Zurich is a leading multi-line insurer that serves its customers in global and local markets. With about 55,000 employees, we provide a wide range of general insurance and life insurance products and services. We serve individuals, small businesses, and mid-sized and large companies, including multinational corporations, in more than 170 countries.
4 As of December 31, 2014 and December 31, 2013, respectively. 5 Shareholders’ equity used to determine ROE and BOPAT ROE is adjusted for net unrealized gains/(losses) on available-for-sale investments and cash flow hedges. In 2013, no such adjustments were made and accordingly figures have been restated. 6 All amounts are shown in U.S. dollars and rounded to the nearest million unless otherwise stated, with the consequence that the rounded percentages may not add to 100 percent in all cases. All ratios and variances are calculated using the underlying amounts rather than the rounded amounts.
in USD millions, for the years ended December 31, unless otherwise stated 2014 2013 Change in USD 1
Net income after tax attributable to shareholders (NIAS) 3,895 4,028 (3%)
Return on common shareholders’ equity (ROE) 5 12.8% 13.3% (0.6 pts)
• Managing other businesses for value Highlights included a unified approach to life in-force management and exit from subscale and unprofitable businesses in Russia and other markets.
• Living up to the Zurich Commitment Our flood resilience program received an award from the UN Climate Change Secretariat. We increased our commitment to ‘green bonds’ to up to USD 2 billion. We became carbon neutral.4 1 Excluding unrealized gains and losses. 2 The Zurich Economic Capital Model (Z-ECM) is an internal measure of capital adequacy, which also forms the basis of Zurich’s Swiss Solvency Test (SST) model.
As of July 1, 2014, the Group’s SST ratio was 215%. 3 Cumulative net cash remittances to Zurich Insurance Company Ltd, after deducting central costs, in 2014 – 2016. 4 Carbon neutrality reached in 2014 by acquiring carbon credits (‘voluntary emissions reduction certificates’ supporting a forestry project in Indonesia), calculated on the basis of CO2 emissions reported in 2013, which were taken as the estimate for 2014.
Zurich is very well capitalized. Our Zurich Economic Capital Model 2 (Z-ECM) was 127 percent as of October 1, 2014. Net cash remittances to the holding company were USD 3.7 billion, which puts us on course to deliver more than USD 9 billion over the three years to 2016, even with the impact from currency headwinds. Reflecting the stability of our business and strong capital position, our Board will propose a dividend of CHF 17.00 per share. Subject to shareholder approval at the Annual General Meeting on April 1, 2015, the proposed 2014 dividend would be paid from the Zurich Insurance Group Ltd’s capital contribution reserves.
At Farmers, 3 the development is very positive, with two consecutive quarters of growth and a continuation of positive trends.
We are continuing to execute on our three strategic cornerstones: prioritizing investment in distinctive positions; managing other businesses for value; and growing our operating earnings. This approach is designed to increase growth and profitability, working toward our 2016 financial targets.
While our financial results do not yet show the full benefit of the initiatives underway, we have made a positive start to the plans we set out at our December 2013 Investor Day.
2 The Zurich Economic Capital Model (Z-ECM) is an internal measure of capital adequacy, which also forms the basis of Zurich’s Swiss Solvency Test (SST) model.
At the Farmers Exchanges, although gross written premiums were flat for the year, momentum was very positive, with growth of 2.4 percent in the final three months of 2014. Customer experience, measured by the Net Promoter Score, a measure of customer satisfaction and loyalty, improved considerably and customer retention rose to 76.8 percent at the end of 2014 from 74.8 percent at the end of 2013.
Tom de Swaan Chairman of the Board of Directors 4 Carbon neutrality reached in 2014 by acquiring carbon credits (‘voluntary emissions reduction certificates’ supporting a forestry project in Indonesia), calculated on the basis of CO2 emissions reported in 2013, which were taken as the estimate for 2014.
Zurich’s strategy is underpinned by developments in our target markets, new technologies, regulation and the expectations of our stakeholders.
Large corporations are centralizing and coordinating risk management and insurance purchasing. They must deal with the increasing interconnection of risks, regulatory complexity and impact of technological change. Our global coverage, experience in this market and holistic approach that brings together our Global Corporate and Corporate Life & Pensions products mean that Zurich is well positioned to be the insurer of choice.
In the next five to 10 years, customers will look to their insurers to help them manage risks in an increasingly complex environment. Deep customer insights derived from predictive analytics will help us compete by enabling a more tailored approach to risk selection and risk pricing, along with delivering valuable risk insights to our customers. Our size and global reach are an advantage, as scale is needed to build sufficiently large data pools to enable us to draw valuable conclusions.
Retail markets Zurich’s retail strategy is to grow market share with our target customer segment, the ‘confident planners,’ in selected markets. Confident planners are sophisticated insurance buyers who seek expert advice and individual treatment. They are more interested in the benefits of insurance products and services than low prices. They have high expectations and want to buy from trustworthy insurers who provide convenience on the customer’s terms, through a range of channels, including digital technology.
Global versus local regulation Risks are increasingly interconnected and global. Likewise, the insurance industry is increasingly becoming global, but insurance regulatory frameworks remain mainly focused on local markets. The fragmented nature of regulation threatens the efficient allocation of capital and makes it harder for global insurers to fulfill their risk-bearing and risk-spreading roles, thus weakening their ability to facilitate international trade, economic growth and individual well-being. This is why, in the interest of avoiding redundant and contradictory
Corporate responsibility Trust in large corporations has been eroded since the onset of the financial crisis in 2007. Against this backdrop, Zurich’s strong reputation is a long-term competitive asset. We aim to reinforce this asset by embedding corporate responsibility (CR) throughout our business. By acting responsibly in everything we do, we want to create sustainable value for all our stakeholders.
Insurance creates value for society. It allows people and businesses to protect themselves from risk and helps them become prosperous and resilient. Risks are becoming more complex as a result of climate change, globalization, urbanization and technological development. Expectations are now growing for insurers to use their core skills to help communities and society become more resilient to these interconnected risks, including natural hazards.
That is why our three lead areas in CR are flood resilience; responsible investment; and CR in our work with corporate customers, which includes taking account of environmental, social and governance factors in our underwriting decisions. These are all areas in which we can make use of our core insurance skills – such as risk management, investment management and underwriting – to address issues of concern to stakeholders.
Zurich’s responsible approach to business includes our corporate governance procedures. For us, high standards of corporate governance are not just a matter of regulatory compliance: good governance supports our reputation for integrity and ethical conduct.
For more information1 on the progress we made in corporate responsibility in 2014, please see: www.zurich.com/corporate-responsibility
We aim to create sustainable value for all our stakeholders: our customers, employees, shareholders and the communities in which we live and work.
Distribution partners Along with direct sales, our distribution partners are an essential part of our business model. They include agents, banks, brokers, independent financial advisers, retailers, automobile dealers and employee benefit consultants.
How we do it We are growing our operating earnings by reducing complication and overhead costs throughout our business, increasing operational efficiency and improving processes, and enhancing investment returns. We are also building the necessary supporting capabilities. This includes investing in our people; laying the foundations for industry top quartile operations and technology; investing in the Zurich brand with its promise of intelligent protection and building our reputation. In all that we do, we are living up to the Zurich Commitment to stakeholders, which includes acting responsibly throughout our business and following our core values.
Global Corporate and Corporate Life & Pensions developed more common customers. North America Commercial successfully utilized predictive analytics. Zurich Switzerland grew premiums and its customer base in its personal lines business. We concluded a wider distribution agreement with Spain’s Banco Sabadell. In Italy, we introduced a new telematics proposition for drivers and in Brazil, we concluded a warranty insurance agreement with Via Varejo. Farmers 1 increased its Net Promoter Score.
Global Life rolled out a unified approach to increase the value of its in-force books. We sold our general insurance retail business in Russia while retaining our Russian corporate business. General Insurance exited an undifferentiated distribution channel in the UK. Global Life ended its tied agent channel in Hong Kong and exited other subscale businesses.
We embedded the Zurich Commitment in our performance management process. Our flood resilience program received an award from the UN Climate Change Secretariat. We increased our commitment to green bonds to up to USD 2 billion. We trained over 900 employees to use our responsible approach to corporate business. We became carbon neutral.2 We improved our DJSI performance.
2 Carbon neutrality reached in 2014 by acquiring carbon credits (‘voluntary emissions reduction certificates’ supporting a forestry project in Indonesia), calculated on the basis of CO2 emissions reported in 2013, which were taken as the estimate for 2014.
While our financial results for 2014 do not yet show the full benefit of the initiatives underway, we have made a positive start to the plans we set out at our December 2013 Investor Day.
Customers appreciate our way of doing business, which is reflected in an increase in the number of our cross-sold transactions, meaning those involving existing Global Corporate customers buying Corporate Life & Pensions products and vice versa. In 2014, the number of such transactions stood at over 170, more than double those in 2013. This is significant, especially as the customers involved represent some of the world’s largest companies.
Business review 2014 credible information about the markets in which we do business.
United Kingdom Zurich Corporate Risk, part of Zurich Global Life, entered the UK corporate market in 2009, helping companies to protect their employees’ and their dependents’ futures. In 2014, the business celebrated its five-year anniversary in a strong position, having gained a 6.5 percent share of the UK corporate risk market.
Zurich Corporate Risk in the UK generated over GBP 120 million in insured premiums in 2014, and has one million members and 3,000 protection plans in place. Our market position strengthened in 2014, when we won 22 percent of Group Life new business in the UK and secured our largest income protection agreement, with 5,300 members, and another Group Life agreement with 7,000 members.
Farmers was also able to improve and grow its agency force in 2014. Through better agent recruiting and training, and smarter resource allocation, the company reversed what had been a declining number of agents in 2013 to add a net 414 agents in 2014, resulting in a total of 13,200 agents. The rate of attrition was also reduced. In 2014, agent retention was at its highest level in over five years. The company also continued its expansion into the eastern U.S. by opening operations in Connecticut to add its sixth eastern state.
In-force business Global Life began implementing a unified in-force approach designed to obtain the most value out of existing business in each country concerned. So far, this has been rolled out across Germany, the UK, the U.S. and Switzerland, which together represent around 70 percent of Global Life’s in-force book. Through a number of measures, including enhancing our customers’ experience in dealing with Zurich, we are working to increase business operating profit.
Exiting under-performing businesses Our strategy calls for us to either turn around or exit businesses that under-perform. Our decision to sell our general insurance retail business in Russia to OLMA Group is in line with this strategy. Zurich will keep and further build its Russian corporate business, which mainly focuses on underwriting risks for large Russian and multinational commercial customers. In 2014, General Insurance also exited the Zurich-branded aggregator distribution channel in the UK, while Global Life ended its tied agents channel in Hong Kong and exited some other subscale businesses.
1 The Farmers Exchanges are owned by their policyholders. Farmers Group, Inc., a wholly-owned subsidiary of the Group, provides certain non-claims administrative and management services to the Farmers Exchanges as attorneyin -fact and receives fees for its services.
Operations and technology Operations and information technology play a key role in supporting Zurich’s growth strategy. Our Group Operations & Technology function is leading a number of programs to increase our operational efficiency and profitability.
And we are using technology to improve the quality of our customer service, while creating additional capacity for efficient growth. As digitization challenges how businesses operate, we will continue to look at innovative workplace and mobility technology to serve our customers in better ways and provide our employees with a technology environment that will support our success, now and in the future.
Building our brand We extended our successful brand campaign ‘For those who truly love’ across Europe, the U.S., and Asia in 2014, focusing on TV to build awareness and using digital media and communication to engage customers. The
Our responsible investment program enables us to ‘do well and do good’ by investing our over USD 200 billion of assets. During 2014, we introduced minimum standards for integrating environmental, social and governance factors to all in-house managers of equity and fixed income investment portfolios. We also increased our commitment to invest in green bonds to up to USD 2 billion, of which over USD 500 million are already invested.
We joined 186 leading companies on the CDP Climate Performance Leadership Index 2014 (CPLI) in recognition of our position on climate change, which includes the impact of our insurance business, flood resilience work, responsible investment approach and carbon reduction efforts. In 2014, Zurich improved its score in the Dow Jones Sustainability Index (DJSI) from 73 to 79. Zurich is a member of DJSI World and DJSI Europe Indices. Zurich also received the Bronze Class distinction, placing it among the top nine companies in its industry assessed in terms of their CR performance.
External asset managers who are signatories to PRI (%) 67.9% 58.3% 9.6 pts
Group assets managed by PRI signatories (%) 1 98.8% 95.1% 3.6 pts
Total amount of impact investments (USD millions) 2 667 236 182%
1 Including assets managed by Zurich. 2 2014 impact investments consisted of: green bonds (USD 589 million); investments committed to private equity funds (USD 45 million, thereof 16 percent drawn down); and other investments (USD 33 million).
In this section Chairman’s statement on corporate governance 18 Corporate governance report 20 Statement of the Chairman of the Remuneration Committee 60 Remuneration report 62
The Board is responsible for overseeing the work of the Group Executive Committee and ensuring good governance. These Board functions are vital – not only to comply with regulations, but also to help build trust with our stakeholders, in line with our Zurich Commitment.1
Changes in our governance structure The Board keeps Zurich’s corporate governance structure under review to ensure that it supports our strategic objectives. During the last year, Zurich has undergone significant change. In line with the simplification program which we initiated in 2014 and are still progressing, we have modified our governance structure.
We have made important changes with regard to governance and remuneration over the last year. We fully implemented the requirements of the Ordinance Against Excessive Compensation. You can find further information about this in the remuneration report which follows this section of our Annual Report.
In addition, we are providing you with more information on the functioning of the Board in this corporate governance report and we have added information on our Board selection process.
Board diversity Diversity and inclusion are important aspects of Zurich’s strategy for the entire business, including the Board. We have made diversity a key factor in the selection of Board members to ensure that the Board includes a variety of people with complementary backgrounds and skills. This will help the Board to build a richer understanding of the opportunities and challenges our global business faces.
The Board proposes to the shareholders to elect Ms. Joan Amble and Mr. Kishore Mahbubani as new members of the Board of Directors at the Annual General Meeting on April 1, 2015.
Introduction 21 Group structure and shareholders 22 Capital structure 25 Board of Directors 28 Group Executive Committee 44 Shareholders’ participation rights 54 Information Policy 55 Employees 55 Changes of control and defense measures 55 Assurance at Zurich Insurance Group 56 External Auditors 57 Group Audit 58 Group Compliance 59 Risk Management and Internal Control Statement 59 Going concern 59
• Swiss Code of Best Practice for Corporate Governance (Swiss Code of Best Practice), issued in 2002 by economiesuisse, as amended in October 2007 and on August 28, 2014.
The principles of corporate governance and the standards described above are incorporated and are reflected in a number of corporate documents, in particular the Articles of Incorporation, the Organizational Rules and the Charters of the Committees of the Board of Directors. The Governance and Nominations Committee, which is responsible for the governance of the Group, regularly reviews the Group’s corporate governance against best practice standards and ensures compliance with corporate governance requirements.
This report essentially follows the recommended structure outlined in the Directive on Information Relating to Corporate Governance of the SIX Exchange Regulation. The information on compensation, shareholdings and loans to Board members and members of the GEC is contained in a separate report, the remuneration report (see pages 62 to 95) which supplements this corporate governance report and also includes the information as required by the Circular 2010/1 on remuneration schemes (minimum standards for remuneration schemes of financial institutions) issued by FINMA on October 21, 2009 as amended on June 1, 2012 as well as the Ordinance against Excessive Compensation (Ordinance AEC) of November 20, 2013.
Elections: • Christoph Franz, elected as a new member (as of April 2, 2014)
Retirements and resignations: • Victor L.L. Chu, former member (as of April 2, 2014)
• George Quinn, Chief Financial Officer (as of May 1, 2014)
2. North America Commercial 3. Asia-Pacific 4. Latin America 5. Europe, Middle East & Africa
The Group pursues a customer-centric strategy and is managed on a matrix basis, reflecting both lines of business and geography. The GEC is headed by the CEO. The CEOs of the business segments General Insurance, Global Life and Farmers as well as the Chief Financial Officer (CFO), the Chief Investment Officer (CIO), the Chief Risk Officer (CRO), the Chief Operations and Technology Officer, the Group General Counsel and the Chief Human Resources Officer, are members of the GEC. The geographic regions of Europe, North America, Asia-Pacific and Middle East and Africa are represented on the GEC by Regional Chairmen who focus on stakeholder management and business development in the respective regions. For further information on the GEC see pages 44 to 54.
The Global Life segment is managed on a regionally based structure within a global framework, including North America, Latin America, Europe and Asia-Pacific & Middle East. Effective January 1, 2015, Zurich has established a new Global Life Europe, Middle East and Africa region (GL EMEA), which will include the current Global Life Europe business units, Global Life Middle East, the Zurich International Life business (ZIL) on the Isle of Man, as well as the Zurich EuroLife Luxembourg (ZEL) business. The newly formed Global Life Asia Pacific (GL APAC) region will include the following business units: Australia, Hong Kong, Indonesia, Japan, Malaysia, Singapore and Taiwan. This new structure aligns the Global Life and General Insurance segments more closely.
As of December 31, 2014, Zurich Insurance Group Ltd is not aware of any person or institution, other than Black Rock, Inc., New York (5.03%), which, directly or indirectly, had an interest as a beneficial owner in shares, option rights and/or conversion rights relating to shares of Zurich Insurance Group Ltd representing three percent or more of its issued shares.
Individual shareholders 95.6 25.7 Legal entities 4.2 25.8 Nominees, fiduciaries 0.2 48.5
Changes of share capital during 2013 During 2013, a total of 603,099 shares were issued to employees out of contingent capital. As a result, on December 31, 2013, the share capital amounted to CHF 14,890,322.20 (148,903,222 shares) and both the authorized share capital and the contingent share capital (as specified in Article 5bis(1) and in Article 5ter(1a) of the Articles of Incorporation, respectively) amounted to CHF 1,000,000 (10,000,000 shares) and the other contingent share capital (as specified in Article 5ter(2a) of the Articles of Incorporation) amounted to CHF 239,203.70 (2,392,037 shares).
For information on changes of share capital during 2012, see the Annual Report 2013 of Zurich Insurance Group, page 33, pages 188 to 189 and pages 249 to 250.
Convertible bonds and options Zurich Insurance Group Ltd had no public convertibles or options outstanding as of December 31, 2014. For information on employee share option plans, see the audited consolidated financial statements, note 22 on pages 222 to 223.
The members of the Board are elected by the shareholders at the AGM. The Board constitutes itself in its first meeting after the AGM, except for the Chairman and the members of the Remuneration Committee who, as required by the Ordinance Against Excessive Compensation (AEC), in force since January 1, 2014, are elected by the shareholders.
The term of office of a board member ends after completion of the next AGM. As a consequence, each member of the Board will have to be re-elected at the AGM each year.
All Directors of Zurich Insurance Group Ltd are also members of the board of directors of Zurich Insurance Company Ltd. Mr. de Swaan also serves as chairman of that board. In addition, Mr. de Swaan has been a member of the board of directors of Zurich Insurance plc until September 30, 2014. Ms. Bies and Mr. Nicolaisen are members of the board of directors of Zurich Holding Company of America, Inc. With the exception of Ms. Bies and Mr. Nicolaisen, the Directors have no further board memberships within the Group.
Fritz Gerber is the Honorary Chairman of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd. He was chairman of Zurich Insurance Company between 1977 and 1995 and its chief executive officer between 1977 and 1991. In recognition of his leadership and services to that company, he was appointed Honorary Chairman. Such designation does not confer Board membership or any Director’s duties or rights, nor does it entitle him to any Directors’ fees.
External appointments Mr. de Swaan has been a non-executive member of the board of GlaxoSmithKline Plc since 2006. He has been a member of the supervisory board of Royal DSM, a Netherlands-based nutrition group, since 2006, and chairman of the supervisory board of Van Lanschot NV, the holding company of F. van Lanschot Bankiers, an independent Dutch bank, since 2008. In addition, Mr. de Swaan is chairman of the board of the Netherlands Cancer Institute, chairman of the board of trustees of the Van Leer Jerusalem Institute and acts as director of certain other non-profit organizations. He is also a member of the European Financial Services Round Table – EFR and of the advisory board of China Banking Regulatory Commission in Beijing.
External appointments In his capacity as a partner of Clayton, Dubilier & Rice, Mr. Kindle has served as chairman of Exova Ltd., UK since 2008 and as chairman of BCA Group, UK since 2010. He has been on the board of VZ Holding Ltd, Zurich, since 2002 and was elected chairman in 2014. He has been serving on the board of privately held Stadler Rail AG since 2008.
Skills and experience Susan Bies began her career in 1970 as regional and banking structure economist with the Federal Reserve Bank of St. Louis, Missouri. In 1972, she became assistant professor of economics at Wayne State University, Detroit, Michigan. In 1977, she moved to Rhodes College, Memphis, Tennessee, in a similar role and in 1979 joined First Tennessee National Corporation in Memphis, where she remained until 2001. Her areas of responsibility included tactical planning and corporate development. In 1984 she became chief financial officer and chairman of the asset/liability committee. In 1995, she became executive vice president of risk management and auditor and chairman of the risk management committee, as well as continuing her duties with the asset/liability committee. From 2001 until 2007, she was a member of the Board of Governors of the Federal Reserve System. Between 1996 and 2001, Ms. Bies was a member of the Emerging Issues Task Force of the Financial Accounting Standards Board. She has been a member of the boards of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd since April 2008.
Skills and experience Thomas Konrad Escher has extensive experience in the fields of information technology (IT) and banking. He joined IBM in 1974 and had managerial responsibility for several international markets. In 1996, Mr. Escher joined Swiss Bank Corporation as a member of the executive board and was CEO for the major market region in Switzerland and for the IT organization. Following the merger of Swiss Bank Corporation and Union Bank of Switzerland to form UBS AG in 1998, he headed the IT business area of the wealth management and business banking division until mid-2005 as a member of the group managing board. Mr. Escher assumed the function of vice-chairman in the business group Global Wealth Management & Swiss Bank of UBS AG in 2005. He has been a member of the boards of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd since April 2004.
External appointments Ms. Mächler has been a member of the supervisory board of directors of Deutsche Börse AG since May 2012. She also serves on the advisory board of the International Center for Insurance Regulation at the Goethe University Frankfurt am Main and on the board of the Stiftung für schweizerische Rechtspflege.
Other directorships within the Group Zurich Insurance Company Ltd, Zurich Holding Company of America, Inc.
Independence of the members of the Board of Directors Zurich considers the independence of its Board members to be an essential feature of good corporate governance. Zurich’s independence criteria comply with applicable laws and reflect best-practice standards such as the Swiss Code of Best Practice and the SIX Exchange Regulation Directive on Information relating to Corporate Governance. Accordingly, the Board consists entirely of Directors who are non-executive, independent from the management and who – except for Ms. Mächler – have never held an executive position in the Group. Ms. Mächler held an executive position until 2006 and was elected in 2013 as a non-executive board member. According to the guidelines of the Swiss Code of Best Practice, she is considered independent.
Given the separation of the roles of Chairman and CEO and the fact that the Board consists entirely of non-executive members, there is no requirement for a lead director to be appointed under the Swiss Code of Best Practice.
The Governance and Nominations Committee reviews the independence of the Board members annually and reports its findings to the Board for final determination. Board members are also subject to rules and regulations to avoid conflicts of interest and the use of inside information.
Multiple mandates for different companies under unified control are counted as a single mandate. The maximum limits set forth in the Articles of Incorporation do not discharge the members of the Board or GEC from their generally applicable duties to act with due care and to protect Group interests. As in the past, the assumption of additional mandates is possible only where, upon assumption of such mandates, sufficient time and resources remain available for performance of the office held in the Group.
At the AGM on April 2, 2014, all Board members, with the exception of Mr. Rolf Watter, who had reached maximum tenure and Mr. Victor Chu, who did not stand for re-election, were re-elected for another one-year term. Mr. Christoph Franz was newly elected. The shareholders elected Mr. Tom de Swaan as Chairman. As members of the Remuneration Committee, they elected Mr. Thomas Escher, Dame Alison Carnwath, Mr. Rafael del Pino and Mr. Tom de Swaan. As independent voting rights representative, the shareholders elected Mr. lic. iur. Andreas G. Keller, Attorney at Law.
• As new members: Ms. Joan Amble and Mr. Kishore Mahbubani • As Chairman: Mr. Tom de Swaan • As members of the Remuneration Committee: Mr. Thomas Escher, Dame Alison Carnwath, Mr. Rafael del Pino,
Internal organizational structure and responsibilities The Board is chaired by the Chairman, or in his absence the Vice-Chairman. The Board appoints its Secretary. The Board has a program of topics that is presented at its meetings throughout the year. It is regularly informed of developments regarding the Group and is provided with timely information in a form and of a quality appropriate to the discharge of its duties in accordance with the standards of care set out in Article 717 of the Swiss Code of Obligations.
The CEO attends Board meetings ex officio. Members of the GEC are regularly invited by the Board to attend meetings. Other executives also attend meetings from time to time at the invitation of the Board. Most Board meetings include private sessions of the Board without the participation of management.
Committee 1 Until April 2, 2014, the Board had 10 and the Governance and Nominations Committee 6 members, respectively.
Self-assessment A self-assessment of the full Board is carried out once a year. In 2014, the Board’s self-assessment was carried out on the basis of a comprehensive questionnaire. The assessment considered the following key aspects of board effectiveness: a) the Board environment (culture and composition, skill set and definition and delineation of tasks); b) the work of the Board (strategy, risk and control, and performance management); and c) the use of time and process (planning and allocation). A detailed report identifying key strengths and challenges was produced for, and considered by the Board. A respective action plan decided by the Board is currently being implemented.
The Governance and Nominations Committee meets at least four times a year. In 2014 it met four times.
Activities 2014: During 2014, in particular the following topics were discussed: • the performance of the Group, the segments and the GEC as well as the approval of STIP award level and LTIP vesting level for 2013 including the approval of the total variable remuneration pool for 2013; • the regulatory environment such as implications from 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 and further guidance to it, issued on January 19, 2011; the Directive on Information relating to Corporate Governance of the SIX Exchange Regulation of September 1, 2014, aspects of remuneration raised by proxy advisors, external developments with regard to remuneration-related matters and their potential effect on Zurich; • share ownership levels of the members of the Board and the GEC (for more details see the remuneration report on pages 62 to 95); • in the annual joint meeting with the Risk Committee, risk management aspects of the Group’s remuneration architecture, as well as key activities with respect to identified Key Risk Taker (KRT) positions, e.g. risk-based assessment of KRTs; • in its annual review, the remuneration report, Zurich’s Remuneration Rules and the Remuneration Committee Charter; these documents were approved; • in its annual review, the Board’s and GEC’s compensation; • implementation of the requirements of the Ordinance AEC, in particular on total remuneration for the Board and the GEC, to be presented to the vote of the shareholders at the Annual General meeting on April 1, 2015; • a review of the incentive architecture; and • an update on the activities of the Group Pension Committee.
The Remuneration Committee meets at least four times a year. In 2014 it met five times.
Audit Committee Composition and membership: Zurich Insurance Group Ltd’s Organizational Rules require the Audit Committee to consist of at least four non-executive Board members, independent from management. Currently, Don Nicolaisen (Chairperson), Fred Kindle, Susan Bies and Monica Mächler, all of whom meet the relevant requirements for independence and qualification, serve on this committee.
The Audit Committee Charter provides that the Audit Committee, as a whole, should have (i) an understanding of IFRS and financial statements, (ii) the ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves, (iii) experience in preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to those of Zurich Insurance Group Ltd and the Group, or experience in actively supervising one or more persons engaged in these activities, (iv) an understanding of internal controls and procedures for financial reporting, and (v) an understanding of audit committee functions.
Key tasks and responsibilities: In general, the Audit Committee: • serves as a focal point for communication and oversight regarding financial accounting and reporting, internal control, actuarial practice, and financial and regulatory compliance; • reviews the Group’s auditing process (including establishing the basic principles relating to and making proposals for the audit of Zurich Insurance Group Ltd and the Group); • at least annually, reviews the standards of internal control, including activities, plans, organization and quality of Group Audit and Group Compliance; • reviews the annual, half-year and quarterly financial reporting of the Group before submission to the Board.
Activities 2014: During 2014, in particular the following topics were discussed: • accounting policy changes; • quarterly reporting with a strong focus on accounting and reserving matters; • the effectiveness of the internal control framework; • Group Audit work plans, Group Audit findings and management implementation of remediation actions; • the work of the external auditors, the terms of their engagement and the external auditor’s findings on key judgements and estimates in financial statements; and • the annual Group Compliance Plan, which it approved and against which it monitored progress during the year.
• The Audit Committee meets at least four times a year. In 2014 it met seven times.
Risk Committee Composition and membership: Zurich Insurance Group Ltd’s Organizational Rules require the Risk Committee to consist of at least four non-executive Board members independent from the management. Currently, Susan Bies (Chairperson), Dame Alison Carnwath, Monica Mächler and Don Nicolaisen serve on this committee.
Key tasks and responsibilities: In general, the Risk Committee: • oversees the Group’s risk management, in particular the Group’s risk tolerance, including agreed limits that the Board regards as acceptable for Zurich to bear, the aggregation of agreed limits across the Group, the measurement of adherence to agreed risk limits and the Group’s risk tolerance in relation to anticipated capital levels; • further oversees the Group-wide risk governance framework, including risk management and control, risk policies, their implementation and the risk strategy and the monitoring of operational risks; • reviews the methodologies for risk measurement and the Group’s adherence to its risk limits and reviews the performance of the risk management function; • reviews, with business management and the Group risk management function, the Group’s general policies and procedures and satisfies itself that effective systems of risk management are established and maintained; and
• receives periodic reports from the Group risk management function and assesses whether significant issues of a risk management and control nature are being appropriately addressed by management in a timely manner.
Activities 2014: From an enterprise risk management perspective, during 2014 the Risk Committee particularly discussed the following topics: • the results of the Group’s risk profile assessment, and the development and assessment of the Group’s economic and regulatory capital; • the results of the Group Total Risk Profiling™ (TRP) assessment including an update regarding risk ownership and mitigation actions; • Zurich Risk Policy (ZRP) including the annual review and approval of new and changed chapters; • investment and asset/liability management, market and credit risks and controls including reports on derivatives; • operational risks and controls, including a detailed review on cyber risk and data security; • potential economic scenarios and their implications for the global outlook; • regulatory risk updates; and • in the annual joint meeting with the Remuneration Committee, risk management aspects of the Group’s remuneration architecture.
The Risk Committee meets at least six times a year. In 2014 it met seven times.
Areas of responsibility of the Board and management The Board determines the overall strategy of the Group, supervises senior management and addresses key matters in the area of strategy, finance, structure and organization and business development. In particular, the Board approves the Group’s strategic plan and the annual financial plans developed by management and reviews and approves the annual, half-year and quarterly financial statements of Zurich Insurance Group Ltd and the Group. For more details with regard to the responsibilities of the Board see page 37 to 38.
Information and control instruments vis-à-vis the Group Executive Committee The Board supervises management and monitors its performance through reporting and controlling processes. Regular reporting by the CEO and other executives to the Board provides for appropriate information and updates, including key data for the core businesses, financial information, existing and upcoming risks, and updates on developments in important markets and with regard to major competitors and other significant events. The Chairman of the Board regularly meets with the CEO. He also meets from time to time with other GEC members and executives outside regular Board meetings. The other members of the Board do so as well, especially with the Chief Financial Officer and the Chief Risk Officer.
The Group has adopted and implemented a coordinated, formalized and consistent approach to risk management and control. Information concerning the Group’s risk management and internal control processes is included in the risk review starting on page 114. The internal audit function, the external auditors and the compliance function also assist the Board in exercising its controlling and supervisory duties. Information on major areas of activities of these functions is set out on pages 57 to 59.
The GEC is headed by the CEO. As of December 31, 2014, members of the GEC included the Chief Financial Officer, the Chief Investment Officer, the Chief Operations and Technology Officer, the Chief Risk Officer, the Group General Counsel and the Chief Human Resources Officer; and in order to reflect both, lines of business and geography, the CEOs of the business segments General Insurance, Global Life and Farmers, as well as the CEO of North America Commercial are also members of the GEC. Further, members of the GEC also act as the Regional Chairmen of Europe, North America and Asia-Pacific, Middle East and Africa.
Members: Chief Executive Officer (Chairman), Chief Financial Officer (Deputy Chairman), Chief Investment Officer, Chief Risk Officer, Chief Executive Officer General Insurance, Chief Executive Officer Global Life.
Key tasks and responsibilities: • acting as a cross-functional advisory body whose main function is to review, and provide recommendations relating to activities that materially affect the balance sheets of the Group or its subsidiaries; • setting the annual capital and balance sheet plans for the Group based on Group strategy or financial plan, as well as recommending specific transactions or unplanned business changes to the Group’s balance sheet; • overseeing all of the main levers of the balance sheet, including but not limited to, capital management, reinsurance, asset/liability management, dividend and share buyback policy, liquidity, leverage, rating agencies and other balance sheet-related matters and topics as measured among others by Zurich Insurance Group’s Zurich Economic Capital Model (Z-ECM).
The Group Finance and Risk Committee (GFRC) Members: Chief Financial Officer (Chair), Chief Risk Officer (Deputy Chair), Chief Investment Officer, Group General Counsel, and the Chief Operations and Technology Officer.
The Finance Committee, chaired by the Chief Financial Officer, is acting as a cross-segment and cross functional advisory body for matters that could materially impact the financial position or the profitability of the Group as a whole. Core topics are capital management, balance sheet management, financial risks and business development.
The Risk and Control Committee, which is chaired by the Chief Risk Officer, was set up as a cross-segment and cross-functional body for matters that could materially impact the overall risk of the Group as a whole. Its core mandates are the Group’s risk tolerance and adherence to risk limits, the Zurich Risk Policy, overall and specific risk exposures and risk management controls and processes.
Martin Senn joined Zurich Insurance Group in 2006 as Chief Investment Officer, serving on its Group Executive Committee, and became Chief Executive Officer, effective January 1, 2010. From 2003 until 2006, he worked for Swiss Life Group, both as a member of its Corporate Executive Board and as Chief Investment Officer.
From 1994 until 2001, Martin Senn was a senior executive with Credit Suisse, where his roles included those of treasurer for the Head Office and Europe and Chairman of Credit Suisse Group, Japan. In 2001, he became a member of the Credit Suisse Banking executive board and was appointed head of its Trading and Investment Services Division. Martin Senn worked for the former Swiss Bank Corporation from 1976 to 1994 in various positions, including treasurer in Hong Kong and regional treasurer for Asia and the Pacific region in Singapore before managing the company’s Tokyo office.
External appointments Martin Senn is active in business and industry organizations based in Switzerland and other European countries, China and the U.S. He is a member of the international advisory board of the Atlantic Council and the advisory board of Tsinghua School of Economics and Management. He is a representative of the Property and Casualty CEO Roundtable and a member of the Pan European Insurance Forum (PEIF). He serves in a senior capacity with the Institute of International Finance (IIF), Avenir Suisse, the Zurich Association of Economics, the Swiss-American Chamber of Commerce, the Swiss Institute of International Studies and the Geneva Association. He is a member of the board of trustees for the Lucerne Festival and serves as a Honorary Consul for the Republic of Korea in Zurich.
Educational background Martin Senn received a Commercial and Banking diploma from the Business School in Basel, Switzerland and completed an International Executive Program at INSEAD in Fontainebleau as well as an Advanced Management Program at Harvard Business School.
Skills and experience Jeff Dailey began his career in 1980 with Mutual Service Insurance Company. He also worked for Progressive Insurance Company. He went on to form Reliant Insurance Company, an auto insurance start-up owned by Reliance Group Holdings, which was sold to Bristol West Holdings Inc. in 2001. From 2001 until 2004, Mr. Dailey was Chief Operating Officer (COO) of Bristol West and, in 2004, he was named President of Bristol West, following the firm’s initial public offering (IPO) on the New York Stock Exchange. In 2006, he became CEO of Bristol West. Mr. Dailey joined Farmers in 2007 as
President of Personal Lines for Farmers when Farmers acquired Bristol West. In January 2011, he was promoted to the position of President and COO of Farmers Group, Inc. He became a member of the Board of Farmers Group, Inc. in February 2011. Mr. Dailey was appointed to his current role of CEO of Farmers Group, Inc. and became a member of the Group Executive Committee in January 2012.
Skills and experience Robert Dickie held various senior positions with National Australia Bank Group in Australia and the UK from 1994 to 2000. From 2000 to 2002, he served as Managing Director, UK Enterprise, for Zurich in the UK. From 2003 to 2008 Mr. Dickie was Group Operations Director and a member of the executive committee of the UK-based bank Bradford & Bingley plc. In 2008 he joined American International Group, Inc. (AIG) where he served as Chief Operations and Systems Officer and was a member of the global leadership team. He joined Zurich in March 2014 as Chief Operations and Technology officer and member of the Group Executive Committee responsible for Zurich’s shared services, information technology (IT), procurement and sourcing and operational transformation initiatives.
External appointments Mr. Dickie is a fellow of the Chartered Institute of Bankers in Scotland and a fellow of the Royal Society for the encouragement of Arts, Manufactures and Commerce.
Mike Foley CEO North America Commercial and Regional Chairman of North America Nationality: U.S. Born: 1962
He joined Zurich in 2006 as Chief Operating Officer of its North America Commercial business division and in January 2008 was appointed CEO of that division and a member of the GEC. Mr. Foley is also the Regional Chairman of North America and Chairman of the Board of Zurich Holding Company of America, Inc.
Skills and experience Michael Kerner joined Zurich in 1992 from the Continental Insurance Company and has held a number of senior executive positions. These include Chief Operations Officer for Zurich North America Specialties and Head of Ceded Reinsurance for Zurich North America from 2002 to 2005. From January 2006 to June 2007, he served as the Global Head of Group Reinsurance and between 2007 and 2009, Mr. Kerner was Global Chief Underwriting Officer for General Insurance and Head of
Group Strategy in Zurich. Prior to his current role, he was Chief Executive Officer (CEO) for Zurich Global Corporate in North America. He became a member of the Group Executive Committee and CEO General Insurance in September 2012.
Educational background Mr. Kerner holds a Bachelor of Science in mathematics and economics from the State University of New York at Binghamton.
Skills and experience Yannick Hausmann started his career in 1995 at a law firm in Basel. From 1998 to 2000, he was associate in the tax and legal department of Arthur Andersen AG and Andersen Legal in Zurich. He was a member of the Legal and Compliance Group of the Swiss Insurance Association for several years. Mr. Hausmann joined the Zurich Corporate Center Litigation and Investigation Team in 2000. He has held his current position since December 2009 and was promoted to be a member of the Group Executive Committee in July 2012. He oversees the Legal, Compliance and GAIA (Government and Industry Affairs) functions worldwide across the Zurich Group as well as the Board Secretariat. Mr. Hausmann has served on the Board of Directors of Farmers Group, Inc. since February 2011. In July 2013, he became a member of the Board of Directors of Zurich Insurance plc (Ireland).
Skills and experience Axel P. Lehmann worked as a project manager and research associate at the Institute for Insurance Economics at the University of St. Gallen. In 1989, he was appointed as a lecturer in business administration at the University of St. Gallen and in 1990 as vice-president and head of consulting and management development at the Institute for Insurance Economics and the European Center. In 1994, he served as a visiting professor at the Bocconi University in Milan, Italy, before assuming the position of head of corporate planning and corporate controlling at Swiss Life in Zurich. Mr. Lehmann joined Zurich in 1996 as a member of the executive management team of Zurich Switzerland and subsequently acted as head of corporate development and head of commercial lines. Mr. Lehmann became a member of the Group management board responsible for business development functions in November 2000. In September 2001, he took over responsibility as CEO for Northern, Central and Eastern Europe and subsequently was appointed CEO of Zurich Group Germany. Mr. Lehmann became a member of the Group Executive Committee and CEO of the Continental Europe business division in March 2002. In 2004, he was in charge of the consolidation of the UK, Ireland and South Africa with the Continental
External appointments Mr. Lehmann is a member of the board of directors of UBS AG and is a member and former chairman of the CRO Forum. He is an honorary professor for business administration and service management, and chairman of the board of the Institute of Insurance Economics at the University of St. Gallen. Mr. Lehmann is also a member of the board of directors of economiesuisse and Chairman of the Global Agenda Council on the Global Financial System of the World Economic Forum (WEF).
Skills and experience George Quinn started his career at KPMG 1988 in London, where he held several positions working with the insurance and reinsurance industry. He joined Swiss Re in 1999 as Chief Accounting Officer based in Zurich and later served as Chief Financial Officer (CFO) for Swiss Re Group’s Financial Services. Mr. Quinn became the Regional CFO for Swiss Re Americas based in New York in 2003. In March 2007 he became Swiss Re Group’s CFO. Mr. Quinn joined Zurich in May 2014 as Group CFO.
Geoffrey Riddell Regional Chairman of Asia-Pacific, Middle East and Africa Nationality: British Born: 1956
Skills and experience Geoffrey (Geoff) Riddell started his career with Price Waterhouse in 1978 and in 1982 moved to American International Group, Inc. (AIG), where he held various roles, including country manager for Hong Kong, Belgium and France. While in Hong Kong, he set up the first foreign general insurance company in China. He joined Zurich in 2000 as managing director of Zurich Commercial in the UK, becoming managing director of the UK Corporate and Government businesses. In 2002, he was appointed Chief Executive Officer (CEO) of General Insurance in the UK, Ireland and South Africa. Mr. Riddell assumed the position of CEO of Global Corporate in April 2004, becoming a member of the Group Executive Committee in October 2004. In 2009, he took on the roles of CEO of Asia-Pacific & Middle East (APME) – responsible for both Life and General Insurance in the APME region – and Chairman of Global Corporate. In 2010, he assumed the newly-created role of Regional Chairman of Asia-Pacific, Middle East and Africa.
Mr. Riddell is a former member of the General Insurance Council of the Association of British Insurers and for three years chaired its liability committee. From 1990 to 1995, he was a member of the Hong Kong Federation of Insurers Council. He was a director of Pool Re from February 2005 until August 2010 and of the Forum for Global Health Protection from 2007 until the end of 2010. He was a member of the Confederation of British Industry’s Chairmen’s Committee and chaired the CBI Financial Services Council until September 2010. Until late 2009, he was a member of the Foundation Board of IMD in Lausanne, the City of London EU Advisory Committee and the Lord Mayor of London’s Advisory Committee.
External appointments Mr. Riddell has been a director of the General Committee of the British Chamber of Commerce in Hong Kong since April 1, 2011 and is now Deputy Chairman.
Cecilia Reyes Chief Investment Officer Nationality: Swiss and Philippine Born: 1959
Skills and experience Kristof Terryn began his career in 1993 in the banking industry, where he worked in capital markets. In 1997, he joined McKinsey & Company where he held various positions within the financial services practice in Brussels and Chicago. He joined Zurich in 2004 as Head of Planning and Performance Management. In 2007, he became COO for the Global Corporate business division and in 2009 was named COO for General Insurance.
Mr. Terryn became a member of the Group Executive Committee in 2010 on his appointment as Group Head of Operations. He assumed his current role as CEO Global Life in August 2013.
Changes to the GEC after January 1, 2015 Mr. Geoffrey Riddell, Regional Chairman of Asia-Pacific, Middle East and Africa will step down from the GEC effective end of March 2015. Ms. Cecilia Reyes will take on the additional responsibility of Regional Chairman of Asia Pacific, and responsibility for Middle East and Africa will be transferred to Mr. Axel Lehmann, Chief Risk Officer and Regional Chairman of Europe.
Management contracts Zurich Insurance Group Ltd has not transferred key parts of management by contract to other companies (or individuals) not belonging to (or employed by) the Group.
Zurich Insurance Group Ltd may under certain circumstances authorize the beneficial owners of the 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 the shareholders’ meetings and exercise votes as proxy of the relevant nominee. For further details, see page 26 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 proxy votes received. Zurich Insurance Group Ltd provided electronic voting devices to its shareholders for all the resolutions taken at the AGM on April 2, 2014.
Information Policy As of December 31, 2014, Zurich Insurance Group Ltd had 119,407 shareholders registered in its share register, ranging from private individuals to large institutional investors (see p. 309). Each registered shareholder receives an invitation to a shareholders’ meeting. A Letter to Shareholders provides an overview of the Group’s activities as the year progresses and outlines its financial performance. A more comprehensive Annual Review, the Annual Report and half-year reports are available on Zurich’s website www.zurich.com (www.zurich.com/shareholder-information) and are also available in printed form on request. Information on the quarterly results reporting is also available for all shareholders on Zurich’s website.
Zurich Insurance Group Ltd will hold its Annual General Meeting on April 1, 2015. 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.
External Auditors Duration of the mandate and term of office of the auditor-in-charge PricewaterhouseCoopers AG (PwC), Birchstrasse 160, in 8050 Zurich, is Zurich Insurance Group Ltd’s external auditor.
Audit fees Total audit fees (including expenses and value added taxes) charged by PwC in the year 2014 amounted to USD 50 million (USD 46.6 million in 2013).
The Audit Committee, boards and audit committees of subsidiary companies and CEO are regularly informed of important audit findings, including ineffective opinions, mitigation actions and attention provided by management. Group Audit is responsible for ensuring that issues 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.
The Audit Committee assesses the independence of Group Audit and reviews its activities, plans and organization, the quality of its work and its cooperation with the external auditors. As required by professional and regulatory quality assurance regulations the Internal Audit function has to be quality-reviewed periodically, at least every five years by an independent qualified body. This review was conducted most recently in 2011. The results confirmed that Group Audit’s practices conform with all Institute of Internal Audit standards and FINMA requirements and Group Audit was assessed as a very mature internal audit function.
G overn an ceTo comply with the Ordinance AEC, we are also submitting to our shareholders at the AGM in 2015 two new binding votes on remuneration-related matters. The first vote relates to the approval of the maximum total amount of remuneration of the Board for the one year period from the AGM in 2015 to the AGM in 2016. The second vote relates to the approval of the maximum total amount of remuneration of the GEC for the financial year 2016. Details on the remuneration votes are included in the Board of Directors Report on the approval of the remuneration of the Board of Directors and of the Group Executive Committee of the Annual General Meeting 2015 of Zurich Insurance Group Ltd (Report on the approval of remuneration), which is distributed with the invitation to the AGM 2015.
Further, based on the requirements of the Ordinance AEC a thorough review and adjustments to the employment contracts of the members of the GEC are being implemented. During the year, the Remuneration report was also reviewed and amendments were made with the objective to increase transparency, enhance readability and incorporate the audit requirement of the Ordinance AEC.
Based on the recommendation of the Remuneration Committee, and subject to the approval of shareholders at the AGM in 2015, the Board proposes to make changes to the Board fee structure effective April 1, 2015. These changes are outlined in the Summary and Outlook sections to this Report.
Thomas K. Escher Chairman of the Remuneration Committee of the Board of Directors
Contents 2014 Remuneration summary 63 Remuneration framework 66 2014 Remuneration and Shareholdings 78 Outlook 93
This year’s remuneration report (Remuneration report) includes the 2014 Remuneration summary, a chapter on the Remuneration framework including the remuneration philosophy and the remuneration governance, and provides an overview of the 2014 remuneration and shareholdings for the members of the Board of Directors (Board), the Group Executive Committee (GEC) and for all employees. For the chapter on the 2014 remuneration and shareholdings, all audited sections have been marked in accordance with the audit requirements of the Ordinance Against Executive Compensation (Ordinance AEC).
Zurich’s remuneration Overall, Zurich operates a balanced and effectively managed remuneration system, which ensures competitive total remuneration opportunities depending on the results achieved, is also an important element of the Group’s risk management framework and is designed to not encourage inappropriate risk taking.
Service cost for pension Other remuneration 1 At target, as a percentage of total remuneration. 2 This excludes the value of target share allocations from transition arrangements. 3 Including the Chief Executive Officer.
Gross written premiums and fees 1 57,572 57,659 Business operating profit (BOP) 4,638 4,680 Net income attributable to shareholders (NIAS) 3,895 4,028 Shareholders’ equity 34,735 32,503 Return on common shareholders’ equity (ROE) 12.8% 13.3% Dividends paid to shareholders 2 2,837 2,651 Total variable remuneration pool for all employees gross before tax 3 652 668 – 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 23% 25%
1 Consists of USD 54,781m gross written premiums and policy fees as well as USD 2,791m Farmers management fees and other related revenues. 2 Dividend at transaction day exchange rate in 2014 and 2013, respectively. 3 This excludes the value of target share allocations made in 2014 from transition arrangements which amount to USD 116m.
Both the total cash expenditures relating to the STIP and the value of the target share allocations made during the year form the total variable remuneration pool. The total variable remuneration pool comprises of the following elements: • the total expenditure on cash incentives to be paid for the performance year comprising the amount of the aggregated funding pools under the STIP and the amounts to be paid under the local short-term incentive plans.
Total remuneration 1 Includes the portion paid in sales restricted shares to Directors.
Key remuneration aspects and outlook Further key aspects for 2014 and topics for 2015 are outlined below: • The Board continues to oversee various activities to ensure compliance with the Ordinance AEC which came into force on January 1, 2014. A separate section Zurich’s approach of implementing the requirements of the Ordinance AEC has been introduced into the Remuneration report to outline the key activities. Further, considering the Ordinance AEC, but also taking practices from peer companies and feedback from proxy advisors into account, the Remuneration Committee agreed to simplify the structure of the Remuneration report, to enhance the remuneration disclosure and to include additional content to the 2014 Remuneration report. One specific action taken based on the feedback of proxy advisors was to include an illustration on the incentive plan assessment framework thereby enhancing transparency on the connection between business and individual performance and variable pay.
• At the Annual General Meeting (AGM) 2014 which took place on April 2, 2014, the shareholders elected Mr. Christoph Franz to the Board. All other members of the Board were also re-elected for a further term of office of one year, as required by the Ordinance AEC. Mr. Victor L.L. Chu and Mr. Rolf Watter retired from the Board at the AGM 2014. The individual members of the Remuneration Committee were also re-elected.
• With regard to changes to the GEC in 2014, Robert Dickie was appointed Chief Operations and Technology Officer effective March 17, 2014, George Quinn was appointed as Chief Financial Officer effective May 1, 2014 and Isabelle Welton was appointed Chief Human Resources Officer, effective July 1, 2014.
• During the year, the Remuneration Committee reviewed the fee structure for the members of the Board in the light of the increasing complexity, accountability and time commitment of its members and the fee levels being provided by other comparatively sized companies in the Swiss Market Index (SMI). The fee structure was last adjusted in 2011. As a result of this review, the Board is seeking approval from shareholders at the AGM in 2015 to adjust the fee levels especially for the Chairman, the Vice-Chairman and the Committee Chairs. The proposed changes will also include increasing the portion of the basic fee that is paid in sales restricted shares from 33 percent to 50 percent, and extending the holding period for the shares to a minimum period of five years rather than the current three years.
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). Therefore, all audited sections in this Report have been marked accordingly. The information disclosed according to Articles 14–16 of the Ordinance AEC and being audited in the Remuneration report, consists of: • Indication of the total remuneration paid to current and former members of the GEC and the Board, specifying the highest amount paid to a member of the GEC mentioning the name and function and the potential supplementary amount paid to a new member of the GEC according to Article 18 para 4 Articles of Incorporation.
Remuneration philosophy The remuneration philosophy is an integral part of the overall employment offering to employees. Zurich operates a balanced and effectively managed remuneration system, which is aligned with risk considerations and provides for competitive total remuneration opportunities that attract, retain, motivate and reward employees to deliver outstanding performance.
• The Group clearly defines expected performance through a structured system of performance management and uses this as the basis for remuneration decisions.
• The Group links variable remuneration awards to key performance factors, which can include the performance of the Group, the business segments, business units, and functions, as well as individual achievements. • STIP and LTIP used for variable remuneration are linked to appropriate absolute and relative performance measures and the overall expenditure on variable pay is considered in connection with the Group’s long-term economic performance.
• The Group provides its employees with a range of benefits based on local market practices, taking into account the Group’s risk capacity with regard to pension funding and investments.
In reviewing remuneration structures and practices on a regular basis, the Remuneration Committee and the Board receive independent advice from the executive compensation practices at Meridian Compensation Partners LLC (Meridian) as well as at Aon Hewitt, part of Aon Corporation (Aon Hewitt). The Remuneration Committee reviews the mandates and fees, and evaluates ongoing performance. Both, Meridian and Aon Hewitt provide advice to the Board, with the lead consultant employed by Meridian. Meridian does not provide any other services to the Group. Although certain practice areas within Aon Hewitt – a large, international brokerage and human resources firm – undertake work for the Group from time to time, the Remuneration Committee does not consider the independence and integrity of the advice it receives from Aon Hewitt to be compromised by these separate assignments.
In accordance with Zurich’s Remuneration Rules, the Remuneration Committee is responsible for proposing to the Board on an annual basis the remuneration payable to the Directors, to the Chief Executive Officer (CEO) and to the other members of the GEC. For the other members of the GEC, these recommendations are based on proposals made by the CEO. The remuneration proposals are approved by the Board, and ultimately the shareholders approve the maximum total remuneration amounts of the members of the Board and the GEC.
The results of benchmarking studies are taken into account in setting fee levels for Directors and the remuneration structure and levels for the CEO and the other members of the GEC. In analyzing the results of the benchmarking studies, market practices in the various countries and the internal relativities between positions are taken into account. Overall positioning of target remuneration packages is toward the median levels. Management is supported in these activities by a variety of firms operating in the field of international executive compensation.
Remuneration Committee Charter Remuneration Committee Board Zurich’s Remuneration Rules Remuneration Committee Board Remuneration payable to Directors (including Chairman and Vice Chairman)
Board and ultimately from shareholders via a vote as an aggregate maximum amount
Remuneration Committee based on proposals by the CEO taking into account a risk assessment by Group Risk Management
In addition to the above, and in line with the requirements of the FINMA Circular on Remuneration Schemes, the Board also approves the total variable remuneration pool for the year.
Remuneration and risk The following section sets out relevant risk aspects with regard to remuneration.
The Remuneration and Risk Committees meet jointly once a year to discuss a risk review of the remuneration architecture and the remuneration governance framework. Group Risk Management evaluated the remuneration architecture in 2014 and reported its findings on whether and how the remuneration architecture is consistent with effective risk management and does not encourage inappropriate risk taking that exceeds the Group’s level of tolerated risk.
As of December 31, 2014, Directors held 37,581 shares and members of the GEC held 147,169 vested shares and 148,567 vested options. To meet the share obligations under the share-based compensation plans, Zurich issued 733,614 new shares in 2014, and 603,099 new shares in 2013, thereby creating minimal dilution for shareholders.
Share dilution Information is also provided below on the share dilution impact arising from issuing shares to meet the obligations under the Group’s share based compensations plans. Zurich meets the share obligations arising from compensation plans either by issuing new shares from the contingent capital that has been authorized by the shareholders or by using Zurich shares purchased in the market. The share dilution impact is considered moderate and is in line with market practice.
As of December 31, 2014, the total number of unvested target shares under the regular LTIP was 870,747 from the allocations made in 2012, 2013 and 2014 excluding any accrued dividend equivalent target shares. Further, under the transition allocation made in 2014, the total number of unvested target shares was 376,409. Given the vesting level of 139 percent in 2015 and assuming 100 percent vesting in 2016 and 2017 for the regular LTIP, this would require the issuance of 977,155 shares or 0.65 percent of the share capital based on 149,636,836 registered shares eligible for dividends as of December 31, 2014. For the transition allocation, this would require the issuance of 425,342 shares.
Annual performance based target share allocations with a three year cliff vesting.
Vesting is determined based on (i) the position of the TSR compared with an international peer group of insurance companies derived from the Dow Jones Titan Insurance Index, (ii) the NIAS ROE and (iii) cash remittance 3.
Employee benefits are provided in line with market practices and positioned toward the market median.
Short-term incentives Short-term (one year) incentives are performance-driven based on the following design: Short-term incentives support employees to focus their performance during the year on the achievement of key financial and individual objectives set at the beginning of the year. The final individual STIP award is determined from the STIP target award, the financial performance, the resulting STIP award structure, and the individual performance as set out in the illustration below.
Each participant has a STIP target award level established for the performance year which is determined by the base salary and the STIP target percentage. The participant is allocated to one of the STIP pools. Unless otherwise approved by the Board, the maximum STIP target award level is set at 100 percent of the base salary at the end of the performance year.
Key driver for determining the individual STIP award structure for the STIP pool is the relevant financial performance during the year, including a qualitative assessment of the results.
Paid in cash and capped at 200% of individual STIP target.
At the year-end the key financial figures are evaluated in relation to the business plan which has been approved by the Board in the December prior to the relevant performance year. A qualitative assessment of the financial performance takes place to ensure a holistic evaluation of the performance including the remuneration review by the Chief Risk Officer. The ultimate size of the STIP pools can vary between 0 percent and 175 percent of target, but typically the STIP pools vary in size in the range of 80 percent to 120 percent of target.
The CEO makes recommendations on the proposed size of the various STIP pools and on the aggregate amount required for STIP award payments across the organization to the Remuneration Committee. Following review and analysis, the Committee discusses their final recommendations with the Board and seeks their approval.
Individual performance At the beginning of the year each individual jointly with his or her line manager defines and agrees the annual objectives. The individual performance achievements are then assessed during and at the end of the year through the Group performance management process. This process utilizes a rating scale between 1 and 5, with 5 being the highest rating. There is a target distribution and payout guideline for each of the ratings. Any violations of internal or external rules or requirements by an individual are taken into account in the individual performance rating.
The calculated vesting level is applied to all LTIP participants and defines the percentage of target shares that will ultimately vest. Half of the vested shares is sales restricted for an additional three year period after the date of vesting.
≥14.25% pa 1st – 3rd 50% vesting 100% vesting 150% vesting 200% vesting
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 of April. From 2011 onwards, Zurich discontinued making any allocations in the form of share options and all outstanding options have vested.
The performance criteria for the period 2014 to 2016 comprise: (i) The position of the TSR compared with an international peer group of insurance companies derived from the Dow Jones Titan Insurance Index. The Remuneration Committee reviews the peer companies to be included in the relative TSR assessment regularly to ensure that the peer group exhibits a strong TSR correlation and reflects the Group’s business profile and geographic spread. The resulting industry peer group includes the following companies: Ace, AIG, Allianz, Allstate, Aviva, AXA, Chubb, Generali, Legal & General, Manulife Financial Corp., Met Life, Munich Re, Progressive Ohio, Prudential Plc, QBE, Swiss Re and Travelers Cos. Inc.
LTIP award The LTIP award is then distributed to participants on the third of April 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.
One half of any vested shares is sales restricted for a further three year period following the date of vesting. This takes the overall vesting and sales restriction period to six years holding period for this part of the award.
3 In line with the methodology used to calculate the ROE with effect from January 1, 2014, the calculation of equity will exclude unrealized investment gains or losses. 4 Due to the potential volatility in any one year, the assessment of cash remittance performance can only meaningfully be assessed over a three-year period. Therefore, the cash remittance measure is being replaced by the BOPAT ROE for the vesting decisions in 2015 and 2016. The BOPAT ROE measure increases the focus on profitability in line with the Group strategy and it will be assessed using the same vesting grid that applies to the NIAS ROE as set out in the table.
LTIP transition arrangements The transition to three year cliff vesting as of January 1, 2014 resulted in a reduction in the total target earning opportunity during the transition period compared to the previous vesting system for all LTIP participants who were members of the plan prior to 2014. Various transition arrangements are being applied to allow the possibility for relevant participants to maintain their total target earning opportunity during the transition period, these are described below: i) The 2014 LTIP allocation will vest one third after two years (i.e. 2016), and two-thirds after three years (i.e. 2017). From the 2015 LTIP allocations onwards, three year cliff vesting for the complete allocation will apply.
ii) The new performance criteria and the performance periods are being phased in, also to assess the vesting decisions in 2015 and 2016 for the tranches of the 2012 and 2013 former LTIP allocations and for the relevant parts of the 2014 transition allocation (see below) that will be assessed for vesting in these years. Due to the potential volatility in any one year, the assessment of cash remittance performance can only meaningfully be assessed over a three year period. Therefore, the cash remittance measure is replaced by the BOPAT ROE achievements for the vesting decisions in 2015 and 2016 and it will be assessed using the same vesting grid that applies to the NIAS ROE.
Through an allocation of supplementary target shares in 2014 (transition allocation) equal in value to the 2014 year’s regular LTIP allocation value and then assessed for vesting in equal amounts in 2015, 2016 and 2017 against the performance criteria according to the above vesting grid, the cumulative target earning opportunity is maintained for plan participants during the transition period. To enhance the long-term and retentive nature of the allocation, the transition allocation is being made in two equal installments for members of the GEC and in the case of the CEO, in three equal installments, instead of in one installment. For members of the GEC, the vesting of these two installments will occur over 2015 to 2018. For the CEO, the vesting of the three installments will occur over 2015 to 2019. The holding period for performance shares under the regular LTIP will also apply to the shares of the transition allocation and no dividend equivalent target shares will accrue on the transition allocation.
To increase transparency for the reader a table on the historical vesting levels under the previous and the current LTIP is disclosed below.
Pensions The Group provides a range of pension benefits to employees which are designed by reference to local market practices with the benefit levels positioned toward the relevant market median. The Group Pensions Committee oversees the management of the Group’s pensions arrangements within the de-risking frameworks established for benefit design, investments, funding and accounting. On a regular basis, the Group Pensions Committee and the local countries assess the competitive environment with regard to pensions. In recent years, there has been a significant shift away from final salary defined benefit pension arrangements such that almost all new employees are enrolled in defined contribution and/or cash balance-type arrangements.
The following table sets out the fee structure and levels for the Chairman, the Vice-Chairman and the members of the Board, as well as committee fees and the different chair fees dependent on the committee (applicable to both 2014 and 2013).
Chair fee for Audit Committee 40 – 40 40 Chair fee for Remuneration Committee 30 – 30 30 Chair fee for Risk Committee 30 – 30 30 Chair fee for Governance and Nominations Committee 4 n / a – n / a n / a 1 Table excludes other fees for board memberships of subsidiary Boards of Zurich and/or Zurich Insurance Company Ltd. 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 2014 and 2013 no such fees were paid as the Chairman of the Board has been chairing the Governance and Nominations Committee.
The following tables set out the fees paid to the Directors for 2014 and 2013 in Swiss Francs. In 2014, 8 members served for the full year and 3 members served for part of the year. In 2013, 9 members served for the full year and 3 members served for part of the year.
2 Committee members receive a cash fee of CHF 50,000 (CHF 50,000 in 2013) for all committees on which they serve, irrespective of the number. The committees on which the Directors serve are set out in the Corporate governance report on page 29.
4 The shares allocated to the Directors are not dependent on the achievement of performance criteria and are sales restricted for three years. 5 As of June 16, 2014, Mr. de Swaan was allocated 1,256 shares, Mr. Kindle was allocated 470 shares, and the other Board members were allocated 301 shares. The share price (CHF 265.50) as of June 13, 2014 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.
Committee of this company. Both amounts are pro-rated for 9 months, as Mr. de Swaan gave up his membership on September 30, 2014. In 2013, Mr. de Swaan earned CHF 75,000 for his membership of the board of Zurich Insurance plc. He also earned an annual fee of CHF 5,000 for being chair of the Audit Committee of this company.
1 At the AGM which took place on April 2, 2014, Mr. Watter retired from the Board.
AUDITED Remuneration and personal loans for former Directors No benefits (or waiver of claims) have been provided to former Directors during the year 2014, nor were any provided during the year 2013. Mr. Watter continues to have a collateralized policy loan in the amount of CHF 2.5 million outstanding as of December 31, 2014. None of the other former Directors had outstanding loans, advances or credits as of December 31, 2013.
Share plans and shareholdings of Directors The shareholdings of the Directors, who held office at the end of the year, in shares of Zurich Insurance Group Ltd are shown in the following table. All interests shown are beneficial, and include the portion of shares allocated to the Directors as part of their fee, shares acquired in the market by the Directors and shares held by parties related to the Directors.
Number of Zurich Insurance Group Ltd shares 1, as of December 31 Ownership of shares
The remuneration structure and the mix of the individual remuneration elements for members of the GEC are determined by taking into account relevant market practices and internal relativities.
Base salaries Short-term incentives Long-term incentives Service cost for pension Other remuneration 1 This includes the Chief Executive Officer, however excludes the value of target share allocations from transition arrangements.
As shown in the chart above, there is an appropriate balance of the 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) shows an emphasis toward long-term incentives.
Elements and amounts of remuneration for the GEC 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 2013 are also included).
For members of the GEC the STIP target percentages for 2014 vary between 75 percent and 100 percent of the base salary. The maximum STIP award for all members of the GEC is 200 percent of the individual target amount. Further information regarding STIP is set out below.
For members of the GEC the LTIP target percentages in 2014 vary between 100 percent and 225 percent of the base salary. As in previous years, the allocations of target shares for 2014 were made on the third working day in April, i.e. on April 3, 2014. The maximum vesting level is 200% of the target number of shares allocated.
GEC STIP performance assessment This section provides further insights into the assessment of the individual STIP awards of the members of the GEC.
Replacement Payments for GEC members appointed in 2014 In extraordinary circumstances payments may be made to new hires to replace forfeitures under the incentive plans of the previous employer. In these circumstances, the payments mirror the type and timing of the forfeited payments and can include cash payments and/or awards of restricted shares. Where payments are made in cash, there is typically a clawback period if the employee leaves the company voluntarily during the first two years of employment. Restricted share allocations typically vest over three to five years following the date of allocation and are forfeited if the holder of such share allocation leaves the company voluntarily before the vesting date and the employment relationship terminates (Replacement Payments).
in USD million, for the years ended December 31 2014 1, 2 2013 1, 3
Base salaries 12.0 11.6 Cash incentive awards earned for the year 11.9 12.1 Value of target share allocations 4 18.7 16.2 Service costs for pension benefits 5 3.6 3.2 Value of other remuneration 6 1.9 2.9 Total in USD 7,8 48.1 46.0 Total in CHF 7,8 44.4 42.7 in USD million, for the years ended December 31 2014 1, 2 2013 1, 3
Value of target share allocations from transition arrangements 4,9 7.2 n / a Replacement Payments for GEC members appointed in 2014 10 8.8 n / a 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 members’ services.
2 On the basis of 12 members of the GEC, of whom 9 served during the full year 2014. Included in the figures are the relevant compensation amounts for the 2 individuals who were acting ad interim in the positions Chief Financial Officer and Chief Operations and Technology Officer during the year.
3 On the basis of 11 members of the GEC, of whom 9 served during the full year 2013. Included in the figures are the relevant compensation amounts for the 2 individuals who were acting “ad interim” in the positions Chief Financial Officer and Group Head of Operations during the year.
With regard to the LTIP, the amount included in the total is the value of target share allocations of USD 18.7 million given out in 2014, which assumes the allocation will vest at 100 percent of target in 2016 and 2017. In addition, the value of the target share allocations from transition arrangements was USD 7.2 million, which also assumes the allocation will vest at 100 percent in 2015, 2016 and 2017. As mentioned above, the vesting level for the allocations from previous years vesting in 2015 was 139 percent of target (compared to 50 percent last year). Based on the number of shares vesting in 2015, the closing share price of CHF 311.70 as at December 30, 2014 and the corresponding exchange rate, the value of shares vesting for the members of the GEC in 2015 will be USD 17.6 million. One-half of the shares vesting are sales restricted for a further period of three years.
CEO remuneration Out of the total remuneration of CHF 44.4 million described above, Mr. Senn’s remuneration in 2014 was CHF 7.2 million including his base salary, the cash incentive awards earned for the year, the value of the target shares allocated in 2014, the value of pension benefits and other remuneration including employee benefits. In addition, Mr. Senn received a target performance share allocation from the transition arrangements with a value of CHF 1.2 million. The difference between the total amounts of remuneration in 2014 and 2013 can be explained by the lower cash incentive earned for 2014. All Mr. Senn’s remuneration is paid in Swiss francs.
With regard to the LTIP, considering the vesting level of 139 percent of target, and based on the number of shares vesting in 2015, (including the first installment of shares from the transition arrangement) and the relevant closing share price of CHF 311.70 as at December 30, 2014, the value of the shares vesting in 2015 will be CHF 4.9 million. One-half of the shares vesting are sales restricted for a further period of three years.
Base salary 1.6 1.6 Cash incentive awards earned for the year 1.6 2.0 Value of target share allocations 2 3.6 3.6 Service costs for pension benefits 3 0.3 0.3 Value of other remuneration 4 0.1 0.1 Total in CHF 6 7.2 7.6 Total in USD 5,6 7.9 8.1 in CHF millions, for the years ended December 31 2014 1 2013 1
4 Includes employee benefits, perquisites, benefits-in-kind and any other payments due under the employment contract. Benefits-in-kind have been valued using market rates. 5 Mr. Senn’s remuneration is paid in Swiss francs. The amounts have been translated from Swiss francs to U.S. dollars at the relevant exchange rates throughout the year and the cash incentive to be paid in 2015 has been translated at the year-end rate in 2014.
6 This excludes the value of the target share allocations from transition arrangements. 7 To maintain the target earning opportunities during the transition period an allocation of supplementary target shares was made. To ensure further increase long-term alignment with shareholders, the transition allocation is being provided in three installments for the CEO.
During 2014, three members were appointed to the GEC. As set out above, the two new hires received Replacement Payments to compensate for the forfeiture of their incentive plan rights with their previous employer. No other benefits were provided to those new hires. No special payments (i.e. golden handshakes) or other benefits were provided to the internally appointed individual during the year, as there was no loss of equity rights with the previous employer.
During 2014, no member of the GEC left the Group and therefore no termination payments (golden parachutes) were made and no other benefits, such as agreements concerning special notice periods or longer term employment contracts (exceeding 12 months in duration), waiver of lock-up periods for equities, shorter vesting periods or additional contributions to occupational pension schemes, were provided.
Remuneration and personal loans for former members of the GEC Former members of the GEC 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 stated above. As of December 31, 2014 and 2013, no former member of the GEC had any outstanding loans, advances or credits.
Share and share option holdings of the GEC Summary of total outstanding share commitments under the regular LTIP, transition arrangements and Replacement Payments and total outstanding share options for members of the GEC
Target share allocations under LTIP, transition arrangements and restricted share allocations for Replacement Payments As at December 31, 2014, the total number of unvested target share allocations under LTIP was 109,445 (102,708 as of December 31, 2013). Further, the total number of unvested target share allocations under the transition arrangement was 23,487 (none allocated in 2013) and 27,470 shares were made in 2014 as Replacement Payments for newly hired members to the GEC (none allocated in 2013).
A summary of the unvested target share allocations as at December 31, 2014 under the LTIP, the transition arrangement and the Replacement Payments is set out in the table below: Summary of unvested target share allocations for the GEC as per December 31
Share option allocations Under the share option program for senior management, the Group issued share options in the past to individuals within defined rules. From 2011, share option allocations were no longer made. The option allocations were made each year on the third working day in April. Further, the exercise price for the options allocated in the past was set at the market price on the day prior to the date of allocation. The performance based option allocations were considered for vesting in one-third installments during the three years after the allocation.
Number of vested shares and vested share options, as of December 31 2014 2013
G. Quinn 2 n / a n / a n / a n / a
I. Welton 3 n / a n / a n / a n / a 1 Mr. Dickie has been appointed Chief Operations and Technology Officer effective March 17, 2014. 2 Mr. Quinn has been appointed Chief Financial Officer effective May 1, 2014. 3 Ms. Welton has been appointed Chief Human Resources Officer, effective July 1, 2014.
Number of vested share options as of December 31, 2013 Year of allocation Total
Trading plans To facilitate the sale of shares and the exercise of options for the members of the GEC, the Board approved the implementation of trading plans effective as of 2008. These plans allow members to sell shares and/or exercise share options under a pre-defined transaction program. Trading plans can only be established at a time when the individual does not possess unpublished price-sensitive information with regard to the Group. Further, the first transaction under a trading plan can only occur three months following the date it is established. The terms and conditions of the transactions have to be defined and they cannot be changed. All trading plans of members require the approval of the Chairman of the Board. Once established, transactions take place on a monthly basis including during close periods. The establishment of a trading plan by a GEC member is reported to the SIX Swiss Exchange according to the rules on disclosure of management transactions. In 2011, the Board approved the extension of the trading plan concept to selected executives who are often prohibited from being able to deal in Zurich securities because of the nature of their function. As of December 31, 2014, there were no trading plans in place. Further, no trading plans were entered into in 2014 or 2013.
2 This represents the present value of the defined benefits from pension and post-retirement benefits plans, plus employers’ contributions to defined contribution plans, arising from employee service over the accounting period. The amount included in this figure for defined benefit plans is calculated using actuarial factors and can vary year on year as economic conditions change. These numbers are explained in greater detail in note 21 of the Consolidated Financial Statements.
Variable remuneration Under the STIP, the average award for all employees across the Group was 96 percent of target for 2014, compared to 101 percent of target for 2013. Under the LTIP the vesting level for the allocations from previous years vesting in 2015 was 139 percent of target (compared to 50 percent last year). Based on the total number of shares vesting in 2015 (including the target performance shares from the transition arrangement), the closing share price of CHF 311.70 as at December 30, 2014 and the applicable fx-rate, the value of vested shares resulted in USD 176.4 million. Half of the vested shares are sales restricted for a further period of three years.
The figures do not include any charges or credits that originate from remuneration paid out during the financial year 2014 that derive from previous financial years.
Variable remuneration for all employees in USD million, for the years ended December 31 2014 2013
4 This excludes the value of target share allocations from transition arrangements which amount to USD 116m.
Value of target share allocations from transition arrangements 116 n / a 1 Includes cash incentive awards, Sign-on and Severance Payments in cash. 2 Includes target share allocations under LTIP and Sign-on Payment in shares. 3 Includes other remuneration and pension benefits.
The following table discloses Sign-on and Severance Payments committed to key risk takers. For the key risk taker positions where the incumbent is a member of the GEC only Replacement Payments and no Payments in Advance and/or Severance Payments have been made.
Sign-on and Severance Payments for key risk takers in USD million, for the years ended December 31 2014 2013
Sign-on Payments/number of beneficiaries 1 11.1 10 2 4 Severance Payments/number of beneficiaries 2 0.8 4 0.6 1 1 Payments (whether paid immediately or over time) that are agreed on the execution of an employment contract. Sign-on Payments may include compensation made prior to a person joining the company and providing any services (Payments in Advance) or compensation for benefits foregone with a previous employer (Replacement Payments). Payments in Advance are prohibited to be paid to members of the Board and the GEC.
Outlook With the distribution of the Remuneration report 2014 to shareholders, information is also being shared in a separate document regarding the two new remuneration votes covering the total maximum amounts of remuneration of the Board and of the GEC which will take place at the AGM on April 1, 2015. These votes are binding and allow our shareholders to approve the maximum remuneration amounts arising from our remuneration policies. Zurich also continues the practice of having a consultative, non-binding vote at the AGM on the Remuneration report 2014.
As mentioned earlier in the Remuneration report, in order to reflect the increased duties and complexity but also the time commitment of the members of the Board, the proposed adjustments in the fee structure are incorporated in the maximum total amount of remuneration of the Board, which is submitted for approval at the AGM. The adjustments, which impact primarily the Chairman, the Vice-Chairman and the work done in the committees, will largely be made in sales restricted shares. The holding period on these shares will also be extended to a minimum period of five years from the current period of three years. By paying the fees in shares with a longer holding period, the interests of the Board are further aligned with those of shareholders.
We have audited the sections on pages 79 to 81 and pages 85 to 90 of the accompanying Remuneration report of Zurich Insurance Group Ltd for the year ended December 31, 2014.
Responsibility of the Board of Directors 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 AEC). 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 AEC.
An audit involves performing procedures to obtain audit evidence on the disclosures made in the Remuneration report with regard to compensation, loans and credits in accordance with articles 14 – 16 of the Ordinance. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatements in the Remuneration report, whether due to fraud or error. This audit also includes evaluating the reasonableness of the methods applied to value components of remuneration, as well as assessing the overall presentation of the Remuneration report.
Opinion In our opinion, the Remuneration report of Zurich Insurance Group Ltd for the year ended December 31, 2014 complies with Swiss law and articles 14 – 16 of the Ordinance AEC.
In this section Operating and financial review 98 Risk review 114
From January 1, 2014, the General Insurance business has managed Middle East and Africa together with Europe to form a single market-facing business called Europe, Middle East & Africa (EMEA). This change had no impact on total General Insurance or the Group. Comparative figures have been re-presented to reflect this change.
Financial highlights 99 Performance overview 100 General Insurance 102 Global Life 107 Farmers 111 Other Operating Businesses 113 Non-Core Businesses 113
Financial highlights in USD millions, for the years ended December 31, unless otherwise stated 2014 2013 Change 1
Global Life business operating profit 1,273 1,272 – Global Life new business annual premium equivalent (APE) 2 5,203 4,418 18% Global Life new business margin, after tax (as % of APE) 2 22.1% 27.0% (4.9 pts) Global Life new business value, after tax 2 1,022 1,060 (4%)
Average Group investments 206,070 208,431 (1%) Net investment result on Group investments 9,209 7,398 24% Net investment return on Group investments 3 4.5% 3.5% 1.0 pts Total return on Group investments 3 8.6% 1.3% 7.3 pts
Diluted earnings per share (in CHF) 23.84 25.23 (6%) Book value per share (in CHF) 4 232.65 196.14 19%
The Group delivered overall business operating profit of USD 4.6 billion, a decrease of USD 42 million or 1 percent compared with 2013. All three core businesses increased business operating profits by focusing on their primary markets and maintaining their disciplined approach to products, underwriting and pricing. Both General Insurance and Farmers benefited from an improvement in underlying loss experience as well as from a lower level of catastrophe and weather-related losses. Global Life focused on its priority markets, as well as improving management of its in-force business. Overall development of loss reserves established in prior years was lower than in 2013 and impacted both the General Insurance business and Non-Core Businesses.
The Group’s capital and solvency positions remain strong, and together with the results for the year, have enabled the Board of Directors to propose a dividend of CHF 17 per share. Solvency measured on an economic basis as determined under the Swiss Solvency Test decreased slightly by 2 percentage points since January 1, 2014 to 215 percent as of July 1, 2014. Shareholders’ equity has increased since December 31, 2013 by USD 2.2 billion to USD 34.7 billion. This was driven by the positive effects of net income and net unrealized gains on investments, partly offset by the currency translation effect of the strong U.S. dollar as of December 31, 2014, and after deducting the total cost of USD 2.8 billion for the dividend paid in April 2014.
• Global Life business operating profit of USD 1.3 billion was broadly flat, increasing by USD 1 million, but increased by 2 percent on a local currency basis, mainly reflecting the weakening of currencies in Latin America against the U.S. dollar, with improvements on a local currency basis arising in most regions. The ongoing focus on fee-based and protection business has resulted in overall improvements in loadings and fees and in the underlying technical margin, excluding the effect of management actions. These improvements were largely offset by the negative effect of a portfolio transfer in North America and an increase in operating costs, mainly driven by investments in Global Life’s priority markets and impairment of software intangible assets.
• Farmers business operating profit increased by USD 58 million to USD 1.6 billion, or by 4 percent. This was due to improved underwriting results in Farmers Re, which benefited from improved results on its assumed reinsurance business from the Farmers Exchanges. The Farmers Exchanges are owned by their policyholders. Farmers Group Inc., a wholly owned subsidiary of the Group, provides certain non-claims administrative and management services to the Farmers Exchanges as attorney-in-fact and receives fees for its services. Farmers Management Services business operating profit slightly reduced by USD 7 million to USD 1.4 billion, as lower management fees and other related revenues as well as decreased investment income were partly offset by gains in other income.
• Other Operating Businesses reported a business operating loss of USD 960 million, compared with a loss of USD 1.0 billion in 2013. Lower interest expenses on debt and an increase in investment income in Holding and Financing were offset by higher Headquarters costs with 2013 Headquarters costs benefiting from one-off positive effects.
Business volumes for the core business segments, comprising gross written premiums, policy fees, insurance deposits and management fees, increased by USD 4.0 billion to USD 74.4 billion, or by 6 percent in U.S. dollar terms and 7 percent on a local currency basis.
• Farmers Management Services management fees and other related revenues decreased by USD 19 million to USD 2.8 billion, or by 1 percent, due to lower premiums earned in the Farmers Exchanges. Farmers Re gross written premiums and policy fees decreased by USD 617 million to USD 3.4 billion, or by 15 percent, due to the reductions in reinsurance assumed from the Farmers Exchanges.
Overall, the net effect of currency fluctuations on the results in 2014 was relatively small with the British pound and the Swiss franc on average stronger against the U.S. dollar compared with 2013 broadly offset by the weakening of Latin American currencies, partly reflecting high inflation rates in that region. Exchange rates as of December 31, 2014 were weaker against the U.S. dollar, which resulted in a reduction in most balance sheet positions.
General Insurance in USD millions, for the years ended December 31 2014 2013 Change
Gross written premiums and policy fees 36,333 36,438 – Net earned premiums and policy fees 30,023 29,769 1% Insurance benefits and losses, net of reinsurance 20,048 20,321 (1%) Net underwriting result 812 605 34% Net investment result 2,288 2,384 (4%) Net non-technical result (excl. items not included in BOP) (112) (57) (95%) Non-controlling interests 95 72 31% Business operating profit 2,894 2,859 1% Loss ratio 66.8% 68.3% 1.5 pts Expense ratio 30.5% 29.7% (0.8 pts) Combined ratio 97.3% 98.0% 0.7 pts in USD millions, for the years ended December 31 Business operating profit (BOP) Combined ratio
GI Global Functions including Group Reinsurance 8 (116) nm nm Total 2,894 2,859 97.3% 98.0%
Gross written premiums and policy fees decreased by USD 106 million to USD 36.3 billion. On a local currency basis gross written premiums increased by 2 percent. Global Corporate and International Markets achieved growth, on a local currency basis. Growth in Global Corporate resulted from favorable new business production across all regions as well as rate increases. In International Markets, gross written premiums increased on a local currency basis mainly in Latin America, driven by inflation as well as new distribution agreements in Brazil. In North America Commercial, gross written premiums decreased due to the non-renewal of a fronted portfolio. Adjusting for the non-renewal, North America Commercial increased by 2 percent compared with 2013. EMEA was broadly flat. The rate environment remained positive in all regions with overall rates increasing by 2 percent.
The net underwriting result increased by USD 207 million to USD 812 million, reflected in the 0.7 percentage points improvement in the combined ratio to 97.3 percent. The loss ratio improved by 1.5 percentage points reflecting improved underlying loss experience across most of the businesses, as well as lower levels of catastrophe and weatherrelated losses compared with 2013. These improvements were partly offset by lower levels of favorable development of loss reserves established in prior years. The expense ratio deteriorated by 0.8 percentage points compared with 2013. This arose from higher commissions due to changes in both product and geographic mix for which higher levels of commissions apply, and higher expenses reflecting investments in growth initiatives.
Global Corporate in USD millions, for the years ended December 31 2014 2013 Change
Business operating profit decreased by USD 111 million to USD 767 million mainly due to a lower underwriting result. An increase in the net investment result, due to hedge fund gains in Europe, was offset by an increase in non-technical expenses arising from higher foreign exchange losses on transactions.
Gross written premiums and policy fees increased by USD 170 million, or by 2 percent to USD 9.4 billion and by 3 percent on a local currency basis. New business production across all regions as well as rate increases in North America and Europe, Middle East and Africa contributed to the growth. The rate environment remained positive in all major lines of business except property where rates declined slightly. Overall rates increased by 2 percent.
The net underwriting result decreased by USD 104 million to USD 241 million, reflected in the deterioration of 1.9 percentage points in the combined ratio to 96.2 percent. The deterioration in the loss ratio of 0.8 percentage points was mainly due to adverse development of loss reserves established in prior years, partly offset by an improvement in underlying losses and lower catastrophe and weather-related events. The expense ratio deteriorated by 1.1 percentage points as a result of investments in growth initiatives, as well as higher management expenses.
North America Commercial in USD millions, for the years ended December 31 2014 2013 Change
Gross written premiums and policy fees 10,056 10,215 (2%) Net underwriting result 270 231 17% Business operating profit 923 972 (5%) Loss ratio 66.4% 68.0% 1.7 pts Expense ratio 30.1% 28.9% (1.2 pts) Combined ratio 96.5% 97.0% 0.5 pts
Gross written premiums and policy fees decreased by USD 158 million or by 2 percent to USD 10.1 billion. Underlying growth was 2 percent after adjusting for a fronted portfolio that was not renewed. Premium growth was apparent in motor, workers compensation and liability lines of business as execution of targeted growth initiatives continues to remain in focus. The rate environment remained positive in all major lines of business with overall rates increasing by 2 percent.
Europe, Middle East & Africa in USD millions, for the years ended December 31 2014 2013 Change
Gross written premiums and policy fees 12,626 12,526 1% Net underwriting result 490 229 nm Business operating profit 1,154 956 21% Loss ratio 64.9% 67.6% 2.8 pts Expense ratio 31.1% 30.5% (0.6 pts) Combined ratio 96.0% 98.1% 2.1 pts
The net underwriting result increased by USD 261 million to USD 490 million, reflected in the improvement in the combined ratio of 2.1 percentage points to 96.0 percent. The improvement in the loss ratio of 2.8 percentage points reflected further improvements in underlying losses, particularly in Germany and the UK as a result of the sustained focus on profitability. The net underwriting result also benefited from reduced weather-related losses compared with 2013, when there were significant losses from the floods in Europe. These improvements were partly offset by lower levels of favorable development of reserves established in prior years. The expense ratio deteriorated by 0.6 percentage points reflecting increased expenses following investments in growth partly offset by the benefit from a one-off pension adjustment in Switzerland.
International Markets in USD millions, for the years ended December 31 2014 2013 Change
1 From January 2014, gross written premiums and policy fees relating to Latin American corporate business have been included in Global Corporate. 2013 includes USD 314 million relating to this business.
Gross written premiums and policy fees decreased by USD 513 million to USD 4.4 billion, or by 10 percent in U.S. dollar terms, but increased by 3 percent on a local currency basis. On a local currency basis, gross written premiums grew in Latin America by 5 percent due to inflation in Argentina and Venezuela and new distribution agreements in Brazil. This increase was partly offset by a change in the reporting of the Latin American corporate business and the impact of underwriting actions in the personal motor portfolio in Brazil. Asia-Pacific premiums increased by 2 percent on a local currency basis, reflecting growth in Japan, Hong Kong and Malaysia partly offset by lower premiums in Australia. Overall International Markets achieved average rate increases of 4 percent.
Global Life in USD millions, for the years ended December 31 2014 2013 Change
Total reserves for life insurance contracts, net of reinsurance, and liabilities for investment contracts (net reserves) 1 221,926 226,166 (2%)
Net policyholder flows 3 5,470 (2,694) nm 1 As of December 31, 2014 and December 31, 2013, respectively.
New business annual premium equivalent (APE) 5,203 4,418 18% New business margin, after tax 22.1% 27.0% (4.9 pts) New business value, after tax 1,022 1,060 (4%)
1 New business value is calculated on embedded value principles after the effect of non-controlling interests, whereas APE is shown gross of non-controlling interests. New business margin is calculated using net business value as a percentage of APE based on figures net of non-controlling interests for both metrics. See Embedded value report included in the 2014 Annual Report for details of these principles.
Insurance deposits increased by USD 4.1 billion to USD 17.3 billion, or by 31 percent in U.S. dollar terms and 30 percent on a local currency basis. Europe experienced strong growth predominantly driven by higher sales of Corporate Life and Pensions products in the UK and Ireland. This growth was partly offset by the reduction in insurance deposits included in Bank Distribution following the withdrawal from new business for certain private banking products in Luxembourg and the UK.
Gross written premiums and policy fees increased by USD 678 million to USD 14.6 billion, or by 5 percent in U.S. dollar terms and 7 percent on a local currency basis. Growth in Europe, predominantly driven by sales of individual savings products in Spain and Germany, was partly offset by a reduction in Latin America, where 2013 included the effect of a large corporate contract in Chile.
NBV, APE, NBM and BOP by region in USD millions, for the years ended December 31 New business value, after tax (NBV) 1
New business value decreased by USD 38 million to USD 1.0 billion, or by 4 percent in U.S. dollar terms and 2 percent on a local currency basis. Changes to the expense allocation methodology, to lapse assumptions in North America and Zurich Santander and to the yield curve methodology in Chile introduced in 2014 all contributed to the overall decrease compared with 2013. These effects were partly offset by increases from higher volumes of sales in North America, Europe and APME.
In APME, the increase in new business value occurred predominantly in Australia, which experienced both volume and margin improvements in protection business.
Business operating profit decreased by USD 7 million to USD 1.4 billion primarily due to slightly reduced management fees and other related revenues.
The managed gross earned premium margin of 7.2 percent remained unchanged.
Farmers Re in USD millions, for the years ended December 31 2014 2013 Change
Gross written premiums and policy fees 3,428 4,045 (15%) Net underwriting result 66 (9) nm Business operating profit 190 125 52% Loss ratio 67.0% 68.9% 1.9 pts Expense ratio 31.3% 31.3% 0.0 pts Combined ratio 98.3% 100.2% 1.9 pts
Gross written premiums 18,635 18,643 – Gross earned premiums 18,545 18,757 (1%)
Gross earned premiums in the Farmers Exchanges decreased by USD 211 million to USD 18.5 billion, or by 1 percent, reflecting the effect of continuing pricing and underwriting actions to improve profitability flowing through gross earned premiums.
Other Operating Businesses in USD millions, for the years ended December 31 2014 2013 Change
Holding and Financing business operating loss decreased by USD 165 million to USD 678 million, primarily driven by lower interest expenses on debt refinanced in 2013 and 2014, higher investment income due to an increased invested asset portfolio and favorable foreign exchange impacts.
Headquarters reported a business operating loss of USD 282 million compared with a loss of USD 196 million in 2013. The increased costs were driven by several non-recurring items in both 2014 and 2013, including lower long-term performance related remuneration costs in 2013.
Non-Core Businesses in USD millions, for the years ended December 31 2014 2013 Change
Other run-off, which largely comprises U.S. life insurance and annuity portfolios, reported a business operating loss of USD 18 million. The deterioration of USD 64 million arose primarily from the effect of increases in loss reserves held for future liabilities established in prior years.
Zurich’s approach to risk management aims to protect the Group’s capital, enhance value creation, optimize its risk-return profile, support decision making and protect Zurich’s reputation and brand. The risk review describes the Group’s risk management framework and risk governance, reports on capital management and capital adequacy, and presents an analysis of its main risks.
In 2014, the Group focused on significant financial reporting controls, and operational key controls for underwriting and claims.
Internal reporting was enriched by including in-depth risk insights into topics such as operational risk and corporate responsibility.
The Group is well within its target capital level, which is calibrated to a ‘AA’ financial strength.
As of July 1, 2014, the Group had a Zurich Economic Capital Model (Z-ECM) ratio of 126%, and was well above the Swiss Solvency Test requirements with a ratio of 215%. As of December 31, 2014, the Group’s Solvency I ratio was 307%. See note 29 for an update on the January 15, 2015 SNB action on the Swiss franc.
In 2014, the Z-ECM ratio was analyzed for sensitivity to three new scenarios: two related to monetary policy errors by central banks that trigger market corrections, and the third a macro-economic crisis. While under two of the scenarios the Z-ECM ratio would remain within the “AA” range, one of the potential policy error scenarios would cause the Z-ECM ratio to exceed our target range.
The Zurich Risk Policy is the Group’s main risk governance document; it specifies the Group’s risk tolerance, risk limits and authorities, reporting requirements, procedures to approve any exceptions and procedures for referring risk issues to senior management and the Board of Directors. Limits are specified per risk type. In 2014, the Zurich Risk Policy was updated in several areas, including life insurance risk, general insurance underwriting risk, information risk, credit risk in treasury transactions and asset/liability risk. Ongoing assessments verify that requirements are met.
The Group regularly reports on its risk profile at local and Group levels. The Group has procedures to refer risk issues to senior management and the Board of Directors in a timely way. To foster transparency about risk, the Board receives quarterly risk reports and additional updates. In 2014, reporting was enhanced by including in-depth risk insights into topics such as operational risk and corporate responsibility.
In addition to this qualitative approach, the Group regularly measures and quantifies material risks to which it is exposed. Zurich’s policy is to maintain capital consistent with an “AA“ financial strength rating for the Group. The Group translates that goal into a quantified risk tolerance. The Zurich Economic Capital Model (Z-ECM) provides a key input into the Group’s strategic planning process as it allows an assessment as to whether the Group’s risk profile is in line with the Group’s risk tolerance. Z-ECM forms the basis for optimizing the Group’s risk-return profile by providing consistent risk measurement across the Group.
Group Risk Management organization The Group Chief Risk Officer leads the Group Risk Management function, which develops methods and processes for identifying, measuring, managing, monitoring and reporting risks throughout the Group. The Group Chief Risk Officer is responsible for oversight of risks across the Group, regularly reporting risk matters to the Chief Executive Officer, senior management committees and the Risk Committee of the Board.
At Group level, the risk analytics department and risk and control department comprise the two centers of expertise. The risk analytics department makes quantitative assessments of insurance, financial market and asset/liability, credit and operational risks and is the Group’s center of excellence for risk quantification, modeling and model validation. The risk and control department includes operational risk management, risk reporting, risk governance and tools and methodologies. The risk management network consists of the Chief Risk Officers (CROs) of the Group’s segments and regions, and the Local Risk Officers (LROs) of the business units and functions and their staff. The risk officers are part of the management teams in their respective businesses and are thus embedded in the business. The LROs also report to the segment or regional CROs, who in turn report to the Group’s Chief Risk Officer.
The Group’s capital management program comprises various actions to optimize shareholders’ total return and to meet capital needs, while enabling Zurich to take advantage of growth opportunities. Such actions include dividends, capital repayments, share buy-backs, issuances of shares, issuance of senior and hybrid debt, securitization and purchase of reinsurance.
The Swiss Code of Obligations stipulates the dividends may only be paid out of freely distributable reserves or retained earnings. Apart from what is specified by the Code, Zurich Insurance Group Ltd faces no legal restrictions on dividends it may pay to its shareholders. As of December 31, 2014, the amount of the general legal reserve exceeded 20 percent of the paid-in share capital.
For details on issuances and redemptions of debt, see note 19 and 20 of the consolidated financial statements.
Zurich pools risk and capital as much as possible at a Group level, creating diversification benefits for the Group. This also allows the Group to take into account the benefits that arise in regions where these benefits are recognized under the capital adequacy regime, e.g., in the U.S., Ireland, and Switzerland.
Solvency I requirements at Group level The Group continues to be subject to Solvency I requirements based on the Swiss Insurance Supervisory Law. Table 1 sets out the Solvency I position as drafted for filing with the Swiss regulator for 2014 and the position for 2013.
Total eligible equity 36,810 31,460 Total required solvency capital 11,976 12,201 Excess margin 24,835 19,259 Solvency I ratio 307% 258%
1 Dated subordinated debt issuances are admissible up to 25 percent of the capital requirement, undated issuances up to 50 percent of the capital requirement. 2 Amount for dividend reflects the proposed dividend for the financial year 2014, not yet approved by the Annual General Meeting, calculated at year-end exchange rates.
Swiss Solvency Test requirements The Group uses an adaptation of its internal Zurich Economic Capital Model (Z-ECM) to comply with the Swiss Solvency Test (SST) requirements and runs a full SST calculation twice a year. The model and ratio are subject to FINMA’s review and approval.
The following chart shows the estimated impact on the Group’s SST ratio of a one percentage point increase/decrease in yield curves, a separate 20 percent rise/decline in all stock markets, after consideration of hedges in place and a separate one percentage point change in credit spreads, as of July 1, 2014. The sensitivities are considered separate but instantaneous scenarios.
The Group uses Z-ECM to assess the economic capital consumption of its business on a one-balance-sheet approach. Z-ECM is an integral part of how the Group is managed. It is embedded in the Group’s organization and decision-making processes, and is used in capital allocation, business performance management, pricing, reinsurance purchasing, transaction evaluation, risk optimization, and regulatory, investor, and rating agency communication. Z-ECM quantifies the capital required for insurance-related risk (including premium and reserve, natural catastrophe, business and life insurance), market risk (market/ALM), credit risk (including reinsurance credit and investment credit) and operational risks. In 2014, Zurich strengthened the validation of Z-ECM.
The chart below shows the development of the Group’s Z-ECM available financial resources, Z-ECM capital required and Z-ECM ratio over time. As of October 1, 2014, the Z-ECM ratio was 127 percent.
The chart below shows an analysis of the composition of the Group’s Z-ECM available financial resources as of July 1, 2014.
Analysis of the Group’s Z-ECM available financial resources (in USD billions as of July 1, 2014)
The chart below shows the Z-ECM capital required split by risk type as of July 1, 2014 and as of January 1, 2014 respectively. As of July 1, 2014, the largest proportion of Z-ECM capital required arose from Market/ALM risk which comprised 39 percent of the total. Premium & Reserve risk was the second-largest, comprising 19 percent.
Scenario 1: Euro crisis • 25% decrease in value of equities • 13% decrease in value of real estate • Interest rate shifts: CHF -15bps, EUR +50bps, USD -25 bps • Impairment of sovereign credit spread by 1 USD billion
Impact on the Z-ECM ratio due to market and credit risk-specific scenarios: Impact on the Z-ECM ratio due to general insurance risk-specific scenarios3: Impact on the Z-ECM ratio due to a life insurance risk-specific scenario: 1 The impact of scenarios on changes to the Z-ECM capital required is not included in the sensitivities for the Z-ECM ratio as the impact is expected to be small and positive. Scenario 1 and Scenario 2 do not take into account the buffering effect of policyholder participation.
2 Scenarios 2 and 3 focus on potential monetary policy errors. For scenario 2, parameters include a 28 percent decrease in value of equities, a 6 – 7 percent decrease in value of real estate, interest rate shifts (CHF –60bps, EUR –60bps, USD –120bps, GBP –120 bps), and a 90 – 94 bps increase in corporate credit spreads. For scenario 3, parameters include an 18 percent increase in value of equities, a 6 percent increase in value of real estate, interest rate shifts (CHF +120bps, EUR +120bps, USD +130bps, GBP +80 bps), and a 16 – 20 basis points decrease in corporate credit spreads.
3 The general insurance risk-specific scenarios relate to natural catastrophe events that are estimated on a modeled 250-year net aggregate loss (equivalent to a 99.6% probability of non-exceedance).
4 The second assumption under the lapse risk scenario, “increase in base lapse rates of 50 percent for all future years,” is applied in a similar manner as the Embedded Value sensitivity, “10 percent increase in voluntary discontinuance rates”; however the former is pre-tax while the latter is post-tax. (For more details, see the “Embedded value report.”) Also, combining the assumptions in the lapse risk scenario introduces potential non-linear effects, which makes it difficult to directly compare the scenario with the embedded value sensitivity.
Insurance risk is the inherent uncertainty regarding the occurrence, amount or timing of insurance liabilities.
The exposure is transferred to Zurich through the underwriting process. Zurich actively seeks to write those risks it understands and that provide a reasonable opportunity to earn an acceptable profit. Zurich manages the customer risks it assumes, and minimizes unintended underwriting risks, through such means as: • Establishing limits for underwriting authority • Requiring specific approvals for transactions above established limits or new products • Using a variety of reserving and modeling methods • Ceding insurance risk through external proportional or non-proportional reinsurance treaties and facultative single-risk placement. The Group centrally manages reinsurance treaties.
General insurance risk General insurance risk includes the reasonable possibility of significant loss due to uncertainty in the frequency of the occurrence of the insured events as well as in the severity of the resulting claims. The following provides an overview of the Group’s main lines of business: • Motor includes automobile physical damage, loss of the insured vehicle and automobile third-party liability insurance.
To arrive at their reserve estimates, the actuaries take into consideration, among other things, the latest available facts, historical trends and patterns of loss payments, exposure growth, court decisions, economic conditions, in particular inflation, and public attitudes that may affect the ultimate cost of claim settlement. Inflation is monitored on a country basis; the monitoring process relies on both Zurich’s economic view on inflation and specific claims activity, and feeds into actuarial models and Zurich’s underwriting processes such as technical price reviews.
The Group closely monitors potential new emerging risk exposures. Zurich has an Emerging Risk Group, with cross-functional expertise from core insurance functions such as underwriting, claims and risk to identify, assess and recommend actions for such risks.
Tables 2.a and 2.b show the Group’s concentration of risk within the General Insurance business by region and line of business based on direct written premiums before reinsurance. General insurance premiums ceded to reinsurers (including retrocessions) amounted to USD 5.5 billion and USD 6.0 billion for the years ended December 31, 2014 and 2013, respectively. Reinsurance programs are managed on a global basis, and therefore, net premium after reinsurance is monitored on an aggregated basis.
Analysis of sensitivities for general insurance risk Tables 3.a and 3.b show the sensitivity of net income before tax and the sensitivity of net assets, using the Group effective income tax rate, as a result of adverse development in the net loss ratio by one percentage point. Such an increase could develop either due to the insured events happening more frequently or due to resulting claims becoming more severe, or from a combination of frequency and severity. The sensitivities do not indicate a probability of such an event and do not consider any non-linear effects of reinsurance. Based on the assumptions applied in the sensitivity analysis in tables 3.a and 3.b, each additional percentage point increase in the loss ratio would have a linear impact on net income before tax and net assets. The Group also monitors insurance risk by evaluating extreme scenarios, taking into account non-linear effects of reinsurance contracts.
Insurance risk sensitivity for the General Insurance business – prior period in USD millions, for the year ended December 31, 2013
Life insurance risk The risks associated with life insurance include: • Mortality risk – actual policyholder death experience on life insurance policies is higher than expected. • Longevity risk – annuitants live longer than expected. • Morbidity risk – policyholder health-related claims are higher than expected.
• Credit risk – the risk associated with a loss or potential loss from counterparties failing to fulfill their financial obligations, which is analyzed in the ‘credit risk’ section.
AUDITED 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.
The Group is also exposed to risks posed by policyholder behavior, and expenses. Policyholder behavior risk is mitigated by designing products that, as closely as possible, match revenue and expenses associated with the contract. Expense risk is reduced by carefully controlling expenses, and through regular expense analysis and allocation exercises.
The Group defines concentration risk in the Global 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.
Zurich is exposed to two main types of concentration risk in its Global Life business: • From a market risk perspective, interest rate guarantees in Germany and Switzerland expose Zurich to financial losses that may arise as a result of adverse movements in interest rates. The Group also wrote a small book of variable annuity business in the U.S. with minimum guaranteed death benefits, but ceased writing new business in 2012. The management of these guarantees is a combination of asset-liability matching and hedging; see the ‘market risk’ section.
• From an insurance risk perspective, the main factors that would affect concentration risk include mortality risk, morbidity risk, longevity risk, policyholder behavior risk (lapse, anti-selection) and expense risk. Due to diversification across geographical regions, lines of business and even across different insurance risk factors, Zurich is not exposed to significant concentrations of insurance risk.
Analysis of sensitivities for life insurance risk The Group reports the Global Life business’s sensitivities to changes in economic and operating risk factors in Embedded Value and New Business Value. The operating risk factors include discontinuance rates, expenses, mortality and morbidity. The embedded value methodology adopted by the Group is based on a market-consistent approach to explicitly allow for market risks. See the ‘embedded value report’ for more information on the Global Life business’s sensitivities to economic and operating risk factors.
Due to its strong balance sheet, Zurich is able to structure and align its reinsurance programs to achieve an optimum risk-return ratio. Zurich manages its central reinsurance purchasing according to these principles. The Group is thus able to manage its risks to retain a significant and stable portion of its risk exposure. The cession rate for General Insurance was 15.1 percent and 16.4 percent as of December 31, 2014 and December 31, 2013, respectively. The cession rate for Global Life was 4.6 percent and 5.0 percent as of December 31, 2014 and December 31, 2013, respectively.
The Group participates in the underlying risks through its retention and through its co-participation in the excess layers. The contracts are on a loss-occurrence basis except the aggregate catastrophe cover Lakeside Re III Cat bond and the Global Aggregate Catastrophe cover which operate on an annual aggregate basis. In addition to these covers, the Group has per risk programs, some local catastrophe covers and a bilateral risk swap in place. These covers are reviewed continuously and are subject to change going forward. The current catastrophe covers are placed annually: January 1 for the U.S. program and the Global Aggregate Catastrophe cover; April 1 for the European program and the Global Catastrophe treaty, and July 1 for the rest of the world program.
AUDITED In 2014, the Group further fine-tuned its reinsurance covers for natural catastrophe events. While the treaty structures of most catastrophe covers, including the regional retentions, remained stable, Zurich reduced the attachment point of the Global Aggregate Catastrophe treaty to achieve an enhanced earnings protection for higher frequency scenarios within the retention of the regional covers.
Reinsurance for natural catastrophes, aggregated – unusually frequent catastrophe events (in USD millions, as of December 31, 2014)
The Group manages the market risk of assets relative to liabilities on an economic total balance sheet basis. This is done to achieve the maximum risk-adjusted excess return on assets relative to the liability benchmark, while taking into account the Group’s risk tolerance and local regulatory constraints.
The Group has policies and limits to manage market risk and keep its strategic asset allocation in line with its risk capacity. To control risk aggregation and ensure a consistent approach to constructing portfolios and choosing external asset managers, Zurich centrally manages certain asset classes to control aggregation of risk, and provides a consistent approach to constructing portfolios and selecting external asset managers. It diversifies portfolios, investments and asset managers, and regularly measures and manages market risk exposure. The Group has set limits on concentration in investments in single issuers and certain asset classes as well by how much asset interest rate sensitivities can deviate from liability interest-rate sensitivities. The Group also limits illiquid investments.
Risk assessment reviews include the analysis of the management of interest rate risk for each major maturity bucket and adherence to the aggregate positions with risk limits. The Group applies processes to manage market risks and to analyze market risk hotspots. Actions to mitigate risk are taken if necessary to manage fluctuations affecting asset/ liability mismatch and risk-based capital.
• The Group manages the market risk of assets relative to liabilities on an economic total balance sheet basis.
Total Z-ECM capital required: USD 36 billion (as per July 1, 2014)
Risk from equity securities and property The Group is exposed to risks from price fluctuations on equity securities and property which could affect the Group’s liquidity, reported income, surplus and regulatory capital position. Equity risk exposure includes common stocks, including equity unit trusts, common stock portfolios backing participating-with-profit policyholder contracts, and equities held for employee benefit plans. Exposure to property risk includes direct holdings in property, listed property company shares and funds, as well as property debt securities such as commercial and residential mortgages, commercial and residential mortgage-backed securities and mezzanine debt. Returns on unit-linked contracts, whether classified as insurance or investment contracts, may be exposed to risks from equity and property, but these risks are borne by policyholders. However, the Group is indirectly exposed to market movements from unit-linked contracts with respect to both earnings and economic capital. Market movements affect the amount of fee income earned when the fee income level is dependent on the valuation of the asset base. Therefore, the value of in-force business for unit-linked business can be negatively affected by adverse movements in equity and property markets.
Table 5, 6 and 7 shows the estimated economic market risk sensitivities of Group investments, including investment property, liabilities, including insurance and financial liabilities, and the net impact for General Insurance and the rest of the business. 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. 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.
AUDITED Analysis of economic sensitivities for interest rate risk Table 5 shows the estimated impacts of a 100 basis point increase/decrease in yield curves after consideration of hedges in place, as of December 31, 2014 and 2013, respectively.
– The sensitivity analysis is based on economic net assets, and not on shareholders’ equity or net income as set out in the consolidated financial statements. – The sensitivity analysis is calculated after tax; the Group effective tax rate is 27.3 percent for 2014 and 24.9 percent for 2013. – The equity market scenarios assume a concurrent movement of all stock markets. – The sensitivity analysis does not take into account actions that might be taken to mitigate losses. Actions may involve changing the asset allocation, for example through selling and buying assets.
Sensitivity of the Group’s total IFRS equity to exchange rate fluctuations in USD millions, as of December 31 2014 2013 10% increase in EUR/USD rate 825 915 GBP/USD rate 302 311 CHF/USD rate (176) (382) Other currencies/USD rates 730 760
The Group’s objective in managing credit risk exposures is to maintain them within parameters that reflect the Group’s strategic objectives and risk tolerance. Sources of credit risk are assessed and monitored, and the Group has policies to manage the specific risks within the various subcategories of credit risk. To assess counterparty credit risk, the Group uses the ratings assigned by external rating agencies, qualified third parties, such as asset managers, and internal rating assessments. If there is a discrepancy among external rating agencies, the Group applies the lowest ratings unless other indicators justify alternative internal credit ratings.
The Group actively uses collateral to mitigate credit risks. Nevertheless, underlying credit risks are managed independently from the collateral. The Group has limits and quality criteria to identify acceptable letter-of-credit providers. Letters of credit enable Zurich to limit the risks embedded in reinsurance captives, deductibles, trade credit and surety.
• In 2014, the overall credit quality of the reported exposures remained materially unchanged.
AUDITED On-balance sheet exposures are the main source of credit risk. Off-balance sheet exposures are related primarily to collateral used to protect underlying credit exposures on the balance sheet. The Group also has off-balance sheet exposures related to undrawn loan commitments of USD 3 million and USD 8 million as of December 31, 2014 and 2013, respectively. See note 23 of the consolidated financial statements for undrawn loan commitments.
The risk-weighted average issuer credit rating of the Group’s debt securities portfolio was “BBB+” in 2014 and 2013.
Rest of Eurozone 1,128 1,147 Eurozone supranationals and similar 1,094 679
Reinsurance assets include reinsurance recoverables (the reinsurers’ share of reserves for insurance contracts) of USD 16.6 billion and USD 18.1 billion as of December 31, 2014 and 2013, respectively and receivables arising from ceded reinsurance, gross of allowances for impairment, of USD 0.9 billion and USD 1.1 billion as of December 31, 2014 and 2013, respectively. Reserves for potentially uncollectible reinsurance assets amounted to USD 135 million as of December 31, 2014 and USD 174 million as of December 31, 2013. 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 premiums ceded and reinsurance assets by rating of reinsurer and captive as of December 31 2014 2013
Credit risk related to mortgage loans The mortgage business is affected by local property market conditions and local legislation. Investment portfolio allocations made to mortgages take these factors into consideration, and are in line with the framework of the strategic asset allocation defined by the Group, and adapted and approved by local investment committees. Conservative lending criteria (i.e., maximum mortgage-loan to property-value ratios) and diversification of loans across many single borrowers, particularly in Germany and in Switzerland, help reduce potential loss. Furthermore, business units are required to clearly state criteria for determining borrower and collateral quality in their local mortgage policies. The Group sets requirements for local policies, and monitoring and reporting standards. The Group closely monitors performance of portfolios with respect to impairments and losses.
The Group’s largest mortgage loan portfolios are in Germany (USD 3.1 billion) and in Switzerland (USD 3.5 billion); these are predominantly secured against residential property. In Switzerland, the underlying properties backing individual loans are revalued every 10 years. In Germany, the property valuation is not generally reassessed after the mortgage loan is granted. A less-frequent, or no revaluation of the underlying property means that reported loan-to-value (LTV) ratios will be higher (lower) than they would be if property prices had risen (fallen) since their valuation. For more details, see table 13.a and 13.b.
Credit risk related to derivatives The positive replacement value of outstanding derivatives represents a credit risk to the Group. These instruments include interest-rate, currency, total-return and equity swaps, forward contracts and purchased options. A potential exposure also arises from possible changes in replacement values. The Group regularly monitors credit risk exposures arising from derivative transactions. Outstanding positions with external counterparties are managed through an approval process embedded in derivative programs.
Less: impairment allowance Impairment allowances on individually assessed financial assets – 726 19 89 835 Impairment allowances on collectively assessed financial assets – 61 – 208 269 1 USD 158 million past due but not impaired and USD 1.4 billion impaired mortgage loans relate to the run-off property loans at Dunbar Assets Ireland.
Increase/(Decrease) in allowance for impairments 92 20 12 Amounts written-off (62) (1) (38) Foreign currency translation effects 24 – (5)
• Conducts operational risk assessments: operational risks are identified for key business areas and are qualitatively assessed. Risks identified and assessed above a certain threshold must be mitigated, and escalated in specific reports at the Group level. Plans to make improvements 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.
The Group regularly assesses risks associated with strategic suppliers to verify that suppliers remain financially viable and able to deliver services, and that the Group is not exposed to geographic and supplier concentration risks.
As part of Z-ECM, the Group uses a scenario-based approach to assess, model and quantify the capital required for operational risk for business units under extreme circumstances and a very slight probability of occurrence. The chart below shows the operational risk scenarios that have the highest impact on Z-ECM capital required.
Z-ECM capital required for operational risk, split by risk scenario clusters (as of July 1, 2014)
Risk management and internal controls The Group considers controls to be key instruments for monitoring and managing operational risk. The Board has overall responsibility for the Group’s risk management and internal controls, in particular for their adequacy and integrity. The Group’s internal control system increases the reliability of Zurich’s financial reporting, makes operations more effective, and aims to ensure legal and regulatory compliance. The internal controls system is designed to manage rather than eliminate the material risk that business objectives will not be achieved. It can provide only reasonable, not absolute, assurance against material financial misstatement or loss.
Management is responsible for identifying, evaluating and addressing significant risks, and designing and maintaining internal controls. Key processes and controls in the organization are subject to reviews by management, Group Audit, Group Compliance and Group Risk Management. Significant risks and the mitigation actions are reported regularly to the Risk and Audit Committees of the Board.
The internal and external auditors also regularly report conclusions, observations and recommendations that arise as a result of their independent reviews and testing of internal controls over financial reporting.
Group-wide liquidity management policies and specific guidelines governing how local businesses plan, manage and report their local liquidity and include regular stress tests for all major carriers within the Group. The stress tests use a standardized set of internally defined stress events, and are designed to provide an overview of the potential drain on liquidity if the Group had to recapitalize local balance sheets.
See note 19 of the consolidated financial statements for more information on debt obligation maturities and credit facilities and note 23 of the consolidated financial statements for information on commitments and guarantees. The Group’s on-going liquidity monitoring includes regular reporting to the executive management and quarterly reporting to the Risk Committee of the Board, covering aspects such as the Group’s actual and forecast liquidity, possible adverse scenarios that could affect the Group’s liquidity and possible liquidity needs from the Group’s main subsidiaries, including under conditions of stress.
Tables 15.a and 15.b provide an analysis of the expected maturity profile of reserves for insurance contracts, net of reinsurance, based on expected cash flows without considering the surrender values as of December 31, 2014 and 2013. Reserves for unit-linked insurance contracts amounting to USD 71.4 billion and USD 74.9 billion as of December 31, 2014 and 2013, respectively, are not included, as policyholders can generally surrender their contracts at any time, at which point the underlying unit-linked assets would be liquidated. Risks from the liquidation of unit-linked assets are largely borne by the policyholders of unit-linked contracts.
AUDITED Liabilities for unit-linked investment contracts amounted to USD 63.0 billion and USD 59.5 billion as of December 31, 2014 and 2013, respectively. Because 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 851 million and USD 922 million as of December 31, 2014 and 2013, respectively. The Group actively manages the Global Life in-force business to improve persistency and retention.
Strategic risk Strategic risk corresponds to the unintended risk that can result as a by-product of planning or executing the strategy.
Risk considerations are a key element in the strategic decision-making process. The Group assesses the implications of strategic decisions on risk-based return measures and risk-based capital to achieve an optimal risk-return profile and take advantage of economically profitable growth opportunities as they arise.
The Group evaluates the risks of M&A transactions both from a quantitative and a qualitative perspective. The Group conducts risk assessments of M&A transactions to evaluate risks specifically related to integrating acquired businesses.
In this section Consolidated financial statements 156 Embedded value report 258 Holding company 292 Shareholder information 308 Contact information 311 Glossary 312
Consolidated income statements 157 Consolidated statements of comprehensive income 158 Consolidated balance sheets 160 Consolidated statements of cash flows 162 Consolidated statements of changes in equity 164 1. Basis of presentation 166 2. New accounting standards and amendments to published accounting standards 168 3. Summary of significant accounting policies 169 4. Critical accounting judgments and estimates 179 5. Acquisitions and divestments 184 6. Group investments 185 7. Group derivative financial instruments and hedge accounting 188 8. Reserves for insurance contracts and reinsurers’ share of reserves for insurance contracts 192 9. Liabilities for investment contracts 198 10. Equity component relating to contracts with DPF 198 11. Gross and ceded insurance revenues and expenses 199 12. Deferred policy acquisition costs and deferred origination costs 200 14. Property and equipment 202 15. Goodwill and other intangible assets 203 16. Receivables and other assets 205 17. Other liabilities 206 18. Income taxes 208 19. Senior and subordinated debt 211 20. Shareholders’ equity 213 21. Employee benefits 215 22. Share-based compensation and cash incentive plans 222 23. Commitments and contingencies, legal proceedings and regulatory investigations 224 24. Fair value measurement 227 25. Related party transactions 237 26. Relationship with the Farmers Exchanges 238 27. Segment information 240 28. Interest in subsidiaries 250 29. Events after the balance sheet date 254 Report of the statutory auditor 256
Consolidated income statements in USD millions, for the years ended December 31 Notes 2014 2013
Less premiums ceded to reinsurers (6,101) (6,546) Net written premiums and policy fees 48,680 48,303
Net change in reserves for unearned premiums 11 (359) (1,025) Net earned premiums and policy fees 48,321 47,277 Farmers management fees and other related revenues 26 2,791 2,810 Net investment result on Group investments 6 9,209 7,398
Net investment result on unit-linked investments 10,784 12,805 Net gain/(loss) on divestments of businesses (259) (1) Other income 1,723 1,757 Total revenues 72,569 72,045 Benefits, losses and expenses Insurance benefits and losses, gross of reinsurance 11 37,452 35,256 Less ceded insurance benefits and losses 11 (3,088) (3,058) Insurance benefits and losses, net of reinsurance 11 34,364 32,198 Policyholder dividends and participation in profits, net of reinsurance 11 12,568 13,946 Underwriting and policy acquisition costs, net of reinsurance 11 9,835 10,041 Administrative and other operating expense 13 8,910 8,804 Interest expense on debt 525 586 Interest credited to policyholders and other interest 523 510 Total benefits, losses and expenses 66,725 66,086 Net income before income taxes 5,844 5,960 Income tax expense 18 (1,670) (1,701)
Net income after taxes 4,174 4,259 attributable to non-controlling interests 280 231 attributable to shareholders 3,895 4,028 in USD
Basic earnings per share 20 24.05 25.33 Diluted earnings per share 20 23.84 25.23
Other intangible assets 15 6,754 7,028 Total assets 406,529 415,053 1 Accrued investment income on unit-linked investments amounted to USD 133 million and USD 230 million as of December 31, 2014 and December 31, 2013, respectively. 2 December 31, 2014 included land and buildings formerly classified as investment property amounting to USD 48 million. December 31, 2013 included assets relating to a subsidiary of Centre Group Holdings Limited amounting to USD 100 million (see note 5) and land and buildings formerly classified as investment property amounting to USD 123 million.
Additional paid-in capital 20 4,843 6,395 Net unrealized gains/(losses) on available-for-sale investments 4,068 1,730 Cash flow hedges 306 106 Cumulative foreign currency translation adjustment (6,259) (4,008) Revaluation reserve 218 195 Retained earnings 31,548 28,075 Shareholders’ equity 34,735 32,503 Non-controlling interests 2,095 2,231 Total equity 36,830 34,734 Total liabilities and equity 406,529 415,053 1 December 31, 2013 included liabilities relating to a subsidiary of Centre Group Holdings Limited amounting to USD 49 million (see note 5).
Consolidated statements of cash flows in USD millions, for the years ended December 31 2014 2013
Cash flows from operating activities Net income attributable to shareholders 3,895 4,028 Adjustments for: Net (gain)/loss on divestments of businesses 259 1 (Income)/expense from equity method accounted investments (12) (11) Depreciation, amortization and impairments of fixed and intangible assets 1,012 1,198 Other non-cash items 62 805
Net capital (gains)/losses on total investments and impairments (12,015) (12,245) Net change in derivatives 38 (75) Net change in money market investments 1,939 936 Sales and maturities
Fin an cial info rm atio n in USD millions, for the years ended December 31 2014 2013
Cash and cash equivalents comprise the following: Cash at bank and in hand 6,592 5,746 Cash equivalents 2,184 2,416
As of December 31, 2014 and 2013, cash and cash equivalents held to meet local regulatory requirements were USD 817 million and USD 1,284 million, respectively.
Share-based payment transactions – 61 – – – – – 61 – 61
Net income – – – – – – 4,028 4,028 Net unrealized gains/(losses) on available-for-sale investments – – (2,794) – – – – (2,794) Cash flow hedges – – – (133) – – – (133) Cumulative foreign currency translation adjustment – – – – (986) – – (986) Revaluation reserve – – – – – 15 – 15 Net actuarial gains/(losses) on pension plans – – – – – – (367) (367)
Net changes in capitalization of non-controlling interests – – – – – – – – (22) (22)
Issuance of share capital 1 – 200 – – – – – 200 – 200
Net income – – – – – – 3,895 3,895 Net unrealized gains/(losses) on available-for-sale investments – – 2,338 – – – – 2,338 Cash flow hedges – – – 200 – – – 200 Cumulative foreign currency translation adjustment – – – – (2,251) – – (2,251) Revaluation reserve – – – – – 24 – 24 Net actuarial gains/(losses) on pension plans – – – – – – (407) (407)
1 The number of common shares issued as of December 31, 2014 was 149,636,836 (December 31, 2013: 148,903,222, December 31, 2012: 148,300,123). 2 As approved by the Annual General Meeting on April 4, 2013, the dividend of CHF 17 per share was paid out of the capital contribution reserve. The difference of
3 As approved by the Annual General Meeting on April 2, 2014, the dividend of CHF 17 per share was paid out of the capital contribution reserve. The difference of USD 1,022 million between the dividend at transaction day exchange rates amounting to USD 2,837 million and the dividend at historical exchange rates amounting to USD 1,815 million is reflected in the cumulative foreign currency translation adjustment.
Zurich Insurance Group Ltd, a Swiss corporation, is the holding company of the Group and is listed on the SIX Swiss Exchange. Zurich Insurance Group Ltd was incorporated on April 26, 2000, in Zurich, Switzerland. It is recorded in the Commercial Register of the Canton of Zurich under its registered address at Mythenquai 2, 8002 Zurich.
The accounting policies applied by the reportable segments are the same as those applied by the Group. The Group accounts for inter-segment revenues and transfers as if the transactions were with third parties at current market prices. Dividends, realized capital gains and losses as well as gains and losses on the transfer of net assets, are eliminated within the segment, whereas all other intercompany gains and losses are eliminated at Group level. In the Consolidated financial statements, inter-segment revenues and transfers are eliminated.
The following balances are mixed in nature (including both current and non-current portions): debt securities, mortgage loans, other loans, reinsurers’ share of reserves for insurance contracts, deposits made under assumed reinsurance contracts, deferred origination costs, other assets, reserves and investments for unit-linked contracts, liabilities for investment contracts, deposits received under ceded reinsurance contracts, deferred front-end fees, reserves for losses and loss adjustment expenses, reserves for unearned premiums, future life policyholders’ benefits, policyholders’ contract deposits and other funds, other liabilities, senior and subordinated debt, and assets and liabilities held for sale.
Maturity tables have been provided for the following balances: reserves for insurance contracts (tables 15.a and 15.b in the Risk review), liabilities for investment contracts (tables 16.a and 16.b in the Risk review), debt securities (table 6.4), derivative assets and derivative liabilities (tables 7.1 and 7.2), other financial liabilities (table 17.2) and outstanding debt (table 19.3).
Table 1.1 summarizes the principal exchange rates used for translation purposes. Net gains/(losses) on foreign currency transactions included in the consolidated income statements were USD 90 million and USD 37 million for the years ended December 31, 2014 and 2013, respectively. Foreign currency exchange forward and swap gains/(losses) included in these amounts were USD 138 million and USD (58) million for the years ended December 31, 2014 and 2013, respectively.
Restatements and reclassifications The Group has reviewed the classification of certain life insurance products, which resulted in the reclassification of a product for an amount of USD 50 million. The reclassification was prospectively recognized in 2014 with no impact on the Group’s consolidated balance sheet or income statement. As a result of this change there was a reduction in future life policyholders’ benefits, and an increase in reserves for unit-linked contracts. The reduction in future life policyholders’ benefits is set out in note 8.
The Group transferred certain liabilities between Reserves for losses and loss adjustment expenses and future life policyholders’ benefits for an amount of USD 47 million. The reclassification was prospectively recognized in 2014 as the reclassification has no impact on the Group’s consolidated balance sheet or income statement. The reclassifications between reserves for losses and loss adjustment expenses and future life policyholders’ benefits are set out in note 8.
The Group has revised the consolidated statement of cash flows to present certain short term purchases and sales net, which were previously presented as gross purchases and gross sales. This resulted in no changes to net cash provided by operating activities. Prior periods have been revised to reflect this change. Further, the Group identified that cash disbursements for certain intangible assets amounting to USD 549 million for the year ended December 31, 2013 had been erroneously classified within operating activities. These have been reclassified to investing activities.
IFRS 11 Accounting for Acquisitions of Interests in Joint Operations January 1, 2016
IAS 16/IAS 38 Clarification of Acceptable Methods of Depreciation and Amortisation January 1, 2016 1 Expected to result in a significant portion of financial assets currently classified as available-for-sale being classified as at fair value through profit or loss. Credit allowances for financial assets carried at amortized cost and debt securities measured at fair value, with changes in fair value recognized in other comprehensive income (OCI), are expected to increase due to the introduction of the expected credit loss methodology. Upon implementation of the revised standard IFRS 4 ‘Insurance Contracts’, more assets might be classified as at fair value through profit or loss under the fair value option.
Fin an cial info rm atio n 3. Summary of significant accounting policies
• Foreign currency translation differences arising on monetary items that form part of net investments in foreign operations are included directly in OCI as cumulative foreign currency translation adjustment.
Reserves for life benefits Future life policyholders’ benefits represent the estimated future benefit liability for traditional life insurance policies and include the value of accumulated declared bonuses or dividends that have vested to policyholders.
Deferred acquisition costs (DAC) Costs that vary with and are directly related to the acquisition of new and renewal business, including for example commissions and certain underwriting and policy issue expenses, are deferred and subsequently amortized over a defined period.
General insurance DAC for general insurance contracts is amortized over the period in which the related premiums written are earned.
DAC for investment type insurance contracts such as universal life, unit-linked and unitized with-profits contracts is amortized based on estimated gross profits expected to be realized over the life of the contract. Estimated gross profits are updated for actual and anticipated future experience and discounted using either the interest rate in effect at the inception of the contracts or the latest revised interest rate for the remaining benefit period, depending on whether crediting is based on the policyholder’s or on the reporting entity’s investment performance. Resultant deviations are reflected in income.
General insurance For general insurance contracts, unearned premiums are tested to determine whether they are sufficient to cover related expected losses, loss adjustment expenses, policyholder dividends, unamortized DAC and maintenance expenses, using current assumptions and considering anticipated investment returns. If a premium deficiency is identified, the DAC asset for the respective grouping of contracts is written down by the amount of the deficiency. If, after writing down the DAC asset to nil, a premium deficiency still exists for the respective grouping of contracts, then a premium deficiency reserve is established for the amount of the remaining deficiency.
Reinsurance contracts that do not transfer significant insurance risk are accounted for using the deposit method.
Unit-linked investment contracts These represent portfolios maintained to meet the specific investment objectives of policyholders who bear the credit, market and liquidity risks related to the investments. The liabilities are carried at fair value, which is determined by reference to the underlying financial assets. Changes in fair value are recorded in income. The related assets for unit-linked investment contracts are designated at fair value through profit or loss in order to reduce measurement inconsistencies.
Available-for-sale financial assets Available-for-sale financial assets are carried at fair value, with changes in fair value recognized in OCI, until the securities are either sold or impaired. The cumulative unrealized gains or losses recorded in OCI are net of cumulative deferred income taxes, certain related life policyholder liabilities and deferred acquisition costs. When available-for-sale financial assets are sold, impaired or otherwise disposed of, the cumulative gains or losses are reclassified from OCI to income as net capital gains/(losses) on investments and impairments.
Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are mainly financial assets backing unit-linked insurance contracts, unit-linked investment contracts and certain life insurance contracts with participation features. The designation of these assets at fair value through profit or loss eliminates or significantly reduces a measurement inconsistency that would otherwise arise from measuring assets or recognizing the gains and losses on them on a different basis compared to the liabilities.
Loans and receivables Loans and receivables are financial assets with fixed or determinable payments that are neither quoted in an active market nor classified in any of the other categories. They are carried at amortized cost using the effective interest rate method, less any charges for impairment.
Investment property is initially recorded at cost (including transaction costs) and subsequently measured at fair value with changes in fair value, as well as any realized gain or loss upon disposal, recognized in income.
Impairment of financial assets General The Group assesses at each reporting date whether there is objective evidence that loss events have occurred that negatively affect the estimated future cash flows of a financial asset or a group of financial assets.
Available-for-sale financial assets When there is objective evidence that an available-for-sale debt security is impaired, the cumulative loss that had been recognized in OCI is reclassified to income as an impairment loss. If the fair value of a debt security increases in a subsequent period, and the increase can be objectively related to an event occurring after the impairment loss was recognized, the impairment loss is reversed through income. The amount of reversal is limited so that it does not result in a carrying amount exceeding the amortized cost that would have been calculated at the date of reversal had an impairment loss not been previously recognized. Any further gains are recognized in OCI. Any subsequent losses, to the extent that they do not represent further impairment losses, are also recognized in OCI.
When there is objective evidence that an available-for-sale equity security is impaired, the cumulative loss that had been recognized in OCI, including any portion attributable to foreign currency changes, is reclassified to income as an impairment loss. The impairment loss is the difference between the weighted-average acquisition cost (less any impairment loss on that security previously recognized in income) and the current fair value. Impairment losses on equity securities are not reversed through income, instead, when the fair value of a previously impaired equity security increases, the resulting unrealized gains are recognized in OCI. Any further decrease in fair value subsequent to recognition of an impairment loss is also recognized in income as an impairment loss, together with any portion attributable to foreign currency changes, until the equity security is derecognized.
Objective evidence of impairment exists if it is probable that the Group will not be able to collect principal and/or interest due according to the contractual terms of the instrument. When 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. The impairment allowance is measured as the difference between the carrying amount of the assets and the present value of estimated future cash flows, calculated using the original effective interest rate, for fixed rate financial assets, or current effective interest rate, for variable rate financial assets. If the amount of the impairment loss decreases and the decrease relates objectively to an event occurring after the impairment loss was recognized, the impairment loss is reversed through income. The amount of reversal is limited so that it does not result in a carrying amount exceeding the amortized cost that would have been calculated at the date of reversal had an impairment loss not been previously recognized.
Derivative financial instruments that qualify for hedge accounting Derivative financial instruments are used by the Group to economically hedge risks. In limited circumstances derivative financial instruments are designated as hedging instruments for accounting purposes in: • Fair value hedges which are hedges of the exposure to changes in the fair value of a recognized asset or liability; • Cash flow hedges, which are hedges of the exposure to variability in cash flows attributable to a particular risk as associated with a recognized asset or liability or a highly probable forecast transaction and could affect profit or loss; or • Net investment hedges, which are hedges of a net investment in a foreign operation.
All hedge relationships are formally documented, including the risk management objectives and strategy for undertaking the hedge. At inception of a hedge and on an ongoing basis, the hedge relationship is formally assessed in order to determine whether the hedging instruments are expected (prospective assessment) and have been (retrospective assessment) highly effective in offsetting changes in fair values or cash flows of hedged items attributable to the hedged risk. Where the hedge accounting criteria are fulfilled, the accounting treatment is as follows: Fair value hedges The hedged item is remeasured for fair value changes attributable to the risk being hedged and such fair value changes are recognized in the same line item of the consolidated income statement as the offsetting gains or losses from remeasuring the hedging derivatives at fair value through profit or loss.
Net investment hedges Measurement of hedge effectiveness is based on changes in forward rates. Gains and losses on the designated hedging derivative relating to the effective portion of the hedge are recognized in OCI, whereas the ineffective portion is immediately recognized in income. The Group also designates non-derivative financial instruments as hedging instruments in hedges of certain net investments in foreign operations. Foreign currency re-measurement gains and losses on the designated non-derivative financial instruments are reported in OCI together with the translation gains and losses on the hedged net investment. The accumulated gains and losses in OCI on the hedging instrument are reclassified to income on disposal or partial disposal of the foreign operation.
If the qualifying criteria for the application of hedge accounting are no longer met, the hedge relationship is discontinued prospectively, in which case the hedging instrument and the hedged item are reported independently in accordance with the respective accounting policy.
g) Borrowings Borrowings (debt issued) are recognized initially at fair value of the consideration received, net of transaction costs incurred. Borrowings are subsequently carried at amortized cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognized in income over the period of the borrowing using the effective interest rate method.
j) Goodwill Goodwill arises on the acquisition of subsidiaries, associates and joint ventures and represents the excess of the cost of acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired entity at the acquisition date.
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 has a finite life and is amortized over the expected life of the acquired contracts, following the same rules as outlined for deferred acquisition costs. The carrying value of the PVFP asset is tested periodically for impairment as part of the liability adequacy test for insurance contracts.
Attorney-in-fact relationships (AIF) The AIF reflects the ability of the Group to generate future revenues based on the Group’s relationship with the Farmers Exchanges, which are managed but not owned by Farmers Group, Inc. (FGI), a wholly owned subsidiary of the Group. In determining that these relationships have an indefinite useful life, the Group considered the organizational structure of inter-insurance exchanges, under which subscribers exchange contracts with each other and appoint an attorney-in-fact to provide non-claims management services, and the historical AIF between FGI and the Farmers Exchanges. The AIF is tested for impairment at least annually.
l) Provisions, contingent liabilities, commitments and financial guarantees Provisions, contingent liabilities, commitments and financial guarantees are recognized when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of such an obligation. Provisions are discounted when the effect of the time value of money is considered material.
o) Net investment income Net investment income includes investment income earned net of investment expenses incurred.
Investment income Investment income primarily consists of interest income on debt securities, loans and receivables, dividend income on equity securities, rental income from investment property and income earned on equity method accounted investments.
Investment expenses Investment expenses consist of costs relating to investment management services and operating expenses for investment property. These expenses are recognized on an accrual basis.
p) Employee benefits Share-based compensation and cash incentive plans The Group operates long-term incentive plans that are accounted for as equity-settled share-based compensation plans. The fair value of these incentive plans is determined at the grant date and is recognized as an expense in income over the vesting period, with a corresponding increase recorded in additional paid-in capital.
Defined benefit plan obligations and contributions are determined annually by qualified actuaries using the projected unit credit method. The Group’s expense relating to these plans is accrued over the employees’ service periods based on the actuarially determined cost for the period. Actuarial gains and losses are recognized, in full in the period in which they occur, in OCI. Past service costs, which result from plan amendments and curtailments, are recognized in income on the earlier of the date on which the plan amendment or curtailment occurs (which is the date from which the plan change is effective) and the date on which a constructive obligation arises. Settlement gains or losses are recognized in income when the settlement occurs.
r) Income taxes The Group provides current tax expense according to the tax laws of each jurisdiction in which it operates. Deferred income taxes are recorded for temporary differences, which are based on the difference between financial statement carrying amounts and income tax bases of assets and liabilities using enacted or substantively enacted tax rates applicable in the respective tax jurisdiction. Deferred tax assets on taxable losses carried forward are recognized to the extent it is probable that they can be utilized against future taxable profits in the respective jurisdictions.
Goodwill and Attorney-in-fact relationships (AIF) Goodwill is allocated to the cash generating units (CGUs) as outlined in note 3. For the General Insurance segment, CGUs are aggregated predominantly at the segment level. Within the Global Life and Farmers segments, CGUs are identified at either business unit level or individual reporting entity level.
Value-in-use is determined using the present value of estimated future cash flows expected to be generated from the CGU. Cash flow projections are based on financial budgets, which are approved by management, typically covering a three-year period or, if appropriate and adequately justified, a longer period, which may be necessary to more accurately represent the nature of the cash flows used to test the goodwill. Cash flows beyond this period are extrapolated using, amongst others, estimated perpetual growth rates, which reflect the expected inflation of the geographical areas in which the cash flows supporting the goodwill are generated. If cash flows are generated in different geographical areas with different expected inflation rates, weighted averages are used. The discount rates applied reflect the respective risk free interest rate adjusted for the relevant risk factors to the extent they have not already been considered in the underlying cash flows.
Table 4.1 sets out, as of the date of valuation, the value of goodwill and AIF for the major CGUs, applied discount rates and the perpetual nominal growth rates beyond the projection period which are dependent on country specific growth rate and inflation expectations.
Distribution agreements The recoverable amount for General Insurance intangible assets relating to distribution agreements is determined on the basis of value-in-use calculations. These calculations use cash flow projections in line with the terms and conditions of the underlying distribution agreements. For Global Life intangible assets relating to distribution agreements, the recoverable amount is determined based on projected cash flows derived from the new business calculation and discount rates consistent with the data used for actuarial valuations.
The discount rates used in the recoverable amount calculations for developed markets are based on a capital asset pricing model and consider government bond rates, which are further adjusted for equity risk premium, appropriate beta and leverage ratio. In emerging markets, discount rates are based on the U.S. dollar discount rate taking into account inflation differential expectations and country risks. All input factors to the discount rates are based on observable market data.
Discount and perpetual growth rates by major distribution agreements as of the date of valuation in USD
Transactions in 2013 Assets/liabilities held for sale As of December 31, 2013, a subsidiary of Centre Group Holdings Limited, Centre Insurance Company, which is a general insurance and reinsurance company based in the United States of America, with total assets of USD 100 million and total liabilities of USD 49 million, was classified as held for sale. As of September 30 2014, Centre Insurance Company was no longer classified as held for sale as the sale was not completed.
Net investment result for Group investments in USD millions, for the years ended December 31 Net investment income
Investments in associates and joint ventures 12 11 36 1 48 12 (2) (1)
Investment result, gross, for Group investments 6,462 6,496 3,002 1,157 9,465 7,653 (86) (201) Investment expenses for Group investments 2 (256) (256) – – (256) (256) – – Investment result, net, for Group investments 6,206 6,240 3,002 1,157 9,209 7,398 (86) (201)
Investments (including cash and cash equivalents) with a carrying value of USD 6,214 million and USD 5,853 million were held to meet local regulatory requirements as of December 31, 2014 and 2013, respectively.
Details of debt securities by category in USD millions, as of December 31
Debt securities: Government and supra-national bonds 3,665 4,245 60,937 64,081 3,751 3,801
As of January 1 8,745 8,561 Additions and improvements 1,049 611
1 Net unrealized gains/(losses) on Group investments include net gains arising on cash flow hedges of USD 306 million and USD 106 million as of December 31, 2014 and 2013, respectively.
Securities lending, repurchase and reverse repurchase agreements in USD millions, as of December 31 2014 2013
Securities lending agreements Securities lent under securities lending agreements 1 7,668 9,947 Collateral received for securities lending 8,266 10,806 of which: Cash collateral 229 332 of which: Non cash collateral 2 8,036 10,474 Liabilities for cash collateral received for securities lending 229 332 Repurchase agreements Securities sold under repurchase agreements 3 1,455 1,694 Obligations to repurchase securities 1,451 1,685 Reverse repurchase agreements Securities purchased under reverse repurchase agreements 4 294 681 Receivables under reverse repurchase agreements 290 678 1 The Group’s counterparties have the right to sell or repledge, in the absence of default, assets pledged as collateral with a fair value of USD 7,668 million and USD 9,947 million as of December 31, 2014 and December 31, 2013, respectively. The majority of these assets were debt securities.
The Group uses derivative financial instruments mainly for economic hedging purposes in order to mitigate risks. Such risks result from changes in interest rates, equity prices and exchange rates. Derivative financial instruments with a positive fair value are reported in other assets (see note 16) and those with a negative fair value are reported in other liabilities (see note 17).
Table 7.1 shows the fair value and notional amounts for instruments which do not qualify for hedge accounting as of December 31, 2014 and 2013. Whilst these notional amounts express the extent of the Group’s involvement in derivative transactions, they are not, however, representative of amounts at risk.
Interest rate contracts Interest rate contracts are used to hedge risks from changes in interest rates and to manage asset liability mismatches. Whenever possible the Group enters into exchange traded contracts, which are standardized and regulated. Furthermore, because of the structure of the exchanges, exchange traded contracts are not considered to carry counterparty risk. Over the counter (OTC) contracts are otherwise applied and comprise swaps and swaptions.
Other contracts Other contracts predominantly include stable value products (SVPs) issued to insurance company separate accounts in connection with certain life insurance policies (Bank Owned Life Insurance (BOLI) and Company Owned Life Insurance (COLI)) with an account value of USD 9.0 billion and USD 9.4 billion and market value of the underlying investments of USD 9.2 billion and USD 9.0 billion as of December 31, 2014 and 2013, respectively. The Group closely monitors the risk of surrender of these life insurance policies and includes the likelihood of surrender as one of the input parameters to determine the fair value of the SVPs which was nil as of December 31, 2014 and 2013.
Fair value hedges: Cross currency interest rate swaps 330 – – 330 8 – 574 108 –
Cash flow hedges: Net investment hedges: Fair value hedges Designated fair value hedges consist of interest rate swaps and cross currency interest rate swaps used to protect the Group against changes in interest rate exposure and foreign currency exposure of debt issued by the Group.
Cash flow hedges Designated cash flow hedges, such as interest rate swaptions are used to protect the Group against variability of future cash flows due to changes in interest rates associated with expected future purchases of debt securities (during the years 2016, 2021 and 2026) required for certain life insurance policies. The effective portion of the gains and losses on these swaptions are initially recognized in other comprehensive income. Subsequently the gains or losses will be recycled to income within net investment income on Group investments until December 31, 2036. The gains and losses relating to the ineffective portion of these hedges are recognized immediately in income within net capital gains/ losses on investments and impairments.
The Group recognized gains of USD 13 million in the consolidated income statement within net investment income on Group investments for both the years ended December 31, 2014 and 2013. The Group also recognized net gains/(losses) of USD (176) million and USD 73 million within administrative and other operating expense for the years ended December 31, 2014 and 2013, respectively, as an offset to the foreign currency revaluation on the underlying hedged items.
A loss of USD 29 million and USD 9 million for the years ended December 31, 2014 and 2013, respectively, was recognized in net capital gains/(losses) and impairments due to hedge ineffectiveness.
No ineffectiveness of net investment hedges was recognized in net capital gains/(losses) and impairments for the years ended December 31, 2014 and 2013.
Reserves for losses and loss adjustment expenses 64,472 68,312 (9,770) (10,993) 54,703 57,319
Significant delays may occur in the notification and settlement of claims, and a substantial measure of experience and judgment is involved in assessing outstanding liabilities, the ultimate cost of which cannot be known with certainty as of the balance sheet date. The reserves for losses and loss adjustment expenses are determined on the basis of information currently available. However, it is inherent in the nature of the business written that the ultimate liabilities may vary as a result of subsequent developments.
For the year ended December 31, 2014, the decrease of USD 2,616 million in net reserves for losses and loss adjustment expenses was mostly driven by the effect of foreign currency translation of USD 3,013 million. Excluding this effect, reserves for losses and loss adjustment expenses increased by USD 397 million. Underlying favorable reserve development arising from reserves established in prior years amounted to USD 59 million during the year ended December 31, 2014, and mainly relates to the following: • The personal and commercial business in Europe reported favorable prior year development of USD 218 million, mostly driven by USD 96 million in motor third party liability in Switzerland and USD 75 million in property in the UK; Q4_2014_12_AR14_104_Consolidated_financial_statements_en.indd 192 23.02.2015 16:37:32
Cumulative paid as of December 31: Seven years later (33,030) (33,665) (35,188) Eight years later (34,896) (35,215) Nine years later (36,162)
Gross reserves re-estimated as of December 31, 2014 60,440 60,939 63,356 60,877 63,763 65,082 65,984 68,041 67,639 Cumulative (deficiency)/ redundancy of gross reserves (15) 3,596 4,535 4,340 4,363 3,192 1,778 1,946 673 Cumulative (deficiency)/ redundancy as a percentage of initial gross reserves (0.0%) 5.6% 6.7% 6.7% 6.4% 4.7% 2.6% 2.8% 1.0%
Development of reserves for losses and loss adjustment expenses for asbestos in USD millions 2014 2013
Losses and loss adjustment expenses incurred 93 93 47 53 Losses and loss adjustment expenses paid (199) (175) (267) (104) Foreign currency translation effects (167) (146) 41 41
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. 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 relating to standard lines of business.
Reserves for asbestos claims decreased by USD 272 million gross and USD 228 million net during 2014. The decrease in the gross reserve primarily relates to foreign currency translation effects of USD 167 million and USD 199 million due to payments, partially offset by adverse prior year development of USD 93 million in the UK and North America.
Reserves for asbestos claims decreased by USD 178 million gross and USD 10 million net during 2013. The decrease in the gross reserve primarily related to the transfer of a general insurance portfolio to RiverStone Insurance (UK) Limited, amounting to USD 152 million.
Fee income and other expenses 1 (3,901) (1,898) 217 176 (3,683) (1,722) Interest and bonuses credited to policyholders 3,259 2,017 (132) (8) 3,127 2,009
Acquisitions/(divestments) and transfers 2 (97) – – – (97) – (Decreases)/increases recorded in other comprehensive income 1,060 (122) – – 1,060 (122)
1 In 2013, premiums were shown net of the change in reserves for unearned premiums. In 2014, premiums represent premiums received, while premiums earned on short-duration contracts are presented within fee income and other expenses. Following the same approach, 2013 net premiums would have been USD 10.4 billion and net fee income and other expenses would have been USD (3.7) billion.
2 The 2014 net movement relates to USD (50) million reclassified to reserves for unit-linked contracts and USD (47) million reclassified to reserves for losses and loss adjustment expenses (see note 1).
Future life policyholders’ benefits are generally calculated by a net premium valuation. In terms of USD, the weighted average discount rate used in the calculation of future life policyholders’ benefits is 3.0 percent and 3.2 percent as of December 31, 2014 and 2013, respectively.
The net impact of changes in assumptions on future life policyholders’ benefits by type of assumption is shown in table 8.6.
Interest rates 111 (134) Investment return 19 37 Changes in modeling 6 27
Policyholders’ contract deposits and other funds gross in USD millions, as of December 31 2014 2013
Unit-linked investment contracts 62,964 59,469 Investment contracts (amortized cost) 843 1,030 Investment contracts with DPF 7,006 6,614
Fee income and other expenses (647) (594) Interest and bonuses credited to policyholders 5,554 6,800 Acquisitions/(divestments) and transfers 1 (425) – Increase/(decrease) recorded in other comprehensive income 500 94 Foreign currency translation effects (6,120) 1,598 As of December 31 70,813 67,113 1 The 2014 movement relates to USD (425) million reclassified to reserves for unit-linked contracts (see note 1).
Fin an cial info rm atio n 11. Gross and ceded insurance revenues and expenses Table 11.1
Insurance benefits and losses in USD millions, for the years ended December 31 Gross Ceded Net
Policyholder dividends and participation in profits in USD millions, for the years ended December 31 2014 2013
Change in policyholders’ contract deposits and other funds 1,624 1,185 Change in reserves for unit-linked products 5,537 6,290 Change in liabilities for investment contracts – unit-linked 5,325 6,605 Change in liabilities for investment contracts – other 238 218 Change in unit-linked liabilities related to UK capital gains tax (157) (352) Total policyholder dividends and participation in profits 12,568 13,946
Amortization of deferred acquisition costs 5,991 6,415 (473) (456) 5,518 5,959 Amortization of deferred origination costs 113 125 – – 113 125 Commissions and other underwriting and acquisition expenses 1 4,453 4,323 (249) (366) 4,204 3,957 Total underwriting and policy acquisition costs 10,557 10,863 (721) (822) 9,835 10,041 1 Net of additions related to deferred acquisition and origination costs.
Consolidated financial statements continued 12. Deferred policy acquisition costs and deferred origination costs Table 12.1
Amortization (charged)/ credited to other comprehensive income – – (579) 102 – – (579) 102 1 Net of eliminations from inter-segment transactions. 2 The 2014 General Insurance movement includes USD (11) million due to the sale of the Group’s General Insurance retail business in Russia (see note 5) and USD 4 million due to the acquisition of MSD (see note 5). The 2014 Global Life movement relates to USD 19 million transferred from deferred origination costs (see note 1). The 2013 Global Life movement relates to a transfer to deferred front-end fees of USD (438) million and a transfer from receivables and other assets of USD 126 million (see note 1 of the Consolidated financial statements 2013).
As of December 31, 2014 and 2013, deferred policy acquisition costs relating to non-controlling interests were USD 422 million and USD 614 million, respectively.
In 2013, the decision to stop offering life products through tied agents in Hong Kong triggered a reassessment of the recoverability of deferred policy acquisition costs, resulting in a USD 54 million impairment. The net impact on the Group was USD 30 million, including an impairment of deferred origination costs and the acceleration of the recognition of deferred front-end fees of USD 4 million and USD 27 million, respectively. An additional impairment of USD 34 million resulted from a reassessment of deferred policy acquisition costs in the Global Life business in Germany.
Impairments – (4) Acquisitions/(divestments) and transfers 1 (19) – Foreign currency translation effects (55) 16 As of December 31 595 724 1 The 2014 movement relates to USD (19) million transferred to deferred policy acquisition costs (see note 1).
Net carrying value as of January 1, 2014 347 614 149 71 314 1,494
Net carrying value as of December 31, 2013 347 614 149 71 314 1,494
Fin an cial info rm atio n 15. Goodwill and other intangible assets
Gross carrying value as of January 1, 2014 2,190 2,918 4,364 1,025 4,720 226 15,443
Net carrying value as of December 31, 2014 1,661 556 3,577 1,025 1,543 53 8,415
Receivables and other assets in USD millions, as of December 31 2014 2013
Other financial liabilities Group derivative liabilities 429 729 Unit-linked derivative liabilities 15 4 Amounts due to policyholders 714 923 Amounts due to insurance companies, agents and intermediaries 1,322 1,437 Amounts due to reinsurers 1,118 1,226 Liabilities for cash collateral received for securities lending 229 332 Amounts due to investment brokers 1,547 1,068 Deposits from banking activities 250 344 Collateralized bank financing for structured lease vehicles 766 796 Liabilities for defined benefit plans 1 4,046 3,665 Other liabilities for employee benefit plans 130 123 Other liabilities 3,970 4,043 Other non-financial liabilities Current tax payables 925 1,246 Restructuring provisions 125 188 Premium prepayments and other advances 1,022 973 Other liabilities 623 806 Total other liabilities 17,230 17,904 1 See note 21
Maturity schedule – other financial liabilities 1 in USD millions, as of December 31 2014 2013