five years followed by a two years minimum time out period. Mr. Stephen O’Hearn the Global Relationship Partner co-signs the auditors’ report for 2013.
Non-audit fees Total fees (including expenses and value added taxes) in the year 2013 for additional services (e.g., tax advice and services, internal control advice, transaction consulting services or special audits required by local law or regulatory bodies) performed by PwC and parties associated with them for Zurich Insurance Group Ltd or a Group company amounted to USD 14.9 million (USD 6.4 million in 2012). Non-audit fees were as follows: Total audit fees 46.6 43.9
Supervision and control over the external audit process The Audit Committee regularly meets with the external auditors, at least four times a year. During 2013, the Audit Committee met with the external auditors ten times. The external auditors regularly have private sessions with the Audit Committee without management present. Based on written reports, the Audit Committee discusses with the external auditors the quality of the Group’s financial and accounting function and any recommendations that the external auditors may have. Topics considered during such discussions include strengthening of internal financial controls, applicable accounting principles and management reporting systems. In connection with the audit, the Audit Committee obtains from the external auditors a timely report relating to the audited financial statements of Zurich Insurance Group Ltd and the Group.
The Audit Committee oversees the work of the external auditors. It reviews, at least annually, the qualification, performance and independence of the external auditors and reviews any matters that may impair their objectivity and independence based on a written report by the external auditors describing the firm’s internal quality control procedures, any material issues raised and all relationships between the external auditors and the Group and/or its in USD millions, as of December 31Audit and non-audit fee amounts
The Audit Committee proposes to the Board the external auditors for appointment by the shareholders and is responsible for approving the audit fees. A proposal for fees for audit services is submitted by the external auditors to and validated by management, before it is submitted to the Audit Committee for approval. The proposal is mainly based on an analysis of existing reporting units and expected changes to the legal and operational structure during the year.
The compliance function provides policies and guidance, business advice, training and assurance of appropriate compliance controls within the mandate of the Group Compliance function. These compliance controls include ongoing reviews of laws, regulations and other requirements at all levels of the organization. The compliance function also supports Zurich’s management in maintaining and promoting a culture of compliance and ethics consistent with Zurich Basics, the Group’s code of conduct. This robust compliance framework relies on an ongoing global compliance risk assessment to support a solid monitoring regime. The results of this assessment underpin the compliance function’s strategic planning which is conducted in consultation with business partners. The compliance plan is annually presented to the Audit Committee.
Risk Management and Internal Control Statement The Board is responsible for overseeing the Group’s risk management and internal control systems, for which management is responsible. The systems are designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable, and not absolute, assurance against material financial misstatement or loss. There are two committees at the Board level that have primary risk management and internal control oversight responsibilities
The Group has adopted a coordinated and formalized approach to risk management and internal control. The Group‘s core risk management and internal control systems and policies are established at the Group level with Group-wide implementation. This approach focuses on major risks that might impact the achievement of the Group‘s business objectives and on the activities to control and monitor these risks, which contributes to control effectiveness. A risk- aware and control-conscious environment is fostered in the Group and reinforced by communication and training.
Processes and controls in the organization are subject to risk-based reviews by management, Group Audit, Group Compliance and Group Risk Management. Management reviews include the effective implementation of policies and procedures including claims, investment, underwriting, actuarial, treasury, accounting and reporting, as well as the effectiveness of control for significant operations and information technology systems. The Board, the Audit and the Risk Committees of the Board receive regular and, as needed, special reports from the Chief Risk Officer, Group General Counsel, Head of Group Compliance, Group Chief Financial Officer and Group Controller, Head of Group Audit and financial and business senior management. In addition, the external auditors regularly report their conclusions, observations and recommendations arising from their independent audit process.
The reports relate to matters such as (a) significant changes in risks, the business and the external environment; (b) management’s monitoring of risks and the effectiveness of the Group’s control systems; (c) risk and control monitoring communications; (d) significant control issues, if any; and (e) the effectiveness of the Group’s external reporting process.
The Risk Committee has reviewed the effectiveness of the Group’s risk management system, including the Group’s risk tolerance and the enterprise-wide risk governance framework, and the Audit Committee has reviewed the effectiveness of the system of internal control operated by the Group related to the calendar year 2013 up to the copy deadline of the Annual Report and have reported to the Board accordingly. The Board is satisfied that the reviews by the Audit and Risk Committees of the Board were conducted in accordance with the Internal Control: Guidance to Directors (formerly known as the Turnbull Guidance) (as revised in October 2005). The assessment included the consideration of the effectiveness of the Group’s on-going process for identifying, evaluating, controlling and managing the risks of the business, including the scope and frequency of reports on both risk management and internal control that were received and reviewed during the year by the Risk and Audit Committees and the Board, as well as important risk and control matters discussed and associated actions taken by management. Issues identified, have been communicated to the Board and either have been or are being addressed by the Group.
In 2013, the Board of Directors continued to oversee and take decisions on the design and implementation of the remuneration principles, rules and architecture, which reflect international best practices in terms of governance, plan design and disclosure. The Group’s remuneration architecture is simple, transparent and market competitive, promotes a high performance culture, is aligned with our risk management principles and has an orientation towards the long-term for Key Risk Takers. With regard to the final rules in the Ordinance Against Excessive Compensation, a new set of Articles of Incorporation is presented for approval by shareholders at the Annual General Meeting (AGM) 2014 and the first binding vote on remuneration for the members of the Board of Directors and the Group Executive Committee will take place at the AGM in 2015. During the year, the Board reviewed the design and operation of the long-term incentive plan (LTIP) component of the executive remuneration package to ensure alignment with the strategy and targets for the three year period 2014–2016 that were outlined at the Investor Day in December 2013. As a result, the LTIP is being amended in 2014.
The following summary provides an overview of the most important aspects of Zurich’s remuneration in 2013.
Remuneration governance and philosophy The Board of Directors (“Board”) is responsible for the design, implementation and monitoring of the Group’s remuneration architecture, and it has established a Remuneration Committee. Amongst other duties, the Remuneration Committee is responsible for proposing to the Board on an annual basis the remuneration for the Directors, the Chief Executive Officer (CEO) and the other members of the Group Executive Committee (GEC). It also assesses individual and business performance as it relates to incentive compensation and proposes the overall expenditure on variable pay.
Remuneration overview Total remuneration includes base salaries, short-term and long-term incentives and employee benefits. The short- and long-term incentive plans used for variable remuneration are linked to appropriate performance measures and the overall expenditure on variable pay is considered in connection with the Group’s long-term economic performance.
Total remuneration 1 Includes the portion paid in shares to Directors.
With regard to the Group Short-Term Incentive Plan (Group STIP) in 2013, the overall increase in profitability led to an average payment of 101 percent of target (relative to 91 percent of target awarded for 2012) for the more than 38,000 employees participating in the plan. With regard to the Group Long-Term Incentive Plan (Group LTIP) the Board reviewed the outcomes under the performance conditions and the overall performance of the company over the three years 2011 to 2013. In line with the move to assess LTIP performance measures on an independent basis with effect from January 1, 2014 and recognizing that this is the more common market practice, the Board adopted this methodology for all LTIP vesting decisions in 2014. Vesting at the on-target level was achieved in respect of the ROE results, where an average of 11.9 percent per annum was achieved over the three years. However, there was no vesting in respect of the relative Total Shareholder Return (TSR) result, where despite a positive cumulative return of 28 percent calculated in Swiss francs over the three years, the result was positioned in the third quartile of the peer group. The overall vesting level was therefore set at 50 percent of the target awards compared to the vesting level of 97 percent of target awards set last year for the performance period 2010 to 2012.
• Following the resignation of Mr. Josef Ackermann from the Board and the Remuneration Committee on August 29, 2013, Mr. Tom de Swaan joined the Remuneration Committee.
• During the year, the Board reviewed the design and operation of the Long-Term Incentive Plan (LTIP) component of the executive remuneration package. The aims of the review were to ensure that the LTIP, i) takes account of the latest best practice principles, and views from proxy-advisors and shareholders; ii) is closely aligned to the achievement of the longer-term strategic goals and the delivery of value for shareholders; and, iii) helps drive sustained performance and assists in the attraction, retention and motivation of executive talent. The review concluded that a number of changes were required to the LTIP to meet these objectives and further details of the changes being made for 2014 are set out on pages 97 to 99.
• The Board has reviewed and analyzed the final rules in the Ordinance Against Excessive Compensation (AEC), in force since January 1, 2014, implementing the new Art. 95 III of the Swiss Constitution. As a result, the Board is presenting a new set of Articles of Incorporation for approval at the Annual General Meeting in 2014. The first binding vote on remuneration for the members of the Board and Group Executive Committee will take place at the Annual General Meeting in April 2015. As in previous years, a consultative vote on the remuneration system will take place in 2014 and the practice of consultative votes will also continue in future years.
Remuneration governance Remuneration architecture The Board is responsible for the design and implementation of Zurich’s remuneration principles and remuneration rules (together the “Remuneration Rules”). To support the Board in performing these duties it has established a Remuneration Committee. The Remuneration Committee comprises four members of the Board, all of whom are experienced in the area of remuneration. On an annual basis the Remuneration Committee evaluates the remuneration architecture and the Remuneration Rules and proposes any amendments to the Board, if appropriate.
In 2013, a number of actions were implemented: • Further meetings took place between the Remuneration Committee and the Governance and Nominations Committee to discuss the implementation of the Ordinance against Excessive Compensation.
• During the annual process to help align remuneration with the Group’s risk-taking capacity, Group Risk Management consulted with other control, governance and assurance functions and provided the CEO with a review of risk factors to consider when overall performance for the funding of incentives was being assessed. The Chief Risk Officer is available to discuss these findings with the Remuneration Committee and the Board. Among other factors, the CEO takes into account the assessment by Group Risk Management when presenting his proposals for the funding of the short-term and long-term incentive pools to the Remuneration Committee, which in turn makes its recommendation to the Board for final approval.
• With regard to the operational implementation of the remuneration architecture across the Group, Group Audit carries out assessments on a regular basis regarding the operational implementation of Zurich’s Remuneration Rules. No material issues were identified in their review for 2013.
• In the review of performance measures for 2013, no changes were made to the STIP and LTIP architecture.
• Further, information is also provided below on the share dilution impact arising from the issuance of shares to meet the obligations under the Group’s share-based compensations plans. Zurich meets the share obligations arising from compensation plans by either issuing new shares from the contingent capital that has been authorized by the shareholders or by using Zurich shares purchased in the market.
As of December 31, 2013, the total number of vested but unexercised share options was 1,763,618. The exercise prices for these options range from CHF 198.10 to CHF 355.75. If all mentioned vested options were to be exercised in the future, the number of shares required represents 1.18 percent of the share capital which is based on 148,903,222 registered shares eligible for dividends as of December 31, 2013. If only those options in the money at December 31, 2013 (share price CHF 258.50) were exercised the number of shares required would be 174,732 or 0.12 percent of the share capital based on 148,903,222 registered shares eligible for dividends as of December 31, 2013.
Approval process for remuneration In accordance with the Remuneration Rules, the Remuneration Committee is responsible for proposing to the Board on an annual basis the remuneration payable to the Directors, to the CEO and to the other members of the GEC. For the other members of the GEC, these recommendations are based on proposals made by the CEO. The remuneration proposals have to be approved by the Board.
In the meetings of the Remuneration Committee and the Board where decisions are made on the remuneration of the Chairman, the Chairman is not present. In making decisions on the remuneration of the CEO, the CEO is not present. Where decisions are made on the remuneration of other members of the GEC, those members are also not present at the meetings. See pages 49 and 50 in the Corporate governance report for further details of the Remuneration Committee’s responsibilities.
The results of the benchmarking studies are taken into account in setting fee levels for Directors and the remuneration structures and levels for the CEO and the other members of the GEC. In analyzing the results of the benchmarking studies, market practices in the various countries and the internal relativities between positions are taken into account. Overall positioning of the remuneration packages is towards the median levels.
For their activities, management is supported by a variety of firms operating in the field of international executive compensation.
Involvement of shareholders As last year, Zurich will provide shareholders with the opportunity to express their views on the remuneration architecture through an advisory vote at the Annual General Meeting to be held on April 2, 2014. As the ultimate decision on remuneration is currently within the powers of the Board, such a vote is non-binding in nature.
Based on their role on the Board and the fee structure described on page 84, fee levels are established for each member of the Board of Zurich Insurance Group Ltd. Fees are paid in cash and in shares with approximately one-third of the basic fee being provided in three-year sales-restricted shares of Zurich Insurance Group Ltd.
The fees paid to Directors (including the portion provided in sales-restricted shares) are not subject to the achievement of any specific performance conditions.
Group Executive Committee and all other employees For the members of the GEC including the CEO, and all other employees throughout the Group, a number of key elements have been implemented to provide a well-balanced and effectively-managed remuneration program. These elements include a group-wide remuneration philosophy, robust short-term and long-term incentive plans, effective governance, and strong links to the business planning and risk policies of the Group.
• The Group’s short-term and long-term incentive plans used for variable remuneration are linked to appropriate absolute and relative performance measures and the overall expenditure on variable pay is considered in connection with the Group’s long-term economic performance.
• The Group provides its employees with a range of benefits based on local market practices, taking into account the Group’s risk capacity on pension funding and investments.
Total remuneration Total remuneration for an individual employee is influenced by a number of factors such as the scope and complexity of the role, business performance and affordability, individual performance, internal relativities, external competitiveness, geographic location and legal requirements. As described on pages 71 and 76, target opportunities are benchmarked to median levels in clearly defined markets. The remuneration mix between base salary and variable pay is also aligned with local market practices and internal structures. Zurich is transparent in the communication of how the reward structure and the processes used for decision making are defined. Total remuneration includes the following elements: Element Type Description
• A number of distinct short-term incentive pools are established to cover each area of the Group’s business: the Leadership Team; each business segment; operations; and the functional areas and Corporate Center. The pool structure is reviewed each year. Each participant is allocated to one of the STIP funding pools.
• The relevant business performance is assessed against the business plan that is approved by the Board in December of the year prior to the performance year. The financial measures to fund the pools typically include the Group’s Net Income for the Leadership Team, and the relevant Business Operating Profit (BOP) for the business segments; for Farmers the business performance of the Farmers Exchanges is also taken into account. Depending on actual achievements, the Group STIP funding pools can vary between 0 percent and 175 percent of the target pools. If the business performance is on target, the potential available Group STIP funding as percent of target awards is around 100 percent. However, if business performance is below target, the potential available Group STIP funding as a percent of target awards is normally below 100 percent and can be zero. In assessing the business results, the financial performance of the area and a review of risk considerations by the Chief Risk Officer are taken into account.
Short-term incentives are delivered primarily through Group STIP. In addition there are some local country plans. The Group plan is utilized across the organization and, in many countries covers all employees in the respective country who are selected to participate. In other countries only the most senior individuals participate in the Group plan. Local country plans, following broadly the same principles as Group STIP, may be utilized for other employees.
Long-term (three year) incentives support the achievement of the Group’s longer-term financial goals and are utilized for a defined group of executives and senior managers, whose specific roles focus on the performance drivers of long-term shareholder value. This group contains the individuals with the highest levels of total remuneration, as well as those individuals considered to be KRTs. In alignment with the Group’s risk profile and business strategy, long-term incentives are provided with a deferral element taking into account material risks and the time horizon thereof. Such deferred remuneration is structured in a way to promote the risk awareness of the participants and to encourage the participants to operate the business in a sustainable manner.
• moreover, for those share awards that vest, one half are sales-restricted for a period of three years from the date of vesting.
For performance based grants, these grants only vest if certain Group performance conditions are met in terms of the absolute return on common shareholders’ equity (ROE) and the position of the Group’s Total Shareholder Return (TSR) compared with an international peer group of insurance companies based on the Dow Jones Titan Insurance Index. Performance is measured over a three year calendar period prior to the vesting date and the vesting percentage, based on the actual ROE and TSR achievements, can vary between 0 percent and 175 percent of the target grants. If the minimum performance thresholds are met, then the Group performance conditions are taken equally into account. If the minimum performance thresholds are not met, the target grants will not vest. If the Group’s ROE goals are met and the TSR is below median, the Remuneration Committee in discussion with the Board of Directors will determine whether, due to exceptional circumstances, a partial vesting of the specific tranche of the target grant is appropriate. The vesting percentage is proposed by the CEO to the Remuneration Committee and the Committee makes a recommendation to the Board for final approval. In principle, the applicable vesting matrix for the grants made in 2013 and in prior years is as follows: Level of vesting for share and share option target grants
Where the actual ROE lies in between the values in the table, the vesting percentage is determined by interpolating the figures in the above matrix. As an example, with the relative TSR in the second quartile and an average ROE of 12.5 percent over the three year period, the vesting percentage would be 104 percent of the target grant.
The underlying performance matrix was reviewed by the Board and it was decided not to make any changes for 2013. The Board may exercise discretion in order to take the current environment into account when assessing the overall levels of vesting. Adjustments of +/–25 percent to the calculated level may be applied and can be positive or negative depending on extraordinary market circumstances for example with regard to interest rates, exchange rates etc. The right to modify individual awards to reflect specific circumstances is reserved for the CEO except for modifications regarding members of the GEC where such right is reserved for the Remuneration Committee and the Board. An adjustment of +/–25 percent to the regular vesting level may be applied before distribution. However, if performance under exceptional or unusual circumstances so warrants it, exceptions to the +/–25 percent adjustment may be made. In this respect the company reserves the right to adjust and even set the vesting percentage to zero for an individual to reflect specific circumstances (e.g. in connection with a breach of internal or external rules) during the period prior to vesting, but any such adjustment is reserved exclusively for the Remuneration Committee and the Board.
Remuneration and shareholdings of the members of the Board and the Group Executive Committee As of December 31, 2013, all of the Directors of Zurich Insurance Group Ltd are non-executives, independent of management. The remuneration for Directors and for members of the GEC, as well as their shareholdings, is disclosed separately.
Directors Directors’ fees All Directors receive a fee, which is paid partly in cash and partly by allocation of three-year sales-restricted Zurich Insurance Group Ltd shares, for their memberships of the Boards of Zurich Insurance Group Ltd and Zurich Insurance Company Ltd. The shares are provided as part of the overall fee which is not subject to the achievement of any defined performance targets.
In 2013, no changes were made to the fee structure established in 2012. The Board has also decided not to make any changes in the fee structure for 2014.
Where a Director is also a member of one or more subsidiary boards of Zurich Insurance Group Ltd, the Director is entitled to an additional fee of CHF 50,000 in 2013 (CHF 50,000 in 2012) per annum plus CHF 10,000 in 2013 (CHF 10,000 in 2012) per annum if he or she also chairs an audit committee of such a board. The fee structure for subsidiary boards can be modified if certain circumstances – such as additional time commitment to discharge the duties of a board member – warrant it. Accordingly, with regard to his membership with Zurich Insurance plc, Mr. de Swaan received a basic fee of CHF 75,000 and a supplement of CHF 5,000 for being the Chair of the Audit Committee to address his additional time commitment with regard to his capacity as a member of this board.
Total fees 8 of which paid in cash of which allocated in shares 4, 12 1 The remuneration shown in the tables is gross, based on the accrual principle and does not include any business-related expenses incurred in the performance of the Directors’ services.
3 Committee chairs receive an annual fee of CHF 30,000 (CHF 30,000 in 2012) and the chair of the Audit Committee receives an additional CHF 10,000 (CHF 10,000 in 2012). Ms. Bies took on the role of the Risk Committee chair as of September 11, 2013. The committees on which the Directors serve and the chairs are set out in the Corporate Governance Report on page 38.
8 Swiss-based Directors are eligible for selected employee benefits. 9 In line with applicable laws, Zurich paid the company-related portion of contributions to social security systems, which amounted to CHF 136,246 in 2013. The corresponding contributions amounted to CHF 160,340 in 2012. Any personal contributions of the Directors to social security systems are included in the amounts shown in the table above.
11 At the Annual General Meeting on March 29, 2012, Mr. Gentz and Mr. Sankey retired from the Board and Ms. Carnwath and Mr. del Pino were elected to the Board. Mr. Ackermann was appointed Chairman and Mr. de Swaan Vice-Chairman of the Board of Directors.
Termination arrangements for members of the Board who gave up their functions At the Annual General Meeting on April 4, 2013, the term of office of Mr. Meyer expired and he did not stand for re-election as he had served the maximum tenure. No termination payments (i.e. “golden parachutes”) were made and no other benefits such as waiver of lock-up periods for equities, shorter vesting periods or additional contributions to occupational pension schemes were provided.
Share plans for Directors The members of the Board of Zurich Insurance Group Ltd and Zurich Insurance Company Ltd do not participate in any of the share-based incentive plans established for executive management. However, part of the fees of the Directors of Zurich Insurance Group Ltd is allocated as three-year sales-restricted shares. As mentioned above, the shares provided to Directors are part of the overall fee and are not subject to the achievement of any defined performance targets.
Shareholdings of Directors The shareholdings of the Directors, who held office at the end of the year, in shares of Zurich Insurance Group Ltd are shown in the following table. All interests shown are beneficial and include sales-restricted shares allocated to the Directors as part of their fee and shares held by parties related to the Directors.
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.
Number of Zurich Insurance Group Ltd shares 1, as of December 31Directors’ shareholdings
Personal loans for Directors Unrelated to his Board membership and on terms and conditions available to other customers, Mr. Watter had a collateralized policy loan in the amount of CHF 2.5 million outstanding as of December 31, 2013 and 2012. The annual interest rate charged on the loan is 4 percent. Other than the loan for Mr. Watter, none of the Directors had outstanding loans, advances or credits as of December 31, 2013 or 2012.
Personal loans for former Directors As of December 31, 2013, and 2012, respectively, no former Director had outstanding loans, advances or credits.
Related parties to the Directors or to former members of the Board 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 years 2013 and 2012 nor had any related party of the Directors or of former members of the Board any outstanding loans, advances or credits as of December 31, 2013 and 2012.
Group Executive Committee Remuneration of the Group Executive Committee The total remuneration of the members of the GEC for 2013 comprised the value of cash remuneration (including short-term cash incentives), the target equity grants made under the Group’s LTIP in 2013, pensions and other remuneration.
The distribution of the total remuneration in 2013 between the individual remuneration elements is set out in the following chart and is based on the target values for the performance related remuneration.
As can be seen from the above chart, there is an appropriate balance of the remuneration elements with a significant emphasis on performance related remuneration through both the Short-Term Incentive Plan and Long-Term Incentive Plan. The distribution of the target values between short-term (one year) and long-term incentives (three years) shows an emphasis towards long-term incentives.
The individual remuneration elements are described in more detail below (the amounts for the highest paid executive are also included): Value of total remuneration The total value of the various remuneration elements earned by the members of the GEC in 2013 was USD 46.0 million, very much in line with USD 46.4 million earned in 2012 calculated on the same basis. In Swiss francs the total value was CHF 42.5 million, slightly below the CHF 42.6 million in 2012. Included in the figures for 2013 are the relevant remuneration amounts for the two individuals who were acting “ad interim” in the positions Chief Financial Officer and Group Head of Operations during the year.
For members of the GEC, including the CEO, the target levels under the Group STIP for 2013 vary between 75 percent and 100 percent of the base salary. The maximum award for all members of the GEC, including the CEO is 200 percent of the target amount. The overall funding for cash incentives is based on the underlying Group profit performance during the year and, in this respect, the NIAS result improved year on year. In discussion with the Chief Executive Officer, the Remuneration Committee reviewed the individual performance accomplishments of each of the GEC members considering a number of factors including the performance of the business segment or function being managed, the accomplishment of strategic objectives across a broad range of areas including business portfolio enhancements, customers and intermediaries, products and services and people management. The proposals were then reviewed and approved by the Board of Directors. The Remuneration Committee and the Board of Directors also reviewed the performance of the CEO during the year and determined his cash incentive award for 2013.
The vesting of the grants and the performance criteria are set out on pages 81 and 82. The following equity grants under Group LTIP were made in 2013: Performance share grants The total number of target performance share grants made to members of the GEC during 2013 was 57,374. This compares with 67,296 made for 2012. The value of the target performance share grants made on April 3, 2013 to members of the GEC was USD 16.2 million at the date of grant. This is based on the assumption of 100 percent vesting in 2014, 2015 and 2016, a share price of CHF 267.30 on the day prior to the grant and an exchange rate of 1 CHF = 1.0576 USD.
Restricted share grants Restricted share grants supplement the regular long-term incentive grants and are used only in extraordinary circumstances mainly for new hires to compensate for the loss of their equity rights with their previous employer. These restricted share grants typically vest over three to five years following the date of grant and are forfeited if the holder of such share grants voluntarily leaves the company before the vesting date and the employment relationship terminates. No restricted share grants were made to members of the GEC during 2013 and 2012.
Share option grants For the three year performance period ended on December 31, 2013, there are no share option awards that will vest in 2014, as the last option grant was made in 2010.
Value of other remuneration paid in 2013 Members of the GEC received other remuneration in 2013 in relation to employee benefits, expatriate allowances, perquisites, benefits-in-kind and any other payments due under each member’s employment contract. The total value of other remuneration in 2013 was USD 2.9 million. Benefits-in-kind have been valued using market rates.
Summary of total remuneration for the Group Executive Committee By reference to the above figures, the total remuneration of the members of the GEC, comprising cash compensation, the value of target equity grants for 2013, pensions and the value of other remuneration was USD 46.0 million, for 2012 it was USD 46.4 million.
3 On the basis of 13 GEC members, of whom 9 served during the full year 2012. 4 The share grants will vest in the future according to achievement of defined performance conditions. The value of the shares assumes that the grant will vest in the future at 100 percent of the target level with the valuation of the target performance share grants based on the share price on the day prior to the grants (CHF 267.30 for 2013 and CHF 225.90 for 2012).
5 The amounts reflect the total value of pension benefits accruing to members of the GEC during 2013 and 2012, respectively, calculated on the basis of the service costs for the company as assessed under IAS 19 accounting principles. Service costs value the amount of the pension benefits accruing during the year and for defined contribution plans takes the amount of the company contribution paid during the year. Service costs do not include the interest costs on accrued benefits, adjustments for actuarial gains and losses, nor the expected return on any assets held.
Based on these figures, the value of the total remuneration for all members of the GEC comprises 38 percent (37 percent in 2012) in fixed remuneration elements (comprising base salaries, service costs for pension benefits and other remuneration) and 62 percent (63 percent in 2012) in performance related components (comprising the cash incentive awards under the Group STIP together with the value of the target performance share grants).
Member of the Group Executive Committee with the highest total remuneration The highest paid remuneration for the GEC members was CHF 7.60 million for Mr. Senn, the Group’s CEO. This amount reflects his 2013 base salary, the cash incentive earned for 2013, the value of the target performance shares granted in 2013, the value of pension benefits and other remuneration. This is the same amount as in 2012. All Mr. Senn’s remuneration is paid in Swiss francs.
Included in the amount for 2013 is the value of target equity grants of CHF 3.6 million given out in 2013 which assumes the grant will vest at 100 percent of target in 2014, 2015 and 2016. As mentioned above, the vesting level under the LTIP for the three year performance period ending December 31, 2013 was 50 percent of target and this results in an actual realizable value of CHF 1.9 million based on the number of shares vesting and the closing share price of CHF 258.50 as at December 31, 2013. As a result, the actual earned total remuneration for the period ending December 31, 2013 was CHF 1.7 million lower than shown in the table below.
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 7.60 7.60 Total in USD 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.
Special payments for new GEC members appointed during the year During 2013, no members were appointed to the GEC.
Remuneration for former members of the Group Executive Committee No former member of the GEC received remuneration in 2013.
Summary of total outstanding share commitments for members of the Group Executive Committee under the Group LTIP Share grants Performance share grants As of December 31, 2013, the total number of target performance share grants outstanding for members of the GEC under the Group LTIP was 102,708 (98,257 as of December 31, 2012). A summary of the outstanding grants as of December 31, 2013 is set out in the table below: Performance period
In connection with the re-design of the Group LTIP in 2003, option grants were made in each year on the third working day in April. Further, the exercise price for the options granted in the past was set at the market price on the day prior to the date of grant. The performance based option grants were considered for vesting in one-third installments during the three years after the grant.
Summary of outstanding performance share grants as of December 31, 2013Summary of outstanding options, 2013
Number of vested shares and vested share options, as of December 31Share and vested share option holdings of the GEC members 1
The following tables show how the totals of the vested share options owned by members of the GEC are distributed according to the grants identified in the tables “Summary of outstanding options” as of December 31, 2013 and 2012, respectively.
P. Wauthier 4 n / a n / a n / a n / a n / a 1 Mr. Nordlin, currently Chief Information Officer assumed responsibility for Group Operations on an ad interim basis succeeding Mr. Terryn effective August 14, 2013. He is formally not a member of the GEC.
Trading plans To facilitate the sale of shares and the exercise of options for the members of the GEC, the Board approved the implementation of trading plans effective as of 2008. These plans allow members to sell shares and/or exercise share options under a pre-defined transaction program. Trading plans can only be established at a time when the individual does not possess unpublished price-sensitive information with regard to the Group. Further, the first transaction under a trading plan can only occur three months following the date it is established. The terms and conditions of the transactions have to be defined and they cannot be changed. All trading plans of members require the approval of the Chairman of the Board. Once established, transactions take place on a monthly basis including during close periods. The establishment of a trading plan by a GEC member is reported to the SIX Swiss Exchange according to the rules on
G overn an ce disclosure of management transactions. In 2011, the Board approved the extension of the trading plan concept to selected executives who are often prohibited from being able to deal in Zurich securities because of the nature of their function. As of December 31, 2013, there were no trading plans in place. Further, no trading plans were entered into in 2013 or 2012.
Additional honoraria and remuneration for members of the Group Executive Committee None of the members of the GEC received any remuneration from the Group or from any of the Group’s companies in 2013 and 2012 other than as set out above.
Personal loans for members of the Group Executive Committee As of December 31, 2013 and 2012, there were no loans, advances or credits outstanding for members of the GEC.
As of December 31, 2013 and 2012, no former member of the GEC had any outstanding loans, advances or credits.
All employees The following section includes information regarding the total remuneration earned by employees for the financial year 2013 across the Group, including remuneration for members of the GEC. The information provided is set out in accordance with the additional disclosure requirements defined in the FINMA Circular on Remuneration Schemes, applicable for the first time in 2010. The Group had 55,102 and 55,312 employees (full-time equivalents) as of December 31, 2013 and 2012, respectively.
Base salaries 4,092 4,036 Value of other remuneration 1 643 628 Service costs for pension benefits 2 513 476 Total fixed remuneration 5,248 5,140 1 Includes employee benefits like health and dental insurance and other fringe benefits etc. 2 This represents the present value of the defined benefits from pension and post-retirement benefits plans, plus employers’ contributions to defined contribution plans, arising from employee service over the accounting period. The amount included in this figure for defined benefit plans is calculated using actuarial factors and can vary year on year as economic conditions change. These numbers are explained in greater detail in note 22 of the Consolidated Financial Statements.
Variable remuneration: Based on recommendations of the Remuneration Committee, the Board approves the aggregate amount of the Total Variable Remuneration Pool for the performance year. This comprises: • The total expenditure on cash incentives to be paid for the performance year comprising the amount of the aggregated funding pools under the Group STIP and the amounts to be paid under the local short-term incentive plans.
The figures do not include any charges or credits that originate from remuneration paid out during the financial year 2013 that derive from previous financial years.
Commission payments made to employed sales agents are not included in the calculation of the Total Variable Remuneration Pool. The sales commission plans of employed agents are not considered part of the profitability based incentive plans. Sales commissions, like the commissions paid to a broker or other external distributors, represent a distribution cost. The employed sales agents do not generate financial risks as they are not involved in establishing the price levels for the products they sell. With regard to operational and reputation risks, in particular due to potential mis-selling, the control of these risks is addressed by the mandatory and Group-wide adherence to the Zurich Risk Policy and Zurich Basics, the Group’s code of conduct.
In determining the amount of the Total Variable Remuneration Pool, the Board considers the long-term economic performance of the Group as well as other relevant factors. The average economic profit is calculated by subtracting the required return on economic capital, based on the weighted average cost of capital, from the adjusted Business Operating Profit after Tax. In this respect, the Group has generated economic profit over the long-term which exceeds the actual expenditure on variable pay.
2 Includes sign-on payments in shares. 3 The share grants will vest in the future according to achievement of defined performance conditions. The value of the shares assumes that the grant will vest in the future at 100 percent of the target level with the valuation of the target performance share grants based on the share price on the day prior to the grants (CHF 267.30 for 2013 and CHF 225.90 for 2012). The charges in the financial statements may be calculated on different vesting basis.
The total number of employees receiving variable remuneration is approximately 50,000 in 2013 (46,000 in 2012). With regard to the Group Short-Term Incentive Plan (Group STIP) in 2013, the overall increase in profitability led to an average payment of 101 percent of target (relative to 91 percent of target awarded for 2012) for the more than 38,000 employees participating in the plan.
Included in the total variable remuneration pool 2013 is the value of the target equity grants made under the Group Long-Term Incentive Plan (Group LTIP) of USD 134.2 million that were given out in 2013 assuming that vesting at 100 percent of target takes place in 2014, 2015 and 2016. With regard to the actual vesting for the period 2011–2013, the Board reviewed the outcomes under the performance conditions and the overall performance of the company. In line with the move to assess LTIP performance measures on an independent basis with effect from January 1, 2014 and recognizing that this is the more common market practice, the Board adopted this methodology for all LTIP vesting decisions in 2014. Vesting at the on-target level was achieved in respect of the ROE results, where an average of 11.9 percent per annum was achieved over the three years. However, there was no vesting in respect of the relative TSR result, where despite a positive cumulative return of 28 percent over the three years, the result was positioned in the third quartile of the peer group. The overall vesting level was therefore set at 50 percent of the target awards compared to the vesting level of 97 percent of target awards set last year for the performance period 2010 to 2012. This results in an actual realizable value of USD 62.1 million based on the number of shares vesting and the closing share price of CHF 258.50 as at December 31, 2013. As a result, the actual earned total variable remuneration for the period ending December 31, 2013 was USD 72.1 million lower than the USD 668 million shown in the table above.
Value of outstanding deferred remuneration The Group’s remuneration system includes instruments for the deferral of remuneration, and the following table provides an overview of the overall value of the outstanding deferred remuneration at December 31, 2013 and 2012: Unvested performance share grants 236 225 Unvested performance option grants – 7 Unvested restricted share grants 9 7 Vested but sales restricted shares 137 140 Value of overall outstanding deferred remuneration 382 379
in USD million, for the years ended December 31Total remuneration in USD million, for the years ended December 31Value of outstanding deferred remuneration
in USD million, for the years ended December 31Sign-on and severance payments for Key Risk Takers
During 2013, the Remuneration Committee reviewed the design and operation of the LTIP. The aims of the review were to ensure that the LTIP
Main features of the new LTIP as of 2014 Based on the recommendations of the Remuneration Committee, the Board approved on February 12, 2014 a number of changes to the LTIP. The main features of the new LTIP as of January 1, 2014 are described below.
In addition to the longer vesting period with cliff-vesting, there will continue to be a requirement for LTIP participants to hold one half of all vested shares for an additional period of three years following the vesting date. This takes the overall vesting and holding period to six years for this part of the award.
Dividend equivalent shares In reviewing latest market practice principles for LTIP the Remuneration Committee and the Board also considered the practice of crediting dividend equivalents during the vesting period. Based on this review and given the significant value of the dividend, to further align the executives with the interests of the shareholders, it was decided that from the 2014 LTIP grant onwards, there will be the possibility that additional shares accrue to participants at the vesting date to compensate for the dividend paid during the vesting period: • The number of additional shares to be credited takes into account the dividends paid to shareholders between the date of grant and the date of vesting.
Transition Arrangements The transition to three-year cliff-vesting results in a reduction in the total target earning opportunity during the transition period compared to the previous LTIP vesting system. This impacts LTIP participants who joined the plan prior to year 2014. The Board has decided to make various transitional arrangements to allow these LTIP participants the possibility to maintain their cumulative target earning opportunity during the transition period.
Application of the new performance framework for vesting decisions in 2015 and 2016 The new performance framework set out in this section will also be applied to assess vesting decisions in 2015 and 2016 for the tranches of the 2012, 2013 and 2014 grants that will be assessed for vesting in these years. This ensures that with effect from January 1, 2014 all LTIP participants are focused on the new set of performance measures and vesting grid.
Transition grant With the move to a three-year cliff-vesting and the vesting schedule described above for 2014 LTIP grant, the Remuneration Committee observed that there was still a shortfall in target earning opportunities, compared to the annual tranches, during the transition period for those LTIP participants who joined the plan prior to year 2014. Having reviewed a number of alternatives the Board decided to close the gap through a grant of supplementary performance shares in 2014 (Transition Grant) equal in value to the 2014 year’s LTIP grant value and to be assessed for vesting in equal amounts in 2015, 2016 and 2017. The Transition Grant ensures that the LTIP participants maintain their cumulative target earning opportunity during the transition period.
In assessing transition solutions for the GEC members, the Board wanted to ensure the GEC members further increase their long-term alignment with shareholders. The Board therefore decided to make the Transition Grant in two installments and in the case of the CEO, in three installments, instead of in one grant. For GEC members, the vesting of these two grants will occur over 2015 to 2018. For the CEO, the vesting of the three grants will occur over 2015 to 2019. The table on page 99 illustrates the Transition Grant and the vesting schedule.
Transition Grant LTIP participants (excl GEC) Grant in 2014 1/3rd vest 1/3rd vest 1/3rd vest Transition Grant GEC (excl CEO) 1/2 Grant in 2014 1/6th vest 1/6th vest 1/6th vest 1/2 Grant in 2015 1/6th vest 1/6th vest 1/6th vest Transition Grant CEO 1/3 Grant in 2014 1/9th vest 1/9th vest 1/9th vest 1/3 Grant in 2015 1/9th vest 1/9th vest 1/9th vest 1/3 Grant in 2016 1/9th vest 1/9th vest 1/9th vest 1 One half of all vested shares is subject to a three-year sales-restriction. For GEC members, this means that the last restriction on the Transition Grant will lapse in 2021 and for the CEO in 2022.
In this section Operating and financial review 102 Risk review 127
Financial highlights 103 Performance overview 104 General Insurance 106 Global Life 111 Farmers 115 Other Operating Businesses 117 Non-Core Businesses 117 Investment position and performance 118 Insurance and investment contract liabilities 120 Capitalization 124 Cash flows 125 Currency translation impact 126
Global Life business operating profit 1,272 1,351 (6%) Global Life new business annual premium equivalent (APE) 3 4,418 4,030 10% Global Life new business margin, after tax (as % of APE) 3 28.3% 22.1% 6.2 pts Global Life new business value, after tax 3 1,251 890 41%
Farmers business operating profit 1,516 1,402 8% Farmers Management Services gross management result 1,353 1,366 (1%) Farmers Management Services managed gross earned premium margin 7.2% 7.3% (0.1 pts)
Return on shareholders’ equity (ROE) 12.0% 11.8% 0.2 pts Business operating profit (after tax) return on shareholders’ equity (BOPAT ROE) 10.5% 9.3% 1.2 pts 1 December 31, 2012 has been restated as set out in note 1 of the Consolidated financial statements. 2 Parentheses around numbers represent an adverse variance. 3 New business amounts are calculated on embedded value principles before the effect of non-controlling interests. See Embedded value report for details of these principles.
The Group’s solvency measured on an economic basis as determined under the Swiss Solvency Test improved by 21 percentage points, rising to 206 percent as of July 1, 2013. Shareholders’ equity decreased by USD 2.0 billion to USD 32.5 billion during 2013 including net income attributable to shareholders of USD 4.0 billion, and after a decrease in net unrealized gains on investments of USD 2.8 billion, and the dividend of USD 2.7 billion paid in April 2013.
• Global Life business operating profit decreased by USD 80 million to USD 1.3 billion, or by 6 percent in U.S. dollar terms and 4 percent on a local currency basis. Increases in Latin America were more than offset by reductions in North America, Europe and Asia-Pacific and Middle East (APME). Improvements from the increased contribution from Zurich Santander, after non-controlling interests, and improvements in the expense and risk margins, were largely offset by a significant reduction in the investment margin and a lower level of positive special operating items, which included a charge of USD 30 million resulting from the closure of the agency distribution channel in Hong Kong.
• Farmers Management Services management fees and other related revenues of USD 2.8 billion decreased by USD 36 million, or by 1 percent, among other factors due to lower levels of fees on new business policies. Farmers Re gross written premiums decreased by 7 percent to USD 4.0 billion, reflecting a reduced participation in the quota share reinsurance agreements with the Farmers Exchanges, as well as a 2 percent reduction in gross written premiums in the Farmers Exchanges.
Gross written premiums and policy fees 36,438 35,610 2% Net earned premiums and policy fees 29,769 29,195 2% Insurance benefits and losses, net of reinsurance (20,321) (20,527) 1% Net underwriting result 1,347 479 nm Net investment income 2,217 2,516 (12%) Net non-technical result (excl. items not included in BOP) (799) (901) 11% Business operating profit 2,859 2,112 35% Loss ratio 68.3% 70.3% 2.0 pts Expense ratio 27.2% 28.0% 0.8 pts Combined ratio 95.5% 98.4% 2.9 pts
Business operating profit increased by USD 747 million to USD 2.9 billion, or by 35 percent in both U.S. dollar terms and on a local currency basis. The underwriting result improved by USD 868 million to USD 1.3 billion. Persistent low investment yields resulted in a decrease in net investment income, which was partly offset by increased investment capital gains recognized in business operating profit. Non-technical expenses were also lower as a result of several non-recurring items.
Gross written premiums and policy fees increased by USD 828 million to USD 36.4 billion, or by 2 percent in U.S. dollar terms and 3 percent on a local currency basis. Growth was achieved in Global Corporate, North America Commercial and in all International Markets. Premium growth was particularly strong in Global Corporate, both in North America and in Europe, as well as in North America Commercial, with the North American businesses benefiting from improving economic conditions and from the market environment, which continued to support rate increases. Premiums in International Markets, particularly on a local currency basis, increased as these businesses executed growth strategies.
The net underwriting result increased by USD 868 million to USD 1.3 billion, reflected in the 2.9 percentage points improvement in the combined ratio to 95.5 percent. The net underwriting result benefited from improvements in the underlying loss experience as well as from lower major catastrophe events. The improvement also reflected a higher level of favorable development of reserves established in prior years. These positive developments were partly offset by an increase in both large and weather-related losses. The expense ratio improved as the business continued to focus successfully on achieving savings in other underwriting expenses in mature markets while investing in priority markets.
Gross written premiums and policy fees 9,264 1 8,609 8% Net underwriting result 466 50 nm Business operating profit 879 498 77% Loss ratio 73.6% 78.0% 4.5 pts Expense ratio 18.8% 21.1% 2.3 pts Combined ratio 92.3% 99.1% 6.8 pts 1 including internal business transfers from North America Commercial
Business operating profit increased by USD 381 million to USD 879 million due to the increase in the underwriting result. Persistent low investment yields resulted in a decrease in net investment income, which was partly offset by increased investment capital gains recognized in business operating profit, primarily in the U.S.
Business operating profit increased by USD 273 million to USD 972 million, or by 39 percent, driven by an increase in the underwriting result. Persistent low investment yields resulted in a decrease in net investment income, which was partly offset by increased investment capital gains recognized in business operating profit and lower non-technical expenses.
Gross written premiums and policy fees increased by USD 212 million to USD 10.2 billion, or by 2 percent. Underlying growth was 6 percent after adjusting for internal business transfers to Global Corporate and a fronted portfolio that was not renewed. This underlying premium growth arose from the continued improvement in economic and market conditions in North America and the successful execution of growth initiatives targeting the construction, real estate, healthcare and technology industries. These initiatives also targeted special lines products and the captive and auto warranty businesses. Volume in property lines was particularly strong, fuelled by growth initiatives and rate increases. The rate environment also remained favorable in other major lines, including workers’ compensation and liability, where focus remained on profitable underwriting. Overall, rate increases of 5 percent were achieved during 2013.
Business operating profit increased by USD 307 million to USD 1.0 billion, or by 44 percent in U.S. dollar terms and 42 percent on a local currency basis. This improvement reflected a significant increase in the underwriting result, which was partly offset by lower investment income as a result of persistent low investment yields. Non-technical expenses were also lower and benefited from several non-recurring items.
Business operating profit decreased by USD 50 million to USD 115 million, or by 30 percent in U.S. dollar terms and 31 percent on a local currency basis. The decrease in the underwriting result was partly offset by a one-off gain included in the non-technical result from the sale of own-use real estate in Taiwan.
The net underwriting result deteriorated by USD 83 million, which was reflected in the 1.9 percentage points deterioration in the combined ratio to 100.7 percent. Losses from floods in Queensland, Australia, higher large losses in Latin America and slightly lower favorable development in loss reserves established in prior years were reflected in the deterioration of 1.4 percentage points in the loss ratio. The expense ratio deteriorated by 0.5 percentage points compared with 2012, a result of higher and partly non-recurring other underwriting expenses in Latin America and higher commissions in Asia-Pacific.
Gross written premiums and policy fees 13,916 13,590 2% Net investment income on Group investments 3,895 3,991 (2%) Insurance benefits and losses, net of reinsurance (9,167) (9,592) 4% Business operating profit 1,272 1,351 (6%)
Total reserves for life insurance contracts, net of reinsurance, and liabilities for investment contracts (net reserves) 1 226,166 213,982 6%
New business – highlights 1, 2 New business annual premium equivalent (APE) 4,418 4,030 10% Present value of new business premiums (PVNBP) 40,586 35,296 15% New business margin, after tax (as % of APE) 28.3% 22.1% 6.2 pts New business margin, after tax (as % of PVNBP) 3.1% 2.5% 0.6 pts New business value, after tax 1,251 890 41%
1 New business amounts are calculated on embedded value principles before the effect of non-controlling interests, details of which are included in the Embedded value report. 2 New business amounts for 2012 did not include Zurich Santander or the new operations in Asia (including Zurich Insurance Malaysia Berhad – ZIMB).
BOP before interest, depreciation and amortization (266) (266) 2,056 2,019 1,790 1,753 Interest, depreciation and amortization (291) (273) (291) (273)
3 Non-controlling interests pertaining to special operating items are excluded from this line and are offset against special operating items.
in USD millions, for the years ended December 31 in USD millions, for the year ended December 31Profit by source 1
The net expense margin improved overall by USD 206 million. Business in-force reflected significant expense reductions in mature markets, while improvements in fund-based fees were offset by a reduction in premium-based fees as a result of lower levels of business in Germany. New business benefited from lower acquisition expenses, albeit this effect was entirely offset by the lower positive impact of acquisition deferrals. The net risk margin improved by USD 52 million, resulting from the underlying growth in protection business and positive experience in Latin America, which also included a full-year contribution from the social security (SIS) contract in Chile acquired in 2012. Persistently low investment yields continued to affect the investment margin, which decreased by USD 138 million, principally in Germany and North America.
Other profit margins decreased by USD 8 million to USD 19 million. An increase of USD 162 million compared with 2012 related to Zurich Santander, before the effect of non-controlling interests, was more than offset by the cost of business expansion in North America, Latin America and APME, and in Germany the indirect impact of lower investment yields and local statutory requirements, including the ‘Zinszusatzreserve’ (a reserve for supplementary interest).
Non-controlling interests increased by USD 86 million, primarily due to the higher contribution from Zurich Santander. After deducting non-controlling interests, the net contribution to business operating profit from Zurich Santander was USD 182 million, compared with USD 105 million in 2012. The impact of acquisition deferrals declined by USD 76 million, as a result of lower deferrals of new business expenses, partly offset by lower net amortization of deferred expenses on business in-force, driven by movements in equity markets. Special operating items decreased by USD 13 million to USD 5 million. This decrease resulted mainly from a charge for the reassessment of deferred acquisition costs of USD 30 million following the closure of the agency distribution channel in Hong Kong. Special operating items also included a benefit from the reduction of a liability largely offset by the impact of accelerated amortization of deferred acquisition costs, both in the UK.
Net reserves increased by USD 12.2 billion, or by 6 percent in U.S. dollar terms and 4 percent on a local currency basis, compared with December 31, 2012, primarily reflecting increased values of unit-linked assets. Assets under management increased by 5 percent in U.S. dollar terms and 4 percent on a local currency basis compared with December 31, 2012, driven by unit-linked asset growth and favorable exchange rate movements. Total assets under management for unit-linked portfolios increased by 8 percent on a local currency basis, primarily as a result of increases in equity markets in Europe. Net policyholder flows were a net outflow of USD 2.7 billion compared with a net inflow of USD 1.4 billion in 2012, as a result of a combination of lower inflows from insurance deposits in the UK and higher net outflows from traditional portfolios in Germany.
2 Zurich Santander and ZIMB new business amounts for the full year 2012 were not included in the Embedded value report nor subjected to audit. Estimates of those figures are as follows: Zurich Santander NBV: USD 182 million, APE: USD 701 million, NBM: 26.0 percent; ZIMB NBV: USD 13 million, APE: USD 35 million, NBM: 36.6 percent.
New business value increased by USD 361 million to USD 1.3 billion, or by 41 percent in U.S. dollar terms and 43 percent on a local currency basis. This increase was driven by the first-time inclusion of Zurich Santander, which contributed USD 268 million, as well as by strong performance in all regions led by volume growth in protection products.
In North America, the IFA/Brokers pillar continued to gain momentum. This led to an overall APE growth of 29 percent and an increase in new business value of 7 percent. Changes in business mix resulted in a lower but still high new business margin of 72.4 percent.
NBV, APE, NBM and BOP by region in USD millions, for the years ended December 31NBV and APE by pillar
In Retail pillars, new business value overall increased by USD 393 million to USD 912 million, or by 76 percent in U.S. dollar terms and 79 percent on a local currency basis. Growth was reported across all regions, with the largest increase occurring in Bank Distribution as a result of the first time inclusion of Zurich Santander, which generated exceptionally strong protection business volumes in Brazil during 2013.
Management fees and other related revenues 2,810 2,846 (1%) Management and other related expenses (1,457) (1,480) 2% Gross management result 1,353 1,366 (1%)
Other net income 38 62 (39%) Business operating profit 1,390 1,428 (3%) Managed gross earned premium margin 7.2% 7.3% –
The gross management result of USD 1.4 billion decreased by USD 13 million, or by 1 percent, and the managed gross earned premium margin was 7.2 percent compared with 7.3 percent in 2012.
Business operating profit of USD 125 million improved by USD 152 million, mainly due to a lower underlying loss ratio.
Gross written premiums and policy fees decreased by USD 316 million, or by 7 percent, to USD 4.0 billion. This was a result of changes in the quota share reinsurance agreements, as well as the 2 percent decrease in gross written premiums in the Farmers Exchanges due to actions taken to improve profitability. The changes in the reinsurance agreements comprised a reduction in the All Lines quota share reinsurance agreement with the Farmers Exchanges from 20.0 percent to 18.5 percent effective December 31, 2012 and a reduction from 18.5 percent to 18.0 percent effective December 31, 2013. The Auto Physical Damage quota share reinsurance agreement with the Farmers Exchanges was reduced from USD 1.0 billion of ceded premium in 2012 to USD 925 million, effective January 1, 2013.
The net underwriting result improved by USD 154 million to a loss of USD 9 million. This improvement was mainly a result of lower non-weather-related losses assumed from the Farmers Exchanges in 2013, demonstrating the impact of rate and underwriting actions taken in 2012 and 2013.
Gross written premiums in the Farmers Exchanges, which are owned by their policyholders and managed by Farmers Group, Inc., a wholly owned subsidiary of the Group, declined by USD 292 million to USD 18.6 billion, or by 2 percent. This decline occurred in most lines of business except home and specialty lines. It resulted from the rate and underwriting actions begun in 2012 to improve profitability, which have impacted both levels of new business and renewals subsequent to the rate increases.
Holding and financing business operating loss deteriorated by USD 108 million to USD 843 million. This was mainly due to lower investment income, a result of special dividends received in 2012, and also the persistent low yield environment.
Centrally managed businesses, which comprise run-off portfolios that are managed with the intention to proactively reduce risk and release capital, reported a business operating profit of USD 27 million.
Common stocks, including equity unit trusts 10,706 9,388 91,203 77,996 Unit trusts (debt securities, real estate and short-term investments) 1,919 2,418 20,750 21,482 Common stock portfolios backing participating with-profit policyholder contracts 558 534 – –
Group investments decreased by USD 2.3 billion to USD 207.3 billion, or by 1 percent in U.S. dollar terms during the year. On a local currency basis, total Group investments decreased by USD 5.1 billion, or by 2 percent. The decline in total Group investments was primarily driven by the impact of rising yields on the value of debt securities partly offset by new cash flows invested in debt and equity securities.
Unit-linked investments increased by USD 10.4 billion to USD 134.3 billion, or by 8 percent in both U.S. dollar terms and on a local currency basis during the year, driven by increases in equity markets mainly in Europe.
Net investment result on Group investments 1 7,398 8,983 (18%) Net investment return on Group investments 2 3.5% 4.4% (0.9 pts) Movements in net unrealized gains/(losses) on investments included in total equity (4,670) 5,349 nm Total investment result on Group investments 1 2,727 14,332 (81%) Average Group investments 208,431 204,066 2% Total return on Group investments 2 1.3% 7.0% (5.7 pts)
1 After deducting investment expenses of USD 256 million and USD 252 million for the years ended December 31, 2013 and 2012, respectively. 2 Calculated on average Group investments.
Total net capital gains on investments and impairments were USD 1.2 billion compared with USD 2.2 billion in 2012. The decrease of USD 1.0 billion was primarily due to negative asset revaluations.
Asset revaluations resulted in losses of USD 636 million, compared with gains of USD 286 million in 2012. The deterioration was due to negative revaluations of debt securities booked at fair value through profit or loss and to increased losses on derivative financial instruments used for hedging underlying business or investment risks.
Impairments of USD 201 million were USD 7 million lower compared with 2012.
Net investment return on Group investments was 3.5 percent, 0.9 percentage points lower than in 2012, a result of both the decrease in the net investment result and an increase in average Group investments.
Total return on unit-linked investments 2 9.9% 8.6% 1.3 pts 1 After deducting investment expenses of USD 575 million and USD 508 million for the years ended December 31, 2013 and 2012, respectively. 2 Calculated on average Group investments.
Gross reserves for losses and loss adjustment expenses 69,986 67,762 66,542 64,311
Net losses and loss adjustment expenses paid (23,404) (23,378) (20,635) (20,412)
Acquisitions/(divestments) and transfers (49) 960 (65) 1,300 Foreign currency translation effects 258 693 244 682
Gross reserves for losses and loss adjustment expenses 68,312 69,986 65,629 66,542
As of December 31, 2013, the net reserves for losses and loss adjustment expenses for the total Group decreased by USD 66 million to USD 57.3 billion compared with December 31, 2012. Foreign currency translation increased the reserves by USD 258 million. Favorable net reserve development arose from reserves established in prior years and amounted to USD 757 million for the full year 2013, reflecting favorable developments in Switzerland and in the Global Corporate business.
During 2012, the increase of USD 2.0 billion for the total Group in net reserves for losses and loss adjustment expenses included USD 693 million related to the positive effect of foreign currency translation and a transfer of USD 1.2 billion from policyholders’ contract deposits and other funds to reserves for losses and loss adjustment expenses, shown in acquisitions/(divestments) and transfers. Favorable reserve developments of USD 571 million on reserves established in prior years included the strengthening of reserves for long-tail liability business in Germany.
This table represents the loss ratio development for individual accident years for the Group, with General Insurance the primary driver. Individual accident years are affected by the level of large catastrophe losses which had the following impact on the loss ratios in the year that the event occurred: • 2004: Hurricanes Charley, Frances, Jeanne and Ivan in the U.S. increased the loss ratio by 2.8 percentage points; • 2005: Hurricanes Katrina, Rita and Wilma in the U.S. and floods in Europe increased the loss ratio by 4.6 percentage points; • 2007: Winter storm Kyrill in Europe and floods in the UK increased the loss ratio by 2.5 percentage points; • 2008: Hurricanes Gustav and Ike in the U.S. increased the loss ratio by 1.8 percentage points; • 2010: The earthquake in Chile and floods in Australia increased the loss ratio by 0.8 percentage points; • 2011: Floods in Australia, earthquakes in New Zealand, the earthquake and subsequent tsunami in Japan,
Hurricane Irene in the U.S. and floods in Thailand increased the loss ratio by 2.6 percentage points, after the Group’s aggregate catastrophe reinsurance recovery; • 2012: Storm Sandy in the U.S. increased the loss ratio by 2.5 percentage points.
Net reserves as of January 1 213,982 1 195,302 16,789 18,027 230,771 1 213,329
As of December 31 1 Restated as set out in note 1 of the Consolidated financial statements.
2 Includes reserves for unit-linked contracts, the net amounts of which were USD 63 billion and USD 62.2 billion, and liabilities for investment contracts, the net amounts of which were USD 67.1 billion and USD 57.4 billion as of December 31, 2013 and 2012, respectively.
Total reserves and liabilities for insurance and investment contracts, net of reinsurance, increased by USD 12.2 billion, or by 6 percent in U.S. dollar terms and 4 percent on a local currency basis compared with December 31, 2012.
Unit-linked insurance and investment contracts, net of reinsurance, increased by USD 10.5 billion, or by 9 percent in U.S. dollar terms and 8 percent on a local currency basis, compared with December 31, 2012, driven by growth in unit-linked assets under management reflecting the rise in equity markets in Europe.
Under the Swiss Solvency Test (SST) the Group is required to use a company-specific internal economic capital model to calculate risk-bearing and target capital, and to file SST reports biannually. As of July 1, 2013 the Group filed, on a consolidated basis, an SST capitalization ratio of 206 percent. The SST capitalization ratio as of January 1, 2013 was 185 percent, which has been approved by FINMA. The filing as of July 1, 2013 is subject to review by FINMA and the final approval of the Group’s internal model continues to be outstanding.
The Group also continues to be subject to Solvency I requirements based on the Swiss Insurance Supervision Law. The Solvency I ratio as of December 31, 2013 decreased to 258 percent from 278 percent as of December 31, 2012.
Net cash provided by/(used in) operating activities 1,443 2,868 Net cash provided by/(used in) investing activities (239) (233) Net cash provided by/(used in) financing activities (3,233) (2,318) Foreign currency translation effects on cash and cash equivalents (17) 187
Net cash provided by operating activities, which included cash movements in and out of, as well as within total investments, was USD 1.4 billion compared with USD 2.9 billion in 2012. Net cash used in investing activities of USD 239 million, compared with USD 233 million in 2012, related mainly to net sales and purchases of property and equipment. Net cash used in financing activities for the year ended December 31, 2013 of USD 3.2 billion was primarily related to the payment of dividends of USD 2.9 billion and a net repayment of debt of USD 403 million. In 2012, the net movement of cash used in financing activities of USD 2.3 billion included dividends of USD 2.7 billion offset by a net issuance of debt of USD 260 million.
Cash flow details are set out in the consolidated statements of cash flows in the Consolidated financial statements.
Total investments 3,899 1% Reserves for insurance contracts, gross 2,399 1% Cumulative foreign currency translation adjustment in shareholders’ equity (986) (3%)
The consolidated balance sheets are translated at end-of-period rates. The U.S. dollar weakened against the euro, Swiss franc and British pound but strengthened against the Japanese yen, the Australian dollar and Latin American currencies, in particular the Brazilian real, as of December 31, 2013 compared with December 31, 2012, resulting in a small net increase in U.S. dollar terms for most balance sheet items.
variance over the prior period, for the year ended December 31, 2013Selected Group income statement line items variance over December 31, 2012, as of December 31, 2013Selected Group balance sheet line items
The Risk review is an integral part of the Consolidated financial statements (except for the “Swiss Solvency Test Requirement,” “Internal Model Capital Adequacy” and “Conclusion” sections presented on pages 169–177). Certain comparative figures have been restated, as set out in note 1 of the Consolidated financial statements.
Risk management Mission and objectives of risk management 128 Risk management framework 128 External environment 129 Risk governance and risk management organization 131
Analysis by risk type Risk type description 134 Strategic risk 134 Insurance risk 135 Market risk 143 Credit risk 151 Liquidity risk 159 Operational risk 162 Risks to the Group’s reputation 163
The mission of risk management at Zurich Insurance Group (Zurich, or the Group) is to promptly identify, measure, manage, report and monitor risks that affect the achievement of strategic, operational and financial objectives. This includes adjusting the risk profile in line with the Group’s stated risk tolerance to respond to new threats and opportunities in order to optimize returns.
In order to achieve its mission and objectives, the Group relies on its risk management framework.
At the heart of the risk management framework is a governance process with clear responsibilities for taking, managing, monitoring and reporting risks. The Group articulates the roles and responsibilities for risk management throughout the organization, from the Board of Directors and the Chief Executive Officer (CEO) to its businesses and functional areas, thus embedding risk management in the business. See the “Risk governance and risk management organization” section.
Risk management is not only embedded in Zurich’s business but is also aligned with the Group’s strategic and operational planning process. The Group assesses risks systematically and from a strategic perspective through its proprietary Total Risk Profiling™ (TRP) process, which allows Zurich to identify and then evaluate the probability of a risk scenario occurring, as well as the severity of the consequences should it occur. The Group then develops, implements and monitors appropriate improvement actions. The TRP process is integral to how Zurich deals with change, and is particularly suited for evaluating strategic risks as well as risks to Zurich’s reputation. At Group level this process is performed annually, reviewed regularly and tied to the planning process.
Regulatory perspective Regulatory regimes, such as the Swiss Solvency Test in Switzerland and the regulatory principles of Solvency II in the European Union, emphasize a risk-based and economic approach, based on comprehensive quantitative and qualitative assessments and reports.
See “Analysis of capital adequacy” for more information about regulatory requirements.
Economic and geopolitical perspective In the first half of 2013, after the U.S. fiscal crisis was averted, economic conditions improved in advanced markets. The new leadership in China maintained support for the economy, and there has been a welcome shift in policy towards strengthening domestic demand. Overall, risk assets started the year 2013 on a strong footing, supported by better economic data, reduced political risks and a notable shift in investor sentiment toward these asset classes.
Zurich is a major contributor to the Global Risk Report that is produced by the World Economic Forum in cooperation with other WEF partners. The report’s assessment of the most pressing global risks and the interconnections among them provides valuable information for risk mitigation across the globe. Supporting the report by sharing Zurich’s expertise is also part of Zurich’s commitment to corporate responsibility.
Board of Directors level The Board of Directors of Zurich Insurance Group Ltd has ultimate oversight responsibility for the Group’s risk management. It establishes the guidelines for the Group’s risk management framework and key principles, particularly as articulated in the Zurich Risk Policy, and approves changes to such guidelines and key principles, as well as transactions reaching specified thresholds.
Group Executive level The CEO, together with the Group Executive Committee (GEC), oversees the Group’s performance with regard to risk management and control, strategic, financial and business policy issues of Group-wide relevance. This includes monitoring adherence to and further development of the Group’s risk management policies and procedures. The Group Balance Sheet Committee and the Group Finance and Risk Committee regularly review and make recommendations on the Group’s risk profile and significant risk-related issues.
The Chief Risk Officer is a member of the GEC and reports directly to the CEO and the Risk Committee of the Board. He is a member of each of the management committees listed below, in order to provide a common and integrated approach to risk management, to allow for appropriate assessment and, where necessary, mitigation of risks identified in these committees.
At a Group level the management committees dealing with risks are: • Group Balance Sheet Committee (GBSC) – acts as a cross-functional body whose main function is to review and make recommendations regarding the activities that materially affect the balance sheets of the Group and its subsidiaries. The GBSC is charged with setting the annual capital and balance sheet plans for the Group based on the Group’s strategy and financial plans, as well as recommending specific transactions or unplanned business changes to the Group’s balance sheet. The GBSC has oversight of all main levers of the balance sheet, including capital management, reinsurance, asset/liability management, and liquidity. The GBSC reviews and recommends the Group’s overall risk tolerance. It is chaired by the CEO.
The management committees rely on output provided by technical committees, including: • Asset/Liability Management Investment Committee – deals with the Group’s asset/liability exposure and investment strategies and is chaired by the Chief Investment Officer.
In order to enable a consistent, systematic and disciplined approach to risk management, Zurich categorizes its main risks as follows: • Strategic – unintended risk that can result as a by-product of planning or executing the strategy • Insurance – risk associated with the inherent uncertainty regarding the occurrence, amount or timing of insurance liabilities • Market – risk associated with the Group’s balance sheet positions where the value or cash flow depends on financial markets • Credit – risk associated with a loss or potential loss from counterparties failing to fulfill their financial obligations • Liquidity – risk that the Group does not have sufficient liquidity to meet its obligations when they fall due, or would have to incur excessive costs to do so • Operational – risk associated with the people, processes and systems of the Group, and external events such as outsourcing, catastrophes, legislation, or external fraud • Reputation – risk that an act or omission by the Group or any of its employees could result in damage to the
The Group works on reducing the unintended risks of strategic business decisions through its risk assessment processes and tools, including the Total Risk Profiling™ process. The Group Executive Committee regularly assesses key strategic risk scenarios for the Group as a whole, including scenarios for emerging risks and their strategic implications.
Section highlights • In 2013, the Group restructured its reinsurance covers for natural catastrophe events. While the retention for the regional catastrophe treaties was increased, the co-participation was reduced to 10 percent. • The cession rate for both General Insurance and Global Life remained stable. Due to its strong balance sheet,
Zurich is able to structure and align its reinsurance programs to achieve an optimum risk/reward ratio.
Insurance risk is the inherent uncertainty regarding the occurrence, amount or timing of insurance liabilities. The exposure is transferred to Zurich through the underwriting process. Zurich actively seeks to write those risks it understands and that provide a reasonable opportunity to earn an acceptable profit. As Zurich assumes certain customer risks, it aims to manage that transfer of risk, and minimize unintended underwriting risks, through such means as: • Establishing limits for underwriting authority • Requiring specific approvals for transactions involving new products or, where established, limits of size and complexity may be exceeded • Using a variety of reserving and modeling methods to address the various insurance risks inherent in the Group’s insurance business • Ceding insurance risk through proportional, non-proportional and facultative reinsurance treaties. The Group centrally manages reinsurance treaties.
General insurance risk General insurance risk includes the reasonable possibility of significant loss due to uncertainty in the frequency of the occurrence of the insured events as well as in the severity of the resulting claims. The following provides an overview of the Group’s main lines of business: • Motor includes automobile physical damage, loss of the insured vehicle and automobile third party liability insurance.
A fundamental component of managing insurance risk is underwriting discipline. The Group sets limits on underwriting capacity, and cascades authority to individuals based on their specific expertise. The Group sets appropriate pricing guidelines with a focus on consistent technical pricing across the organization. As part of these guidelines, the Group requires the setting of a technical price according to common standards. The technical price is set in a way that allows a return on risk-based capital in line with the Group’s target. The ratio of actual premium to technical price is a key performance metric, which is monitored regularly. Technical reviews confirm whether underwriters perform within authorities and adhere to underwriting philosophies and policies. The Group’s global line of business networks share best practices across the globe, providing additional guidance and governance. The Group has governance procedures to review and approve potential new products to evaluate whether the risks are well understood and justified by the potential rewards.
The Group faces the risk that actual losses emerging on claims provisions may be higher than anticipated. Because of this uncertainty, general insurance reserves are regularly measured, reviewed and monitored. The total loss and loss
Zurich Insurance GroupAnnual Report 2013Group performance review136 adjustment expense reserves are based on work performed by qualified and experienced actuaries at the local, regional and Group level.
In most instances, these actuarial analyses are conducted at least twice a year for on-going business according to agreed timetables. Analyses are performed by product line, type and extent of coverage and year of occurrence. The Group has reserve committees to facilitate communications and reporting regarding reserve opinions. A series of reserve committees feed from the local level to regions and segments and into a Group reserve committee, where the Group’s total loss and loss adjustment expense reserves are consolidated and recommended for approval by Group management. As with any projection, there is an inherent uncertainty in the estimation of claim reserves due to the fact that the ultimate liability for claims will be impacted by trends as yet unknown, including future changes in the likelihood of claimants bringing suit, the size of court awards, and the attitudes of claimants toward settlement of their claims.
The Group closely monitors potential new emerging risk exposures. Zurich has an Emerging Risk Group, with crossfunctional expertise from core insurance functions such as underwriting, claims and risk in order to identify, assess and recommend actions for such risks.
In addition to the specific risks insured, each line of business could expose the Group to losses that could arise from natural and man-made catastrophes. The main concentrations of risks arising from such potential catastrophes are regularly reported to senior management. The most important peril regions and risks are United States and Caribbean tropical cyclone, Europe windstorm and California earthquake, as well as potential terrorism exposures.
Table 1.a in USD millions, for the year ended December 31, 2013
+1% in net loss ratio Net income before tax (61) (76) (116) (45)
Modeling natural catastrophes Understanding the potential effects of natural catastrophes is a critical component of risk management for general insurance. While specific catastrophes are unpredictable, modeling helps to determine potential losses should catastrophes occur. The Group uses a combination of third-party and in-house models to manage its underwriting and accumulations in modeled areas to stay within intended exposure limits and to guide the levels of reinsurance Zurich buys.
The Group models exposures in a center of excellence for consistency in approach and to form a global perspective on accumulations. The center of excellence works with the local businesses to help improve the overall quality of data, by analyzing and comparing data quality levels, providing priorities for data quality improvements and supporting implementation with advice and external data, where required. The Group models potential losses from property policies located in hazard-prone areas with material exposure and from workers’ compensation policies covering earthquakes in California. Other non-property related losses are quantified based on adjustments. The risk modelling principally addresses climate-induced perils such as windstorms, river floods, tornadoes and hail, and geologically induced perils such as earthquakes. The Group constantly seeks to improve its modeling, fill in gaps in models with additional assessments and increase the granularity of data collection in order to enhance the accuracy and utility of the information.
With an expanded catastrophe research and development team, the Group continues to improve the “Zurich view” of catastrophe risk by using output from multiple catastrophe models, by using internal and external expertise, for instance through the Natural Catastrophe Advisory Council, a group of scientists associated with research organizations such as the U.S. National Center for Atmospheric Research, the United States Geological Survey and the Intergovernmental Panel on Climate Change. Zurich further validates modeling results through comparisons with claims experience. In addition, Zurich continues its effort to extend assessments by evaluating potential nonmodeled catastrophe hotspots and including appropriate modeling or loadings for non-modeled lines.
Table 2.b in USD millions, for the year ended December 31, 2012
Risks from man-made catastrophes Man-made catastrophes include such risks as industrial accidents and terrorism attacks. Zurich’s experience in monitoring potential exposures from natural catastrophes is also applicable to threats posed by man-made catastrophes, particularly terrorism.
• Expense – risk that expenses incurred in acquiring and administering policies are higher than expected. • Market – risk associated with the Group’s balance sheet positions where the value or cash flow depends on financial markets, which is analyzed in the “Market risk” section.
• Credit – risk associated with a loss or potential loss from counterparties failing to fulfill their financial obligations, which is analyzed in the “Credit risk” section.
From a risk-management perspective, unit-linked products have been designed in order to reduce much of the market and credit risk associated with traditional business for the Group. Those risks inherent in these products are largely passed on to the policyholder, although a portion of the Group’s management fees are linked to the value of funds under management and hence are at risk if the fund values decrease. Unit-linked products carry mortality/morbidity risk and market risk to the extent that there are guarantees built into the product design. Contracts may have minimum guaranteed death benefits where the sum at risk depends on the fair value of the underlying investments. For certain contracts these risks are mitigated by explicit mortality and morbidity charges.
Other life insurance liabilities include traditional life insurance products, which include protection products and life annuity products. Protection products carry mortality, longevity and morbidity risk as well as market and credit risk. The most significant factors that could increase the frequency of mortality claims are epidemics, such as strains of influenza, or lifestyle changes such as eating, drinking and exercise habits, resulting in earlier or more claims than expected. Morbidity claims experience would not only be affected by the factors mentioned above, but because disability is defined in terms of the ability to perform an occupation, it could also be affected by economic conditions. In order to reduce cross-subsidies in the pricing basis, premiums are differentiated, where permitted, for example by product, age, gender and smoker status. The policy terms and conditions and the disclosure requirements contained in insurance applications are designed to mitigate the risk arising from non-standard and unpredictable risks that may result in severe financial loss.
Certain life insurance contracts contain guarantees for which liabilities have been recorded for additional benefits and minimum guarantees. These arise primarily in the subsidiary Zurich American Life Insurance Company (ZALICO) which in the past wrote variable annuity contracts that provide policyholders with certain guarantees related to minimum death and income benefits. After 2001, ZALICO no longer issued new policies with such features. The Group has a dynamic hedging strategy to manage its economic exposure and reduce the volatility associated with its closed book of variable annuities products within its U.S. life business. New Life products developed with financial guarantees are subject to review and approval by the Group-level product approval committee. The Group is also exposed to risks arising out of Bank Owned Life Insurance contracts sold in the U.S. See heading “other contracts“ in note 7 of the Consolidated financial statements for additional information.
• From an insurance risk perspective, the main factors that would affect concentration risk include mortality risk, morbidity risk, longevity risk, policyholder behavior risk (lapse, anti-selection) and expense risk. There is diversification across geographical regions, lines of business and even across the different insurance risk factors such that Zurich is not exposed to significant concentrations of insurance risk.
Asia-Pacific and Middle East 3,927 3,371 2,860 3,035 6,787 6,406 1 See note 28 of the Consolidated financial statements for additional information on the Group’s segments.
Ceded premium – trend (% of general insurance gross written premiums ceded to reinsurers)
Ceded premium – trend (% of life insurance gross written premiums ceded to reinsurers)
In 2013, the Group restructured its reinsurance covers for natural catastrophe events. While the retention for the regional catastrophe treaties was increased, the co-participation was reduced to 10 percent. A new Global Catastrophe Treaty covering extreme single events and a Combined Global Catastrophe Occurrence/Aggregate Treaty covering either aggregate losses or individual large events have been put in place.
Reinsurance for natural catastrophes by region – unusually severe catastrophe events (in USD millions, as of December 31, 2013)
1 Original cover is in EUR. Conversion rate EUR/USD 1.345 has been applied to calculate the corresponding USD amount. 2 Lakeside Re III - Cat Bond
Reinsurance for natural catastrophes, aggregated – unusually frequent catastrophe events (in USD millions, as of December 31, 2013)
The Group manages the market risk of assets relative to liabilities on an economic total balance sheet basis. It strives to maximize the economic risk-adjusted excess return of assets relative to the liability benchmark taking into account the Group’s risk tolerance as well as local regulatory constraints.
Risk assessment reviews include the analysis of the management of interest rate risk for each major maturity bucket and adherence to the aggregate positions with risk limits. The Group applies processes to manage market risks and to analyze market risk hotspots. Risk mitigation actions are taken if necessary to manage fluctuations affecting asset/ liability mismatch and risk-based capital.
The Group uses derivative financial instruments to limit market risks arising from changes in currency exchange rates, interest rates and equity prices, from credit quality of assets and liabilities and commitments to third parties. The Group enters into derivative financial instruments mostly for economic hedging purposes and, in limited circumstances, the instruments may also meet the definition of an effective hedge for accounting purposes. The latter include crosscurrency interest rate swaps in fair value hedges and cross-currency swaps in cash flow hedges of Zurich’s borrowings, in order to mitigate exposure to foreign currency and interest rate risk. In compliance with Swiss insurance regulation, the Group’s policy prohibits speculative trading in derivatives, meaning a pattern of “in and out” activity without reference to an underlying position. Derivatives are complex financial transactions; therefore, the Group addresses the risks arising from derivatives through a stringent policy that requires approval of a derivative program before transactions are initiated, and by subsequent regular monitoring by Group Risk Management of open positions and annual reviews of derivative programs.
The Group manages its risks from equity securities and real estate as part of the overall investment risk management process, and applies limits as expressed in policies and guidelines. Specifically, Zurich has limits for holdings in equities, real estate and alternative investments.
Risk from interest rate and credit spread Interest rate risk is the risk of loss resulting from changes in interest rates, including changes in the shape of yield curves. The Group is exposed to interest rate risk including from debt securities, reserves for insurance contracts, liabilities for investment contracts, employee benefit plans and loans and receivables. Changes in interest rates affect the Group’s held-to-maturity floating-rate debt securities and unhedged floating-rate borrowings through fluctuations in interest income and interest expense. Changes in interest rates affect the Group’s held-for-trading debt securities and fair value hedged borrowings through periodic recognition of changes in their fair values through the income statement. Changes in interest rates affect the Group’s available-for-sale debt securities through periodic recognition of changes in their fair values through shareholders’ equity. Zurich has limits on holdings in real assets and limits on deviations of asset interest rate sensitivities from liability interest rate sensitivities. The Group also manages credit spread risk, which describes the sensitivity of the values of assets and liabilities due to changes in the level or the volatility of credit spreads over the risk-free interest rate yield curves.
Tables 4.a, 4.b, 6.a and 6.b show the estimated economic market risk sensitivities of Group investments, including real estate for own use, liabilities, including insurance and financial liabilities, and the net impact for General Insurance and the rest of the businesses. Positive values represent an increase of the balance, whereas values in parentheses represent a decrease of the balance. Mismatches in changes in value of assets relative to liabilities represent an economic risk to the Group. The net impact is the difference between the impact on Group investments and liabilities. It represents the economic risk the Group faces related to changes in market risk factors.
In determining the sensitivities, investments and liabilities are fully re-valued in the given scenarios. Each instrument is re-valued separately taking the relevant product features into account. Non-linear effects, where they exist, are reflected in the model. The sensitivities are shown after tax. They do not include the impact of Group-internal transactions.
Basis of presentation – Global Life Tables 5.a and 5.b show the estimated economic sensitivity of the Embedded Value of the Global Life business to financial market movements. In modeling these exposures, where appropriate, allowance has been made for dynamic actions that would be taken by management or by policyholders. For contracts with financial options and guarantees, such as some participating business, movements in financial markets can change the nature and value of these benefits. The dynamics of these liabilities are captured so that this exposure is quantified, monitored, managed and where appropriate, mitigated.
Analysis of economic sensitivities for interest rate risk Tables 4.a to 6.b show the estimated impacts of a 100 basis point increase/decrease in yield curves of the major currencies U.S. dollar (USD), euro (EUR), British pound (GBP), Swiss franc (CHF) and “other currencies” after consideration of hedges in place, as of December 31, 2013 and 2012, respectively.
Other currencies Total 100 basis points increase in the interest rate yield curves Group investments (1,346) (636) (316) (328) (187) (2,813)
Other currencies Total 100 basis points increase in the interest rate yield curves Total impact on Embedded Value (211) (195) (72) (4) 57 (425)
Table 5.a in USD millions, as of December 31, 2013Economic interest rate sensitivities for the Global Life business – current period
Table 5.b in USD millions, as of December 31, 2012Economic interest rate sensitivities for the Global Life business – prior period
10% decline in stock markets Group investments (525) (456) Liabilities – – Net impact before tax (525) (456) Tax impact 131 113 Net impact after tax (394) (343)
10% decline in stock markets Total impact on Embedded Value (279) (246)
Net impact before tax (113) (205) Tax impact 28 49 Net impact after tax (85) (156)
Other currencies Total 100 basis points increase in credit spreads Net impact before tax (1,001) (332) (178) (144) (89) (1,744)
Other currencies Total 100 basis points increase in credit spreads Net impact before tax (939) (278) (198) (160) (102) (1,677)
Table 10.a in USD millions, as of December 31, 2013Economic credit spread sensitivities for the General Insurance business – current period
Other currencies Total 100 basis points increase in credit spreads Total impact on Embedded Value (174) (262) (86) (234) (145) (901)
Other currencies Total 100 basis points increase in credit spreads Total impact on Embedded Value (189) (282) (100) (250) (130) (951)
Other currencies Total 100 basis points increase in credit spreads Net impact before tax (339) (49) 5 4 – (380)
Table 11.a in USD millions, as of December 31, 2013Economic credit spread sensitivities for the Global Life business – current period
Table 12.b in USD millions, as of December 31, 2012Economic credit spread sensitivities for the rest of the businesses – prior period
Although the Group actively uses collateral to mitigate credit risks, the principle is nevertheless to manage the underlying credit risks independently from the collateral. The Group has limits and quality criteria to identify acceptable letter-of-credit providers. Letters of credit enable Zurich to limit the risks embedded in reinsurance captives, deductibles, trade credit and surety.
Macro review of the credit risk environment During 2013, the intensity of the euro crisis eased despite areas of negative growth and high unemployment. Unresolved high government and private debt levels in Europe continued to drive negative rating actions on governments – even beyond the peripheral countries. Even though credit conditions are more favorable in the U.S., it remains vulnerable to both domestic and global risks such as fiscal policy challenges, developments in the Eurozone and the tapering of the U.S. Federal Reserve System’s expansive policy.
Financial institutions have been slowly re-establishing levels of profitability and asset quality seen prior to the crisis. They have overall built up capital and liquidity and improved their operating flexibility. Therefore, on the one hand, the credit outlook for banks slightly improved and the potential for rating downgrades decreased. On the other hand, Zurich expects government support for financial institutions to decrease over time. For example, the European Union has developed a new directive for the recovery and resolution of troubled banks that would allow losses to be imposed on a broad range of liabilities, including senior unsecured debt. Such aspects of new regulations negatively impact the credit outlook of financial institutions.
The maximum exposure to credit risk consists mainly of on-balance sheet exposures. Off-balance sheet exposures are primarily related to collateral, such as letters of credit, used to protect the underlying credit exposures on the balance sheet. The Group also has off-balance sheet exposures related to undrawn loan commitments of USD 8 million and USD 20 million as of December 31, 2013 and 2012, respectively. See note 24 of the Consolidated financial statements for undrawn loan commitments.
As of December 31, 2013, investment grade securities comprise 97.9 percent of the Group’s debt securities, and 23.7 percent were rated “AAA.” The downgrades of several Eurozone governments and related entities caused breaches of internal rating category limits, which were managed as circumstances allowed. The migration from AAA to AA is mostly due to the downgrade of UK governments. As of December 31, 2012, investment grade securities comprised 98.1 percent of debt securities, and 31.2 percent were rated “AAA.” The Group’s investment policy prohibits speculative grade investments, unless specifically authorized and under exceptional circumstances. Where the Group identifies investments expected to be downgraded to below investment grade, it implements appropriate corrective actions.
The Group measures the average issuer credit rating both with a linear and a risk-weighted scale. Despite the ongoing de-risking of the fixed income portfolio, the risk-weighted average issuer credit rating of the Group’s debt securities
As of December 31, 2013, the largest concentration in the Group’s debt securities portfolio is in governments, supranationals and similar debt securities at 48.4 percent. In all other categories, a total of USD 37.9 billion or 47 percent is secured. As of December 31, 2012, 48.2 percent of the Group’s debt portfolio was invested in governments, supranationals and similar. In all other categories, a total of USD 40.3 billion or 49.5 percent was secured.
The second largest concentration in the Group’s debt securities portfolio is to financial institutions (including banks), at 21.1 percent, of which 44.5 percent is secured. In response to the European government-debt crisis, the Group identified and selectively reduced unsecured and subordinated credit exposure issued by banks with weak credit profiles, and credit exposure to banks supported by weaker governments.
The third largest concentration in the Group’s debt securities portfolio is to structured finance securities (mortgagebacked securities (MBS)/asset-backed securities (ABS) and similar). Although credit risks of the underlying securities are diverse in nature, the Group also considers macro impacts that may affect structured finance sub-categories (e.g. auto or credit card ABS’s) in its credit assessments. Structured finance exposures are assessed on a look-through basis prior to acquisition and not merely on the strength of prevailing credit ratings or credit profiles.
Compared to December 31, 2012, collateral decreased by USD 414 million to USD 7.6 billion.
millions total 1 The value of the collateral received amounts to USD 7.6 billion and USD 8.0 billion as of December 31, 2013 and 2012, respectively.
In Switzerland, the residential property market has seen steady price growth since 2000 and fast growth in the past six years, raising concerns about the development of a price bubble. Residential property price increases have been strongest in the main economic centers and more moderate in the rest of the country; residential prices in the Lake Geneva region and in the Canton of Zug have more than doubled since 2000, and in the Canton of Zurich have increased by 76% in the same period. In 2013, outstanding mortgages in the Lake Geneva region represent approximately 33% of the Swiss portfolio. Mortgages in the Canton of Zurich and in the Canton of Zug represent 35% and 1.3% of the Swiss portfolio respectively. The bulk of those mortgages was granted before 2008 and is therefore not affected by price developments in the last six years. In Germany, residential prices are increasing in the major cities, however in line with the Group’s investment policy, mortgage exposure has been reduced. To mitigate the impact of potential bubbles in the portfolio, the Group has a process to regularly review regional property markets, and to tighten underwriting standards in areas with strong price appreciation. Zurich’s German and Swiss mortgage portfolios remain strong and well managed; LTV lending buffers are generally strong, and loss impairments and losses remain low.
The next largest portfolio comprises loans granted by Dunbar Assets Ireland (including the UK property loans of Dunbar Assets plc) of USD 864 million (after provisions) in the UK and Ireland. They consist of residential and commercial property development financing or investment loans, secured as either property under development or completed developments. In 2010, these entities ceased originating new business in these markets following the significant deterioration in economic conditions and the drop in property values in the UK and Ireland. Provisions at Dunbar Assets Ireland now stand at a significant USD 761 million (USD 713 million in 2012) or 47 percent and 39 percent of the portfolio as of December 31, 2013 and December 31, 2012 respectively; this accordingly reduces the carrying balance of net loans outstanding. Dunbar Assets Ireland regularly reviews its property valuations as part of the continual assessment of the appropriateness of provisioning on a portfolio that is largely impaired. For more details, see table 18.a and 18.b.
Credit risk related to derivatives The positive replacement value of outstanding derivatives, such as interest rate, currency, total return and equity swaps, forward contracts and purchased options represents a credit risk to the Group. In addition there is a potential exposure arising from possible changes in replacement value. The Group regularly monitors credit risk exposures arising from derivative transactions. Outstanding positions with external counterparties are managed through an approval process embedded in derivative programs.
Less: impairment allowance Impairment allowances on individually assessed financial assets – 726 19 89 835 Impairment allowances on collectively assessed financial assets – 61 – 208 269 1 Available-for-sale debt securities are included net of USD 2 million of impairment charges recognized during the year. 2 USD 158 million past due but not impaired and USD 1.4 billion impaired mortage loans relate to the run-off property loans at Dunbar Assets Ireland.
Table 18.a in USD millions, as of December 31, 2013Analysis of financial assets – current period
Past due but not impaired financial assets – 537 – 2,024 2,561
Section highlights • The Group maintains internal liquidity sources that cover the Group’s potential liquidity needs, including those that might arise under stressed conditions.
At the Group level, similar guidelines apply and detailed liquidity forecasts based on the local businesses’ input and the Group’s own forecasts are regularly performed. As part of its liquidity management, the Group maintains sufficient cash and cash equivalents and high quality, liquid investment portfolios to meet expected outflows including those for maturing debt obligations. In addition, the Group maintains internal liquidity sources that cover the Group’s potential liquidity needs, including those that might arise under stressed conditions. The Group takes into account the amount, permanence of availability and speed of accessibility of the sources. The Group centrally maintains committed borrowing facilities, as well as access to diverse funding sources to cover contingencies. Funding sources include asset sales, external debt issuances and use of letters of credit. The Group maintains a broad range of maturities for external debt securities. A possible liquidity risk could arise from a downgrade of the Group’s credit rating. This could impact the Group’s commitments and guarantees, thus potentially increasing the Group’s liquidity needs. This risk and potential mitigating actions are assessed on an ongoing basis within the Group’s liquidity framework.
See note 20 of the Consolidated financial statements for information on the maturities of total debt issued. For more information on the Group’s other financial liabilities, see note 18 of the Consolidated financial statements.
Table 21.b in USD millions, as of December 31, 2012Expected maturity profile for liabilities for investment contracts – prior period
Section highlights • Zurich regularly reviews projects to identify significant risks that may threaten successful project delivery, and mitigates these risks.
Zurich has a comprehensive framework with a common approach to identify, assess, quantify, mitigate, monitor and report operational risk within the Group as summarized below.
A key task is maintaining and developing the Group’s business continuity capability with an emphasis on recovery from events such as natural catastrophes, significant operational interruptions and the possibility of a pandemic. In order to achieve this The Group has continued to further implement a more globally consistent approach to business continuity and crisis management.
Zurich regularly reviews projects to identify significant risks that may threaten successful project delivery, and mitigates these risks. In 2013, this area was strengthened by adding to the Zurich Risk Policy specific requirements to manage project risks. The Group Chief Risk Officer reports regularly on the status and development of significant project risks to the CEO, senior management committees and the Risk Committee of the Board.