Country Mortality table for major plans Switzerland BVG 2015 Generational 22.38 24.26 24.43 26.29 United Kingdom PNXA00 with CMI_2015 projection 22.92 24.22 23.69 25.19
Maturity analysis of benefits expected to be paid (in USD millions): < 1 year 215 479 220 58 215 563 214 54 1 to 5 years 893 1,819 879 254 891 2,067 876 229 5 to 10 years 1,129 2,070 1,069 348 1,143 2,194 1,077 307
Defined benefit obligation 1 in USD millions, as of December 31 2018 2017
Discount rate +50 bps 1,647 1,927 Discount rate –50 bps (1,886) (2,217) Salary increase rate +50 bps (71) (85) Salary decrease rate –50 bps 65 89 Price inflation increase rate +50 bps (865) (1,036) Price inflation decrease rate –50 bps 763 920 Cash balance interest credit rate +50 bps (116) (128) Cash balance interest credit rate –50 bps 73 78 Mortality 10% increase in life expectancy (1,841) (2,020) Mortality 10% decrease in life expectancy 1,789 1,890 1 A negative number indicates an increase and a positive number indicates a decrease in the defined benefit obligation.
The Group has adopted various share-based compensation and cash incentive plans to attract, retain and motivate executives and employees. The plans are designed to reward employees for their contribution to the performance of the Group and to encourage employee share ownership. Share-based compensation plans include plans under which shares and options to purchase shares, based on the performance of the businesses, can be awarded. Share-based compensation plans are based on the provision of Zurich Insurance Group Ltd shares.
a) Cash incentive plans Various businesses throughout the Group operate short-term incentive programs for executives, management and, in some cases, for employees of that business. Awards are made in cash, based on the accomplishment of both organizational and individual performance objectives. The expense recognized for these cash incentive plans amounted to USD 523 million and USD 485 million for the years ended December 31, 2018 and 2017, respectively.
Prior to 2011, for selected senior executives, options in shares of Zurich Insurance Group Ltd were allocated. For the years ended December 31, 2018 and 2017, nil and 172,978 share options, respectively, were exercised.
Quantifiable commitments and contingencies in USD millions, as of December 31 2018 2017
Remaining commitments under investment agreements 2,283 1,820 Guarantees and letters of credit 1 2,083 871 Future operating lease commitments 2,149 2,127 Undrawn loan commitments 2 16 Other commitments and contingent liabilities 2 2,346 2,625 1 Guarantee features embedded in life insurance products are not included. 2 Other commitments include an agreement related to the acquisition of ANZ’s life insurance businesses (see note 5).
Guarantees and letters of credit In 2018 and 2017, USD 605 million and USD 642 million, respectively, related to guarantees in the aggregate amount of GBP 475 million which were provided to the directors of a wholly owned subsidiary in connection with the repatriation of capital. These guarantees have no expiry date.
Future payments under non-cancelable operating leases with terms in excess of one year in USD millions, as of December 31 2018 2017
Table 23.1 compares the fair value with the carrying value of financial assets and financial liabilities. Certain financial instruments are not included in this table as their carrying value is a reasonable approximation of their fair value. Such instruments include cash and cash equivalents, obligations to repurchase securities, deposits made under assumed reinsurance contracts, deposits received under ceded reinsurance contracts and other financial assets and liabilities. This table excludes financial assets and financial liabilities related to unit-linked contracts.
Total fair value through profit or loss securities 8,862 9,295 8,862 9,295
Total financial liabilities held at amortized cost (12,658) (12,196) (12,516) (11,295)
Total available-for-sale securities 8,854 127,478 8,778 145,110 Fair value through profit or loss securities
Fair value hierarchy – non unit-linked – prior period in USD millions, as of December 31, 2017 Level 1 Level 2 Level 3 Total
Total available-for-sale securities 10,859 136,331 7,239 154,430 Fair value through profit or loss securities
Reinsurers’ share of liabilities for insurance contracts fair value option 1 – – 224 224
Fair value hierarchy – unit-linked – prior period in USD millions, as of December 31, 2017 Level 1 Level 2 Level 3 Total
Within level 3, the Group has classified: 33 Unlisted stocks, private equity funds and hedge funds that are not actively traded. Such instruments are obtained from net asset value information and audited financial statements provided by the issuing company. Quantitative unobservable inputs are not developed by the Group when measuring fair value of these assets.
33 Options and long-dated derivative financial instruments with fair values determined using counterparty valuations or calculated using significant unobservable inputs such as historical volatilities, historical correlation, implied volatilities from the counterparty or derived using extrapolation techniques. Quantitative information on unobservable inputs are not available when counterparty pricing was used. For internally calculated fair values significant increases/ (decreases) in volatilities or correlation, would result in a significantly higher/(lower) fair value measurement.
For the year ended December 31, 2018, the Group transferred USD 1.3 billion of fair value UL equity securities out of level 2 into level 1 and 932 million of fair value UL equity securities out of level 1 into level 2 as a result of a review of the classification of certain mutual fund investments.
Realized gains/(losses) recognized in income 1 104 14 38 – (1) – 123 Unrealized gains/(losses) recognized in income 1,2 (9) (15) (43) (2) (6) (5) 136 Unrealized gains/(losses) recognized in other comprehensive income 102 (163) – – 11 1 –
Realized gains/(losses) recognized in income 1 199 8 6 1 2 (48) 177 Unrealized gains/(losses) recognized in income 1,2 2 (9) 238 4 (58) 43 129 Unrealized gains/(losses) recognized in other comprehensive income (40) 34 – – (2) (4) 38
Transfer from/to assets held for own use – – – – – – 51 Transfer to assets held for sale – – – – – – (37) Transfers into level 3 – 121 – – – – – Transfers out of level 3 – (115) – – (316) – –
Fee income and other expenses (15) 2 (12) Interest and bonuses credited to policyholders (26) 1 (24) Changes in assumptions (6) – (6)
Realized gains/(losses) recognized in income 1 6 – 134 Unrealized gains/(losses) recognized in income 1 – 1 (18)
Tables 24.1a and 24.1b provide an analysis, for non unit-linked businesses, of the age of financial assets that are past due but not impaired, and of financial assets that are individually determined to be impaired.
Analysis of financial assets – prior period in USD millions, as of December 31, 2017
Tables 24.2a and 24.2b show how the allowances for impairments of financial assets in tables 24.1a and 24.1b developed during the periods ended December 31, 2018 and 2017, respectively.
The Group has elected to defer the full implementation of IFRS 9 until IFRS 17 becomes effective on January 1, 2021. For further information on the Group’s eligibility to the temporary exemption from IFRS 9, please refer to note 2.
Equity instruments including fund investments will be accounted for at fair value through profit or loss. The Group does not intend to make use of the election to present changes in fair value of certain equity instruments that are not held for trading in OCI with no subsequent reclassification of realized gains or losses to the income statement.
Fair value and carrying value of financial assets split by SPPI and other financial assets – current period in USD millions, as of December 31, 2018 SPPI Other financial assets Total
Fair value and carrying value of financial assets split by SPPI and other financial assets – prior period in USD millions, as of December 31, 2017 SPPI Other financial assets Total
Total available-for-sale securities 132,141 132,141 22,289 22,289 154,430 154,430 Fair value through profit or loss securities
With IFRS 9, the incurred loss impairment approach will be replaced by a forward-looking expected credit loss (ECL) approach that will apply to debt securities, loans and receivables that are not accounted for at fair value through profit or loss. Thus, the same ECL requirements will apply to all financial assets measured at amortized cost and those measured at fair value with changes recognized in OCI.
The Group applies the ‘low credit risk practical expedient’, by assuming that no increase in credit risk has occurred since initial recognition for financial assets that have an external or internal rating equivalent to ‘investment grade’ (i.e., AAA to BBB-) at the reporting date. For the remaining financial assets, the Group considers all relevant reasonable supporting information that is available without undue cost or effort when determining whether a SICR has occurred since initial recognition, or not. An increase in credit risk is assessed using a transition matrix approach that determines SICR thresholds depending on the credit rating at initial recognition and residual time to maturity of the instrument. Where necessary, the quantitative assessment is supplemented by a qualitative assessment of the issuer’s credit quality. For certain less material portfolios, including residential mortgage loans, the ‘30 days past due’ criterion is used as a primary indicator of a SICR. Where a SICR is no longer observed, the instrument transitions back to stage 1.
Available-for-sale debt securities 131,470 131,470 495 495 176 176 132,141 132,141 Held-to-maturity debt securities 2,966 2,322 – – – – 2,966 2,322 1 Other loans do not include policyholder loans, which will come under IFRS 17 and are therefore not applicable for IFRS 9, of USD 782 million and USD 659 million for fair value and carrying value, respectively.
Remuneration of key personnel of the Group Cash compensation, current benefits and fees 30 28 Post-employment benefits 4 4 Share-based compensation 23 22 Other remuneration 3 3 Total remuneration of key personnel 60 56
As of December 31, 2018 and 2017, there were no loans, advances or credits outstanding from members of the Executive Committee. Outstanding loans and guarantees granted to members of the Board of Directors amounted to nil for the years ended December 31, 2018 and 2017. The terms ‘members of the Board of Directors’ and ‘members of the Executive Committee’ in this context include the individual as well as members of their respective households. The figures in table 25 include the fees paid to members of the Board of Directors of Zurich Insurance Group Ltd and Zurich Insurance Company Ltd, which were USD 4 million for both years ended December 31, 2018 and 2017.
a) Certificates of contribution/surplus notes issued by the Farmers Exchanges As of December 31, 2018 and 2017, FGI and other Group companies held the following certificates of contribution and surplus note issued by the Farmers Exchanges. Originally these were purchased by FGI in order to supplement the policyholders’ surplus of the Farmers Exchanges.
In June 2018, the Farmers Exchanges repaid the USD 200 million certificate of contribution at the 6.15 percent rate to Zurich American Insurance Company. The USD 100 million of 10-year, no call five year notes at a 3.758 percent rate that the Farmers Exchanges issued to Farmers New World Life Insurance Company remain unchanged.
The Farmers Exchanges participate in an All Lines Quota Share reinsurance agreement (All Lines agreement) with Farmers Re Co and ZIC. The All Lines agreement provides for a cession of a quota share of the premiums written and the ultimate net losses sustained in all lines of business written by the Farmers Exchanges.
Quota share reinsurance treaties in USD millions, for the years ended December 31 All Lines agreement
1 From January 1, 2018, Farmers Re Co assumed a 1.0 percent quota share. Another 28.0 percent was assumed by third parties. ZIC has no participation in the December 31, 2017 All Lines agreement.
2 From January 1, 2017, ZIC assumed an 8.0 percent quota share. Another 16.0 percent was assumed by third parties. Farmers Re has no participation in the December 31, 2016 All Lines agreement.
4 Under the All Lines agreement, the Farmers Exchanges receive a ceding commission of 26.7 percent, 8.1 percent of premiums for unallocated loss adjustment expenses and 5.3 percent of premiums for other expenses c) Farmers management fees and other related revenues FGI as the appointed attorney-in-fact of the Farmers Exchanges, which are managed but not owned by FGI, a wholly owned subsidiary of the Group, is permitted by policyholders of the Farmers Exchanges to receive a management fee of up to 20 percent (up to 25 percent in the case of the Fire Insurance Exchange) of the gross premiums earned by the Farmers Exchanges. Other related revenues include reimbursement of certain ancillary service costs incurred by FGI on behalf of primarily the Farmers Exchanges that are not covered under the attorney-in-fact contracts. The amounts incurred for these services are reimbursed to FGI at cost in accordance with allocations that are subject to approval by the Farmers Exchanges Board of Governors.
Group Functions and Operations comprise the Group´s Holding and Financing, Headquarter and Zurich Insurance Mobile Solutions (ZIMS) activities. Certain alternative investment positions not allocated to business operating segments are included within Holding and Financing. In addition, this segment includes operational technical governance activities relating to technology, underwriting, claims, actuarial and pricing.
Non-Core Businesses include insurance and reinsurance businesses that the Group does not consider core to its operations and that are therefore mostly managed to achieve a beneficial run-off. Non-core businesses are mainly situated in the U.S., Bermuda, and in Europe.
Net written premiums and policy fees 12,211 11,866 9,728 10,588 2,372 2,013 2,237 2,220 (83) (155) – – 26,465 26,532 Net change in reserves for unearned premiums (125) (1) 277 (132) (122) (101) (93) (287) 28 22 – – (34) (499)
Benefits, losses and expenses Insurance benefits and losses, net 7,884 8,478 7,109 7,917 1,304 1,055 960 805 35 (259) – – 17,291 17,996 Policyholder dividends and participation in profits, net 8 (1) 10 8 – – 1 – – – – – 19 7 Underwriting and policy acquisition costs, net 2,315 2,223 2,318 2,461 580 452 916 832 7 2 – – 6,136 5,970 Administrative and other operating expense (excl. depreciation/amortization) 1,741 1,693 515 356 463 392 239 223 33 27 – (2) 2,992 2,688 Interest credited to policyholders and other interest 181 185 (23) 31 1 3 – 2 (4) (3) – – 156 218 Restructuring provisions and other items not included in BOP (108) (115) (110) (50) (13) (16) 9 (6) – 2 – – (221) (185) Total BOP benefits, losses and expenses (before interest, depreciation and amortization) 12,022 12,462 9,819 10,722 2,335 1,886 2,126 1,856 72 (230) – (2) 26,373 26,695 Business operating profit (before interest, depreciation and amortization) 998 470 1,222 878 120 194 255 304 (51) 243 – – 2,543 2,088 Depreciation and impairments of property and equipment 36 39 37 26 18 16 6 5 3 4 – – 101 89 Amortization and impairments of intangible assets 76 143 84 52 16 23 10 10 – – – – 187 228
Net investment result on Group investments 613 681 986 1,121 68 60 204 161 13 15 – – 1,884 2,038
Net investment result on Group investments 2,840 3,002 11 33 117 174 407 368 – – (2) (2) 3,373 3,574 Net investment income on unit-linked investments 1,375 1,301 – (4) 104 92 22 17 – – – – 1,501 1,406 Net capital gains/(losses) and impairments on unit-linked investments (6,534) 7,978 (29) 80 (163) 110 990 1,319 – – – – (5,737) 9,486
Business operating profit by business in USD millions, for the year ended December 31
Net written premiums and policy fees 26,465 26,532 13,717 12,942 916 1,676 5 6 129 (19) – – 41,230 41,136 Net change in reserves for unearned premiums (34) (499) (202) (132) (1) 546 – – 12 5 – – (224) (79)
Net investment income on Group investments 1,932 1,847 3,035 2,925 213 215 198 170 222 233 (212) (175) 5,387 5,215 Net capital gains/(losses) and impairments on Group investments (48) 191 338 649 (1) 1 – – (109) (8) – – 181 833
Net investment result on Group investments 1,884 2,038 3,373 3,574 211 216 198 170 113 225 (212) (175) 5,568 6,048 Net investment result on unit-linked investments – – (4,236) 10,892 (52) 136 – – (86) 636 – – (4,374) 11,664 of which: Inter-segment revenues (141) (200) (141) (125) (51) (37) (282) (303) (21) (17) 636 682 – – Benefits, losses and expenses
Insurance benefits and losses, net 17,291 17,996 9,702 9,259 563 1,434 1 – 89 (45) – – 27,646 28,643 Policyholder dividends and participation in profits, net 19 7 (2,640) 12,095 (43) 144 – – (72) 737 – – (2,736) 12,984 Income tax expense/(benefit) attributable to policyholders – – (183) 171 – – – – – – – – (183) 171 Underwriting and policy acquisition costs, net 6,136 5,970 2,252 2,489 167 582 – 1 10 4 – (7) 8,565 9,039 Administrative and other operating expense (excl. depreciation/amortization) 2,992 2,688 1,871 1,870 1,800 1,521 342 305 75 90 7 15 7,086 6,490 Interest credited to policyholders and other interest 156 218 282 315 95 109 135 119 44 54 (279) (269) 433 546 Restructuring provisions and other items not included in BOP (221) (185) (50) (104) (49) (22) (43) (66) (1) (1) – – (364) (377) Total BOP benefits, losses and expenses (before interest, depreciation and amortization) 26,373 26,695 11,234 26,096 2,533 3,769 435 359 144 839 (272) (261) 40,448 57,496 Business operating profit (before interest, depreciation and amortization) 2,543 2,088 2,000 1,733 1,840 1,850 (38) 45 57 52 (365) (420) 6,037 5,348 Depreciation and impairments of property and equipment 101 89 17 15 45 34 9 12 – – – – 173 152 Amortization and impairments of intangible assets 187 228 133 161 152 125 30 56 – – – – 501 570
Net income before income taxes 2,441 2,361 1,794 1,861 1,622 1,705 (790) (849) 44 48 5,110 5,125 Income tax (expense)/benefit (1,134) (1,816)
Revenues/(expenses) not included in BOP: Net capital gains/(losses) on investments and impairments, net of policyholder allocation 481 972 197 238 28 35 (9) (55) 24 10 720 1,201 Net gains/(losses) on divestment of businesses 1 (19) (96) (5) 7 – – 16 5 (15) – (24) (84)
Add back: Business operating profit attributable to non-controlling interests 115 124 281 289 – – (1) (2) – – 395 411 Net income before shareholders’ taxes 2,441 2,361 1,977 1,689 1,622 1,705 (790) (849) 44 48 5,293 4,954 Income tax expense/(benefit) attributable to policyholders – – (183) 171 – – – – – – (183) 171
2 In 2018, the Group reclassified assets and liabilities of USD 24 billion respectively, to held for sale based on agreements to sell businesses in the UK, Venezuela and Germany. In 2017, the Group reclassified assets and liabilities of USD 29 billion respectively, to held for sale based on agreements to sell businesses in the UK (see note 5).
Investments in associates and joint ventures 2 2 14 15 – – 16 – 3 3 – – 36 21
Liabilities for insurance contracts, gross 78,041 79,521 152,787 162,055 7,311 7,669 27 50 11,139 14,688 (96) (176) 249,208 263,805
Equity Shareholders’ equity 30,189 33,063 Non-controlling interests 1,613 1,831 Total equity 31,802 34,893 Total liabilities and equity 395,342 422,065 Supplementary information Additions and capital improvements to property, equipment and intangible assets 816 264 99 185 181 174 56 31 – – – – 1,152 653 1 In 2017, the Group transferred a portfolio of stable value products (SVP) marketed with life insurance policies (Bank Owned Life Insurance, BOLI) from Non-Core Businesses to Life. The change resulted in a transfer of USD 8.3 billion of investments for unit-linked contracts and of reserves for unit-linked contracts.
Property & Casualty – Commercial and Retail Insurance overview 1 in USD millions, for the year ended December 31 Commercial Insurance Retail and Other Insurance
Gross written premiums and policy fees 15,450 15,852 19,443 18,441 Net earned premiums and policy fees 10,425 11,007 16,061 15,159 Insurance benefits and losses, net 8,071 9,213 9,185 9,041 Policyholder dividends and participation in profits, net 14 8 5 – Total net technical expenses 2,776 3,038 5,872 5,270
Life – Revenues and non-current assets by region in USD millions Gross written premiums and policy fees from external customers Life insurance deposits
Rest of Europe, Middle East & Africa 167 171 179 179 5 4
Australia Cover-More Group Limited Sydney 100 100 AUD 1,014.2 Zurich Australia Limited Sydney 100 100 AUD 426.5 Zurich Australian Insurance Limited Sydney 100 100 AUD 6.6 Zurich Financial Services Australia Limited Sydney 100 100 AUD 2,198.8 Austria Zürich Versicherungs-Aktiengesellschaft Vienna 99.98 99.98 EUR 12.0 Brazil Zurich Santander Brasil Seguros e Previdência S.A. Sao Paulo 51 51 BRL 2,509.2 Zurich Minas Brasil Seguros S.A. Belo Horizonte 100 100 BRL 4,726.8 Zurich Resseguradora Brasil S.A. Sao Paulo 100 100 BRL 204.0 Chile Chilena Consolidada Seguros de Vida S.A. Santiago 98.97 98.97 CLP 177,382.6 Zurich Santander Seguros de Vida Chile S.A. Santiago 51 51 CLP 24,252.9 Germany Deutscher Herold Aktiengesellschaft Bonn 100 100 EUR 18.4 Zürich Beteiligungs-Aktiengesellschaft (Deutschland) Frankfurt 100 100 EUR 152.9 Zurich Deutscher Herold Lebensversicherung Aktiengesellschaft Bonn 100 100 EUR 68.5 Ireland Zurich Life Assurance plc Dublin 100 100 EUR 17.5 Zurich Holding Ireland Limited Dublin 100 100 EUR 0.1 Zurich Insurance plc Dublin 100 100 EUR 8.2 Italy Zurich Investments Life S.p.A. Milan 100 100 EUR 199.0 Luxembourg REX-ZDHL S.C.S. SICAV-SIF Leudelange 100 100 EUR 981.0 Malaysia Zurich Life Insurance Malaysia Berhad Kuala Lumpur 100 100 MYR 579.0 Zurich Holdings Malaysia Berhad Kuala Lumpur 100 100 MYR 515.4 Mexico Zurich Santander Seguros México, S.A. 1 Mexico City 99.99 99.99 MXN 190.0
Zurich UK General Services Limited Fareham, England 100 100 GBP 300.7
Farmers New World Life Insurance Company 3 Bellevue, WA 100 100 USD 6.6 Zurich American Corporation Wilmington, DE 100 100 USD 0.00001 Zurich American Insurance Company (and subsidiaries) New York, NY 100 100 USD 5.0 Rural Community Insurance Company Anoka, MN 100 100 USD 3.0 Zurich American Life Insurance Company Schaumburg, IL 100 100 USD 2.5 Zurich Holding Company of America, Inc. 4 Wilmington, DE 100 100 USD 0.0
For Zurich Santander Insurance America, S.L. and its subsidiaries, and the Bansabadell insurance entities, certain protective rights exist, which, among others, include liquidation, material sale of assets, transactions affecting the legal ownership structure, dividend distribution and capital increase, distribution channel partnerships and governance, which are not quantifiable.
Dividends paid to non-controlling interests 201 205 – 120 1 Includes reserves for premium refunds, liabilities for investment contracts, deposits received under ceded reinsurance contracts, deferred front-end fees and liabilities for insurance contracts.
On January 16, 2019, the Group announced the successful placement of CHF 200 million of senior unsecured notes. The notes will be issued by Zurich Insurance Company Ltd and will mature in October 2027.
Report of the statutory auditor to the General Meeting of Zurich Insurance Group Ltd, Zurich
Opinion We have audited the consolidated financial statements of Zurich Insurance Group Ltd and its subsidiaries (the Group), which comprise the consolidated balance sheet as at December 31, 2018 and the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of cash flows and consolidated statement of changes in equity for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.
Basis for opinion We conducted our audit in accordance with Swiss law, International Standards on Auditing (ISAs) and Swiss Auditing Standards. Our responsibilities under those provisions and standards are further described in the “Auditor’s responsibilities for the audit of the consolidated financial statements” section of our report.
We concluded full scope audit work at 19 business units in 8 countries. The full scope audit work addressed 72% and 79% of the Group’s gross written premiums and policy fees (GWP) and total assets, respectively. In addition, specific procedures were performed on a further 16 business units in 8 countries representing a further 4% and 6% of the Group’s GWP and total assets, respectively.
As key audit matters the following areas of focus have been identified: – Valuation of actuarially determined life insurance assets and liabilities
Audit scope We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the consolidated financial statements as a whole, taking into account the structure of the Group, the accounting processes and controls, and the industry in which the Group operates.
The Group’s business units vary significantly in size and we identified 19 which, in our view, required an audit of their complete financial information, due to their size or risk characteristics. Audits of these business units were performed using materiality levels lower than the materiality level for the Group as a whole, ranging from USD 20 million to USD 150 million, and established by reference to the size of, and risks associated with, the business concerned. Specific audit procedures on certain balances and transactions were performed at a further 16 business units. Together the full scope audits and specific audit procedures accounted for 76% and 85% of Group GWP and total assets, respectively.
Our involvement included various site visits and component auditor working paper reviews across significant business units, together with discussions around audit approach and audit results arising from the work during regular conference calls with the component audit teams.
Based on our professional judgment, we determined certain quantitative thresholds for materiality, including the overall Group materiality for the consolidated financial statements as a whole as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and in aggregate, on the consolidated financial statements as a whole.
We chose NIBIT as a benchmark because, in our view, it is the benchmark against which the Group’s performance is most commonly measured, and is a generally accepted benchmark. We also consider BOP as a benchmark because, in our view, BOP is a key indicator for analysts and external parties.
We agreed with the Audit Committee that we would report to them misstatements above USD 20 million identified during our audit as well as any misstatements below that amount which, in our view, warranted reporting for qualitative reasons.
The Group’s valuation of the actuarially determined life insurance assets (including deferred policy acquisition costs, deferred origination costs, and present value of future profits) and liabilities (reserves for insurance contracts and deferred front-end fees) is based on complex actuarial methodologies and models and involves comprehensive assumption setting processes with regards to future events. Actuarial assumptions selected by the Group with respect to interest rates, investment returns, mortality, morbidity, longevity, persistency, expenses, stock market volatility and future policyholder behaviour and the underlying methodologies and assumptions used may result in material impacts on the valuation of actuarially determined life insurance assets and liabilities.
We assessed and tested the design and operating effectiveness of selected key controls over actuarial methodology, integrity of data used in the actuarial valuation, and the assumptions setting and governance processes used by management related to the valuation of property and casualty reserves.
In relation to the particular matters set out opposite, our substantive testing procedures included the following: – Testing the completeness and accuracy of underlying claims data utilized by the Group’s actuaries in estimating property and casualty loss reserves.
– Performing independent re-projections on selected product lines, particularly focusing on the largest and most uncertain property and casualty reserves. For these product lines our actuarial specialists compared their re-projected reserves to those recorded by the Group, and assessed whether the recorded reserves were within a reasonable range.
– Performing sensitivity testing and evaluated the appropriateness of any significant adjustments made to management’s property and casualty reserve estimates.
Based on the work performed we determined the methodology and assumptions used in the valuation of property and casualty reserves are reasonable and in line with financial reporting requirements and industry accepted practice.
We assessed the design effectiveness of selected key controls over terminal growth rate assumptions, and discount rates related to the recoverability of goodwill, distribution agreements and attorney-in-fact contracts. In relation to the particular matters set out opposite, our substantive testing procedures included the following: – Corroborating the justification of the CGUs defined by management for goodwill allocation.
– Testing the principles and integrity of the Group’s discounted cash flow model that supports the value-in-use calculations in order to assess the appropriateness of the methodology applied in the Group’s annual impairment assessment.
Zurich Insurance Group Ltd’s net income after taxes for the year was CHF 67 million compared with CHF 2,370 million in 2017. In 2017, the net income after taxes mainly reflects dividend income from its subsidiary Zurich Insurance Company Ltd (ZIC) in the amount of CHF 2,300 million. This dividend did not recur in 2018. In 2018, ZIC paid back CHF 2,700 million of the subordinated debt to its parent.
The Annual General Meeting on April 4, 2018, approved a total dividend of CHF 18.00 per share to be paid to the shareholders, whereof CHF 1.40 per share were paid out of the capital contribution reserve free of Swiss withholding tax and CHF 16.60 per share less 35 percent for Swiss withholding tax were paid out of the available earnings.
Shareholders’ equity decreased by CHF 3,164 million to CHF 13,561 million as of December 31, 2018, from CHF 16,725 million as of December 31, 2017. The decrease was mainly driven by the dividend of CHF 2,684 million paid in 2018 as well as by the public share buy-back program of 1,740,000 shares for a total purchase value of CHF 548 million completed on May 18, 2018, partially offset by the net income after taxes for the year 2018. On April 3, 2019, the Board of Directors will propose to the Annual General Meeting 2019 that the share capital be reduced via the cancellation of the repurchased 1,740,000 shares.
Assets in CHF thousands, as of December 31 Notes 2018 2017
Liabilities and shareholders’ equity in CHF thousands, as of December 31 Notes 2018 2017
Retained earnings, as of December 31 12,729,702 15,529,736 Total shareholders’ equity (before appropriation of available earnings) 13,561,297 16,725,008 Total liabilities and shareholders’ equity 13,628,759 16,735,516 1 Dividends paid in the year, out of capital contribution reserve in respect of the 2017 result, amounting to CHF 208,759.
e) Reserves for treasury shares (indirectly held via subsidiaries) Reserves for treasury shares are accounted for at the acquisition costs of these shares held by the respective subsidiary.
7. Subordinated loans to subsidiaries Subordinated loans include a loan to Zurich Insurance Company Ltd of CHF 2,132 million as of December 31, 2018. In April 2018, ZIC paid back CHF 2,700 million.
In addition to the above mentioned directly held subsidiaries, the Company indirectly owns additional subsidiaries primarily through Zurich Insurance Company Ltd. Information regarding indirectly owned subsidiaries is included on pages 271 to 273 of this Annual Report.
10. Share capital a) Changes to the share capital At the Annual General Meeting of April 4, 2018, the shareholders approved to extend the validity period of the authorized share capital and the combined dilution limitations for authorized and contingent share capital until April 4, 2020. The authorized share capital (Art. 5bis 1) amounted to 45,000,000 shares. The contingent share capital for Financial Instruments (Art. 5ter 1a) amounted to 30,000,000 shares and the contingent share capital for employees (Art. 5ter 2a) amounted to 4,947,232 shares. During the years 2018 and 2017, a total of 8,176 shares and 732,445 shares, respectively, were issued to Group employees out of the contingent capital.
The Board is further authorized to restrict or exclude the subscription rights of shareholders and to allocate them to third parties, the Zurich Insurance Group Ltd or one of its group companies, up to a maximum of 15,000,000 fully paid registered shares, if the shares are to be used: 33 for the take-over of an enterprise, of parts of an enterprise or of participations or for investments by the Zurich Insurance Group Ltd or one of its group companies, or the financing including re-financing of such transactions; or 33 for the purpose of expanding the scope of shareholders in connection with the quotation of shares on foreign stock exchanges or issuance of shares on the national or international capital markets (including private placements to one or more selected investors); or 33 for the conversion of loans, bonds, similar debt instruments, equity-linked instruments or other financial market instruments (collectively, the ‘Financial Instruments’) issued by the Zurich Insurance Group Ltd or one of its group companies; or 33 for the improvement of the regulatory capital position of the Zurich Insurance Group Ltd or one of its group companies in a fast and expeditious manner.
c) Contingent share capital (as specified in Article 5ter of the Articles of Association) Financial Instruments The share capital of Zurich Insurance Group Ltd may be increased by an amount not exceeding CHF 3,000,000 by issuing of up to 30,000,000 fully paid registered shares with a nominal value of CHF 0.10 each by the voluntary or mandatory exercise of conversion and/or option rights which are granted in connection with the issuance of loans, bonds, similar debt instruments, equity-linked instruments or other financial market instruments (collectively, the ‘Financial Instruments’) by Zurich Insurance Group Ltd or one of its group companies or by mandatory conversion of Financial Instruments issued by the Zurich Insurance Group Ltd or one of its group companies, that allow for contingent mandatory conversion into shares of Zurich Insurance Group Ltd, or by exercising option rights which are granted to the shareholders. The subscription rights are excluded. The then-current owners of the Financial Instruments shall be entitled to subscribe for the new shares. The conversion and/or option conditions are to be determined by the Board.
The Board is authorized, when issuing Financial Instruments to restrict or exclude the advance subscription rights in cases where they are issued: 33 for the financing including re-financing of a take-over of an enterprise, of parts of an enterprise, or of participations or of investments by the Zurich Insurance Group Ltd or one of its group companies; or 33 on national or international capital markets (including private placements to one or more selected investors); or 33 for the improvement of the regulatory capital position of the Zurich Insurance Group Ltd or one of its group companies in a fast and expeditious manner.
During 2018 and 2017, 8,176 shares and 732,445 shares, respectively, were issued to Group employees from contingent share capital. The remaining contingent share capital, which can be issued to employees amounted to CHF 494,723.20 and CHF 495,540.80 or 4,947,232 and 4,955,408 fully paid registered shares as of December 31, 2018 and 2017, respectively, with a nominal value of CHF 0.10 each. Subscription rights of the shareholders, as well as advance subscription rights, are excluded. The issuance of new shares or respective option rights to employees is subject to one or more regulations to be issued by the Board and takes into account performance, functions, levels of responsibility and criteria of profitability. New shares or option rights may be issued to employees at a price lower than that quoted on the stock exchange.
As of January 1 494,374 1,154,003 Transfer to free reserve (adjustment capital contribution reserve) (19) (1,960) Dividend payment out of capital contribution reserve (208,759) (855,656) Agio on share-based payment transactions 1,910 197,987 As of December 31 287,506 494,374 12. Reserves for treasury shares (indirectly held via subsidiaries) These reserves correspond to the purchase value of all Zurich Insurance Group Ltd shares held by companies of the Zurich Insurance Group as shown in the table below.
Purchases during the year 1,634,015 502,359 – – Sales during the year (448,150) (133,354) (46,956) (11,434)
Thereof held in general legal reserve As of January 1 – – – – As of December 31 1,277,704 391,338 – – Average purchase price, in CHF 307 – Average selling price, in CHF 319 262 1 in CHF thousands
As of January 1 344,624 342,664 Transfer from capital contribution reserve 19 1,960 As of December 31 344,643 344,624 14. Shareholders According to information available as of December 31, 2018, Zurich Insurance Group Ltd is not aware of any person or institution, other than BlackRock, Inc., New York, (>5 percent of the shares) and The Capital Group Companies, Inc., Los Angeles, (>3 percent of the shares) which, directly or indirectly, had an interest as a beneficial owner in shares, option rights and/or conversion rights relating to shares of Zurich Insurance Group Ltd exceeding the relevant thresholds prescribed by law.
16. Shareholdings of the Board of Directors and the Executive Committee The information on share and share option holdings of Directors and of the members of the Executive Committee (ExCo), who held office as of December 31, 2018, as required by article 663c paragraph 3 and article 959c paragraph 2 cif 11 of the Swiss Code of Obligations is included and audited in the remuneration report on pages 80 to 113 of this Annual Report.
Eligible shares 151,348,027 151,339,851 1 These figures are based on the share capital issued on December 31, 2018, and may change depending on the number of shares issued on April 8, 2019. Treasury shares are not entitled to dividends and will not be taken into account.
The Board of Directors proposes to the shareholders at the Annual General Meeting on April 3, 2019, a dividend of CHF 19.00 per share.
Available earnings As of January 1, 2018 15,529,736 Dividends paid (2,475,287) Net income after taxes 66,591 Allocation to reserve for treasury shares (indirectly held via subsidiaries) (391,338)
Available earnings, as of December 31, 2018 12,729,702 in CHF thousands Available earnings
Opinion We have audited the financial statements of Zurich Insurance Group Ltd, which comprise the income statement for the year ended December 31, 2018, balance sheet as at December 31, 2018, and notes, including a summary of significant accounting policies.
As key audit matter the following area of focus has been identified: Valuation of Investments in subsidiaries
We consider the investments in subsidiaries to be a key audit matter not only due to the judgment involved but also based on the magnitude of CHF 11.4 billion, which makes up more than 83% of the Company’s total assets.
Management assesses whether there are any impairments in the carrying value of the investments in subsidiaries. As a first step the Company compares the carrying value to the IFRS net asset value of the subsidiary as at December 31. If the net asset value is below the carrying value, then the Company may perform a valuation of the subsidiary by using a discounted cash flow analysis. If the valuations still indicate a need for an impairment, the Company reduces the carrying value of the investment in subsidiary accordingly.
We refer to note 3, para b) (“Summary of significant accounting policies”) and note 8 (“Investments in subsidiaries”) to the financial statements 2018.
Opinion In our opinion, the issue of 8,176 registered shares with a nominal value of CHF 0.10 complies with Swiss law and the Company’s articles of association.
Business operating profit (BOP) is the Group’s internal performance measure, on which the Group manages all of its business units. It indicates the underlying performance, after non-controlling interests, by eliminating the impact of financial market volatility and other non-operational variables. BOP reflects adjustments for shareholders’ taxes, net capital gains/ (losses) and impairments on investments (except for certain non-insurance operations included in Non-Core Businesses, investments in hedge funds as at fair value through profit or loss, certain securities held for specific economic hedging purposes and policyholders’ share of investment results for the life businesses) and nonoperational foreign exchange movements. Significant items arising from special circumstances, including restructuring charges, legal matters or large one-off regulatory projects outside the ordinary course of business, gains and losses on divestment of businesses, certain business combination integration costs and impairments of goodwill are also excluded from BOP. Business operating profit before interest, depreciation and amortization (BOPBIDA) excludes interest expense on debt, depreciation and impairments of property and equipment and amortization and impairments of intangible assets. BOPBIDA includes amortization of deferred policy acquisition costs, deferred origination costs and distribution agreements.
Business operating profit (after-tax) return on shareholders’ equity (BOPAT ROE) indicates the level of BOP relative to resources provided by shareholders. It is calculated as BOP, annualized on a linear basis and adjusted for taxes, divided by the average value of shareholders’ equity, adjusted for net unrealized gains/(losses) on available-for-sale investments and cash flow hedges, using the value at the beginning and end of each quarter within the period. The average shareholders’ equity for each quarter is then added together and divided by the number of quarters. If the dividend is approved at the Annual General Meeting within the first ten working days in April, then the dividend is deducted from the second quarter opening shareholders’ equity.
Investments Total investments in the consolidated balance sheets include Group investments and investments for unit-linked contracts. Group investments are those for which the Group bears part or all of the investment risk. They also include investments related to investment contracts with discretionary participation features. Average invested assets include investment cash, but exclude cash collateral received for securities lending. The Group manages its diversified investment portfolio to optimize benefits for both shareholders and policyholders while ensuring compliance with local regulatory and business requirements under the guidance of the Group’s Asset/Liability Management and Investment Committee. Investments for unit-linked contracts include investments where the policyholder bears the investment risk, and are held for liabilities related to unit-linked investment contracts and reserves for unit-linked contracts. They are managed in accordance with the investment objectives of each unit-linked fund. The investment result for unit-linked products is passed to policyholders through a charge to policyholder dividends and participation in profits.
Expense ratio is a performance measure that indicates the level of technical expenses during the period relative to net earned premiums and policy fees. It is calculated as the sum of net technical expenses and policyholder dividends and participation in profits, divided by net earned premiums and policy fees.
The Annual Report is published in English and German, with the financial statements in English only. In the event of inconsistencies in the German translation, the English original version shall prevail.
Our reporting consists of the Annual Report, which is divided into the Group overview, the governance, the risk review and the financial review, and which contains the annual financial statements (Holding Company) and the consolidated financial statements. With regards to content, the management report as per the Articles of Association consists of the aforementioned reports excluding the remuneration report.
Photography: Lee Mawdsley (Cover, 9), Elisabeth Real (1, 15), Ivan Stefania (2/3, 4/5, 9, 10, 17, 30/31, 42/43, 60/61, 78/79, 118/119, 152/153, 164/165), Rodrigo Rodrich for Practical Action (5), Andreas Guntli (5, 7, 9), Dan Sheridan, Inpho (19), Matthew Worden (60).