Z-ECM 125% Zurich Economic Capital Model (Z-ECM) ratio estimated as of December 31, 2018 6
2 Shareholders’ equity used to determine ROE and BOPAT ROE is adjusted for net unrealized gains or losses on available-for-sale investments and cash flow hedges.
5 See page 164 for more information. 6 The Z-ECM is an internal measure of capital adequacy and reflects midpoint estimates with an error margin of +/– 5 pts. 7 Impact investments in 2018 consisted of: green bonds
(USD 2.68 billion), social and sustainability bonds (USD 425 million), and investments committed to private equity funds (USD 145 million, thereof 45 percent drawn down) and impact infrastructure private debt (USD 540 million).
8 Number shown as of 2017; 2018 data will be available in Q2 2019. 9 In 2018, Zurich interviewed over 760,000 customers (including
Zurich Santander) in over 20 countries through its NPS (Net Promoter Score) program.
Read more on our non-financial performance on pages 22 – 27.
We are on a challenging but rewarding journey to become a truly customer-led insurer. Our aim to also be a leader in sustainability reinforces and builds on our strengths and expertise, and complements our strategy.
We set the right priorities and we are now starting to reap the benefits of the course we have chosen.” Michel M. Liès Chairman of the Board of Directors
First impressions The past year has been one of transformation – both for Zurich and for me personally. In these first months as Chairman, I have taken time to deepen my insight into this great company. Having been able to immerse, reflect and understand, I am pleased to report my confidence that Zurich’s transformation is putting us on a good path to success. Zurich has the knowledge and expertise to achieve our aims. What truly sets us apart is our people, and the commitment they are demonstrating each day to driving the transformation. Our people will drive our success: from our diverse and experienced management team, a passionate and skilled workforce, to people just starting on their career paths. I have been privileged to witness this process in action – including through our Make the Difference program and country visits – and look forward to seeing many more examples in future.
Our strategy builds confidence Our strategy to become one of the first customer-led insurers puts us on the right path. It reflects a clear understanding of today’s fast-changing world, and identifies the right actions for us to take.
Technological empowerment has raised our customers’ expectations. But if Zurich can help them enhance their lives and activities through our products and services, there is great potential to increase our value and relevance to all stakeholders. As our strategy takes hold, we are providing robust returns and strong investor confidence, meeting investors’ expectations and delivering on our financial targets. We will propose to shareholders an increase in the dividend to CHF 19 per share, further demonstrating our strength following a set of strong and sustainable results in 2018.
Living up to our brand For nearly 150 years, Zurich’s brand has stood for technical excellence, an open and collaborative approach and both global and local expertise. Today, we are strengthening this identity by embracing the wider role that insurance and risk management can play in people’s lives, in protecting companies and strengthening communities, and in addressing society’s most pressing challenges. Risk, after all, is our expertise, and that understanding has never been in greater demand.
From transitioning to a new carbonsensitive economy to adapting to a new digital workforce, the impact of macro- level forces on people, communities and the world will be immense, and Zurich understands that its core capabilities can have a positive impact in securing an inclusive and resilient future. We are proud of the efforts we have made to date, but even more excited about the possibilities we can envision.
Looking to the future Going forward, our focus will be on implementing and executing our transformation. The Board has an important oversight role, ensuring that long-term thinking is embedded into the process. To facilitate this, I am ensuring that management benefits from the rich and diverse array of perspectives represented among my fellow Directors, and that we collectively understand both the challenges and opportunities that lie before us. Zurich’s ambition is a bold one, but we have all the ingredients in place to succeed. I look forward to continuing to play my part and updating you again in due course.
USD 33.4 bn Gross written premiums, policy fees and insurance deposits
A changing world demands focus and a clear understanding of how to create value. Zurich is delivering on both while transforming itself for a digital age.
After reshaping our business, Zurich is well-positioned to face this transformation from a position of strength.” Mario Greco Group Chief Executive Officer
But our growth has not been limited to acquisitions. We also established a series of collaborations that expand our service offerings and gain us new ways to access customers, ranging from new mobility solutions through Bright Box to smart home services with Vodafone to cyber prevention capabilities with Cyence. In addition, we developed new offerings internally, including an insurance-on-demand device coverage for millennials in Spain and an innovative software-as-a-service tool for automobile dealers in the U.S. All of these represent ground-breaking new approaches to managing customers’ risks, challenging traditional product concepts and distribution models.
Make the Difference, inviting all employees to propose ways to improve how we work.
March 2018 Zurich accelerates growth of its Cover-More business with an acquisition in Latin America.
We have started introducing customer satisfaction measures across the organization, as we are committed to learn from every interaction that our millions of customers have with us. Satisfied customers, after all, tend to be more loyal, and tend to have a longer and broader relationship with Zurich. Through our efforts, and by truly listening to customers, we are making changes and seeing net promoter scores improve. And to underscore how serious we are, we have also included ‘NPS’ metrics as a measure to determine leaders’ incentive plans.
Engaging employees In the end, though, our transformation will be led by our people, who are increasingly demonstrating a renewed sense of purpose that is more agile, collaborative and entrepreneurial. You can read one way we are doing this through our Make the Difference campaign described here.
We also support a range of charities that aim to improve the lives of many people and groups. Outside of Switzerland we extended the award-winning global Flood Resilience Alliance that has already enhanced resilience in 110 mostly low-income communities, expanded the Z Zurich Foundation local grants program to over 20 countries, and contributed extensively to the debates around the future of work, climate change, cyber security and other critical risk topics. We are proud of these and countless other efforts our people make to improve the lives of our neighbors, and are committed to doing even more in the years to come to promote an inclusive and resilient future.
Our diverse workforce has provided multiple perspectives, which helps us to reach workable solutions: no fewer than 16 nationalities were represented among the 22 employees leading just one cohort of Make the Difference.
We are also addressing rapid changes in customers’ expectations. “As part of Make the Difference, we want to radically simplify the customer experience, making it quicker, easier and more intuitive,” says Marina Cardoso, Customer Proposition and Services Manager at Zurich Insurance Mobile Solutions.
Top: Through Make the Difference, employees like Marina Cardoso are leading our transformation to become a simpler, more agile company.
“ Customer expectations are changing quickly. As part of Make the Difference, we want to radically simplify the customer experience .” Marina Cardoso Customer Proposition and Services Manager at Zurich Insurance Mobile Solutions
Human Our approximately 54,000 employees include some of the most talented people in the insurance industry.
‘Zurich Way of Reserving,’ with well-defined and prudent standards, is the basis for how we calculate insurance liabilities.
Our reserving process is supported by strong governance, including extensive internal and external reviews.
Underwrite and manage risk Insuring and managing risk is central to what we do. Understanding, measuring and modeling risks helps us to price risk fairly and offer competitive premiums to customers, who also look to us to provide expertise aimed at mitigating risks.
Serve customers and distribute through multiple channels Our products and solutions are available to customers with a focus on great customer service, through many channels: directly, or indirectly via brokers, through employee benefits consultants, and in cooperation with third parties including banks, travel providers, retailers, rental agreements and car dealerships.
Read more about how we create value for our employees on pages 16–17.
”Our business faces nothing less than a revolution. Digital advances are changing what customers need and expect, while new entrants into our industry vie with established providers to introduce new and innovative products and services. Along with enabling new ideas, technology like artificial intelligence allows a more personalized service, increases accuracy and reduces the time needed for often mundane, repetitive tasks. Interconnectivity offers potential for making people safer, but also exposes them to new risks.
Today our customer base includes digital nomads, gig workers, companies that depend on shared services, and customers willing to chat online with strangers but mistrustful of large corporations. At the same time, multinational enterprises demand real-time information on policies, claims and risks. We welcome these changes taking place that ultimately benefit our customers, and recognize that today’s technologies are empowering customers in ways never experienced in insurance before. To embrace these changes, we are adapting our culture, how we work and the solutions we provide to allow us to fully participate in this new world of opportunity.”
Growing premiums in established markets is challenging. New entrants into traditional insurance markets are putting conventional market approaches and traditional insurance models to the test.
Zurich’s approach As a global company, we benefit from our diversity, with over 100 nationalities in our workforce. We can attract talent through our flexible work approach. Our culture of inclusion is recognized by leading prodiversity organizations. We have increased our listening capability via the ‘employee net promoter score’ (ENPS), and actively engage with employees to implement improvements through ‘Make the Difference.’
New rules to protect customers reinforce the need for compliance. Insurers are also preparing to adopt the first major revision to global insurance reporting standards in almost 20 years, IFRS 17, which will change how insurers measure and communicate profitability.
Zurich’s approach We have sound corporate governance throughout our company aimed at making sure we are compliant with regulations. In terms of IFRS 17, we have made progress on plans for adoption of this new standard, and are preparing for a dry run simulation in 2019 to be ready for full implementation.
The threat of severe weather is increased by climate change. Changes in weather patterns can worsen the risk of floods.
Zurich’s approach We work with customers and others to enhance resilience and to reduce CO2 emissions, including those related to thermal coal. We have set clear targets on impact investing and reducing CO2 emissions. In 2018 Zurich extended its award-winning flood resilience alliance for another five years.
Long term targets Our strategy to deliver long-term competitive advantage focuses on continuing to increase profitability and consolidating the Group’s position as a leading global underwriter for property and casualty (P&C) and life insurance. The Group will expand customer relationships, simplify the business and significantly reduce costs.
At the operating level, Zurich will continue to reduce complexity and improve accountability. Zurich will enhance technical excellence and strengthen its go-to-market-approach for commercial customers. It will also seek to enhance its offerings to individuals by monitoring and aiming to increase customer satisfaction and retention.
The Farmers Exchanges1 will continue to focus on improving customer satisfaction and retention rates.
Focus on customers We increased use of customer feedback through the ‘transactional’ net promoter score (TNPS) and achieved improvements in TNPS across all four business regions.
We gained access to new customers through acquisitions in Latin America, Australia and Indonesia and expanded our Cover-More travel assistance platform globally.
We introduced our first Group- wide internal social media platform which gives employees across our businesses an easy way to share ideas and collaborate.
We established a new unit, Zurich Customer Active Management, to generate insights from the data we gather to allow us to better provide solutions to customers.
A 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 wellearned positive reputation as a business and an employer.
A trusted brand, talented people Our brand is strong and reinforces our reputation for being able to understand the risks our customers face and to structure offerings that meet their unique needs. Our global brand and reputation help us to continue to attract the most talented people in the industry.
We are developing innovative risk solutions for retail and commercial customers.
Listening to our customers To best serve all our customers we need to get better at listening to them. To do this we are using the net promoter score (NPS) and have introduced many improvements based on feedback we received through NPS. In 2018 we expanded this program to over 20 countries comprising 90 percent of our business. To underscore the importance of customer satisfaction, in 2018 we also included NPS in performance incentives of senior leaders. We’ve already addressed pain points based on such customer feedback: in Spain we improved our roadside service for motorists, for example, and in Hong Kong, we introduced a new way to streamline home insurance claims. While this approach is used mainly for retail customers, we also are starting to develop it for commercial customers.
Helping to protect businesses We insure businesses across a variety of industries, supported by about 1,350 risk engineers who offer their expertise to help better understand risks, and over 9,600 claims professionals. We are constantly developing new ways to better serve business customers. For example, in 2018, we began a pilot to test application programming interface (API) technology that will allow multinationals to access their data in our systems in real time.
The transactions in Latin America, Australia and Indonesia also augment the over 70 agreements we already have in place around the world that allow us to distribute our products through banks and other distribution channels. The largest such agreements are separate joint ventures with Banco Santander S.A. in Latin America and with Banco Sabadell S.A. in Spain.
Making history We are fortunate to have been helping customers adapt to, and thrive in a changing environment for nearly 150 years. In 2018 we were proud to have installed the first modern fire safety sprinklers at a National Trust site. Our goal is to help every customer protect against risk. We share solutions, too, to help customers reduce risk, including through hazard analysis workshops and on-site training and make it possible for customers to do own risk assessments via the Zurich Risk Advisor app.
Farmers 1 Insurance launches millennial-centric brand for renters In 2018, Farmers launched Toggle, an innovative brand aimed at digitallyactive consumers in Illinois and Wisconsin, which includes elements of game design to deliver customizable coverages and offerings. Through the new renters insurance offering, subscribers can chose options that cover damage to their residence caused by their pet, or covers the things members use to make extra money on the side, like the camera for a food blogger, or the laptop and sound equipment for a DJ.
“ Zurich’s Make the Difference marks a turning point in our culture.” Cecilia Parnell Strategic Specialist, Zurich North America
We are using employee NPS, or ENPS, to systematically measure employee satisfaction, gather feedback and take action.
Our industry is in the midst of a revolution. Advances in digital technology are changing what our customers need and expect from us. Customers’ expectations of what insurers should provide, how they provide it and even what an insurer is, are changing as well. In this challenging environment, each and every one of our people must understand our deeper purpose and their importance in helping us to address our customers’ evolving needs.
To achieve this, we are implementing a simplified, more customer-focused organization and operating model empowering our regional and local businesses. We are introducing more talent management discipline, and an integrated performance and development-cycle approach. That includes equipping new employees to more quickly make an impact, while allowing managers to spend more time on coaching and less time on administrative tasks.
We also enrich our own knowledge and capabilities through acquisitions, including the innovative travel assistance provider, Cover-More, from which we are learning new ways to develop customer-focused services that we can apply to a range of customer needs in future.
Supporting knowledge gaps in our industry We believe we have a responsibility to educate tomorrow’s insurers. This will bring fresh thinking and new ideas to our workforce. Our Swiss-style apprenticeship program, offered through William Rainey Harper College in Illinois, is the first such apprenticeship program for insurance professionals in the U.S. In 2018, the program added cyber security to its offerings. We also actively support ‘hackathons’ where the world’s best young programmers meet to compete in delivering solutions to specific problems. And we work to educate industry professionals. These efforts were recognized in 2018, when our Zurich Broker Academy won top prize for innovation at the European Risk Management Awards 2018, underscoring Zurich’s outstanding work in educating brokers about international programs.
Our industry is at a key inflection point. Our employees are one of our greatest strengths and we aim to make sure we continue to have the right people with the right skills and mindset for this changing environment. By being agile, faster and making every employee responsible for their success, we can promote a culture that will support our aim to be a truly customer-led insurer. Guided by our purpose and values, we believe we are on the right path to make sure our workforce is capable of meeting the challenges of the future.
We work globally including through our award-winning multi-organizational flood resilience alliance. In 2018 we extended the program for another five years.
A global flood alliance We are already making a significant impact by helping customers and communities reduce the devastating impacts of floods. Through our risk expertise as a global insurer, we can make a positive difference even before a flood occurs – we call this flood resilience. An ability to adapt and address risks prior to an event can make a big difference, especially when it comes to addressing the impacts of flooding.
Over 225,000 people have already directly benefited from the work done by the Flood Resilience Alliance, which has established 13 programs in nine countries since it started in 2013. In the second five-year phase of the program, launched in July 2018, we will work with the Alliance members to raise USD 1 billion for investing into building resilience to floods globally – and saving lives. Prevention is by far more cost-effective than clean-up post-event.
We already know that every USD 1 invested in prevention saves on average USD 5 in future losses. We want to provide further proof that our approach aimed at resilience works. By documenting the success we achieve, we will support our case for investing in resilience, encouraging investment from public authorities, and public and private donors.
Learn more about Zurich's sustainability initiatives in the Sustainability Highlights 2018 www.zurich.com/en/sustainability
Our work over many years to benefit our customers, communities and society has generated positive results. With our expertise, capabilities and passion we can contribute even more.
Helping communities survive and thrive despite repeated floods Floods affect more people globally than any other type of natural hazard and cause some of the largest economic, social and humanitarian losses. To help communities cope with repeated flooding, we created the Zurich Flood Resilience Alliance. This award-winning multi-organizational alliance brings together research organizations, humanitarian sector organizations. Zurich, as the founder of the alliance, provides expertise, funding and serves to coordinate our approach.
“ With our flood resilience work, we are helping to prevent disasters, and protect and keep communities together.” Gary Shaughnessy Chair of the Board of Trustees, Z Zurich Foundation
In Australia, Zurich is working with indigenous Australian artists through the Beyond Empathy organization. Through different art forms, Beyond Empathy aims to enrich the lives of disadvantaged individuals and their communities.
1 Impact investments in 2018 consisted of: green bonds (USD 2.68 billion), social and sustainability bonds (USD 425 million), and investments committed to private equity funds (USD 145 million, thereof 45 percent drawn down) and impact infrastructure private debt (USD 540 million).
Zurich has a highly cash-generative business model and is focused on paying an attractive and growing dividend, while managing the group balance sheet in a consistent and conservative manner.
Zurich is rated in the ‘AA’ range by three internationally recognized rating agencies. The estimated Zurich Economic Capital Model (Z-ECM) ratio stands at a very strong 125 percent2 (calibrated to AA). Zurich’s financial flexibility is strong, with a conservative ‘Aa’-level leverage as defined by Moody’s.
The Group's consistent and conservatively managed balance sheet is based on disciplined risk management and producing stable cash flows. A key element of the capital management strategy is to maximize capital fungibility by pooling risk, capital and liquidity centrally as much as possible. Zurich’s investment portfolio is generally conservative with an asset allocation comprising mainly publicly traded fixed income securities, with moderate investments in other asset classes.
Provision of financial information Zurich’s annual financial results are published in printed and electronic form. Detailed information for the Group and the key segments are published for the half and full year. For first and third quarters, the Group provides highlights for the quarter and qualitative comments on trading and market trends. Zurich’s management hosts an investors’ and analysts’ call each quarter.
Quarterly updates and current publication dates can be found online www.zurich.com/en/investor-relations/ results-and-reports
For the first time in 2018, we are including in our Annual Report information on a comprehensive set of ‘non-financial’ measures that we use to monitor and report information related to our four key stakeholder groups. The information is based on the requirements some of our subsidiaries and branches are required to follow since 2017, as stipulated by the Directive on the disclosure of non-financial and diversity information by certain large undertakings and groups (Directive 2014/95/EU). We believe that providing these metrics gives a more complete overview of our business, and shows how we monitor our effectiveness in these areas pertaining to social information and employees, customers, responsible investment, the environment, and our tax contributions. We have also used references to the Global Reporting Initiative (GRI) as an index to help our stakeholders find the information relevant to them throughout the Annual Report and on our Group website without adhering to the standards listed in the index in its entirety. PricewaterhouseCoopers AG performed limited assurance procedures on the indicators for social and environmental matters as well as those related to responsible investment as outlined in their independent assurance report at the end of this section.
The information contained within the consolidated non-financial statements is based on the consolidated results of the Group for the years ended December 31, 2018 and 2017. Amounts are rounded to the nearest million unless otherwise stated, with the consequence that the rounded amounts may not always add up to the rounded total. All ratios and variances are calculated using the underlying amounts rather than the rounded amounts. This document should be read in conjunction with the stakeholders reports from the Group overview section of this Annual Report, and with the Sustainability Highlights 2018 report of the Group which is available on www.zurich.com.
Number of close the loop feedback calls 52,000 26,000 100% 1 In 2018, Zurich interviewed over 760,000 customers (including Zurich Santander) in over 20 countries through its NPS (Net Promoter System) program.
Total number of employees – FTE (full time equivalents) 52,267 51,633 1%
Technical functions voluntary turnover (%) 1, 2 7% 7% (0 pts)
Employee participation in Group-wide feedback channels (%) 3 70% – –
ENPS is based on the methodology of measuring and improving customer satisfaction and loyalty (transaction NPS and relationship NPS) which Zurich uses as a successful method to retain customers. 5 Employees who have taken at least one course during the year reported. Farmers Management Services is not included in the KPI scope.
Group assets managed by PRI signatories (%) 2 97% 97% (0 pts)
and impact infrastructure private debt (USD 540 million). 4 The investment portfolio is calculated on a market basis, and is different from the total Group investments reported in the consolidated financial statements, which is calculated on an accounting basis and doesn’t include cash and cash equivalents.
Impact of real estate investment: Energy consumption (kWh per sqm) 1, 2 114 117 (2%)
CO2e emissions per employee (tons per FTE) 2 2.1 2.1 (1%) 1 Scope includes real estate investments in Switzerland (44% of global direct real estate investment value). Buildings in the real estate investment portfolio are largely not used by Zurich. The data are based on meter readings and energy supplier information and are heating degree adjusted. 2 CO2e emissions per employee data 2018 will be available in Q2 2019, and Impact of real estate investment data 2018 will be available in Q1 2020.
Total tax contributions 1 2017 2 1 Numbers based on IFRS excluding deferred income tax. 2 Tax contributions for 2018 will be available in Q2 2019.
Tax borne by shareholders 2017 total tax contributions by region in USD millions
Key: AR: Annual Report 2018 SR: Sustainability highlights 2018* CDP: CDP submission 2018 : Link to Zurich Insurance Group website * The Sustainability Highlights 2018 report includes the United Nations Global Compact communication on progress and our progress in implementing the UN Environment Programme Finance Initiative Principles for Sustainable Insurance. For more information see www.zurich.com/en/sustainability
General disclosures 102-1 Name of the organization AR inside front cover (ifc)
AR 16 to 17 and 23 102-9 Supply chain SR 13; CDP
102-10 Significant changes to the organization and its supply chain 102-11 Precautionary principle or approach AR inside back cover 102-12 External initiatives AR 14 to 21; 102-13 Membership of associations CDP
102-20 Executive-level responsibility for economic, environmental, and social topics AR 53; SR 9 102-21 Consulting stakeholders on economic, environmental, and social topics SR 6 and 7 102-22 Composition of the highest governance body and its committees AR 42 to 58 102-23 Chair of the highest governance body AR 30 to 31 and 44; SR 9 102-24 Nominating and selecting the highest governance body
102-35 Remuneration policies AR 85 to 86 102-36 Process for determining remuneration AR 90 to 98 102-37 Stakeholders’ involvement in remuneration AR 85 and 89 102-40 List of stakeholder groups
102-53 Contact point for questions regarding the report AR 300 102-55 GRI content index AR 25 to 26; SR 35 102-56 External assurance AR 27, 73 to 74, 114, 276 to 281 and 292 to 296; SR 33
Management approach 103-1 Explanation of the material topic and its boundary SR 6 to 8 103-3 Evaluation of the management approach AR 57; SR 6 to 8
Employment 401-1 New employee hires and employee turnover AR 23; SR 18
Occupational health and safety 403-1 Occupational health and safety management system SR 20 403-6 Promotion of worker health SR 19 to 20
Criteria The reporting criteria used by ZIG are described in the internal reporting guidelines and define those procedures, by which the non-financial indicators are internally gathered, collated and aggregated.
ZIG Responsibilities The Executive Committee of ZIG is responsible for both the subject matter and the criteria as well as for selection, preparation and presentation of the information in accordance with the criteria. This responsibility includes the design, implementation and maintenance of related internal control relevant to this reporting process that is free from material misstatement, whether due to fraud or error.
Our Independence and Quality Control We have complied with the independence and other ethical requirements of the Code of Ethics for Professional Accountants issued by the International Ethics Standards Board for Accountants, which is founded on fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behavior.
Summary of work performed Our limited assurance procedures included, but were not limited to the following work: – Reviewing the application of ZIG’s internal guidelines using a sample of affiliates in Switzerland, UK, USA, Germany, Chile, Australia and Malaysia
– Reviewing and assessing the management reporting processes for non-financial reporting and consolidation and their related controls
Limited assurance conclusion Based on the procedures we performed, nothing has come to our attention that causes us to believe that a) The non-financial indicators as described in the scope and subject matter section are not prepared and disclosed in all material respects in accordance with ZIG’s internal reporting guidelines; and b) The management and reporting processes to collect and aggregate the non-financial indicators as well as the control environment in relation to the data aggregation are not functioning as designed.
Playing our part in creating a sustainable future is more than an opportunity for insurers – it is our responsibility. We must demonstrate this through actions, and Zurich is doing just that. Good corporate governance enables Zurich to create this sustainable value for our stakeholders.
In a world facing massive changes, insurers have never had a more important role in addressing society’s challenges. Zurich is demonstrating this powerfully and consistently.” Michel M. Liès Chairman of the Board of Directors
Diversity that favors sustainability To succeed as a sustainable global insurer, Zurich needs to attract, develop and retain talented people who reflect the diversity of our global customers. A workplace that brings out the best in everybody, where people feel welcome, valued and included, allows employees to achieve their full potential and perform at their best.
I am proud of the diverse composition of our Board and executive team. The Board and ExCo members are men and women with a variety of experience and professional backgrounds, and from many different countries – reflecting our customer base.
As announced on December 14, 2018, and on February 6, 2019, the Board will propose that shareholders elect Jasmin Staiblin, Michael Halbherr and Barry Stowe as new members of the Board at the next AGM on April 3, 2019. David Nish will not stand for re-election.
Our sustainability approach Sustainability means doing business in a way that safeguards the future of our company and society. It is about the solutions we provide to customers, the way in which we invest our assets, and how we address environmental, social and governance issues in our-day-to-day activities. Insurance has an important role, and Zurich is demonstrating this powerfully and consistently.
We are acting on climate change and we are assisting in the transition to a low-carbon world: Zurich helps customers to better understand their exposure to climate risks.
We help communities worldwide through our award-winning Zurich Flood Resilience Alliance.
We strive for greater sustainability in our investments – aiming to double our impact investment portfolio to USD 5 billion, avoiding 5 million tons of CO2-equivalent emissions and improving 5 million people’s lives annually.
We invest in thought leadership, including on Agile Protection systems for evolving workforce needs and vulnerabilities.
Finally, we are committed to being stewards of data – building trust in the digital age.
This means being responsible in the way we work with and handle data. It also means increasing cyber resilience through risk awareness, mitigation and insurance programs.
Changing climate Providing insight, protection and transparency to support the transition to a low carbon economy
Workforce in transition Preparing for new ways of working and the skills, solutions and initiatives
Confidence in a digital society Making people and organizations more resilient by enabling and inspiring confidence in a digital society
This report describes the Group’s approach to the key elements of corporate governance within the Group. It includes the information required under the following rules, with which Zurich complies: 33 Directive on Information Relating to Corporate Governance of the SIX Exchange Regulation (as of March 20, 2018).
Zurich is subject to insurance group supervision by the Swiss Financial Market Supervisory Authority FINMA (’FINMA’). The Joint Committee of the European Supervisory Authorities has also designated the Group as an insurance group and not as an insurance conglomerate because of the small size of its non-insurance activities. The Swiss Insurance Supervision Act (ISA) requires Swiss insurance companies and groups to establish and maintain strong governance and risk management systems as well as effective internal control systems that are appropriate to their business activities. It prescribes the calculation of a risk-based solvency margin on a Group-wide basis and at legal entity level pursuant to the Swiss Solvency Test (SST). All material intra-group transactions must be reported to FINMA. In addition to the group supervision exercised by FINMA and its insurance supervision of the legal entities Zurich Insurance Company Ltd, Zurich Life Insurance Company Ltd, Zurich Reinsurance Company Ltd and Orion Legal Expenses Insurance Ltd., the insurance subsidiaries and remaining financial services entities of the Group are supervised by the respective local supervisory authorities.
e Group Policy manuals e Business/Region/Function management rules e Business/Region/Function Policies & Policy manuals
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 (Group CEO) and the Executive Committee ('ExCo') which together are responsible for managing the Group on a day-to-day basis. The Board is composed entirely of non-executive members, independent from the management.
Amanda Blanc, CEO EMEA (Europe, Middle East & Africa) (as of October 5, 2018)
Michel M. Liès, elected as Chairman (as of April 4, 2018)
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 property and casualty and life insurance products and services to individuals, small businesses, mid-sized and large companies.
The following chart shows the operational group structure on December 31, 2018.
33 Group Functions and Operations comprise the Group’s Holding and Financing and Headquarters activities. Certain alternative investment positions not allocated to business operating segments are included within Holding and Financing. In addition, Group Functions and Operations includes operational technical governance activities relating to technology, underwriting, claims, actuarial and pricing.
A detailed review of the results of the businesses as reported for 2018 can be found in the financial review starting on page 155. Furthermore, an overview of the Group’s business activities is contained in the Annual Review, available on Zurich’s website (www.zurich.com/en/investor-relations/results-and-reports).
A list of the Group’s significant subsidiaries can be found on pages 271 to 273. For further information on the share listing of Zurich Insurance Group Ltd, see the investor section on pages 20 to 21.
Significant shareholders According to the rules regarding the disclosure of significant shareholdings of Swiss companies listed in Switzerland, disclosure has to be made if certain thresholds starting at 3 percent are reached or if the shareholding subsequently falls below those thresholds. Disclosure must be made separately for purchase positions (including shares, long call options and short put options) and sale positions (including long put options and short call options). The percentage thresholds are calculated on the basis of the total amount of voting rights according to the number of shares issued as disclosed in the commercial register.
Zurich Insurance Group Ltd is not aware of any person or institution which, as of December 31, 2018, directly or indirectly, alone or with others, exercised or was a party to any arrangements to exercise control over Zurich Insurance Group Ltd.
Number of shares held as of December 31, 2018 Number of registered shareholders registered share capital 1 of registered shareholders.
Latin America 0.1 0.0 Rest of the world 4.6 7.4 1 of registered shareholders.
Moreover, there is an additional contingent share capital (Art. 5ter 2a) of CHF 494,723.20, representing 4,947,232 fully paid registered shares with a nominal value of CHF 0.10 each, which may be issued to employees of Zurich Insurance Group Ltd or one of its Group companies. For further information on the capital structure and the authorized and contingent share capital, see the audited consolidated financial statements, note 19 on pages 225 to 227. This contingent share capital compares to about 3.3 percent of the current total registered shares issued as of December 31, 2018.
Changes to share capital during 2018 During 2018, a total of 8,176 shares were issued to employees out of contingent share capital. As a result, on December 31, 2018, the share capital amounted to CHF 15,134,802.70 (151,348,027 shares). The authorized share capital (Art. 5bis 1) amounted to CHF 4,500,000 (45,000,000 shares). The contingent share capital for financial instruments (Art. 5ter 1a) amounted to CHF 3,000,000 (30,000,000 shares) and the contingent share capital for employees (Art. 5ter 2a) amounted to CHF 494,723.20 (4,947,232 shares).
For information on changes of share capital during 2016, see the Annual Report 2016 of Zurich Insurance Group, page 35, pages 174 to 175 and pages 224 to 225 (www.zurich.com/en/investor-relations/results-and-reports).
Some interests in shares are held by investors in the form of American Depositary Receipts (ADRs) 1. As of December 31, 2018, investors held 23‘893‘050 ADRs (representing 2‘389‘305 Zurich Insurance Group Ltd shares).
1 Zurich Insurance Group Ltd has established an American Depositary Share, or ADS, level 1 program in the U.S. Under this program, The Bank of New York Mellon Corporation issues the ADSs. Each ADS represents the right to receive one-tenth of one share of Zurich Insurance Group Ltd. Each ADS also represents securities, cash or other property deposited with The Bank of New York Mellon Corporation but not distributed to ADS holders. Zurich’s ADSs are traded over the counter (OTC) and are evidenced by American Depositary Receipts, or ADRs. Since July 1, 2010, Zurich’s ADRs have been traded on “OTCQX”, an electronic platform operated by OTC Markets Group Inc. under the symbol ZURVY. ADS holders are not treated as shareholders of Zurich Insurance Group Ltd and are not able to directly enforce or exercise shareholder rights. Only The Bank of New York Mellon Corporation as Depositary of the level 1 program may exercise voting rights with respect to instructions received from beneficial owners of ADRs.
Nationality: Swiss and German Committee membership: Remuneration Committee (Chairman), Governance, Nominations and Sustainability Committee
The governance structure that controls relations between our Board and our management and the truly diverse composition of our Board, enable Zurich to create sustainable value for our shareholders, customers, employees and other stakeholders.
Nationality: Swiss Committee membership: Governance, Nominations and Sustainability Committee, Audit Committee
Nationality: U.S. Committee membership: Risk and Investment Committee (Chairman), Governance, Nominations and Sustainability Committee
All Directors of Zurich Insurance Group Ltd are also members of the Board of Directors of Zurich Insurance Company Ltd. Mr. Liès also serves as Chairman of that board. None of the Directors have further board memberships within the Group.
Board Composition Diversity is a key factor for success in today’s fast-changing global environment. Zurich’s Board consists of individuals with different backgrounds and experience, and a diverse set of knowledge and skills. The Board can draw on this diverse group of individuals to carry out its responsibilities and tasks, while taking into account a full range of current business needs.
As of December 31, 2018, the Board included members of six different nationalities. Board members’ business experience covers a broad range of jurisdictions, giving the Board profound collective knowledge of international business practices. The Board also benefits from the broad cultural, educational and professional backgrounds of its members, which include financial services, manufacturing, engineering, and legal and regulatory experience.
Board by background, experience, skills and knowledge %, as of December 31, 2018
Skills and experience Michel Liès has 40 years’ experience in global insurance and reinsurance, life insurance, and property and casualty insurance. He has held a number of positions in the industry, including Group CEO of Swiss Re. He began his career at the reinsurer in 1978, working first in the life market in Latin America before moving to Europe in 1983, where he held a number of senior positions within Swiss Re’s life businesses. In 1994 he moved into Swiss Re’s non-life sector, with responsibility for southern Europe and Latin America. From 1998 he served as Swiss Re’s Head of Latin America Division until 2000, when he was appointed Head of the Europe Division of its Property & Casualty Business Group. In 2005 he became Swiss Re’s Head Client Markets with responsibility for client relationships worldwide, and was also appointed as a member of the reinsurer’s Group Executive Committee. From 2011 to 2012 Mr. Liès served as Swiss Re’s Chairman of Global Partnerships, which works with governments, international development bodies and non-governmental organizations (NGOs) to mitigate and address global risks and increase resilience. He was appointed Swiss Re’s Group CEO in February 2012 and served in that role until his retirement from Swiss Re in 2016. He became Chairman of the Board of Zurich Insurance Group Ltd and Zurich Insurance Company Ltd in April 2018.
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 Chugai Pharmaceuticals Ltd, and of Stadler Rail. Mr. Franz serves as a member of the board of trustees of the Ernst-Goehner-Foundation, of Avenir Suisse, of the Swiss Study Foundation and of the Lucerne Festival and is a member of the advisory board of the University of St. Gallen (HSG). He was named as an honorary professor of business administration at the University of St. Gallen in May 2017. In September 2017, the International Committee of the Red Cross (ICRC) appointed Mr. Franz as a member of its Assembly, the organization’s top governing body, in May 2018 he was elected to the Assembly Council.
Skills and experience Dame Alison Carnwath has substantial financial industry experience. She began her career with Peat Marwick Mitchell, now KPMG, where she practiced as a chartered accountant from 1975 to 1980. From 1980 to 1982, she worked as a corporate financier for Lloyds Bank International. From 1982 to 1993, she was assistant director, then director, at J. Henry Schroder Wagg & Co in London and New York. From 1993 to 1997, Ms. Carnwath was a senior partner at the financial advisory firm Phoenix Partnership. The firm was taken over by Donaldson, Lufkin & Jenrette (DLJ) in late 1997; she continued working for DLJ until 2000. Ms. Carnwath has held several board offices. From 2000 to 2005, she was the Chairman of the board of Vitec Group plc, from 2001 to 2006 a director of Welsh Water, from 2004 to 2007 of Friends Provident plc, from 2004 to 2007 of Gallaher Group and from 2007 to 2010, she was the independent Chairman of MF Global Inc. She also served on the boards of directors of Barclays from 2010 to 2012, and of Man Group plc from 2001 to 2013. From 2008 to July 2018 she was Chairman of the board of Land Securities Group plc. She has been a member of the boards of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd since March 2012.
Educational background Ms. Carnwath graduated in economics and German from the University of Reading. She was awarded honorary doctorates (LLB) from the University of Reading and the University of Exeter.
Skills and experience Monica Mächler has substantial legal, regulatory and governance expertise in a national and international context. She served as vice-chair of the board of directors of the integrated Swiss Financial Market Supervisory Authority (FINMA) from 2009 to 2012, after having been the director of the Swiss Federal Office of Private Insurance from 2007 to 2008. From 2010 to 2012, Ms. Mächler chaired the Technical Committee of the International Association of Insurance Supervisors (IAIS). She assumed the roles of Group General Counsel and Head of the Board Secretariat of Zurich Insurance Group from 1999 to 2006 and was appointed a member of the Group Management Board in 2001 after joining in 1990. During the years 1985 to 1990 she was in private practice specializing in banking and business law. Ms. Mächler has been a member of several Swiss federal expert commissions on regulatory projects and regularly speaks, lectures and publishes on matters related to international business law and regulation, and their impact. From May 2012 until May 2018 she was a member of the supervisory board of directors of Deutsche Börse AG. She has been a member of the boards of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd since April 2013.
Skills and experience Kishore Mahbubani began his career in 1971 as a diplomat with the Singapore Foreign Service, 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 Singapore Foreign Ministry from 1993 to 1998. He served as dean at the Lee Kuan Yew School of Public Policy of the National University of Singapore (NUS) from its founding in 2004 until the end of 2017. He continues to be a professor in the practice of public policy at the NUS. He has spoken and has published extensively on geopolitical and economic issues. In 2013 the Financial Times chose one of his books, ‘The Great Convergence: Asia, the West and the Logic of One World,’ as one of the best books about economics in that year. His latest book, ‘Has the West Lost It?,’ published in London in April 2018, was described by Martin Wolf as “a compelling warning.” He has been a member of the Boards of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd since April 2015.
Skills and experience David Nish started his professional career in 1981 at Price Waterhouse (now PWC) in the UK, where he served as an audit and transaction partner from 1993 to 1997. In 1997, he joined ScottishPower plc as deputy finance director, and in 1999 he was promoted to group finance director, a role he held until 2005 when he became executive director responsible for the division operating ScottishPower’s regulated transmission and distribution business. In 2006, Mr. Nish became group finance director at global investment management and life insurance group Standard Life plc, and was promoted to group CEO of Standard Life plc in 2010, a position he held until 2015. He has also served as deputy Chairman of the Association of British Insurers, as a member of TheCityUK board advisory committee, as a member of the financial services advisory board of the Scottish government and as a council member of the Scottish Institute of Chartered Accountants. He has been a member of the boards of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd since March 2016.
Mandates for Group subsidiaries No limit Mandates on behalf of the Group 5 maximum 5 maximum Mandates for associations, charitable organizations, foundations or pension funds 5 maximum 5 maximum
Multiple mandates for different companies under unified control are counted as a single mandate. The maximum limits set forth in the Articles of Association do not discharge the members of the Board or ExCo from their duties to act with due care and protect Group interests. As in the past, additional mandates may be assumed only where, upon assuming such mandates, time and resources remain available to perform the office held in the Group.
Tom de Swaan, Fred Kindle and Susan Bies did not stand for re-election at the AGM on April 4, 2018. All other Board members were re-elected for another one-year term. Michel M. Liès was newly elected as Chairman. As members of the Remuneration Committee, the AGM elected Catherine Bessant, Christoph Franz, Michel M. Liès and Kishore Mahbubani. As independent voting rights representative, the shareholders elected Mr. lic. iur. Andreas G. Keller, attorney at law.
As announced December 14, 2018, and on February 6, 2019, the Board will propose that shareholders elect Jasmin Staiblin, Michael Halbherr and Barry Stowe as new members of the Board at the next AGM on April 3, 2019. David Nish will not stand for re-election.
In 2018, average attendance at Board meetings was 94 percent. In fulfillment of their duties, the members of the Board spent additional time participating in Board committee meetings and preparing for meetings.
Catherine Bessant 12/12 – 4/4 4 8/8 Susan Bies 2 2/4 – – 1/1 5 1/1 5 Alison Carnwath 11/12 2/5 – 6/8 8/8 Tom de Swaan 2 4/4 2/2 5 1/1 5 – – Christoph Franz 11/12 4/5 5/5 – – Jeffrey Hayman 12/12 5/5 – 8/8 –
Monica Mächler 12/12 3/3 4 – 1/1 5 8/8 Kishore Mahbubani 12/12 – 5/5 8/8 – David Nish 9/12 – – 6/7 4 7/8 1 Until April 4, 2018, the Board had 11, the Governance, Nominations & Sustainability Committee 5, the Audit Committee 6, the Remuneration Committee 4 and the Risk & Investment Committee 5 members.
2 Retired at AGM April 4, 2018. 3 Elected at AGM April 4, 2018. 4 Joined Committee on April 4, 2018. 5 Left Committee as of April 4, 2018.
33 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 to Group functions. In this respect, the Board 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 dividend. Within its authority the Board also makes resolutions on capital increases and the certification of capital increases and respective amendments to the Articles of Association.
The Board may establish committees for specific topics, terms of reference and rules with respect to delegated tasks, responsibilities and reporting to the Board. Except for the Remuneration Committee, the Board constitutes such committees from among its members at its own discretion. The members of the Remuneration Committee are elected at the shareholders’ meeting. The committees assist the Board in performing its duties. They discuss and propose matters to the Board in order that it may take appropriate actions and pass resolutions unless they are authorized to take resolutions in specific areas on their own. In 2018, committee meetings lasted over an hour and a half on average.
Self-assessment The full Board and its committees conduct a self-assessment once a year. In 2018 the Board considered the following key aspects that have an influence on its and its committees' effectiveness: a) the Board and committee environment (size, culture and composition, skill set and qualification); b) the work of the Board and its committees (strategy, governance, competition and peer comparison and performance management); and c) the use of time and process (planning quality and allocation). A report identifying key strengths and challenges was produced for, and considered by the Board. The Board is putting into practice steps taking into account the findings of its assessment.
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 & Sustainability Committee Composition and membership: The Governance, Nominations & Sustainability Committee consists of at least four Board members. Currently, the committee comprises Michel M. Liès (Chairman), Alison Carnwath, Christoph Franz, Jeffrey Hayman and Monica Mächler.
The Governance, Nominations & Sustainability Committee meets at least twice per year. In 2018 it met five times.
The external auditors, the internal auditors, members of the ExCo and other executives attend Audit Committee meetings to, among other things, 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 Management members being present.
For more information on the supervision and control of the external audit process, see page 74.
33 at least annually, reviews the standards of internal control, including activities, plans, organization and quality of Group Audit and Group Compliance 33 reviews annual and half year consolidated financial statements of the Group, the Group's updates for the first three months and first nine months of the year and the Financial Condition Report of the Group
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, the committee comprises Jeffrey Hayman (Chairman), Joan Amble, Alison Carnwath, Kishore Mahbubani and David Nish.
Activities 2018: From an enterprise risk management perspective, during 2018 the Risk and Investment Committee in particular discussed the following topics: 33 the effectiveness of the enterprise risk management (ERM) approach, including the annual revision of the Group risk appetite 33 the refreshed Group Risk Management ambition and strategy and progress made in implementing it, together with an update on Integrated Assurance 33 results of the Group Total Risk Profiling™ (TRP) assessment including risk ownership and mitigation actions 33 the Group’s Own Risk and Solvency Assessment 2018 33 the Group’s Recovery Plan 2018, which included a recovery exercise under conditions of stress 33 the Group’s risk profile and economic and regulatory capital, including development of the internal capital model and risk-based capital limits 33 revisions of the Zurich Risk Policy (ZRP)
The Risk and Investment Committee meets at least four times per year. In 2018 it met eight times.
Areas of responsibility of the Board and management The Board decides on the strategy of the Group, supervises senior management and addresses key matters in the area of strategy, finance, and organization. In particular, the Board approves the Group’s strategic plan and the annual financial plans developed by management. It reviews and approves the Annual Report and the half-year financial reporting of the Group, as well as the Group's updates for the first three months and first nine months of the year, and the annual financial statements of Zurich Insurance Group Ltd. For more details with regard to the responsibilities of the Board see page 52.
Subject to the powers reserved to the Board, the Board has delegated management of the Group to the Group CEO and, under the Group CEO's supervision, to the ExCo and its members. The Group CEO is the highest executive officer in the Group and has responsibility and accountability for the Group’s management and performance. The Group CEO represents the overall interests of the Group toward third parties to the extent such interests are not represented by the Board. The Group CEO is responsible for developing and implementing the strategic and financial plans approved by the Board. The Group CEO has specific powers and duties pertaining to strategic, financial and organizational matters and manages, supervises and coordinates the activities of the members of the ExCo and of his other direct reports.
Our Executive Committee in its experienced and diverse composition is well prepared for a customer-led transformation and the challenges posed by fast changing technological developments.
ExCo Composition As of December 31, 2018, the Exco included members of six nationalities. ExCo members’ business experience covers a broad range of jurisdictions, giving the ExCo profound collective knowledge of international business practices.
Executive Committee by length of tenure %, as of December 31, 2018
The Group Risk Committee (GRC) Members: Group CRO (Chairman), Group CFO, Group CIO, Group COO, Group General Counsel. The Head of Group Audit is invited ex officio to attend the meetings, but is not a voting member.
Technical committees In addition to management committees, the Group’s governance structure provides for committees of a more technical nature to support further aspects of Zurich’s business activities; these include: The Asset/Liability Management Investment Committee, chaired by the Group CIO, acts as a cross-divisional body and has primary responsibility for monitoring and reviewing the Group’s asset/liability management and the strategic asset allocation of Zurich’s invested assets.
Mr. Greco started his professional career in management consulting, working in McKinsey & Company’s Milan office from 1986 until 1994, where he became a partner in 1992 and subsequently a partner leader in the insurance segment. In 1995, he joined RAS (Allianz Group) in Milan as head of the claims division. He became general manager in charge of the insurance business the following year. In 1998, he was appointed managing director and in 2000, he became the company’s CEO. At the end of 2004, Mr. Greco joined Allianz AG’s executive board, with responsibility for France, Italy, Spain, Portugal, Greece and Turkey. In April 2005, he joined the Sanpaolo IMI Group in Milan as CEO of EurizonVita and in October 2005, he was appointed CEO of Eurizon Financial Group. From 2007 to 2012, he served at Zurich, first as CEO Global Life and from 2010, as CEO General Insurance. In 2012 he was appointed CEO of Generali.
External appointments Mr. Greco is a board member of The Geneva Association, a member of the board of trustees of the Lucerne Festival and a member of the International Advisory Council of Bocconi University.
Skills and experience Amanda Blanc has nearly 30 years of experience in various insurance markets and has held several senior executive roles across the industry as a qualified chartered insurer. Ms. Blanc joined Zurich as Chief Executive Officer for Europe, Middle East & Africa (EMEA) with additional responsibility for Global Banking Partnerships in October 2018, when she also became a member of the Executive Committee. Before she joined Zurich, Ms. Blanc served as Group CEO of AXA UK & Ireland from 2016 until 2018, having previously joined the board of AXA UK in 2011 as CEO of AXA Insurance, Commercial Lines. Prior to that, she held executive leadership positions at the UK-based insurance broker Towergate Partnership Ltd from 2006 until 2010, served on the executive committee at Groupama Insurance Co Ltd from 2003 until 2006 and was appointed as regional director for her first term at AXA Insurance UK from 1999 until 2003. Ms. Blanc became a management consultant at Ernst & Young in 1998 working on transformational assignments, having started her career as a graduate trainee at Commercial Union Assurance Company Ltd (now Aviva plc) in 1989. Ms. Blanc was the president of the Chartered Insurance Institute in 2013 and was also a previous chair of the UK Insurance Fraud Bureau.
External appointments Ms. Blanc is chair of the board of the Association of British Insurers. She is a member of the UK Panel on Takeovers and Mergers and a member of the Panel’s Hearings Committee.
Educational background Mr. Dailey graduated from the University of Wisconsin-Madison with a bachelor’s degree in economics and has an MBA from the University of Wisconsin-Milwaukee.
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 General Insurance Latin America, based in Brazil, and was appointed CEO Latin America in 2016. She became a member of the Executive Committee in October 2016.
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 for Asia Pacific and became a member of the Executive Committee in October 2016.
Educational background Mr. Howell holds an MBA from the University of Chicago and a Bachelor of Science in quantitative economics from Tufts University in Massachusetts.
External appointments Mr. Quinn is a member of the finance chapter of the Swiss-American Chamber of Commerce.
External appointments In June 2017 Mr. Shaughnessy was appointed councilor of the British-Swiss Chamber of Commerce and in August 2018 became a Trustee of Parkinson’s UK.
Educational background Mr. Terryn holds a law degree and a degree in economics from the University of Leuven, Belgium, as well as an MBA from the University of Michigan.
Changes to the ExCo since January 1, 2019 There were no changes to the ExCo since January 1, 2019.
Zurich Insurance Group Ltd may under certain circumstances authorize the beneficial owners of shares that are held by professional persons as nominees (such as a trust company, bank, professional asset manager, clearing organization, investment fund or another entity recognized by Zurich Insurance Group Ltd) to attend shareholders’ meetings and exercise votes as proxy of the relevant nominee. For further details, see page 40 of this report.
In accordance with Swiss law and practice, Zurich Insurance Group Ltd informs all shareholders at the beginning of the shareholders’ meeting of the aggregate number of shares represented by shareholders and the number of shares represented by the independent voting rights representative. Zurich Insurance Group Ltd provided electronic voting devices to its shareholders for all the resolutions taken at the AGM on April 4, 2018.
As of December 31, 2018, Zurich Insurance Group Ltd had 129,409 shareholders registered in its share register, ranging from private individuals to large institutional investors. Each registered shareholder receives an invitation to a shareholders’ meeting. A Letter to Shareholders provides an overview of the Group’s activities as the year progresses and outlines its financial performance. A more comprehensive Annual Review, the Annual Report and half-year reports are available on Zurich’s website and the Annual Review and the Annual Report are also available in printed form on request. Information on the Group's updates for the first three months and first nine months of the year is also available on Zurich’s website (www.zurich.com/en/investor-relations/results-and-reports). News Releases are distributed in accordance with the Directive on Ad hoc Publicity and available on Zurich’s website www.zurich.com (www.zurich.com/en/media).
Zurich Insurance Group Ltd will hold its Annual General Meeting on April 3, 2019. 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.
Duty to make an offer The Articles of Association 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.
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 ExCo in case of a change of control.
Three lines of defense at Zurich Insurance Group as of December 31, 2018 1st line: Business management The first line of defense consists of business management and all functions except Group Risk Management, Group Compliance and Group Audit. The first line takes risks and is responsible for day-to-day risk management (i.e. risks are identified and monitored, mitigation actions are implemented and internal controls are in place and operating effectively).
Group Risk Management is responsible for Zurich’s enterprise risk management framework. The Group CRO regularly reports risk matters to the Group CEO, senior management committees and the Risk and Investment Committee of the Board.
Board – Audit Committee and Risk and Investment Committee The Board is ultimately responsible for the supervision of the control and assurance activities. Its Audit and Risk and Investment committees receive regular updates from Group Risk Management, Group Compliance, Group Audit and external audit throughout the year.
Zurich uses the three- lines-of-defense model in its approach to governance and enterprise risk management. Zurich’s three-lines-of-defense approach runs through Zurich’s governance structure, so that risks are clearly identified, assessed, owned, managed and monitored.
Alex Finn of PwC is the Global Relationship Partner, lead auditor and auditor in charge for the statutory audit work since the business year 2018. Mark Humphreys, audit engagement partner, co-signs the auditors’ report for 2018. Ray Kunz is the auditor in charge for the regulatory audit work since 2017.
This year the Group updated its policy on the rotation of the external audit mandate to adopt best practices adopted by the European Union and as a result will rotate its external auditor in 2021. The Group will thereafter tender its external audit mandate every ten years. The incumbent firm may be invited to participate in that tender, and will be eligible to be awarded the mandate for a second 10-year term, as long as the total length of service would not exceed 20 years.
In 2018, in accordance with the new policy and in order to allow the greatest amount of flexibility and time for a smooth transition to the selected audit firm, the Group ran a competitive, transparent and fair tender process to select the firm to replace PwC. The Audit Committee was actively engaged throughout. At the AGM in 2021 Ernst & Young will be proposed as external auditor for financial year 2021.
Audit fees Total audit fees (including expenses and value added taxes) charged by PwC in the year 2018 amounted to USD 45.3 million (USD 46.3 million in 2017).
External audit fees are reviewed with the Group’s Audit Committee annually. Once the fees are agreed, they are further allocated to the countries and reporting units via a global allocation process with the allocations communicated to local CFOs and FAR Controllers. As the year comes to a close, actual fees charged are reviewed and agreed with the local CFOs. At all levels – Group and local – there is a clear understanding of the basis for the current year fee including the impacts of changes in scope or other factors. Unplanned overruns are reviewed and agreed with the business (responsible CFO or audit contact).
The Group has a comprehensive policy covering non-audit services. The Group’s policy specifies definitions of allowable and non-allowable non-audit services as well as approval limits for non-audit service mandates at the local and Group level. The Group’s external auditor tracks non-audit services and reports semi-annually to the Head of Group FAR and the Audit Committee the extent of non-audit services provided world-wide.
Non-audit fees were as follows: Audit and non-audit fee amounts in USD millions, as of December 31 2018 2017
Total non-audit fees 16.2 8.9 – Tax advice 0.9 0.9 – Audit-related, including MCEV 5.0 7.0 – Other, primarily related to the IFRS 17/9 projects 10.3 1.0
Supervision and control over the external audit process The Audit Committee regularly meets with the external auditors. During 2018, 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 oversees the work of the external auditors. It reviews, at least annually, the qualification, performance and independence of the external auditors and reviews any matters that may impair their objectivity and independence, based on a written report by the external auditors describing the firm’s internal quality control procedures, any material issues raised and all relationships between the external auditors and the Group and/or its employees that could be considered to bear on the external auditors’ independence. The Audit Committee evaluates the performance of the external auditors during their audit examination. It elicits the comments of management regarding the auditors’ performance (based on criteria such as their understanding of Zurich’s business, technical knowledge and expertise, etc.) and the quality of the working relationship (responsiveness of the external auditors to the needs of Zurich Insurance Group Ltd and the Group and the clarity of communication). The Audit Committee reviews, prior to the commencement of the annual audit, the scope and general extent of the external audit and suggests areas requiring special emphasis.
The Audit Committee, boards and audit committees of subsidiary companies and Group CEO are regularly informed of important audit findings, including adverse opinions, mitigation actions and attention provided by management. Group Audit is responsible for ensuring that issues identified by Group Audit, that could have an impact on the Group’s operations are brought to the attention of the Audit Committee and appropriate levels of management and that timely follow-up action occurs. This is supported by the attendance of the Head of Group Audit at each meeting of the Audit Committee. In addition, the Head of Audit meets with the Chairman of the Audit Committee each month.
The Group is committed to comply with all applicable laws, regulations and internal requirements, professional and industry standards and its stated corporate values.
Group Compliance is vertically integrated to support a global framework and it is led by the Group Chief Compliance Officer.
Group Compliance supports the embedment of a strong compliance culture across the Group in a changing regulatory environment via training and awareness initiatives.
All employees 1 At target, as a percentage of total remuneration. 2 Including the Group CEO.
The outlook section of this report outlines our plan to expand the use of customer metrics for STIP purposes to other Group markets in 2019. Information on proposed enhancements to the performance and incentive framework are also provided.
Vesting level in 2019 as a percentage of target based on the actual achievements for relative total shareholder return (TSR), net income attributable to shareholders’ return on common shareholders’ equity (NIAS ROE) and cash remittance for the performance period 2016 to 2018 (2018: 83%).
Remuneration structure Zurich’s remuneration architecture puts a greater emphasis on variable remuneration elements, with a higher weighting on average towards the long term, for our most senior employees. The variable remuneration is largely determined by the achievements against predefined measures which are aligned with the Group’s strategy and financial targets.
2018 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 2018 and 2017, and show that the total variable remuneration pool in 2018 is slightly higher compared to 2017.
Key financial figures in USD millions, for the years ended December 31 2018 2017
Gross written premiums and fees 1 52,689 52,005 Business operating profit (BOP) 4,566 3,803 Underlying business operating profit 2 4,566 4,762 Net income attributable to shareholders (NIAS) 3,716 3,004 Shareholders’ equity 30,189 33,062 Return on common shareholders’ equity (ROE) 13.1% 10.9% Dividends paid to shareholders 3 2,805 2,639 Total variable remuneration pool for all employees gross before tax 693 669 – as a percentage of gross written premiums and fees 1% 1% – as a percentage of shareholders’ equity 2% 2% – as a percentage of dividends paid to shareholders 25% 25%
2 Adjusted in 2017 for the impact of the hurricanes Harvey, Irma and Maria, measures related to the Group’s restructuring, and the impact of changes to UK capital gains tax indexation relief.
3 Dividend at transaction day exchange rate in 2018 and 2017, respectively.
Context The key factors driving individual awards for 2018 are primarily: 109% 106% 33 Group BOP and customer metrics for members of the leadership team, control functions and
Based on the relevant BOP performance, the analysis of customer metrics (which showed overall results in line with plan), and a qualitative assessment, the average award for plan participants across the Group (more than 39,000 employees) is slightly higher compared with 2017.
Context In determining the amount of the total variable remuneration pool for all employees, the Board considers the long-term economic performance of the Group as well as other relevant factors. The average economic profit is calculated by subtracting the required return on economic capital, based on the weighted average cost of capital, from the adjusted BOP 1 after tax. In this respect, the Group has continued to generate economic profit over the long-term which exceeds the actual expenditure on variable pay.
1 The adjusted BOP is the amount before interest and variable remuneration.
Commission payments made to employed sales agents are not included in the variable remuneration pool.
2 Zurich defines 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 not paid to members of the Board or the ExCo.
33 Customer metrics: The use of customer metrics for STIP award purposes will be expanded to additional markets in 2019. The transactional net promoter score (TNPS) was first used as part of the assessment of business performance for STIP award purposes in selected major markets for 2018. In 2019 this will be expanded to additional markets.
33 Articles 14–16 of the Ordinance Against Excessive Compensation (AEC) (replacing the information in the notes to the consolidated financial statements according to Article 663bbis of the Swiss Code of Obligations).
33 Requirements of the Circular 2010/1 on minimum standards for remuneration schemes of financial institutions, issued by the Swiss Financial Market Supervisory Authority (FINMA) on October 21, 2009 as amended on June 1, 2012, December 3, 2015 and September 22, 2016, as well as further guidance issued on January 19, 2011 (FINMA Circular on Remuneration Schemes).
Zurich’s approach to implementing the requirements of the Ordinance AEC The Ordinance AEC came into effect on January 1, 2014 with a two-year transition period. During this time Zurich has amended its Articles of Association as approved by shareholders at the AGM in 2014. Since the AGM in 2015, shareholders are authorized to vote on and approve the maximum total amount of remuneration for the Board for the one-year period from AGM to AGM and the maximum total amount of remuneration for the ExCo for the subsequent financial year (Article 18 para 1 Articles of Association: www.zurich.com/en/investor-relations/our-shares/articles-ofassociation ). Details of the votes can be found in the Board of Directors Report accompanying the invitation to the AGM 2019 (www.zurich.com/en/investor-relations/shareholder-area/annual-general-meeting).
Further, the information provided according to Articles 14–16 of the Ordinance AEC contained in the remuneration report has been externally audited following the audit requirements of the Ordinance AEC (Article 13 para 1 and Article 17 of the Ordinance AEC) and the information subject to audit is marked in the respective sections of the remuneration report.
33 Expected performance is clearly defined through a structured system of performance management and this is used as a basis for remuneration decisions.
Remuneration governance framework The Board is responsible for the design and implementation of Zurich’s Remuneration Rules 3, which include the overall remuneration philosophy, principles, system and practices. 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 Association, the members of the Remuneration Committee are elected individually at the AGM. 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 2018, there continued to be four members in the Committee. The Remuneration Committee evaluates the remuneration architecture and Zurich’s Remuneration Rules on an annual basis, and if appropriate, proposes amendments to the Board.
Overall remuneration architecture Remuneration Committee and Risk and Investment Committee based on proposal by the Group CEO
Organizational Rules (Annex – Charter of the Committees, Chapter 7: Remuneration Committee)
Remuneration to the Group CEO Remuneration Committee Board and ultimately from shareholders via a vote as an aggregate maximum amount
Board 3 The remuneration policy of the Company which serves as a framework for the governance, design, implementation and monitoring of the Group’s remuneration architecture; is designed to support the Group’s business strategy, risk management framework and operational and financial plans, and takes into account legal and regulatory requirements.
The results of benchmarking studies are taken into account in setting the fee levels for Directors and the remuneration structure and levels for the Group CEO and the other members of the ExCo. In analyzing the results of the benchmarking studies, market practices in the various countries and internal relativities between positions are taken into account. Overall positioning of target remuneration packages is toward the median levels. The Board and management are supported in these activities by a variety of firms operating in the field of international executive compensation.
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. When applying the criteria in 2018, the number of key risk taker roles remained similar to the previous year and included all leadership team roles.
As of December 31, 2018, Directors held 16,991 shares and members of the ExCo held 103,413 vested shares. At the end of 2018, all Directors and all members of the ExCo, who have served at least five years on the Board or the ExCo respectively, met the required share ownership level.
Share dilution In 2018, Zurich began purchasing its own shares on the market to fulfill share obligations for long-term compensation awards and currently the intention is to continue doing this moving forward. Zurich has also taken additional measures to offset the impact of dilution from previously vested long-term share plans with the completion of its public share buyback program for cancellation purposes in 2018. Zurich will propose to the AGM 2019 that the Group’s ordinary share capital be reduced via the cancellation of the 1.74 million shares repurchased under the share buy-back program.
2 Given the vesting level of 149 percent for the share allocations vesting in 2019 and assuming 100 percent vesting in 2020 and 2021. For 2017 the figure represents vesting of 83 percent in 2018 and assumed 100 percent vesting for 2019 and 2020.
Vesting level of 0 – 200 percent of the individual target shares and dividend equivalent target shares.
Eligibility All employees. Country specific (more than 39,000 plan participants in 2018).
Members of the ExCo and a defined group of the most senior positions, including key risk takers.
Short-term incentives Short-term (one-year) incentives are performance-driven based on the following design for 2018: Short-term incentives support employees to focus their performance on the achievement of key short-term financial, customer and individual objectives set at the beginning of the year. The final individual STIP award for the year ending December 31, 2018, is determined by the target STIP award (STIP target), financial performance, customer metrics in selected major markets, the resulting STIP award levels and individual performance as set out in the following illustration.
Business performance, together with a qualitative assessment, determines the funding and the range of STIP awards for each level of individual performance.
Business performance The key measures to fund the pools typically include: 33 Group BOP and the overall customer transactional net promoter score (TNPS) in selected major markets for members of the leadership team, control functions, and Group and regional employees.
At year-end the key measures are evaluated in relation to the business plan which was approved by the Board in the December meeting prior to the relevant performance year. A qualitative assessment of the performance also takes place to ensure a holistic evaluation of performance, including the remuneration review carried out by the Group CRO. Depending on the outcome of this assessment, the funding of the STIP pools can vary between 0 percent and 175 percent of target, however typically, the funding varies in the range of 80 percent to 120 percent of target.
STIP award levels The business performance defines the funding available for each STIP pool and also the resulting range of potential STIP awards for varying levels of individual performance. For example, if the business performance meets expectations then the award for an individual that successfully achieves his or her individual objectives, will be in line with their STIP target. If the business performance only partially meets expectations however, then the STIP award for an individual who successfully achieves his or her individual objectives will be lower than target and can potentially be 0 percent of their STIP target. Similarly, if business performance is above expectations, than an award for an individual can also be above target, but is capped at 200 percent of an individual’s STIP target.
STIP award The business performance and the resulting STIP award levels, together with the individual performance assessment, determine the final individual STIP award for the year which can vary between 0 percent and 200 percent of the individual’s STIP target. In this way, STIP awards are differentiated based on business and individual performance.
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 other countries, based on market practice in that location, only the most senior individuals participate in STIP. Where local plans exist, they broadly follow the same principles as the Group STIP.
The vesting grid is based on predefined performance criteria and used to assess the overall vesting level.
The vesting level is calculated according to an assessment of the performance criteria in the vesting grid during the three-year performance period. Each performance criteria is assessed independently and has an equal weighting. For the NIAS ROE and cash remittance metrics, linear interpolation is used. The vesting level is applied to all LTIP participants and defines the percentage of target shares that will vest.
A detailed description of the LTIP is set out below: Vehicle and target amount Allocations are made in the form of target shares on the third working day in April. Each participant has an annual target amount established for the year of allocation which is determined as a percentage of the annual base salary. The number of target shares is calculated by dividing the target amount by the closing share price on the day prior to the allocation.
The performance criteria for the period 2018 to 2020 comprise: (i) The position of the total shareholder return (TSR) over the performance period compared with an international peer group of insurance companies derived from the Dow Jones Insurance Titans 30 Index. The Remuneration Committee reviews the peer companies to be included in the relative TSR assessment regularly to ensure that the peer group exhibits a strong TSR correlation and reflects the Group’s business profile and geographic spread. The resulting industry peer group includes the following companies: AIG, Allianz, Allstate, Aviva, AXA, Chubb, Generali, Legal & General, Manulife Financial Corp., MetLife, Munich Re, Progressive Ohio, Prudential Plc, QBE, Swiss Re, The Hartford and Travelers Cos. Inc.
The cash remittance goals were re-calibrated in 2017 with an increase of USD 0.5 billion as shown in the vesting grid on the previous page. This is relevant for the LTIP in 2017 and 2018, vesting in 2020 and 2021 respectively. For the vesting decision in 2019 from the 2016 plan allocation, the vesting grid outlined in the remuneration report for 2016 is relevant.
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 the 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.
LTIP award Any vesting of shares for the LTIP award, based on meeting the thresholds defined in the LTIP vesting grid shown earlier, takes place on April 3, three years after the target shares were allocated to the participant. In no circumstances can the LTIP award for an individual be more than 200 percent of the aggregate number of target shares and dividend equivalent target shares noted below.
1 For the 2017 and 2018 allocations, the vesting level will be known in 2020 and 2021 respectively.
Chair fee for the Audit Committee 80 – 80 80 Chair fee for the Remuneration Committee 4 60 – 60 60 Chair fee for the Risk and Investment Committee 60 – 60 60 Chair fee for the Governance, Nominations and Sustainability Committee 5 60 – 60 60 1 These amounts are for the period from AGM to AGM. The table excludes other fees for board memberships of subsidiary boards of Zurich. 2 Neither the Chairman nor the Vice-Chairman receive any additional fees for their committee work on the Board of Zurich. 3 Amount remains the same irrespective of the number of committees on which a member of the Board serves. 4 For 2018, the Chair fee for the Remuneration Committee was only paid for the first quarter, as the Vice-Chairman of the Board was designated as Chair of the
Remuneration Committee since the AGM in 2018. 5 For 2018 and 2017 no Chair fees were paid for the Governance, Nominations and Sustainability Committee, as the Chairman of the Board has been chairing this committee.
The total aggregate fees allocated to the Directors of Zurich and Zurich Insurance Company Ltd for the calendar year ended December 31, 2018, amounted to CHF 4,257,500. This included CHF 2,467,500 in cash and CHF 1,790,000 in five-year sales-restricted shares. The share price at the allocation date was CHF 297.20. The corresponding amount for 2017 was CHF 4,832,000, which comprised CHF 2,802,000 in cash and CHF 2,030,000 in five-year sales-restricted shares. The share price at the allocation date in 2017 was CHF 285.90. The Directors’ fees are not pensionable.
The following tables set out the actual fees paid to the Directors for 2018 and 2017 in Swiss francs. In 2018, eight members served for the full year and four members served for part of the year. In 2017, 10 members served for the full year and one member served for part of the year.
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, 2018, Michel Liès was allocated 2,523 shares, Christoph Franz was allocated 672 shares, and the other members of the Board were allocated 403 shares.
7 Neither the Chairman nor the Vice-Chairman received any additional fees for their committee work on the Board of Zurich. 8 At the AGM on April 4, 2018, Michel Liès was elected to the Board as Chairman of the Board; Tom de Swaan, Fred Kindle and Susan Bies retired from the Board; and
9 In line with applicable laws, Zurich paid the company-related portion of contributions to social security systems, which amounted to CHF 192,690 in 2018. The corresponding contributions in 2017 have been restated to CHF 153,036 instead of CHF 177,366 as previously disclosed in the remuneration report 2017. 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.
10 As of June 16, 2017 Tom de Swaan was allocated 2,623 shares, Fred Kindle was allocated 700 shares, and the other members of the Board were allocated 420 shares. The share price as of June 15, 2017 (CHF 285.90) 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 At the AGM on April 4, 2018, Michel Liès was elected as the new Chairman of the Board. No replacement payments or other benefits were provided. Further, Tom de Swaan, Fred Kindle and Susan Bies stood down. No termination payments (i.e. golden parachutes) were made nor any other benefits such as waiver of lock-up periods for equities or additional contribution to occupational pension schemes were provided to the leaving members of the Board.
Related parties to the Directors or to former Directors No benefits (or waiver of claims) have been provided to related parties of the Directors or related parties of former members of the Board during the years 2018 and 2017, nor had any related party of the Directors or of former members of the Board any outstanding loans, advances or credits as of December 31, 2018 and 2017.
The core peer group, which is reviewed by the Remuneration Committee on a regular basis, consists of the following insurance and reinsurance firms: AIG, Allianz, Allstate, Aviva, AXA, Chubb, Generali, Legal & General, Manulife Financial Corp., MetLife, Munich Re, Progressive Ohio, Prudential Plc, QBE, Swiss Re, The Hartford and Travelers Cos. Inc.
The remuneration structure and the mix of the individual remuneration elements for members of the ExCo are determined by taking into account relevant market practices within the peer groups outlined above and internal relativities.
As shown in the chart above, there is an appropriate balance of remuneration elements with a significant emphasis on performance-related remuneration through both STIP and LTIP. The distribution of the target values between short-term (one-year) and long-term incentives (three- to six-years), reflects an emphasis on long-term incentives.
Elements and amounts of remuneration for the ExCo The individual remuneration elements and the corresponding amounts are described in more detail below. The amounts for the highest-paid executive and comparative figures for 2017 are also included.
The total number of target shares allocated in 2018 to members of the ExCo was 57,555 which reflects a value of USD 18.6 million on the second working day in April. This is based on the assumption of 100 percent vesting in 2021, a share price of CHF 309.70 (2017: CHF 263.80) and an exchange rate of CHF 1 = USD 1.04237. This compares with 63,341 target shares allocated in 2017 at a value of USD 16.7 million for the allocations made in 2017.
The individual STIP award is determined in a similar way as for all employees, taking into account business performance, the resulting STIP award levels and individual performance.
Summary of total remuneration in 2018 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 in 2018 (to be assessed for vesting in 2021), pensions, and the value of other remuneration including employee benefits, amounted to USD 50.6 million. In 2017, the corresponding amount was USD 47.1 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.
Other payments and share allocations 7 2.6 3.8 Contractually agreed remuneration after stepping down and during notice period in the respective year 8 5.8 1.1 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.
Base salary 1.6 1.6 Cash incentive awards earned for the year 3.0 2.8 Value of target performance share allocations 3.6 3.6 Service costs for pension benefits 0.5 0.5 Value of other remuneration 0.1 0.1 Total in CHF 8.8 8.6 Total in USD 2 9.1 8.7 1 The remuneration shown in the table is gross, based on the accrual principle and does not include any business-related expenses incurred in the performance of the Group CEO’s services.
Regarding the replacement payments for Mario Greco made in 2016 and disclosed in the remuneration report for 2016, 19,532 target shares were allocated as additional target performance shares in the 2016 – 2018 LTIP to be assessed for vesting in 2019. Taking into consideration the dividend equivalent units credited during the performance period and the relevant vesting level, the amount of shares vesting in April 2019 will be 35,185.
Audited Special payments and termination arrangements, additional honoraria and remuneration, and personal loans for members of the ExCo During 2018, there was one new member appointed to the ExCo as an external appointment, and three members relinquished their responsibilities as members of the ExCo.
There were no termination payments (golden parachutes) or payments in advance made, nor any 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, provided.
None of the members of the ExCo received any remuneration from the Group or from any of the Group’s companies in 2018 or 2017 other than as set out in the tables above.
Remuneration and personal loans for former members of the ExCo Former members of the ExCo are eligible to continue their mortgage loans following retirement on similar terms to those when they were employed, in line with the terms available to employees in Switzerland. As of December 31, 2018 and 2017, no former member of the ExCo had any outstanding loans, advances or credits.
No former member of the ExCo received remuneration in 2018, other than disclosed in the remuneration report 2018.
Shareholdings of the members of the ExCo This section provides a summary of total outstanding share commitments under the LTIP and from restricted share allocations for members of the ExCo as of December 31, 2018.
A summary of the unvested target share allocations as of December 31, 2018, under the LTIP and from restricted share allocations is set out in the following table: Summary of unvested target share allocations for the ExCo as of December 31
Year of vesting 1 Dividend equivalent target shares are credited within the regular LTIP and are included in these amounts where they have already accrued. At the vesting date, the original number of target shares allocated, plus the dividend equivalent target shares, will be assessed for vesting in aggregate based on the performance achievements against the vesting grid. No dividends will accrue on the dividend equivalent target shares.
CEO North America-Designate as an internal appointment effective October 1, 2017.
The following section includes information regarding the total remuneration earned by employees for 2018 and 2017 across the Group, including remuneration for members of the ExCo.
Total remuneration for all employees in USD millions, for the years ended December 31 2018 2017
Base salaries 3,739 3,740 Value of other remuneration including employee benefits 480 476 Service costs for pension benefits 1 436 401
Variable remuneration Cash incentive awards earned for the year 2 547 533 Value of target share allocations made in the year 3 146 136
2 Includes sign-on and severance payments in cash. 3 Includes sign-on payments in shares.
Value of outstanding deferred remuneration The Group’s remuneration system includes instruments for the deferral of remuneration. The following table provides an overview of the overall value of outstanding deferred remuneration as of December 31, 2018 and 2017.
The Group as a principle does not make any sign-on or severance payments, however if circumstances in the Group’s interest warrant such payments, these can be approved through a clear governance process. Any such payment with a value of CHF 1 million or more is approved by the Chairman of the Remuneration Committee prior to the time the employment offer is made or prior to the time the severance payment is committed to.
The following table discloses sign-on and severance payments committed to key risk takers. For key risk taker roles where the incumbent is a member of the ExCo, no payments in advance and/or severance payments have been made. Replacement payments for the ExCo in 2018 and 2017 are included.
Sign-on and severance payments for key risk takers in USD millions, for the years ended December 31 2018 2017
Sign-on payments/number of beneficiaries 11.6 15 7.0 6 Severance payments/number of beneficiaries 0.1 1 – –
Zurich continues to evolve the remuneration architecture to support the achievement of strategic and financial objectives, to ensure compliance with legal and regulatory requirements and to align with risk considerations. Following organization-wide engagement during 2018, with a specific focus on employee experience, simplicity and flexibility, the following adjustments to the Group’s performance assessment and incentive framework are proposed. The enhancements, which are effective from 2019, ensure that the key principles of differentiation and meritocracy are maintained and continue to support the achievement of the Group’s strategic goals.
33 Performance management: • The performance assessment process is to be simplified with a move from a five-point rating scale to three categories depending on the level of performance.
• The use of customer metrics for STIP purposes will be extended to additional markets in 2019.
• For employees above a certain job level, differentiated STIP awards have been defined for each performance category, taking into account how results have been achieved.
33 Long-term incentive plan: • The existing LTIP framework, including the performance criteria outlined in the vesting grid, the performance period and the vehicle used, will remain for the 2019 allocation.
Shareholders will again be given the opportunity to express their opinion on the remuneration report 2018, through a consultative, non-binding vote at the AGM in 2019. Shareholders will also receive the Board of Directors Report 2019 (www.zurich.com/en/investor-relations/shareholder-area/annual-general-meeting) which includes information regarding the two remuneration votes on the total maximum amounts of remuneration for the Board and for the ExCo, taking place at the AGM on April 3, 2019. The votes allow shareholders to have a say on the prospective remuneration for the Board and for the ExCo arising from Zurich’s remuneration policies.
Board of Directors’ responsibility The Board of Directors is responsible for the preparation and overall fair presentation of the remuneration report in accordance with Swiss law and the Ordinance against Excessive Compensation in Stock Exchange Listed Companies (Ordinance). The Board of Directors is also responsible for designing the remuneration system and defining individual remuneration packages.
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.
Building a resilient future is at the heart of all we do.
For Zurich, 2018 was another year of continuous improvement in our strong risk management practices.
Among the risks we focused on in 2018 are the uncertainties of geopolitical and macroeconomic environments, inflation, credit and cyber risks, and risks to the execution of our organizational transformation.
Financial strength supports the Group’s dividend strategy We use sensitivity and scenario analyses to assess the potential impact of conditions under stress.
Digital transformation The digital transformation of the industry can be seen in all aspects of our business, and we support the Group to manage the risks associated with driving digital transformation throughout the customer journey. We follow a holistic approach by providing risk insights on major digital trends and developments in our risk management organization.
Market risk In 2018 the Group’s overall market risk position remained stable and in line with our risk appetite. Interest rate risk contribution has moderately increased following liability modelling refinements, partially off-set by a lower credit risk position.
Other credit risk Our credit exposures related to reinsurance assets were of sustained high credit quality and remained basically unchanged in 2018 compared with 2017.
The Zurich Risk Policy is the Group’s main risk governance document; it sets standards for effective risk management throughout the Group. The policy describes the Group’s risk management framework, identifies Zurich’s principal risk types and defines the Group’s appetite for risks at Group level. Risk-specific policy manuals provide guidelines and procedures to implement the principles in the Zurich Risk Policy. Ongoing assessments verify that requirements are met.
The Group’s risk appetite statement includes capital, liquidity, earnings volatility and non-financial metrics. 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 primary metric used to steer business is the Zurich Economic Capital Model (Z-ECM) which provides a key input into the Group’s strategic planning process as an assessment of the Group’s risk profile against 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.
Zurich strives to simplify the Group’s legal entity structure to reduce complexity and increase fungibility of capital.
The Group’s capital management framework forms the basis for actively managing capital within Zurich. The Group uses a number of different capital models, taking into account economic, regulatory, and rating agency constraints. The Group’s capital and solvency position is monitored and regularly reported to the Executive Committee (ExCo).
For details on the share repurchase program, see note 19 of the consolidated financial statements.
The Group uses Z-ECM to assess the economic capital consumption of its business on a one-balance-sheet approach. Z-ECM is an integral part of how the Group is managed. It is embedded in the Group’s organization and decisionmaking processes, and is used in capital allocation, business performance management, pricing, and communication. Z-ECM quantifies the capital required for insurance-related risk (including premium and reserve, natural catastrophe, business and life insurance), market risk including investment credit risk, reinsurance credit risk, other credit risk, and operational risk.
The chart below shows the development of the Group’s Z-ECM AFR, Z-ECM capital required and Z-ECM ratio over time. As of January 1, 2019, the Z-ECM ratio was estimated at 125% with an error margin of +/– 5 percentage points.
The chart below shows the Z-ECM capital required, split by risk type as of July 1, 2018 and as of January 1, 2018. As of July 1, 2018, the largest proportion of Z-ECM capital required arose from market risk which comprised 44 percent of the total. Z-ECM capital required for premium and reserve risk was the second-largest, comprising 25 percent.
The total allocated capital as of July 1, 2018 equaled USD 30.9 billion. As of July 1, 2018 the largest proportions of Z-ECM capital required were allocated to Property & Casualty with 54 percent and Life with 36 percent of the total. The following chart shows the Z-ECM capital required allocated to the businesses as of July 1, 2018 and January 1, 2018.
1 Includes direct allocation of USD 0.2 billion to Farmers. 2 Includes direct allocation of USD 0.4 billion to Farmers.
As of December 31, 2018, the IFSR of ZIC, the main operating entity of the Group, was ‘AA–/Stable’ by Standard and Poor’s, ‘Aa3/Stable’ by Moody’s, and ‘A+ (Superior)/Stable’ by A.M. Best.
In each country in which the Group operates, the local regulator specifies the minimum amount and type of capital that each of the regulated entities must hold in addition to their liabilities. In addition to the minimum capital required to comply with the solvency requirements, the Group aims to hold an adequate buffer to ensure regulated subsidiaries meet local capital requirements.
Regulatory requirements in Switzerland Under the Swiss Solvency Test (SST), insurance companies and insurance groups can apply to use company-specific 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). Zurich filed with FINMA an SST ratio of 216 percent (unaudited) as of January 1, 2018.
In 2018, Zurich continued to enhance its internal model, advanced the approval process with FINMA, and has received approval for specific enhancements of the model. The model approval process continues for other parts of the internal model. The 2019 model changes will primarily address new regulatory requirements that enter into force in 2020 and that have not yet been implemented into the Group’s internal model. Zurich intends to file these modules for FINMA's approval during the course of 2019. The Group does not expect a material impact on the SST ratio as of January 1, 2019 from the changes made to the model in 2018 (unaudited).
Regulatory requirements in Asia Pacific, Latin America, and Middle East and Africa Every country has a capital standard for insurance companies. Several jurisdictions (e.g., Brazil and Mexico) have taken approaches similar to Solvency II.
To ensure a common understanding of business insights and new trends for reserve analysis, financial plans, underwriting and pricing decisions, the Group has established a culture of continuous cross-functional collaboration. For this, underwriting, actuarial (pricing and reserving), claims, finance, sales and distribution, risk engineering and risk management contribute to quarterly meetings on local and Group level.
The Group uses third-party models (adjusted to Zurich's view) to manage its underwriting and ensure accumulations stay within intended exposure limits. The same view Zurich has on natural catastrophe risk also underpins profitability assessment and strategic capacity allocation and guides the type and quantity of reinsurance Zurich buys.
Zurich constantly strives to improve its modeling and improve data quality. It supplements internal knowledge with external knowledge (e.g., the Advisory Council for Catastrophes). Zurich is a governor sponsor of the Global Earthquake Model Foundation, is a shareholder of PERILS AG, and is a member of the Oasis Loss Modeling Framework.
The Group uses third-party models to manage its underwriting and accumulations for cyber and casualty catastrophe. We are actively monitoring and managing our cyber exposure and continue to refine products to ensure their appropriateness. Improving modeling capabilities and data capture for cyber and casualty catastrophe risks are key focus areas.
Concentration of Property & Casualty business insurance risk The Group defines concentration risk in the Property & Casualty (P&C) business as the risk of exposure to increased losses associated with inadequately diversified portfolios. Concentration risk for a property and casualty insurer may arise due to a concentration of business written within a geographical area or of underlying risks covered.
Tables 1.a and 1.b show the Group’s concentration of risk within the P&C business by region and line of business based on direct written premiums before reinsurance. P&C premiums ceded to reinsurers (including retrocessions) amounted to USD 7.0 billion and USD 6.5 billion for the years ended December 31, 2018 and 2017, respectively. Reinsurance programs are managed on a global basis, and therefore, net premium after reinsurance is monitored on an aggregated basis.
Property & Casualty business – Direct written premiums and policy fees by line of business – current period in USD millions, for the year ended December 31, 2018 Motor Property Liability
Worker injury Total 1 In 2018, the crop business line in North America was reclassified, resulting in a USD 1.7 billion shift from special lines to property.
Insurance risk sensitivity for the Property & Casualty business – current period in USD millions, for the year ended December 31, 2018
Insurance risk sensitivity for the Property & Casualty business – prior period in USD millions, for the year ended December 31, 2017
Business risk 33 Policyholder behavior risk – on average, the policyholders discontinue or reduce contributions or withdraw benefits prior to the maturity of contracts at a rate that is different from expected 33 Expense risk – expenses incurred in acquiring and administering policies are higher than expected 33 New business risk – volumes of new business are insufficient to cover fixed acquisition expenses
A more diversified portfolio of risks is less likely than an undiversified portfolio to be affected across the board by a change in any subset of the risks. The offsetting effects between unit-linked and traditional business reduce some of the risk associated with the life business.
Other life insurance liabilities include traditional life insurance products, such as protection and life annuity products. Protection products carry mortality, longevity and morbidity risk, as well as market and credit risk. Changes in medical treatments and lifestyle changes are among the most significant factors that could result in earlier or more claims than expected. Disability, defined in terms of the ability to perform an occupation, could be affected by adverse economic conditions. To reduce pricing cross-subsidies, where permitted, premiums are adjusted for factors such as age, gender and smoker status. Policy terms and conditions and disclosure requirements in insurance applications are designed to mitigate the risk arising from non-standard and unpredictable risks that could result in severe financial loss. In the life annuity business, medical advances and improved social conditions that lead to increased longevity are the most significant insurance risk. Annuitant (beneficiary) mortality assumptions include allowance for future mortality improvements.
Interest rate guarantees (with concentration in traditional, guaranteed business in Germany and Switzerland and 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 management and hedging.
Concentration of Life business insurance risk The Group defines concentration risk in the life business as the risk of exposure to increased losses associated with inadequately diversified portfolios of assets or obligations. Concentration risk for a life insurer may arise with respect to investments in a geographical area, economic sector, or individual issuers, or due to a concentration of business written within a geographical area, of a policy type, or of underlying risks covered.
Observing best-estimate assumptions on cash flows related to benefits of insurance contracts gives some indication of the size of the exposure to risks and the extent of risk concentration. Table 3 shows the Group’s concentration of risk within Life by region and line of business based on reserves for life insurance on a net of reinsurance basis. The life insurance reserves also include policyholder surplus reserves with a loss absorbing capacity 1, predominantly in Germany for an amount of USD 7.4 billion in 2018 (2017: USD 8.2 billion) and in the UK for an amount of USD 0.5 billion in 2018 (2017: USD 0.6 billion). The Group’s exposure to life insurance risks varies significantly by geographic region and line of business and may change over time. See note 8 of the consolidated financial statements for additional information on reserves for insurance contracts. 1 Policyholder surplus reserves with loss absorbing capacity refer to funds allocated to the policyholders that can be used by the shareholders, under certain conditions which may require regulatory approval.
Reinsurance for Property & Casualty and Life businesses The Group’s objective in purchasing reinsurance is to provide market-leading capacity for customers while protecting the balance sheet, supporting earnings volatility management, and achieving capital efficiency. The Group follows a centralized reinsurance purchasing strategy for both Property & Casualty (P&C) and Life, and bundles programs, where appropriate, to benefit from diversification and economies of scale. In support of the Group’s empowerment- based management model and to align risk-bearing capacities between the Group and individual country operations, the internal reinsurance vehicle introduced in 2017 has been successfully implemented and applied to all externally reinsured lines of business. In addition, to actively manage and reduce potential claims-recovery risks on facultative cessions and to support the strategy on operational excellence, the Group started to tailor specific facultative property and casualty facilities.
In compliance with Swiss insurance regulation, the Group’s policy prohibits speculative trading in derivatives, meaning a pattern of ‘in and out’ activity without reference to an underlying position. The Group addresses the risks arising from derivatives through a stringent policy that requires approval of a derivative program before transactions are initiated, and by subsequent regular monitoring by Group Risk Management of open positions and annual reviews of derivative programs.
Group investments sensitivities The economic market risk sensitivities for the fair value for Group investments before tax as of 2018 is a negative USD 9.9 billion (negative USD 10.7 billion as of 2017) for a 100-basis-point increase in interest rate. For a 100-basis-point decrease in interest rate, the sensitivity is USD 11.1 billion (USD 12.0 billion as of 2017). For a 10 percent decline in equity market, Group investments drop in value by USD 1.1 billion compared to USD 1.2 billion as of 2017. A 100-basispoint increase in credit spreads results in a decrease of USD 5.2 billion compared to USD 5.4 billion as of 2017.
In addition to the sensitivities, management uses stress scenarios to assess the impact of more severe market movements on the Group’s financial condition. For more information on stress scenarios, see ‘Group economic net asset sensitivities' (unaudited), below.
The basis of presentation for the Life business to financial market movements uses replicating portfolios. The replicating portfolios are portfolios of assets that replicate the cash flows or present values of the life insurance liabilities under stochastic scenarios from the embedded value models. They are calibrated to match dependencies of life insurance liabilities on developments in the financial markets, in respect of interest rates, equity and property. The options and guarantees of the underlying life insurance liabilities are captured through the inclusion of options in the replicating portfolios.
The net impact – the difference between the impact on Group investments and liabilities – represents the economic risk related to changes in market risk factors that the Group faces. Tables 4, 5 and 6 show the estimated economic market risk sensitivities of the net impact. Positive values represent an increase in the balance, and values in parentheses represent a decrease. Mismatches in changes in value of assets relative to liabilities represent an economic risk to the Group.
Sensitivities for the rest of the business include Farmers, Group Finance and Operations, and Non-Core Businesses.
Rest of the business 151 236 1 Modeling enhancements introduced in 2018 for the German Life business that extended the maximum maturity to 60 years compared to 40 years previously.
Analysis of economic sensitivities for equity risk Table 5 shows the estimated net impact before tax from a 10 percent decline in stock markets, after consideration of hedges in place, as of December 31, 2018 and 2017.
In USD millions, as of December 31 2018 2017 10% decline in stock markets Property & Casualty (593) (642)
Analysis of economic sensitivities for credit spread risk Table 6 shows the estimated net impact before tax from a 100 basis points increase in corporate credit spreads, as of December 31, 2018 and 2017. The sensitivities apply to all fixed income instruments, excluding government, supranational and similar debt securities. For Life business the loss-absorbing capacity of liabilities for losses on credit spreads are not included, as they are not modeled in the replicating portfolios.
Debt securities by rating of issuer as of December 31 2018 2017
Exposure-level limits are in place and are 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 risk-weighted average credit rating of the Group’s debt securities portfolio is ‘A–’ in 2018, compared with ‘A–’ in 2017.
As of December 31, 2018, the largest concentration in the Group’s debt securities portfolio was governmentrelated at 49 percent of all debt securities. In all other categories, a total of USD 31.4 billion (44 percent) was secured. As of December 31, 2017, 50 percent of the Group’s debt portfolio was invested in government-related securities. In all other categories, a total of USD 30.0 billion (41 percent) was secured. Industry classifications in the fixed income portfolio were revised during 2018 to better align with the management view of the portfolio and financial industry practice. The 2017 figures were restated accordingly.
The credit risk arising from other loans is assessed and monitored together with the ‘debt securities’ portfolio. Out of the USD 7.6 billion reported loans as of December 31, 2018, 62 percent are government-related, of which 94 percent are to the German central government or the German federal states. As of December 31, 2018, USD 4.7 billion were rated as ‘AAA’ (61 percent) compared with 5.1 billion as of December 31, 2017; USD 0.7 billion as ‘AA’ (10 percent) compared with 0.7 billion as of December 31, 2017; USD 0.3 billion as ‘A’ (4 percent) compared to with 0.6 billion as of December 31, 2017; USD 1.2 billion as ‘BBB’ and below (16 percent) compared with 1.2 billion as of December 31, 2017; and USD 0.7 billion as unrated (10 percent) compared with 1.2 billion as of December 31, 2017.
Table 8 shows the total IFRS equity’s sensitivity to changes in exchange rates for the main functional currencies to which the Group is exposed. Positive values represent an increase in the value of the Group’s total equity. See notes 1, 3 and 7 of the consolidated financial statements for additional information on foreign currency translation and transactions.
Sensitivity of the Group’s total IFRS equity to exchange rate fluctuations in USD millions, as of December 31 2018 2017 10% increase in EUR/USD rate 336 467 GBP/USD rate 215 245 CHF/USD rate 350 447 BRL/USD rate 163 147 Other currencies/USD rates 624 645
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 8 shows the effect of a 10 percent increase in currency exchange rates, a decrease of 10 percent would have the converse effect.
The Group has counterparty limits, which are regularly monitored. Exposure to counterparties’ parent companies and subsidiaries is aggregated to include reinsurance assets, investments, derivatives, and for the largest counterparties, certain insurance products. There was no unapproved material exposure in excess of the Group’s limits for counterparty aggregation as of December 31, 2018 nor December 31, 2017.
Reinsurance assets included reinsurance recoverables (the reinsurers’ share of reserves for insurance contracts) of USD 21.3 billion and USD 21 billion, and receivables arising from ceded reinsurance of USD 1.1 billion and USD 1.2 billion as of December 31, 2018 and 2017, respectively, gross of allowance for impairment. Reserves for potentially uncollectible reinsurance assets amounted to USD 113 million as of December 31, 2018 and USD 94 million as of December 31, 2017. 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 9 are shown before taking into account collateral such as cash or bank letters of credit and deposits received under ceded reinsurance contracts. Unsecured reinsurance assets shown are after deducting collateral. Except for an immaterial amount, letters of credit are from banks rated ‘A–’ or better. Collateral increased by USD 0.2 billion to USD 9.6 billion per December 31, 2018, compared to previous year.
Reinsurance assets and unsecured reinsurance assets by rating of reinsurer and captive as of December 31 2018 2017
33 Conducts risk assessments where operational risks are identified for key business areas. Risks identified and assessed above a certain threshold must be mitigated. Risk mitigation plans are documented and tracked on an ongoing basis. In the assessments, the Group uses such sources of information as the Total Risk Profiling™ process, internal control assessments, and audit findings, as well as scenario modeling and loss event data.
Managing information security, including cyber risk, remains a key focus for Zurich. To measure the global exposure to this risk, a dedicated framework has been established, resulting in substantial improvements achieved throughout the year. As part of the introduction of this framework, capability upgrading took place across the risk function and increased emphasis on risk types resulting from the digital transformation the Group is progressing, notably focusing on information security, emerging technologies, innovation, and third party management.
Our customer focused organization, with enhanced capabilities and increased attention to operational resilience, maintains our core business services by upgrading our continuous reviews and assurance around our existing business continuity program. Zurich pays increasing attention to the protection and privacy of data for all of our stakeholders. We have done this by revising corresponding risk policies and governance, which has led to a more precise alignment to new legal and regulatory requirements and the changing operating environments.
With the increased use of third parties and suppliers and in conjunction with continual upgrades to regulatory requirements, we provide greater support to the organization in supporting third party and supplier risk management practices. This is in conjunction with a continued focus on critical suppliers, identifying the risks and obtaining assurance over key controls to confirm that they are able to deliver services as required throughout the lifecycle of the sourcing arrangements. Assessments include ensuring that suppliers remain financially viable, comply with our security and resilience requirements, and limit the Group’s exposure to geographic and supplier concentration risks.
Preventing, detecting and responding to fraud are embedded in Zurich’s business. Both claims and non-claims fraud are included in the common framework for assessing and managing operational risks. For Z-ECM calculations, claims fraud is part of insurance risk and non-claims fraud is part of operational risk.
Risk management and internal controls The Group considers internal control to be key for managing operational risk. The Board has overall responsibility for the Group’s risk management and internal control frameworks. The objectives of the Group’s internal control system are to provide reasonable assurance that Zurich’s financial statements and disclosures are materially correct, support reliable operations, and to ensure legal and regulatory compliance. The internal control system is designed to mitigate rather than eliminate the material risk that business objectives might not be met. Key controls are assessed for their design and operating effectiveness.
For more information on the Group’s other financial liabilities, see note 16 of the consolidated financial statements. See note 6 of the consolidated financial statements for information on the maturity of debt securities.
Strategic risks can arise from: 33 Inadequate risk-reward assessment of strategic plans 33 Improper implementation of strategic plans 33 Unexpected changes to underlying assumptions
Risks to the Group’s reputation Risks include acts or omissions by the Group or any of its employees that could damage the Group’s reputation or lead to a loss of trust among its stakeholders. Every risk type has potential consequences for Zurich’s reputation. Effectively managing each type of risk helps reduce such threats.
Executing on key strategic priorities 2018 saw the Group continue to make strong progress on key strategic priorities. The Group further strengthened its positioning in the fast developing regions of Southeast Asia and Latin America, as well as the rapidly growing global travel and assistance segment, through a number of targeted acquisitions.
On track to meet our 2017 – 2019 financial targets The Group continued to build on the positive performance of 2017, making further progress in terms of profitability across the businesses, while remaining on track to meet the financial targets set out in November 2016.
The strength of the Group’s reserves was clearly demonstrated, with prior year reserve development of 2.3 percent in line with the upper end of the indicated 1–2 percent range.
In 2019, the Group expects to deliver further improvement in underwriting results as the benefits of portfolio shifts, higher rates in North America and lower expenses continue to earn through.
Conversion of earnings into distributable cash was strong with USD 3.8 billion of cash remittances over the year.
Certain comparatives have been revised as a result of reclassifications and other adjustments. For details refer to note 1 of the audited consolidated financial statements.
Life business operating profit 1,554 1,258 23% Life gross written premiums, policy fees and insurance deposit 33,448 33,242 1% Life new business annual premium equivalent (APE) 2 4,639 4,868 (5%) Life new business margin, after tax (as % of APE) 2 24.1% 23.3% 0.8 pts Life new business value, after tax 2 981 999 (2%)
Return on common shareholders’ equity (ROE) 8 13.1% 10.9% 2.1 pts Business operating profit (after tax) return on common shareholders’ equity (BOPAT ROE) 8 12.1% 9.2% 2.8 pts 1 Parentheses around numbers represent an adverse variance.
By region, growth in EMEA and North America due to improved underwriting results was partly offset by a weaker underwriting performance in Latin America, lower prior year reserve releases in the Asia Pacific region and lower reinsurance recoveries in the Group Reinsurance unit.
The Group’s combined ratio of 97.8 percent was 3.1 percentage points better than in the previous year, mainly due to a lower accident year loss ratio ex-catastrophes and lower claims from catastrophe events. These improvements were partially offset by an increase in the commission ratio as a result of shifts in the mix of business. Development of reserves established in prior years was 2.3 percent, reflecting the general strength of the Group’s claims reserves, including the positive development of claims from the 2017 hurricanes Harvey, Irma and Maria.
Gross written premiums and policy fees 14,754 14,070 5% Net investment income on Group investments 3,035 2,925 4% Insurance benefits and losses, net of reinsurance (9,702) (9,259) (5%) Business operating profit 1,554 1,258 23%
Total reserves for life insurance contracts, net of reinsurance, and liabilities for investment contracts (net reserves) 202,024 215,424 (6%)
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 on balance sheet Group investments and unit-linked investments plus assets that are managed by third parties, on which fees are earned.
In EMEA, the Business Operating Profit increased by 22 percent in U.S. dollars and 17 percent in local currencies, with most countries contributing to the performance. Growth was driven by a combination of portfolio growth, cost reductions and the absence of the impact from the change to UK indexation tax relief in 2017 as well as a number of one-time items relating to market movements and assumption changes.
Assets under management decreased by 6 percent due to negative foreign exchange effects and adverse market movements in the fourth quarter of 2018.
NBV, APE and NBM by Segment in USD millions, for the years ended December 31
Europe, Middle East & Africa (EMEA) 619 605 2,890 3,333 22.8% 19.1%
1 New business value is calculated on embedded value principles net of non-controlling interests. 2 APE is shown gross of non-controlling interests. 3 New business margin is calculated using new business value as a percentage of APE based on figures net of non-controlling interests for both metrics.
Asia Pacific saw growth of 17 percent on a like-for-like basis driven by growth in protection business across the region.
In Latin America APE sales increased by 40 percent on a like-for-like basis including a large corporate protection scheme in Chile as well as positive developments in Brazil, Mexico and Argentina.
In Latin America, higher corporate business volumes were partially offset by unfavorable operating assumption updates and currency translation effects, while in Asia Pacific higher sales volumes and positive assumption updates were partially offset by business mix developments.
The new-business margin decreased by 2.9 percent on a like-for-like basis and improved by 0.8 percentage points to 24.1 percent on a headline basis.
The managed gross earned premium margin remained stable at 7.0 percent.
Farmers Life business operating profit was USD 43 million lower than in the prior year, driven by a USD 6 million negative impact from the annual assumption review compared to a USD 28 million positive benefit in the prior year, and slightly unfavorable mortality experience. New business APE was USD 6 million below prior year, while the new business value increased 13 percent driven by updated operating assumptions and the reduction in U.S. corporate tax rates.
in USD millions, for the years ended December 31 2018 2017 Change
Group Functions and Operations in USD millions, for the years ended December 31 2018 2017 Change
The business operating loss reported under Group Functions & Operations increased by USD 22 million to USD 753 million. Lower recharges to business units more than offset reduced Headquarters expenses, while the Holding and Financing result benefited from gains on currency hedges. The 2018 figure also includes a USD 17 million charge relating to the Group’s restructuring charges recognized within the business operating profit, compared with a charge of USD 38 million in 2017.
These factors also drove a decrease in the total liabilities for the Group to USD 364 billion from USD 387 billion in 2017.
Group liabilities and equity Total liabilities and equity as of December 31, 2018 (in USD millions)
The Group’s shareholder equity decreased from USD 33 billion in 2017 to USD 30 billion in 2018. The decrease primarily resulted from unrealized losses on available-for-sale investments. The Group’s 2018 net income attributable to shareholders of USD 3.7 billion was offset by a dividend payment of USD 2.8 billion and a USD 914 million negative development in the cumulative foreign currency translation reserve due to a general strengthening of the U.S. dollar against other key currencies where the Group owns subsidiaries.
Net cash remittances by business for the year ended December 31, 2018 (in USD millions)
The Group built on its travel insurance and assistance solutions franchise by acquiring, for approximately USD 82 million, Travel Ace and Universal Assistance, the leading providers of traveler assistance in Latin America. The acquisition comprised entities operating throughout Latin America, most notably in Argentina, Brazil, Chile, Colombia and Mexico. In addition, the Group acquired Blue Insurance Ltd, an Irish-domiciled insurance intermediary, for approximately USD 64 million.
It also continued to focus on growth within the Latin American region with the acquisition of the Latin American operations of the Australian insurer QBE Insurance Group Limited (QBE) with operations in Argentina, Brazil, Ecuador, Mexico, and Colombia. These acquisitions were closed during the second half of 2018, and completed with the acquisition of QBE Colombia on February 1, 2019. In addition, the Group finalized the acquisition of the individual and group life insurance portfolios as well as the long-term savings operations of EuroAmerica in Chile for an estimated aggregate price of USD 144 million.
As part of Zurich’s tax strategy, the Group strives to manage tax costs- and control-associated risks for the benefit of its customers, employees, shareholders and for society as a whole. The Group employs rigorous tax accounting and reporting oversight. The location of Group subsidiaries and affiliated companies is driven by business reasons and not the avoidance of tax. The Group’s consolidated result includes only a very limited number of companies located in low or nil tax rate jurisdictions and in all cases these carry out operative insurance, reinsurance and asset management activities.
Taxes collected Total 2017: USD 5.7bn (all numbers based on IFRS excluding deferred income tax)
The shareholders’ effective tax rate decreased to 24.9 percent for the period ended December 31, 2018 compared with 33.2 percent for the same period of 2017. The decrease was driven primarily by the U.S. corporate tax reform enacted at the end of 2017, under which U.S. profits are now taxed at 21.0 percent, compared with 35.0 percent in previous years. In addition 2018 was impacted by favorable shifts in the geographical profit mix towards lower tax rate jurisdictions, catastrophe events in 2017 (mainly hurricanes Harvey, Irma and Maria) as well as several non-recurring charges in 2017, which did not attract tax relief.
Challenging market environment 2018 was a challenging year for most asset classes. Despite higher U.S. Treasury yields throughout most of the year, other government bond yields remained near historic lows. Credit markets were weak and we saw a notable widening of spreads. Increasing geopolitical tensions and protectionist sentiments put pressure on equity markets. Against this backdrop, Zurich delivered a strong investment income performance.
Although 2018 was challenging for most asset classes, we are pleased with the progress achieved against our investment objectives.” Urban Angehrn Group Chief Investment Officer
Disciplined investment approach As a long-term investor, Group Investment Management’s mission is to achieve superior risk-adjusted returns relative to our liabilities. We do this through a systematic investment approach, disciplined risk-taking, and a focus on asset-liability management.
Zurich’s interest rate exposure was well matched, limiting the risk from yield curve movements.
The quality of Zurich’s debt securities remained high, with approximately 95 percent allocated to investment grade securities. At the same time, the fixed income portfolio remained well diversified with the largest single non-sovereign exposure amounting to less than 0.5 percent of the total investment portfolio.
Further progress in delivering our responsible investment strategy Responsible investment is an integral part of our investment philosophy and approach. In 2018, we took further steps toward achieving our commitments. Our allocation to impact investments increased to USD 3.8 billion (see more details on our responsible investment strategy at www.zurich.com).
Despite these challenges, Group Investment Management delivered USD 5.4 billion of net investment income (NII), which was 3 percent higher than in 2017 in U.S dollar terms. The improvement was driven mainly by rising bond yields in U.S dollars and Latin American currencies.
Note: Rounded amounts may not always add up to the rounded total. 1 Market view of the investment portfolio (economic view). 2 Includes government and government guaranteed, credit and private debt exposure.
Consolidated income statements in USD millions, for the years ended December 31 Notes 2018 2017
Policy fees 2,447 2,429 Gross written premiums and policy fees 49,485 49,114
Less premiums ceded to reinsurers (8,255) (7,977) Net written premiums and policy fees 41,230 41,136
Net change in reserves for unearned premiums 10 (224) (79) Net earned premiums and policy fees 41,007 41,057 Farmers management fees and other related revenues 26 3,204 2,892
Net investment income on Group investments 5,387 5,215 Net capital gains/(losses) and impairments on Group investments 901 2,034
Net investment result on Group investments 6 6,288 7,249 Net investment result on unit-linked investments (4,374) 11,664 Net gains/(losses) on divestment of businesses 5 (24) (84) Other income 1,080 1,183 Total revenues 47,180 63,961 Benefits, losses and expenses Insurance benefits and losses, gross of reinsurance 10 33,483 34,894 Less ceded insurance benefits and losses 10 (5,837) (6,252) Insurance benefits and losses, net of reinsurance 10 27,646 28,643 Policyholder dividends and participation in profits, net of reinsurance 10 (2,736) 12,984 Underwriting and policy acquisition costs, net of reinsurance 10 8,565 9,039 Administrative and other operating expense 12 7,761 7,212 Interest expense on debt 402 411 Interest credited to policyholders and other interest 433 546 Total benefits, losses and expenses 42,070 58,835 Net income before income taxes 5,110 5,125 of which: Attributable to non-controlling interests 400 459 Income tax (expense)/benefit 17 (1,134) (1,816)
attributable to policyholders 17 183 (171) attributable to shareholders 17 (1,317) (1,645) of which: Attributable to non-controlling interests (139) (154)
Basic earnings per share 19 24.55 19.71 Diluted earnings per share 19 24.28 19.58
Comprehensive income for the period 3,716 (2,428) (47) (914) (3,389) (17) 582 564 (2,825) 892 137 1,028 Details of movements during the period
Assets in USD millions, as of December 31 Notes 2018 2017
Assets: Cash and cash equivalents 8,649 8,228 Total Group investments 6 182,647 194,084
Investments for unit-linked contracts 109,294 120,699 Total investments 291,940 314,782 Reinsurers’ share of liabilities for insurance contracts 8 21,197 20,918 Deposits made under reinsurance contracts 883 1,269 Deferred policy acquisition costs 11 19,541 18,663 Deferred origination costs 11 419 460 Receivables and other assets 15 18,225 18,195 Deferred tax assets 17 1,125 1,076 Assets held for sale 1 5 24,124 29,371 Property and equipment 13 1,037 961 Attorney-in-fact contracts 14 1,025 1,025
Additional paid-in capital 19 1,180 1,162 Net unrealized gains/(losses) on available-for-sale investments 649 3,078 Cash flow hedges 363 410 Cumulative foreign currency translation adjustment (9,676) (8,762) Revaluation reserve 211 228 Retained earnings 37,452 36,936 Shareholders’ equity 30,189 33,062 Non-controlling interests 1,613 1,831 Total equity 31,802 34,893 Total liabilities and equity 395,342 422,065 1 In 2018, the Group reclassified USD 26 billion of liabilities to held for sale based on agreements to sell certain businesses in the UK, Venezuela and Germany (see note 5). In 2017, the Group reclassified USD 29 billion of liabilities to held for sale based on agreements to sell certain businesses in the UK (see note 5).
Cash flows from operating activities Net income attributable to shareholders 3,716 3,004 Adjustments for: Net (gains)/losses on divestment of businesses 24 84 (Income)/expense from equity method accounted investments (1) (3) Depreciation, amortization and impairments of fixed and intangible assets 898 936 Other non-cash items 128 519
Net capital (gains)/losses on total investments and impairments 5,274 (12,201) Net change in derivatives (7) (229) Net change in money market investments 563 (1,528) Sales and maturities
Net changes in sale and repurchase agreements (19) 24 Movements in receivables and payables (1,103) 581 Net changes in other operational assets and liabilities (294) (77) Deferred income tax, net 15 (311) Net cash provided by/(used in) operating activities 4,388 5,207
Balance as of December 31, 2017 as previously reported 11 1,162 – 3,078 410 (8,762) 228 36,936 33,062 1,831 34,893
Net changes in capitalization of non-controlling interests – – – – – – – – – (105) (105)
Share-based payment transactions – 30 – – – – – (1) 29 – 29 Treasury share transactions – – – – – – – (956) (957) – (957) of which: share buy-back program 2 – – – – – – – (555) (555) – (555) Reclassification from revaluation reserves – – – – – – – 36 36 – 36 Total comprehensive income for the period, net of tax – – – (2,429) (47) (914) (17) 4,298 891 137 1,028
Maturity tables have been provided for the following balances: debt securities (table 6.4), derivative assets and derivative liabilities (tables 7.1 and 7.2), reserves for insurance contracts (tables 8.9a and 8.9b), liabilities for investment contracts (tables 9.3a and 9.3b), other financial liabilities (table 16.2) and outstanding debt (table 18.2).
Changes in presentation IFRS 9 ‘Financial Instruments’ The Group has deferred the full implementation of IFRS 9 ‘Financial Instruments’ until IFRS 17 ‘Insurance Contracts’ becomes effective. For details on the implementation of IFRS 9, refer to notes 2 and 24.
Reclassifications Insurance liabilities towards policyholders and reinsurers in the total amount of USD 2.5 billion at December 31, 2017, have been reclassified from other liabilities to liabilities for insurance contracts. In addition, some revenues related to administrative and other operating services provided between Group entities (inter-segment transactions) have been reclassified from other income to administrative and other operating expenses. Prior year comparative figures have been restated accordingly (see note 8 and 27, respectively).
New standards/interpretations IFRS 15 Revenue from Contracts with Customers January 1, 2018 IFRIC 22 Foreign Currency Transactions and Advance Consideration January 1, 2018 Amended standards IFRS 2 Classification and Measurement of Share-based Payment Transactions January 1, 2018 IFRS 4 Applying IFRS 9 with IFRS 4 January 1, 2018 IAS 40 Transfers of Investment Property January 1, 2018
New standards/interpretations IFRS 16 Leases January 1, 2019 IFRS 9 Financial Instruments January 1, 2021 IFRS 17 Insurance Contracts January 1, 2021 IFRIC 23 Uncertainty over Income Tax Treatments January 1, 2019 Amended standards IAS 19 Plan Amendment, Curtailment or Settlement January 1, 2019 IAS 28 Long-term Interests in Associates and Joint Ventures January 1, 2019 IFRS 3 Definition of a Business January 1, 2020 IAS 1/IAS 8 Definition of Material January 1, 2020 IFRS 9 Prepayment Features with Negative Compensation January 1, 2022
IFRS 16 ‘Leases’ IFRS 16 ‘Leases’ introduces new requirements for lease accounting which have an impact on contracts where the Group acts as a lessee (and intermediate lessor). Under IFRS 16, the Group will recognize a right-of-use asset and a lease liability for real estate rental contracts which are mainly classified as operating leases under IAS 17 ‘Leases’. For the transition to IFRS 16, the Group will apply the modified retrospective approach and not restate the comparative figures for the 2018 financial year. The option of measuring the right-of-use asset retrospectively available on a lease-by-lease asset will result in a negative cumulative effect of initially applying IFRS 16, however, this will not have a significant impact on the opening balance of retained earnings.
A dedicated methodology work stream covers group accounting policies, actuarial methodologies and disclosure requirements to be consistently implemented throughout the Group. This work stream further contributes to the industry wide discussions on standard interpretation and its operational effects and closely monitors the developments in the IASB Transition Resource Group for IFRS 17 to evaluate the effects and align the accounting policies and actuarial methodologies accordingly. The implementation work stream drives the analysis of processes, data and systems implications which have revealed significant implementation challenges. However, considerable progress was made in 2018, finalizing the target solution landscape and developing pilot functionalities at Group and local levels to ensure readiness for the dry-run simulation scheduled for 2019. In 2019, the focus of the Program will be on finalizing the implementation efforts, analyzing the effects from IFRS 17 on the consolidated financial statements and education of key stakeholders.
Other standards, amendments and interpretations shown in table 2.2 are expected to have no or only an insignificant impact on the Group’s financial position or performance.
a) Consolidation principles The Group’s consolidated financial statements include the assets, liabilities, equity, revenues, expenses and cash flows of Zurich Insurance Group Ltd and its subsidiaries. A subsidiary is an entity that Zurich Insurance Group Ltd either directly or indirectly controls. The results of subsidiaries acquired are included in the consolidated financial statements from the date of acquisition. The results of subsidiaries that have been divested during the year are included up to the date control ceased. All intra-Group balances, profits and transactions are eliminated.
b) Foreign currency translation and transactions Foreign currency translation Due to the Group’s economic exposure to the U.S. dollar (USD), the presentation currency of the Group’s consolidated financial statements is USD. Many Group companies have a different functional currency, being that of the respective primary economic environment in which these companies operate. Assets and liabilities are translated into the presentation currency at end-of-period exchange rates, while income statements and statements of cash flows are translated at average exchange rates for the period. The resulting foreign currency translation differences are recorded directly in other comprehensive income (OCI) as cumulative translation adjustment (CTA).
The Group also issues products containing embedded options that entitle the policyholder to switch all or part of the current and future invested funds into another product issued by the Group. Where this results in the reclassification of an investment product to a product that meets the definition of an insurance contract, the previously held reserve and the related deferred origination costs are reclassified and are accounted for in accordance with the accounting policy that is to be applied to the new product on a prospective basis. As a consequence, no gain or loss is recognized when a contract is reclassified from an investment to an insurance contract.
Premiums Property & Casualty Premiums from the sale of property & casualty products are generally recorded when written and are recognized as revenue in relation to the insurance coverage provided. The unearned premium reserve represents the portion of the premiums written related to the unexpired coverage period.
Life insurance Premiums from traditional life insurance contracts, including participating contracts and annuity policies with life contingencies, are recognized as revenue when they are due from the policyholder. For single premium and limited pay contracts, premiums are recognized as revenue when due, with any excess profit deferred and recognized in income in a constant relationship to the insurance in-force or, for annuities, the amount of expected benefit payments.
Life insurance DAC for traditional participating life insurance contracts is amortized based on estimated gross margins expected to be realized over the life of the contract. Estimated gross margins are updated for actual and anticipated future experience and discounted using the latest revised interest rate for the remaining benefit period. Resulting deviations are reflected in income.
For traditional participating and investment-type life insurance contracts, DAC is adjusted for the impact of unrealized gains/(losses) on allocated investments that are recorded in OCI.
A deposit asset or liability is recognized based on the premium paid, or received less any explicitly identified premiums or fees to be retained by the ceding company. Interest on deposits is accounted for using the effective interest rate method. Future cash flows are estimated to calculate the effective yield, and revenues and expenses are recorded as interest income or expense. Reinsurance deposit assets or liabilities also include funds deposited or held by the Group under assumed or ceded reinsurance contracts, respectively, when funds are retained by the reinsured under the terms of the contract.
The services provided by the Group under such contracts are investment management and policy administration services that are provided over time and are not contingent on meeting specified performance criteria. Fees from such services are recognized ratably over the service period as policy fee revenue except where such fees are charged in connection with contract origination in which case such fees are recognized as contract liabilities (included within deferred front-end fees). The costs to fulfill over time services are generally recognized as incurred, except the costs of acquiring new investment contracts with investment management services, such as commissions and other incremental expenses directly related to the issuance of each new contract. Such fees enhance the resources that will be used to satisfy future performance obligations and – to the extent recoverable – are capitalized as contract assets (deferred origination costs; DOC) and amortized in line with the revenue generated by providing investment management services. Refer to note 11 for further information.
Group investments at amortized cost include debt securities for which the Group has the positive intention and ability to hold to maturity (held-to-maturity financial assets) as well as mortgage and other loans (loans and receivables). Such investments are carried at amortized cost using the effective interest rate method, less any charges for impairment. When an impairment is determined to have occurred, the carrying amount of held-to-maturity investments and loans and receivables is reduced through the use of an allowance account, and the movement in the impairment allowance is recognized in income as an impairment loss.
f) Derivative financial instruments and hedge accounting Derivative financial instruments, except those designated under a qualifying cash flow or net investment hedge relationship, are carried at fair value on the balance sheet with changes in fair value recognized in income.
The services provided by FGI under such contracts are non-claims administrative and management services including risk selection, preparation and mailing of policy documents and invoices, premium collection, management of the investment portfolios and certain other administrative and managerial functions. The multiple performance obligations covered by the consideration received are considered to be a series with the same pattern of transfer, therefore, the performance obligations are not separated. Farmers management fees and other related revenues that are primarily determined as a percentage of gross premiums earned by the Farmers Exchanges are recognized ratably over the period the services are provided. Membership fees charged at the time of the policy issuance are recognized as revenue over the expected life of the customer relationship. The incremental costs incurred in connection with the customer setup activity are recognized as an asset and subsequently amortized using the same pattern as the related revenue. Refer to note 26 for further information.
i) Intangible assets All intangible assets have finite lives and are carried at cost, less accumulated amortization and impairments. Such assets are generally amortized using the straight-line method over their useful lives and reviewed for impairment at least annually, or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Present value of future profits from acquired insurance contracts (PVFP) An intangible asset representing the PVFP arises from the acquisition of life insurance businesses. Such an asset is amortized over the expected life of the acquired contracts, following the same principles as for DAC. The carrying value of the PVFP asset is tested periodically for impairment as part of the liability adequacy test for insurance contracts.
The time required to learn of and settle claims is an important consideration in establishing the Group’s reserves. Short-tail claims, such as those for motor and property damage, are normally reported soon after the incident and are generally settled within months. Long-tail claims, such as bodily injury, pollution, asbestos and product liability, can take years to develop and additional time to settle. For these claims, information concerning the event, such as the required medical treatment for bodily injury claims and the required measures to clean up pollution, may not be readily available. Accordingly, the reserving analysis of long-tail lines of business is generally more difficult and subject to greater uncertainties than for short-tail claims.
Since the Group does not establish reserves for catastrophes in advance of the occurrence of such events, these events may cause volatility in the levels of its incurred losses and reserves subject to the effects of reinsurance recoveries. This volatility may also be contingent upon political and legal developments after the occurrence of the event.
Life insurance The reserves for future life policyholder benefits and policyholder contract deposits and other funds contain a number of assumptions regarding mortality or longevity, lapses, surrenders, expenses, discount rates and investment returns. These assumptions can vary by country, year of policy issuance and product type and are determined with reference to past experience adjusted for new trends, current market conditions and future expectations. As such the liabilities for future life policyholder benefits and policyholder contract deposits may not represent the ultimate amounts paid out to policyholders. For example: 33 The estimated number of deaths determines the value of the benefit payments. The main source of uncertainty arises because of the potential for pandemics and wide-ranging lifestyle changes, such as changes in eating, smoking and exercise habits, which could result in earlier deaths for age groups in which the Group has significant exposure to mortality risk.
33 For contracts that insure the risk of longevity, such as annuity contracts, an appropriate allowance is made for people living longer. Continuing improvements in medical care and social conditions could result in further improvements in longevity in excess of those allowed for in the estimates used to determine the liability for contracts where the Group is exposed to longevity risk.
33 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.
33 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.
See note 8 for further information on liabilities for insurance contracts and note 11 for deferred policy acquisition costs. Also refer to the insurance risk section of the risk review.
The evaluation of whether an available-for-sale debt security is impaired requires analysis of the credit standing of a particular issuer and involves management judgment. When assessing impairment of available-for-sale debt securities, the Group places emphasis on issuer specific factors, such as significant financial difficulty, default or delinquency on interest or principal payments. A credit rating downgrade, worsened liquidity or decline in fair value below the weighted-average cost is not by itself considered a loss event, but rather incorporated in the impairment analysis along with other available information.
For goodwill impairment testing, the recoverable amount is the higher of its fair value less costs to sell and its value-inuse.
Sensitivity tests have been performed on goodwill and AIF contracts that 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, so as to capture potential future variations in market conditions. The recoverability of the Latin America Property & Casualty CGU goodwill is very sensitive to key assumptions such as macroeconomic conditions, industry and market growth considerations, and cost factors in particular in Brazil, Argentina and Mexico.
In addition, the Group has recognized USD 52 million of goodwill relating to the acquisition of mobile solution technology. The recoverability of this goodwill is reliant upon successful achievement of ambitious growth targets.
Adira Insurance On September 27, 2018, Zurich Insurance Group entered into agreements to acquire 80 percent of PT Asuransi Adira Dinamika (Adira Insurance) from PT Bank Danamon Indonesia (Bank Danamon) and a minority investor for approximately USD 414 million, with potential future incremental payments based on business performance. The transaction includes two separate long-term strategic cooperation agreements with Bank Danamon and PT Adira Dinamika Multi Finance TbK. The transaction is expected to close in the first half of 2019, subject to regulatory approval.
QBE Latin America On February 24, 2018, the Group entered into an agreement to acquire the Latin American operations of the Australian insurer QBE Insurance Group Limited (QBE) with operations in Argentina, Brazil, Colombia, Ecuador and Mexico, subject to regulatory approvals. On July 2, 2018, the acquisitions of Argentina and Brazil were closed for an amount of USD 196 million and USD 34 million, respectively. The acquisitions of Mexico and Ecuador were closed on August 31, 2018 and October 1, 2018, for an amount of USD 32 million and USD 52 million, respectively. The acquisition of Colombia was completed on February 1, 2019, for an amount of USD 36 million.
Table 5.1 shows the main balance sheet line items as of the acquisition dates, representing the fair value of acquired QBE Latin America’s net tangible assets, intangible assets and goodwill, based on initial purchase price accounting.
Cash and cash equivalents 87 Total investments 307 Receivables and other assets 349 Deferred tax assets 18 Property and equipment 23 Goodwill 195 Other intangible assets 55 Assets acquired 1,033
During the 12 months ended December 31, 2017, the Group entered into an agreement to sell a Life business in the UK. As of December 31, 2018, the related assets and liabilities held for sale decreased by USD 6 billion to USD 23 billion since December 31, 2017.
As of December 31, 2018, the total assets and liabilities reclassified to held for sale were USD 24 billion and USD 26 billion, respectively.
Acquisitions Bright Box On December 22, 2017, the Group announced the acquisition of 100 percent of the shares of Bright Box HK Limited (Bright Box) and its subsidiaries, a provider of telematics solutions linking vehicle drivers, dealers and manufacturers. The purchase price amounted to USD 75 million, of which USD 25 million are dependent on meeting certain criteria. The net tangible assets acquired amounted to minus USD 2 million and intangible assets amounted to USD 25 million. Goodwill amounted to USD 52 million, and mainly reflects business know-how as well as technical capabilities. Bright Box was reported for the first time in 2018.
ANZ’s life and consumer credit insurance businesses On December 11, 2017, the Group announced it had entered into an agreement to acquire 100 percent of the Australian life insurance and consumer credit businesses (OnePath Life) of Australia and New Zealand Banking Group Limited (ANZ) for AUD 2.85 billion (USD 2 billion), subject to a purchase price adjustment. The transaction, which is subject to regulatory approval, is expected to be completed in the first half of 2019.
Cover-More On April 13, 2017, the Group completed the acquisition of all the shares in Cover-More Group Limited (Cover-More), a travel insurance and assistance solutions provider listed on the Australian Securities Exchange, with main operations in Australia, India and the U.S. In conjunction with this acquisition, the Group also acquired Halo Insurance Services Limited (Halo), a distributor of vehicle-hire-related insurance in the UK.
Cash and cash equivalents 38 Receivables and other assets 34 Property and equipment 4 Goodwill 549 Other intangible assets 163 Assets acquired 787
Cover-More’s net income after taxes for the nine months since the acquisition date, as included in the Group consolidated income statements for the year ended December 31, 2017, amounts to USD 17 million including transaction-related costs. Pro-forma net income after taxes for the full 12 months ended December 31, 2017, amounts to approximately USD 24 million, adjusted for transaction-related costs incurred by Cover-More.
Net investment result on Group investments in USD millions, for the years ended December 31 Net investment income
Investment result, gross, on Group investments 5,606 5,433 901 2,034 6,507 7,467 (238) (69) Investment expenses on Group investments (219) (218) – – (219) (218) – – Investment result, net, on Group investments 5,387 5,215 901 2,034 6,288 7,249 (238) (69)
1 Rental operating expenses for investment property amounted to USD 98 million and USD 91 for the years ended December 31, 2018 and 2017, respectively.
Details of Group investments by category as of December 31 2018 2017
Mortgage and asset-backed securities 409 397 17,899 17,038 – – 18,308 17,434
Investment property consists of investments in commercial, residential and mixed-use properties primarily located in Germany, U.S. and Switzerland.
1 Net unrealized gains/(losses) on Group investments include net gains arising on cash flow hedges of USD 363 million and USD 398 million as of December 31, 2018 and 2017, respectively.
Securities lending agreements Securities lent under securities lending agreements 1 599 970 Collateral received for securities lending 676 1,082 of which: Cash collateral 47 153 of which: Non-cash collateral 2 629 929 Liabilities for cash collateral received for securities lending 47 153 Repurchase agreements Securities sold under repurchase agreements 3 1,318 1,397 Obligations to repurchase securities 1,316 1,394 Reverse repurchase agreements Securities purchased under reverse repurchase agreements 4 48 156 Receivables under reverse repurchase agreements 47 153 1 The Group’s counterparties had the right to sell or repledge, in the absence of default, assets pledged as collateral with a fair value of USD 599 million and USD 970 million as of December 31, 2018 and 2017, respectively. The majority of these assets were debt securities.
Gains/(losses) on hedging instruments 1 (7) (38) on hedged items attributable to the hedged risk (2) 30 1 Excluding current interest income, which is recognized as an offset on the same line as the interest expense of the hedged debt.
The net change of gains/(losses) deferred in OCI on derivative financial instruments designated as cash flow hedges were USD (3) million and USD (36) million before tax for the years ended December 31, 2018 and 2017, respectively.
A nil amount for the years ended December 31, 2018 and 2017, respectively, was recognized in net capital gains/ (losses) and impairments due to hedge ineffectiveness.
The net change of gains/(losses) deferred in OCI were USD (114) million and USD 59 million before tax for the years ended December 31, 2018 and 2017, respectively as a result of a hedge relationship through foreign exchange forwards and swaps.
No ineffectiveness of net investment hedges was recognized in net capital gains/(losses) and impairments for the years ended December 31, 2018 and 2017.
Related amounts not offset (169) (71) 168 69 Cash collateral (received)/pledged (666) (758) 90 69 Non-cash collateral (received)/pledged (26) (60) 60 35
Total liabilities for insurance contracts 4 249,208 263,805 (21,273) (20,971) 227,936 242,834 1 The Group’s life operations in the UK finalized the transfer of USD 1.6 billion of insurance assets and liabilities, associated with an annuities portfolio, as of June 30, 2017. 2 Farmers New World Life Insurance Company entered into a retrospective reinsurance agreement to transfer the risk of certain annuity portfolios with effect from April 1, 2017, which resulted in an initial increase of USD 1.6 billion in ceded policyholder contract deposits and other funds and USD 362 million of ceded future life policyholder benefits. The net gain of the transaction will be amortized over the remaining life of the underlying annuity contracts which is estimated to be between 30 to 50 years.
4 Total liabilities for insurance contracts ceded are gross of allowances for uncollectible amounts of USD 76 million and USD 53 million as of December 31, 2018 and 2017, respectively.
Discounted reserves for losses and loss adjustment expenses in USD millions, as of December 31 Gross Ceded Net
Initial net reserves for losses and loss adjustment expenses 55,944 56,180 55,341 57,385 57,319 54,703 53,739 52,458 55,623 50,627
Cumulative incurred: Seven years later (2,629) (2,107) (1,112) Eight years later (2,603) (2,188) Nine years later (2,619)
Cumulative (deficiency)/ redundancy of net reserves 2,619 2,188 1,112 1,136 576 823 1,666 1,043 674 Cumulative (deficiency)/ redundancy as a percentage of initial net reserves 4.7% 3.9% 2.0% 2.0% 1.0% 1.5% 3.1% 2.0% 1.2%
Cumulative (deficiency)/ redundancy of gross reserves 4,450 3,632 2,461 2,921 1,824 1,476 2,150 1,777 726 Cumulative (deficiency)/ redundancy as a percentage of initial gross reserves 6.5% 5.3% 3.6% 4.2% 2.7% 2.3% 3.4% 2.9% 1.1%
Table 8.4 presents changes in the historical reserves for losses and loss adjustment expenses, net of reinsurance, that the Group established in 2009 and subsequent years. Reserves are presented by financial year, not by accident year. The reserves (and the development thereon) are for all accident years in that financial year. The top line of the table shows the estimated gross reserves for unpaid losses and loss adjustment expenses as of each balance sheet date, which represents the estimated amount of future payments for losses incurred in that year and in prior years. The cumulative paid portion of the table presents the cumulative amounts paid through each subsequent year in respect of the reserves established at each year end. Similarly, the cumulative incurred losses section details the sum of the cumulative paid amounts shown in the triangle above and the changes in loss reserves since the end of each financial year. The net undiscounted reserves re-estimated portion of the table shows the re-estimation of the initially recorded reserve as of each succeeding year end. Reserve development is shown in each column. Changes to estimates are made as more information becomes known about the actual losses for which the initial reserves were established. The cumulative deficiency or redundancy is equal to the initial net reserves less the liability re-estimated as of December 31, 2018. It is the difference between the initial net reserve estimate and the last entry of the diagonal in the net undiscounted reserves re-estimated portion of the table. Conditions and trends that have affected the development of reserves for losses and loss adjustment expenses in the past may or may not necessarily occur in the future, and accordingly, conclusions about future results cannot be derived from the information presented in table 8.4.
The Group has considered asbestos, including latent injury, claims and claims expenses in establishing the reserves for losses and loss adjustment expenses. The Group continues to be advised of indemnity claims asserting injuries from asbestos. Coverage and claim settlement issues, such as determination that coverage exists and the definition of an occurrence, together with increased medical diagnostic capabilities and awareness have often caused actual loss development to exhibit more variation than in other lines of business. Such claims require specialized reserving techniques and the uncertainty of the ultimate cost of these types of claims has tended to be greater than the uncertainty related to standard lines of business.
Effect of changes in assumptions for future life policyholder benefits in USD millions, for the years ended December 31 2018 2017
2 The 2018 net movement is mainly related to the acquisition of EuroAmerica in Chile (see note 5).
Unit-linked investment contracts 41,188 45,484 Investment contracts (amortized cost) 504 510 Investment contracts with DPF 9,746 9,633
Tables 9.3a and 9.3b provide an analysis of investment contract liabilities according to maturity, based on expected cash flows as of December 31, 2018 and 2017. The undiscounted contractual cash flows for investment contract liabilities are USD 51 billion and USD 56 billion as of December 31, 2018 and 2017, respectively. Liabilities for unit-linked investment contracts amounted to USD 41 billion and USD 45 billion as of December 31, 2018 and 2017, respectively. Policyholders of unit-linked investment contracts can generally surrender their contracts at any time, leading the underlying assets to be liquidated, risks arising from liquidation of unit-linked assets are borne by the policyholders. Certain non-unit-linked contracts also allow for surrender of the contract by the policyholder at any time. Liabilities for such contracts amounted to USD 463 million and USD 558 million as of December 31, 2018 and 2017, respectively. The Group actively manages the Life in-force business to improve persistency and retention.
Expected maturity profile for liabilities for investment contracts – current period in USD millions, as of December 31, 2018
Expected maturity profile for liabilities for investment contracts – prior period in USD millions, as of December 31, 2017
Losses and loss adjustment expenses 22,248 23,842 (4,851) (4,748) 17,397 19,094 Life insurance death and other benefits 11,236 11,053 (986) (1,504) 10,250 9,548 Total insurance benefits and losses 33,483 34,894 (5,837) (6,252) 27,646 28,643
Change in policyholder contract deposits and other funds 1,245 1,202 Change in reserves for unit-linked insurance contracts (1,350) 5,331 Change in liabilities for investment contracts – unit-linked (2,930) 6,428 Change in liabilities for investment contracts – other 190 175 Change in unit-linked liabilities related to UK capital gains tax 109 (150) Total policyholder dividends and participation in profits (2,736) 12,984
3 Farmers New World Life Insurance Company entered into a retrospective reinsurance agreement to transfer the risk of certain annuity portfolios with effect from April 1, 2017, which resulted in deferred policy acquisition costs impairment of USD 55 million.
Foreign currency translation effects (22) 49 As of December 31 419 460
1 Includes in 2018 the gross-up of certain costs following adoption of IFRS 15 (see note 2). 2 Included within commissions and other underwriting and acquisition expenses (see table 10.3). 3 Included within losses and loss adjustment expenses (see table 10.1). 4 Excludes expenses arising from investment property within investment expenses for Group investments (see table 6.1).
Gross carrying value as of January 1, 2018 155 415 380 326 740 2,017
Net carrying value as of January 1, 2018 155 250 147 82 327 961
Gross carrying value as of January 1, 2018 1,025 2,706 2,619 4,293 4,780 247 15,671 Less: accumulated amortization/
Net carrying value as of January 1, 2018 1,025 2,353 507 2,828 1,288 139 8,140
Net carrying value as of December 31, 2018 1,025 2,634 498 2,689 1,162 194 8,202 Plus: accumulated amortization/
As of December 31, 2018, intangible assets related to non-controlling interests were USD 63 million for present value of future profits (PVFP) of acquired insurance contracts, USD 1 billion for distribution agreements, USD 10 million for software, USD 9 million for goodwill and USD 3 million for other intangible assets.
In 2018, a distribution agreement in Brazil was signed replacing the existing distribution agreement. Additional intangible assets of USD 263 million related to this distribution agreement were recorded as at December 31, 2018.
Intangible assets by business – current period in USD millions, as of December 31, 2018
Gross carrying value as of January 1, 2017 1,025 2,110 2,422 3,860 4,652 251 14,321 Less: accumulated amortization/
Net carrying value as of December 31, 2017 1,025 2,353 507 2,828 1,288 139 8,140 Plus: accumulated amortization/
Gross carrying value as of December 31, 2017 1,025 2,706 2,619 4,293 4,780 247 15,671 1 Amortization of distribution agreements is included within underwriting and policy acquisition costs.
Intangible assets by business – prior period in USD millions, as of December 31, 2017
Other financial liabilities Group derivative liabilities 325 214 Unit-linked derivative liabilities 12 15 Amounts due to agents & intermediaries 870 798 Liabilities for cash collateral received for securities lending 47 153 Amounts due to investment brokers 987 1,096 Bank deposits 1 1 Collateralized bank financing for structured lease vehicles 436 518 Liabilities for defined benefit plans 1 2,491 3,590 Other liabilities for employee benefit plans 129 141 Accrued liabilities 2,067 2,078 Other financial liabilities 5,273 5,563 Other non-financial liabilities Current income tax payables 601 953 Restructuring provisions 258 269 Other non-financial liabilities 824 603 Total other liabilities 14,321 15,993 1 See note 20
As of January 1 269 334 Provisions made during the period 191 192 Increase of provisions set up in prior years 45 56 Provisions used during the period (226) (296) Provisions reversed during the period (13) (42) Foreign currency translation effects (8) 24 As of December 31 258 269
During the year ended December 31, 2018 the Group incurred total restructuring costs of USD 350 million, of which USD 223 million is due to net increases in restructuring provisions, affecting mainly Property & Casualty in Europe, Middle East & Africa (EMEA), North America and Farmers.
During the year ended December 31, 2017, the Group incurred total restructuring costs of USD 355 million, of which USD 206 million was due to net increases in restructuring provisions, affecting mainly Property & Casualty in EMEA and North America.
Income tax expense – current/deferred split in USD millions, for the years ended December 31 2018 2017
Expected and actual income tax expense in USD millions, for the years ended December 31 Rate 2018 Rate 2017
Net income before income taxes 5,110 5,125 less: income tax (expense)/benefit attributable to policyholders 183 (171) Net income before income taxes attributable to shareholders 5,293 4,954 Expected income tax expense attributable to shareholders computed at the Swiss statutory tax rate 22.0% 1,165 22.0% 1,090 Increase/(reduction) in taxes resulting from: Tax rate differential in foreign jurisdictions (27) 331 Tax exempt and lower taxed income (106) (124) Non-deductible expenses 152 133 Tax losses not recognized 98 83 Prior year adjustments and other 34 132
Actual income tax expense attributable to shareholders 24.9% 1,317 33.2% 1,645 plus: income tax expense/(benefit) attributable to policyholders (183) 171 Actual income tax expense 22.2% 1,134 35.4% 1,816
Deferred tax assets/(liabilities) analysis by source in USD millions, as of December 31 2018 2017
Gross deferred tax Deferred acquisition and origination costs 52 (658) 52 (659) Depreciable and amortizable assets 27 (86) 39 (55) Life policyholders’ benefits and deposits 1 4 (1) – (3) Unrealized (gains)/losses on available-for-sale investments and cash flow hedges 109 (49) 38 (179) Accruals and deferred income 92 (16) 96 (22) Reserves for losses and loss adjustment expenses 295 (116) 210 (238) Reserves for unearned premiums 722 (66) 691 – Pensions and other employee benefits 537 (72) 644 (62)
Tax loss carryforwards 634 – 717 – Gross deferred tax assets/(liabilities) before valuation allowance 2,643 (1,110) 2,689 (1,239) Valuation allowance (408) – (374) – Gross deferred tax assets/(liabilities) after valuation allowance 2,235 (1,110) 2,314 (1,239) Deferred tax assets 1,125 1,076 Gross deferred tax Deferred acquisition and origination costs 25 (2,125) 24 (2,167) Depreciable and amortizable assets 133 (1,699) 142 (1,798) Life policyholders’ benefits and deposits 1 1,924 (1,017) 1,816 (949) Unrealized (gains)/losses on available-for-sale investments and cash flow hedges 288 (860) 226 (1,054) Accruals and deferred income 76 (122) 81 (87) Reserves for losses and loss adjustment expenses 57 (90) 97 (118) Reserves for unearned premiums 18 (6) 20 (64) Deferred front-end fees 511 – 522 – Pensions and other employee benefits 340 (325) 352 (278)
The Group’s deferred tax assets and liabilities are recorded by its tax-paying entities throughout the world, which may include several legal entities within each tax jurisdiction. Legal entities are grouped as a single taxpayer only when permitted by local legislation and when deemed appropriate. The first part of table 17.3 includes single taxpayers with a net deferred tax asset position and the second part includes single taxpayers with a net deferred tax liability position.
As of December 31, 2018 and 2017, the aggregate amount of temporary differences associated with investments in subsidiaries, branches and associates and interests in joint ventures, for which deferred tax liabilities have not been recognized amount to approximately USD 19 billion and USD 22 billion, respectively. In the remote likelihood that these temporary differences were to reverse simultaneously, the resulting tax liabilities would be very limited due to participation exemption rules.
The net deferred tax liabilities related to non-controlling interests amounted to USD 189 million and USD 239 million as of December 31, 2018 and 2017, respectively.
Development of deferred income taxes included in equity in USD millions 2018 2017
As of January 1 73 313 Net unrealized gains/(losses) on available-for-sale investments 419 132 Cash flow hedges 11 14 Revaluation reserve 9 – Net actuarial gains/(losses) on pension plans (96) (392) Foreign currency translation effects (10) 5 As of December 31 406 73
Tax loss carryforwards and tax credits in USD millions, as of December 31 2018 2017
For which deferred tax assets have been recognized, expiring > 20 years or with no time limitation 747 1,267
The recoverability of the deferred tax asset for each taxpayer is based on the taxpayer’s ability to utilize the deferred tax asset. This analysis considers the projected taxable income to be generated by the taxpayer, as well as its ability to offset the deferred tax asset against deferred tax liabilities.
Management assesses the recoverability of the deferred tax-asset carrying values based on future years’ taxable income projections and believes the carrying values of the deferred tax assets as of December 31, 2018, to be recoverable.
3.271% AUD 200 million loan due May 2023 141 – 3.477% AUD 350 million notes, due May 2023 1 246 – 4.500% AUD 250 million notes, due July 2038 1 176 –
Maturity schedule of outstanding debt in USD millions, as of December 31 2018 2017
Debt maturities reflect original contractual dates, taking early redemption options into account. For call/redemption dates, see table 18.1. The total notional amount of debt due in each period is not materially different from the total carrying value disclosed in table 18.2. Undiscounted cash flows include interest and principal cash flows on debt outstanding as of December 31, 2018 and 2017. Floating interest rates are assumed to remain constant as of December 31, 2018 and 2017. The aggregated cash flows are translated into U.S. dollars at end-of-period rates.
As of January 1 10,784 11,212 Issuance of debt recognized in cash flows 3,079 – Repayment of debt recognized in cash flows (1,566) (1,049) Acquisitions/(divestments) and transfers 1 (1) (18) Changes in fair value (7) (27) Other changes (9) 3 Foreign currency translation effects (269) 664 As of December 31 12,012 10,784 1 The 2018 and 2017 movement of USD 1 million and USD 18 million respectively, is related to the sale of Endsleigh Limited (see note 5).
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 Company 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 Company or one of its group companies in a fast and expeditious manner.
Treasury shares (repurchased under the public share buy-back program for cancellation purposes, see f)) 1,740,000 – – Total Treasury shares 4,082,432 1,156,567 1,203,523
Treasury shares comprise shares acquired in the market as well as shares repurchased via the 2018 public share buy-back program for cancellation purposes (see f) below).
Basic earnings per share 3,716 148,048,737 25.10 24.55 Effect of potentially dilutive shares related to share-based compensation plans 1,620,039 (0.27) (0.27) Diluted earnings per share 3,716 149,668,776 24.83 24.28
Basic earnings per share 3,004 150,001,064 20.02 19.71 Effect of potentially dilutive shares related to share-based compensation plans 974,049 (0.13) (0.13) Diluted earnings per share 3,004 150,975,114 19.90 19.58 1 The translation from U.S dollars to Swiss francs is shown for information purposes only and has been calculated at the Group’s average exchange rates for the years ended December 31, 2018 and 2017.
However, the majority of employees now going forward accrue benefits for future service under defined contribution plans, which provide benefits equal to the amounts contributed by both the employer and the employee plus investment returns.
The Group Pensions Committee provides a point of focus and co-ordination on the topic of pensions and postretirement benefits at Group level for the supervision and exercise of company powers and obligations in relation to pension and post-retirement benefit plans.
For post-employment defined benefit plans, total contributions to funded plans and benefits paid directly by the Group were USD 642 million for 2018 compared with USD 550 million for 2017. The estimated total for 2019 is USD 279 million (actual amount may differ).
U.S. pension plans There are two major pension plans in the U.S., the Zurich North America (ZNA) plan and the Farmers Group, Inc. (FGI) pension plan. These are both cash balance pension plans funded entirely by the participating employers. The ZNA plan is entirely cash balance and the FGI pension plan provides benefits on a cash balance pension formula for benefits accruing after January 1, 2009, except with respect to certain grandfathered participants. A final average pay defined benefit formula applies for the grandfathered participants. For both cash balance plans, an amount is credited to the cash balance account each quarter, determined by an employee’s age, service and their level of earnings up to and above the social security taxable wage base. The minimum annual interest earned on the account balance is 5 percent. The cash balance account is available from age 65, or age 55 with five years of service. The benefit can be taken as a monthly annuity or as a lump sum. Both the ZNA plan and the FGI pension plan have fiduciaries as required under local pension laws. The fiduciaries are responsible for the governance of the plans. Actuarial valuations are completed regularly. The annual employer minimum required contributions are equal to the present value of benefits accrued each year, plus a rolling amortization of any prior underfunding. The FGI plan has been frozen with effect from December 31, 2018 following a Plan amendment decision in late 2016. FGI employees participating in the cash balance component of the FGI pension plan will continue to earn interest credits on their existing cash balance account balance after the freeze date. FGI employees participating in the final average pay formula will continue to earn eligibility service used to determine vesting and the percentage of pension benefit payable for early retirement before normal retirement age of 65. Farmers Group employees will earn only defined contribution retirement benefits starting January 1, 2019.
A separate arrangement was also established in 2010 to provide for retirement obligations that were in payment at that time. Consideration is given from time to time based on the fiscal efficiency of adding recent retirees to this arrangement and to adding assets to the contractual trust.
The defined benefit plans provide benefits on either a final salary, career average salary or a cash balance basis. These plans are now closed to new entrants, who instead participate in a new cash balance arrangement, which has the characteristics of a defined contribution arrangement with a capital guarantee on members’ balances, which mirrors the capital guarantee given in a conventional life insurance arrangement in Germany.
Net post-employment benefit (expense)/income: Current service cost (262) – – (262) Interest (expense)/income (444) 349 – (95) Settlements gains/(losses) (2) – – (2) Past service (cost)/credit 123 – – 123
Change in asset ceiling – – (86) (86) Remeasurement effects included in other comprehensive income 411 582 (86) 907 Employer contributions – 513 – 513 Employer contributions paid to meet benefits directly 37 – – 37 Plan participants’ contributions (57) 57 – – Payments from the plan (incl. settlements) 734 (734) – – Foreign currency translation effects (1,578) 1,284 – (294)
For the classification of pension assets the Group follows the same principles as outlined in note 23 (Fair value measurement). Assets meeting the criteria of Level 1 are generally considered quoted in active markets, while assets meeting the criteria of Level 2 or Level 3 are generally considered in other assets.
As a matter of policy, pension plan investment guidelines do not permit investment in any assets in which the Group or its subsidiaries have an interest, including shares or other financial instruments issued and own use property. Exceptions to the policy require approval by the Group Pensions Committee.
Mortality tables and life expectancies for major plans – current period in years, as of December 31, 2018 Life expectancy at age 65 for a male currently
United Kingdom PNXA00 with CMI_2017 projection with plan specific adjustments 22.53 23.63 23.25 24.45
Mortality tables and life expectancies for major plans – prior period in years, as of December 31, 2017 Life expectancy at age 65 for a male currently