Other post-employment benefits Other post-employment benefits, such as medical care and life insurance, are also provided for certain employees and are primarily funded internally. Similar to defined benefit plans, the cost of such benefits is accrued over the service period of the employees based on the actuarially determined cost for the period.
k) Leases The Group is typically acting as a lessee in property and car or equipment leases. Further, the Group is acting as a lessor in leases of investment property.
When acting as a lessee, under IFRS 16, the Group recognizes a right-of-use asset and a corresponding lease liability at the lease commencement date when the leased asset is available for use by the Group. The lease liability is measured at the present value of the lease payments due over the lease term, discounted using the Group’s incremental borrowing rate. Any options to extend or terminate a lease that the Group is reasonably certain to exercise are included in the lease term. The right-of-use asset is initially recognized at an amount equal to the lease liability adjusted for lease prepayments made or lease incentives received, initial direct costs and any estimated costs to dismantle or restore the leased asset.
The Group records short-term leases and leases of low-value assets as an expense on a straight-line basis over the lease term. Short-term leases are leases with a lease term of 12 months or less. Low-value assets are comprised of hardware and smaller office equipment. The lease expense is included in ‘Administrative and other operating expense.’
Under IAS 17 all operating leases were accounted for off balance sheet with lease expense recognized on a straightline basis over the lease term. Future payments under the non-cancellable operating leases were disclosed in note 22.
Deferred policy acquisition costs and the present value of future profits (PVFP) are recognized on balance sheet only to the extent that they are recoverable from future policy income which also depends on the above assumptions. Recoverability is tested at contract inception and subsequently on a regular basis with reference to current expectations of future profits or margins.
In addition, the Group’s policy is to ensure that independently-sourced prices are developed by making maximum use of current observable market inputs derived from orderly transactions and by employing widely-accepted valuation techniques and models. When third party pricing providers are unable to obtain adequate observable information for a particular financial instrument, the fair value is determined either by requesting selective non-binding broker quotes or by using internal valuation models.
Fair value is determined, considering quoted market prices, current share values in the market place for similar publicly traded entities, and recent sale transactions of similar businesses.
Value-in-use is determined using the present value of estimated future cash flows expected to be generated from the CGU. Cash flow projections are based on financial budgets, which are approved by management, typically covering a three-year period or, if appropriate and adequately justified, a longer period, which may be necessary to more accurately represent the nature of the cash flows used to test the goodwill. Cash flows beyond this period are extrapolated using, among others, estimated perpetual growth rates, which typically do not exceed the expected inflation of the geographical areas in which the cash flows supporting the goodwill are generated. If cash flows are generated in different geographical areas with different expected inflation rates, weighted averages are used. The discount rates applied reflect the respective risk-free interest rate adjusted for the relevant risk factors to the extent they have not already been considered in the underlying cash flows.
The recoverable amounts of AIF contracts and goodwill are determined on the basis of value-in-use calculations further described above. The basis for determining the values assigned to the key assumptions are current market trends and earnings projections.
Table 4 sets out for the major CGUs the applied discount rates and the perpetual nominal growth rates beyond the projection period that depend on expectations about country-specific growth rates and inflation as of the date of valuation, as well as the value of goodwill and AIF contracts as of December 31, 2019. No impairment was identified.
In 2018, the Group recognized USD 52 million of goodwill relating to the acquisition of mobile solution technology. The recoverability of this goodwill is reliant upon successful achievement of ambitious growth targets.
Distribution agreements Qualitative analyses have been performed on distribution agreements, typically comprised of an analysis of the current financial performance, any change in the conditions in the agreement and environment that would indicate an impairment. No impairment was identified.
Table 5.1 shows the preliminary balance sheet line items as of the OnePath acquisition date, representing the fair value of tangible and intangible assets and draft goodwill.
Cash and cash equivalents 252 Total Group investments 2,233 Total unit-linked investments 770 Total investments 3,003 Reinsurers’ share of reserves for insurance contracts 168 Receivables and other assets 223 Deferred tax assets 328 Property and equipment 1 Goodwill 936 Other intangible assets 47 Assets acquired 4,957
Liabilities for insurance contracts 2,175 Liabilities for investment contracts 1,206 Accrued liabilities 18 Other liabilities 150 Deferred tax liabilities 12 Liabilities acquired 3,562
OnePath’s pro-forma gross written premiums and net income after taxes for the twelve months ended December 31, 2019, were approximately USD 1.1 billion and USD 42 million, respectively. In addition, the Group generated net income after taxes of USD 14 million for the respective period on its existing reinsurance agreement with OnePath. The Group incurred transaction-related costs of approximately USD 26 million in non-technical expenses in BOP, the majority of which were incurred in 2019.
On December 14, 2018, Zurich Insurance plc entered into an agreement with Catalina Holdings (Bermuda) Ltd and certain of its subsidiaries to transfer a portfolio of pre-2007 United Kingdom legacy employers’ liability policies to Catalina London Limited, subject to regulatory and court approvals. The transfer is expected to be completed in 2020. As of December 31, 2019, assets reclassified to held for sale were USD 1.8 billion and liabilities reclassified to held for sale were USD 1.8 billion.
UK workplace pensions and savings business On October 12, 2017 the Group announced a strategic deal under which Lloyds Banking (LBG) would acquire the UK workplace pension and savings business. On April 3, 2018, Sterling ISA Managers Limited completed the sale of its Corporate Savings Platform together with the associated infrastructure, assets and business to LBG subsidiary, Scottish Widows Administration Services Limited. On July 1, 2019, the remaining insurance business was transferred by Zurich Assurance Ltd to Scottish Widows Limited by a UK court process under Part VII of the Financial Services and Markets Act 2000. In 2019, the Group has recorded a pre-tax gain of USD 24 million in the statement of income upon completion of the sale.
Venezuelan Operations On May 24, 2019, the Group completed the sale of its 69 percent participation in Zurich Seguros, S.A. The Group has recorded a pre-tax loss of USD 260 million, of which USD 258 million results from negative currency translation adjustments, in the statement of income upon completion of the sale.
EuroAmerica portfolio in Chile On April 20, 2018, the Group announced it had entered into an agreement to acquire the individual and group life insurance portfolios as well as the long-term savings operations of EuroAmerica in Chile. The Group finalized the acquisition on November 5, 2018, for an estimated aggregate price of USD 144 million, subject to purchase price adjustments. Based on purchase price accounting, goodwill amounted to USD 90 million, including a USD 12 million reduction of goodwill in 2019 from post-acquisition adjustments.
Travel Ace and Universal Assistance On March 12, 2018, the Group announced the acquisition of Travel Ace and Universal Assistance, the leading providers of traveler assistance in Latin America, for approximately USD 82 million. The transaction encompassed 19 legal entities operating throughout Latin America, most notably in Argentina, Brazil, Chile, Colombia and Mexico. Based on purchase price accounting, goodwill amounted to USD 94 million.
QBE Latin America On February 24, 2018, the Group entered into an agreement to acquire the Latin American operations of the Australian insurer QBE Insurance Group Limited (QBE) with operations in Argentina, Brazil, Colombia, Ecuador and Mexico. On July 2, 2018, the acquisitions of Argentina and Brazil were closed for an amount, including purchase price adjustments, of USD 190 million and USD 27 million, respectively. The acquisitions of Mexico and Ecuador were closed on August 31, 2018 and October 1, 2018, each for an amount of USD 46 million including purchase price adjustments. The acquisition of Colombia was completed on February 1, 2019, for an amount of USD 18 million, subject to purchase price adjustments.
Cash and cash equivalents 89 Total investments 397 Receivables and other assets 411 Deferred tax assets 21 Property and equipment 21 Goodwill 222 Other intangible assets 51 Assets acquired 1,212
Divestments Endsleigh Limited On March 29, 2018, the Group completed the sale of the Endsleigh Limited group of companies to A-Plan Holdings. A pre-tax loss of USD 116 million has been recorded within net gains/losses on divestment of businesses, of which USD 97 million were recognized in December 2017 at the time the sale was announced.
1 Rental operating expenses for investment property amounted to USD 141 million and USD 98 million for the years ended December 31, 2019 and 2018, respectively.
Debt securities: Fair value through profit or loss 6,713 3.5 5,229 2.9
Mortgage and asset-backed securities 489 409 17,634 17,899 – – 18,123 18,308
As of January 1 12,351 12,238 Additions and improvements 1,284 757 Acquisitions/(divestments) – 1
Market value revaluation 428 247 Transfer from/to assets held for own use 25 – Transfer to assets held for sale (36) (15) Foreign currency translation effects (15) (315) As of December 31 13,261 12,351
Table 7.1 shows the fair value and notional amounts for instruments which did not qualify for hedge accounting as of December 31, 2019 and 2018. While these notional amounts express the extent of the Group’s involvement in derivative transactions, they do not, however, represent the amounts at risk.
Total other contracts – – – – – – 95 – (8) Total Group derivative financial instruments 28,741 4,484 3,797 37,022 505 (240) 32,543 327 (245)
Interest rate contracts Interest rate contracts are used to hedge risks from changes in interest rates and to manage asset liability mismatches. Whenever possible the Group enters into exchange traded contracts, which are standardized and regulated. Furthermore, because of the structure of the exchanges, exchange traded contracts are not considered to carry counterparty risk. Over-the-counter (OTC) contracts are otherwise entered into and comprised of swaps and swaptions.
Other contracts Other contracts predominantly include stable value products (SVPs) issued to insurance company separate accounts in connection with certain life insurance policies (Bank Owned Life Insurance (BOLI) and Company Owned Life Insurance (COLI)) with an account value of USD 11.1 billion as of December 31, 2019 and USD 10.8 billion as of December 31, 2018, and with a market value of the underlying investments of USD 11.1 billion and USD 10.4 billion as of December 31, 2019 and 2018, respectively (not included in the table above). The Group includes the likelihood of surrender as one of the input parameters to determine the fair value of the SVPs which was nil as of December 31, 2019 and 2018.
Maturity profile of notional amounts and fair values of Group derivative financial instruments in USD millions, as of December 31 2019 2018
Fair value hedges: Cash flow hedges: Forex swaps and forwards – – – – – – 31 – (1)
Net investment hedges: 1 Includes USD 623 million and USD 636 million notional related to derivatives centrally cleared as of December 31, 2019 and 2018, respectively.
The Group also has fair value hedge relationships consisting of cross currency swaps and forwards to protect the Group from foreign currency fluctuation of certain fixed income securities and hybrid equity securities denominated in a currency other than the functional currency of the reporting entity.
Forward Bonds are used to hedge bond’s fair values against rates movements.
Gains/(losses) on hedging instruments 1 23 (7) on hedged items attributable to the hedged risk (24) (2)
Cash flow hedges Designated cash flow hedges, such as interest rate swaptions and forwards are used to protect the Group against variability of future cash flows due to changes in interest rates associated with expected future purchases of debt securities required for certain life insurance policies. The effective portion of the gains and losses on these swaptions are initially recognized in OCI. Subsequently the gains or losses will be recycled to profit or loss within net investment income on Group investments over the period to December 31, 2036. The gains and losses related to the ineffective portion of these hedges are recognized immediately in income within net capital gains/(losses) on investments and impairments.
A nil amount for the years ended December 31, 2019 and 2018, respectively, was recognized in net capital gains/ (losses) and impairments due to hedge ineffectiveness.
Net investment hedges The Group applies net investment hedge accounting to protect against the effects of changes in exchange rates in its net investments in foreign operations.
No ineffectiveness of net investment hedges was recognized in net capital gains/(losses) and impairments for the years ended December 31, 2019 and 2018.
Policyholder contract deposits and other funds 27,480 24,266 (3,285) (3,416) 24,195 20,850 Reserves for unit-linked insurance contracts 77,684 68,766 – – 77,684 68,766
Undiscounted reserves for losses and loss adjustment expenses 60,384 62,187 (12,161) (11,561) 48,223 50,627 of which: Undiscounted amount of discounted reserves 4,297 4,117 (64) (59) 4,233 4,058 1 Average discount rate increase due to hyperinflationary economy in Argentina.
Losses and loss adjustment expenses incurred: Losses and loss adjustment expenses paid: Interest effects of discounted reserves 145 64 (3) (6) 142 59 1 In 2019, the Group reclassified USD 177 million to liabilities held for sale in Germany (see note 5). In addition, a retroactive reinsurance agreement of a Non-Core Business portfolio resulted in a decrease of net reserves by USD 402 million. In 2018 the Group reclassified USD 1.8 billion to assets and liabilities held for sale in UK and Germany (see note 5). Additional movements mainly related to QBE and Travel Ace and Universal Assistance acquisitions (see note 5) and portfolio transfers in Germany and Australia with retroactive reinsurance agreements signed in 2018.
For the year ended December 31, 2018, the decrease of USD 4.9 billion in net reserves for losses and loss adjustment expenses is mainly driven by reclassification of USD 1.8 billion to assets and liabilities held for sale (see note 5) and decrease of USD 1.3 billion due to foreign currency translation effects. In addition, certain portfolios with retroactive reinsurance agreements signed in 2018 in Germany and Australia were transferred to external parties, resulting in a decrease of net reserves of USD 690 million.
Gross reserves for losses and loss adjustment expenses (undiscounted) 68,274 67,762 69,986 68,312 64,472 62,971 62,254 66,715 62,187 60,384
Cumulative incurred: Seven years later (2,107) (1,112) (1,552) Eight years later (2,188) (1,576) Nine years later (2,504)
Cumulative (deficiency)/ redundancy of gross reserves 4,097 3,045 3,552 2,531 2,337 3,213 3,129 2,051 769 Cumulative (deficiency)/ redundancy as a percentage of initial gross reserves 6.0% 4.5% 5.1% 3.7% 3.6% 5.1% 5.0% 3.1% 1.2%
Fee income and other expenses (3,911) (4,281) 258 335 (3,652) (3,945) Interest and bonuses credited to policyholders 2,107 1,951 (101) (89) 2,007 1,862
Increase/(decrease) recorded in other comprehensive income 876 (228) – – 876 (228)
1 The 2019 net movement is mainly related to the acquisition of OnePath (see note 5), the 2018 net movement is mainly related to the EuroAmerica acquisition in Chile (see note 5) and sale of a portfolio in Singapore.
The net impact of changes in assumptions on future life policyholder benefits by type of assumption is shown in table 8.6.
Effect of changes in assumptions for future life policyholder benefits in USD millions, for the years ended December 31 2019 2018
Universal life and other contracts 13,679 13,250 Policyholder dividends 13,801 11,016
Fee income and other expenses (291) (402) – (6) (290) (407) Interest and bonuses credited to policyholders 1,393 1,406 (119) (123) 1,274 1,284
1 The 2019 movement relates to the acquisition of OnePath (see note 5), the 2018 net movement is mainly related to the acquisition of EuroAmerica in Chile (see note 5).
Tables 8.9a and 8.9b provide an analysis of the expected maturity profile of reserves for insurance contracts, net of reinsurance, based on expected cash flows without considering the surrender values as of December 31, 2019 and 2018. Reserves for unit-linked insurance contracts amounting to USD 78 billion and USD 69 billion as of December 31, 2019 and 2018, respectively, are not included, as policyholders can generally surrender their contracts at any time, at which point the underlying unit-linked assets would be liquidated. Risks from the liquidation of unit-linked assets are largely borne by the policyholders of unit-linked contracts.
Liabilities for investment contracts in USD millions, as of December 31 2019 2018
Unit-linked investment contracts 48,967 41,188 Investment contracts (amortized cost) 931 504 Investment contracts with DPF 11,863 9,746
Development of liabilities for investment contracts in USD millions 2019 2018
Fee income and other expenses (425) (464) Interest and bonuses credited to policyholders 10,257 (2,739) Acquisitions/(divestments) and transfers 1 (1,916) 4,139 Increase/(decrease) recorded in other comprehensive income 660 (302) Foreign currency translation effects 419 (2,603) As of December 31 61,761 51,439 1 As of December 31, 2019, the net carrying amount of liabilities for investment contracts decreased by USD 3.1 billion due to the completion of the sale in the UK (see note 5) and increased by USD 1.2 billion from the acquisition of OnePath (see note 5).
Expected maturity profile for liabilities for investment contracts – current period in USD millions, as of December 31, 2019
Expected maturity profile for liabilities for investment contracts – prior period in USD millions, as of December 31, 2018
Losses and loss adjustment expenses 21,631 22,248 (4,965) (4,851) 16,666 17,397 Life insurance death and other benefits 11,989 11,236 (1,085) (986) 10,903 10,250 Total insurance benefits and losses 33,620 33,483 (6,051) (5,837) 27,570 27,646
Change in policyholder contract deposits and other funds 1,080 1,245 Change in reserves for unit-linked insurance contracts 9,515 (1,350) Change in liabilities for investment contracts – unit-linked 10,050 (2,930) Change in liabilities for investment contracts – other 219 190 Change in unit-linked liabilities related to UK capital gains tax (283) 109 Total policyholder dividends and participation in profits 20,582 (2,736)
Amortization of deferred acquisition costs 6,525 6,466 (866) (810) 5,660 5,655 Amortization of deferred origination costs 71 74 – – 71 74 Commissions and other underwriting and acquisition expenses 1 3,141 2,882 (342) (47) 2,798 2,835 Total underwriting and policy acquisition costs 9,737 9,422 (1,208) (857) 8,529 8,565 1 Net of additions related to deferred acquisition and origination costs.
Change in reserves for unearned premiums 1,187 339 (239) (115) 949 224
11. Deferred policy acquisition costs and deferred origination costs Table 11.1
4 2019 movement in Life is related to the elimination of the internal reinsurance agreement on consolidation of OnePath (see note 5), Property & Casualty movement of
Foreign currency translation effects (1) (22) As of December 31 400 419
Buildings held for own use and equipment are carried at cost less accumulated depreciation and any accumulated impairment loss. Generally, these assets are depreciated on a straight-line basis to income over the following estimated useful lives: 33 buildings 25 to 50 years; 33 furniture and fixtures 5 to 10 years; 33 computer equipment 3 to 6 years; 33 other equipment 6 to 10 years (or determined by the term of lease).
Property and equipment overview in USD millions, as of December 31 Real Estate Equipment Total
Right-of-use 1,610 57 1,667 Owned and subject to operating lease 451 517 968
Gross carrying value as of January 1, 2019 606 3 2,146 2,755 1,379 117 1,496 1,988 2,263 4,251 Less: accumulated depreciation/
Net carrying value as of January 1, 2019 459 2 1,353 1,814 535 74 608 995 1,427 2,422
Mount Street land and building for a total consideration of USD 245 million. Settlement took place on November 15, 2019 upon completion of all conditional precedents. Total consideration is formed of the following components: land USD 35 million, building constructed to date USD 52 million, estimated construction costs USD 70 million, final development fee (FDF) USD 88 million. 10 year lease term is expected to start from October 2020 to September 2029 with total lease payments of USD 104 million.
Lessor – finance lease and operating lease income in USD millions, for the years ended December 31 2019
Finance lease Selling profit or loss 7 Interest income on finance lease receivables 72 Total 79 Operating lease Operating lease income – property and equipment 23 Operating lease income – investment property 615 Total 638
Intangible assets – current period in USD millions Attorneyin -fact contracts Goodwill PVFP
Net carrying value as of January 1, 2019 1,025 2,662 498 2,726 1,162 199 8,272
Net carrying value as of December 31, 2019 1,025 3,610 440 2,534 1,141 218 8,968 Plus: accumulated amortization/
Gross carrying value as of December 31, 2019 1,025 3,883 2,556 4,286 5,059 331 17,140 1 Amortization of distribution agreements is included within underwriting and policy acquisition costs.
Group Functions and Operations – 63 – – 83 – 145
Group Functions and Operations – 52 – – 88 – 139
2 Lease liabilities separated from other financial liabilities as the effect of adoption IFRS 16.
Income tax expense – current/deferred split in USD millions, for the years ended December 31 2019 2018
Actual income tax expense attributable to shareholders 23.6% 1,351 24.9% 1,317 plus: income tax expense/(benefit) attributable to policyholders 365 (183) Actual income tax expense 28.1% 1,716 22.2% 1,134
Table 17.2 sets out the factors that cause the actual income tax expense to differ from the expected expense computed by applying the Swiss statutory tax rate, which is the rate applicable in the jurisdiction where the ultimate parent company is resident. Following recent changes in the Swiss tax legislation, the applicable Swiss statutory tax rate has been revised to 21.0 percent for 2019 from 22.0 percent in 2018.
Deferred tax assets/(liabilities) analysis by source in USD millions, as of December 31 2019 2018
Tax loss carryforwards 390 – 634 – Gross deferred tax assets/(liabilities) before valuation allowance 2,281 (813) 2,643 (1,110) Valuation allowance (317) – (408) – Gross deferred tax assets/(liabilities) after valuation allowance 1,964 (813) 2,235 (1,110) Deferred tax assets 1,151 1,125 Gross deferred tax Deferred acquisition and origination costs 22 (2,377) 25 (2,125) Depreciable and amortizable assets 326 (1,818) 133 (1,699) Life policyholders’ benefits and deposits 1 1,947 (1,087) 1,924 (1,017) Unrealized (gains)/losses on available-for-sale investments and cash flow hedges 248 (1,348) 288 (860) Accruals and deferred income 170 (99) 76 (122) Reserves for losses and loss adjustment expenses 228 (484) 57 (90) Reserves for unearned premiums 217 (70) 18 (6) Deferred front-end fees 494 – 511 – Pensions and other employee benefits 386 (348) 340 (325)
Development of net deferred tax liabilities in USD millions 2019 2018
As of January 1 (2,790) (3,281) Net change recognized in the income statement (302) (15) Net change recognized in equity (607) 344 Net changes due to acquisitions/(divestments) 314 75 Foreign currency translation effects 3 86 As of December 31 (3,382) (2,790)
The net deferred tax liabilities related to non-controlling interests amounted to USD 179 million and USD 189 million as of December 31, 2019 and 2018, respectively.
As of January 1 406 73 Net unrealized (gains)/losses on available-for-sale investments (580) 419 Cash flow hedges (3) 11 Revaluation reserve 4 9 Net actuarial (gains)/losses on pension plans (28) (96) Foreign currency translation effects 8 (10) As of December 31 (193) 406
For which deferred tax assets have not been recognized, expiring > 20 years or with no time limitation 2,313 2,010
Management assesses the recoverability of the deferred tax-asset carrying values based on future years’ taxable income projections and believes the carrying values of the deferred tax assets as of December 31, 2019, to be recoverable.
Senior and subordinated debt in USD millions, as of December 31 2019 2018
Zurich Holding Comp. of America Inc Euro commercial paper notes, due in less than 12 months 399 399 Zurich Finance (Australia) Limited Floating rate AUD 241 million loan due July 2020 169 170 3.271% AUD 200 million loan due May 2023 141 141 3.477% AUD 350 million notes, due May 2023 1 245 246 4.500% AUD 250 million notes, due July 2038 1 175 176
Zurich Finance (UK) plc 6.625% GBP 450 million perpetual notes, first callable October 2022 1 593 570
None of the debt instruments listed in table 18.1 were in default as of 31 December 2019 or 31 December 2018.
To facilitate the issuance of debt, the Group has in place a Euro Medium Term Note Program (EMTN Program) allowing for the issuance of senior and subordinated notes up to a maximum of USD 18 billion. All issuances under this program are either issued or guaranteed by Zurich Insurance Company Ltd. The Group has also issued debt outside this program.
Maturity schedule of outstanding debt in USD millions, as of December 31 2019 2018
Development of debt arising from financing activities in USD millions Total
The following information related to authorized share capital and contingent share capital is specified in articles 5bis and 5ter of the Articles of Association of Zurich Insurance Group Ltd.
a) Authorized share capital Until April 4, 2020, the Board of Zurich Insurance Group Ltd is authorized to increase the share capital of Zurich Insurance Group Ltd (Company) by an amount not exceeding CHF 4,500,000 by issuing up to 45,000,000 fully-paid registered shares with a nominal value of CHF 0.10 each. An increase in partial amounts is permitted. The Board would determine the date of issue of any such new shares, the issue price, type of payment, conditions for exercising subscription rights, and the commencement of entitlement to dividends.
The Board is further authorized to restrict or exclude the subscription rights of shareholders and to allocate them to third parties, the Company or one of its Group companies, up to a maximum of 15,000,000 fully-paid registered shares, if the shares are to be used: 33 for the take-over of an enterprise, or parts of an enterprise or of participations or for investments by the Company or one of its Group companies, or the financing including re-financing of such transactions; or 33 for the purpose of expanding the scope of shareholders in connection with the quotation of shares on foreign stock exchanges or issuance of shares on the national or international capital markets (including private placements to one or more selected investors); or 33 for the conversion of loans, bonds, similar debt instruments, equity-linked instruments or other financial market instruments (collectively, the ‘Financial Instruments’) issued by the Company or one of its Group companies; or 33 for the improvement of the regulatory capital position of the Company or one of its Group companies in a fast and expeditious manner.
The conversion rights may be exercisable during a maximum of ten years and option rights during a maximum of seven years from the time of the respective issue; contingent conversion features may remain in place indefinitely.
Employee participation During 2019 no shares were issued to Group employees out of the contingent capital. During 2018, 8,176 shares were issued to employees from contingent share capital. The remaining contingent share capital, available for issuance to employees amounted to CHF 494,723 and 4,947,232 fully paid registered shares as of December 31, 2019 and 2018, respectively, with a nominal value of CHF 0.10 each. Subscription rights, as well as advance subscription rights of the shareholders are excluded. The issuance of new shares or respective option rights to employees is subject to one or more regulations to be issued by the Board and taking into account performance, functions, levels of responsibility and criteria of profitability. New shares or option rights may be issued to employees at a price lower than that quoted on the stock exchange.
Treasury shares number of shares, as of December 31 2019 2018 2017
e) Dividends The dividend of CHF 19 per share was paid out of the available earnings on April 9, 2019, as approved at the Annual General Meeting on April 3, 2019. The difference between the respective amounts of the dividend at transaction day exchange rates amounting to USD 2.8 billion and at historical exchange rates are reflected in the cumulative foreign currency translation adjustment.
f) Share buy-back program On April 11, 2018, Zurich Insurance Group Ltd launched a public share buy-back program for up to 1,740,000 shares of Zurich Insurance Group Ltd, which was completed on May 18, 2018. A total of 1,740,000 shares were repurchased on a second trading line on the SIX Swiss Exchange via Zürcher Kantonalbank as agent.
The corresponding reduction of the share capital of Zurich Insurance Group Ltd from 151,348,027 to 149,608,027 fully paid registered shares with a nominal value of CHF 0.10 each through cancellation of the repurchased own shares was completed in June 2019.
Basic earnings per share 4,147 148,033,715 28.01 27.84 Effect of potentially dilutive shares related to share-based compensation plans 1,739,334 (0.33) (0.32) Diluted earnings per share 4,147 149,773,049 27.69 27.51
Basic earnings per share 3,716 148,048,737 25.10 24.55 Effect of potentially dilutive shares related to share-based compensation plans 1,620,039 (0.27) (0.27) Diluted earnings per share 3,716 149,668,776 24.83 24.28 1 The translation from U.S dollars to Swiss francs is shown for information purposes only and has been calculated at the Group’s average exchange rates for the years ended December 31, 2019 and 2018.
The Group operates a number of retirement benefit arrangements for employees. Historically, the majority of employees belonged to defined benefit pension plans and will still have past service benefits accrued in those plans.
Remeasurement effects included in other comprehensive income (1,992) 2,350 (323) 35 Employer contributions – 252 – 252 Employer contributions paid to meet benefits directly 35 – – 35 Plan participants’ contributions (65) 65 – – Payments from the plan (incl. settlements) 828 (828) – – Foreign currency translation effects (503) 437 – (67)
of which: Assets for defined pension plans 316 of which: Liabilities for defined pension plans (2,519)
Change in asset ceiling – – (18) (18) Remeasurement effects included in other comprehensive income 1,424 (713) (18) 693 Employer contributions – 611 – 611 Employer contributions paid to meet benefits directly 34 – – 34 Plan participants’ contributions (65) 65 – – Payments from the plan (incl. settlements) 965 (965) – – Foreign currency translation effects 816 (686) – 129 of which: Assets for defined pension plans 232 of which: Liabilities for defined pension plans (2,491)
Table 20.2 provides a breakdown of plan assets by asset class.
Fair value of assets held in funded defined benefit pension plans in USD millions, as of December 31 2019 2018
Mortality tables and life expectancies for major plans – current period in years, as of December 31, 2019 Life expectancy at age 65 for a male currently
BVG 2015 with generational projections according to CMI model adapted to Swiss mortality with a long-term trend rate of 1.25% 21.60 23.20 23.60 25.10
Pri-2012 with MP-2019 Generational projection and white collar adjustment 21.99 23.51 23.40 24.94 RP 2014 with plan specific adjustments 21.30 22.26 23.31 24.21
Mortality tables and life expectancies for major plans – prior period in years, as of December 31, 2018 Life expectancy at age 65 for a male currently
Defined benefit obligation 1 in USD millions, as of December 31 2019 2018
a) Cash incentive plans Various businesses throughout the Group operate short-term incentive programs for executives, management and, in some cases, for employees of that business. Awards are made in cash, based on the accomplishment of both organizational and individual performance objectives. The expense recognized for these cash incentive plans amounted to USD 511 million and USD 523 million for the years ended December 31, 2019 and 2018, respectively.
Employee share plans Share Incentive Plan for employees in the UK The Group established an Inland Revenue approved Share Incentive Plan and launched the Partnership Shares element of this plan in 2003, which enabled participating employees to make monthly purchases of Zurich Insurance Group Ltd shares at the prevailing market price from their gross earnings. This plan was terminated in 2007. There were 34 and 47 participants in the plan as of December 31, 2019 and 2018, respectively.
A Dividend Shares scheme was launched in 2014 which allows employees to reinvest their dividends from Partnership Shares 3 and Reward Shares 3. As of December 31, 2019 and 2018, there were 439 and 385 participants in the scheme, respectively.
Share Incentive Plan for employees in Switzerland Under this plan, employees have the option to acquire sales-restricted shares at a 30 percent discount to the market value. The maximum permitted investment in shares is equivalent to CHF 3,500 per employee per annum. During 2019, 4,096 employees were eligible to participate in the share incentive plan, compared with 4,097 in 2018. For the years ended December 31, 2019 and 2018, 1,761 and 1,648 employees, respectively, purchased shares under the 2018 and 2019 share plans.
Shares allocated during the period for the years ended December 31
Remaining commitments under investment agreements 1,398 2,283 Guarantees and letters of credit 1 1,003 2,083 Future operating lease commitments 2 – 2,149 Undrawn loan commitments 1 2 Other commitments and contingent liabilities 3,4 732 2,346 1 Guarantee features embedded in life insurance products are not included. 2 Movement driven by the implementation of IFRS 16 ’Leases.’ 3 Movement is related to the acquisition of OnePath in May 2019 (see note 5). 4 Includes USD 131 million future cash outflows, that the Group as lessee is potentially exposed to which are not reflected in the measurement of lease liabilities in the balance sheet, of which USD 104 million is a lease agreement in Australia commencing in 2020 ( see note 13.4).
Zurich Insurance Group Ltd has provided unlimited guarantees in support of entities belonging to the Zurich Capital Markets group of companies.
The Group has commitments to provide collateral on certain contracts in the event of a financial strength downgrading for Zurich Insurance Company Ltd from the current AA– by Standard & Poor’s. Should the rating by Standard & Poor’s fall to A+, then the additional collateral based on information available amounts to nil as of both December 31, 2018 and 2019.
The Group, on its own initiative, undertook an internal review of the life insurance, savings and pension business sold by its non-U.S. operating companies with relevant cross-border business to customers with a nexus to the U.S. The Group engaged outside counsel and other advisors to assist in this review, which was focused on assessing compliance with relevant U.S. tax laws. The review confirmed that the Group’s cross-border business with U.S. persons was very limited and of a legacy nature, with the large majority of sales having occurred more than a decade ago. The review also confirmed that the Group’s U.S. operating companies were not involved in or connected to those activities.
This resolution has not had and will not have an adverse effect on the Group’s operating results or consolidated financial condition.
Legal proceedings and regulatory investigations The Group’s business is subject to extensive supervision, and the Group is in regular contact with various regulatory authorities. The Group is continuously involved in legal proceedings, claims and regulatory investigations arising, for the most part, in the ordinary course of its business operations.
Level 3 – includes assets and liabilities for which fair values are determined using valuation techniques with at least one significant input not being based on observable market data. This approach is used only in circumstances when there is little, if any, market activity for a certain instrument, and the Group is required to rely on third party providers or develop internal valuation inputs based on the best information available about the assumptions that market participants would use when pricing the asset or liability.
Total fair value through profit or loss securities 11,105 8,862 11,105 8,862
Total financial liabilities held at amortized cost (14,052) (12,658) (12,930) (12,516)
1 2019 includes equity securities, debt securities, other loans and liabilities due to investment contracts related to the OnePath acquisition (see note 5).
Fair value hierarchy – non-unit-linked – current period in USD millions, as of December 31, 2019 Level 1 Level 2 Level 3 Total
Total available-for-sale securities 9,633 133,818 9,129 152,581 Fair value through profit or loss securities
Reinsurers’ share of liabilities for insurance contracts fair value option 1 – – 206 206
Liabilities for insurance contracts fair value option 2 – – (2,215) (2,215)
Fair value hierarchy – non-unit-linked – prior period in USD millions, as of December 31, 2018 Level 1 Level 2 Level 3 Total
Total fair value through profit or loss securities 92,528 29,062 940 122,530
Liabilities related to unit-linked investment contracts – (48,967) – (48,967) Derivative liabilities (2) – – (2)
Investment property – – 3,222 3,222 Total investments for unit-linked contracts 1 76,888 28,084 3,863 108,835 Financial liabilities at FV through profit or loss
Over the counter derivative financial instruments are valued using internal models. The fair values are determined using dealer price quotations, discounted cash flow models and option pricing models, which use various inputs including current market and contractual prices for underlying instruments, time to expiry, yield curves and volatility of underlying instruments. Such instruments are classified within level 2 as the inputs used in pricing models are generally market observable or derived from market observable data.
33 The Group’s private debt holdings comprise certain private placements and other collateralized loan obligations (CLO) which are valued by dedicated external asset managers applying a combination of expert judgment and other specific adjustments for which interest rates as well as credit spreads serve as input parameters. Quantitative unobservable inputs are not developed by the Group when measuring fair value of these assets.
Transfers out of level 3 – (43) – – – – –
Development of liabilities for insurance contracts fair value option classified within level 3 – current period in USD millions Gross Ceded Net
Fee income and other expenses 1 5 6 Interest and bonuses credited to policyholders 194 (18) 176 Changes in assumptions (3) – (3)
Fee income and other expenses (15) 2 (12) Interest and bonuses credited to policyholders (26) 1 (24) Changes in assumptions (6) – (6) (Decreases)/increases recorded in other comprehensive income – – –
Analysis of financial assets – current period in USD millions, as of December 31, 2019
Less: impairment allowance Impairment allowances on individually assessed financial assets – 2 21 69 93 Impairment allowances on collectively assessed financial assets – 4 – 194 198
Analysis of financial assets – prior period in USD millions, as of December 31, 2018
Less: impairment allowance Impairment allowances on individually assessed financial assets – 1 – 74 75 Impairment allowances on collectively assessed financial assets – 4 – 169 174
Development of allowance for impairments – current period in USD millions Mortgage loans
Increase/(decrease) in allowance for impairments – 7 22 Amounts written-off – 15 (1) Acquisitions and divestments – – 4 Foreign currency translation effects – – (5)
Fair value and carrying value of financial assets split by SPPI and other financial assets – current period in USD millions, as of December 31, 2019 SPPI Other financial assets Total
Total available-for-sale securities 131,040 131,040 21,542 21,542 152,581 152,581 Fair value through profit or loss securities
Total fair value through profit or loss securities – – 11,105 11,105 11,105 11,105 Held-to-maturity debt securities 2,702 2,074 55 43 2,757 2,117 1 Do not include policyholder loans, which will come under IFRS 17 and are therefore not applicable for IFRS 9, of USD 826 million and USD 674 million for fair value and carrying value, respectively.
Fair value and carrying value of financial assets split by SPPI and other financial assets – prior period in USD millions, as of December 31, 2018 SPPI Other financial assets Total
Total available-for-sale securities 124,829 124,829 20,281 20,281 145,110 145,110 Fair value through profit or loss securities
Financial assets (SPPI) by stages – current period in USD millions, as of December 31, 2019
Available-for-sale debt securities 130,333 130,333 505 505 202 202 131,040 131,040 Held-to-maturity debt securities 2,702 2,074 – – – – 2,702 2,074 1 Do not include policyholder loans, which will come under IFRS 17 and are therefore not applicable for IFRS 9, of USD 826 million and USD 674 million for fair value and carrying value, respectively.
Available-for-sale debt securities 124,194 124,194 502 502 132 132 124,829 124,829 Held-to-maturity debt securities 2,653 2,115 3 3 – – 2,655 2,118 1 Do not include policyholder loans, which will come under IFRS 17 and are therefore not applicable for IFRS 9, of USD 742 million and USD 636 million for fair value and carrying value, respectively.
2 Include a reduction of USD 293 million in stage 2 compared to 2018, due to a reassessment resulting in those assets not being classified as SPPI.
Farmers Group, Inc. and its subsidiaries (FGI) provide certain non-claims services to the Farmers Exchanges as their attorneys-in-fact, and also provide certain ancillary services to the Farmers Exchanges. Farmers Group Inc. is a wholly owned subsidiary of the Group. Attorney-in-fact services primarily include risk selection, preparation and mailing of policy documents and invoices, premium collection, management of the investment portfolios and certain other administrative and managerial functions. Fees for these services are primarily determined as a percentage of gross premiums earned by the Farmers Exchanges. Ancillary services primarily include information technology, brand advertising and certain distribution related services that are not covered under the attorney-in-fact contracts for which FGI acts as a principal in arranging for those services to the Exchanges. The finances and operations of the Farmers Exchanges are governed by independent Boards of Governors. In addition, the Group has the following relationships with the Farmers Exchanges.
Certificates of contribution/surplus note in USD millions, as of December 31 2019 2018 3.758% surplus note, due December 2027 100 100 Various other certificates of contribution 23 23
The All Lines agreement provides for a cession of a quota share of the premiums written and the ultimate net losses sustained in all lines of business written by the Farmers Exchanges.
Quota share reinsurance treaty in USD millions, for the years ended December 31 All Lines agreement
c) Farmers management fees and other related revenues Farmers Group, Inc. and its subsidiaries (FGI), wholly-owned subsidiaries of the Group, are the appointed attorneys-infact of the Farmers Exchanges, which are not owned by FGI. As the attorney-in-fact, FGI is permitted by policyholders of the Farmers Exchanges to receive a management fee of up to 20 percent (up to 25 percent in the case of the Fire Insurance Exchange) of the gross premiums earned by the Farmers Exchanges. This management fee, the primary source of revenue for FGI, has an agreed upon margin cap of 7% which is derived from FGI gross management result divided by the gross premium earned by the Farmers Exchanges. The expected revenues and expenses are assessed monthly to determine if expected revenues will be in excess of the cap, in which case the revenue is reduced on a pro-rata basis to ensure that no revenue is recognized for the amounts exceeding the cap. In addition, FGI revenue includes reimbursement of certain ancillary service costs incurred by FGI on behalf of primarily the Farmers Exchanges that are not covered under the attorney-in-fact contracts. The amounts incurred for these services are reimbursed to FGI at cost in accordance with allocations that are subject to approval by the Farmers Exchanges Board of Governors.
FGI has historically charged a lower management fee than the amount allowed by policyholders. The range of fees has varied by line of business over time and from year to year. The gross earned premiums of the Farmers Exchanges were USD 20.4 billion and USD 20.2 billion for the years ended December 31, 2019 and 2018, respectively.
Farmers Management Services in USD millions, for the years ended December 31 2019 2018 Change
Non-Core Businesses include insurance and reinsurance businesses that the Group does not consider core to its operations and that are therefore mostly managed to achieve a beneficial run-off. Non-Core Businesses are mainly situated in the U.S., Bermuda, and in Europe.
For additional informational purposes, the Group also discloses income statement information for Property & Casualty Commercial Insurance and Property & Casualty Retail and Other Insurance results. Other Insurance includes SME, direct market and other program business.
In 2019 the Group amended its BOP policy to exclude the monetary gains and losses resulting from the application of IAS 29 ‘Financial Reporting in Hyperinflationary Economies.’ The policy change was implemented with prospective effect, as the impact on comparable balances was not material to the Group’s financial results.
Net written premiums and policy fees 11,818 12,211 9,672 9,728 2,525 2,372 2,289 2,237 59 (83) – – 26,362 26,465 Net change in reserves for unearned premiums (327) (125) (116) 277 (75) (122) (132) (93) (104) 28 – – (754) (34)
Net earned premiums and policy fees 11,491 12,086 9,556 10,005 2,449 2,250 2,157 2,145 (45) (55) – – 25,608 26,431 Net investment income on Group investments 578 621 1,081 1,026 74 68 217 204 11 13 – – 1,961 1,932 Net capital gains/(losses) and impairments on Group investments 37 (8) 174 (40) – – – – – – – – 211 (48)
Gross written premiums and policy fees 14,558 14,600 15,223 14,716 3,030 2,858 2,871 2,704 593 364 (2,091) (1,736) 34,184 33,505 Less premiums ceded to reinsurers (2,739) (2,389) (5,551) (4,988) (505) (486) (583) (466) (534) (447) 2,091 1,736 (7,822) (7,041)
Net investment result on unit-linked investments 16,514 (5,159) 676 (29) 225 (60) 1,292 1,012 – – – – 18,706 (4,236)
Net investment result on Group investments 3,111 2,840 49 11 238 117 424 407 – – (2) (2) 3,821 3,373 Net investment income on unit-linked investments 1,278 1,375 – – 99 104 36 22 – – – – 1,413 1,501 Net capital gains/(losses) and impairments on unit-linked investments 15,236 (6,534) 676 (29) 126 (163) 1,256 990 – – – – 17,293 (5,737)
Net investment result on Group investments 2,171 1,884 3,821 3,373 207 211 196 198 325 113 (174) (212) 6,546 5,568 Net investment result on unit-linked investments – – 18,706 (4,236) 194 (52) – – 584 (86) – – 19,485 (4,374)
Insurance benefits and losses, net 16,475 17,291 10,190 9,702 562 563 – 1 342 89 – – 27,570 27,646 Policyholder dividends and participation in profits, net 12 19 19,769 (2,640) 204 (43) – – 597 (72) – – 20,582 (2,736) Income tax expense/(benefit) attributable to policyholders – – 365 (183) – – – – – – – – 365 (183) Underwriting and policy acquisition costs, net 5,939 6,136 2,417 2,252 152 167 2 – 20 10 – – 8,529 8,565 Administrative and other operating expense (excl. depreciation/amortization) 2,571 2,992 2,015 1,871 2,333 1,800 383 342 70 75 (69) 7 7,303 7,086 Interest credited to policyholders and other interest 271 156 303 282 111 95 150 135 37 44 (282) (279) 590 433 Restructuring costs and other items not included in BOP (180) (221) (228) (50) (17) (49) (47) (43) (4) (1) – – (476) (364) Total BOP benefits, losses and expenses (before interest, depreciation and amortization) 25,088 26,373 34,831 11,234 3,345 2,533 488 435 1,061 144 (351) (272) 64,462 40,448 Business operating profit (before interest, depreciation and amortization) 3,359 2,543 1,897 2,000 1,900 1,840 (74) (38) (31) 57 (272) (365) 6,780 6,037 Depreciation and impairments of property and equipment 214 101 39 17 69 45 10 9 – – – – 331 173 Amortization and impairments of intangible assets 151 187 80 133 125 152 30 30 – – – – 386 501
Life includes approximately USD 1.4 billion and USD 2.3 billion of gross written premiums and future life policyholder benefits for certain universal life-type contracts in the Group’s Spanish operations for the years ended December 31, 2019 and 2018, respectively.
Revenues/(expenses) not included in BOP: Net capital gains/(losses) on investments and impairments, net of policyholder allocation 716 481 204 197 5 28 (151) (9) 70 24 845 720 Net gains/(losses) on divestment of businesses 1 (198) (19) (146) (5) – – 49 16 – (15) (295) (24)
Net income after taxes 4,384 3,977 attributable to non-controlling interests 237 261 attributable to shareholders 4,147 3,716 1 In 2019, Property & Casualty included losses of USD 217 million related to the sale of the Venezuelan operations offset by gains of USD 19 million related to the sale of ADAC Autoversicherung AG, Life included losses of USD 167 million for re-measurements of assets held for sale based on agreements to sell businesses in the UK and USD 43 million related to the sale of the Venezuelan operations offset by gains of USD 24 million related to the sale of the UK Life portfolio and gains of USD 39 million related to the sale of Bonnfinanz AG, Group Functions and Operations included gains of USD 44 million for re-measurements of assets held for sale based on agreements to sell businesses in the UK (see note 5). In 2018, Property & Casualty included losses of USD 19 million related to the sale of Endsleigh Limited companies (see note 5), Group Functions and Operations included provision release gains of USD 16 million related to the sale of insurance operations in Morocco, Middle East and South Africa and Non-Core Businesses included losses of USD 15 million related to a portfolio transfer in Singapore.
Investments in associates and joint ventures 2 2 16 14 – – 17 16 3 3 – – 39 36
Investments for unit-linked contracts – – 121,390 104,695 932 746 – – 3,889 3,852 – – 126,211 109,294
Total assets (after cons. of investments in subsidiaries) 116,485 116,233 262,170 257,312 14,765 14,860 19,063 21,007 16,766 16,122 (24,562) (30,190) 404,688 395,342 Liabilities
Liabilities for insurance contracts, gross 77,643 78,041 168,114 152,787 7,364 7,311 3 27 11,075 11,139 (59) (96) 264,140 249,208
Reinsurers’ share of liabilities for insurance contracts 14,859 14,454 2,714 1,803 2,142 2,242 – – 3,072 2,765 (34) (67) 22,752 21,197 Deposits made under assumed reinsurance contracts 191 172 65 57 229 400 – – 258 254 (17) – 726 883
Property & Casualty – Commercial and Retail Insurance overview 1 in USD millions, for the years ended December 31 Commercial Insurance Retail and Other Insurance
Gross written premiums and policy fees 16,279 15,450 19,419 19,443 Net earned premiums and policy fees 9,874 10,425 15,779 16,061 Insurance benefits and losses, net 7,157 8,071 9,034 9,185 Policyholder dividends and participation in profits, net 9 14 6 5 Total net technical expenses 2,584 2,776 5,725 5,872
Net capital gains/(losses) and impairments on investments 166 (37) 45 (11) Net non-technical result (excl. items not included in BOP) 7 (92) (51) (51) Business operating profit before non-controlling interests 1,528 614 1,727 1,677 1 Commercial and Retail Insurance overview exclude Group Reinsurance.
Latin America 1 Includes business written under freedom of services and freedom of establishment in Europe, and the related assets. 2 Includes business written through licenses, mainly into Asia Pacific and Middle East, and the related assets. 3 Primarily relates to the quota share agreement with OnePath.
Australia Cover-More Group Limited Sydney 100 100 AUD 1,014.2 Zurich Australia Limited Sydney 100 100 AUD 476.5 Zurich Australian Insurance Limited Sydney 100 100 AUD 6.6 Zurich Financial Services Australia Limited Sydney 100 100 AUD 2,674.9 OnePath Life Limited Sydney 100 100 AUD 1,219.4 OnePath Life Australia Holdings Pty Limited Sydney 100 100 AUD 2,470.7 Austria Zürich Versicherungs-Aktiengesellschaft Vienna 99.98 99.98 EUR 12.0 Brazil Zurich Santander Brasil Seguros e Previdência S.A. 1 Sao Paulo 51 51 BRL 2,509.2 Zurich Minas Brasil Seguros S.A. Belo Horizonte 100 100 BRL 2,476.0 Zurich Resseguradora Brasil S.A. Sao Paulo 100 100 BRL 204.0 Chile Chilena Consolidada Seguros de Vida S.A. Santiago 98.98 98.98 CLP 179,682.6 Zurich Santander Seguros de Vida Chile S.A. 1 Santiago 51 51 CLP 24,252.9 Germany Deutscher Herold Aktiengesellschaft Bonn 100 100 EUR 18.4 Zürich Beteiligungs-Aktiengesellschaft (Deutschland) Frankfurt 100 100 EUR 152.9 Zurich Deutscher Herold Lebensversicherung Aktiengesellschaft Bonn 100 100 EUR 68.5 Ireland Zurich Life Assurance plc Dublin 100 100 EUR 17.5 Zurich Holding Ireland Limited Dublin 100 100 EUR 0.1 Zurich Insurance plc Dublin 100 100 EUR 8.2 Italy Zurich Investments Life S.p.A. Milan 100 100 EUR 199.0 Luxembourg REX-ZDHL S.C.S. SICAV-SIF Leudelange 100 100 EUR 1,446.8 Malaysia Zurich Life Insurance Malaysia Berhad Kuala Lumpur 100 100 MYR 579.0 Zurich Holdings Malaysia Berhad Kuala Lumpur 100 100 MYR 515.4 Mexico Zurich Santander Seguros México, S.A. 1 Mexico City 51 51 MXN 190.0
Farmers New World Life Insurance Company 2 Bellevue, WA 100 100 USD 6.6 Zurich American Company, LLC Wilmington, DE 100 100 USD 0.00001 Zurich American Insurance Company New York, NY 100 100 USD 5.0 Zurich American Life Insurance Company Schaumburg, IL 100 100 USD 2.5 Zurich Holding Company of America, Inc. 3 Wilmington, DE 100 100 USD 0.0
2 The ownership percentages in Farmers Group, Inc. and its fully owned subsidiaries have been calculated based on the participation rights of Zurich Insurance Group in a situation of liquidation, dissolution or winding up of Farmers Group, Inc. 3 Shares have no nominal value in accordance with the company’s articles of incorporation and local legislation.
For details on the Group’s capital restrictions, see the capital management section in the risk review, which forms an integral part of the consolidated financial statements.
In our opinion, the accompanying consolidated financial statements (pages 179 to 289 and the audited sections of the risk review on pages 129 to 157) give a true and fair view of the consolidated financial position of the Group as at December 31, 2019 and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with the International Financial Reporting Standards (IFRS) and comply with Swiss law.
The following key audit matters have been identified: – Valuation of actuarially determined life insurance assets and liabilities
We have selected a combined 3 year average of net income before income taxes (NIBIT) and business operating profit (BOP) as appropriate benchmarks for measuring audit materiality. We applied a 5% rule of thumb which resulted in a selected overall audit materiality of USD 240 million.
In establishing the overall approach to the Group audit, we determined the type of work that needed to be performed at the business units by us, as the Group engagement team, or by component auditors from PwC network firms operating under our instruction. Where the work was performed by component auditors, we determined the level of involvement we needed to have in the audit work at those business units to be able to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion on the consolidated financial statements of the Group as a whole.
Specifically, the continued low interest rate environment, which results in reduced investment returns, influences policyholders’ behaviors, thereby creating a risk of accelerated amortization of deferred policy acquisition costs and a strain on the sufficiency of reserves for traditional life insurance contracts.
Refer to Notes 4, 8 and 11 to the consolidated financial statements.
We assessed and tested the design and operating effectiveness of selected key controls over actuarial methodology, integrity of data used in the actuarial valuation, and the assumptions setting processes used by management related to the valuation of actuarially determined life insurance assets and liabilities.
In relation to the particular matters set out opposite, our substantive testing procedures included the following: – Testing the completeness and accuracy of underlying data to source documentation.
Based on the work performed we determined that the methodologies, assumptions and underlying data used in the valuation of actuarially determined life insurance assets and liabilities are reasonable and in line with industry accepted practice.
Refer to Notes 4 and 8 to the consolidated financial statements.
– Testing the Group’s discounted cash flow model that supports the value-in-use calculations in order to assess the appropriateness of the methodology applied in the Group’s annual impairment assessment.
Based on the work performed we consider Management’s impairment testing including the assumptions used to support the carrying value of goodwill and attorney-in-fact contracts as reasonable.
Other information in the annual report The Board of Directors is responsible for the other information in the annual report. The other information comprises all information included in the annual report, but does not include the consolidated financial statements, the stand-alone financial statements of Zurich Insurance Group Ltd, the audited sections of the risk review on pages 129 to 157, the Remuneration report of Zurich Insurance Group Ltd and our auditor’s reports thereon.
Alex Finn Mark Humphreys Audit expert Audit expert Auditor in charge
The Annual General Meeting on April 3, 2019, approved a dividend of CHF 19.00 less 35 percent Swiss withholding tax per share out of the available earnings.
Shareholders’ equity increased by CHF 47 million to CHF 13,608 million as of December 31, 2019, from CHF 13,561 million as of December 31, 2018, as a result of the net income after taxes for the year, partially offset by the dividend paid in 2019. During 2018, Zurich Insurance Group Ltd repurchased 1,740,000 treasury shares via a public share buy-back program. At the Annual General Meeting of April 3, 2019, the shareholders approved the cancellation of these shares. The corresponding reduction of the share capital of Zurich Insurance Group Ltd from 151,348,027 to 149,608,027 fully paid registered shares with a nominal value of CHF 0.10 each through cancellation of the repurchased treasury shares was completed in June 2019.
Income statements in CHF thousands, for the years ended December 31 Notes 2019 2018
Dividend income 2,753,243 – Interest income 134,380 91,469 Other financial income 14 80
Assets in CHF thousands, as of December 31 Notes 2019 2018
Current assets Cash and cash equivalents 2,423 2,557 Receivables from subsidiaries 921 77 Receivables from third parties 31,375 34,222 Accrued income and prepaid expenses from subsidiaries 91,429 91,429 Total current assets 126,148 128,285 Non-current assets Subordinated loans to subsidiaries 7 2,132,405 2,132,405 Investments in subsidiaries 8 11,368,069 11,368,069 Total non-current assets 13,500,474 13,500,474 Total assets 13,626,622 13,628,759
Liabilities and shareholders’ equity in CHF thousands, as of December 31 Notes 2019 2018
Notes to the financial statements 1. General information Zurich Insurance Group Ltd (the Company) is a corporation domiciled in Zurich, Switzerland, and its shares are listed on the SIX Swiss Exchange. It was incorporated on April 26, 2000, and is the holding company of the Zurich Insurance Group with the principal activity of holding subsidiary companies. The Company does not employ staff, as employees work in a joint capacity for Zurich Insurance Company Ltd (ZIC).
3. Summary of significant accounting policies a) Exchange rates Unless otherwise stated, assets and liabilities expressed in currencies other than Swiss francs are translated at year end exchange rates. Revenues and expenses are translated using the exchange rate at the date of the transaction. Net unrealized exchange losses are recorded in the income statements and net unrealized exchange gains are deferred until realized.
e) Treasury shares (directly held by the Company) All treasury shares held directly by the Company as of December 31, 2018, were cancelled upon approval by the Annual General Meeting of April 3, 2019, and completion of the share capital reduction process in June 2019. In 2018, treasury shares are carried at acquisition cost and presented as a deduction in shareholders’ equity.
4. Other operating expenses Other operating expenses include directors’ fees of CHF 4.7 million and CHF 4.3 million for the years ended December 31, 2019, and December 31, 2018, respectively. Overhead expenses decreased by CHF 3.2 million to CHF 3.6 million in 2019. In addition, fees paid to the Swiss Financial Market Supervisory Authority of CHF 2.5 million and CHF 3.4 million are included for the years ended December 31, 2019, and December 31, 2018.
5. Financial income Financial income for the year 2019 consists of dividend income of CHF 2,753 million mainly received from the Company’s subsidiary ZIC and interest income of CHF 134.3 million (2018: CHF 91.4 million) on the subordinated loan with ZIC. This interest income is recognized when Zurich Insurance Company Ltd declares its intention to pay a dividend to the Company.
6. Direct taxes Direct taxes include income and capital taxes in Switzerland.
7. Subordinated loans to subsidiaries Subordinated loans include a loan to Zurich Insurance Company Ltd of CHF 2,132 million as of December 31, 2019, and December 31, 2018, respectively. In April 2018, ZIC paid back CHF 2,700 million.
Zurich Insurance Group Ltd is not aware of any event of default that would require it to satisfy any of these guarantees or to take action under a support agreement.
During 2019, no shares were issued to Group employees out of the contingent capital. During 2018, 8,176 shares were issued to Group employees from contingent share capital. As of December 31, 2019 and December 31, 2018, the remaining contingent share capital available for issuance to Group employees amounted to CHF 494,723.20 or 4,947,232 fully paid registered shares with a nominal value of CHF 0.10 each. Subscription rights as well as advance subscription rights of the shareholders are excluded. The issuance of new shares or respective option rights to employees is subject to one or more regulations to be issued by the Board and taking into account performance, functions, levels of responsibility and criteria of profitability. New shares or option rights may be issued to employees at a price lower than that quoted on the stock exchange.
Thereof held in general legal reserve As of January 1 1,277,704 391,338 – –
Average purchase price, in CHF 390 307 Average selling price, in CHF 210 319 1 in CHF thousands
As of January 1 344,643 344,624 Transfer from capital contribution reserve – 19 As of December 31 344,643 344,643 14. Shareholders According to information available as of December 31, 2019, Zurich Insurance Group Ltd is not aware of any person or institution, other than BlackRock, Inc., New York, (>5 percent of the shares) and The Capital Group Companies, Inc., Los Angeles, (>5 percent of the shares) which, directly or indirectly, had an interest as a beneficial owner in shares, option rights and/or conversion rights relating to shares of Zurich Insurance Group Ltd exceeding the relevant thresholds prescribed by law.
16. Shareholdings of the Board of Directors and the Executive Committee The information on share and share option holdings of Directors and of the members of the Executive Committee (ExCo), who held office as of December 31, 2019, as required by article 663c paragraph 3 and article 959c paragraph 2 cif 11 of the Swiss Code of Obligations is included and audited in the remuneration report on pages 92 to 101 of this Annual Report.
17. Supplementary information Cash and cash equivalents of CHF 2.4 million include restricted cash of CHF 0.3 million as of December 31, 2019, compared to cash and cash equivalents of CHF 2.6 million and thereof restricted cash of CHF 0.3 million in the previous year.
Appropriation of available earnings As of January 1, 2020 12,445,649 Dividend payment out of available earnings 1 (2,992,161) Balance carried forward 1 9,453,488 1 This figure is based on the share capital issued on December 31, 2019, and may change depending on the number of shares issued on April 6, 2020. Treasury shares are not entitled to dividends and will not be taken into account.
The Board of Directors proposes to the Annual General Meeting to be held on April 1, 2020, that the Company pay a dividend of CHF 20.00 per share, less 35 percent Swiss withholding tax, out of the available earnings for 2019 and to carry forward the remaining available earnings for 2019 in the amount of CHF 9,453 million as shown in the above table.
If this proposal is approved, a dividend of CHF 20.00 per share, less 35 percent Swiss withholding tax, will be paid from April 7, 2020.
Opinion We have audited the financial statements of Zurich Insurance Group Ltd (the Company), which comprise the income statement for the year ended December 31, 2019, balance sheet as of December 31, 2019, and notes, including a summary of significant accounting policies.
Management assesses whether there are any impairments in the carrying value of the investments in subsidiaries. The determination whether an investment in subsidiary needs to be impaired includes assumptions about the profitability of the underlying business and growth, which involves management’s judgment.
We refer to note 3, para b) (“Summary of significant accounting policies”) and note 8 (“Investments in subsidiaries”) to the financial statements 2019.
Responsibilities of the Board of Directors for the financial statements The Board of Directors is responsible for the preparation of the financial statements in accordance with the provisions of Swiss law and the Company’s articles of association, and for such internal control as the Board of Directors determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
Report on other legal and regulatory requirements In accordance with article 728a paragraph 1 item 3 CO and Swiss Auditing Standard 890, we confirm that an internal control system exists which has been designed for the preparation of financial statements according to the instructions of the Board of Directors.
Business operating profit (BOP) is the Group’s internal performance measure, on which the Group manages all of its business units. It indicates the underlying performance, after non-controlling interests, by eliminating the impact of financial market volatility and other non-operational variables. BOP reflects adjustments for shareholders’ taxes, net capital gains/ (losses) and impairments on investments (except for certain non-insurance operations included in Non-Core Businesses, investments in hedge funds as at fair value through profit or loss, certain securities held for specific economic hedging purposes and policyholders’ share of investment results for the life businesses) and non- operational foreign exchange movements. Significant items arising from special circumstances, including restructuring charges, legal matters or large one-off regulatory projects outside the ordinary course of business, gains and losses on divestment of businesses, certain business combination integration costs and impairments of goodwill are also excluded from BOP. Business operating profit before interest, depreciation and amortization (BOPBIDA) excludes interest expense on debt, depreciation and impairments of property and equipment and amortization and impairments of intangible assets. BOPBIDA includes amortization of deferred policy acquisition costs, deferred origination costs and distribution agreements. Please refer to the ‘consolidated financial statements, Note 27. Segment information, Table 27.4’ for further information.
Like-for-like is the change in the underlying metric over a period of time and after removing the impact of foreign exchange movements and the impact of acquisitions and disposals.
Net savings are based on savings calculated on the total direct cash expenses of the Group including unallocated loss adjustment expenses (ULAE) after allowance for inflation and incremental investment.
Combined ratio is a performance measure that indicates the level of claims and net technical expenses during the period, relative to net earned premiums and policy fees. It is calculated as the sum of the loss ratio and the expense ratio. Please refer to the ‘supplementary information (unaudited)/P&C by segment & customer units’ for further information.
Embedded value (EV) principles is a methodology using a ‘bottom-up’ market consistent approach, which explicitly allows for market risk. In particular, asset and liability cash flows are valued using risk discount rates consistent with those applied to similar cash flows in the capital markets. Options and guarantees are valued using market consistent models calibrated to observable market prices. Please refer to the ‘embedded value report/embedded value methodology’ for further information.
New business annual premium equivalent (APE) is a sales index that reflects the volume of life new business sales during the period. APE is calculated as the value of new annual premiums plus 10 percent of new single premiums sold in the period and is stated before the effect of non-controlling interests. Present value of new business premiums (PVNBP) is calculated as the present value of new business premiums discounted at the risk-free rate, before the effect of non-controlling interests.
New business margin (NBM) is a measure that reflects the profitability of new business and is calculated as the new business value divided by APE after the effect of non-controlling interests.
For more information see page 25 of this report or website: www.zurich.com/en/investor-relations/calendar
Photography: cover, pages 2, 4, 20, 38, 90, 126, 164, 176, Jorma Müller; page 6, José Bernad; pages 10–11, Getty; pages 12–13, Ruben Sprich; pages 13, 19, 21, 22, 24, 27, 29, Daniel Bürgisser; pages 14–15, Belinda Mason; pages 16–17, Stephan Birrer; page 23, John H. Sauer; page 26, Michael Szoenyi; page 28, Zurich Colombia.
Gross management result is a performance measure of Farmers Management Services calculated as management fees and other related revenues minus management and other related expenses, including amortization and impairments of intangible assets. Please refer to the ‘supplementary information (unaudited)/Farmers’ for further information.
Managed gross earned premium margin is a performance measure calculated as the gross operating profit of Farmers Management Services divided by the gross earned premiums of the Farmers Exchanges, which are owned by their policyholders. Farmers Group, Inc., a wholly owned subsidiary of the Group, provides certain non-claims services and ancillary services to the Farmers Exchanges.
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