3 The Zurich Economic Capital Model (Z-ECM) is an internal measure of capital adequacy and reflects midpoint estimates with an error margin of +/–5 ppts.
Formulated by our people, for our customers, our new strategy will guide us in our efforts to provide the best service and products. Our cover shows the individuals who worked with 12 senior Zurich leaders over five months to develop our new strategy. Learn more on page 7.
As part of the simplification of our business, we are removing the segment layers of General Insurance and Global Life. The new business structure is focused on geographic regions and consists of Asia Pacific, Europe, Middle East & Africa (EMEA), Latin America and North America. Further, the Group has created a new unit called Commercial Insurance, which combines Corporate and Commercial businesses into a single global business. Starting in 2017, the products and solutions belonging to the former General Insurance will be referred to collectively as Property & Casualty, or P&C; the same applies to Global Life, which will now be Life; Farmers remains the same, but in future will contain the Farmers New World Life business results.
Message from our Chairman 2016 was a year of transition. I am confident that our new strategy and structure will allow us to meet the challenges and grasp the opportunities that lie ahead.
“We will work toward becoming a more agile and customer-focused organization.”
USD 30.3 bn Gross written premiums, policy fees and insurance deposits
Pages 152 to 156 Pages 157 to 160 Pages 161 to 162
For Zurich and externally, 2016 was a year of transition and change. Following his appointment by the Board, Mario Greco began as Group CEO in March 2016. His immediate focus was how best to position Zurich for long-term sustainable success. This culminated in our new strategy presented to investors in November 2016. The strategy provides Zurich with a clear direction, a focused set of actions and a simpler, more efficient way of working. Our aspiration is to serve every customer in a way that feels personal, is effective and is uniquely Zurich. The new strategy harnesses Zurich’s core strengths. These include our well-balanced geographical footprint and portfolio, our solid financial base, our trusted brand and our highly skilled and talented people.
To be successful, Zurich must ensure its culture and behaviors are consistent with its strategic aims. We will work toward becoming a more agile and customer- focused organization, with an accountable, collaborative and merit-based culture. One example of how we are increasing our focus on customers was our decision to merge our Global Corporate and Commercial businesses into a single, strong Commercial Insurance unit.
Our ability to reduce costs and increase efficiency is implicit within achieving the strategy. We are pleased that expenses fell significantly in 2016, reflecting actions taken during the year. We will continue to focus on achieving net savings over the years to come in line with our targets. Zurich’s encouraging 2016 results show that our new strategy and organizational structure already are beginning to take effect. We achieved underlying improvements in our General Insurance business, a continued strong performance of our Global Life business, and in Farmers.
Focusing on sustainability Through this period of organizational and strategic change, Zurich remains focused on corporate responsibility. By acting responsibly, we can create sustainable value for all our stakeholders. In 2016, Zurich achieved its highest score of 85 in the Dow Jones Sustainability Index review, outperforming 97 percent of other companies in the insurance industry group. Our responsible investment approach was awarded the Institutional Investor Institute’s Peer-to-Peer award for ‘Best Environmental, Social and Governance Programme.’ Meanwhile, Zurich’s award-winning flood resilience program continued its work within our flood resilience alliance in communities in Mexico, Indonesia, Nepal, Peru and Bangladesh.
Zurich is well positioned to succeed in this environment. Our new strategy and organization will help us in our aims to deliver the disciplined, sustainable profit that we have already seen the beginnings of in 2016.
Going forward, Zurich will retain its identity as a global insurer. We will continue to champion the benefits of free and open cross-border trade, which has lifted millions out of poverty to date. We will navigate external challenges and seize the opportunities presented by trends such as digitalization. And we will strive to deliver success sustainably as a responsible business.
With a robust new strategy and structure in place, I am confident we will meet the challenges and grasp the opportunities that lie ahead. Thank you for your continued support.
Our strategic aims At our Investor Day on November 17, 2016, Zurich announced a new strategy that positions the company for future success. Building on its solid foundations, Zurich will strengthen its position as a global multi-line insurer by enhancing commercial capabilities and developing a more focused retail proposition. At the same time, we will continue to invest for the future and reinforce capabilities to make our business more efficient and deliver excellent client service. And Zurich is determined to deliver sustainable earnings that will support an increase in the return of capital to our shareholders over time.
Zurich is a very solid and sound company with a good balance of businesses, uniquely diversified by product lines, geographies and customer types. Zurich’s exposure to property and casualty risks is well balanced between Europe and the U.S. We have a strong, growing presence in Latin America. Our Asia Pacific business, although small, is stable and profitable.
“Zurich is a very solid and sound company with a good balance of businesses, uniquely diversified by product lines, geographies and customer types.”
Mario Greco is appointed Group Chief Executive Officer, returning to Zurich where from 2007 to 2012 he served first as head of Zurich’s Global Life business, then as head of its property and casualty (General Insurance) business.
A new Strategy Task Force is formed. By late June, the team of 40 individuals is at work with 12 senior leaders, supported by experts and other employees, drafting plans for Zurich’s future.
As part of its process to simplify and strengthen its organization, Zurich announces that it will combine its Global Corporate and Commercial businesses into a single global business: Commercial Insurance.
Zurich unveils its new strategy; built on qualities that include financial strength, a trusted brand and talented people, Zurich also sets financial targets for 2017 – 2019.
Nevertheless, we have some clear opportunities to improve our competitive position.
We aim to continue to increase our insurance profitability, and in order to do this, we are enhancing technical excellence – this includes becoming more disciplined in selecting and pricing risks, and reducing volatility. Initial results that we achieved in 2016 were encouraging.
Keeping within our cost constraints, we are planning to invest about USD 700 million over the next three years to improve our technologies and platforms. The newlycreated role of Group Chief Operating Officer, which combines responsibility for operations and technology with underwriting, risk engineering and claims, will ensure a close connection between operational investments and business.
Enhancing our commercial capabilities We have a strong leadership position in our core markets in commercial insurance, with top-tier positioning in the UK and Switzerland, and a strong position in the U.S. and Germany. We also have an added advantage in that we have extensive experience in developing international programs for large multinationals, managing captives and in providing our business customers with insights on cross-border regulatory issues.
We will augment our global capabilities and make best use of our unique platform for global commercial clients, adding new skills and improving our ability to ‘cross-sell’ property and casualty, and life products to international clients.
We plan to re-balance our portfolio and reduce our overweight position in long-tail lines. We will build our capabilities in specialties and will adopt a more global and market-based approach, making the specialties business into a key differentiator, especially in serving the needs of our large, global commercial customers.
We took the first step to deliver on these priorities in 2016 when we combined our Global Corporate and Commercial businesses. The newly-created Commercial Insurance unit will focus on case underwriting business, which will enable us to use and extend to all commercial customers the immense capabilities we have already established for Global Corporate customers. This will allow Zurich to serve multinational customers in a single, unified way.
Strengthening our retail position in key markets Retail business is a valuable contributor to Zurich’s performance. The earnings from retail are historically less volatile and, once adjusted for investment returns, largely uncorrelated with profits from the commercial business. Retail also provides a sizable share of Zurich’s operating profit. We will seek to strengthen our retail position in key markets; through our retail strategy we will differentiate ourselves in customer service and customer relationships.
We will also improve our proposition for small and medium-sized enterprises by delivering consistent service across our key markets. And, to grow our base in retail, we will invest in technologies and platforms to capture new customers and better serve existing ones.
Focusing on transformation and efficiency Over the coming years, costs will remain an issue for the industry and for Zurich. This development is led by changes in customer behavior and increasing competitive pressures.
To ensure we remain competitive, Zurich aims to reduce net costs by USD 1.5 billion by the end of 2019 relative to our 2015 base. This target goes beyond our previous objectives. We will deliver these savings through a combination of initiatives, including simplifying our organization, making best use of our shared services model, streamlining processes, reducing real estate and facilities costs, getting the most from our spending on IT infrastructure, and through selected country initiatives.
We look forward to delivering these objectives over the next three years, and we are fully committed to carrying out this strategy.
The Task Force’s diversity reflects our business and the broad range of customers we serve. Strategy team members collectively speak 18 languages and between them have 17 different nationalities. Each brought vital skills to the table. The average age of Task Force members during the project was 34. Even so, members were already well acquainted with the industry, having spent on average six years at Zurich, and nine years working in the broader insurance field.
Many Task Force members cited teamwork and an interesting challenge as reasons to join the team. Some wished to inspire others: “I wanted to help reinforce a sense of truly liking to work for Zurich, and a feeling of responsibility toward its success,” said Eric Chandler, a senior corporate counsel for the life business in Zurich North America. Task Force members were also keen to give back to those who rely on us. Julie Quach, Senior Project Leader for Hong Kong claims, summed it up well: “I wanted to join the Task Force to enable us to deliver the best services to our customers.”
As a global insurer, we support our customers in a complex and increasingly risky environment. We track, analyze and weigh the impact of trends affecting our customers’ businesses and lives. They may have considerable implications for our commercial customers’ profitability, competitiveness, and how and where they operate. These changes can also affect individual customers, including ways they plan for the future and how they interact with us. Here are some examples of developments that are influencing our business now, or might in the future.
Advanced materials and nanomaterials Creation of new materials and nanostructures for the development of beneficial material properties, such as thermoelectric efficiency, shape retention and new functionality.
Biotechnologies Innovations in genetic engineering, sequencing and therapeutics, as well as biological computational interfaces and synthetic biology.
New technologies, new opportunities Advances in technology are profoundly influencing how we live and work. Technology opens avenues for new competitors to enter markets traditionally dominated by insurers. Customers are better informed, can more easily compare products and switch between providers. One way insurers can compete in this environment is by harnessing technology to provide expertise and services.
Our strategic aspiration In the spring of 2016, CEO Mario Greco took a unique approach to developing Zurich’s strategy – he invited all employees to volunteer for the assignment. More than 2,000 applied, and after a rigorous vetting process, 40 colleagues who represent the diversity of Zurich in every sense of the word were selected for a Strategy Task Force. In a collaborative forum they worked with another 2,000 employees, as well as subject matter experts from across the business (see also page 7).
The result: A strategy built on Zurich’s strengths that can be owned and delivered by every employee.
This collaborative effort reflects the spirit of Zurich’s strategic aspiration: We will build on our market leadership in commercial insurance and on our strong and trusted brand to serve every commercial and retail customer in a personal, effective and uniquely Zurich way.
Net savings USD 1.5 bn by 2019 compared with 2015 baseline 1 The Farmers Exchanges are owned by their policyholders. Farmers Group, Inc., a wholly owned subsidiary of Zurich Insurance Group, provides certain non-claims administrative and management services to the Farmers Exchanges as attorney-in-fact and receives fees for its services.
2 Business operating profit (after-tax) return on shareholders’ equity. Excludes unrealized gains and losses. 3 The Zurich Economic Capital Model (Z-ECM) is an internal measure of capital adequacy. 4 Cumulative net cash remittances to Zurich Insurance Company Ltd, after deducting central costs, in 2017 to 2019.
Our actions We will deliver on our strategic aspiration by: Making our technical capabilities a competitive advantage by investing in the skills of our technical community, simplifying governance, adopting new tools and technologies, and making it easier and more beneficial to work together.
Enhancing our propositions and capabilities by making specialties a truly global business for our commercial customers. In the retail market, we will strengthen our digital capabilities for customers and distributors alike and build direct delivery channels, helping us to meet the changing needs of all our customers.
Our unique footprint Our unique footprint is balanced between Europe and North America, between commercial and retail, and between property and casualty and life insurance. The Latin American contribution is strong and growing, and business in Asia Pacific is limited in size but profitable. This diversification positions us well to weather economic and market volatility, and gives us a strong presence across customer segments and product lines.
Our solid financial position We have a solid financial position. That can reassure our customers that we will be there when they need us to handle their claims, our shareholders that we are financially stable, and our colleagues that we have a well-earned positive reputation as a business and an employer.
Our strategy builds on these strengths and positions Zurich for success over the long term.
“We now have a consistent approach to providing products and risk management services to all our customers,” says James Shea, CEO Commercial Insurance. “One good example is our international programs proposition. We will expand this platform to address the growing needs of smaller and medium-sized companies with operations overseas.”
We are also investing in product and underwriting capability. Technology and predictive analytics support us in reaching our goals. This approach will help to meet the complex and changing risk management needs of current and future customers. In 2016, Zurich’s commercial business won the Strategic Account Management Association’s award for excellence, recognizing us as a leader in customer relationship management.
Nearly half of our business operating profit comes from serving commercial customers. A good part of this involves our property and casualty business. Increasingly, we are also covering businesses’ life and pensions-related needs.
Employee benefits are important to gain and retain talent – even more so in a context of widening income protection gaps (see page 15), as responsibility to provide for employees and their families is shifting to the private sector.
In the past, employee benefits have generally been managed locally by companies’ human resource departments. But rising costs, more complex regulatory requirements and increasingly international workforces are leading multinationals to look for better solutions.
“Companies are asking insurance providers for more central control over their employee benefits, including centralized purchase with economies of scale, reduced complexity through a simplified program structure and a single contact point, and technology that provides faster access to data and reporting,” says Wendy Liu, Head of Zurich Global Employee Benefits Solutions.
Understanding our global risks We are using advanced data processing and analytics technologies to control our global risk ‘accumulation.’ Accumulations of risk can occur, for instance, if we insure several properties or other assets in an area that can be affected by a single event. If the area is hit by a catastrophe, large losses can occur.
One way we are getting a better overview of accumulated risks is through our Risk Exposure Data Store (REDS), a system that stores information about our location-based exposure to risk in a single place. For example, our underwriters can use REDS to analyze insured risks within a 200-meter radius and, if necessary, take action to reduce risk exposure at a particular site.
In 2016, we strengthened our position in core markets, helped by our global relations with distributors and customers. We further strengthened our positions in Switzerland and in the UK in our group risk solutions business, which includes life and disability protection for employees. We also increased the assets under administration in our UK group savings business, growth that was supported by our existing distribution partnerships. In Ireland, we continued to invest in developing our savings and risk products, helping to consolidate an already strong market position.
In 2016, we launched a program for employees of multinationals seeking centralized control of their employee benefits programs (see story on this page). Our other international business that caters mainly to expatriate employees entered into an agreement with Storebrand Group, a company that provides savings and insurance products to about 1.8 million customers in Norway and Sweden, and Mandatum Life, a financial services provider based in Finland, extending our business in northern Europe.
Organizing around retail customers’ needs We introduced changes in 2016 to reflect the importance of retail business to our overall success. One of the most important changes was our decision to bring together, in local markets, the property and casualty, and life insurance businesses. This approach will provide clearer accountability and ‘ownership’ for local business leaders who best know and understand their customers and markets.
At the same time, we are providing our products and expertise to customers where they need us. Customers can communicate with us through channels that work best for them. We are positioning ourselves as one company: online, in person or on the phone.
In addition, we are strengthening our agency business, especially in Europe and Asia, and seeking ways to improve Zurich’s bank distribution model, a profitable, solid part of the retail business, especially for life insurance. 1 The Farmers Exchanges are owned by their policyholders.
Farmers Group, Inc., a wholly owned subsidiary of Zurich Insurance Group, provides certain non-claims administrative and management services to the Farmers Exchanges as attorney-in-fact and receives fees for its services.
We continue to grow our business through such agreements. The largest one is a joint venture with Banco Santander S.A. in Latin America, providing access to customers in Brazil, Argentina, Chile, Mexico and Uruguay.
Our joint venture with Banco Sabadell S.A. in Spain provides access to about six million potential customers. The Santander and Sabadell agreements together contributed USD 319 million to our BOP in 2016, reflecting our participation of 51 and 50 percent, respectively. We also have almost 70 local agreements in place with other providers worldwide. These agreements include a strategic relationship with Deutsche Bank in Germany, Italy and Spain, and with HSBC and Citibank in the Middle East.
Helping to offset financial worries due to disability Disability or illness can pose serious financial hardships for individuals and their families, and affect businesses and even society. When financial protection is insufficient to cover the associated costs, ‘income protection gaps’ arise. These become more acute as people age and labor markets change. We help customers to mitigate these risks. And we use our expertise and knowledge to inform people about income protection, including through research. In 2016, we published a new study on this topic, based on surveys involving over 11,000 people in 11 countries.
That study, produced with the Smith School of Enterprise and Environment at the University of Oxford, showed that over half of people without income protection would consider buying it. One reason they didn’t was their perception that it was too expensive. Our study also found, however, that people often overestimated the cost. Better information may help to overcome this barrier. We also learned that people who have direct experience with loss of income are more likely to see the value of income protection. This too is a useful insight when considering how to address these gaps. We continue to work with regulators and policy makers, also involving our customers and distribution partners, and are exploring new approaches to insurance that are simple and easy to understand for everyone.
Focusing on customer loyalty and growth in the eastern U.S. The Farmers Exchanges1 continue to focus on customer loyalty. They are also improving products and services. One way the Farmers Exchanges did this in 2016 was by upgrading their online services and making these services more accessible via mobile devices. The Farmers Exchanges also used feedback from customers to redesign the digital ‘storefronts’ that customers use to contact local agents.
The Farmers Exchanges are committed to sharing customer feedback to improve how customers experience the service they provide. By using information they collect through the Net Promoter Score (NPS), a measure of customer loyalty, they spot ways to make effective improvements. At the end of 2016, the NPS score stood at 43.2 compared with 40.4 in 2015.
The Farmers Exchanges also continue to grow their share of business along the Atlantic seaboard. Efforts designed to attract and place better-capitalized and experienced agents in Eastern markets are paying off. Gross written premiums from the Eastern states, including Pennsylvania, New Jersey, Georgia, Maryland, New York and Connecticut, increased in 2016 to USD 691 million from USD 486 million in 2015.
Zurich sets industry standard in transparency In the UK we gained industry-wide attention in 2016 by publishing in-depth statistics on the claims our UK business paid out. “By publishing these numbers, we aim to show that the vast majority of claims are paid,” according to Zurich’s Gary Shaughnessy, CEO Europe, Middle East & Africa. “It shows that we can help our customers when they need us most – after all, that’s why we’re here.”
Although Zurich in the UK has published some information about claims in the past, in 2016 it provided more details. The decision prompted the Financial Times to mention us in an article headlined ‘Zurich raises the bar on claims history transparency.’
We are investing in the future of our business – in new products and innovative services. By offering innovative products and services we can help all of our customers to better meet their goals, while making Zurich a more profitable, efficient company.
Using satellites and drones to assess hazardous claims We are using technology to ‘see’ damaged properties before anyone can set foot on dangerous locations where there may be a claim, helping us to inform customers about potential damage and process their claims faster. As a global company, Zurich can use a wealth of information about sites where there may be claims to do remote assessments long before we ever visit a customer’s factory or home.
One way we did this in 2016 was by using imagery from satellites and aircraft to assess property in the path of huge wildfires in Alberta Canada, which burned through the town of Fort McMurray.
Helping a mid-size pension fund control risk Through our Corporate Life & Pensions (CLP) business we are supporting mid-sized pension funds in the U.K. by offering innovative ways to limit the risks associated with pensioners’ longevity. Large companies have been able to significantly reduce this risk through an agreement called a longevity swap. Due to the cost and complexity of such agreements, however, generally only the largest businesses have chosen this option.
In 2016, Zurich collaborated with Mercer and a panel of reinsurers to streamline processes, so that smaller and mid-sized pension schemes can afford to cover longevity risks. Since the launch of this solution in 2016, we have covered over GBP 1 billion of longevity swap liabilities, contributing over GBP 45 million of annual premium equivalent (APE). This includes liability cover of more than GBP 600 million for about 5,000 pensioners and dependents of tire manufacturer Pirelli. For Zurich, these agreements already contributed to our profit in 2016, and helped us to use capital more efficiently.
Drones and satellites allow us to assess our customers’ risks more easily and accurately.
Drawing on the knowledge and experience of Zurich’s more than 900 risk engineering specialists, Zurich Risk Advisor helps business customers to ‘self-assess’ risks they face and, based on Zurich’s established expertise, choose measures to help them manage and mitigate these risks.
In recognition of its value, in 2016 the Zurich Risk Advisor received the Risk Management ‘Innovation of the Year’ award sponsored by CIR (Continuity Insurance & Risk) Magazine and won second place in the Innovation Prize of the Swiss Insurance Industry.
Using technology to make a difference to crop insurance Following our acquisition of crop insurer Rural Community Insurance Services (RCIS) in 2016, we are using predictive analytics to augment critical underwriting decisions. Crop loss risk can be volatile, highly dependent on weather and commodity prices and difficult to predict. Combining RCIS’ expertise with insights from predictive analytics helps us to make better decisions about the risks we will underwrite, and can ultimately improve the profitability of our expanded crop business.
“We are making full use of digital technologies to help our customers understand and protect themselves from risk.” Robert Gremli Global Chief Risk Engineering Officer, Zurich Risk Engineering >2,750 downloads of our award-winning Zurich Risk Advisor application >900 risk engineering specialists helping business customers to assess risks
Focusing on profitable markets We are strengthening our presence in some key markets, including in the U.S. where we completed the acquisition of Rural Community Insurance Services (RCIS). With a national network of over 4,000 agents, RCIS conducts business in all 50 U.S. states, insuring more than 130 crops on over 90 million acres. The acquisition builds on an already strong crop business.
Employing capital in a disciplined way Zurich is in the business of writing insurance and does not seek to add market risk through its investments solely to generate returns. In our investment portfolio, Group Investment Management aims to achieve optimum returns relative to Zurich’s insurance obligations. We do this by making the best use of the capital we allocate to market risk. In 2016 we achieved strong returns despite a continuing decline in fixed income yields. Our investment approach included slightly increasing equity and corporate bond holdings, while continuing to implement a strategy of investing in sound, less-liquid assets such as corporate lending, real estate and infrastructure debt. Starting in the second half of 2016, we decided to reduce the amount of market risk we take relative to our overall risk capital, and we began to gradually decrease our equity exposure. We also realized some gains in 2016 from fixed income that reflect our market view. We consistently ensure that our invested assets match our insurance obligations and are in line with our risk appetite. Our Group Investments as of December 31, 2016, totaled USD 190 billion.
We are growing in promising markets in Asia Pacific, including in Australia.
Efficiency includes reducing the number of data centers. At the end of 2016 we had 35 compared with 70 in early 2015. By the end of 2019, we plan to have just eight. Our new European data center in London replaces several older centers, meets future business needs and minimizes complexity, cost and energy consumption.
“We are investing about USD 700 million over the next three years to make savings sustainable.” Kristof Terryn Group Chief Operating Officer
Investing responsibly At Zurich, we believe that it is possible to directly affect lives and benefit society through our investments, while achieving market returns. Our impact investment portfolio in 2016 totaled USD 1.7 billion, with the biggest part invested in green bonds, which support environmentally beneficial projects including renewable energy generation. We also invest in social and sustainability bonds that raise funds to address issues such as education and social housing.
To achieve greater impact, we also share our knowledge and collaborate with six major industry groups to promote responsible investment. One of these is the Investment Leaders Group (ILG), of which we are a founding member. In 2016 with Zurich’s support, the ILG published three influential reports on climate risk, long-term investing and impact reporting.
For further information and a breakdown of our investments, see the chart on responsible investment KPIs.
External asset managers who are signatories to PRI (%)1 74.1% 70.4% 3.7 pts
Group assets managed by PRI signatories (%) 2 98.2% 98.1% 0.1 pts
A local and global approach with the Z Zurich Foundation Community investment is at the heart of Zurich’s corporate responsibility strategy. We establish long-term community programs that support local business objectives and allow our people to apply more of their skills and know-how to make a difference. These local community programs run by Zurich offices around the world focus on areas such as mental health, youth empowerment, homelessness and helping disadvantaged communities to build resilience to disasters.
Zurich provides funding to the Z Zurich Foundation, which supports these local programs as well as our global flood resilience program.
Promoting sound, sustainable leadership We adhere to sound and sustainable principles of corporate governance. Zurich, as a strategic partner of the World Economic Forum, supports the WEF’s ‘Compact for Responsive and Responsible Leadership.’ The Compact encourages global businesses and investors to focus on sustainability and the long-term goals of society. Our Board and Executive Committee also take an active role in overseeing and implementing our approach to corporate responsibility. Zurich is a signatory to the United Nations Global Compact, which commits us to aligning our strategy, culture and day-to-day operations with the Global Compact’s 10 principles. And we are a signatory of the Principles for Responsible Investment (PRI). You can read more about our approach to corporate governance starting on page 26.
Action, supported by research by the International Institute for Applied Systems Analysis (IIASA) in Austria, and the Wharton Risk Management and Decision Processes Center in the U.S. In 2016, the IFRC worked with 22 rural communities in Mexico and 21 urban and semi-urban communities in Indonesia directly, while Practical Action offered direct assistance to 74 rural communities in the Karnali basin in Nepal, 15 semi-urban communities in the Rimac and Piura river basins in Peru and 15 communities in Bangladesh.
A sophisticated database at the heart of the new program includes profiles and standardized information on about 41,000 roles our employees fill throughout Zurich for over 2,000 job types. It covers a wide range of employees, from trainees and graduates fresh out of university to senior managers. Our people also have full access to our global job catalogue. The information is available in English, German, Italian, Spanish, French, Portuguese, and Japanese.
Zurich also benefits from having standardized descriptions that make it easier to compare jobs across countries, and describe jobs when a role is vacant. The system also supports data analytics, helping us to track information including turnover, demographics, and other key metrics.
To achieve our aims, we became the first global company in the insurance industry to receive ‘EDGE’ (Economic Dividends for Gender Equality) certification. Our decision to apply for EDGE certification demonstrates our aim to improve gender equality within all areas of our business, starting in 2015 with Germany, Hong Kong, Italy, Spain, Switzerland and the UK. Building on our success, in 2016 we received certification in Australia, Austria, Brazil, Ireland, Japan and Mexico. These 12 businesses represent over 28,000 employees.
EDGE not only provides data and benchmarking; the insights we gain through this program have also enabled Zurich to focus resources on global initiatives to encourage greater workplace inclusion for all employees. We are continuing our global approach by expanding our new flexible working program, while continuing to focus on pay equality and improving transparency in recruitment and promotions.
Training new leaders By providing a single, uniform standard of leadership training and accountability, we can ensure that we meet customers’ expectations around the world. Our employees also have opportunities to work in different countries, so we need a global, coherent approach to leadership.
Building on Zurich Oxygen, we have begun harmonizing how we develop leaders at Zurich. We are introducing a curriculum covering four sets of learning modules matching different career levels. These will replace existing local or regional programs.
Returning veterans to the workforce Zurich North America is grateful to those who have served and protected the U.S. More than one million veterans will need to transition from military service over the next few years. It’s of great importance for companies to provide opportunities that support this move from active duty to the civilian workforce. The insurance industry offers a number of jobs, including in claims, risk engineering, information technology, operations and underwriting suited to veterans’ skills and experience. Veterans are also helping Zurich to succeed. Zurich has joined more than 170 companies in the U.S. participating in the Veteran Jobs Mission, a national coalition committed to hiring veterans. To make it easier for veterans to pursue careers at Zurich, Zurich North America set up the web page ‘zurichhiresheroes.com’ to help veterans align their transferable military skills to available Zurich jobs across the nation.
“By supporting veterans as they transition from active duty to the civilian workforce, we gain their leadership, discipline and teamwork skills. It’s the least we can do to say ‘thank you’,” said Randall Clouser, Zurich’s head of Marketing, Distribution and Regional Management in North America and executive sponsor for the Veterans Engagement Team at Zurich (VETZ).
Zurich was named one of the top 75 employers for veterans in the U.S. by the Military Times.
Strengthening our governance structure We strengthened Zurich and our governance structure in 2016. Our new, simplified structure will help us to better serve our customers. Good governance supports us in our aim to create sustainable value for all our stakeholders.
Dear Shareholder We strengthened Zurich and our governance structure in 2016. In the process, we have given the business more power to make decisions and have enhanced internal processes and policies.
Board and Executive Committee changes At the Annual General Meeting on March 30, 2016, you elected Jeffrey Hayman and David Nish as new members of the Board of Directors. Don Nicolaisen, Rafael del Pino and Thomas K. Escher did not stand for re-election.
As of March 7, 2016, Mario Greco was appointed Group Chief Executive Officer and member of the Executive Committee (ExCo). Gary Shaughnessy, CEO Global Life and member of the ExCo since January 1, 2016, was appointed CEO EMEA (Europe, Middle East & Africa) as of July 1, 2016. Robert Dickie stepped down as Chief Operations and Technology Officer and member of the ExCo as of July 1, 2016 and Kristof Terryn, who was CEO General Insurance up to that date, was appointed Group Chief Operating Officer. As of October 1, 2016, Claudia Dill was appointed member of the ExCo in her function as CEO Latin America, Jack Howell was appointed CEO Asia Pacific and member of the ExCo, and James Shea was appointed CEO Commercial Insurance and member of the ExCo.
Good corporate governance enables Zurich to create sustainable value for its shareholders, customers, employees and other stakeholders. The corporate governance report describes the work of Zurich’s Board of Directors (the Board) and management and its committees.
“We have reorganized ourselves to mirror how we serve our customers.”
Zurich Stakeholders It is important for Zurich to engage in dialogue with all our stakeholders. This includes our shareholders at institutional investors’ meetings, at our Investor Day and at our Annual General Meeting. I’d like to encourage you to attend this year’s AGM on March 29, 2017 and to thank you for your continued support and engagement.
New Operational Group Structure We have reorganized to mirror how we serve our customers. The Executive Committee is now composed of all heads of the regional businesses in North America; Europe, the Middle East and Africa; Latin America; and Asia Pacific as well as the heads of our Commercial Insurance and Farmers businesses. In addition, the Group CIO, CFO, CRO and COO are members of the Executive Committee.
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 Charter of the Committees of the Board of Directors of Zurich Insurance Group Ltd. The Governance, Nominations and Corporate Responsibility 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 Executive Committee (ExCo) who together are responsible for managing the Group on a day-to-day basis. Before 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 Group CEO, effective March 7, 2016, when the roles of Chairman and CEO were again split so that the Board consists, as before, entirely of non-executive members from March 7, 2016. While the Chairman of the Board served as Chief Executive Officer ad interim, Fred Kindle, Vice-Chairman of the Board, has taken on certain additional responsibilities to ensure continued good governance.
Robert Dickie, Group Chief Operations and Technology Officer (as of July 1, 2016)
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.
During 2016, the following changes to the operational group structure were implemented: kk The previous segment structure (General Insurance and Global Life) was abolished on July 1, 2016 and a new structure was created by combining life and non-life insurance businesses.
Consisting of four regions: 1. North America 2. Europe, Middle East & Africa 3. Latin America 4. Asia Pacific
The Group pursues a customer-centric strategy and is managed by regions with the addition of the Farmers and Commercial Insurance businesses. The ExCo is headed by the Group CEO. Six members of the ExCo fully represent the Group’s businesses: the CEOs of the regions (CEO North America, CEO EMEA, CEO Latin America, CEO Asia Pacific), the CEO Farmers and the CEO Commercial Insurance. Four members represent Group functions: the Group Chief Financial Officer (CFO), the Group Chief Investment Officer (CIO), the Group Chief Risk Officer (CRO) and the Group Chief Operating Officer (COO). The Group COO function combines responsibility for operations and technology with underwriting, claims, actuarial and pricing, creating a unified sense of purpose and responsibility for technical excellence, efficiency and business transformation across all parts of the business. In addition, the Group CFO is newly responsible for re-insurance life and non-life. For further information on the ExCo see pages 56 to 66.
The previous segment structure (General Insurance and Global Life) was abolished on July 1, 2016 and a new structure was created by combining the life and non-life insurance businesses, applying a unified go-to-market approach. On October 1, 2016 the Group combined its corporate and commercial businesses into a single global business called Commercial Insurance as part of its process to simplify and strengthen its organization. The Commercial Insurance business unit brings together corporate and commercial insurance expertise worldwide under a single umbrella. The Group’s operating structure reflects the businesses operated by the Group and how these are strategically managed to offer different products and services to specific customer groups. The new operational group structure is being phased in and becomes fully effective in the financial year 2017. The Group’s reportable business units for 2016 are as follows: kk General Insurance is the segment through which the Group provides a variety of motor, home and commercial products and services for individuals, as well as small and large businesses.
kk Global Life pursues a strategy with market-leading propositions in unit-linked and protection products as well as fee-based solutions managed through three global pillars (Bank Distribution, Corporate Life & Pensions and other Retail) to develop leading positions in its target markets.
From 2017 onwards the Group considers the Regions and Farmers to be its core businesses.
Zurich Insurance Group Ltd is obliged to announce shareholdings by third parties in its shares when notification is received from a third party that a threshold has been reached. During 2016, the Group received one new notification from Norges Bank (the Central Bank of Norway), Oslo that they exceeded the threshold of three percent.
Number of shares held as of December 31, 2016 Number of registered shareholders registered share capital
Registered shareholders by type as of December 31, 2016 Registered shareholders in %
Individual shareholders 95.9 29.1 Legal entities 3.9 27.0 Nominees, fiduciaries 0.2 43.9 1 of registered shareholders.
Share capital As of December 31, 2016, the ordinary share capital of Zurich Insurance Group Ltd amounted to CHF 15,060,740.60 divided into 150,607,406 fully paid registered shares with a nominal value of CHF 0.10 each. The Board will propose to the shareholders at the Annual General Meeting on March 29, 2017 a dividend of CHF 17 per share. It is planned that the dividend payment will be partially made from the capital contribution reserve, which part will be exempt from Swiss withholding tax.
Authorized and contingent share capital As of December 31, 2016, as specified in Article 5bis(1) of the Articles of Incorporation, the Board is authorized to increase the share capital of Zurich Insurance Group Ltd by up to CHF 1,000,000 representing 10,000,000 fully paid registered shares with a nominal value of CHF 0.10 each until March 30, 2018. The contingent share capital of Zurich Insurance Group Ltd, as specified in Article 5ter(1a) of the Articles of Incorporation, may be increased by an amount not exceeding CHF 1,000,000 by issuing up to 10,000,000 fully paid registered shares with a nominal value of CHF 0.10 each by exercising conversion and/or option rights which are granted in connection with the issuance of bonds or similar debt instruments by Zurich Insurance Group Ltd or one of its Group companies in national or international capital markets and/or option rights which are granted to the shareholders. Moreover, there is an additional contingent share capital of CHF 68,785.30 as specified in Article 5ter(2a) of the Articles of Incorporation, representing 687,853 fully paid registered shares with a nominal value of CHF 0.10 each, which may be issued to employees of the Group. For further information on the capital structure and the authorized and contingent share capital, see the audited consolidated financial statements, note 19 on pages 224 to 225.
Changes to share capital during 2016 During 2016, a total of 202,442 shares were issued to employees out of contingent capital. As a result, on December 31, 2016, the share capital amounted to CHF 15,060,740.60 (150,607,406 shares) and both the authorized capital and the contingent share capital (as specified in Article 5bis(1) and in Article 5ter(1a) of the Articles of Incorporation, respectively) amounted to CHF 1,000,000 (10,000,000 shares) and the other contingent share capital (as specified in Article 5ter(2a) of the Articles of Incorporation) amounted to CHF 68,785.30 (687,853 shares).
Changes to share capital during 2015 During 2015, a total of 768,128 shares were issued to employees out of contingent capital. As a result, on December 31, 2015, the share capital amounted to CHF 15,040,496.40 (150,404,964 shares) and both the authorized share capital and the contingent share capital (as specified in Article 5bis(1) and in Article 5ter(1a) of the Articles of Incorporation, respectively) amounted to CHF 1,000,000 (10,000,000 shares) and the other contingent share capital (as specified in Article 5ter(2a) of the Articles of Incorporation) amounted to CHF 89,029.50 (890,295 shares).
Some interests in shares are held by investors in the form of American Depositary Receipts (ADRs)1. As of December 31, 2016, investors held 23,582,820 ADRs (representing 2,358,282 Zurich Insurance Group Ltd shares).
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 is a member of the Board of Directors of Zurich American Insurance Company. With the exception of Ms. Bies, the Directors have no further board memberships within the Group.
Fred Kindle Kishore Mahbubani * Chairman of Board or Chairperson of Board Committee, respectively.
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 he 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. From 2008 until February 2016, Mr. de Swaan was a member of the supervisory board of Van Lanschot NV, the holding company of F. van Lanschot Bankiers, an independent Dutch bank. He also served as its chairman until December 2015. 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. He was elected chairman of the Board in September 2013. In addition Mr. de Swaan served as Chief Executive Officer a.i. from December 2015 to early March 2016.
Committee membership Governance, Nominations and Corporate Responsibility Committee (chairperson), Remuneration Committee
* While serving as Chief Executive Officer a.i., Mr. de Swaan held his mandates with this listed company in abeyance.
Skills and experience Fred Kindle worked at Hilti AG in Liechtenstein from 1984 until 1986. From 1988 until 1992 he was a consultant with McKinsey & Company in New York and Zurich. He then joined Sulzer AG in Switzerland, where he held several management positions. In 1999 he was appointed CEO of Sulzer Industries and in 2001 he became CEO of Sulzer AG. After joining ABB Ltd in 2004, Mr. Kindle was appointed CEO of ABB Group, a position he held until 2008. From 2008 to 2015 he was a partner of Clayton, Dubilier & Rice LLP, a private equity firm based in New York and London. In 2016 he took on the role of operating adviser to that company. He has been a member of the boards of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd since April 2006. He was elected vice-chairman in September 2013.
Educational background Mr. Kindle graduated from the Swiss Federal Institute of Technology (ETH) in Zurich with a master’s degree in engineering and holds an MBA from Northwestern University, Evanston.
Skills and experience Susan Bies began her career in 1970 as regional and banking structure economist with the Federal Reserve Bank of St. Louis, Missouri. In 1972, she became assistant professor of economics at Wayne State University, Detroit, Michigan. In 1977, she moved to Rhodes College, Memphis, Tennessee, in a similar role and in 1979 joined First Tennessee National Corporation in Memphis, where she remained until 2001. Her areas of responsibility included tactical planning and corporate development. In 1984 she became chief financial officer and chairman of the asset/liability committee. In 1995, she became executive vice president of risk management and auditor and chairman of the risk management committee, as well as continuing her duties with the asset/liability committee. From 2001 until 2007, she was a member of the Board of Governors of the Federal Reserve System. Between 1996 and 2001, Ms. Bies was a member of the Emerging Issues Task Force of the Financial Accounting Standards Board (FASB). She has been a member of the boards of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd since April 2008.
Committee membership Governance, Nominations and Corporate Responsibility Committee, Remuneration Committee (chairperson)
External appointments Mr. Franz was elected chairman of the board of Roche Holding Ltd in March 2014. He is also a member of the board of directors of Stadler Rail. Mr. Franz serves as a member of the board of trustees of the Ernst-Goehner-Foundation, of Avenir Suisse and of the Lucerne Festival and is a member of the advisory board of the University of St. Gallen (HSG).
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.
External appointments Mr. Mahbubani is dean and professor in the practice of public policy at the Lee Kuan Yew School of Public Policy of the National University of Singapore. In January 2016 he also became an independent director of the board of Wilmar International Limited, Singapore. In addition, he serves on boards and councils of several institutions in Singapore, Europe and North America, including Yale’s President’s Council on International Activities (PCIA), the University of Bocconi International Advisory Committee, the World Economic Forum’s Global Agenda Council on Geo- economics, and as chairman of the Lee Kuan Yew World City Prize Nominating Committee.
External appointments David Nish is a non-executive director of HSBC Holdings plc, Vodafone Group plc, London Stock Exchange Group plc and of the UK Green Investment Bank plc, a company wholly owned by the UK government, where he chairs the audit committee. He is a member of the Council of the Institute of Chartered Accountants of Scotland. His former appointments include non-executive directorships at HDFC Life (India), Northern Foods plc, Thus plc, and the Royal Scottish National Orchestra.
Independence of the members of the Board of Directors Zurich considers the independence of its Board members to be an essential feature of good corporate governance. Zurich’s independence criteria comply with applicable laws and reflect best-practice standards such as the SIX Exchange Regulation Directive on Information relating to Corporate Governance and the Swiss Code of Best Practice. Up to December 1, 2015 the Board consisted entirely of Directors who are non-executive, independent from the management and who – except for Ms. Mächler – have never held an executive position in the Group. Ms. Mächler held an executive position until 2006 and was elected in 2013 as a non-executive board member. According to the guidelines of the Swiss Code of Best Practice, she is considered independent.
The roles of Chairman and CEO were separated up to December 1, 2015 and were separated again from March 7, 2016, when Mario Greco took over the role of Chief Executive Officer. For the interim period during which the Chairman of the Board, Tom de Swaan, served as Chief Executive Officer ad interim, Fred Kindle, Vice-Chairman of the Board, took on certain additional responsibilities to ensure continued good governance. The Board, with the exception of this period, consists entirely of non-executive members and there is no requirement for a lead director to be appointed under the Swiss Code of Best Practice.
The Governance, Nominations and Corporate Responsibility Committee reviews the independence of the Board members annually and reports its findings to the Board for final determination. Board members are also subject to rules and regulations to avoid conflicts of interest and the use of inside information.
Additional mandates for listed companies 3 maximum 1 maximum Mandates for non-listed companies 5 maximum 3 maximum
Exempted from this general limit are the following categories of mandates (art. 33, para. 2, of the Articles of Incorporation): Board of
Multiple mandates for different companies under unified control are counted as a single mandate. The maximum limits set forth in the Articles of Incorporation do not discharge the members of the Board or Executive Committee from their generally applicable duties to act with due care and to protect Group interests. As in the past, the assumption of additional mandates is possible only where, upon assumption of such mandates, sufficient time and resources remain available for performance of the office held in the Group.
In 2016, average attendance at Board meetings was 93 percent. In fulfillment of their duties, the members of the Board spent additional time participating in Board Committee meetings and preparing for meetings.
The Board is responsible for the ultimate management of Zurich Insurance Group Ltd and of the Group as a whole as well as for the supervision of management. In particular, it is responsible for taking actions in the following areas: kk Group strategy: The Board regularly reviews and discusses in particular the Group’s business portfolio including its target market, acquisitions, customer and intermediaries strategy and its human resources strategy; kk Finance: The Board particularly approves the financial and operating plan annually, establishes guidelines for capital allocation and financial planning. Further, the Board reviews and approves the annual and interim (half year and quarterly) consolidated financial statements of the Group. Above certain thresholds, the Board approves major lending and borrowing transactions; kk Structure and organization of the Group: The Board determines and regularly reviews the basic principles of the Group’s structure and major changes in the Group’s management organization including major changes of management functions. In this respect, the Board particularly discusses the Group’s corporate governance framework and its remuneration system. The Board also adopts and regularly reviews the Group’s basic principles of conduct, compliance and risk management. Further, as part of its duty to convene the shareholders’ meeting and submit proposals to the shareholders’ meeting, it discusses the dividend policy and the Board’s proposal for the payment of dividends. Within its authorities the Board also makes resolutions on capital increases and the certification of capital increases and respective amendments to the articles of incorporation; kk Business Development: Above certain thresholds, the Board regularly discusses and approves acquisitions and disposals of businesses and assets, investments, new businesses, mergers, joint ventures, co-operations and restructurings of business units or books of businesses.
Committees of the Board of Directors The Board has the following standing committees, which regularly report to the Board and submit proposals for resolution by the Board: Governance, Nominations & Corporate Responsibility Committee Composition and membership: The Governance, Nominations & Corporate Responsibility Committee consists of at least four Board members. Currently, Tom de Swaan (Chairperson), Dame Alison Carnwath, Christoph Franz and Fred Kindle serve on this committee.
Activities 2016: During 2016, in particular the following topics were discussed: kk Group CEO succession; kk ExCo composition; kk Board and management succession planning; kk developments with regard to corporate governance-related matters, including the implementation of legislative and regulatory changes on Swiss and international levels; kk adapting corporate governance documents to new organizational structure, review of independence of Board members.
The Governance, Nominations & Corporate Responsibility Committee meets at least twice in each year. In 2016 it met four times.
Remuneration Committee Composition and membership: Zurich Insurance Group Ltd’s Organizational Rules require the Remuneration Committee to consist of at least four independent non-executive Board members. Currently, Christoph Franz (Chairperson), Tom de Swaan, Fred Kindle and Kishore Mahbubani serve on this committee.
Activities 2016: During 2016, in particular the following topics were discussed: kk the performance of the Group, the segments and the ExCo as well as the approval of the STIP award level and the LTIP vesting level in 2016 including the approval of the total variable remuneration pool for 2015; kk the regulatory environment regarding remuneration and its implications for Zurich as well as external developments; kk the Ordinance AEC with respect to the implementation of its requirements, in particular on the amounts of total remuneration for the Board and the ExCo presented to the vote of the shareholders at the AGM on March 30, 2016, including the results thereof; kk in the annual joint meeting with the Risk and Investment Committee, risk management aspects of the Group’s remuneration architecture, as well as key activities with respect to identified Key Risk Taker (KRT) positions, e.g. risk-based assessment of KRTs; kk the remuneration report and the Board of Directors report on the approval of the remuneration of the Board of Directors and the ExCo; kk Zurich’s remuneration rules and the Committees Charter were revised and approved by the Board of Directors; kk the Board’s and ExCo’s compensation; kk activities of the Group Pensions Committee; kk the new STIP architecture for 2017 onwards.
The Remuneration Committee meets at least twice in each year. In 2016 it met five times.
The Charter for the Committees of the Board of Directors of Zurich Insurance Group Ltd (Committees Charter) provides that the Audit Committee, as a whole, should have (i) an understanding of IFRS and financial statements, (ii) the ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves, (iii) experience in preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to those of Zurich Insurance Group Ltd and the Group, or experience in actively supervising one or more persons engaged in these activities, (iv) an understanding of internal controls and procedures for financial reporting, and (v) an understanding of audit committee functions.
To facilitate an ongoing exchange of information between the Risk and Investment Committee and the Audit Committee, the Chairperson of the Audit Committee is a member of the Risk and Investment Committee and at least one member of the Risk and Investment Committee is a member of the Audit Committee. The Chairman of the Board regularly participates in both the Audit and Risk and Investment Committees meetings as a guest.
The external auditors, the internal auditors, appropriate members of the ExCo and other executives attend its meetings in order to, inter alia, discuss auditors’ reports, review and assess the auditing concept and the examination process and to assess the activities of both external and internal auditors. Private sessions with external and internal auditors are scheduled at the majority of Audit Committee meetings to enable discussion without the presence of management.
For more information on the supervision and control of the external audit process, see pages 70 to 71.
Key tasks and responsibilities: In general, the Audit Committee: kk serves as a focal point for communication and oversight regarding financial accounting and reporting, internal control, actuarial practice, and financial and regulatory compliance; kk reviews the Group’s auditing process (including establishing the basic principles relating to and making proposals for the audit of Zurich Insurance Group Ltd and the Group); kk at least annually, reviews the standards of internal control, including activities, plans, organization and quality of Group Audit and Group Compliance; kk reviews the annual, half-year and quarterly financial reporting of the Group before submission to the Board.
Risk and Investment Committee Composition and membership: Zurich Insurance Group Ltd’s Organizational Rules require the Risk and Investment Committee to consist of at least four non-executive Board members independent from management. Currently, Susan Bies (Chairperson), Joan Amble, Dame Alison Carnwath, Jeffrey Hayman, Monica Mächler and Kishore Mahbubani serve on this committee.
Key tasks and responsibilities: In general, the Risk and Investment Committee: kk oversees the Group’s risk management, in particular the Group’s risk tolerance, including agreed limits that the Board regards as acceptable for Zurich to bear, the aggregation of agreed limits across the Group, the measurement of adherence to agreed risk limits and the Group’s risk tolerance in relation to anticipated capital levels; kk further oversees the Group’s enterprise-wide risk governance framework, including risk management and control, risk policies and their implementation and the risk strategy and the monitoring of operational risks; kk reviews the methodologies for risk identification; kk oversees the impact of various risk types on economic and regulatory capital; kk reviews, with business management and the Group risk management function, the Group’s general policies and procedures and satisfies itself that effective systems of risk management are established and maintained; kk receives periodic reports from the Group risk management function and assesses whether significant issues of a risk management and control nature are being appropriately addressed by management in a timely manner; kk oversees the investment process; kk reviews transactions above the pre-defined threshold; kk receives updates on the Group’s annual strategic asset allocation, market risk consumption relative to allocated market risk capital and limit and major market risk drivers, accounting investment result, economic investment return relative to liabilities, as well as updates on the performance of asset managers; kk assesses the independence and objectivity of the risk management function and reviews the activities, plans, organization and the quality of the risk management and investment management functions.
Activities 2016: From an enterprise risk management perspective, during 2016 the Risk and Investment Committee particularly discussed the following topics: kk revised Enterprise Risk Management (ERM) approach, including Group risk appetite; kk new Group Risk Management strategy; kk results of the Group Total Risk Profiling™ (TRP) assessment including an update regarding risk ownership and mitigation actions; kk the Group’s Own Risk and Solvency Assessment 2016; kk the Group’s Recovery Plan 2016; kk the Group’s risk profile and economic and regulatory capital, including development of the internal capital model and risk-based capital limits; kk revision plans for the Zurich Risk Policy (ZRP); kk Swiss Solvency Test (SST) internal model approval project; kk Operational Risk Framework; kk regulatory risk updates; kk in the annual joint meeting with the Remuneration Committee, risk management aspects of the Group’s remuneration architecture; kk macroeconomic developments; investment and asset/liability management, market and credit risks and controls including reports on derivatives; and performance of asset managers; kk non-life insurance risks and controls, accumulation management, underwriting reviews and reinsurance; kk life insurance risks, including an assessment of the low interest rate environment on the business performance and longevity risk.
The Risk and Investment Committee meets at least four times in each year. In 2016 it met eleven times.
Information and control instruments vis-à-vis the Executive Committee The Board supervises management and monitors its performance through reporting and controlling processes. Regular reporting by the Group CEO and other executives to the Board provides for appropriate information and updates, including key performance indicators and other relevant financial data of the Group, existing and emerging risks, and updates on developments in important markets and on peers and other significant events. During 2016, the Chairman of the Board regularly met with the Group CEO. He meets from time to time with other ExCo members and management outside regular Board meetings. The other members of the Board do so as well, especially with the Group Chief Financial Officer and the Group Chief Risk Officer. While the Chairman of the Board served as CEO ad interim, the Vice-Chairman of the Board has taken on certain additional responsibilities to ensure continued good governance.
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 114. 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 70 to 72.
We will consolidate our position as a leading global underwriter for property and casualty and life business and will focus on increasing profitability in a difficult market environment.
For key areas, the following cross-functional committees have been established to facilitate the coordination and alignment of recommendations to the Group CEO for approval on specific subjects.
Key tasks and responsibilities: The GRC‘s main function is to review, and provide recommendations to the Group CEO regarding the activities related to the Group’s overall risk profile, including insurance, financial market, credit, operational and strategic risks.
The Group Pensions Committee, chaired by the CEO EMEA, is responsible for developing, reviewing and advising on the Group governance framework for matters relating to retirement benefit arrangements and post-employment benefits, including the relevant policies and processes. It provides oversight and guidance over the Group’s retirement benefit arrangements and post-retirement benefits for benefit design, funding, investment and accounting purposes and provides recommendations to the GBSC in terms of material pension-related matters.
The Disclosure Committee, chaired by the Group Controller, is responsible for reviewing all external communications and disclosures with information material to the financial position and/or performance of the Group. In particular it reviews quarterly, half-year and year-end IFRS financial results and related documents, e.g. related news releases and analysts’ information. It reviews other external communications with material information as to the financial position and performance of the Group, proposals from Group Compliance regarding projects that have an impact on the Group and respective dealing restrictions as well as controls and procedures regarding the effectiveness of the Group’s internal controls over financial reporting. It makes recommendations to the Group CFO.
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, 2016, the Group had access to two 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. 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.
Educational background Mr. Angehrn holds a Ph.D. in mathematics from Harvard University and a Master of Science in theoretical physics from the Swiss Federal Institute of Technology (ETH) in Zurich.
External appointments Mr. Dailey is a member of The Institutes Board of Trustees.
Skills and experience Claudia Dill has more than 25 years of experience in the banking and insurance sectors and has held a range of senior international positions. Ms. Dill joined Credit Suisse as an internal auditor in 1990. She moved to Japan in 1992, where she worked as an auditor for Deutsche Bank and Commerzbank. Ms. Dill spent most of 1994 working as an external auditor for Coopers & Lybrand in Moscow, before returning to Switzerland. She resumed working for Credit Suisse from the end of 1994 until 1999 in various roles in the credit risk management department. Ms. Dill joined Zurich in 1999 as Financial Controller of Group Reinsurance and in 2001 was promoted to Chief Financial Officer (CFO) for Group Reinsurance. In 2003, she was appointed CFO for the business division Continental Europe and was promoted in 2004 to CFO of the European Region and European General Insurance business division. In 2007 she was appointed Chief Operating Officer (COO) for the same business area. In 2009, Ms. Dill took on the role of CEO and President for the North America Shared Services Platform (ZFUS) and was promoted in 2010 to Head of Global Business Services, both roles based in the U.S. From 2012 until 2015, Ms. Dill served as COO for the General Insurance business, based in Switzerland. In 2015, she was named CEO Latin America General Insurance, based in Brazil, and was appointed CEO Latin America in 2016. She became a member of the Executive Committee in October 2016.
Educational background Mr. Foley graduated with a Bachelor of Science in mathematics and economics from Fairfield University, Connecticut in 1984 and received a master’s degree from the J.L. Kellogg Graduate School of Management at Northwestern University, Evanston, in 1989.
Skills and experience Jack Howell has more than 20 years’ experience in the financial services sector, of which more than 10 have been in various senior leadership positions for insurance companies in Asia. Prior to his appointment at Zurich, Mr. Howell was the regional officer for Asia for Assicurazioni Generali based in Hong Kong. He joined Generali from Prudential plc Group, where he briefly served as CEO and President Director for PT Prudential Life Assurance, Indonesia and for almost six years as CEO of Prudential Vietnam Assurance. Before Prudential, he held various positions in AIG in the Philippines, Hong Kong and New York, co-founded a boutique investment bank called TwentyTen, and spent several years as a consultant, including in The Boston Consulting Group. Mr. Howell joined Zurich in September 2016 as CEO Asia Pacific and became a member of the Executive Committee in October 2016.
Skills and experience George Quinn started his career at KPMG 1988 in London, where he held several positions working with the insurance and reinsurance industry. He joined Swiss Re in 1999 as Group Chief Accounting Officer based in Zurich and later served as Chief Financial Officer (CFO) for Swiss Re Group’s financial services. Mr. Quinn became the Regional CFO for Swiss Re Americas based in New York in 2005. In March 2007 he became Swiss Re Group’s CFO. Mr. Quinn joined Zurich in May 2014 as Group CFO and is a member of the Executive Committee.
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.
Educational background Mr. Shea holds a Bachelor’s Degree in political science from McGill University, Canada.
Skills and experience Kristof Terryn began his career in 1993 in the banking industry, where he worked in capital markets. In 1997, he joined McKinsey & Company where he held various positions within the financial services practice in Brussels and Chicago. He joined Zurich in 2004 in the Finance department. In 2007, he became Chief Operating Officer (COO) for the Global Corporate business division and in January 2009 was named COO for General Insurance. Mr. Terryn became a member of the Executive Committee in 2010 upon his appointment as Group Head Operations. In September 2013 he was appointed CEO Global Life, and after becoming CEO General Insurance in October 2015, continued to serve as CEO Global Life on an ad interim basis until the end of December 2015. He was appointed Group Chief Operating Officer effective July 2016.
A shareholder with voting rights can attend shareholders’ meetings of Zurich Insurance Group Ltd in person. He or she may also authorize, in writing, another shareholder with voting rights or any person permitted under the Articles of Incorporation and a more detailed directive of the Board to represent him or her at the shareholders’ meeting. Based on the Articles of Incorporation, minors or wards may be represented by their legal representatives, married persons by their spouses and a legal entity may be represented by authorized signatories or other authorized representatives, even if such persons are not shareholders.
Statutory quora Pursuant to the Articles of Incorporation, the AGM constitutes a quorum irrespective of the number of shareholders present and shares represented. Resolutions and elections generally require the approval of a simple majority of the votes cast, excluding abstentions, blank and invalid votes, unless respective provisions in the Articles of Incorporation (of which there are currently none) or mandatory legal provisions stipulate otherwise. Article 704 of the Swiss Code of Obligations provides for a two-thirds majority of votes represented and an absolute majority of the nominal value of shares represented for certain important matters, such as a change of the company’s purpose or domicile, a dissolution of the company and certain matters relating to capital increases.
Agenda The Board is responsible for setting the agenda and sending it to shareholders. Shareholders with voting rights who together represent shares with a nominal value of at least CHF 10,000 may request in writing, no later than 45 days before the day of the meeting, that specific items be included in the agenda.
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 2016, an Investor Day was held in London on November 17. 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 29, 2017. 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.
For addresses and further upcoming important dates, see shareholder information starting on page 294 (Financial Calendar on page 297).
The Group is committed to providing equal opportunities when recruiting and promoting people, whereby ability, experience, skills, knowledge, integrity and diversity are guiding principles. The Group actively encourages employee involvement in its activities through printed and online publications, team briefings and regular meetings with employees’ representatives. Further, the Group is party to an agreement with employee representatives of the Group’s companies in Europe. For further information on the Group’s people management activities, see page 23 of the Annual Report and a longer report on Zurich’s website www.zurich.com/en/corporate-responsibility/doing-businessresponsibly /our-people.
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 125 and 135 of the Federal Act on Financial Market Infrastructures and Market Conduct in Securities and Derivatives 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.
Clauses on changes of control Employment agreements have been entered into with members of the ExCo, setting out the terms and conditions on which they are employed. The longest notice period for members of the ExCo is 12 months. No other benefits are provided in the case of a change of control.
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 Group 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.
At Zurich, various governance and control functions help to ensure that risks are identified and appropriately managed and internal controls are in place and operating effectively. This coordination is referred to as ‘integrated assessment and assurance’. The Board is ultimately responsible for the supervision of these assurance activities. Although each assurance provider maintains its distinct mandate and responsibilities, the assurance providers are closely aligned and co-operate with each other through a regular exchange of information, planning and other activities. This approach supports management in its responsibilities and provides confidence that risks are appropriately addressed and that adequate mitigation actions are implemented.
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 March 30, 2016, 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 29, 2017 as external auditors for the business year 2017. 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.
Supervision and control over the external audit process The Audit Committee regularly meets with the external auditors, at least four times a year. During 2016, 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 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 (Chairperson), the Group CFO, 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 Group’s internal audit function (Group Audit) is tasked with providing independent and objective assurance to the Board, the Audit Committee, the Group CEO and management and to the boards and audit committees of subsidiary companies. This is accomplished by developing a risk-based plan, which is updated continuously as the risks faced by the business change. The plan is based on the full spectrum of business risks including concerns and issues raised by the Audit Committee, management and other stakeholders. Group Audit executes the plan in accordance with defined operating standards, which incorporate and comply with the International Standards for the Professional Practice of Internal Auditing, issued by the Institute of Internal Auditors (IIA). Key issues raised by Group Audit are communicated to the responsible management function, the Group CEO and the Audit Committee using a suite of reporting tools.
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 the Institute of Internal Auditors (IIA) International Standards, the Internal Audit function is quality-reviewed at least every five years by an independent qualified assessor. This review was conducted most recently in 2016. The results confirmed that Group Audit’s practices conform with all IIA Standards.
The Audit Committee approves the Group Audit Plan annually, and reviews reports from the function on its activities and significant risk, control and governance issues, at least three times per annum. The Head of Group Audit reports functionally to the Chairperson of the Audit Committee and administratively to the Group CEO, and meets regularly with the Chairman of the Board and the Chairperson of the Audit Committee. Group Audit has no operational responsibilities over the areas it reviews and, to ensure independence, all Group Audit staff report (via audit managers) to the Head of Group Audit. In some instances, country audit managers also have a reporting line to the local CEO to comply with regulatory requirements.
The Group’s compliance function provides policies and guidance, business advice, training and assurance of appropriate compliance controls within its mandate. The compliance function also supports Zurich’s management in maintaining and promoting a culture of compliance and ethics consistent with Zurich Basics, the Group’s code of conduct. This compliance framework relies on an ongoing global compliance risk assessment to support a risk-based monitoring regime. The results of this assessment underpin the compliance function’s strategic planning which is conducted in consultation with business partners. The compliance plan is presented annually to the Audit Committee. Through a comprehensive program, the compliance function implements, embeds and monitors internal compliance policies and guidance. As part of that program, compliance officers introduce new employees to applicable rules and are involved in the integration of newly acquired companies. To help employees understand their responsibilities under Zurich Basics and internal compliance policies, all employees receive yearly ethical and compliance training, focusing on Zurich’s five basic values and twelve key rules of conduct. Local business units may supplement this module with additional training courses and high-risk compliance topics, as appropriate. In addition, the Group’s compliance function spearheads internal awareness campaigns on ethical and regulatory conduct. Each year all Zurich employees confirm their understanding of and compliance with Zurich Basics and internal policies. Zurich encourages its employees to speak up and report improper conduct that they believe is illegal, unethical, or violates Zurich Basics or our Group’s policies. Employees are free to report their concerns to management, Human Resources, the Group’s legal department, its compliance function, or through the Zurich Ethics Line (or similar service provided locally), a phone and web-based service run by an external specialized provider. Zurich does not tolerate retaliation against any employee who reports such concerns in good faith.
The Group’s compliance function, which consists of compliance professionals around the world, is overseen by the Group Compliance Officer, who reports to the Group General Counsel and regularly provides reports to the Group’s Audit Committee. The Group Compliance Officer has an additional reporting line to the Chairperson of the Audit Committee and appropriate access to the Chairman of the Board.
For information regarding the Group’s risk management and internal control framework, see the Risk review of this Annual Report 2016 on pages 114 to 147. The Group no longer separately describes risk management and internal control information in this governance report.
As the new Chairman of the Remuneration Committee, I am pleased to share with you the remuneration report for 2016.
Performance 2016 The overall financial results in 2016 were good across all businesses after a difficult year in 2015. With the significant dedication and accomplishments of the employees, the transformation of the business and the simplification of the organizational structure, this helped to improve profitability resulting in a net income attributable to shareholders of USD 3.2 billion (plus 74 percent compared to USD 1.8 billion in 2015) and a business operating profit of USD 4.5 billion (plus 55 percent compared to USD 2.9 billion in 2015).
The aggregate amount of variable remuneration for 2016 for the entire Group is determined based on the Group’s long- term economic performance and resulted in USD 691 million (plus 37 percent compared to USD 505 million in 2015).
Achievements in 2016 Following the appointment of Mario Greco as the new Group Chief Executive Officer (Group CEO), Zurich communicated during 2016 the new strategic direction, including the changes to the organizational structure and composition of the Executive Committee (ExCo). The Group moved to a simpler, more customer-oriented structure, reducing complexity, creating greater accountability and empowering teams to deliver products and services to customers in a unique and differentiated way.
AGM 2017 Finally, I would like to thank shareholders and other stakeholders for their input and engagement during my first year as Chairman of the Committee, especially at the Corporate Governance Roadshows held throughout the year. I welcome all shareholders’ feedback on this report.
Base salaries/Fees Short-term incentives Service cost for pension benefits Other remuneration
Note on terminology Effective July 1, 2016 the name of the Group Executive Committee (GEC) was changed to the Executive Committee (ExCo). In the remuneration report 2016 the abbreviation GEC is no longer used and in all instances it has been replaced by the abbreviation ExCo.
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 ExCo 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).
2016 remuneration in light of the business results Expenditure on remuneration is considered in the context of Zurich‘s overall revenues, capital base and profitability. As can be seen from the metrics in the following table, relative to Zurich’s overall revenues and shareholders’ equity, expenditure on variable remuneration remains relatively small, also in relation to the amount of dividends payable to shareholders. The key financial figures reflect data for 2016 and 2015 and show the increase in the total variable remuneration pool in 2016 compared to 2015, as an outcome of the increase in overall business profitability.
Key financial figures in USD millions, for the years ended December 31 2016 2015
Context The key factors driving individual awards are: 109% 65% kk The Group’s NIAS for members of the Leadership Team, the Control Functions, Investment Management, Support Functions and Group Operations. kk The overall business operating profit results for General Insurance and Global Life respectively. kk Specific growth and profitability measures for Farmers.
Context The key factors driving the vesting level in 2017 are: 121% 0% kk Group’s relative total shareholder return (TSR) against an international peer group of insurance companies kk NIAS ROE kk Cash remittance
kk The value of the target share allocations made in 2016 on the assumption that the allocations will vest at 100 percent of the target level in 2019 for performance over the three years 2016, 2017 and 2018.
kk The total amount of sign-on payments 1 committed in 2016, regardless of when the payments are due, for people taking up their employment in 2016.
kk Commission payments made to employed sales agents are not included in the variable remuneration pool.
Total remuneration 1 Includes the portion paid in sales-restricted shares to Directors. 2 The cash incentives earned for the year for all employees. 3 Represents the value of the target share allocations made in 2016, which assume vesting levels in 2019 at 100 percent of target. 4 Actual, gross and for cash amounts based on the accrual principle. 5 For all employees the Other remuneration includes Sign-on and Severance Payments committed in cash and/or in shares for comparison reasons.
1 Payments (whether paid immediately or over time) that are agreed on the completion of an employment contract. Sign-on Payments can 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 ExCo.
2 Payments that 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. However, Zurich does include garden leave or similar payments 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 ExCo.
The financial metrics for determining the funding of each pool have been reviewed and the key focus throughout STIP is to support the achievement of the BOP targets.
Performance management calibration: Calibration ensures consistency and comparability of ratings across the Group by aligning ratings to Zurich’s global target distribution guideline (calibration curve).
Legal and regulatory requirements This remuneration report provides all the information that is required by the following rules, with which Zurich complies: kk Chapter 5 of the Directive on Information Relating to Corporate Governance of the SIX Exchange Regulation (as of September 1, 2014).
According to the Ordinance AEC and Article 18 para 4 Articles of Incorporation, the Group and/or its subsidiaries are authorized to make payments to any member who joins the ExCo during a period for which the AGM has already approved the remuneration of the ExCo, of a supplementary amount for the period(s) in question, where the total amount already approved for such remuneration is not sufficient. The sum of all supplementary amounts may not exceed, during any one remuneration period, 30 percent of the respective total amount of approved maximum remuneration of the ExCo. Details on the votes on pay, on performance related remuneration for the ExCo, allocation of shares as well as the approach regarding loans and credits can be found in Articles 18, 28 and 34 of the Articles of Incorporation.
kk Remuneration is tied to long-term results for individuals who have a material impact on the Group’s risk profile.
kk A high performance culture is promoted by differentiating total remuneration based on the relative performance of businesses and individuals.
kk 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.
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 2016 there are four 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.
At Remuneration Committee and Board meetings where decisions are made on the individual remuneration of the Chairman, the Chairman is not present. In making decisions on the individual remuneration of the Group CEO, the Group CEO is not present. Where decisions are made on the individual remuneration of other members of the ExCo, those members are also not present at the meetings. See page 50 in the Corporate Governance Report for further details on the Remuneration Committee’s responsibilities.
Remuneration and risk The Remuneration and Risk and Investment Committees meet jointly once a year to discuss a risk review of the remuneration architecture and the remuneration governance framework. Group Risk Management evaluated the remuneration architecture in 2016 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. Group Risk Management has also played an active part in reviewing the remuneration architecture for 2017 which is outlined in further detail in the Outlook 2017 section later in the report.
Group Risk Management reviews the processes and criteria for identifying the key risk taker roles annually. The criteria are based on factors that materially affect risk-taking within the Group, such as overall governance, capital consumption for each risk type as determined by the internal model, strategy and reputation. The criteria are then applied to those who take, and those who control, the specific risks at the level of the Group where the risks are most material. All key risk taker roles for the Group were reviewed and in 2016 the number of key risk taker roles increased by a small amount. Group Risk Management, together with other control and assurance functions, provides risk and compliance information about each key risk taker as part of the annual individual performance assessment. The remuneration for key risk taker positions includes STIP and LTIP with a greater emphasis toward long-term, and therefore deferred remuneration.
LTIP Total number of unvested target shares1) 1,614,185 1,267,179 – as percentage of share capital based on the registered shares 1.07% 0.84% Total number of vested but unexercised options 172,978 330,888 – as percentage of share capital based on the registered shares 0.11% 0.22%
1 Given the vesting level of 121 percent for the tranches vesting in 2017 and assuming 100 percent vesting in 2018 and 2019. For 2015 the figure represents a zero vesting in 2016 and assuming 100 percent vesting in 2017 and 2018.
Total remuneration Target total remuneration is set around the relevant market median and includes the following elements: Remuneration elements
Scope and complexity of the role, level of responsibility and geographic location.
Vesting is determined based on (i) the position of the TSR compared with an international peer group of insurance companies derived from the Dow Jones Titan Insurance Index, (ii) the NIAS ROE and (iii) cash remittance.
Members of the ExCo and a defined group of the most senior positions of the Group, including key risk takers.
Base salary See the remuneration elements table for information regarding base salaries.
Individual objectives relevant to the role of the employee are defined and agreed at the beginning of the year. The line manager assesses the performance achievements during and at the end of the year, supported by the Group performance management process.
Short-term incentives are delivered primarily through STIP, although there are also local plans in a small proportion of 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. Where local plans exist, they are following broadly the same principles as STIP.
Allocations are made in the form of target shares. In no circumstances can the final LTIP award for an individual be more than 200 percent of the aggregate number of target shares and dividend equivalent shares.
<USD 8.0 billion USD 8.0 billion USD 9.0 billion USD 9.5 billion ≥USD 10.0 billion
Financial performance The financial performance is determined by the assessment of the performance criteria as per the vesting grid, which are set and reviewed by the Board annually in order to ensure alignment with the strategy.
Each performance metric is assessed independently over a three-year period starting at the beginning of the calendar year when the target shares are allocated. Each metric has a one third equal weighting. The vesting level is defined according to the vesting grid.
The vesting level is proposed by the Group CEO to the Remuneration Committee and ultimately approved by the Board. The Board may exercise discretion to prevent unreasonable outcomes, or to reflect the financial impact of decisions taken to implement strategy, or to deal with exceptional circumstances. An adjustment of +/–25 percent to the calculated vesting level may be applied and this can be positive or negative.
Exceptional individual adjustments The right to modify awards to reflect individual circumstances is reserved for the Group CEO except for modifications regarding members of the ExCo where this right is reserved for the Remuneration Committee and the Board. An adjustment of +/–25 percent to the calculated final vesting level may be applied on an individual level prior to vesting. However, if performance under exceptional or unusual circumstances warrants it exceptions to the +/–25 percent adjustment may be made. In this respect Zurich reserves the right to adjust and even set the vesting level to zero percent for an individual to reflect specific circumstances (e.g., in connection with a breach of internal or external rules) during the period prior to vesting but any such adjustment is reserved exclusively for the Remuneration Committee and the Board.
Dividend equivalent shares To further align plan participants with the interests of shareholders, effective from January 1, 2014 onwards, the target shares are credited with dividend equivalent target shares. The number of dividend equivalent target shares takes into account the actual dividends paid to shareholders prior to vesting (vesting period). Each year during the vesting period, the dividend amount is calculated on the number of target shares provided at the date of allocation and this amount is subsequently converted into dividend equivalent target shares based on the closing share price on the day prior to the dividend payment. At the vesting date, the number of target shares plus the dividend equivalent target shares will in aggregate be assessed for vesting against the performance criteria as per the LTIP vesting grid. In this way only the number of shares vesting from the target shares will be eligible for accrual of dividend equivalent target shares. Further, no dividends will accrue on the dividend equivalent target shares. The vested dividend equivalent target shares are subject to the same sales restriction periods as the vested target shares.
LTIP transition The transition to the three-year cliff vesting as of January 1, 2014 resulted in a reduction in the total target earning opportunity during the transition period compared to the previous vesting system for all LTIP participants who were members of the plan prior to 2014. Transition arrangements have been applied to allow the possibility for relevant participants to maintain their total target earning opportunity during the transition period.
The transition allocation, equal in value to the 2014 year’s regular LTIP allocation value, was assessed for vesting in equal amounts in 2015, 2016 and 2017 with the same vesting level as the regular allocations. To enhance the long-term and retentive nature of the allocation for the ExCo, the transition allocation was made in up to three installments with vesting in annual tranches over a three-year period. The holding period for performance shares under the regular LTIP also applies to the shares of the transition allocation and no dividend equivalent target shares accrue on the transition allocation.
The transition to three-year cliff vesting including the performance criteria and performance period is now complete.
LTIP vesting levels To increase transparency for the reader, a table with the vesting levels under the regular LTIP is provided below.
Vesting level as percentage of target in 20151 n.a. n.a. n.a. 20161 n.a. n.a.
The following table sets out the fee structure and levels for the Chairman, the Vice-Chairman and the members of the Board, as well as committee fees and chair fees for the four committees.
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.
The committees on which the Directors serve are set out in the Corporate Governance Report on page 38. Up until December 2015, the Board consisted entirely of non-executive Directors who are independent from management. As of December 1, 2015 and until March 6, 2016, Tom de Swaan was appointed as Chief Executive Officer ad interim in addition to his function as Chairman of the Board. To ensure continued good governance, Fred Kindle, Vice-Chairman of the Board, took on certain additional responsibilities for this interim period. Since March 2016, the Board again consists entirely of non-executive Directors independent from management.
2 Members of a committee receive a cash fee of CHF 60,000 (CHF 60,000 in 2015) for all committees on which they serve, irrespective of the number. The committees on which the Directors serve are set out in the Corporate Governance Report.
4 In addition to the fees received as Directors of Zurich Insurance Company Ltd, Susan Bies and Don Nicolaisen earned fees for their board memberships of the subsidiary board Zurich American Insurance Company.
5 The shares allocated to the Directors are not dependent on the achievement of performance criteria and are sales-restricted for five years. 6 As of June 16, 2016, Tom de Swaan was allocated 3,364 shares, Fred Kindle was allocated 897 shares, and the other members of the Board were allocated 538 shares.
The share price (CHF 222.90) as of June 15, 2016 was adopted to calculate the number of shares based on the fixed portion of the fee allocated in shares for the respective members. Where the value of the allocated shares did not equal the value of the portion of the fee to be allocated in shares, the difference was paid in cash.
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 a. i. effective December 1, 2015. In 2015 no payments were made to Tom de Swaan for this role nor as a member of the ExCo. In 2016, the Board decided that additional remuneration will be paid to Tom de Swaan to recognize the period where he held the Chief Executive Officer a. i. This remuneration is disclosed as compensation for management and included in the maximum total amount of remuneration approved for the Executive Committee by shareholders at the AGM in 2015 or in accordance with Article 18 para. 4 of the Articles of Incorporation. Further details can be found in the section Executive Committee – Remuneration of the ExCo.
10 In line with applicable laws, Zurich paid the company related portion of contributions to social security systems, which amounted to CHF 293,471 in 2016. The corresponding contributions amounted to CHF 92,129 in 2015. Any personal contributions of the Directors to social security systems are included in the amounts shown in the table above. Swiss-based Directors are eligible for selected employee benefits.
11 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. The share price (CHF 287.10) as of June 15, 2015 was adopted to calculate the number of shares based on the fixed portion of the fee allocated in shares for the respective members. Where the value of the allocated shares did not equal the value of the portion of the fee to be allocated in shares, the difference was paid in cash.
Audited 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 March 30, 2016, Jeffrey Hayman and David Nish, were elected as new members of the Board. No Replacement Payments or other benefits were provided. Further, Thomas Escher, Rafael del Pino and Don Nicolaisen did not stand for re-election. 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 to leaving members of the Board.
Share plans and shareholdings of Directors The shareholdings of the Directors who held office at the end of 2016, 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 9,829 6,465 F. Kindle, Vice-Chairman 19,310 18,413 J. Amble, Member 955 417 S. Bies, Member 3,220 2,682 A. Carnwath, Member 1,880 1,342 R. del Pino, Member n / a 1,342 Th. Escher, Member n / a 10,520 Ch. Franz, Member 1,181 643 J. Hayman, Member 538 n / a M. Mächler, Member 1,503 965 K. Mahbubani, Member 955 417 D. Nicolaisen, Member n / a 1,436 D. Nish, Member 538 n / a 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, 2016 or 2015, respectively.
The total amount of annual cash incentive awards to be paid in 2017 for the 2016 performance year for all members of the ExCo was USD 12.8 million compared to USD 5.9 million for 2015. The annual cash incentive awards are determined individually and are performance-based.
Members of the ExCo received other remuneration in 2016 in relation to employee benefits, expatriate allowances, perquisites, benefits-in-kind and any other payments due under each member’s employment contract.
The total value of other remuneration in 2016 was USD 1.4 million (compared to USD 1.2 million in 2015). Benefits-in-kind have been valued using market rates.
Replacement Payments for members of the ExCo appointed in 2016 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.
No Replacement Payments or allocations in restricted shares, were made in 2015 to members of the ExCo.
Value of target share allocations from transition arrangements for the ExCo No transition allocations were made in 2016.
Summary of total remuneration (excluding Replacement Payments and allocations from transition arrangements) The following table shows that the total remuneration of the members of the ExCo, comprising base salaries, cash incentive awards earned for the year, the value of target share allocations for 2016 (to be assessed for vesting in 2019), pensions and the value of other remuneration including employee benefits amounted to USD 44.9 million. In 2015, the corresponding figure was USD 40.1 million. Below the total amounts, the values of any one-time remuneration awards and the amounts of contractually agreed remuneration after stepping down from the ExCo and during the notice period are disclosed. The amounts for these items are outlined above and also shown separately in the following table.
in USD millions, for the years ended December 31 20161,2 20151,3
Base salaries 10.0 11.6 Cash incentive awards earned for the year 12.8 5.9 Value of target performance share allocations 17.2 17.5 Service costs for pension benefits 3.5 3.9 Value of other remuneration 4 1.4 1.2 Total in USD 5,6 44.9 40.1 Total in CHF 5,6,7 44.2 38.7 in USD millions, for the years ended December 31 20161,2 20151,3
Value of target share allocations from transition arrangements 8 0.0 5.7 Other payments and share allocations 9 10.1 0.0 Contractually agreed remuneration after stepping down and during notice period in the respective year10 3.7 4.6 1 The remuneration shown in the table is gross, based on the accrual principle, for the time employees are members of the ExCo during the year and does not include any business-related expenses incurred in the performance of the members’ services.
2 On the basis of 15 (including Tom de Swaan in his position as CEO a.i.) members and former members of the ExCo, of whom 7 served during the full year 2016. 3 On the basis of 13 members of the ExCo, of whom 9 served during the full year 2015. 4 Includes remuneration of Tom de Swaan for his time in the position of Chief Executive Officer a. i. which amounted to USD 304,602 or CHF 300,000 applying the respective
6 Excludes the value of target share allocations from transition arrangements for all members of the ExCo. 7 The amounts have been translated from USD to CHF at the relevant exchange rates throughout the year and the cash incentive to be paid in 2017 has been translated at the year-end rate in 2016.
9 Other payments and share allocations are extraordinary and include payments and share allocations to compensate incentive plan forfeitures with previous employers. 10 The amount relates to contractually agreed remuneration for the period of employment in 2016 after stepping down from the ExCo and during the notice period. Such remuneration includes pro-rated base salaries, cash incentives and LTIP target allocations for the financial year 2016.
Chief Executive Officer a. i. remuneration for Tom de Swaan, the Chairman of the Board of Directors With effect from December 1, 2015 until March 6, 2016, Tom de Swaan also served as Chief Executive Officer ad interim (a.i.) in addition to his function as Chairman of the Board. The Board decided to recognize his time in this role with a cash payment in 2016 of CHF 300,000. In the table above, this payment has been included in other remuneration.
Member of the ExCo with the highest remuneration The highest-paid individual in 2016 was Mario Greco, Group CEO since March 7, 2016. The remuneration comprises a total of CHF 7.8 million representing the base salary, cash incentive awards earned for the year, the value of the target shares allocated in 2016 under the LTIP, the value of pension benefits and other remuneration including employee benefits. In addition there is a Replacement Payment in cash and performance shares vesting in 2019 with an aggregate value of CHF 4.2 million to compensate for the forfeiture of his incentive plan rights with his previous employer.
Highest-paid executive, Mario Greco in 2016 (started on March 7, 2016) and comparison with former CEO Martin Senn’s remuneration in 20151 in CHF millions, for the years ended December 31 2016 2 2015 2
Value of target share allocations from transition arrangements 5 0.0 1.2 Other payments and share allocations 6 4.2 n / a 1 The remuneration for Mario Greco is disclosed on a pro rata basis reflecting his start date in the position as Group CEO with Zurich on March 7, 2016. Martin Senn stepped down on December 1, 2015 as CEO, however the table shows twelve months of remuneration for Martin Senn in 2015.
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.
Special payments and termination arrangements, additional honoraria and remuneration, and personal loans for members of the ExCo During 2016, two new members were appointed to the ExCo as internal appointments, and three new members, including the Group CEO, were external appointments. Four members, including Tom de Swaan in his role as Chief Executive Officer a. i., relinquished their responsibilities as members of the ExCo.
Payments in Advance and Severance Payments are prohibited for members of the ExCo according to the Ordinance AEC. There were no termination payments (golden parachutes) made and no other benefits, such as agreements concerning special notice periods or longer term employment contracts (exceeding 12 months in duration), waiver of lock-up periods for equities, shorter vesting periods or additional contributions to occupational pension schemes, were provided.
No former member of the ExCo received remuneration in 2016, other than disclosed in the remuneration report 2016.
Related parties to members or former members of the ExCo No benefits (or waiver of claims) have been provided to related parties of members of the ExCo or related parties of former members of the ExCo during the years 2016 and 2015. No party related to members of the ExCo or former members of the ExCo had outstanding loans, advances or credits as of December 31, 2016 and 2015.
A summary of the unvested target share allocations as at December 31, 2016 under the LTIP, the transition arrangement and the restricted shares is set out in the following table: Summary of unvested target share allocations for the ExCo as of December 31
Year of vesting 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 vests one-third after two years (i.e. 2016), and two-thirds after three years (i.e. 2017).
All options shown above entitle the holder to purchase one share of Zurich Insurance Group Ltd at the exercise price stated with normal voting and dividend rights.
Audited Share and share option holdings of members of the ExCo The following table sets out the actual share and share option holdings of each member of the ExCo as of December 31, 2016 and 2015. In addition to any shares acquired in the market, the numbers include vested shares, whether sales restricted or not, and vested share options received under the LTIP. However, the table does not include the share interests of the members of the ExCo through their participation in the currently unvested target shares or unvested restricted shares.
All interests include shares or share options held by related parties to members of the ExCo.
1 None of the members of the ExCo, together with parties related to them, held more than 0.5 percent of the voting rights as at December 31, 2016 or 2015, either directly or through share options.
4 Robert Dickie, Yannick Hausmann and Isabelle Welton stepped down from the ExCo effective June 30, 2016. 5 Mike Foley was appointed CEO North America effective July 1, 2016, Kristof Terryn was appointed Group Chief Operating Officer effective July 1, 2016 and Gary Shaughnessy was appointed CEO EMEA effective July 1, 2016.
J. Howell – – G. Quinn – – C. Reyes – – G. Shaughnessy1 – – J. Shea – –
Distribution of vested share options of members of the ExCo 2015
Trading plans To facilitate the sale of shares and the exercise of options for members of the ExCo, the Board approved the implementation of trading plans under a pre-defined transaction program effective as of 2008. The terms and conditions of the transactions have to be defined and they cannot be changed. All trading plans require the approval of the Chairman of the Board. The establishment of a trading plan by an ExCo member is reported to the SIX Swiss Exchange according to the rules on disclosure of management transactions. As of December 31, 2016, there were no trading plans in place. Further, no trading plans were entered into in 2016 or 2015.
Remuneration of all employees Please refer to the remuneration framework section on page 81 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 52,473 full-time equivalent employees as of December 31, 2016 (2015: 54,335).
Total remuneration for all employees in USD millions, for the years ended December 31 2016 2015
Base salaries 3,722 3,922 Value of other remuneration including employee benefits1 601 641 Service costs for pension benefits 2 477 556
3 Includes Sign-on and Severance Payments in cash. 4 Includes Sign-on Payments in shares.
Value of outstanding deferred remuneration The Group’s remuneration system includes instruments for the deferral of remuneration, and the following table provides an overview of the overall value of the outstanding deferred remuneration as of December 31, 2016 and 2015: Value of outstanding deferred remuneration for all employees in USD millions, for the years ended December 31 2016 2015
The value of the deferred remuneration has been determined by multiplying the number of outstanding shares by the relevant share price at the original date of allocation and reflects the assumption of a 100 percent future vesting level.
The following table discloses Sign-on and Severance Payments committed to key risk takers. For the key risk taker roles where the incumbent is a member of the ExCo, no Payments in Advance and/or Severance payments have been made. There were no Replacement Payments for the ExCo in 2015; however Replacement Payments for the ExCo in 2016 are included.
Sign-on and Severance Payments for key risk takers in USD millions, for the years ended December 31 2016 2015
Sign-on Payments/number of beneficiaries1 11.2 6 2.7 6 Severance Payments/number of beneficiaries 2 0.4 1 0.4 3 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 ExCo.
As outlined in last year’s report, the remuneration architecture was reviewed during 2016 to ensure alignment with the new strategy and organizational structure. Following this review, the main changes are in the STIP architecture and the LTIP vesting grid in relation to cash remittance.
STIP pool funding metrics for 2017 Funding for each STIP pool is based primarily on BOP, ensuring that the funding criteria are consistent across the Group. Previously the funding metric for the Leadership Team, Control Functions, Group Operations, Investment Management and Support Functions was Group NIAS. In determining the final awards under each STIP pool, there will continue to be a qualitative assessment of the performance achievements and the awards will also be considered in relation to the overall Group results.
<USD 8.5 billion USD 8.5 billion USD 9.5 billion USD 10.0 billion ≥USD 10.5 billion
We have audited the sections on pages 93 to 96 and pages 100 to 105 of the accompanying remuneration report of Zurich Insurance Group Ltd for the year ended December 31, 2016.
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 .
Our risk framework rated very strong Our enterprise risk management (ERM) framework supports us in achieving the Group’s strategy, while helping to protect capital, liquidity, earnings and reputation. In 2016, Standard & Poor’s upgraded its rating of Zurich’s ERM to ‘very strong.’
Message from our Group Chief Risk Officer Taking risk is inherent to the insurance business, but such risk taking needs to be made in an informed and disciplined way, and within a pre-determined risk appetite and tolerance. This is the primary objective of Zurich’s risk management.
We use our Total Risk ProfilingTM process to stay on top of both external and internal risks to our strategy and financial plan. Among the risks we identified in 2016 are the uncertainties regarding the path of Brexit, inflation risk, cyber risk, and risks to execution of our transformation.
Highlights by risk type kk Insurance risk: The Group diversifies its sources of revenue by geography, line of business, product and customer, and therefore is not exposed to concentrations of insurance risk beyond our risk appetite.
kk Other credit risk: The high and stable credit quality of our reinsurance assets portfolio allows Z-ECM capital required for this risk type to remain stable, with little volatility.
Own Risk and Solvency Assessment In 2016, we produced our second Own Risk and Solvency Assessment, as required by the Swiss regulator, FINMA. We strengthened analysis of our risk profile and forwardlooking scenarios, based on our extended risk appetite framework. Multi-year scenarios address causality across time, geography, products and risk. Our risk analysis shows that the main driver of capital-at-risk is market risk, while premium and reserve risks contribute most to volatility of earnings. These risks are recognized and closely managed as part of our enterprise risk management framework. Actions, both preventative and, if necessary, reactive, are in place at the level of the organization where they are ost appropriate.
The Group identifies plausible threat scenarios, and quantifies their potential impact on financial resources, or capital required, or both. 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 seven market- and credit-risk scenarios, and three natural catastrophe scenarios. The Z-ECM ratio would remain within the ‘AA’ range for most scenarios. One market-risk sensitivity would cause the Z-ECM ratio to drop below the Group’s risk tolerance under a capital perspective.
The major risk management objectives at Zurich Insurance Group (Zurich, or the Group) are to: kk Support achievement of the Group strategy and protect capital, liquidity, earnings and reputation by monitoring that risks are taken within the Group’s risk tolerance kk Enhance value creation by embedding disciplined risk taking in the company culture and contributing to an optimal risk-return profile where risk reward trade-offs are transparent, understood, and risks are appropriately rewarded kk Efficiently and effectively diversify risk and mitigate unrewarded risks kk Encourage openness and transparency to enable effective risk management kk Support decision-making processes by providing consistent, reliable and timely risk information kk Protect Zurich’s reputation and brand by promoting a sound culture of risk awareness, and disciplined and informed risk taking
The Group regularly reports on its risk profile at local and Group levels. The Group has procedures to refer risk issues to senior management and the Board of Directors in a timely way. To foster transparency about risk, the Board receives quarterly risk reports and risk updates. In 2016, reporting was enhanced with in-depth risk insights into historical large losses and risk selection and pricing, and into the potential effects on Zurich of such topical issues as the Brexit vote in the UK, cyber risk, climate risk, and the Zika virus.
The Group regularly measures and quantifies material risks to which it is exposed. Zurich’s policy is to maintain capital consistent with an ‘AA’ financial strength rating for the Group. The Group translates that goal into a quantified risk tolerance. The Zurich Economic Capital Model (Z-ECM) provides a key input into the Group’s strategic planning process as an assessment between the Group’s risk profile and the Group’s risk tolerance. The Z-ECM forms the basis for optimizing the Group’s risk-return profile by providing consistent risk measurement across the Group.
Risk-based remuneration 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 Group Chief Risk Officer (Group 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 Group 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 CRO leads the Group Risk Management function, which provides risk governance mechanisms to assess and manage risks effectively and efficiently with clear accountabilities, roles and responsibilities that enable disciplined risk taking throughout the Group. The Group CRO is responsible for oversight of risks across the Group, regularly reporting risk matters to the Group Chief Executive Officer, executive management committees and the Risk and Investment Committee of the Board.
The Group manages its capital to maximize long-term shareholder value while maintaining financial strength within its ‘AA’ target range, and meeting regulatory, solvency and rating agency requirements. In particular, the Group endeavors to manage its shareholders’ equity under IFRS to balance maximization of shareholder value and constraints from its economic framework, rating agencies and regulators. Shareholders’ equity of USD 30.7 billion and subordinated liabilities of USD 7.1 billion as of December 31, 2016 are part of the capital available in the Group’s economic framework. Further adjustments usually include such items as intangible assets, deferred tax assets and liabilities, or allowing for discounting of liabilities and the value of in-force business. For more information, see ‘analysis of the Group’s Z-ECM available financial resources (unaudited).’
Zurich’s policy is to allocate capital to businesses earning the highest risk-adjusted returns, and to pool risks and capital as much as possible to operationalize its risk diversification.
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 2016, the Group paid a dividend out of the capital contribution reserve, and refinanced part of maturing senior debt and callable hybrid debt with new hybrid debt.
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 decision-making processes, and is used in capital allocation, business performance management, pricing, 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.
Analysis of the Group’s Z-ECM available financial resources and Z-ECM capital required USD billions
January 1, 2014 July 1, 2014 January 1, 2015 July 1, 2015 January 1, 2016 July 1, 2016
The chart below shows the Z-ECM capital required, split by risk, type as of July 1, 2016 and as of January 1, 2016 respectively. As of July 1, 2016, the largest proportion of Z-ECM capital required arose from market risk which comprised 55 percent of the total. Premium and reserve risk was the second-largest, comprising 21 percent.
Sensitivity and scenario analysis The Group evaluates sensitivities to, and stress scenarios on, the Z-ECM ratio, and presents results relative to our risk tolerance and appetite. The sensitivities and stress scenarios in the following chart capture two key risks to the Group: market and insurance risk. For insurance risk, the chart shows the three largest natural catastrophe events to which the Group is exposed.
Market risk sensitivities show the estimated impact on the Group’s Z-ECM ratio of a one percentage point increase/ decrease in yield curves, a 10 percent appreciation in the U.S. dollar, a 20 percent rise/decline in all stock markets, and a one percentage point change in credit spreads, with and without European sovereigns. The sensitivities are considered as separate but instantaneous scenarios. They are a best estimate and non-linear, i.e., will vary depending on prevailing market conditions at the time.
Scenarios are defined as events that have a very small probability of occurring but that could, if realized, negatively affect the Group’s Z-ECM available financial resources. The impact of the changes to the required capital are not taken into account.
Impact on the Z-ECM ratio from sensitivities to financial market conditions: Risk Tolerance
Impact on the Z-ECM ratio due to general insurance risk-specific scenarios:3
The Group maintained its strong rating level in 2016. As of December 31, 2016, the IFSR of Zurich Insurance Company Ltd (ZIC), the main operating entity of the Group, was ‘AA–’ by Standard and Poor’s, ‘Aa3/stable’ by Moody’s, and ‘A+/negative’ by A.M. Best.
The Group endeavors to manage its capital so that all of its regulated entities meet local regulatory capital requirements at all times.
Regulatory requirements in Switzerland Under the Swiss Solvency Test (SST), insurance companies and insurance groups can apply for the use of companyspecific internal models to calculate risk-bearing and target capital, as well as the SST ratio. The SST ratio has to be calculated as per January 1 and must be submitted to the Swiss Financial Market Supervisory Authority (FINMA). Internal models must be approved by FINMA.
FINMA approved the use of Zurich’s internal model for 2016 on a provisional basis, without prejudicing the final approval. Zurich filed with FINMA an SST ratio of 189 percent (unaudited) as of January 1, 2016, which was approved accordingly.
Regulatory requirements in the U.S. In the U.S., required capital is determined to be ‘company action level risk-based capital’ calculated using the National Association of Insurance Commissioners’ risk-based capital model. This method, which builds on regulatory accounts, measures the minimum amount of capital for an insurance company to support its overall business operations by taking into account its size and risk profile.
General insurance risk General insurance risk comprises premium and reserve risk, and business risk. Premium and reserve risk covers uncertainties in the frequency of the occurrence of the insured events as well as in the severity of the resulting claims. Business risk for general insurance predominantly relates to unexpected increases in the expenses relating to claims handling, underwriting, and administration. The following provides an overview of the Group’s main lines of business: kk Motor includes automobile physical damage, loss of the insured vehicle and automobile third-party liability insurance.
Audited The Group’s underwriting strategy takes advantage of the diversification of general insurance risks across lines of business and geographic regions. Zurich’s underwriting governance is applicable throughout the Group.
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 financial 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 most cases, these actuarial analyses are conducted at least twice a year for on-going business according to agreed timetables. Analyses are performed by product line, type and extent of coverage and year of occurrence. As with any projection, claim reserve estimates are inherently uncertain due to the fact that the ultimate liability for claims will be affected by trends as yet unknown, including future changes in the likelihood of claimants bringing suit, the size of court awards, and claimants’ attitudes toward settlement of their claims.
Insurance risk sensitivity for the General Insurance business – current period in USD millions, for the year ended December 31, 2016
+1% in net loss ratio Net income before tax (50) (81) (100) (32)
Insurance risk sensitivity for the General Insurance business – prior period in USD millions, for the year ended December 31, 2015
Life insurance risk The risks associated with life insurance include life liability risk (mortality, longevity, and morbidity), business risk (policyholder behavior, expense, and new business), market risk and credit risk.
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 annuity 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. These guarantees are managed through a combination of asset-liability matching and hedging.
The Group structures and aligns its external reinsurance protection to its capital position to achieve an optimum risk-return ratio. This includes a participation in the underlying risks through self-retentions. The Group manages its central reinsurance purchasing according to these principles. The cession rate for General Insurance was 21.2 percent and 16.6 percent as of December 31, 2016 and December 31, 2015, respectively. The cession rate for Global Life was 5.6 percent and 17.2 percent as of December 31, 2016 and December 31, 2015, respectively. The decrease in ceded premiums for Global Life is due to temporary reinsurance in 2015 of a run-off portfolio.
The Group participates in the underlying risks through its retention and through its co-participation in excess layers. The contracts are on a loss-occurrence basis except the Global Aggregate Catastrophe cover, which operates on an annual aggregate basis. The current catastrophe covers are placed annually with the exception of the USD 750 million Global Catastrophe treaty, which is a three-year treaty. In addition to these covers, the Group has some local catastrophe covers, a bilateral risk swap, and various lines of business-specific risk treaties in place. These covers are reviewed continuously and are subject to change going forward.
Major changes in 2016 included the non-renewal of the specific U.S. Earthquake Cat bond which is now covered as part of a traditional regional annually renewable treaty, the reduced attachment point of the U.S. and International Catastrophe towers, and the placement of a three-year USD 750 million Global Catastrophe treaty which can be applied to any region. To maintain a superior earnings protection for higher-frequency catastrophe scenarios, the Group slightly decreased the attachment point of the Global Aggregate Catastrophe treaty.
Reinsurance for catastrophes, aggregated – unusually frequent catastrophe events USD millions, as of December 31, 2016
Percentage of co-participation 1 This USD 200m 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 occurrence or event.
Single global USD 750 million treaty, which can be applied to any region
Market risk is the risk associated with the Group’s balance sheet positions where the value or cash flow depends on financial markets. Risk factors include: kk Equity market prices kk Property market prices kk Interest rate risk kk Credit and swap spread changes kk Defaults of issuers kk Currency exchange rates
Risk from equity securities and property The Group is exposed to risks from price fluctuations on equity securities and property which could affect the Group’s liquidity, reported income, economic surplus and regulatory capital position. Equity risk exposure includes common stocks, including equity unit trusts, private equity, common stock portfolios backing participating-with- profit policyholder contracts, and equities held for employee benefit plans. Exposure to property risk includes direct holdings in property, listed property company shares and funds, as well as property debt securities such as commercial and residential mortgages, commercial and residential mortgage-backed securities and mezzanine debt. Returns on unit-linked contracts, whether classified as insurance or investment contracts, may be exposed to risks from equity and property, but these risks are borne by policyholders. However, the Group is indirectly exposed to market movements from unit-linked contracts with respect to both earnings and economic capital. Market movements affect the amount of fee income earned when the fee income level is dependent on the valuation of the asset base. Therefore, the value of in-force business for unit-linked business can be negatively affected by adverse movements in equity and property markets.
The Group manages its risks from equity securities and property as part of the overall investment risk management process, and applies limits as expressed in policies and guidelines. Specifically, Zurich limits holdings in equities, real estate and alternative investments. In order to realize an optimal level of risk diversification, the strategy for equities is defined through a composite of market benchmark indices. The Group has the capability and processes in place to change the exposure to the key equity markets within a short time frame through the use of derivatives.
Sensitivities for the rest of the business include Farmers, Other Operating Businesses and Non-Core Businesses.
For the economies in the U.S., the UK and the Eurozone, risk-free nominal interest rate are modeled using a LIBOR market model. Negative nominal interest rates, if any, are floored to zero. For Switzerland, risk free nominal interest rates are modeled using a variant of the LIBOR market model with displacement diffusion and stochastic volatility. This model allows for modelling negative nominal interest rates in a market where these are more severe than in other economies.
In USD millions, as of December 31 2016 2015 100 basis point increase in the interest rate yield curves General Insurance business Net impact after tax1,2 (158) (288) Global Life business Total impact on Embedded Value (192) (276) Rest of the business Net impact after tax1,2 (107) 67 100 basis point decrease in the interest rate yield curves General Insurance business Net impact after tax1,2 56 247 Global Life business Total impact on Embedded Value (388) 29 Rest of the business Net impact after tax1,2 123 (157)
1 Modeling enhancements for the General Insurance business reflecting revised estimates over the expected duration on certain inter-company loans resulted in an increase of USD 102 million and a decrease of USD 208 million for the 100 basis point increase and decrease, respectively, in the interest rate yield curves for the year ending December 31, 2016. This results in equal and offsetting impacts to the Rest of the Business.
2 Sensitivities for General Insurance and Rest of the Business have been developed using general insurance liability cash flow data as of September 30, 2016, re-valued as of December 31, 2016 using standard methodology and models.
In USD millions, as of December 31 2016 2015 10% decline in stock markets General Insurance business Net impact after tax (387) (459) Global Life business Total impact on Embedded Value (262) (289) Rest of the business Net impact after tax (35) (31)
Audited 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, 2016 and 2015, respectively. The sensitivities apply to all fixed income instruments, excluding government, supranational and similar debt securities.
In USD millions, as of December 31 2016 2015 100 basis point increase in credit spreads General Insurance business Net impact after tax (1,144) (1,004) Global Life business Total impact on Embedded Value (1,122) (1,056) Rest of the business Net impact after tax (262) (220)
In August 2016, the Group revised its investment policy to allow for speculative grade investments without specific authorization. Revised limits are now based on default and recovery rates that tighten progressively for lower ratings. Where the Group identifies investments expected to trigger limit breaches, appropriate actions are implemented.
The second-largest concentration in the Group’s debt securities portfolio is in financial institutions (including banks), at 19.8 percent, of which 37.8 percent is secured.
Cash and cash equivalents amounted to USD 7.2 billion as of December 31, 2016 and USD 8.2 billion as of December 31, 2015. The risk-weighted average rating of the overall cash portfolio is ‘A–’ as of December 31, 2016 and December 31, 2015. 57 percent of the total was with the 10 largest global banks, whose risk-weighted average rating increased from ‘A–’ as of December 31, 2015 to ‘A’ as of December 31, 2016.
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, are in line with the framework of the strategic asset allocation defined by the Group, and adapted and approved by local investment committees. The Group’s largest mortgage loan portfolios are held in Germany (USD 2.4 billion) and in Switzerland (USD 3.5 billion); these are predominantly secured against residential property but also include mortgages secured by commercial property. In Switzerland, the underlying properties backing individual loans are revalued every 10 years. In Germany, the property valuation is not always 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. Conservative lending criteria (i.e., maximum mortgage-loan to propertyvalue ratios) and diversification of loans across many single borrowers, particularly in Germany and in Switzerland, help reduce potential loss.
For more details, see note 24 in the consolidated financial statements.
In compliance with EMIR (European Market Infrastructure Regulation), applicable clearing obligations were met in 2016.
The sensitivities show the effects of a change of the exchange rates only, while other assumptions remain unchanged. The sensitivity analysis does not take into account management actions that might be taken to mitigate such changes. The sensitivities do not indicate a probability of such events occurring in the future. They do not necessarily represent Zurich’s view of expected future market changes. While table 10 shows the effect of a 10 percent increase in currency exchange rates, a decrease of 10 percent would have the converse effect.
The Group’s objective in managing credit risk exposures is to maintain them within parameters that reflect the Group’s strategic objectives, and risk appetite and tolerance. Sources of credit risk are assessed and monitored, and the Group has policies to manage specific risks within various subcategories of credit risk. To assess counterparty credit risk, the Group uses ratings assigned by external rating agencies, qualified third parties such as asset managers, and internal rating assessments. If external rating agencies’ ratings differ, the Group generally applies the lowest, unless other indicators justify an alternative, which may be an internal credit rating.
On-balance sheet exposures are the main source of credit risk. Off-balance sheet credit exposures are related primarily to certain insurance products and collateral used to protect underlying credit exposures on the balance sheet. The Group also has off-balance sheet exposures related to undrawn loan commitments of USD 7 million and USD 8 million as of December 31, 2016 and 2015, respectively. See note 22 of the consolidated financial statements for undrawn loan commitments.
Reinsurance assets included reinsurance recoverables (the reinsurers’ share of reserves for insurance contracts) of USD 18.4 billion and USD 17.9 billion, and receivables arising from ceded reinsurance of USD 1.4 billion and USD 0.9 billion as of December 31, 2016 and 2015, respectively, gross of allowance for impairment. Reserves for potentially uncollectible reinsurance assets amounted to USD 94 million as of December 31, 2016 and USD 149 million as of December 31, 2015. The Group’s policy on impairment charges takes into account both specific charges for known situations (e.g., financial distress or litigation) and a general, prudent provision for unanticipated impairments.
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, 2015, collateral decreased by USD 0.6 billion to USD 8.4 billion. In 2015, reinsurance assets and collateral increased due to the sale of a run-off portfolio.
kk Documents and reviews loss events exceeding a threshold determined by the Zurich Risk Policy. Remedial action is taken to avoid a recurrence of such operational loss events.
Risk scenario clusters contributing to the Z-ECM capital required for operational risk
Regulatory and tax compliance: This risk cluster relates to possible non-compliance with applicable laws and regulations, leading to a range of consequences. It includes fines and penalties, litigation, compensation to policyholders, increased regulatory scrutiny, financial losses and increased cost of compliance, as well as consequences from a possible failure to comply with tax requirements.
M&A – due diligence and integration: This risk cluster relates to poor execution of both the due diligence and the post-M&A integration processes. It includes the understatement of liabilities and required investments, operational or legal risks in the acquired business, inadequate transaction decisions, loss of key staff, inability to realize synergies or deliver benefits.
Management, as the first line of defense, is responsible for identifying, evaluating and addressing significant risks, and designing, implementing and maintaining internal controls. Key processes and controls in the organization are subject to reviews by management, Group Risk Management, Group Compliance, and Group Audit. Significant risks and associated mitigation actions are reported regularly to the Risk and Investment Committee and the Audit Committee of the Board.
Significant controls are assessed for their design and operating effectiveness. Significant control issues or issues affecting more than one business unit may be categorized as having Group-level significance. The Risk and Investment Committee of the Board and the Audit Committee of the Board monitor resolution of such issues.
The Risk and Investment Committee of the Board has reviewed the effectiveness of the Group’s risk management system, including the Group’s risk tolerance and enterprise-wide risk governance framework, and the Audit Committee of the Board has reviewed the effectiveness of the system of control over financial reporting for the calendar year 2016 and has reported to the Board accordingly. Issues identified have been communicated to the Board and have been or are being addressed by the Group.
The fair value hierarchy tables in note 23 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.
See note 18 of the consolidated financial statements for more information on debt obligation maturities and credit facilities and note 22 of the consolidated financial statements for information on commitments and guarantees. The Group’s ongoing liquidity monitoring includes regular reporting to the executive management and quarterly reporting to the Risk and Investment Committee of the Board, covering aspects such as the Group’s actual and forecast liquidity, possible adverse scenarios that could affect the Group’s liquidity and possible liquidity needs from the Group’s main subsidiaries, including under conditions of stress.
On June 10, 2016, Zurich announced a planned change in the structure of the Group, effective July 1, 2016, which will lead to a simpler, more customer-oriented structure and reduced complexity. The new business structure will be focused on geographic regions in our core businesses of Property and Casualty (P&C) and Life – Asia Pacific, Europe, Middle East and Africa (EMEA), Latin America and North America – as well as Farmers, Group Functions and Operations and Non-Core Businesses. On September 20, 2016, Zurich announced further changes to the business structure of the Group by creating a new unit, called Commercial Insurance, which will combine its Corporate and Commercial business into a single global business. The new reporting structure will be reflected in the consolidated financial statements in 2017.
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 years ended December 31, 2016, compared with 2015.
Financial highlights in USD millions, for the years ended December 31, unless otherwise stated 2016 2015 Change1
Business operating profit 4,530 2,916 55% Net income attributable to shareholders 3,211 1,842 74%
Global Life business operating profit 1,344 1,300 3% Global Life new business annual premium equivalent (APE) 2 4,779 4,772 – Global Life new business margin, after tax (as % of APE) 2 21.0% 21.6% (0.6 pts) Global Life new business value, after tax 2 866 912 (5%)
Farmers business operating profit 1,520 1,421 7% Farmers Management Services gross management result 1,367 1,338 2% Farmers Management Services managed gross earned premium margin 7.0% 7.1% (0.1 pts)
Return on common shareholders’ equity (ROE) 6 11.8% 6.4% 5.4 pts Business operating profit (after tax) return on common shareholders’ equity (BOPAT ROE) 6 11.6% 6.4% 5.2 pts 1 Parentheses around numbers represent an adverse variance.
5 Ratios as of December 31, 2016 and December 31, 2015, respectively. Ratio for December 31, 2016 reflects midpoint estimate with an error margin of +/–5ppts. 6 Shareholders’ equity used to determine ROE and BOPAT ROE is adjusted for net unrealized gains/(losses) on available-for-sale investments and cash flow hedges.
kk General Insurance business operating profit increased by USD 1.6 billion to USD 2.4 billion, resulting mainly from an improvement in the net underwriting result of USD 1.4 billion across all regions.
kk Farmers business operating profit increased by USD 99 million to USD 1.5 billion, or by 7 percent. Farmers Management Services business operating profit increased by USD 118 million to USD 1.5 billion, driven by growth in gross earned premiums of the Farmers Exchanges1 and a one-time USD 86 million favorable impact as a result of a pension plan curtailment gain. Farmers Re business operating profit decreased by USD 19 million to USD 42 million, due to a lower underwriting result compared with 2015.
kk Other Operating Businesses reported a business operating loss of USD 758 million, compared with a loss of USD 720 million in 2015. The increased loss was primarily due to the impact of less favorable foreign exchange movements and several one-off items in both 2016 and 2015.
kk Non-Core Businesses reported a business operating loss of USD 11 million compared with a profit of USD 51 million in 2015. This deterioration resulted from a higher release of long-term reserves in 2015 compared with 2016, as a consequence of a buy-back program for a variable annuity product in the U.S.
Zurich Insurance Group Annual Report 2016 1 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.
kk Farmers Management Services management fees and other related revenues increased by USD 81 million to USD 2.9 billion, or 3 percent, due to growth in gross earned premiums of the Farmers Exchanges. Farmers Re gross written premiums and policy fees decreased by USD 558 million to USD 1.6 billion, or by 26 percent, due to lower reinsurance assumed from the Farmers Exchanges.
The net investment result on Group investments, before allocations to policyholders, of USD 7.0 billion decreased by USD 417 million, or by 6 percent in U.S. dollar terms and 3 percent on a local currency basis, resulting in a net investment return on average Group investments of 3.7 percent compared with 3.8 percent in 2015. Net investment income, predominantly included in the core business results, of USD 5.5 billion decreased by USD 87 million, or 2 percent in U.S. dollar terms, but was 1 percent higher on a local currency basis. Net capital gains on investments and impairments included in the net investment result decreased by USD 330 million to USD 1.6 billion, mainly due to lower realizations compared with 2015. Total return on average Group investments was 4.3 percent, compared with 1.7 percent for 2015. Total return includes the net investment return and the favorable impact from net unrealized investment gains before allocations to policyholders, of USD 1.1 billion compared with losses of USD 4.1 billion in 2015, neither of which flow through net income. This improvement arose mainly as a result of positive equity market performance in 2016 and falling bond yields compared with rising bond yields during 2015.
The U.S. dollar, on average, strengthened during 2016 compared with 2015 against all of the Group’s major trading currencies. The translation effect of the strengthening of the U.S. dollar during 2016 affected many line items in both the consolidated income and cash flow statements, and reduced business operating profit by USD 197 million. As of December 31, 2016 compared with December 31, 2015, the U.S. dollar was stronger against major currencies in particular the British pound, which weakened 16 percent following the EU membership referendum vote, and affecting most line items in the balance sheet.
The shareholders’ effective tax rate decreased to 30.7 percent for the period ended December 31, 2016 compared with 36.6 percent for 2015. The decrease of 5.9 percentage points reflects changes in the geographical profit mix and the effect of several non-recurring charges in 2015, which did not attract tax relief.
ROE increased by 5.4 percentage points to 11.8 percent, largely due to the increase in net income attributable to shareholders. BOPAT ROE increased by 5.2 percentage points to 11.6 percent as a result of the increase in business operating profit. Diluted earnings per share in Swiss francs increased by 77 percent to CHF 21.04 compared with CHF 11.86 in 2015. Diluted earnings per share in U.S. dollars increased by 73 percent to USD 21.36 compared with USD 12.33 in 2015.
GI Global Functions including Group Reinsurance (240) (45) nm nm Total 2,435 864 98.4% 103.6%
The net underwriting result improved by USD 1.4 billion to USD 412 million, with an overall combined ratio of 98.4 percent, an improvement of 5.1 percentage points from 2015. The loss ratio improved by 5.2 percentage points reflecting lower catastrophe and weather events, and an improvement in large and underlying loss experience across most regions. The result also reflects favorable development in loss reserves established in prior years compared with negative development in 2015. The favorable development in 2016 was due to reductions in most regions, partly offset by Group Reinsurance. The expense ratio remained at prior year levels, reflecting a lower expense base as a result of initiatives to reduce costs across all regions and the effect of positive non-recurring items in 2016, offset by lower premium volumes.
Business operating profit increased by USD 667 million to USD 322 million, mainly due to the improvement in the net underwriting result.
Gross written premiums and policy fees of USD 7.7 billion decreased by USD 989 million, or 11 percent in U.S. dollar terms and 8 percent on a local currency basis. This reflected the outcome of re-underwriting measures taken to restore profitability in both existing books and new business. Rates overall increased by 1 percent in 2016, despite continued rate pressure, particularly in North America.
The net underwriting result improved by USD 626 million to an underwriting loss of USD 209 million, reflected in the improvement of 9.7 percentage points in the combined ratio to 104.2 percent. The improvement in the loss ratio of 10.4 percentage points was mainly attributable to positive development of reserves established in prior years compared with negative development in 2015, as well as lower catastrophe and weather related losses in Asia Pacific, EMEA and North America. The expense ratio increased by 0.7 percentage points, mainly as a result of lower premium volumes despite reduced costs and the effect of positive non-recurring items in 2016.
Gross written premiums and policy fees increased by USD 1.2 billion to USD 11.9 billion, or by 11 percent. This increase was driven by the completion of the acquisition of RCIS on March 31, 2016 with its results included as of April 1, 2016. RCIS is a provider of agricultural insurance in the U.S. through a federal crop insurance program and other private crop insurance products. Excluding RCIS, gross written premiums and policy fees decreased by 2 percent as a result of underwriting measures. The rate environment remained positive with overall rates increased by 1 percent.
The net underwriting result increased by USD 165 million to USD 311 million, reflected in the 2.0 percentage points improvement in the combined ratio to 96.1 percent. Despite higher loss ratio pertaining to the RCIS business, the overall ratio decreased by 1.6 percentage points, mainly attributable to an improvement in the underlying losses. In addition, the result benefited from positive development of reserves established in prior years compared with negative development in 2015. This was partly offset by an increase in catastrophe and weather related losses. The expense ratio improved by 0.4 percentage points, as a result of initiatives to reduce costs, the effect of positive non-recurring items in 2016 and the inclusion of RCIS. This was partly offset by higher commissions due to change in business mix in the non RCIS book.
Europe, Middle East & Africa in USD millions, for the years ended December 31 2016 2015 Change
Gross written premiums and policy fees 10,162 10,955 (7%) Net underwriting result 458 (138) nm Business operating profit 1,016 403 nm Loss ratio 64.0% 69.1% 5.2 pts Expense ratio 31.4% 32.1% 0.7 pts Combined ratio 95.4% 101.3% 5.9 pts
Gross written premiums and policy fees 3,556 3,894 (9%) Net underwriting result 145 (112) nm Business operating profit 364 82 nm Loss ratio 49.2% 56.5% 7.4 pts Expense ratio 46.3% 46.8% 0.5 pts Combined ratio 95.4% 103.3% 7.9 pts
Business operating profit increased by USD 282 million to USD 364 million. The increase resulted from improvements in the net underwriting result and the non-technical result. The latter was mainly a result of foreign exchange gains.
Gross written premiums and policy fees decreased by USD 337 million to USD 3.6 billion, or 9 percent in U.S. dollar terms, but remained flat on a local currency basis. On a local currency basis, gross written premiums grew by 5 percent in Latin America due to the impact of inflation in the region, mainly in Argentina. Despite growth in some areas of Asia Pacific, premiums decreased overall by 6 percent on a local currency basis due to the impact of underwriting actions taken in Australia. Overall, International Markets achieved average rate increases of 1 percent in 2016.
Global Life in USD millions, for the years ended December 31 2016 2015 Change
1 Net policyholder flows are defined as the sum of gross written premiums and policy fees and deposits, less policyholder benefits. 2 Assets under management comprise Group and unit-linked investments that are included in the Global Life balance sheet plus assets that are managed by third parties, on which fees are earned. 3 As of December 31, 2016 and December 31, 2015, respectively.
New business – highlights in USD millions, for the years ended December 31 2016 2015 Change
Source of earnings1 in USD millions, for the years ended December 31 2016 2015 Change
Business operating profit increased by USD 44 million to USD 1.3 billion, or 3 percent in U.S. dollar terms and 9 percent on a local currency basis. Improvements on a local currency basis in Latin America, EMEA, and Asia Pacific were partly offset by a lower contribution from North America. In EMEA, the main improvement on a local currency basis arose through the investment margin and lower overall costs. This improvement was partly offset by a deterioration in the technical margin from higher claims and lower fees due to lower volumes and change in mix of business. Asia Pacific benefited from growth, including the contribution of recent acquisitions, and the transition to run-off of the Singapore business, with a corresponding transfer to Non-Core Businesses. In Latin America, higher volumes, increased investment returns and overall favorable claims experience were the main contributors on a local currency basis. North America was mainly affected by an adverse variance resulting from a review of expected persistency in certain universal life books of business.
Loadings and fees deteriorated by USD 209 million to USD 3.6 billion, or by 5 percent in U.S dollar terms, but remained flat on a local currency basis. In local currency, volume growth in Latin America and the positive contribution from the recent acquisitions in Asia Pacific, both MAA Takaful Berhad insurance company in Malaysia and the retail life insurance protection business of Macquarie Group in Australia, were offset by lower fees in EMEA largely from lower single premium business in Germany and changes in mix of business in the UK.
Technical margin deteriorated by USD 194 million to 927 million, or by 17 percent in U.S dollar terms and 14 percent on a local currency basis. This deterioration was predominantly driven by adverse claims experience in EMEA and the International Group Risk (IGR) business, where higher than expected levels of large losses occurred.
Operating and funding costs improved by USD 237 million to USD 1.5 billion, or by 13 percent in U.S dollar terms, and 9 percent on a local currency basis. In local currency, the positive impact of disciplined central expense management, expense reductions across EMEA and a one-off benefit relating to unit-linked funds in the UK were partly offset by project costs for growth initiatives in other regions.
Acquisition costs decreased by USD 253 million to USD 2.5 billion, or by 9 percent in U.S dollar terms, and by 5 percent on a local currency basis. The decrease on a local currency basis reflected lower volumes of business, particularly in Germany, and changes in business mix in the rest of EMEA and in North America. The contribution from the impact of deferrals decreased by USD 102 million to USD 274 million, or by 27 percent both in U.S. dollar terms and on a local currency basis. The negative effect arose mainly in North America, resulting from the review of expected persistency in certain universal life books of business and changes in product mix, and in EMEA, also impacted by changes in product mix.
Net policyholder flows were positive at USD 8.3 billion and USD 1.1 billion higher compared with 2015. The majority of the improvement occurred in the retail business in EMEA, driven by individual savings business in Spain, with a partial offset in Germany due to lower single premium business. Assets under management increased by 1 percent in U.S. dollar terms and 7 percent on a local currency basis compared with December 31, 2015. The increase was driven by positive net policyholder flows and favorable market movements. In U.S. dollar terms, this increase was offset by the impact of the weaker British pound against the U.S. dollar on investments denominated in British pounds. Net reserves increased by 1 percent in U.S. dollar terms, and by 8 percent on a local currency basis compared with December 31, 2015, substantially reflecting movements similar to those in the related assets.
NBV, APE, NBM and BOP by region in USD millions, for the years ended December 31 New business value, after tax (NBV)1
APE remained flat at 4.8 billion in U.S. dollar terms, but increased 7 percent on a local currency basis. Latin America increased by 42 percent on a local currency basis mostly due to the effect of a large corporate contract in the Zurich operations in Chile and higher sales of individual protection products in Zurich Santander Brazil. The improvement in Spain resulted from increased sales in Bank Distribution. These improvements were partly offset by lower new business sales in the rest of EMEA, particularly in Germany and Zurich International Life, and in North America.
New business value decreased by USD 45 million to USD 866 million, or 5 percent in U.S. dollar terms, but remained flat on a local currency basis. On a local currency basis, favorable product mix across EMEA, in spite of overall lower sales, and a refinement in the modeling of policyholder participation in Switzerland, led to an improvement in the region. Higher sales resulted in the improvement in Latin America and positive changes to persistency assumptions led to higher new business value in North America. These positive effects were offset by adverse impacts in Asia Pacific, primarily due to lower swap rates in Japan, only partly offset by improved business mix in Australia.
New business margin decreased by 0.6 percentage points to 21 percent. Improvements in North America and EMEA were mainly due to product mix, in spite of Spain being negatively impacted by higher sales of lower margin individual savings products. These improvements were more than offset by a decrease in Latin America, mainly attributable to the effect of a large corporate contract in the Zurich operations in Chile, and in Asia Pacific, due to the adverse impact of lower swap rates in Japan.
On a pillar basis, the new business results were as follows: In Bank Distribution, NBV decreased by USD 3 million to USD 238 million, or by 1 percent in U.S. dollar terms, but increased 4 percent on a local currency basis. The increase on a local currency basis largely resulted from higher margins in the Zurich Santander operations in Mexico, together with higher sales in Zurich Santander Brazil.
In Other Retail, NBV decreased by USD 45 million to USD 308 million, or by 13 percent in U.S. dollar terms and 10 percent on a local currency basis. The decrease on a local currency basis arose mainly in Japan and Switzerland, both negatively impacted by lower interest rates, partly offset by improved business mix in North America.
Farmers business operating profit increased by USD 99 million to USD 1.5 billion. This was due to an increase of USD 118 million in Farmers Management Services, which was partly offset by a reduction in business operating profit of USD 19 million in Farmers Re.
Management fees and other related revenues 2,867 2,786 3% Management and other related expenses (1,500) (1,448) (4%) Gross management result 1,367 1,338 2%
Other net income 112 22 nm Business operating profit 1,478 1,360 9% Managed gross earned premium margin 7.0% 7.1% (0.1 pts)
Farmers Re in USD millions, for the years ended December 31 2016 2015 Change
Business operating profit decreased by USD 19 million to USD 42 million due to the deterioration of underwriting results compared with 2015.
Gross written premiums and policy fees decreased by USD 558 million to USD 1.6 billion, or by 26 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 10 percent to 8 percent, effective December 31, 2015. The Auto Physical Damage (APD) quota share reinsurance agreement was terminated effective January 1, 2016.
Holding and Financing business operating loss of USD 528 million increased by USD 8 million, or by 2 percent in U.S. dollar terms and 5 percent on a local currency basis. This was primarily driven by less favorable foreign exchange impacts, which were higher in 2015 partly as a result of the Swiss National Bank action to discontinue the link of the Swiss franc to the euro, partly offset by reductions in external debt expense.
Headquarters business operating loss of USD 230 million increased by USD 30 million compared with 2015, or by 15 percent in U.S. dollar terms and 18 percent on a local currency basis. Underlying expense savings were offset by several one-off items in both 2015 and 2016, including higher performance remuneration costs compared with 2015.
Business operating profit: Zurich Legacy Solutions (21) (50) 58% Other run-off 10 101 (90%) Total business operating profit (11) 51 nm
Zurich Legacy Solutions, which comprise run-off portfolios managed with the intention of proactively reducing risk and releasing capital, reported a business operating loss of USD 21 million. The improvement of USD 29 million arose primarily from the one-off impacts of successful exit strategies partly offset by reduced investment income following capital repatriation.
Key financial information This section provides the audited consolidated financial statements, including financial reports, accounting policies, transactions, investments, reserves for insurance contracts, intangible assets, income taxes, and executive and employee incentives.
Consolidated statements of changes in equity 174 1. Basis of presentation 176 2. New accounting standards and amendments to published accounting standards 178 3. Summary of significant accounting policies 180 4. Critical accounting judgments and estimates 187 5. Acquisitions and divestments 192 6. Group investments 195 7. Group derivative financial instruments and hedge accounting 198 8. Reserves for insurance contracts and reinsurers’ share of reserves for insurance contracts 202 9. Liabilities for investment contracts 208 10. Gross and ceded insurance revenues and expenses 210 11. Deferred policy acquisition costs and deferred origination costs 211 13. Property and equipment 213 14. Attorney-in-fact contracts, goodwill and other intangible assets 214 15. Receivables and other assets 216 16. Other liabilities 217 17. Income taxes 219 18. Senior and subordinated debt 222 19. Share capital and Earnings per Share 224 20. Employee benefits 226 21. Share-based compensation and cash incentive plans 233 22. Commitments and contingencies, legal proceedings and regulatory investigations 235 23. Fair value measurement 238 24. Analysis of financial assets 248 25. Related party transactions 250 26. Relationship with the Farmers Exchanges 251 27. Segment information 253 28. Interest in subsidiaries 264 29. Events after the balance sheet date 268
Consolidated income statements in USD millions, for the years ended December 31
Less premiums ceded to reinsurers (7,843) (8,078) Net written premiums and policy fees 42,772 42,920
Assets in USD millions, as of December 31 Notes 2016 2015
In addition, assets held for sale includes land and buildings formerly classified as investment property and held for own use amounting to USD 67 million and USD 7 million, respectively. As of December 31, 2015, includes land and buildings formerly classified as investment property amounting to USD 10 million.
Liabilities Reserve for premium refunds 509 537 Liabilities for investment contracts 9 69,113 70,627 Deposits received under ceded reinsurance contracts 568 903 Deferred front-end fees 4,872 5,299 Reserves for insurance contracts 8 238,326 237,622 Obligations to repurchase securities 1,280 1,596 Accrued liabilities 3,038 2,849
Deferred tax liabilities 17 4,562 4,498 Liabilities held for sale1 290 –
Additional paid-in capital 19 1,348 3,245 Net unrealized gains/(losses) on available-for-sale investments 2,809 2,556 Cash flow hedges 418 294 Cumulative foreign currency translation adjustment (9,973) (9,347) Revaluation reserve 235 228 Retained earnings 35,812 34,192 Shareholders’ equity 30,660 31,178 Non-controlling interests 1,813 1,725 Total equity 32,473 32,904 Total liabilities and equity 382,679 381,972 1 As of December 31, 2016, includes USD 290 million of liabilities reclassified based on agreements signed to sell businesses in Taiwan and Middle East (see note 5).
(Income)/expense from equity method accounted investments (3) (8) Depreciation, amortization and impairments of fixed and intangible assets 781 1,200 Other non-cash items 431 325
Underwriting activities: 14,798 6,868 Reserves for insurance contracts, gross 7,665 4,528 Reinsurers’ share of reserves for insurance contracts (977) (1,981) Liabilities for investment contracts 9,506 4,806 Deferred policy acquisition costs (1,056) (981) Deferred origination costs 31 47 Deposits made under assumed reinsurance contracts (46) 526 Deposits received under ceded reinsurance contracts (326) (77)
Net changes in sale and repurchase agreements (137) 237 Movements in receivables and payables (1,238) (69) Net changes in other operational assets and liabilities (28) (485) Deferred income tax, net 355 24 Net cash provided by/(used in) operating activities 1,473 5,222
Cash flows from investing activities Additions to tangible and intangible assets (715) (678) Disposals of tangible and intangible assets 59 60 (Acquisitions)/disposals of equity method accounted investments, net (2) 88 Acquisitions of companies, net of cash acquired (826) (8) Divestments of companies, net of cash divested 341 4 Dividends from equity method accounted investments 1 8 Net cash provided by/(used in) investing activities (1,142) (526) Cash flows from financing activities Dividends paid (2,768) (2,869) Issuance of share capital 40 44 Net movement in treasury shares 17 21 Other acquisitions and divestments related cash flows – (34) Issuance of debt 3,066 298 Repayment of debt (1,652) (1,023) Net cash provided by/(used in) financing activities (1,296) (3,564) Foreign currency translation effects on cash and cash equivalents (280) (714) Change in cash and cash equivalents1 (1,245) 417 Cash and cash equivalents as of January 1 9,193 8,776 Cash and cash equivalents as of December 31 7,948 9,193 of which: – Group investments 7,197 8,159 – Unit-linked 751 1,034
As of December 31, 2016 and 2015, cash and cash equivalents held to meet local regulatory requirements were USD 625 million and USD 710 million, respectively.
Issuance of share capital1 – 205 – – – – – 205 – 205
Net income – – – – – – 1,842 1,842 Net unrealized gains/(losses) on available-for-sale investments – – (1,512) – – – – (1,512) Cash flow hedges – – – (12) – – – (12) Cumulative foreign currency translation adjustment – – – – (3,034) – – (3,034) Revaluation reserve – – – – – 9 – 9 Net actuarial gains/(losses) on pension plans – – – – – – 629 629
Net changes in capitalization of non-controlling interests – – – – – – – – (54) (54)
On February 8, 2017, 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 29, 2017.
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 117 to 147, and they form an integral part of the consolidated financial statements.
USD per foreign currency unit Consolidated balance sheets at end-of-period exchange rates
Consolidated income statements and cash flows at average exchange rates 12/31/16 12/31/15 12/31/16 12/31/15
Standards, amendments and interpretations effective or early adopted as of January 1, 2016 and relevant for the Group’s operations Table 2.1 shows new accounting standards or amendments to and interpretations of standards relevant to the Group that have been implemented for the financial year beginning January 1, 2016, with no material impact on the Group’s financial position or performance. In addition to the standards and amendments listed in table 2.1 the Group also incorporated amendments resulting from the IASB annual improvements project, which relate primarily to disclosure enhancements.
New Standards IFRS 15 Revenue from Contracts with Customers January 1, 2018 IFRS 16 Leases January 1, 2019 IFRS 9 Financial Instruments January 1, 2021
IFRS 17 ‘Insurance contracts’ IFRS 17 ‘Insurance contracts’ is expected to be issued in the first half of 2017. IFRS 17 will provide comprehensive guidance on accounting for insurance contracts and investment contracts with discretionary participation features. For general insurance contracts, IFRS 17 will introduce mandatory discounting of loss reserves expected to be paid in more than one year as well as risk adjustment, for which confidence level equivalent disclosure will be required. Further, IFRS 17 is expected to have a significant impact on accounting for life insurance contracts as well as on the presentation of insurance contract revenue in the financial statements.
In September 2016, the IASB issued an amendment to IFRS 4 introducing a temporary exemption from the adoption of IFRS 9 for reporting entities that have not previously applied any version of IFRS 9 and whose activities are predominantly related to insurance. Based on an analysis performed as of December 31, 2015, the Group is eligible to apply the temporary exemption as the predominance ratio reflecting the share of liabilities connected with insurance to total liabilities exceeds 90 percent. For the purpose of calculating the predominance ratio, liabilities connected with insurance include unit-linked investment contracts measured at fair value through profit or loss of USD 62.2 billion (see note 9) and subordinated funding liabilities that are considered to be part of regulatory capital of USD 5.6 billion (see note 18). The Program is proceeding on the assumption that the Group will apply the temporary exemption from the adoption of IFRS 9 and defer the implementation of IFRS 9 until a later date, however, no later than January 1, 2021.
Furthermore, credit allowances for financial assets carried at amortized cost and debt securities measured at fair value, with changes in fair value recognized in other comprehensive income (OCI), are expected to increase due to the introduction of the expected credit loss methodology. Upon implementation of the revised standard IFRS 17 ‘Insurance Contracts’, more assets may be classified at fair value through profit or loss under the fair value option.
The consolidated financial statements are prepared as of December 31 based on individual company financial statements at the same date. In some cases information is included with a time lag of up to three months. The consequent effect on the Group’s consolidated financial statements is not material.
Foreign currency transactions and balances Foreign currency transactions are translated into the functional currency using the spot exchange rate at the date of the transaction or, for practical reasons, a weighted average rate, if exchange rates do not fluctuate significantly. Foreign currency monetary items and foreign currency non-monetary items that are carried at fair value, are translated at end-of-period exchange rates. The resulting foreign currency translation differences are recorded in income, except for the following: kk Foreign currency translation differences that are recognized in OCI in conjunction with the recognition of unrealized gains or losses on available-for-sale investments; and kk Foreign currency translation differences arising on monetary items that form part of net investments in foreign operations as well as foreign currency translation differences arising from monetary items that are designated as hedging instruments in a qualifying net investment hedge relationship are included directly in OCI as CTA.
c) Insurance contracts and investment contracts with discretionary participating features (DPF) Classification Contracts issued under which the Group accepts significant insurance risk and obligations arising from investment contracts with DPF are accounted for as insurance contracts.
The reserves for life benefits for other traditional life insurance policies are calculated using a net level premium valuation method based on actuarial assumptions including mortality, persistency, expenses and investment return, plus a margin for adverse deviations. These assumptions are locked-in at inception and are regularly assessed as part of the liability adequacy testing over the period of the contract.
Investment contracts at amortized cost Liabilities for investment contracts with fixed and guaranteed terms are measured at amortized cost, using the effective interest rate method. Transaction costs are included in the calculation of the effective yield. As of each reporting date, the Group re-estimates the expected future cash flows and re-calculates the carrying amount of the financial liability by computing the present value of estimated future cash flows using the original effective interest rate for the financial liability. Any adjustment is immediately recognized in income.
All hedge relationships are formally documented, including the risk management objectives and strategy for undertaking the hedge. At inception of a hedge and on an ongoing basis, the hedge relationship is formally assessed in order to determine whether the hedging instruments are expected (prospective assessment) and have been (retrospective assessment) highly effective in offsetting changes in fair values or cash flows of hedged items attributable to the hedged risk. 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 then subsequently reported independently in accordance with the respective accounting policy.
g) Attorney-in-fact contracts (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.
Distribution agreements Distribution agreements may have useful lives extending up to 30 years which are estimated based on the period of time over which they are expected to provide economic benefits, but for no longer than the contractual term, after taking into account all economic and legal factors such as stability of the industry, competitive position and the period of control over the assets.
a) Reserves for insurance contracts and deferred acquisition costs General Insurance The Group is required to establish reserves for payment of losses and loss adjustment expenses that arise from the Group’s general insurance products and the run-off of its former third party reinsurance operations. These reserves represent the expected ultimate cost to settle claims occurring prior to, but still outstanding as of, the balance sheet date. The Group establishes its reserves by product line, type and extent of coverage and year of occurrence. There are two categories of loss reserve: reserves for reported losses and reserves for incurred but not reported (IBNR) losses. Additionally, reserves are held for loss adjustment expenses, which contain the estimated legal and other expenses expected to be incurred to finalize the settlement of the losses.
kk Under certain contracts, the Group has offered product guarantees (or options to take up product guarantees), including fixed minimum interest rate or mortality rate returns. In determining the value of these options and/or benefits, estimates have been made as to the percentage of contract holders that may exercise them. Changes in investment conditions could result in significantly more contract holders exercising their options and/or benefits than has been assumed.
kk Estimates are made as to future investment income arising from the assets backing long-term insurance contracts. These estimates are based on current market returns as well as expectations about future economic and financial developments.
b) Fair value measurement In determining the fair values of financial debt instruments and equity instruments traded on exchanges and in OTC markets, the Group makes extensive use of independent, reliable and reputable third party pricing providers and only in rare cases places reliance on prices that are derived from internal models.
Valuations can be subject to significant judgment especially when the fair value is determined based on at least one significant unobservable input parameter; such items are classified within level 3 of the fair value hierarchy. See notes 6, 7 and 23 for further information regarding the estimate of fair value.
The Group determines that there is objective evidence of impairment of an available-for-sale equity security, if at the reporting date: kk Its fair value is below the weighted-average cost by an amount significantly exceeding the volatility threshold determined quarterly for the respective equity market (such as North America, Asia Pacific, UK, Switzerland and other European countries), or kk Its fair value has been below the weighted-average cost for a prolonged period of 24 consecutive months or longer.
The discount rates used in the recoverable amount calculations for developed markets are based on the capital asset pricing model and consider government bond rates which are further adjusted for equity risk premium, appropriate beta and leverage ratio. In emerging markets, discount rates are based on the U.S. dollar discount rate taking into account inflation differential expectations and country risks. All input factors to the discount rates are based on observable market data.
Sensitivity tests have been performed on goodwill and AIF, and typically comprise of an analysis for either a decrease in cash flows of up to 30 percent, a decrease in the perpetual growth rate of up to 1.0 percentage point or an increase in the discount rate of up to 3.5 percentage points in order to capture potential future variations in market conditions. The recoverability of the Latin America P&C CGU goodwill is very sensitive to key assumptions such as macroeconomic conditions, industry and market growth considerations, and cost factors in particular in Brazil and Mexico.
Distribution agreements A qualitative analysis has been performed on distribution agreements, typically comprised of an analysis of the current financial performance, any change in the conditions in the agreement and environment that would indicate an impairment. No impairment was identified.