USD 29,037 m Gross written premiums, policy fees and insurance deposits
Market segments of the Farmers Exchanges 3 Individual and commercial customers
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Group overview Performance overview 2 Message from the Chairman 4 Business environment 6 How we create sustainable value 8
Financial information Consolidated financial statements 158 Holding company 260 Shareholder information 276 Contact information 279 Glossary 280
Net investment return on Group investments 3 3.8% 4.5% (0.7 pts)
Business operating profit (after tax) return on common shareholders’ equity (BOPAT ROE) 5 6.4% 11.2% (4.7 pts)
1 Parentheses around numbers represent an adverse variance. 2 Total Group business volumes comprises gross written premiums, policy fees, insurance deposits and management fees generated within General Insurance, Global Life and Farmers. 3 Calculated on average Group investments. 4 As of December 31, 2015 and December 31, 2014, respectively.
• Investing in distinctive positions We are acquiring a major U.S. crop insurer. Global Corporate and Corporate Life & Pensions increased the number of large corporations they jointly serve. Our bank distribution networks saw continued growth, capitalizing on our access to millions of customers in 15 countries.
• Living up to the Zurich Commitment Zurich achieved its highest score since joining the Dow Jones Sustainability Index (DJSI) of 83 and outperformed 99 percent of other companies in the insurance industry group. We reached over USD 1 billion in overall impact investments in 2015, an increase of 54 percent. Our flood resilience alliance extended its work with at-risk communities.
2015 Key results 1 Business operating profit (after-tax) return on shareholders’ equity. Excludes unrealized gains and losses. 2 The Zurich Economic Capital Model (Z-ECM) is an internal measure of capital adequacy. It also forms the basis of Zurich’s Swiss Solvency Test (SST) model, which is subject to approval by the Swiss Financial Market Supervisory Authority (FINMA). As of July 1, 2015, the Group’s SST ratio was 203 percent.
In 2015, our business operating profit1 (BOP) was USD 2.9 billion, 37 percent lower than in 2014. Net income attributable to shareholders (NIAS) was USD 1.8 billion, a decrease of 53 percent from the prior year. This is a disappointing result for Zurich, reflecting challenges in our General Insurance business and some charges as we position ourselves for the future. We have initiated rigorous actions to improve profitability.
The rest of the Group continues to perform well. Global Life’s BOP increased by 2 percent to USD 1.3 billion. Gross written premiums, policy fees and insurance deposits fell 9 percent in U.S. dollar terms, but rose 6 percent on a local currency basis. Our bank joint ventures continued to show steady growth, while Global Life has already achieved its 2016 goal of a run-rate improvement in BOP of more than USD 80 million from in-force management initiatives.
Our Zurich Economic Capital Model 3 ratio stood at 114 percent as of September 30, 2015, within our target range. We are on track to deliver cash remittances in excess of USD 10 billion in our three-year strategy period from 2014 to 2016, well ahead of our target. Our strong capital position and cash remittances have given the Board the confidence to propose a dividend of CHF 17 per share, subject to shareholder approval at the Annual General Meeting on March 30.
A new CEO and other senior executive appointments In recent months, we have made several senior appointments. In January we announced that, subject to regulatory approval, Mario Greco will join Zurich as our new Chief Executive Officer (CEO). We are convinced that Mario is best placed to lead Zurich into the future. He was most recently CEO of Generali. Prior to that, he was at Zurich, where he held the position of CEO Global Life and then CEO General Insurance. He will take over the position I have held on an interim basis since Martin Senn stepped down in December 2015. We would like to thank Martin for guiding Zurich with foresight and great commitment.
On the Group Executive Committee (GEC), Kristof Terryn also took on a new role as CEO General Insurance in October after Mike Kerner decided to leave the company. We thank Mike for his many contributions. Gary Shaughnessy, who has been CEO of Zurich UK Life since 2012, took on the role of CEO Global Life in January 2016. In addition, Cecilia Reyes, who served as Chief Investment Officer (CIO), was named Chief Risk Officer in July after Axel Lehmann decided to leave Zurich. We thank Axel for his dedicated and outstanding service to Zurich. Urban Angehrn, who was formerly head of Alternative Investments, joined the GEC as the new CIO in July.
Board appointments In December, our Board proposed two new members: Jeffrey L. Hayman, a U.S. citizen with extensive experience in the insurance industry and David Nish, a British citizen, who until 2015 was Group CEO of Standard Life plc. As already announced, Don Nicolaisen, Thomas K. Escher and Rafael del Pino will not stand for re-election at the Annual General Meeting. We are grateful to them for their service and commitment to Zurich.
Outlook The global economic outlook remains challenging. We have accelerated a program to increase efficiencies, and aim to exceed the previously communicated cost savings target for 2016 of USD 300 million. We are also on our way to achieving group-wide annual run-rate cost savings of more than USD 1 billion by the end of 2018.
2 The Farmers Exchanges are owned by their policyholders. Farmers Group, Inc., a wholly-owned subsidiary of the Group, provides certain non-claims administrative and management services to the Farmers Exchanges as attorney-in-fact and receives fees for its services.
3 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.
Corporate market Zurich is a leader in the corporate insurance marketplace, offering a full spectrum of general and life insurance products, services and solutions through Global Corporate and Corporate Life & Pensions. Corporate customers’ needs are evolving in response to a number of long-term trends.
These include globalization and the attendant interconnectivity of risks, growing regulatory complexity and advances in digital technologies. Global corporations are increasingly centralizing insurance buying and risk management to take advantage of economies of scale. Many are choosing to do so through global insurance brokers and employee benefit consultants, who help them select from listed, pre-approved insurance carriers.
Commercial mid-market For our commercial mid-market customers, the world is risky and becoming riskier. They must get to grips with emerging risks such as cyber-attacks, data theft, terrorism and the disruption of global supply chains. Natural catastrophes are becoming more frequent and costly, and the regulatory environment is more complex.
Services such as these are particularly important to Zurich’s target segment: ‘expertise-seekers,’ who look to those companies that can best help them manage and mitigate – not just insure – their risks. As in the corporate market, brokers and other intermediaries are a key part of the insurance buying process. Intermediaries are themselves making use of data and analytics to strengthen their offer.
In November 2015, the Financial Stability Board (FSB) updated its list of global systemically important insurers (G-SIIs) – those that in its judgment are ‘too big to fail.’ As in 2014, Zurich was not designated as systemically important. We believe that this decision recognizes our focus on traditional insurance business and our view that it poses no systemic threat.
It also provides us with an opportunity to use our core insurance skills – such as risk management, underwriting expertise and investment management – to respond to long-term societal and environmental trends, including climate change and extreme weather, aging populations and financial exclusion. CR applies to our corporate governance procedures, too: good corporate governance strengthens Zurich’s reputation for integrity and ethical conduct.
To help ensure that our people act in accordance with our responsible and ethical approach to business, the Zurich Commitment to stakeholders and Zurich Basics, our code of conduct, are a compulsory part of training for virtually every employee. They encapsulate our core values.
Our people To find out more about developments affecting our people in 2015, see the Business Review section in this Annual Report and the online-only supplement ‘Our people 2015’ on: www.zurich.com/cr/our-people
Zurich takes on risk, provides claims and other payments, and returns on savings and investment plans, and offers risk management services
W h at w e do How w e d o it
What we do We are prioritizing investment in distinctive positions – our high-potential market positions – in the corporate market, commercial mid-market and select retail markets. We are managing other businesses for value. This means optimizing selected Global Life in-force books and capturing value in our smaller General Insurance markets, while turning around or exiting under-performing businesses.
How we do it We are growing our operating earnings by reducing complication and overhead costs throughout our business, increasing operational efficiency and improving processes, and enhancing investment returns.
We retained more business from maturing life policies in Germany, and reduced the number of policies that lapse in the U.S. We exited some non-core businesses, including in the UK, Singapore, Australia and the Middle East.
We initiated programs to achieve savings and increase efficiency, and continued to upgrade our processes and technology. We added more than USD 3 billion of less-liquid assets to the Group’s balance sheet in 2015, enhancing our investment return.
We are also building the supporting capabilities that underpin our ambitions. This means developing our people and their skills, investing in efficient and cost-effective operations and technology, and building our brand and reputation. And it means living up to our Zurich Commitment to stakeholders, which includes acting responsibly throughout our business.
We are prioritizing investment in our highpotential market positions in the corporate market, the commercial mid-market and select retail markets.
Simplifying challenges at big corporations Large companies have complex insurance needs, typically across many countries, and increasingly want to centralize how they buy and manage insurance. General Insurance’s Global Corporate (GC), and Global Life’s Corporate Life & Pensions (CLP) are serving these customers through a unified approach by offering them both general insurance, and life insurance products and services, while helping them to standardize benefits and coverage across countries. This not only makes it easier for these customers to manage all their insurance needs, it is more cost-efficient as well. This approach also gives customers the confidence that their insurance programs are fully compliant in today’s complex regulatory environment. In 2015, we increased the number of customers taking advantage of this approach by 220, the highest level since we introduced this program in 2011, and 32 percent more than the agreements added in 2014.
We aim to focus on our strengths, improve or exit other businesses and grow our operating earnings, supported by our people, processes and technology.
We also gained a major customer in Germany. In October, CLP reached an agreement with a major German institution to manage pensions of 2,300 employees.
Targeting Select Brokers in North America In North America, Zurich is transforming the way it works with its Select Brokers – brokers that Zurich is targeting to grow our business. We identified the needs and priorities of these brokers through research and developed a new model that makes it easier for our sales team to share information with the brokers. We piloted the approach with four brokers in over 20 locations. It has made our sales process more effective, and is helping to make our relationship with Select Brokers more efficient. We are now aiming to expand the model to all Select Broker relationships in North America.
Focusing on target customers, retention in the U.S. Farmers Group, Inc., which is owned by the Group,1 provides the non-claims administrative and management services necessary to help the Farmers Exchanges, which are owned by their policyholders, identify customers who want professional, high-quality service and products that fit their specific needs.
Our General Insurance business has clear strengths to build on; a well-diversified portfolio, excellent franchises, including Global Corporate, strong technical foundations and highly-skilled people, and global distribution reach. But we need to reinforce underwriting discipline, reduce exposure to large losses and improve efficiency.
Worldwide over one million people die each year in traffic accidents: In most cases, human error is at least partly to blame. As one of the world’s largest motor insurers, we are very interested in technologies that can make driving safer. In 2015, as part of our aim to learn more
In Switzerland we have developed a free, easy-to-use online tool to help people assess risks to their homes and property posed by natural hazards. Since its launch in June 2015, more than 25,000 people have used this tool to spot
about self-driving vehicles (SDV), we were pleased to be appointed as the insurance associate for ‘CityMobil2,’ the largest EU-funded research project testing automated public transport systems. We contribute management support and consulting on insurance solutions to this project.
Exiting underperforming and non-core businesses In 2015, we exited some businesses. For example, we began transferring around 28,000 policies in UK Life’s legacy annuity book to Rothesay Life. Zurich also sold its stake in 7IM Holdings Limited to Caledonia Investments plc. In Singapore, Zurich’s Life business stopped accepting new policy applications starting December 1, 2015. In New South Wales, Australia, we are withdrawing from the compulsory third-party (CTP) ‘green slip’ business that protects drivers against injury claims. In the Middle East, we are closing to new retail and small business customers in our general insurance lines, and we will exit this business by the end of 2016, or as soon as possible after that. Zurich remains firmly committed to its life and corporate business in the region.
Reducing lapse rates in North America Global Life is reducing ‘lapse’ rates in the U.S. A life insurance policy can lapse if a customer fails to pay premiums. This has serious consequences for customers who might forfeit their policy, and for insurers, which face a loss of future profits. To reduce lapse risk, Farmers New World Life in the U.S. introduced various programs to identify policies at risk, and engaged with customers to reduce lapse rates. In 2015, we experienced 12,300 fewer lapses (including cancellations and surrenders), a reduction of 11 percent versus 2014. We also incurred USD 1.3 billion less in lapses based on the insured amount, a reduction of 7 percent.
To date, several of Zurich’s businesses in Europe, North America, Asia Pacific, and Latin America have adopted a more efficient management approach. We are committed to expanding the program to improve efficiency in other business units, and supporting them as they transform the way they work.
Achieving greater efficiency and lower costs As part of our third strategic cornerstone, Group Operations and Technology (GOT), together with all Zurich’s segments and functions, is working on several initiatives to make us more efficient. Our overarching Zurich efficiency transformation plan comprises three main work streams to provide expense savings of at least USD 300 million by the end of 2016, achieve at least USD 1 billion in efficiency improvements by the end of 2018, and transform our operational processes and technology for the future.
Seeking optimum returns in a challenging environment Investment Management’s mandate is to achieve superior, risk-adjusted investment returns relative to liabilities with the risk capital allocated to market risk. Investment Management’s strategy to enhance investment returns and grow operating earnings was supported by investing in less liquid assets throughout 2015.
Overall performance was negatively influenced by the strengthening of the U.S. dollar and a continuing decline in yields to record low levels. We managed to partly offset the impact of some of those factors by slightly increasing equity and corporate bond holdings, and by successfully implementing our less-liquid asset strategy. In 2015, more than USD 3 billion of additional less-liquid assets were added to the Group’s balance sheet, mainly in the areas of corporate lending, real estate and infrastructure debt. In line with our disciplined investment approach, we ensure that these investments match our insurance obligations and are within our risk appetite, while seeking to obtain optimum returns relative to risks.
We are investing in the capabilities needed to carry out our strategy. This includes developing our people, investing in efficient and cost-effective operations and technology, and building our brand and reputation.
Focus on our people Our people drive our success. With this in mind, we need to be able to recruit, develop and retain a diverse and talented workforce that can thrive in a culture of mutual trust, transparency and inclusion. At Zurich, we believe this is key to meeting our strategic objectives. We are making progress in creating a diverse environment that brings out the best in our people and attracts the brightest talent. In 2015, we launched a range of global programs designed to enhance our culture, create more opportunities for career growth, advance people manager skills and provide flexible ways of working.
Introducing a Swiss approach in the U.S. Ensuring the next generation has the right skills and expertise offers clear benefits for Zurich, and for our people’s long-term success. While it is common for insurers in Europe to offer apprenticeships, this approach is not nearly as popular in the U.S. The success of our traditional Swiss apprenticeship program convinced us that it would make sense to introduce this system in the U.S., too. We began what we believe is the first ‘Swiss-style’ insurance apprenticeship program in early 2016 with 23 participants enrolled in classes at William Rainey Harper College, not far from Zurich’s offices in Schaumburg, Illinois. For two years, they will combine coursework with on-the-job training at Zurich. The program aims to train at least 100 apprentices by 2020.
External asset managers who are signatories to PRI (%)1 70.4% 67.9% 2.5 pts
Group assets managed by PRI signatories (%) 2 98.1% 98.8% (0.7 pts)
Total amount of impact investments (USD millions) 3 1,031 667 54%
1 The United-Nations supported Principles for Responsible Investment (PRI). 2 Including assets managed by Zurich. 3 2015 impact investments consisted of: green bonds (USD 870 million); investments committed to private equity funds
(USD 105 million, thereof 17 percent drawn down); and other investments (USD 55 million).
We reprised our successful ‘snowman’ campaign during the 2015 winter holidays. This campaign helps to communicate the emotional side of the Zurich brand and aims to instill pride among our employees in being part of a company that helps people protect the things they truly love.
We invest in our brand because it increases our customers’ willingness to consider, purchase and pay a premium for our products and services, in both retail and business markets.
Corporate responsibility is an important part of our Zurich Commitment to care for our customers, employees, shareholders and the communities in which we live and work. We act responsibly by taking environmental, social and governance issues into account throughout our business.
Sustainable real estate investments We believe there is a clear business case for including ESG factors in our real estate investment decisions. Real estate consumes a significant amount of energy and resources, and is a major source of carbon emissions. In 2015, we extended our ESG integration approach to real estate assets, which represent over six percent of our investment portfolio. We will begin to implement this program in 2016. In addition, our goal is to reduce greenhouse gas emissions in Swiss real estate, which comprises over half of our portfolio, by 20 percent by 2020. By 2050, we aim to cut greenhouse gas emissions by 80 percent (both targets versus 2010 levels).
As part of this program, we set up the Zurich flood resilience alliance, whose members include the International Federation of Red Cross and Red Crescent Societies (IFRC). We are working with the IFRC to establish flood programs in 21 communities in the state of Tabasco, Mexico. We are also working with the Indonesian Red Cross (PMI) to help 21 communities in West and Central Java develop solutions to recurring flooding. Along with another alliance member, Practical Action, similar programs are underway in 74 communities in Nepal, 15 communities in Peru, and 15 communities in Bangladesh, where access to efficient early warning systems, alternative livelihoods and strengthened collaboration with local decision makers are key to enhancing resilience.
We have further improved our remuneration structure, about which you can find further information in the remuneration report, which follows this section of our Annual Report.
As already announced last year, after 10 years on the Board, Don Nicolaisen will not stand for re-election at the Annual General Meeting 2016. Also Rafael del Pino and Thomas K. Escher will not stand for re-election. Mr. Escher will have served the maximum tenure of office of 12 years. The Board proposes to the shareholders to re-elect all other current members of the Board at the Annual General Meeting on March 30, 2016 and to elect Jeffrey L. Hayman and David Nish as new members.
On the Group Executive Committee (GEC), as of July 1, 2015, we have appointed Urban Angehrn as the new Chief Investment Officer while Cecilia Reyes, who was previously in that role, has been appointed Chief Risk Officer. Kristof Terryn was appointed CEO of General Insurance as of 1 October 2015, while retaining his position as CEO of Global Life ad interim. During 2015, Geoffrey Riddell, Axel Lehmann and Michael Kerner stepped down from the GEC. In December 2015, we appointed Gary Shaughnessy as CEO Global Life and member of the GEC as of 1 January 2016.
Zurich Stakeholders Zurich benefits from a wide group of stakeholders, including our shareholders and it is important to us to keep up the dialogue with you at institutional investors’ meetings, at our Investor Day and foremost at our Annual General Meeting. I’d like to encourage you to attend this year’s AGM on March 30, 2016. And I would like to thank you for your continued support and engagement.
“Zurich’s goal is to actively engage in the emerging big data debate by stressing the importance of a responsible regulatory approach that takes into account the societal costs and benefits.”
The principles of corporate governance and the standards described above are incorporated and are reflected in a number of corporate documents, in particular the Articles of Incorporation, the Organizational Rules and the Charters of the Committees of the Board of Directors of Zurich Insurance Group Ltd. The Governance and Nominations Committee of the Board of Directors of Zurich Insurance Group Ltd 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, 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. Until December 1, 2015, the Board was composed entirely of non-executive members independent from the management. The roles of Chairman of the Board and CEO were split, until the Chairman of the Board, Tom de Swaan, took over the role of Chief Executive Officer ad interim on December 1, 2015. In January 2016, Mario Greco was appointed Chief Executive Officer, effective March 7, 2016, when the roles of Chairman and CEO will be split again and the Board will as before consist entirely of non-executive members. While the Chairman of the Board is serving as Chief Executive Officer ad interim, Fred Kindle, Vice-Chairman of the Board, has taken on certain additional responsibilities to ensure continued good governance.
Key governance developments in 2015 – at a glance as of December 31, 2015
Elections: • Joan Amble, elected as a new member (as of April 1, 2015)
New appointments: • Urban Angehrn, Chief Investment Officer (as of July 1, 2015)
• Kristof Terryn, CEO General Insurance and CEO Global Life (ad interim), former CEO Global Life (as of October 1, 2015)
• Axel P. Lehmann, Chief Risk Officer (as of October 1, 2015)
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. Zurich’s business is focused on providing best-in-class general and life insurance products and services to individuals, small businesses and mid-sized and large companies.
At a secondary level, the General Insurance segment is managed based on market-facing businesses, including: Global Corporate, North America Commercial, Europe, Middle East & Africa (EMEA), Latin America and Asia-Pacific.
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, 2015, directly or indirectly, alone or with others, exercised or was a party to any arrangements to exercise control over Zurich Insurance Group Ltd.
Registered shareholders by type as of December 31, 2015 Registered shareholders in %
Some interests in shares are held by investors in the form of American Depositary Receipts (ADRs)1. As of December 31, 2015, investors held 28,483,340 ADRs (representing 2,848,334 Zurich Insurance Group Ltd shares).
Convertible bonds and options Zurich Insurance Group Ltd had no public convertibles or options outstanding as of December 31, 2015. For information on employee share option plans, see the audited consolidated financial statements, note 22 on pages 224 to 225.
Board of Directors and its Committees as of December 31, 2015 * Chairman of Board or Chairperson of Board Committee, respectively
All Directors of Zurich Insurance Group Ltd are also members of the Board of Directors of Zurich Insurance Company Ltd. Mr. de Swaan also serves as Chairman of that board. Ms. Bies and Mr. Nicolaisen are members of the Board of Directors of Zurich Holding Company of America, Inc. With the exception of Ms. Bies and Mr. Nicolaisen, the Directors have no further board memberships within the Group.
Fritz Gerber is the Honorary Chairman of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd. He was Chairman of Zurich Insurance Company between 1977 and 1995 and its Chief Executive Officer between 1977 and 1991. In recognition of his leadership and services to that company, he was appointed Honorary Chairman. Such designation does not confer Board membership or any Director’s duties or rights, nor does it entitle him to any Directors’ fees.
External appointments Mr. de Swaan has been a member of the supervisory board of Royal DSM, a Netherlands based global life sciences and material sciences group, since 2006. He is also a member of the supervisory board of Van Lanschot NV, the holding company of F. van Lanschot Bankiers, an independent Dutch bank, since 2008 and served as its chairman until December 2015.* 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 European Financial Services Round Table (EFR) and of the advisory board of China Banking Regulatory Commission in Beijing.
Fred Kindle Vice-Chairman Nationality: Swiss and Principality of Liechtenstein Born: 1959
Joan Amble Member of the Board of Directors Nationality: U.S. Born: 1953
Skills and experience Joan Amble has substantial financial industry experience. She started her professional career as an accountant with Ernst & Young in 1977. From 1984 to 1989 she served at the Financial Accounting Standards Board (FASB), specializing in pensions, derivatives and other financial instruments. She then spent 14 years with General Electric Company (GE) in various leadership roles, including CFO GE Real Estate, COO and CFO GE Capital Markets, and as Vice President and corporate controller for GE Capital Services. From 2003 to May 2011, Ms. Amble served as executive vice president and corporate comptroller, and until the end of 2011 as executive vice president, Finance, of the American Express Company. In December 2011, Ms. Amble completed a four-year term as a member of the Financial Accounting Standards Advisory Council (FASAC). She has been a member of the Boards of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd since April 2015.
External appointments She is a member of the boards of Sirius XM Satellite Radio and Brown-Forman, where she chairs the audit committees. In addition, she is a member of the board and the audit committee at Booz Allen Hamilton. In January 2015, Ms. Amble was appointed to the Public Company Accounting Oversight Board’s Standing Advisory Group, which advises on the development of auditing and professional practice standards. She is also involved in several organizations focused on the development of women in business, including chair emeritus and co-founder of W.O.M.E.N in America Inc.
Skills and experience Dame Alison Carnwath has substantial financial industry experience. She began her career with Peat Marwick Mitchell, now KPMG, where she practiced as a chartered accountant from 1975 to 1980. 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 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 continued working for DLJ until 2000. Dame Alison 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 Year Honours List in the UK.
Educational background Mr. del Pino graduated in civil engineering from the Universidad Politécnica Madrid and obtained an MBA from MIT Sloan School of Management.
Skills and experience Thomas Konrad Escher has extensive experience in the fields of information technology (IT) 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 IT 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 held the function of vice-chairman in the business group Global Wealth Management & Swiss Bank of UBS AG from 2005 until early 2013. He has been a member of the boards of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd since April 2004.
Educational background Mr. Escher graduated both in electrical engineering and business management from the Swiss Federal Institute of Technology (ETH).
Christoph Franz Member of the Board of Directors Nationality: German Born: 1960
Skills and experience Kishore Mahbubani began his career as a diplomat with the Singapore Foreign Service in 1971 in which he served until 2004, with postings in Cambodia, Malaysia, Washington D.C. and New York. He served two postings as Singapore’s ambassador to the UN and as President of the UN Security Council in January 2001 and May 2002. Mr. Mahbubani was permanent secretary of the Foreign Ministry from 1993 to 1998. He has spoken and published globally on geopolitical and economic issues. His latest book The Great Convergence: Asia, the West and the Logic of One World, was selected by the Financial Times as one of the best books of 2013. He has been a member of the Boards of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd since April 2015.
Don Nicolaisen Member of the Board of Directors Nationality: U.S. Born: 1944
Skills and experience Don Nicolaisen has substantial expertise in accounting, auditing and financial reporting. He joined Price Waterhouse in 1967 (which subsequently became PricewaterhouseCoopers or PwC). Mr. Nicolaisen was admitted to that firm’s partnership in 1978 where he served in various capacities, including as an auditor and as chairman of their Financial Services practice. Mr. Nicolaisen also led PwC’s National Office for Accounting and Securities and Exchange Commission Services from 1988 to 1994 and served on both the U.S. and global boards of PwC from 1994 to 2001. From September 2003 to November 2005, Mr. Nicolaisen was Chief Accountant of the U.S. Securities and Exchange Commission where he served as the principal adviser to the Commission on accounting and auditing matters. He has been a member of the boards of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd since April 2006.
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.
Size of Board and tenure The Articles of Incorporation require that the Board shall consist of not less than seven and not more than thirteen members. According to the Group’s internal guidelines, in general, the maximum tenure of Board members may not exceed twelve years and no individual of 72 years of age or older shall be nominated or stay in office as a Director, although exceptions may be made under special circumstances.
As already announced last year, after 10 years on the Board, Mr. Don Nicolaisen will not stand for re-election at the Annual General Meeting 2016. Also Mr. Rafael del Pino and Mr. Thomas K. Escher will not stand for re-election. Mr. Escher will have served the maximum tenure of office of 12 years. The Board proposes to the shareholders to re-elect all other current members of the Board at the AGM, which will take place on March 30, 2016, and that they elect Jeffrey L. Hayman and David Nish as new members.
• As new members: Mr. Jeffrey L. Hayman and Mr. David Nish • As Chairman: Mr. Tom de Swaan • As members of the Remuneration Committee: Mr. Tom de Swaan, Mr. Fred Kindle, Mr. Christoph Franz and
Internal organizational structure and responsibilities The Board is chaired by the Chairman, or in his absence the Vice-Chairman. The Vice-Chairman is appointed by the Board. The Board also appoints its Secretary. The Board has a program of topics that is presented at its meetings throughout the year. It is regularly informed of developments relevant to the Group and is provided with timely information in a form and of a quality appropriate to the discharge of its duties in accordance with the standards of care set out in Article 717 of the Swiss Code of Obligations.
The Board is required to meet at least six times each year. During 2015 it held 16 meetings (of which 15 were partly attended by tele-/videoconference and six were held over two days). One meeting was fully dedicated to the discussion of strategy. Five meetings lasted four or more hours during the course of a day, four meetings took about three hours on average and seven meetings lasted less than three hours. In addition, the Board approved two circular resolutions.
Committee 1 Until April 1, 2015, the Board had 9 and the Audit Committee, the Remuneration Committee and the Risk Committee each 4 members.
In 2015, the Board specifically focused on the following topics: • Strategy implementation and execution including further development of Zurich’s human resources strategy; • Detailed reviews of various regional business operations; • Customer trends, structural industry changes and disruptive technologies; • Merger & acquisition transactions; • Board self-assessment and resulting recommendations.
Key tasks and responsibilities: In general, the Governance and Nominations Committee: • oversees the Group’s governance and measures it against best practice with a view to ensuring that the rights of shareholders are fully protected; • develops and proposes guidelines to the Board for corporate governance and reviews them from time to time; • ensures compliance with corporate governance disclosure requirements as well as legal and regulatory requirements; • is entrusted with succession planning for the Board, the CEO and members of the GEC. In this regard, it proposes the principles for the nomination and ongoing qualification of members of the Board and makes proposals to the Board on the composition of the Board, the appointment of the Chairman, the Vice-Chairman, the CEO and members of the GEC. Final decisions for nominations and appointments are made by the Board, subject to shareholder approval, where required. When identifying and proposing candidates as new Board members, the preservation and improvement of the Board’s diversity is a key factor. This includes diversity in many respects, such as gender, culture, technical and interpersonal skills, education and viewpoints, experience, geographical origins and a variety of complementary backgrounds, which should enable the Board to meet the Group’s current and future challenges. Notwithstanding the specific profile, every individual candidate should possess integrity and be in good standing, and be capable and available to fulfill his or her duty of care by serving, in close collaboration with the other Board members, in the best interest of the Group’s stakeholders; • reviews the system for management development and supervises progress made in respect of succession planning.
Activities 2015: During 2015, in particular the following topics were discussed: • Board and management succession planning, • developments with regard to corporate governance-related matters, including the implementation of legislative and regulatory changes on Swiss and international levels; • review of corporate governance rules, review of independence of Board members.
The Remuneration Committee has retained its own independent advisors, Meridian Compensation Partners, LLC and New Bridge Street, to assist in its review of the remuneration structures and practices.
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 management. Currently, Don Nicolaisen (Chairperson), Joan Amble, Susan Bies, Fred Kindle and Monica Mächler, all of whom meet the relevant requirements for independence and qualification, serve on this committee.
For more information on the supervision and control of the external audit process, see pages 62 and 64.
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, Kishore Mahbubani and Don Nicolaisen serve on this committee.
Moreover, from a segment perspective, the Risk Committee discussed: • Farmers risk and controls, including a detailed review of selected risks of the segment risk profile; • General Insurance risks and controls, accumulation management, underwriting reviews and reinsurance; • Global Life risks and controls, including an assessment of the lower interest rate environment on the business performance.
For further information on risk governance, see the risk review on pages 122 – 155.
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. In particular, 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 the Group and the annual financial statements of Zurich Insurance Group Ltd. For more details with regard to the responsibilities of the Board see page 42 to 43.
The Group has adopted and implemented a coordinated, formalized and consistent approach to risk management and control. Information concerning the Group’s risk management and internal control processes is included in the risk review starting on page 122. The internal audit function, the external auditors and the compliance function also assist the Board in exercising its controlling and supervisory duties. Information on these functions’ major areas of activity is set out on pages 62 to 64.
George Quinn Chief Financial Officer and Regional Chairman of Europe, Middle East and Africa
Kristof Terryn CEO General Insurance and CEO Global Life (ad interim)
Our Management strives to meet our ambition to become the best global insurer as measured by our shareholders, customers and employees.
For key areas, the following cross-functional committees have been established to facilitate the coordination and alignment of recommendations to the CEO for approval on specific subjects.
Members: Chief Financial Officer (Chairman), CFO GI, CFO GL, Head of Risk and Control, Representative of Investment Management, Representative of Group Legal, Group Controller, Head of Group Treasury & Capital Management, Head of M & A.
Key tasks and responsibilities: The FC acts as a cross-segment and cross-functional advisory body for matters that could materially affect the financial position or the profitability of the Group as a whole. The committee issues recommendations to the Group Executive Committee. Core topics are: • capital management on capital allocations and lending and borrowing decisions; • balance sheet planning on liquidity, solvency, changes to the foreign exchange policy, investment and asset/liability management strategies and associated capital allocation, including changes to investment strategy; • management of financial risk; • business development matters on corporate transactions with third parties, internal restructuring, investments, including real estate, IT and e-business, and entry into new types of business and markets; • material group reinsurance strategy and reinsurance programs; and • other topics and matters where the CFO reports directly into the Audit Committee or Risk Committee of the
Key tasks and responsibilities: The RCC acts as cross-segment and cross-functional body for matters that could materially affect the overall risk of the Group as a whole. The core mandate of the committee refers to matters that result in a recommendation to the Group Executive Committee, and therefore discusses: • risk tolerance and adherence to risk limits; • the Zurich Risk Policy and group policies and any significant revisions thereof; • implementation and alignment of Group Risk and Control frameworks; • material changes to the Group’s risk-based capital methodology and the overall risk tolerance; • the governance of the economic capital calculations; and • other topics and matters where the Chief Risk Officer reports directly into the Risk Committee of the Board of Directors.
The Group Reinsurance Committee, chaired by the Global Head of Group Reinsurance, leads the Group’s reinsurance business process and is responsible for defining and executing its reinsurance strategy in alignment with its risk framework. It also governs the segments’ reinsurance activities and ensures that they have access to re-insurance capacity on economic terms.
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 the underwriting and related risk control policy for all General Insurance business, develops and agrees the Group’s underwriting strategy, observes emerging issues and trends, monitors accumulation control and approves mitigation plans. The committee is also responsible for approving new products and oversees and monitors technical underwriting.
Panels To enhance its understanding and assessment of the challenges and risks Zurich may face, the Group continues to seek external expertise and perspective. As of December 31, 2015, the Group had access to three panels of leading academics and experts from business and industry which provide feedback and insight. They are not corporate bodies of the Group and have no decision-making powers. These panels provide expertise and advice to senior management or certain functions of the Group. In particular, the International Advisory Council is mandated to provide an external perspective and expertise to the CEO and to members of the GEC on the Group’s growth and public policy strategies. The Investment Management Advisory Council offers feedback on Zurich’s investment results and strategy and on achieving superior risk-adjusted returns relative to liabilities for the Group’s invested assets. The Natural Catastrophe Advisory Council provides insight into the patterns of occurrence, predictability and destructiveness of catastrophes and feedback about Zurich’s approach to such catastrophes in order to help improve the effectiveness of its underwriting and reinsurance purchasing.
Tom de Swaan Chairman and Chief Executive Officer a.i. Nationality: Dutch Born: 1946
Skills and experience Tom 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 adviser 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. From 2006 until May 2015 he was a non-executive member of the board of GlaxoSmithKline Plc. 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 vice-chairman, acting as chairman from August 2013 on. He was elected chairman of the Board in September 2013. As of December 1, 2015, Tom de Swaan also serves as Chief Executive Officer ad interim (a.i.).
Skills and experience Urban Angehrn joined the Group Executive Committee as Chief Investment Officer in July 2015. Before taking his current position he served as Head of Alternative Investments and prior to that, from 2010 to 2012, as Head of Strategy Implementation in Investment Management. He joined Zurich in 2007 as Regional Investment Manager for Europe. Before joining Zurich he held various positions in capital markets-related roles in the insurance and investment banking industries, including as Head of Allocation & Strategy in asset management at the Winterthur Group. He also served as an adviser to Swiss institutional clients in the use of derivatives, and held positions in derivatives marketing and fixed income sales at Credit Suisse and J.P. Morgan.
* While serving as Chief Executive Officer a.i., Mr. de Swaan will hold his mandates with these listed companies in abeyance.
Jeff Dailey CEO of Farmers Group, Inc. Nationality: U.S. Born: 1957
External appointments Mr. Dickie is a fellow and currently Senior Vice President of the Chartered Institute of Bankers in Scotland and a fellow of the Royal Society for the encouragement of Arts, Manufactures and Commerce.
George Quinn Chief Financial Officer and Regional Chairman of Europe, Middle East and Africa Nationality: British Born: 1966
External appointments Mr. Quinn is a member of the Board of Trustees of the Zurich International School and a member of the Finance Chapter of the Swiss-American Chamber of Commerce.
Skills and experience Isabelle Welton started her career at Citibank in New York, and in Tokyo as product manager for custody and securities lending. She then moved to Simko Communication & Marketing in Geneva in 1992 where she was responsible for several financial services clients as advertising and communications consultant. In 1994, she moved to Interbrand, Zintzmeyer & Lux in Zurich, where she was responsible for the agency’s financial services clients. In 1996, she joined Zurich, leading external communications. In this position, she was responsible for branding, corporate identity, advertising, sponsoring and community marketing globally. She joined EFG Private Bank in 2001 as senior vice president and Head of Corporate Communications. In 2003 Ms. Welton joined IBM where she held several management positions in the marketing and communications function. From 2010 to 2012 she was Country General Manager for IBM Switzerland. In January 2013 she joined Zurich as Chief Marketing Officer and was appointed Chief of Staff in September 2013. In this position, she was responsible for overseeing the operational delivery of Group Communications, Group Human Resources, Group Marketing and Group Strategy. In July 2014 she was appointed Chief Human Resources Officer and became a member of the Group Executive Committee. She was appointed Regional Chairman of Latin America effective October 2015.
Shareholders’ participation rights Voting rights restrictions and representation Each share entered into the share register entitles the holder to one vote. There are no voting rights restrictions.
In accordance with the Ordinance AEC and reflected in article 13 of our Articles of Incorporation, authority of representation may also be given to the independent voting rights representative. The AGM elects the independent voting rights representative. The term of office ends with the conclusion of the next AGM. The independent voting rights representative may be re-elected. The shareholders may give voting instructions to the independent voting rights representative either in writing or via the online platform Sherpany.
Zurich Insurance Group Ltd may under certain circumstances authorize the beneficial owners of 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 shareholders’ meetings and exercise votes as proxy of the relevant nominee. For further details, see page 30 of this report.
Information Policy As of December 31, 2015, Zurich Insurance Group Ltd had 130,151 shareholders registered in its share register, ranging from private individuals to large institutional investors (see p. 276). 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 (www.zurich.com/shareholder-information) 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.
Zurich Insurance Group Ltd maintains a regular dialogue with investors through its Investor Relations department and responds to questions and issues raised by institutional and private individual shareholders. In addition, Zurich Insurance Group Ltd organizes investor days for institutional investors and analysts to provide comprehensive information on its businesses and strategic direction. Such presentations can be followed via webcast or conference call. In 2015, an Investor Day was held in Zurich on May 21. A wide range of information on the Group and its businesses, including results reporting documents and the documentation from the Investor Day are available on the Investor Relations section of Zurich’s website www.zurich.com (www.zurich.com/en/investor-relations).
Zurich Insurance Group Ltd will hold its Annual General Meeting on March 30, 2016. The meeting will be conducted in the Hallenstadion in Zurich-Oerlikon. An invitation setting out the agenda for this meeting and an explanation of the proposed resolutions is issued to shareholders at least 20 days before the meeting.
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 33 1⁄3 percent ownership 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 a change of control have the right to the vesting of share obligations. No other benefits are provided to members of the Group’s senior management in case of a change of control.
No benefits are provided for the members of the Board in case of a change of control.
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 1, 2015, 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 March 30, 2016 as external auditors for the business year 2016. 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.
Mark Humphreys of PwC is the lead auditor and auditor in charge for regulatory and statutory audit work since the business year 2014. Mr. Stephen O’Hearn, the Global Relationship Partner, co-signs the auditors’ report for 2015.
Audit fees Total audit fees (including expenses and value added taxes) charged by PwC in the year 2015 amounted to USD 47.2 million (USD 50 million in 2014).
Supervision and control over the external audit process The Audit Committee regularly meets with the external auditors, at least four times a year. During 2015, the Audit Committee met with the external auditors eight times. The external auditors regularly have private sessions with the Audit Committee without management present. Based on written reports, the Audit Committee and the external auditors discuss 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 proposes the external auditors to the Board for appointment by the shareholders and is responsible for approving the audit fees. A proposal for fees for audit services is submitted to management by the external auditors and validated, 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 Audit Committee has approved a written policy on the use of external auditors for non-audit services, which sets out the rules for providing such services and related matters (including a list of prohibited services). Allowable non-audit services may include tax advice, comfort and consent letters, certifications and attestations, and due diligence and audit support in proposed transactions, to the extent that such work complies with applicable legal and regulatory requirements and does not compromise the independence or objectivity of the external auditors. In order to avoid conflicts of interest, all allowable non-audit services need pre-approval from the Audit Committee (Chairman), the Chief Financial Officer, the Group Controller or the local CFO, depending on the level of the expected fee. This policy further requires, among other things, an engagement letter specifying the services to be provided.
The Audit Committee assesses the independence of Group Audit and reviews its activities, plans and organization, the quality of its work and its cooperation with the external auditors. As required by professional and regulatory quality assurance regulations, the Internal Audit function has to be quality-reviewed periodically, at least every five years, by an independent qualified body. This review was conducted most recently in 2011. The results confirmed that Group Audit’s practices conform with all Institute of Internal Audit standards and FINMA requirements and Group Audit was assessed as a very mature internal audit function.
The Remuneration Committee continues to ensure that the remuneration approach is aligned with our strategic objectives, allows us to attract, motivate and retain high caliber employees, rewards appropriately for the business results achieved, and as part of our risk framework, does not promote excessive risk-taking. The design of our remuneration architecture complies with regulatory requirements, embraces market practices and trends, and provides attractive and balanced rewards to our employees.
2015 Performance Despite the significant dedication and commitment of our employees and the fact that many of our businesses performed well in 2015, the overall financial results for the year were disappointing and we are taking the necessary steps to progress the execution of our strategy and achieve our targets. For 2015, we reported a business operating profit of USD 2.9 billion, a decrease of 37 percent compared to 2014. Net income attributable to shareholders, also impacted by large restructuring charges during the year, decreased by 53 percent to USD 1.8 billion compared with the previous year.
Stakeholder engagement We greatly value and appreciate our stakeholders’ views on matters related to remuneration and we therefore consult with large investors and proxy advisers on these issues throughout the year.
Details on the remuneration votes, as well as the actual total amount of remuneration paid to the Board from the 2015 AGM to the 2016 AGM, are included in the 2016 Board of Directors Report of Zurich Insurance Group Ltd (Board of Directors Report), which is distributed with the invitation to the AGM 2016. We intend to provide a reconciliation in 2019 of the total amount of remuneration awarded to the GEC for the 2016 financial year, compared to the amount approved by shareholders at the AGM in 2015, once the final remuneration, including the LTIP vesting level for the period 2016 to 2018, is known.
The Board and I are grateful for your continuous trust in Zurich and for your valuable feedback with regard to our remuneration approach. On the following pages you will find further insights into Zurich’s Remuneration framework including the remuneration philosophy, the governance and also details on the remuneration of the members of the Board, the GEC and all employees for 2015. I believe that the information disclosed in the Remuneration Report and also the details included in the Board of Directors Report provide you with a clear picture on Zurich’s remuneration.
Finally, I will be retiring from the Board of Zurich at the AGM 2016 and as a result am presenting my final Remuneration Report as Chairman of the Remuneration Committee. I would like to take this opportunity to thank both my fellow Committee members and shareholders for their support during my tenure as member of the Board and as Chairman of the Remuneration Committee.
Contents 2015 Remuneration summary 69 Remuneration framework 74 2015 Remuneration and Shareholdings 86 Outlook 101
The members of the Board receive fixed remuneration as an annual fee, of which the basic fee is paid half in cash and half in five-year sales-restricted shares which are not subject to the achievement of any specific performance conditions. Total remuneration for employees including the members of the GEC comprises, as applicable, fixed remuneration consisting of base salaries, pensions and employee benefits, as well as variable remuneration consisting of short- and long-term incentive awards. The Group short- and long-term incentive plans (STIP and LTIP) aim to align the remuneration architecture with the achievement of the Group’s key financial objectives, the execution of the business strategy, the risk management framework and the operational plans (see the Remuneration framework section for more information on the elements of Zurich’s remuneration).
1 Consists of USD 50,998 million gross written premiums and policy fees as well as USD 2,786 million Farmers management fees and other related revenues. 2 Dividend at transaction day exchange rate in 2015 and 2014, respectively. 3 This excludes the value of target performance share allocations made in 2015 and 2014 from transition arrangements which amount to USD 6 million and 116 million respectively.
In 2015 we saw mixed results, with an overall decrease in business profitability compared to 2014. As a result, the average award for the plan participants across the Group (more than 41,600) is significantly lower than the corresponding amount for 2014.
Context The key factors driving the vesting level in 2016 were: • Group’s relative total shareholder return (TSR) against an international peer group of insurance companies • NIAS ROE • BOPAT ROE
• The total amount of sign-on payments1 committed in 2015, regardless of when the payments are due, for people taking up their employment in 2015.
Total variable remuneration pool in USD million, for the years ended December 31 Aggregate amount of variable remuneration for 2015 for the entire Group
Context In determining the amount of the total variable remuneration pool for all employees, 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 BOP after tax. In this respect, the Group has continued to generate economic profit over the long-term which exceeds the actual expenditure on variable pay.
As mentioned above, the amount of USD 505 million includes the value of the LTIP target allocations made in 2015 which will be assessed for vesting in 2018 based on the performance achievements over the three-year period 2015 to 2017. Taking the actual LTIP vesting level of zero percent into account and therefore considering that none of the shares from previous allocations will vest in 2016, the actual earned total variable remuneration for the period ending December 31, 2015 was USD 365 million.
1 Payments (whether paid immediately or over time) that are agreed on the execution of an employment contract. Sign-on Payments may include compensation made prior to a person joining the company and providing any services (Payments in Advance) or compensation for benefits foregone with a previous employer (Replacement Payments). Payments in Advance are prohibited to be paid to members of the Board and the GEC.
For 2015, the remuneration amounts were as follows: Remuneration amounts in USD million, for the years ended December 31 Base salary/
Total remuneration 1 Includes the portion paid in sales-restricted shares to Directors.
Key remuneration aspects in 2015 Further key developments in 2015 are outlined below: Regulatory and market practice
Change applied in 2015 following the proposal made to shareholders and subsequent approval at the 2015 AGM to adjust the fee structure in light of the increasing complexity, accountability and time commitment of its members and the fee levels of other comparatively sized companies in the Swiss Market Index (SMI).
The Board continues to oversee various activities to ensure compliance with the Ordinance AEC which came into force on January 1, 2014, as well as continued alignment with best practice corporate governance and regulatory requirements such as Solvency II.
Clawback framework introduced for the members of the GEC. Prohibition of hedging of share based remuneration adopted for all LTIP participants.
Outlook summary for 2016 Zurich will continue to carefully monitor and act upon legal and regulatory requirements. Solvency II requirements are of particular focus for a number of Zurich’s subsidiary boards within the European Union and any remuneration related requirements resulting from Solvency II are being reviewed and implemented.
The remuneration architecture is being reviewed to ensure continuous alignment with the latest market conditions and practices and to support the execution of the goals and objectives underlying the next strategy cycle.
In addition, Zurich will continue to engage in a dialogue with key stakeholders on remuneration related matters to exchange views and to better understand and respond to any particular areas of concern regarding the Group’s remuneration architecture.
Further information can be found in the Outlook section later in the Report on page 101.
In addition, Zurich has a clearly defined global performance management process which supports the achievement of the overall business strategy and operating plans, and links individual pay with business and individual performance. Actions of Zurich employees with regard to customers, people, shareholders and communities continue to be guided by the Zurich Basics and the Zurich Commitment. In order to support this undertaking, all Zurich employees have an objective with respect to what they do to actively care for and add value to the stakeholder groups. Moreover, performance management objectives are also assessed in terms of how they are achieved according to the values and behaviors underlying the Zurich Basics.
Guiding principles of the remuneration philosophy The guiding principles of the remuneration philosophy as set out in Zurich’s Remuneration Rules are as follows: • The Group’s remuneration architecture is simple, transparent and implementable. For those individuals having a material impact on the Group’s risk profile, it is oriented towards the long-term.
• The Group links variable remuneration awards to key performance factors which include the performance of the Group, the business segments, business units, functions as well as individual achievements. • The Group’s STIP and LTIP used for variable remuneration are linked to appropriate performance criteria and the overall expenditure on variable pay is considered in connection with the Group’s long-term economic performance. • The structure of the LTIP links remuneration with the future development of performance and risk by including features for deferred remuneration.
Governance framework Remuneration governance framework The Board is responsible for the design and implementation of Zurich’s remuneration principles and remuneration rules (together Zurich’s Remuneration Rules). To support the Board in performing these duties, the Board has established a Remuneration Committee. Under the Ordinance AEC and as reflected in the Articles of Incorporation, the AGM elects the members of the Remuneration Committee individually. Their term of office ends with the conclusion of the next AGM with re-election being possible. The Remuneration Committee consists of at least three members of the Board, all of whom are experienced in the area of remuneration. As of the AGM in 2015 there are five members in the Committee. On an annual basis the Remuneration Committee evaluates the remuneration architecture and Zurich’s Remuneration Rules, and if appropriate, proposes amendments to the Board.
Overall remuneration architecture Remuneration Committee and Risk Committee based on proposal by the CEO
Remuneration Committee Charter Remuneration Committee Board Zurich’s Remuneration Rules Remuneration Committee Board Remuneration Report Remuneration Committee Board and consultative, non-binding vote by the shareholders Remuneration payable to Directors (including Chairman and Vice Chairman)
Remuneration Committee Board and ultimately from shareholders via a vote as an aggregate maximum amount
Remuneration and risk The Remuneration and Risk Committees meet jointly once a year to discuss a risk review of the remuneration architecture and the remuneration governance framework. Risk Management evaluated the remuneration architecture in 2015 and reported that the remuneration architecture is consistent with effective risk management and does not encourage inappropriate risk-taking that exceeds the Group’s level of tolerated risk.
The variable remuneration of employees in control functions is structured to avoid conflicts of interest, by referring to Group profitability rather than the profitability of the business controlled by such functions.
Share ownership guidelines To align the interests of the Board and the GEC with those of shareholders, Directors and members of the GEC are required to meet certain levels of share ownership as follows: • Members of the Board: at the level of one times the basic annual fee. • CEO: vested awards at the level of five times base salary. • Other members of the GEC: vested awards at 2.5 times base salary.
Directors achieve this requirement through part of their fee being made in five year sales restricted shares and market purchases. Members of the GEC achieve this through their participation in the LTIP and market purchases. Directors, the CEO and other members of the GEC have a period of five years to meet their ownership requirements and the Remuneration Committee monitors compliance with these guidelines on an annual basis.
Description Fixed pay for the role performed to attract and retain employees and is reviewed annually. Overall base salary structures are positioned to manage salaries around the relevant market medians.
Employee benefits are provided to attract and retain employees, in line with market practices and positioned toward the market median.
Award of 0 – 200 percent of an individual’s target amount.
Eligibility All employees Country specific (more than 41,600 plan participants in 2015)
Delivery Fixed cash Performance-based cash Performance-based shares Country specific fixed benefits
Base salary See the Remuneration elements table for information regarding base salaries.
Overall financial performance together with a qualitative assessment determines the funding and the range of potential STIP awards for various levels of individual performance.
At year-end the key financial figures are evaluated in relation to the business plan which has been approved by the Board in the December prior to the relevant performance year. A qualitative assessment of the financial performance takes place to ensure a holistic evaluation of performance including the remuneration review by the Chief Risk Officer. The ultimate size of the STIP pools can vary between 0 percent and 175 percent of target, but typically the STIP pools vary in size in the range of 80 percent to 120 percent of target.
The CEO makes recommendations to the Remuneration Committee on the proposed size of the various STIP pools and on the aggregate amount required for STIP award payments across the Group. Following review and analysis, the Remuneration Committee discusses their final recommendations with the Board and seeks the Board’s approval.
STIP award structure The financial performance defines the funding available for each STIP pool and the resulting range of potential STIP awards for various levels of individual performance. If the financial performance meets expectations then the award structure for an individual that successfully achieves his or her individual objectives, is set at the target level. If the financial performance only partially meets expectations however, then the STIP award for an individual who successfully achieves his or her individual objectives will be set at a level lower than target and can be zero percent. Within General Insurance and Global Life, there are a number of sub-pools, for example at the country level, where the award structure is specifically defined to reflect the overall results of the segment and also the sub-pool.
Short-term incentives are delivered primarily through STIP although there are also local plans in some countries. 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, based on market practice, only the most senior individuals participate in STIP. Local country plans, following broadly the same principles as STIP, may be utilized for other employees.
In recent years, more than 13,250 employees have been transferred from local incentive plans to STIP. In 2016, there is no intention to transfer further employees from local incentive plans to STIP.
Allocations are made in the form of target shares. In no circumstances can the LTIP award for an individual be more than 200 percent of the aggregate number of target shares and dividend equivalent shares.
The calculated vesting level is applied to all LTIP participants and defines the percentage of target shares that will ultimately vest. Half of the vested shares are sales restricted for an additional three year period after the date of vesting.
≥USD 10.0 billionUSD 9.5 billionUSD 9.0 billionUSD 8.0 billion<USD 8.0 billion
Each participant has an annual target amount (target amount) established for the year of allocation which is determined as a percentage of the annual base salary. The number of target shares is calculated by dividing the target amount by the closing share price on the day prior to the allocation.
The performance criteria for the period 2015 to 2017 comprise: (i) The position of the TSR compared with an international peer group of insurance companies derived from the Dow Jones Titan Insurance Index. The Remuneration Committee reviews the peer companies to be included in the relative TSR assessment regularly to ensure that the peer group exhibits a strong TSR correlation and reflects the Group’s business profile and geographic spread. The resulting industry peer group includes the following companies: Ace, AIG, Allianz, Allstate, Aviva, AXA, Chubb, Generali, Legal & General, Manulife Financial Corp., Met Life, Munich Re, Progressive Ohio, Prudential Plc, QBE, Swiss Re and Travelers Cos. Inc.
Each performance measure is assessed independently over a three year period starting at the beginning of the calendar year when the target shares are allocated. Each measure has a one third equal weighting. The vesting level is defined according to the vesting grid.
The vesting level is proposed by the CEO to the Remuneration Committee and finally approved by the Board. The Board may exercise discretion in order to take the financial and operating environment into account when assessing the final vesting level. Adjustments of +/–25 percent to the proposed vesting 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 final vesting level, which may include exceptional individual adjustments, is then used to assess the number of target shares for vesting.
One half of any vested shares are sales-restricted for a further three-year period following the date of vesting. This takes the overall vesting and sales restriction period to a six year holding period for this part of the award.
3 In line with the methodology used to calculate the ROE with effect from January 1, 2014, the calculation of equity will exclude unrealized investment gains or losses. 4 Due to the potential volatility in any one year, the assessment of cash remittance performance can only be meaningfully assessed over a three-year period.
Due to the potential volatility in any one year, the cash remittance performance can only be meaningfully assessed over a three-year period. Therefore, the cash remittance measure has been replaced by the BOPAT ROE achievements for the vesting decisions taken in 2015 and in 2016 and is assessed using the same vesting grid that applies to the NIAS ROE.
The approach set out here is used to assess vesting decisions in 2016 for all allocations vesting. This includes the third tranche of the 2013 former LTIP allocation, one third of the 2014 LTIP allocation as explained above and the relevant parts of the 2014 transition allocation (see below).
iii) 2014 allocation of supplementary target shares to maintain target earning opportunity
Transition allocation LTIP participants (excl GEC) Allocation in 2014 1/3 rd vest 1/3 rd vest 1/3 rd vest Transition allocation GEC (excl CEO) 1/2 allocation in 2014 1/6 th vest 1/6 th vest 1/6 th vest 1/2 allocation in 2015 1/6 th vest 1/6 th vest 1/6 th vest Transition allocation CEO 1/3 allocation in 2014 1/9 th vest 1/9 th vest 1/9 th vest 1/3 allocation in 2015 1/9 th vest 1/9 th vest 1/9 th vest 1/3 allocation in 2016 1/9 th vest 1/9 th vest 1/9 th vest 1 Half of all vested shares are subject to a three-year sales restriction. For members of the GEC, this means that the last restriction on the transition allocation will lapse in 2021.
Year of LTIP allocation 1 The average vesting level for the 2014 LTIP allocation can only be calculated once the vesting level has been assessed in 2017. For the 2015 allocation, the vesting level will be known in 2018.
2 The calculated vesting level in 2016 of zero percent of target also applies to the relevant parts of the transition allocations made in 2014 and 2015, which are being assessed for vesting in 2016.
Other remuneration including employee benefits The Group also provides a range of other relevant employee benefits in line with the local market, for example life insurance, medical coverage and flexible benefits. Further, the Group operates a number of mobility related policies to facilitate the movement of people across the organization.
The following section sets out the remuneration and shareholdings of Directors and of members of the GEC, as well as the remuneration of all employees.
The information provided according to Articles 14 – 16 of the Ordinance AEC contained in the Remuneration Report needs to be externally audited following the audit requirements of the Ordinance AEC (Article 13 para 1 and Article 17 of the Ordinance AEC). In addition, the information according to Article 663c of the Swiss Code of Obligations is being audited and disclosed as such in the Remuneration Report. All audited sections have been highlighted accordingly.
Directors Directors’ fees As a global insurance provider, Zurich’s Directors’ fees need to be established at a level which enables the Group to attract and retain high caliber individuals with diverse backgrounds. To assist in determining Board remuneration, an independent adviser carries out benchmarking studies on a regular basis. Zurich aims to set the remuneration of its members of the Board at the relevant median levels using the Swiss Market Index (SMI) as a basis. Based on the role and the fee structure, fee levels are established for each member of the Board. Fees are paid in cash and in shares, with approximately half of the basic fee provided in five-year sales-restricted Zurich shares. The fees paid to Directors (including the portion provided in sales restricted shares) are not subject to the achievement of any specific performance conditions.
As of April 1, 2015, and as approved by shareholders at the 2015 AGM, the fee structure established in 2011 was changed to recognize the increased complexity, accountability and time commitment for members of the Board, in particular for the Chairman, the Vice-Chairman and the committee chairs: • Chairman and Vice-Chairman fees have been adjusted to a total of CHF 1,500,000 and CHF 400,000, respectively.
• Committee chair fees have been increased to recognize the additional responsibility and accountability. • The portion of the basic fee allocated in shares has been increased to 50 percent from 33 percent to further align remuneration with shareholders’ interests. • The sales restriction period on shares has been increased to five years from three years to further align remuneration with shareholders’ interests. These restrictions continue to apply upon leaving the Board.
Basic fee for the Chairman of the Board 2 750 750 1,500 1,000 Basic fee for the Vice-Chairman of the Board 2 200 200 400 375 Basic fee for a Member of the Board 120 120 240 240
Where a Director is also a member of one or more subsidiary boards of Zurich, the Director is entitled to an additional fee of CHF 50,000 in 2015 (CHF 50,000 in 2014) per annum plus CHF 10,000 in 2015 (CHF 10,000 in 2014) 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, for example, the additional time commitment to discharge the duties of a board member, warrant it.
Based on this structure, the total aggregate fees allocated to the Directors of Zurich and Zurich Insurance Company Ltd for the calendar year ended December 31, 2015, amounted to CHF 4,816,625. This included CHF 2,786,625 in cash and a value at the allocation date of CHF 2,030,000 in five-year sales-restricted shares. The share price at the allocation date was CHF 287.10. The corresponding amount for 2014 was CHF 3,700,807, which comprised CHF 2,702,252 in cash and a value at the allocation date of CHF 998,555 in three-year sales-restricted shares. The share price at the allocation date in 2014 was CHF 265.50. The Directors’ fees are not pensionable.
3 Committee chairs receive an annual fee of CHF 60,000 (CHF 30,000 in 2014) and the chair of the Audit Committee receives an additional CHF 20,000 (CHF 10,000 in 2014). The committees on which the Directors serve and the chairs are set out in the Corporate Governance Report.
Audit Committee of Zurich Insurance plc. Both amounts are pro-rated for 9 months, as Tom de Swaan gave up his membership on September 30, 2014. 5 The shares allocated to the Directors are not dependent on the achievement of performance criteria and are sales-restricted for five years. Shares allocated in 2014 are sales-restricted for three years. 6 As of June 16, 2015, Tom de Swaan was allocated 2,612 shares, Fred Kindle was allocated 696 shares, and the other members of the Board were allocated 417 shares.
7 Neither the Chairman nor the Vice-Chairman receive any additional fees for their committee work on the Board of Zurich. 8 Tom de Swaan was appointed Chief Executive Officer ad interim effective December 1, 2015. In 2015 no payments were made to Tom de Swaan for his role as CEO ad interim nor as a member of the GEC. The Board of Directors will decide in 2016 whether any additional remuneration will be paid to Tom de Swaan for the time he held the CEO role ad interim. Any such payments would be disclosed in the Remuneration Report for the year 2016 and paid as compensation for management in 2016, i.e. as approved by the General Meeting in 2015 or in accordance with Article 18 para. 4 of the Articles of Incorporation.
9 At the AGM on April 1, 2015, Joan Amble and Kishore Mahbubani were elected to the Board, and Christoph Franz was elected as a member of the Remuneration Committee.
Special payments and termination arrangements, additional honoraria and remuneration and personal loans for Directors Severance Payments and Payments in Advance are prohibited for members of the Board according to the Ordinance AEC. At the AGM on April 1, 2015, Joan Amble and Kishore Mahbubani, were elected as new members of the Board. No Replacement Payments or other benefits were provided. No termination payments (i.e. golden parachutes) were made and no other benefits such as waiver of lock-up periods for equities or additional contributions to occupational pension schemes were provided.
Share plans and shareholdings of Directors The shareholdings of the Directors, who held office at the end of 2015, in shares of Zurich Insurance Group Ltd are shown in the following table. All interests shown include the portion of shares allocated to the Directors as part of their fee, shares acquired in the market by the Directors and shares held by parties related to the Directors.
T. de Swaan, Chairman 6,465 3,853 F. Kindle, Vice-Chairman 18,413 17,717 J. Amble, Member 417 n / a S. Bies, Member 2,682 2,265 A. Carnwath, Member 1,342 925 R. del Pino, Member 1,342 925 Th. Escher, Member 10,520 10,103 Ch. Franz, Member 643 226 M. Mächler, Member 965 548 K. Mahbubani, Member 417 n / a D. Nicolaisen, Member 1,436 1,019 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, 2015 or 2014, respectively.
Group Executive Committee Remuneration of the GEC A number of key elements are in place 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.
To assist decisions on the remuneration of the GEC, the Board conducts benchmarking studies on a regular basis. The remuneration structures and practices of a selected industry peer group of the largest insurance companies are analyzed, based on relevant companies in the Dow Jones Insurance Titans 30 Index. This Index comprises the largest insurance companies throughout the world, predominantly in Europe and in the U.S. The Remuneration Committee reviews this peer group regularly. This analysis is supplemented by additional benchmarking studies as appropriate, e.g. by reviewing practices of large SMI companies in Switzerland or similarly sized companies in other countries. The Remuneration Committee regularly reviews the benchmarking approach.
The distribution of the total remuneration in 2015 for the GEC between the individual remuneration elements is set out in the following chart and is based on the target values for the performance related remuneration1.
As shown in the chart above, there is an appropriate balance of remuneration elements with a significant emphasis on performance related remuneration through both STIP and LTIP. The distribution of the target values between short-term (one-year) and long-term incentives (three- to six-year) shows an emphasis toward long-term incentives.
See remuneration elements, page 78. The total amount of base salaries for all members of the GEC paid in 2015 was USD 11.6 million compared to USD 12.0 million in 2014.
For members of the GEC the STIP target percentages for 2015 vary between 75 – 100 percent of the base salary. The maximum STIP award for all members of the GEC is 200 percent of the individual target amount. Further information regarding STIP is set out below.
In 2015, each member of the GEC received an annual allocation of target shares under the LTIP for the three-year performance cycle 2015 – 2017. For members of the GEC the LTIP target percentages in 2015 vary between 125 – 225 percent of base salary. As in previous years, the allocations of target shares for 2015 were made on the third working day in April, i.e. on April 7, 2015. The value of target share allocations does not include dividend equivalent target shares or transition allocations. The maximum vesting level is 200% of the target number of shares allocated.
The total value of pension benefits accruing to members of the GEC during 2015, calculated on the basis of the service costs for the company as assessed under IAS 19 accounting principles, was USD 3.9 million (compared to USD 3.6 million in 2014). Service costs value the amount of the pension benefits accruing during the year and for defined contribution plans take the amount of the company contribution paid during the year
The total value of other remuneration in 2015 was USD 1.2 million (compared to USD 1.9 million in 2014). Benefits-in-kind have been valued using market rates.
The individual STIP award is determined in a similar way to all employees, taking into account financial performance, the resulting STIP award structure and individual performance.
Replacement Payments for members of the GEC appointed in 2015 In extraordinary circumstances payments may be made to new hires to replace forfeitures under the incentive plans of the previous employer. In these circumstances, the payments mirror the type and timing of the forfeited payments and can include cash payments and/or awards of restricted or performance shares. Where payments are made in cash, there is typically a clawback period if the employee leaves the company voluntarily during the first two years of employment. Restricted share allocations typically vest over three to five years following the date of allocation and are forfeited if the holder of such share allocations leaves the company voluntarily before the vesting date and the employment relationship terminates.
in USD million, for the years ended December 31 2015 1, 2 2014 1, 3
Value of target share allocations from transition arrangements 7 5.7 7.2 Replacement Payments for members of the GEC 8 0.0 8.8 Contractually agreed remuneration after stepping down and during notice period in the respective year 9 4.6 0.0 1 The remuneration shown in the table is gross, based on the accrual principle, for the time employees are members of the GEC during the year and does not include any business-related expenses incurred in the performance of the members’ services.
USD 2.2 million in 2015 and USD 1.6 million in 2014. Since the contributions are based on full earnings, whereas benefits are capped, there is no direct correlation between the costs paid to the social security system and the benefits received by the executives.
5 This includes twelve months of remuneration for Martin Senn and excludes the value of target share allocations from transition arrangements for all members of the GEC. 6 The amounts have been translated from U.S. dollars to Swiss francs at the relevant exchange rates throughout the year and the cash incentive to be paid in 2016 has been translated at the year-end rate in 2015.
7 To maintain the target earning opportunities during the transition period an allocation of supplementary performance shares was made to all current LTIP participants in 2014. To ensure that the members of the GEC further align their long-term interests with those of shareholders, the transition allocation is being provided in two installments for the members of the GEC (2014 and 2015).
Based on these figures, the value of the total remuneration for all members of the GEC comprises 42 percent (36 percent in 2014) in fixed remuneration (comprising base salaries, service costs for pension benefits and other remuneration including employee benefits) and 58 percent (64 percent in 2014) in performance related elements (comprising the cash incentive awards under the STIP and the value of the target share allocations under the LTIP). The emphasis within variable remuneration lies on the deferred part, with 75 percent represented by target performance shares under the LTIP and 25 percent as cash incentive awards under the STIP. The total amount of remuneration of USD 40.1 decreased compared to last year’s amount mainly due to the significant decline in cash incentives reflecting the lower overall business performance in 2015.
The amount reflects Martin Senn’s remuneration for the full year 2015. With regard to the LTIP, the amount included in the total remuneration of CHF 6.1 million is the value of target share allocations of CHF 3.6 million allocated in 2015 and assumed to vest at 100 percent of target in 2018. As mentioned above, the vesting level for the allocations from previous years vesting in 2016 is zero percent (compared to 139 percent last year), reflecting that the minimum performance levels under the three performance metrics were not met over the two-year performance period. Given there are no shares vesting from prior LTIP allocations, the actual earned total remuneration for Martin Senn for the period ending December 31, 2015 was CHF 2.5 million compared to the total remuneration of CHF 6.1 million shown below. Further there is no vesting of prior allocations made under transition arrangements based on the two year results (compared to the CHF 1.2 million shown below).
Highest paid executive, Martin Senn in 2015 and comparison with his remuneration in 2014 1 in CHF millions, for the years ended December 31 2015 2 2014 2
Value of target share allocations from transition arrangements 5 1.2 1.2 1 Martin Senn stepped down on December 1, 2015 as CEO. The table above includes twelve months of remuneration. 2 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.
3 This excludes the value of target share allocations from transition arrangements. 4 Martin Senn’s remuneration is paid in Swiss francs. The amounts have been translated from Swiss francs to U.S. dollars at the relevant exchange rates throughout the year and the cash incentive to be paid in 2016 has been translated at the year-end rate in 2015.
None of the members of the GEC received any remuneration from the Group or from any of the Group’s companies in 2015 and 2014 other than as set out in the tables above.
Transition arrangement 3 1 With effect from January 1, 2014, the Board approved the transition to three-year cliff vesting. To transition to three-year cliff vesting, the 2014 LTIP allocation will vest one-third after two years (i.e. 2016), and two-thirds after three years (i.e. 2017). From the 2015 LTIP allocations onwards, three-year cliff vesting for 100 percent of the allocation will apply.
3 To maintain the target earning opportunities during the transition period an allocation of supplementary target shares was made to all current LTIP participants. To ensure members of the GEC further align their long-term term interests with those of shareholders, the transition allocation is provided in two installments for the GEC.
Share option allocations Under the share option program for senior management, the Group issued share options in the past to individuals within defined rules. From 2011, share option allocations were no longer made. Prior to this, the option allocations were made each year on the third working day in April. Further, the exercise price for the options allocated in the past was set at the market price on the day prior to the date of allocation. The performance based option allocations were considered for vesting in one-third installments during the three years after the allocation.
Share and vested share option holdings of the members of the GEC 1
Number of vested shares and vested share options, as of December 31 2015 2014
G. Riddell, former Regional Chairman of Asia-Pacific & Middle East 4 n / a n / a 19,845 48,548 K. Terryn, CEO General Insurance and CEO Global Life a.i. 4 8,778 13,570 4,427 17,194 I. Welton, Chief Human Resources Officer 3 3,916 n / a 2,062 n / a 1 None of the members of the GEC, together with parties related to them, held more than 0.5 percent of the voting rights as at December 31, 2015 or 2014, either directly or through share options.
The following tables show how the totals of the vested share options owned by members of the GEC are distributed according to the allocations identified in the tables Summary of unexercised options as of December 31, 2015 and 2014, respectively.
Distribution of vested share options of members of the GEC 2015
1 Urban Angehrn was appointed Chief Investment Officer effective July 1, 2015, Cecilia Reyes was appointed Chief Risk Officer effective July 1, 2015 and Kristof Terryn was appointed Chief Executive Officer General Insurance effective October 1, 2015.
Distribution of vested share options of members of the GEC 2014
I. Welton 3 n / a n / a n / a n / a 1 Robert Dickie was appointed Chief Operations and Technology Officer effective March 17, 2014. 2 George Quinn was appointed Chief Financial Officer effective May 1, 2014. 3 Isabelle Welton was appointed Chief Human Resources Officer, effective July 1, 2014.
Remuneration of all employees Please refer to the Remuneration framework section on page 74 for the key elements of remuneration and the benchmarking approach for all employees. Also note that the benchmarking analysis is mainly carried out and approved at the local level. The Group had 54,335 full-time equivalent employees as of December 31, 2015 (2014: 54,551).
The following section includes information regarding the total remuneration earned by employees for the financial year 2015 across the Group, including remuneration for members of the GEC.
Fixed remuneration for all employees in USD million, for the years ended December 31 2015 2014
Variable remuneration The aggregate amount of variable remuneration for 2015 (total variable remuneration pool, see page 71) resulted in an amount of USD 505 million, compared with USD 652 million in 2014. This amount includes the value of the LTIP target allocations made in 2015 which will be assessed for vesting in 2018 based on the performance achievements over the three year period 2015 to 2017. 100% of target vesting has been assumed in the calculation. However, taking the actual LTIP vesting level of zero percent into account, the actual earned total variable remuneration for the period ending December 31, 2015 was USD 365 million. Further, under the STIP, the average award for all employees across the Group is 65 percent of target for 2015, compared to 96 percent of target for 2014.
The figures do not include any charges or credits that originate from remuneration paid out during the financial year 2015 that derive from previous financial years.
Variable remuneration for all employees in USD million, for the years ended December 31 2015 2014
Cash incentive awards earned for the year 1 363 499 Value of target share allocations made in the year 2,3 142 153 Total variable remuneration pool 4 505 652 Value of target share allocations from transition arrangements 3 6 116 1 Includes Sign-on and Severance Payments in cash.
2 Includes Sign-on Payments in shares. 3 The value of the target share allocations reflects the allocations made in 2015 and assumes that the allocation will vest in the future at 100 percent of the target level.
4 This excludes the value of target share allocations from transition arrangements which amount to USD 6 million in 2015.
Value of target share allocations from transition arrangements 6 116 1 Includes cash incentive awards, Sign-on and Severance Payments in cash. 2 Includes target share allocations under LTIP and Sign-on Payments in shares. 3 Includes other remuneration and pension benefits.
4 This excludes the value of target share allocations from transition arrangements which amount to USD 6 million.
Value of outstanding deferred remuneration for all employees in USD million, for the years ended December 31 2015 2014
Impact on net income in 2015 and 2014 from remuneration made in prior years Under the LTIP, the vesting level is used to determine the actual number of shares to be awarded to participants relative to the target shares initially allocated. Differences in value between the target shares allocated and the actual shares vesting is reflected in the consolidated income statement in the year of vesting in line with the accounting principles. For shares vesting in 2015 and 2016 a USD 65 million reduction in expense was recognized in the 2015 income statement to reflect actual performance compared to original estimated. In 2014, there was no material difference in the actual estimated amounts.
Key risk takers With regard to the disclosure of Sign-on and Severance Payments for individuals considered to be key risk takers for the Group, the following definition and principles for Sign-on and Severance Payments apply.
• Severance Payments are provided in connection with the termination of an employment relationship. Zurich does not include under the term Severance Payments garden leave or similar payments for employees in jurisdictions where such payments are required by applicable law, or where they are based on contractual notice periods which conform with recognized market practice, or where they are non-contractual but in line with recognized market practice. Zurich does include garden leave or similar payments however, that go beyond recognized market practice, irrespective of whether these are provided pursuant to an agreement or are ex gratia. Severance Payments are prohibited to be paid to members of the Board and the GEC.
Sign-on and Severance Payments for key risk takers in USD million, for the years ended December 31 2015 2014
Outlook As we move into 2016, Zurich will continue to carefully monitor and act upon legal and regulatory requirements. One aspect of this, which is of particular focus for a number of Zurich’s subsidiary boards within the European Union are the requirements under Solvency II. Any remuneration-related requirements resulting from Solvency II are being reviewed and implemented with ongoing dialogue between the Group and the affected countries.
The Remuneration Committee will continue to ensure that the remuneration framework is aligned with the strategy, is embedded in the risk framework and complies with legal and regulatory requirements. As in previous years, the Committee enforces the governance framework and carefully monitors the link between key performance factors and variable remuneration awards.
Report of the statutory auditor on the audit of the Remuneration Report
Auditor’s responsibility Our responsibility is to express an opinion on the accompanying Remuneration Report. We conducted our audit in accordance with Swiss Auditing Standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the Remuneration Report complies with Swiss law and articles 14 – 16 of the Ordinance AEC.
Group performance review In this section Operating and financial review 106 Risk review 122
Financial highlights 107 Performance overview 108 General Insurance 110 Global Life 115 Farmers 119 Other Operating Businesses 121 Non-Core Businesses 121
The information contained within the Operating and financial review is unaudited and is based on the consolidated results of the Group for the years ended December 31, 2015 and 2014. All amounts are shown in U.S. dollars and rounded to the nearest million unless otherwise stated, with the consequence that the rounded amounts may not add up to the rounded total in all cases. All ratios and variances are calculated using the underlying amounts rather than the rounded amounts. This document should be read in conjunction with the Annual results 2015 of the Group and, in particular, with its Consolidated financial statements for the year ended December 31, 2015.
The Operating and financial review is the management analysis of the business performance of Zurich Insurance Group Ltd and its subsidiaries (collectively the Group) for the year ended December 31, 2015, compared with 2014.
General Insurance gross written premiums and policy fees 34,020 36,333 (6%) Global Life gross written premiums, policy fees and insurance deposits 29,037 31,883 (9%) Farmers Management Services management fees and other related revenues 2,786 2,791 – Farmers Re gross written premiums and policy fees 2,145 3,428 (37%)
Farmers business operating profit 1,421 1,573 (10%) Farmers Management Services gross management result 1,338 1,335 – Farmers Management Services managed gross earned premium margin 7.1% 7.2% (0.1 pts)
Diluted earnings per share (in USD) 12.33 26.44 (53%) Diluted earnings per share (in CHF) 11.86 24.17 (51%) Book value per share (in CHF) 4 209.27 232.65 (10%)
1 Parentheses around numbers represent an adverse variance. 2 Details of the principles for calculating new business are included in the Embedded value report in the Annual results 2015. New business value and new business margin are calculated after the effect of non-controlling interests, whereas APE is presented before non-controlling interests. 3 Calculated on average Group investments. 4 As of December 31, 2015 and December 31, 2014, respectively.
Business operating profit decreased by USD 1.7 billion to USD 2.9 billion, or by 37 percent in U.S. dollar terms and 34 percent on a local currency basis.
• General Insurance business operating profit decreased by USD 2.1 billion to USD 864 million, or 71 percent in U.S. dollar terms and 70 percent on a local currency basis. This was primarily due to a deterioration in the net underwriting result of USD 1.9 billion. The deterioration in the net underwriting result arose mainly in Global Corporate and EMEA and resulted from an increase in large and catastrophe losses, as well as an absence of favorable loss development of reserves established in prior years. The expense ratio was negatively impacted by the costs of ongoing growth initiatives and changes in product and geographic mix.
• Farmers business operating profit decreased by USD 152 million to USD 1.4 billion, or by 10 percent. Farmers Re business operating profit decreased by USD 129 million to USD 61 million due to underwriting losses, as well as lower net investment income. Farmers Management Services business operating profit decreased by USD 23 million to USD 1.4 billion with the gross management result at the same level as in 2014, but with a reduction in other income.
• Non-Core Businesses reported a business operating profit of USD 51 million compared with a loss of USD 227 million in 2014. The improvement arose from the impact of both lower adverse development of reserves established in prior years and lower loan losses compared with 2014 and from the release of long-term reserves as a consequence of a buy-back program for a variable annuity product.
The U.S. dollar, on average, strengthened significantly against all of the Group’s major trading currencies during the year compared with 2014. The translation effect of the strengthening of the U.S. dollar during the year affected many line items in both the consolidated income and cash flow statements, as well as reducing business operating profit by USD 147 million. The U.S. dollar also strengthened as of December 31, 2015 compared with December 31, 2014 with many line items in the balance sheet affected. The net effect of these currency translation adjustments was a reduction of USD 3.0 billion in shareholders’ equity since December 31, 2014, which includes the difference of USD 1.0 billion between the dividend at transaction day exchange rates and the dividend at historical exchange rates.
The shareholders’ effective tax rate increased to 36.6 percent for the year ended December 31, 2015 compared with 27.0 percent for 2014. The increase of 9.6 percentage points reflects changes in the profit mix, restructuring costs, write-down of deferred tax assets and the effects of several non-recurring charges in 2015, as well as the impairment of goodwill for the German Life business, which did not attract tax benefits.
ROE decreased by 6.6 percentage points to 6.4 percent, largely due to the reduction in net income attributable to shareholders partly offset by the reduction in average shareholders’ equity. BOPAT ROE decreased by 4.7 percentage points to 6.4 percent, as a result of the decrease in business operating profit partly offset by the reduction in average shareholders’ equity. Diluted earnings per share in Swiss francs decreased by 51 percent to CHF 11.86 compared with CHF 24.17 in 2014. Diluted earnings per share in U.S. dollars decreased by 53 percent to USD 12.33 compared with USD 26.44 in 2014.
General Insurance in USD millions, for the years ended December 31 2015 2014 Change
The net underwriting result deteriorated by USD 1.9 billion to a loss of USD 1.0 billion, reflected in the 6.7 percentage points deterioration in the combined ratio to 103.6 percent. The loss ratio increased 5.5 percentage points reflecting higher large losses in Global Corporate and certain European countries, the Tianjin port explosion and higher natural catastrophe losses resulting from severe flooding in the UK and Ireland in December. The result also reflects the absence of favorable development of loss reserves established in prior years. The expense ratio increased by 1.2 percentage points. This arose from higher expenses from investments in growth initiatives in all regions and the effect of positive non-recurring items in 2014, as well as higher commissions due to changes in both product and geographic mix for which higher levels of commission apply.
Global Corporate in USD millions, for the years ended December 31 2015 2014 Change
Business operating profit deteriorated by USD 1.1 billion to a loss of USD 345 million. The decrease resulted mainly from the deterioration in the net underwriting result, but also from a relatively small decrease in the net investment result due to the absence of hedge fund gains, slightly offset by minor improvements in the non-technical result from foreign exchange gains.
The net underwriting result deteriorated by USD 1.1 billion to an underwriting loss of USD 835 million, reflected in the deterioration of 18.2 percentage points in the combined ratio to 113.9 percent. The deterioration in the loss ratio of 17.2 percentage points was mainly attributable to higher catastrophe losses, a higher number and increased severity of large losses, particularly in the property line of business in North America and Europe, and the Tianjin port explosion. The development of loss reserves established in prior years also deteriorated compared with 2014. The expense ratio deteriorated by 0.9 percentage points as a result of investments in growth initiatives.
North America Commercial in USD millions, for the years ended December 31 2015 2014 Change
Gross written premiums and policy fees 10,742 10,056 7% Net underwriting result 146 270 (46%) Business operating profit 768 923 (17%) Loss ratio 67.0% 66.4% (0.6 pts) Expense ratio 31.2% 30.1% (1.0 pts) Combined ratio 98.2% 96.5% (1.7 pts)
Gross written premiums and policy fees increased by USD 686 million to USD 10.7 billion, or by 7 percent. This increase was driven by organic growth including increased levels of business from captives, particularly in the workers compensation and liability lines of business. The rate environment remained positive in liability, motor and specialty lines of business with overall rates increasing by 1 percent despite market pressures.
The net underwriting result deteriorated by USD 730 million to a loss of USD 138 million, reflected in the deterioration in the combined ratio of 6.1 percentage points to 101.3 percent. The deterioration in the loss ratio of 5.1 percentage points reflected higher catastrophe related losses mainly from flooding in the UK in December and higher large losses, also mainly in the UK, as well as less favorable development of reserves established in prior years. The expense ratio deteriorated by 1.1 percentage points resulting from the effect of several favorable non-recurring items in 2014 and increased expenses following investments in growth initiatives.
International Markets in USD millions, for the years ended December 31 2015 2014 Change
Gross written premiums and policy fees decreased by USD 566 million to USD 3.9 billion, or by 13 percent in U.S. dollar terms, but increased by 9 percent on a local currency basis. On a local currency basis, gross written premiums grew by 19 percent in Latin America due to new distribution agreements in Brazil and the impact of inflation in the region. Despite growth in some areas of Asia Pacific, premiums decreased by 3 percent on a local currency basis due to the impact of underwriting actions taken in Australia. Overall, International Markets achieved average rate increases of 5 percent, mainly in Latin America.
The net underwriting result improved by USD 62 million, reflected in the 1.3 percentage points improvement in the combined ratio to 103.3 percent. The loss ratio improved by 5.2 percentage points, mainly as a result of an improvement in the underlying loss ratio, as well as lower catastrophe and weather-related losses and higher levels of favorable development of loss reserves established in prior years compared with 2014. The expense ratio deteriorated by 3.9 percentage points due to an increase in commissions and higher expenses, including costs related to the implementation of new distribution agreements in Brazil and several one-off costs in 2015.
New business annual premium equivalent (APE)1 4,772 5,203 (8%) New business margin, after tax 2, 4 21.6% 20.8% 0.8 pts New business value, after tax 3, 4 912 965 (5%)
Impact of deferrals 376 447 (16%) Business operating profit 1,300 1,273 2%
Investment margin decreased by USD 64 million, or 12 percent in U.S. dollar terms, but increased 4 percent on a local currency basis. The improvement in local currency largely resulted from increased investment returns in Latin America, while the investment margin in EMEA remained flat.
Technical margin improved by USD 123 million, or by 10 percent in U.S dollar terms and by 22 percent on a local currency basis, with the largest improvements arising in EMEA and North America. In EMEA, the improvement was driven by favorable claims experience, as well as by positive impacts associated with management actions to drive value from in-force business. It also includes the partial recognition of a significant gain on the transfer of risk through reinsurance in a legacy in-force annuity portfolio in the UK to be recognized in total over the lifetime of the reinsurance contract. In North America, the improvement in technical margin largely resulted from the effect of non-recurring costs incurred in 2014 relating to the transfer of an annuity portfolio to Non-Core Businesses.
Operating and funding costs decreased by USD 48 million, or by 3 percent in U.S dollar terms, but increased by 10 percent on a local currency basis. In local currency, the positive impact of disciplined central expense management in 2015 was more than offset by the effect of positive non-recurring items in 2014, including a favorable impact from policyholders’ tax expense in the UK and a reduction in pension liabilities in Switzerland.
New business value decreased by USD 53 million to USD 912 million, or by 5 percent in U.S. dollar terms, but increased 7 percent on a local currency basis. The increase on a local currency basis was primarily driven by EMEA, where improved profitability of corporate business more than offset the negative impact of low interest rates on individual savings business. Higher sales in Zurich Santander and Asia Pacific, particularly in Japan, also contributed to the overall improvement on a local currency basis.
New business margin increased by 0.8 percentage points to 21.6 percent, with increases occurring in North America, Zurich Santander and Asia Pacific. New business margin in EMEA slightly increased, despite the continued reduction in interest rates negatively affecting new business margin in continental European countries, supported by improved profitability in corporate business. In Other, the decrease arose from changes in product mix in corporate business.
In Latin America, APE decreased by 18 percent in U.S. dollar terms, but increased by 9 percent on a local currency basis. The increase in local currency mainly arose from increased sales in Zurich Santander. This increase was partly offset by decreased sales in the Zurich operations, primarily in Chile and Brazil, resulting in an overall flat NBV on a local currency basis.
In EMEA, APE decreased by 6 percent in U.S. dollar terms, but increased by 6 percent on a local currency basis. In local currency, APE increased in Spain and Italy as a result of increased sales of individual savings business, and in Switzerland, driven by higher sales of corporate products, partly offset by a decrease in APE in the UK driven by lower volumes of corporate business and unit-linked business in Zurich International Life. NBV also increased in local currency, with the improved profitability of corporate business only partly offset by the negative impact of low interest rates on individual savings business.
On a pillar basis, the new business results were as follows: In Bank Distribution, NBV decreased by USD 28 million to USD 241 million, or 10 percent in U.S. dollar terms, but increased 12 percent on a local currency basis. The increase in local currency resulted from higher volumes in Zurich Santander and Spain and improved margins in Germany.
In Other Retail, NBV decreased by USD 52 million to USD 353 million, or 13 percent in U.S. dollar terms and 6 percent on a local currency basis. The decrease in local currency arose in most regions; North America was impacted by lower volumes, EMEA experienced lower margins mainly due to the negative impact of low interest rates in continental European countries, and in Latin America both volumes and margins decreased. These negative effects were partly offset by Asia Pacific, primarily from increased volumes in Japan.
Management fees and other related revenues 2,786 2,791 – Management and other related expenses (1,448) (1,455) 1% Gross management result 1,338 1,335 –
The managed gross earned premium margin decreased to 7.1 percent compared with 7.2 percent for 2014.
Farmers Re in USD millions, for the years ended December 31 2015 2014 Change
Gross written premiums and policy fees 2,145 3,428 (37%) Net underwriting result (26) 66 nm Business operating profit 61 190 (68%) Loss ratio 70.1% 67.0% (3.1 pts) Expense ratio 31.1% 31.3% 0.3 pts Combined ratio 101.2% 98.3% (2.8 pts)
Gross written premiums and policy fees decreased by USD 1.3 billion to USD 2.1 billion, or 37 percent, as a result of lower participation in the reinsurance agreements with the Farmers Exchanges. Participation in the All Lines quota share reinsurance agreement was reduced from 18 percent to 10 percent, effective December 31, 2014, and further reduced from 10 percent to 8 percent, effective December 31, 2015, subject to the approval of the California Department of Insurance. Participation in the Auto Physical Damage (APD) quota share reinsurance agreement was reduced from USD 900 million in 2014 to USD 500 million in 2015.
Gross written premiums 19,077 18,635 2% Gross earned premiums 18,885 18,545 2%
Gross earned premiums in the Farmers Exchanges increased by USD 340 million to USD 18.9 billion, or by 2 percent.
Holding and Financing business operating loss of USD 520 million decreased by USD 159 million, or by 23 percent in U.S. dollar terms and 19 percent on a local currency basis. This was primarily driven by lower interest expense on debt refinanced in 2014 and 2015 and favorable foreign exchange impacts partly as a result of the Swiss National Bank action in January 2015 to discontinue the link of the Swiss franc to the euro.
Non-Core Businesses in USD millions, for the years ended December 31 2015 2014 Change
Business operating profit: Zurich Legacy Solutions (50) (209) 76% Other run-off 101 (18) nm Total business operating profit 51 (227) nm
Other run-off, which largely comprises U.S. life insurance and annuity portfolios, reported a business operating profit of USD 101 million, an improvement of USD 119 million compared with 2014. This arose primarily from the release of long-term reserves as a consequence of a buy-back program for a variable annuity product in the U.S.
Own risk and solvency assessment 126 Economic capital adequacy 126 Insurance financial strength rating 131 Regulatory capital adequacy 131
Analysis by risk type 134 Insurance risk 134 Market risk including investment credit risk 141 Other credit risk 149 Operational risk 152 Liquidity risk 154 Strategic risk and risks to the Group’s reputation 155
The folded corner indicates that the information contained within the shaded panel is audited and forms an integral part of the consolidated financial statements.
The Group reinforced its mission for risk management to emphasize embedding disciplined risk taking in Zurich’s culture, in which risk-reward trade-offs are transparent, understood, and risks are appropriately rewarded.
Zurich’s Total Risk Profiling™ (TRP) assesses risks strategically. The Group TRP identified and assessed risks in executing the Group’s transformation program, customer strategy, information security and cyber risks.
The Group is well within its target capital level, which is calibrated to a ‘AA’ financial strength
The Group identifies plausible threat scenarios, and quantifies their potential impact on financial resources. Depending on the outcome, the Group then develops, implements and monitors appropriate actions.
In this report, we present a Z-ECM ratio sensitivity analysis to three market- and credit-risk scenarios, three natural catastrophe scenarios, and one life insurance-specific scenario. The Z-ECM ratio would remain within the ‘AA’ range for most scenarios. One market-risk scenario would cause the Z-ECM ratio to exceed – and another to drop below – the Group’s risk tolerance under a capital perspective.
Group's Overall Risk Tolerance and Appetite 120-140% Consider increased risk taking or remedial actions
The mission of risk management at Zurich Insurance Group (Zurich, or the Group) is to enhance the value of the Group by embedding disciplined risk taking in its culture, in which risk-reward trade-offs are transparent, understood and risks are appropriately rewarded.
The Zurich Risk Policy is the Group’s main risk governance document; it specifies the Group’s risk tolerance, risk limits and authorities, reporting requirements, procedures to approve any exceptions and procedures for referring risk issues to senior management and the Board of Directors. Limits are specified per risk type. In 2015 the Zurich Risk Policy was updated in several areas, including general insurance claims and actuarial reserving, reinsurance, investment risk, capital management, model risk, and internal controls. Ongoing assessments verify that requirements are met.
The Group assesses risks systematically and from a strategic perspective through its proprietary Total Risk Profiling™ (TRP) process, which allows Zurich to identify and evaluate the probability and severity of a risk scenario. The Group then develops, implements and monitors improvements. The TRP process is integral to how Zurich deals with change, and is particularly suited to evaluating strategic risks as well as risks to Zurich’s reputation. At Group level this process is conducted annually, reviewed regularly and tied to the planning process.
Based on the Group’s remuneration rules, the Board of Directors designs and structures remuneration arrangements to ensure they do not encourage inappropriate risk taking. The Chief Risk Officer (CRO) consults with the other assurance, control and governance functions to provide the CEO with a review of risk factors to consider in the annual variable-compensation process. In consultation with these functions, the CRO provides an individual assessment of Group key risk takers as part of their annual individual performance assessment. For more information on Zurich’s remuneration system, see the ‘remuneration report.’
Risk management organization The Chief Risk Officer leads the Risk Management function, which develops frameworks and processes for identifying, measuring, managing, monitoring and reporting risks throughout the Group. The Chief Risk Officer is responsible for oversight of risks across the Group, regularly reporting risk matters to the Chief Executive Officer, senior management committees and the Risk Committee of the Board.
The Group seeks to maintain a balance between higher returns for shareholders on equity held, and the security a sound capital position provides. Dividends, share buy-backs, and issuances and redemption of debt have a significant influence on capital levels. In 2015 the Group paid a dividend out of the capital contribution reserve, and refinanced parts of maturing senior debt and callable hybrid debt with new senior and hybrid debt.
The Swiss Code of Obligations stipulates that dividends may only be paid out of freely distributable reserves or retained earnings. Apart from what is specified by the Swiss Code of Obligations, Zurich Insurance Group Ltd faces no legal restrictions on dividends it may pay to its shareholders. As of December 31, 2015, the amount of the general legal reserve exceeded 20 percent of the paid-in share capital.
The ability of the Group’s subsidiaries to pay dividends may be restricted or indirectly influenced by minimum capital and solvency requirements imposed by insurance and other regulators in the countries in which the subsidiaries operate. Other limitations or considerations include foreign exchange control restrictions in some countries, and rating agencies’ methodologies.
The Group uses Z-ECM to assess the economic capital consumption of its business on a one-balance-sheet approach. Z-ECM is an integral part of how the Group is managed. It is embedded in the Group’s organization and decisionmaking processes, and is used in capital allocation, business performance management, pricing, reinsurance purchasing, transaction evaluation, risk optimization, and regulatory, investor, and rating agency communication. Z-ECM quantifies the capital required for insurance-related risk (including premium and reserve, natural catastrophe, business and life insurance), market risk, reinsurance credit and operational risks. In 2015, Zurich enhanced its market risk model; market risk and investment credit risk are now quantified in an integrated way.
At the Group level, Zurich compares Z-ECM capital required to the Z-ECM available financial resources (Z-ECM AFR) to derive an Economic Solvency Ratio (Z-ECM ratio). Z-ECM AFR reflects financial resources available to cover policyholder liabilities in excess of their expected value. It is derived by adjusting the IFRS shareholders’ equity to reflect the full economic capital base available to absorb any unexpected volatility in the Group’s business activities.
Analysis of the Group’s Z-ECM available financial resources (in USD billions as of July 1, 2015)
1 The credit spread sensitivity is applied to corporate debt, mortgages and euro currency government debt (excluding Germany), and takes into account the buffering effect of policyholder participation.
4 The second assumption under the lapse risk scenario, ‘increase in base lapse rates of 50 percent for all future years,’ is applied in a similar manner as the embedded value sensitivity; however the former is pre-tax while the latter is post-tax. (For more details, see the ‘embedded value report 2015’ at www.zurich.com/investor-relations/ results-and-reports.) Also, combining the assumptions in the lapse risk scenario introduces potential non-linear effects, which makes it difficult to directly compare the scenario with the embedded value sensitivity.
Impact on the Z-ECM ratio due to market and credit risk-specific scenarios: Impact on the Z-ECM ratio due to general insurance risk-specific scenarios3: Impact on the Z-ECM ratio due to a life insurance risk-specific scenario: Q4_2015_09_AR15_Risk_review_part1_en.indd 130 23.02.2016 09:29:25
The Group maintained its strong rating level in 2015. As of December 31, 2015, the IFSR of Zurich Insurance Company Ltd (ZIC), the main operating entity of the Group, was ‘AA–’ by Standard and Poor’s, ‘Aa3’ by Moody’s and ‘A+ (superior)’ by A.M. Best.
Moody’s left its stable outlook unchanged in 2015. Standard & Poor’s revised its outlook for Zurich from ‘positive’ to ‘stable,’ while reaffirming Zurich’s ‘AA–’ financial strength, on August 28, 2015. A.M. Best revised its outlook for Zurich Insurance Group and its core entities from ‘stable’ to ‘negative’ on October 2, 2015, following the preliminary update on third quarter results on September 21, 2015.
In each country in which the Group operates, the local regulator specifies the minimum amount and type of capital that each of the regulated entities must hold in addition to their liabilities. Besides the minimum capital required to comply with the solvency requirements, the Group aims to hold an adequate buffer to ensure regulated subsidiaries meet local capital requirements. The Group is subject to different capital requirements depending on the countries in which it operates.
Sensitivities for the Group’s Swiss Solvency Test ratio (as of July 1, 2015)
Regulatory requirements in the European Economic Area In countries of the European Economic Area (EEA), insurance entities are required to maintain minimum solvency margins according to the existing Solvency I legislation. Solvency I capital is calculated as a fixed percentage of premiums, claims, reserves and net amounts at risk. In certain European countries, both EU and non-EU, further requirements have been imposed by regulators.
The directive on Solvency II was adopted on November 25, 2009. The complete framework was introduced on January 1, 2016. Solvency II is designed to be more risk-sensitive and sophisticated in its approach than Solvency I. Solvency II capital requirements also take into account all material risks and how these interact. Under Solvency II, every insurance and reinsurance entity will be required to conduct its own risk and solvency assessment, including taking into account specific risk profiles. Under disclosure provisions, companies will have to publicly report their solvency and financial condition for the first time in 2017, based on 2016 figures.
Zurich is fully engaged in order to meet Solvency II requirements. Zurich Insurance plc (Ireland) will use its internal model, which aligns the Solvency II approach with that used for Z-ECM, and has received approval from the Central Bank of Ireland accordingly. Other EEA subsidiaries will use the Solvency II standard formula.
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. Zurich manages the customer risks it assumes, and minimizes unintended underwriting risks, through such means as: • Establishing limits for underwriting authority • Requiring specific approvals for transactions above established limits or new products • Using a variety of reserving and modeling methods • Ceding insurance risk through external proportional or non-proportional reinsurance treaties and facultative single-risk placement. The Group centrally manages reinsurance treaties.
• The Group diversifies its sources of revenues by geographies, lines of business, products and customers. Therefore, Zurich is not exposed to concentrations of insurance risk beyond its risk appetite.
Underwriting discipline is a fundamental part of managing insurance risk. The Group sets limits on underwriting capacity, and delegates authority to individuals based on their specific expertise. The Group sets appropriate underwriting guidelines. These guidelines generally include a technical price set in line with common standards to allow 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 has governance procedures to review and approve potential new products to evaluate whether the risks are well understood and justified by the potential rewards.
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 U.S. and Caribbean tropical cyclone, Europe windstorm and California earthquake, as well as potential terrorism exposures.
General Insurance – Direct written premiums and policy fees by line of business – prior period in USD millions, for the year ended December 31, 2014 Motor Property Liability
From a risk-management perspective, unit-linked products are designed to reduce much of the market and credit risk associated with the Group’s traditional business. Risks that are 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 fund values decrease. To the extent that there are guarantees built into the product design, unit-linked products carry mortality/morbidity risk and market risk. 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 mortality and morbidity charges.
The subsidiary Zurich American Life Insurance Company (ZALICO) wrote variable annuity contracts that provide policyholders with certain guarantees related to minimum death and income benefits. After 2001, ZALICO stopped issuing 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. These exposures have been substantially reduced as a result of a policy buy back program begun in 2015. 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.
Interest rate guarantees (with concentration in traditional, guaranteed business in Germany and Switzerland or variable annuity business in the U.S. containing minimum guaranteed death benefits) expose Zurich to financial losses that may arise as a result of adverse movements in interest rates. The management of these guarantees is through a combination of asset-liability matching and hedging.
Observing best estimate assumptions on cash flows related to benefits of insurance contracts gives some indication of the size of the exposure to risks and the extent of risk concentration. Table 3 shows the Group’s concentration of risk within the life business by region and line of business based on reserves for life insurance on a net basis. The Group’s exposure to life insurance risks varies significantly by geographic region and line of business and may change over time. See note 8 of the consolidated financial statements for additional information on reserves for insurance contracts.
Modeling natural catastrophes While specific catastrophes are unpredictable, modeling helps to determine potential losses and the likelihood of such losses. The Group uses adjusted third-party models to manage its underwriting and accumulations to stay within intended exposure limits and to guide how much reinsurance Zurich buys.
The Group reviews and aggregates worker injury, property and life risk exposures to identify areas of significant concentration and assesses other lines of business, such as liability and auto, although the potential exposure is not as significant. The data allows underwriters to evaluate how insuring a particular customer’s risk might affect Zurich’s overall exposure. Zurich uses a vendor-provided catastrophe model to evaluate potential exposures in every major U.S. city and selected cities in Europe. The Group undertakes more detailed and frequent analyses for cities in which Zurich has greater exposure.
The Group’s analysis for general insurance business has shown that its exposures outside North America are lower, in large part due to government-provided pools; even so, the Group assesses the risk for countries with the next-greatest potential net exposure. The Group periodically monitors accumulation limits for these and other areas.
Reinsurance for general insurance and life insurance The Group’s objective in purchasing reinsurance is to provide market-leading capacity for customers while protecting the balance sheet and achieving capital efficiency. The Group follows a centralized reinsurance treaty purchasing strategy for both General Insurance and Global Life, and bundles programs, where appropriate, to benefit from diversification and economies of scale.
The Group continues to use traditional reinsurance markets and other alternatives, such as catastrophe bonds, to protect against extreme single events and increased frequency of events. In particular the Group is able to use its global reach for catastrophe protection. It has a combination of ‘per event’ and annual aggregate covers. This protects the Group’s business by event and region, and also if multiple events occur across regions.
Reinsurance for natural catastrophes by region – unusually severe catastrophe events1
*This USD 150 million cover is the same combined global occurrence / aggregate treaty presiding over the global catastrophe treaty. This cover can be used only once, either for aggregated losses or for an individual event.
Total Z-ECM capital required: USD 33 billion (as of July 1, 2015)
• In 2015 Zurich enhanced its market risk model; market risk and investment credit risk are now quantified in an integrated way.
During 2015, the Group gradually increased market risk, in particular with equities and corporate bonds. However, due to uncertainties about the potential exit of Greece from the Eurozone, the Group implemented a macro equity hedge in April 2015 to protect against a drop of European equity assets. As of the end of August 2015, the Group unwound the hedge because the European bailout plan reduced the probability of such a tail event.
Risk from interest rates and credit spreads 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.
Basis of presentation – General Insurance and rest of the business The basis of the presentation for tables 4, 5, and 6 is an economic valuation represented by the fair value for Group investments, IFRS insurance liabilities discounted at risk-free market rates (the Group describes risk-free market rates as swap rates) to reflect the present value of insurance liability cash flows and other liabilities, for example own debt. In the sensitivities, own debt does not include subordinated debt, which Zurich considers available to protect policyholders in a worst-case scenario.
Analysis of economic sensitivities for credit spread risk Table 6 shows the estimated impacts from a 100 basis points increase in corporate credit spreads, as of December 31, 2015 and 2014, respectively. The sensitivities apply to all fixed income instruments, excluding government, supranational and similar debt securities.
In USD millions, as of December 31 2015 2014 100 basis points increase in credit spreads General Insurance business Net impact after tax (1,004) (1,342) Global Life business Total impact on Embedded Value (1,056) (884) Rest of the business Net impact after tax (220) (423)
In addition to the sensitivities, management uses stress scenarios to assess the impact of more severe market movements on the Group’s financial condition. For more information on stress scenarios, see ‘impact of market, credit, and insurance scenarios on Z-ECM (unaudited).’
– The market risk scenarios assume a concurrent movement of all stock markets and an unrelated parallel shift of all interest rates in different currencies. – The assumptions on policyholder behavior, such as lapsing of policies, included in the sensitivity analysis for Global Life may be different from actual behavior.
Table 7 shows the credit risk exposure of debt securities, by issuer credit rating. As of December 31, 2015, 96.9 percent of the Group’s debt securities is investment grade and 21.2 percent is rated ‘AAA.’ Downgrades of several Eurozone governments and related entities caused breaches of internal rating category limits; the breaches were approved. As of December 31, 2014, 97.5 percent of debt securities was investment grade and 19.7 percent was rated ‘AAA.’ The Group’s investment policy prohibits non-investment-grade investments, unless specifically authorized. Where the Group identifies investments expected to be downgraded, it implements appropriate actions.
As of December 31, 2015, the largest concentration in the Group’s debt securities portfolio was in governments, supranationals and similar at 46.6 percent. In all other categories, a total of USD 24.5 billion or 33.3 percent was secured. As of December 31, 2014, 46.4 percent of the Group’s debt portfolio was invested in governments, supranationals and similar. In all other categories, a total of USD 35.9 billion or 44 percent was secured.
The Group’s debt exposure to Eurozone governments and supranationals & similar in USD millions, as of December 31 2015 2014
In addition to debt exposure, the Group had sovereign loan exposure of USD 4.7 billion and USD 3.6 billion to Germany as of December 31, 2015 and 2014, respectively. For more information, see the ‘other loans’ section.
The second-largest concentration in the Group’s debt securities portfolio is in financial institutions (including banks), at 20.8 percent, of which 38.4 percent is secured.
Cash and cash equivalents amounted to USD 8.2 billion as of December 31, 2015 and USD 7.6 billion as of December 31, 2014. The risk-weighted average rating of the overall cash portfolio increased from ‘BBB+’ as of December 31, 2014 to ‘A–’ as of December 31, 2015. 60 percent of the total was with the ten largest global banks, whose risk-weighted average rating declined from ‘A’ as of December 31, 2014 to ‘A–’ as of December 31, 2015.
Mortgage loans The mortgage business is affected by local property market conditions and local legislation. Investment portfolio allocations made to mortgages take these factors into consideration, and are in line with the framework of the strategic asset allocation defined by the Group, and adapted and approved by local investment committees. Conservative lending criteria (i.e., maximum mortgage-loan to property-value ratios) and diversification of loans across many single borrowers, particularly in Germany and in Switzerland, help reduce potential loss. Furthermore, business units are required to clearly state criteria for determining borrower and collateral quality in their local mortgage policies. The Group sets requirements for local policies, and monitoring and reporting standards. The Group closely monitors performance of portfolios with respect to impairments and losses.
The Group’s largest mortgage loan portfolios are in Germany (USD 2.6 billion) and in Switzerland (USD 3.6 billion); these are predominantly secured against residential property. In Switzerland, the underlying properties backing individual loans are revalued every 10 years. In Germany, the property valuation is not generally reassessed after the mortgage loan is granted. A less-frequent, or no revaluation of the underlying property means that reported loan-to-value (LTV) ratios will be higher (lower) than they would be if property prices had risen (fallen) since their valuation. For more details, see note 25 in the consolidated financial statements.
Other loans The credit risk arising from other loans is assessed and monitored together with the fixed income securities portfolio. 51.8 percent of the reported loans are to governments, supranationals and similar, of which 94.4 percent are to the German Central Government or the German Federal States. Table 9 shows the composition of the loan portfolio by rating class. As of December 31, 2015, a total of USD 5.0 billion or 52.6 percent of loans are secured. As of December 31, 2014, a total of USD 6.0 billion or 55.5 percent of loans were secured.
To limit credit risk, derivative financial instruments are typically executed with counterparties rated ‘A–‘ or better by an external rating agency, unless collateral is provided as per Zurich Risk Policy. The Group’s standard practice is to only transact derivatives with those counterparties for which the Group has in place an ISDA Master Agreement, with a Credit Support Annex. This mitigates credit exposures from over-the-counter transactions due to close-out netting and requires the counterparty to post collateral when the derivative position is beyond an agreed threshold. The Group further mitigates credit exposures from derivative transactions by using exchange-traded instruments whenever possible.
Risk from currency exchange rates Currency risk is the risk of loss resulting from changes in exchange rates. The Group operates internationally and therefore is exposed to the financial impact arising from changes in the exchange rates of various currencies. The Group’s presentation currency is the U.S. dollar, but its assets, liabilities, income and expenses are denominated in many currencies, with significant amounts in the euro, Swiss franc and British pound, as well as the U.S. dollar. On local balance sheets a currency mismatch may cause a balance sheet’s net asset value to fluctuate, through either income or directly through equity. The Group manages this risk by matching foreign currency positions on local balance sheets within prescribed limits. Residual local mismatches are reported centrally to make use of the netting effect across the Group. Zurich hedges these residual local mismatches within an established limit through a central balance sheet. For information on net gains/losses on foreign currency transactions included in the consolidated income statements, see note 1 of the consolidated financial statements. The monetary currency risk exposure on local balance sheets is considered immaterial.
Differences arise when functional currencies are translated into the Group’s presentation currency, the U.S. dollar. The Group applies net investment hedge accounting to protect against the impact that changes in certain exchange rates might have on selected net investments.
Credit risk concentration The Group limits and regularly monitors credit exposures to individual and related counterparties. The Group’s exposure to counterparties’ parent companies and subsidiaries is aggregated to include reinsurance assets, investments, certain insurance products and derivatives. There is no unapproved material exposure in excess of the Group’s limits for counterparty aggregation as of December 31, 2015 or December 31, 2014.
Reinsurance assets in table 11 are shown before taking into account collateral such as cash or bank letters of credit and deposits received under ceded reinsurance contracts. Except for an immaterial amount, letters of credit are from banks rated ‘A–’ and better. Compared with December 31, 2014, collateral increased by USD 1.4 billion to USD 9.0 billion. The increase in collateral is due to the temporary reinsurance of a run-off portfolio, pending regulatory approval of the portfolio transfer to a third party.
Reinsurance premiums ceded and reinsurance assets by rating of reinsurer and captive as of December 31 2015 2014
Receivables from ceded reinsurance are part of reinsurance assets and are managed accordingly. See notes 16 and 25 of the consolidated financial statements for additional information on receivables.
• In 2015 the Group enhanced the internal control framework for operations and investment management.
As part of Z-ECM, the Group uses a scenario-based approach to assess, model and quantify the capital required for operational risk under extreme circumstances and a very slight probability of occurrence. The chart below shows the operational risk scenarios that have the highest impact on Z-ECM capital required.
Outsourcing: This risk cluster relates to the need to exit a strategic supplier arrangement for (i) poor service quality; or (ii) a foreseeable disruption in services to financial distress of the ultimate parent company.
Z-ECM capital required for operational risk, split by risk scenario clusters (as of July 1, 2015)
Group-wide liquidity management policies and specific guidelines govern how local businesses plan, manage and report their local liquidity and include regular stress tests for all major carriers within the Group. The stress tests use a standardized set of internally defined stress events, and are designed to provide an overview of the potential drain on liquidity if the Group had to recapitalize local balance sheets.
Similar guidelines apply at the Group level, and detailed liquidity forecasts are regularly conducted, based on local businesses’ input and the Group’s forecasts. As part of its liquidity management, the Group maintains sufficient cash and cash equivalents and high-quality, liquid investment portfolios to meet outflows under expected and stressed conditions. The Group also maintains internal liquidity sources that cover the Group’s potential liquidity needs, including those that might arise in times of stress. The Group takes into account the amount, availability and speed at which these sources can be accessed. The Group has access to diverse funding sources to cover contingencies, including asset sales, external debt issuance and making use of committed borrowing facilities or letters of credit. The Group maintains a range of maturities for external debt securities. A potential source of liquidity risk is the effect of a downgrade of the Group’s credit rating. This could affect the Group’s commitments and guarantees, potentially increasing liquidity needs. This risk, and mitigating actions that might be employed, are assessed on an ongoing basis within the Group’s liquidity framework.
The Group limits the percentage of the investment portfolio that is not readily realizable and regularly monitors exposures to take action if necessary to maintain an appropriate level of asset liquidity. During 2015, the Group was within its limits for asset liquidity. The fair value hierarchy tables in note 24 of the consolidated financial statements segregate financial assets into three levels, reflecting the basis for how fair value was determined. These tables indicate the high degree of liquidity of the Group’s investments.
Strategic risk Strategic risk corresponds to the risk that Zurich is unable to achieve its strategic targets.
Strategic risks can arise from: • Inadequate assessment of strategic plans • Ineffective implementation of strategic plans • Unexpected changes to assumptions underlying strategic plans
Zurich defines the strategy as the long term plan of action designed to allow the Group to achieve its goals and aspirations.
The Group aims to preserve its reputation by adhering to applicable laws and regulations, and by following the core values and principles of Zurich Basics, the Group’s code of conduct, which promotes integrity and good business practice. The Group centrally manages certain aspects of reputation risk, for example, communications, through functions with the appropriate expertise.
Consolidated income statements 159 Consolidated statements of comprehensive income 160 Consolidated balance sheets 162 Consolidated statements of cash flows 164 Consolidated statements of changes in equity 166 1. Basis of presentation 168 2. New accounting standards and amendments to published accounting standards 170 3. Summary of significant accounting policies 171 4. Critical accounting judgments and estimates 178 5. Acquisitions and divestments 183 6. Group investments 184 7. Group derivative financial instruments and hedge accounting 187 8. Reserves for insurance contracts and reinsurers’ share of reserves for insurance contracts 191 9. Liabilities for investment contracts 198 10. Equity component relating to contracts with DPF 199 11. Gross and ceded insurance revenues and expenses 200 12. Deferred policy acquisition costs and deferred origination costs 201 14. Property and equipment 203 15. Attorney-in-fact contracts, goodwill and other intangible assets 204 16. Receivables and other assets 206 17. Other liabilities 207 18. Income taxes 209 19. Senior and subordinated debt 212 20. Shareholders’ equity 214 21. Employee benefits 216 22. Share-based compensation and cash incentive plans 224 23. Commitments and contingencies, legal proceedings and regulatory investigations 226 24. Fair value measurement 229 25. Analysis of financial assets 239 26. Related party transactions 241 27. Relationship with the Farmers Exchanges 242 28. Segment information 244 29. Interest in subsidiaries 254 Report of the statutory auditor 258
Net investment result on unit-linked investments 6,238 10,784 Net gain/(loss) on divestments of businesses 10 (259) Other income 1,448 1,723 Total revenues 60,568 72,571 Benefits, losses and expenses Insurance benefits and losses, gross of reinsurance 11 36,076 37,452 Less ceded insurance benefits and losses1 11 (5,330) (3,088) Insurance benefits and losses, net of reinsurance 11 30,746 34,364 Policyholder dividends and participation in profits, net of reinsurance 11 7,863 12,568 Underwriting and policy acquisition costs, net of reinsurance 11 9,061 9,835 Administrative and other operating expense 13 8,659 8,858 Interest expense on debt 431 525 Interest credited to policyholders and other interest 467 523 Total benefits, losses and expenses 57,227 66,672 Net income before income taxes 3,340 5,898 Income tax (expense)/benefit 18 (1,294) (1,670)
Basic earnings per share 20 11.89 24.39 Diluted earnings per share 20 11.86 24.17 1 The Group’s life operations in the UK entered into a reinsurance agreement to transfer the risk associated with a significant annuities portfolio as of April 1, 2015 and an additional tranche as of October 1,2015. The combined initial impact of these transactions was an increase of USD 1.8 billion in premiums ceded to reinsurers and an increase of USD 1.8 billion in ceded insurance benefits and losses in the Global Life business.
Change (before reclassification, tax and foreign currency translation effects and after allocation to policyholders) 5,297 132 (2,305) 3,124 32 (855) (823) 2,301 Reclassification to income statement (before tax, foreign currency translation effects and allocation to policyholders) (1,950) 163 (1,787) – – – (1,787) Deferred income tax (before foreign currency translation effects) (704) (65) – (769) (8) 190 183 (586) Foreign currency translation effects (305) (30) – (335) – 257 257 (78)
Change (before reclassification, tax and foreign currency translation effects and after allocation to policyholders) 17 23 (3,034) (2,994) 12 649 661 (2,333) Reclassification to income statement (before tax, foreign currency translation effects and allocation to policyholders) (1,777) (16) – (1,793) – – – (1,793) Deferred income tax (before foreign currency translation effects) 397 (15) – 382 (2) (162) (164) 218 Foreign currency translation effects (149) (4) – (153) – 142 142 (11)
Reinsurers’ share of reserves for insurance contracts1 8 17,774 16,550 17,978 Deposits made under assumed reinsurance contracts 1,708 2,203 2,645 Deferred policy acquisition costs 12 17,677 17,750 18,724
Attorney-in-fact contracts 15 1,025 1,025 1,025 1 The Group’s life operations in the UK entered into a reinsurance agreement to transfer the risk associated with a significant annuities portfolio as of April 1, 2015 and an additional tranche as of October 1, 2015. The combined initial impact of these transations was a decrease of USD 1.7 billion in total investments and an increase of USD 1.8 billion in Reinsurers’ share of reserves for insurance contracts in the Global Life business.
Liabilities Reserve for premium refunds 537 606 571 Liabilities for investment contracts 9 70,627 70,813 67,113 Deposits received under ceded reinsurance contracts 903 1,022 1,245 Deferred front-end fees 5,299 5,539 5,791 Reserves for insurance contracts 8 237,622 253,719 265,440 Obligations to repurchase securities 1,596 1,451 1,685
Additional paid-in capital 20 3,245 4,843 6,395 Net unrealized gains/(losses) on available-for-sale investments 2,556 4,068 1,730 Cash flow hedges 294 306 106 Cumulative foreign currency translation adjustment (9,347) (6,313) (4,008)
(Income)/expense from equity method accounted investments (8) (12) Depreciation, amortization and impairments of fixed and intangible assets 1,200 1,012 Other non-cash items 325 9
Net capital (gains)/losses on total investments and impairments (6,261) (12,017) Net change in derivatives 200 38 Net change in money market investments 1,415 1,939 Sales and maturities
Net changes in sale and repurchase agreements 237 (139) Movements in receivables and payables (69) 913 Net changes in other operational assets and liabilities (485) 425 Deferred income tax, net 24 178 Net cash provided by/(used in) operating activities 5,222 5,860 1 The Group’s life operations in the UK entered into a reinsurance agreement to transfer the risk associated with a significant annuities portfolio as of April 1, 2015 and an additional tranche as of October 1, 2015. The combined initial impact of these transactions was an increase of USD 1.8 billion in reinsurers’ share of reserves for insurance contracts and a transfer of USD 1.7 million of debt securities in the Global Life business.
Cash flows from investing activities Disposals of tangible and intangible assets 60 86 Additions to tangible and intangible assets (678) (1,381) (Acquisitions)/disposals of equity method accounted investments, net 88 95 Acquisitions of companies, net of cash acquired (8) (100) Divestments of companies, net of cash divested 4 67 Dividends from equity method accounted investments 8 1 Net cash provided by/(used in) investing activities (526) (1,233) Cash flows from financing activities Dividends paid (2,869) (2,958) Issuance of share capital 44 129 Net movement in treasury shares 21 25 Other acquisitions and divestments related cash flows (34) (403) Issuance of debt 298 1,526 Repayment of debt (1,023) (1,560) Net cash provided by/(used in) financing activities (3,564) (3,241) Foreign currency translation effects on cash and cash equivalents (714) (773) Change in cash and cash equivalents 417 614 Cash and cash equivalents as of January 1 8,776 8,162 Cash and cash equivalents as of December 31 9,193 8,776 of which: – Group investments 8,159 7,600 – Unit-linked 1,034 1,176
Balance as of December 31, 2013, as previously reported 11 6,395 1,730 106 (4,008) 195 28,075 32,503 2,231 34,734 Issuance of share capital1 – 200 – – – – – 200 – 200
Net changes in capitalization of non-controlling interests – – – – – – – – (59) (59) Balance as of December 31, 2014, as restated 11 4,843 4,068 306 (6,313) 218 31,602 34,735 2,095 36,830
Balance as of December 31, 2014, as previously reported 11 4,843 4,068 306 (6,259) 218 31,548 34,735 2,095 36,830 Total adjustments due to restatement – – – – (54) – 54 – – – Balance as of December 31, 2014, as restated 11 4,843 4,068 306 (6,313) 218 31,602 34,735 2,095 36,830 Issuance of share capital1 – 205 – – – – – 205 – 205
4 The number of treasury shares deducted from equity as of December 31, 2015 amounted to 1,243,931 (December 31, 2014: 1,292,220, December 31, 2013: 1,320,652).
Net changes in capitalization of non-controlling interests – – – – – – – – (34) (34)
1 The number of common shares issued as of December 31, 2015 was 150,404,964 (December 31, 2014: 149,636,836, December 31, 2013: 148,903,222). 2 As approved by the Annual General Meeting on April 2, 2014, the dividend of CHF 17 per share was paid out of the capital contribution reserve. The difference of USD 1,022 million between the dividend at transaction day exchange rates amounting to USD 2,837 million and the dividend at historical exchange rates amounting to USD 1,815 million is reflected in the cumulative foreign currency translation adjustment.
Zurich Insurance Group Ltd and its subsidiaries (collectively the Group) is a provider of insurance products and related services. The Group mainly operates in Europe, North America, Latin America and Asia Pacific through subsidiaries, as well as branch and representative offices.
On February 10, 2016 the Board of Directors of Zurich Insurance Group Ltd authorized these Consolidated financial statements for issue. These financial statements will be submitted for approval to the Annual General Meeting of Shareholders to be held on March 30, 2016.
Disclosures under IFRS 4 “Insurance Contracts” and IFRS 7 “Financial Instruments: Disclosures” relating to the nature and extent of risks, and capital disclosures under IAS 1 “Presentation of Financial Statements” have been included in the audited sections of the Risk review on pages 123 to 155, and they form an integral part of the Consolidated financial statements.
The Group’s consolidated balance sheets are not presented using a current/non-current classification. The following balances are generally considered to be current: cash and cash equivalents, deferred policy acquisition costs on general insurance contracts, accrued investment income, receivables, reserve for premium refunds, obligations to repurchase securities and accrued liabilities.
The following balances are generally considered to be non-current: equity securities, investment property, investments in associates and joint ventures, deferred policy acquisition costs on life insurance contracts, deferred tax assets, property and equipment, goodwill, other intangible assets and deferred tax liabilities.
All amounts in the Consolidated financial statements, unless otherwise stated, are shown in U.S. dollars, rounded to the nearest million with the consequence that the rounded amounts may not add to the rounded total in all cases. All ratios and variances are calculated using the underlying amounts rather than the rounded amounts.
Implementation of new accounting standards Neither new accounting standards nor amendments to and interpretations of standards have been implemented for the financial year beginning January 1, 2015.
a) Consolidation principles The Group’s Consolidated financial statements include the assets, liabilities, equity, revenues, expenses and cash flows of Zurich Insurance Group Ltd and its subsidiaries. A subsidiary is an entity that Zurich Insurance Group Ltd either directly or indirectly controls. The results of subsidiaries acquired are included in the Consolidated financial statements from the date of acquisition. The results of subsidiaries that have been divested during the year are included up to the date control ceased. All significant intercompany balances, profits and transactions are eliminated in full.
Changes in ownership interests in a subsidiary that do not result in a change in control are recorded within equity.
Reserves for losses and loss adjustment expenses Losses and loss adjustment expenses are charged to income as incurred. Reserves for losses and loss adjustment expenses represent estimates of future payments of reported and unreported claims for losses and related expenses, with respect to insured events that have occurred. Any changes in estimates are reflected in the results of operations in the period in which estimates are changed. The Group does not discount its loss reserves, other than for settled claims with fixed payment terms.
d) Liabilities for investment contracts (without DPF) Investment contracts are those contracts that do not transfer significant insurance risk. The Group issues investment contracts without fixed terms (unit-linked) and investment contracts with fixed and guaranteed terms (fixed interest rate).
The Group recognizes regular purchases and sales of financial assets on the trade date, which is the date on which the Group commits to purchase or sell the asset.
Derivative financial instruments that qualify for hedge accounting Derivative financial instruments are used by the Group to economically hedge risks. In limited circumstances derivative financial instruments are designated as hedging instruments for accounting purposes in: • Fair value hedges which are hedges of the exposure to changes in the fair value of a recognized asset or liability; • Cash flow hedges, which are hedges of the exposure to variability in cash flows attributable to a particular risk as associated with a recognized asset or liability or a highly probable forecast transaction and could affect profit or loss; or
All hedge relationships are formally documented, including the risk management objectives and strategy for undertaking the hedge. At inception of a hedge and on an ongoing basis, the hedge relationship is formally assessed in order to determine whether the hedging instruments are expected (prospective assessment) and have been (retrospective assessment) highly effective in offsetting changes in fair values or cash flows of hedged items attributable to the hedged risk. If the qualifying criteria for the application of hedge accounting are no longer met, the hedge relationship is discontinued prospectively, in which case the hedging instrument and the hedged item are reported independently in accordance with the respective accounting policy.
g) Attorney-in-fact relationships (AIF) The AIF reflects the ability of the Group to generate future revenues based on the Group’s relationship with the Farmers Exchanges, which are managed but not owned by Farmers Group, Inc. (FGI), a wholly owned subsidiary of the Group. In determining that these relationships have an indefinite useful life, the Group considered the organizational structure of inter-insurance exchanges, under which subscribers exchange contracts with each other and appoint an attorney-in-fact to provide non-claims management services, and the historical AIF between FGI and the Farmers Exchanges. The AIF is tested for impairment at least annually.
The useful lives of computer software licenses and capitalized internal software development costs generally do not exceed five years. In limited circumstances, capitalized software development costs may be amortized over a period of up to ten years, taking into account the effects of obsolescence, technology, competition and other economic and legal factors.
Life insurance The reserves for future life policyholder benefits and policyholder contract deposits and other funds contain a number of assumptions regarding mortality or longevity, lapses, surrenders, expenses, discount rates and investment returns. These assumptions can vary by country, year of policy issuance and product type and are determined with reference to past experience adjusted for new trends, current market conditions and future expectations. As such the liabilities for future life policyholder benefits and policyholder contract deposits may not represent the ultimate amounts paid out to policyholders. For example: • The estimated number of deaths determines the value of the benefit payments. The main source of uncertainty arises because of the potential for pandemics and wide-ranging lifestyle changes, such as changes in eating, smoking and exercise habits, which could result in earlier deaths for age groups in which the Group has significant exposure to mortality risk.
See note 8 for further information on reserves for insurance contracts and note 12 for deferred policy acquisition costs. Also refer to the insurance risk section of the Risk review.
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.
Distribution agreements The recoverable amount for General Insurance intangible assets relating to distribution agreements is determined on the basis of value-in-use calculations. These calculations use cash flow projections in line with the terms and conditions of the underlying distribution agreements. For Global Life, the recoverable amount of intangible assets relating to distribution agreements is determined based on projected cash flows derived from the new business calculation and discount rates consistent with the data used for actuarial valuations, or based on business operating profit (BOP).
Banco Sabadell S.A. entities in Spain 1,569 8.6 9.3 2.0 2.0
Transactions in 2015 On December 17, 2015, the Group entered into an agreement with Wells Fargo & Company (Wells Fargo) to acquire 100 percent of Rural Community Insurance Agency, Inc. (RCIA) and its fully owned subsidiary Rural Community Insurance Company (RCIC). The two entities are collectively known as Rural Community Insurance Services (RCIS), a provider of agricultural insurance in the United States. The purchase price will amount to approximately USD 675 million plus the amount of excess capital in RCIS at the date of closing, estimated to be up to approximately USD 375 million. The transaction is expected to close in the first half of 2016 and is subject to applicable anti-trust and insurance regulatory approvals, as well as other customary closing conditions.
On October 27, 2015, the Group signed an agreement to purchase a 100 percent stake in Kono Insurance Limited, a general insurance company incorporated in Hong Kong, for approximately USD 27 million subject to a purchase price adjustment post closing. The transaction was closed on January 29, 2016.
The initial consideration on a 50.0 percent basis amounted to USD 50 million, including an immaterial purchase price adjustment. In addition to the initial consideration, an uncapped contingent liability based on the future profitability over the term of the distribution agreement was agreed, for which the fair value was estimated to amount to USD 4 million on a 50.0 percent basis. Based on the final purchase accounting, the fair value of net tangible assets acquired amounted to USD 30 million, identifiable intangible assets relating to the distribution agreement amounted to USD 79 million, net of deferred tax and the non-controlling interest amounted to USD 54 million as reflected in the Consolidated financial statements as of the acquisition date.
On May 28, 2014, the Group increased its shareholding in Deutscher Herold AG to 100 percent. This increase was the result of the non-controlling shareholder exercising its put option right over 15.17 percent of the shares and the Group exercising its call option right over 5.0 percent. The total consideration amounted to USD 366 million, of which USD 275 million for 15.17 percent was previously recorded on the balance sheet as a put option liability.
Investments in associates and joint ventures 8 12 31 38 39 49 – (2)
Investment result, gross, for Group investments 5,827 6,462 1,891 3,004 7,718 9,467 (224) (86) Investment expenses for Group investments 2 (256) (256) – – (256) (256) – – Investment result, net, for Group investments 5,572 6,206 1,891 3,004 7,462 9,211 (224) (86)
Cash and cash equivalents 8,159 4.3 7,600 3.7 Equity securities: Fair value through profit or loss 3,519 1.8 3,619 1.8
Debt securities: Fair value through profit or loss 6,180 3.2 7,121 3.5
Investments in associates and joint ventures 18 0.0 70 0.0 1 As of January 1, 2015, USD 1.5 billion of hybrid instruments were classified as available-for-sale equity securities. These were previously classified as available-for-sale debt securities.
Market value revaluation 132 189 Transfer from assets held for own use 28 70 Transfer to assets held for sale (16) (28) Foreign currency translation effects (436) (1,032) As of December 31 9,865 8,784
Gross unrealized gains/(losses) on Group investments 10,309 14,456 Less amount of unrealized gains/(losses) on investments attributable to: Life policyholder dividends and other policyholder liabilities (5,814) (7,628) Life deferred acquisition costs and present value of future profits (654) (995) Deferred income taxes (968) (1,421) Non-controlling interests (23) (38)
Securities lending, repurchase and reverse repurchase agreements in USD millions, as of December 31 2015 2014
Securities lending agreements Securities lent under securities lending agreements1 4,527 7,668 Collateral received for securities lending 4,909 8,266 of which: Cash collateral 93 229 of which: Non cash collateral 2 4,815 8,036 Liabilities for cash collateral received for securities lending 93 229 Repurchase agreements Securities sold under repurchase agreements 3 1,596 1,455 Obligations to repurchase securities 1,596 1,451 Reverse repurchase agreements Securities purchased under reverse repurchase agreements 4 194 294 Receivables under reverse repurchase agreements 193 290 1 The Group’s counterparties had the right to sell or repledge, in the absence of default, assets pledged as collateral with a fair value of USD 4,527 million and USD 7,668 million as of December 31, 2015 and 2014, respectively. The majority of these assets were debt securities.
2 The Group had the right to sell or repledge, in the absence of default by its counterparties, securities received as collateral with a fair value of USD 4,672 million and USD 7,344 million as of December 31, 2015 and 2014, respectively.
3 The Group’s counterparties had the right to sell or repledge, in the absence of default, assets pledged as collateral with a fair value of USD 997 million and USD 1,307 million as of December 31, 2015 and 2014, respectively. The majority of these assets were debt securities.
Under a reverse repurchase agreement, the securities received are not recognized on the balance sheet, as long as the risk and rewards of ownership have not been transferred to the Group. The cash delivered by the Group is derecognized and a corresponding receivable is recorded within receivables and other assets. Interest income is recognized in income using the effective interest rate method over the life of the agreement.
Total Group derivative financial instruments 22,387 4,599 4,047 31,034 417 (249) 28,600 561 (307)
Maturity profile of notional amounts and fair values of Group derivative financial instruments in USD millions, as of December 31 2015 2014
Fair value hedges: Cross currency interest rate swaps – – – – – – 330 8 –
Information on debt issuances designated as hedged items in fair value hedge relationships is set out in note 19.
The Group also has fair value hedge relationships consisting of cross currency swaps and forwards to protect the Group from foreign currency fluctuation certain fixed income securities and hybrid equity securities denominated in a currency other than the functional currency of the reporting entity.
Table 7.3 sets out gains and losses arising from fair value hedges: Q4_2015_12_AR15_Consolidated_financial_statements_v118_en.indd 188 23.02.2016 09:33:50
Information on debt issuances designated as hedged items in cash flow hedge relationships is set out in note 19.
The Group recognized gains of USD 12 million and USD 13 million in the consolidated income statement within net investment income on Group investments for the years ended December 31, 2015 and 2014, respectively. The Group also recognized net gains/(losses) of USD (40) million and USD (176) million within administrative and other operating expense for the years ended December 31, 2015 and 2014, respectively, as an offset to the foreign currency revaluation on the underlying hedged items.
A gain of USD 10 million and a loss of USD 29 million for the years ended December 31, 2015 and 2014, respectively, was recognized in net capital gains/(losses) and impairments due to hedge ineffectiveness.
Net investment hedges The Group applies net investment hedge accounting in order to protect itself against the effects of changes in exchange rates in its net investments in foreign operations.
Measurement of hedge effectiveness is based on changes in forward rates. Gains and losses on the designated hedging derivative and non-derivative financial instruments relating to the effective portion of the hedge are recognized in OCI together with the translation gains and losses on the hedged net investment. The accumulated gains and losses in OCI are reclassified to income on disposal or partial disposal of the foreign operation.
Information on debt issuances designated as hedging instruments in a net investment hedge relationship is set out in note 19.
Related amounts not offset (109) (186) 110 186 Cash collateral (received)/pledged (919) (896) 55 82 Non cash collateral (received)/pledged (25) (27) 62 8
Reserves for losses and loss adjustment expenses1 62,971 64,472 (9,231) (9,770) 53,739 54,703
Policyholder contract deposits and other funds 22,076 23,415 (1,956) (1,994) 20,121 21,421 Reserves for unit-linked contracts 64,393 71,400 – – 64,393 71,400 Total reserves for insurance contracts 3 237,622 253,719 (17,885) (16,650) 219,737 237,069 1 The net 2015 includes USD 2.5 billion reserves for losses and loss adjustment expenses discounted at an average rate of 2.3% with a corresponding undiscounted amount of USD 3.7 billion. The net 2014 includes USD 2.4 billion reserves for losses and loss adjustment expenses discounted at an average rate of 2.6% with a corresponding undiscounted amount of USD 3.7 billion.
2 The Group’s life operations in the UK entered into a reinsurance agreement to transfer the risk associated with a significant annuities portfolio as of April 1, 2015 and an additional tranche as of October 1, 2015. The combined initial impact of these transactions was an increase of USD 1.8 billion in reinsurers’ share of reserves for insurance contracts in the Global Life business.
3 Total reserves for insurance contracts ceded are gross of allowances for uncollectible amounts of USD 111 million and USD 100 million as of December 31, 2015 and 2014, respectively.
For the year ended December 31, 2015, the decrease of USD 964 million in net reserves for losses and loss adjustment expenses was mostly driven by the effect of foreign currency translation of USD 2,349 million. Excluding this effect, reserves for losses and loss adjustment expenses increased by USD 1,385 million. Underlying unfavorable reserve development arising from reserves established in prior years amounted to USD 149 million during the year ended December 31, 2015, and mainly related to the following: • In North America, adverse prior year development of USD 264 million was driven by auto liability and certain lines of business; • Favorable prior year development of USD 121 million driven by Swiss motor third party liability; • Adverse prior year development of USD 110 million from Non-core business from latent diseases and other discontinued portfolios.
For the year ended December 31, 2014, the decrease of USD 2,616 million in net reserves for losses and loss adjustment expenses was mostly driven by the effect of foreign currency translation of USD 3,013 million. Excluding this effect, reserves for losses and loss adjustment expenses increased by USD 397 million. Underlying favorable reserve development arising from reserves established in prior years amounted to USD 59 million during the year ended December 31, 2014, and mainly relates to the following: • The personal and commercial business in Europe reported favorable prior year development of USD 296 million, mostly driven by USD 96 million in motor third party liability in Switzerland and USD 75 million in property in the UK; • In Global Corporate, adverse prior year development of USD 26 million arising in North America, partially offset by favorable development in Europe; • Adverse prior year development of USD 93 million relating to asbestos.
Development of insurance losses, net in USD millions, as of December 31 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Cumulative incurred as of December 31: Seven years later (3,146) (3,215) (2,973) Eight years later (2,845) (3,271) Nine years later (2,808)
Cumulative (deficiency)/ redundancy of net reserves 2,808 3,271 2,973 2,677 2,020 804 777 139 (149) Cumulative (deficiency)/ redundancy as a percentage of initial net reserves 5.5% 6.0% 5.6% 4.8% 3.6% 1.5% 1.4% 0.2% (0.3%)
For the year ended December 31, 2015, reserves for asbestos claims decreased by USD 170 million gross and USD 145 million net. The decrease in the gross reserve primarily arose from payments of USD 162 million mainly in the UK and North America, foreign currency translation effects of USD 23 million and an adverse prior year development of USD 16 million due to adverse development in UK and North America. Reserve adequacy improved during 2015 following a commutation settlement in Centre Group Holdings Limited related to asbestos claims.
For the year ended December 31, 2014, reserves for asbestos claims decreased by USD 272 million gross and USD 228 million net. The decrease in the gross reserve primarily relates to foreign currency translation effects of USD 167 million and USD 199 million due to payments, partially offset by adverse prior year development of USD 93 million in the UK and North America.
2 The 2015 net movement relates to USD (425) million transferred to Banco Santander S.A., which was previously managed on a fiduciary and ring-fenced basis, and USD (381) million reclassified to policyholder contract deposits and other funds (see note 1), partially offset by USD 90 million reclassified from other liabilities and USD 48 million reclassified from reserves for unit-linked insurance contracts and liabilities for investment contracts. The 2014 net movement relates to USD (50) million reclassified to reserves for unit-linked contracts and USD (47) million reclassified to reserves for losses and loss adjustment expenses (see note 1 of the Consolidated financial statements 2014).
The amount of policyholder dividends to be paid is determined annually by each life insurance subsidiary. Policyholder dividends include life policyholder share of net income and unrealized appreciation of investments that are required to be allocated by the insurance contract or by local insurance regulations. Experience adjustments relating to future policyholder benefits and policyholder contract deposits vary according to the type of contract and the country. Investment, mortality and morbidity results may be passed through by experience credits or as an adjustment to the premium mechanism, subject to local regulatory provisions.
Net impact of changes in assumptions 158 14 1 2014 includes USD (105) million relating to changes in assumptions for terminal bonus reserves in Germany.
Universal life and other contracts 12,120 12,626 Policyholder dividends 9,957 10,789
Expected maturity profile for reserves for insurance contracts, net of reinsurance – current period in USD millions, as of December 31, 2015 Reserves for losses and loss adjustment expenses
Consolidated financial statements continued 9. Liabilities for investment contracts Table 9.1
Unit-linked investment contracts 62,245 62,964 Investment contracts (amortized cost) 754 843 Investment contracts with DPF 7,629 7,006
Fee income and other expenses (465) (647) Interest and bonuses credited to policyholders 3,277 5,554 Acquisitions/(divestments) and transfers1 (29) (425) Increase/(decrease) recorded in other comprehensive income 152 500 Foreign currency translation effects (5,115) (6,120) As of December 31 70,627 70,813 1 The 2015 movement relates to USD (29) million reclassified to future life policyholder benefits. The 2014 movement relates to USD (425) million reclassified to reserves for unit-linked contracts (see note 1 of the Consolidated financial statements 2014).
Tables 9.3a and 9.3b provide an analysis of investment contract liabilities according to maturity, based on expected cash flows as of December 31, 2015 and 2014. The undiscounted contractual cash flows for investment contract liabilities are USD 70.8 billion and USD 71.1 billion as of December 31, 2015 and 2014, respectively. Liabilities for unit-linked investment contracts amounted to USD 62.2 billion and USD 63.0 billion as of December 31, 2015 and 2014, respectively. Policyholders of unit-linked investment contracts can generally surrender their contracts at any time, leading the underlying assets to be liquidated, risks arising from liquidation of unit-linked assets are borne by the policyholders. Certain non-unit-linked contracts also allow for surrender of the contract by the policyholder at any time. Liabilities for such contracts amounted to USD 767 million and USD 851 million as of December 31, 2015 and 2014, respectively. The Group actively manages the Global Life in-force business to improve persistency and retention.
Expected maturity profile for liabilities for investment contracts – current period in USD millions, as of December 31, 2015
Expected maturity profile for liabilities for investment contracts – prior period in USD millions, as of December 31, 2014
Certain investment and insurance contracts sold by the Group contain benefit features for which the amount and timing of declaration and payment are at the discretion of the Group. Where that discretion has not been exercised, the total amount of undeclared funds surplus is included in equity. Mandated allocations related to unrealized results and earnings are included in policyholder liabilities and, upon declaration, discretionary bonuses are allocated to policyholders. The changes in table 10 represent the increase or decrease in unallocated gains and retained earnings after charging discretionary bonuses to policyholder liabilities.
Losses and loss adjustment expenses 24,771 25,360 (2,909) (2,488) 21,862 22,871 Life insurance death and other benefits 11,305 12,093 (2,422) (600) 8,884 11,492 Total insurance benefits and losses 36,076 37,452 (5,330) (3,088) 30,746 34,364
Policyholder dividends and participation in profits in USD millions, for the years ended December 31 2015 2014
Underwriting and policy acquisition costs in USD millions, for the years ended December 31 Gross Ceded Net
Table 11.4 in USD millions, for the years ended December 31 Gross Ceded Net
Change in reserves for unearned premiums 648 351 (352) 8 296 359
Development of deferred policy acquisition costs in USD millions General Insurance Global Life Farmers Total
Amortization (charged)/ credited to other comprehensive income – – 240 (579) – – 240 (579) Acquisitions/(divestments) and transfers1 – (7) – 19 – – – 12 1 The 2014 General Insurance movement includes USD (11) million due to the sale of the Group’s General Insurance retail business in Russia (see note 5) and USD 4 million due to the acquisition of MSD (see note 5). The 2014 Global Life movement relates to USD 19 million transferred from deferred origination costs (see note 1 of the Consolidated financial statements 2014).
As of January 1 595 724 Origination costs deferred 51 57
Administrative and other operating expense 8,659 8,858 Other underwriting and policy acquisition expenses1 2,406 2,439 Unallocated loss adjustment expenses 2 1,425 1,690 Other investment expenses for Group investments 3 145 160 of which: Personnel and other related costs 5,715 6,132 Amortization and impairments of intangible assets 1,004 840 Depreciation and impairments of property and equipment 198 173 Building and infrastructure 582 577 Brand and marketing expenses 439 523 Life recurring commission 400 415 Asset and other non-income taxes 81 95 IT expenses 1,391 1,487 Restructuring costs 457 97 External professional services 1,078 1,109 Foreign currency translation (245) (82)
Property and equipment – current period in USD millions Land held for own use
Gross carrying value as of January 1, 2015 239 823 385 426 769 2,643
Net carrying value as of December 31, 2015 211 374 138 65 352 1,140
Net carrying value as of December 31, 2014 233 471 148 69 353 1,273
Gross carrying value as of December 31, 2014 239 823 385 426 769 2,643
Amortization charged to other comprehensive income – – 28 – – – 28
As of December 31, 2015, intangible assets relating to non-controlling interests were USD 89 million for the present value of future profits (PVFP) of acquired insurance contracts, USD 1,221 million for distribution agreements and USD 14 million for software.
Additions to goodwill of USD 8 million relate to the acquisition of Tennyson Insurance Limited which is a general insurance company based in the UK.
Intangible assets by segment – current period in USD millions, as of December 31, 2015
Other Operating Businesses – – – – 129 – 129 Net carrying value as of December 31, 2015 1,025 1,289 466 2,752 1,505 43 7,080
Intangible assets – prior period in USD millions Attorneyin -fact relationships Goodwill PVFP
Gross carrying value as of January 1, 2014 1,025 2,190 2,918 4,364 4,720 226 15,443
Gross carrying value as of December 31, 2014 1,025 1,778 2,701 4,480 4,588 186 14,760
Other Operating Businesses – – – – 195 – 195 Net carrying value as of December 31, 2014 1,025 1,661 556 3,577 1,543 53 8,415
Non-financial assets Current tax receivables 742 737 Accrued premiums 953 720 Prepaid expenses 276 317 Prepaid insurance benefits 327 327 Other assets 337 401 Total receivables and other assets 14,930 16,946 1 December 31, 2015 and 2014 includes USD 38 million and USD 35 million, respectively, for receivables arising from ceded reinsurance. 2 December 31, 2014 includes USD 552 million of investments managed on a fiduciary and ring-fenced basis transferred to Banco Santander S.A. in 2015.
Receivables are carried at notional amounts, and are generally settled within one year. The notional and fair value amounts do not vary significantly.
Other liabilities in USD millions, as of December 31 2015 2014
Maturity schedule – other financial liabilities1 in USD millions, as of December 31 2015 2014
During the year ended December 31, 2015, restructuring programs with estimated costs of USD 467 million were announced and impacted mainly Europe, for both General Insurance and Global Life. USD 9 million related to net decreases of provisions for restructuring which were initiated in prior years. In addition, the Group recorded USD 67 million of software impairments (note 15) and USD 32 million of impairments of own use properties (note 14), resulting from restructuring decisions.
Income tax expense – current/deferred split in USD millions, for the years ended December 31 2015 2014
Expected and actual income tax expense in USD millions, for the years ended December 31 Rate 2015 Rate 2014
Net income before income taxes 3,340 5,898 less: income tax (expense)/benefit attributable to policyholders (110) (106) Net income before income taxes attributable to shareholders 3,230 5,792 Expected income tax expense attributable to shareholders computed at the Swiss statutory tax rate 22.0% 711 22.0% 1,274 Increase/(reduction) in taxes resulting from: Tax rate differential in foreign jurisdictions 287 237 Tax exempt and lower taxed income (92) (109) Non-deductible expenses 41 148 Tax losses not recognized 165 85 Prior year adjustments and other 72 (73)
Tax loss carryforwards 617 – 615 – Gross deferred tax assets/(liabilities) before valuation allowance 3,352 (1,562) 3,282 (1,521) Valuation allowance (334) – (200) – Gross deferred tax assets/(liabilities) after valuation allowance 3,017 (1,562) 3,083 (1,521) Deferred tax assets 1,455 1,561 Gross deferred tax Deferred acquisition and origination costs 42 (2,282) 28 (2,447) Depreciable and amortizable assets 129 (1,980) 236 (2,215) Life policyholders’ benefits and deposits1 1,286 (840) 1,392 (855) Unrealized (gains)/losses on available-for-sale investments and cash flow hedges 210 (1,029) 190 (1,367) Accruals and deferred income 133 (119) 118 (203) Reserves for losses and loss adjustment expenses 87 (87) 105 (95) Reserves for unearned premiums 33 (90) 40 (104) Deferred front-end fees 468 – 528 – Pensions and other employee benefits 594 (269) 498 (94)
Development of net deferred tax liabilities in USD millions 2015 2014
As of January 1 (3,458) (3,090) Net change recognized in the income statement (24) (196) Net change recognized in equity 217 (586) Net changes due to acquisitions/(divestments) (1) (26) Foreign currency translation effects 223 440 As of December 31 (3,042) (3,458)
Tax loss carryforwards and tax credits in USD millions, as of December 31 2015 2014
The tax rates applicable to tax losses for which a deferred tax asset has not been recognized are 23.0 percent and 19.2 percent as of December 31, 2015 and 2014, respectively.
Consolidated financial statements continued 19. Senior and subordinated debt Table 19.1
Senior debt Zurich Insurance Company Ltd Floating rate CHF 200 million notes, due June 2016 4 200 201 2.25% CHF 500 million notes, due July 2017 4 498 501 2.375% CHF 525 million notes, due November 2018 4 522 525 1.50% CHF 400 million notes, due June 2019 3,4 415 414 1.125% CHF 400 million notes, due September 2019 3,4 420 419 0.625% CHF 250 million notes, due July 2020 3,4 259 256 2.875% CHF 250 million notes, due July 2021 4 247 249 3.375% EUR 500 million notes, due June 2022 3,4,5 587 656 1.875% CHF 100 million notes, due September 2023 3,4 111 110 1.750% EUR 500 million notes, due September 2024 3,4,5 545 609 1.500% CHF 150 million notes, due July 2026 3,4 164 161
Zurich Santander Insurance America S.L. 7.5% EUR 77 million loan, due December 2035 74 113 Other Various debt instruments 29 40 Senior debt 4,471 5,379 Subordinated debt
Zurich Insurance Company Ltd 4.25% CHF 700 million perpetual notes, first callable May 2016 4 698 702 8.25% USD 500 million perpetual capital notes, first callable January 2018 4,5 498 497 4.625% CHF 500 million perpetual notes, first callable May 2018 4 496 499 7.5% EUR 425 million notes, due July 2039, first callable July 2019 4,5 460 512 2.75% CHF 200 million perpetual capital notes, first callable September 2021 3,4 209 206 4.25% EUR 1 billion notes, due October 2043, first callable October 2023 4,5 1,075 1,196 4.25% USD 300 million notes, due October 2045, first callable October 2025 4,5 298 –
To facilitate the issuance of debt, the Group has in place a Euro Medium Term Note Programme (EMTN Programme) allowing for the issuance of senior and subordinated notes up to a maximum of USD 18 billion. All issuances under this programme are either issued or guaranteed by Zurich Insurance Company Ltd. The Group has also issued debt instruments outside this programme.
Debt maturities reflect original contractual dates taking early redemption options into account. For call/redemption dates, see table 19.1. The total notional amount of debt due in each period is not materially different from the total carrying value disclosed in table 19.2. Undiscounted cash flows include interest and principal cash flows on debt outstanding as of December 31, 2015 and 2014. All debt is assumed to mature within 20 years of the balance sheet date without refinancing. Floating interest rates are assumed to remain constant as of December 31, 2015 and 2014. The aggregated cash flows are translated into U.S. dollars at end-of-period rates.
Credit facilities The Group has access to a multi-currency revolving credit facility of USD 3.2 billion that terminates in 2018. It is guaranteed by Zurich Insurance Company Ltd.
New shares issued from contingent capital in 2015 76,813 768,128 0.10