Net income before income taxes 5,125 5,321 less: income tax (expense)/benefit attributable to policyholders (171) (304) Net income before income taxes attributable to shareholders 4,954 5,017 Expected income tax expense attributable to shareholders computed at the Swiss statutory tax rate 22.0% 1,090 22.0% 1,104 Increase/(reduction) in taxes resulting from: Tax rate differential in foreign jurisdictions 331 322 Tax exempt and lower taxed income (124) (95) Non-deductible expenses 133 121 Tax losses not recognized 83 3 Prior year adjustments and other 132 84
Actual income tax expense attributable to shareholders 33.2% 1,645 30.7% 1,539 plus: income tax expense/(benefit) attributable to policyholders 171 304 Actual income tax expense 35.4% 1,816 34.6% 1,843
Deferred tax assets/(liabilities) analysis by source in USD millions, as of December 31 2017 2016
Tax loss carryforwards 717 – 667 – Gross deferred tax assets/(liabilities) before valuation allowance 2,689 (1,239) 3,512 (1,712) Valuation allowance (374) – (352) – Gross deferred tax assets/(liabilities) after valuation allowance 2,314 (1,239) 3,160 (1,712) Deferred tax assets 1,076 1,448 Gross deferred tax Deferred acquisition and origination costs 24 (2,167) 27 (2,189) Depreciable and amortizable assets 142 (1,798) 113 (1,964) Life policyholders’ benefits and deposits 1 1,816 (949) 1,350 (793) Unrealized (gains)/losses on available-for-sale investments and cash flow hedges 226 (1,054) 165 (1,038) Accruals and deferred income 81 (87) 124 (92) Reserves for losses and loss adjustment expenses 97 (118) 56 (85) Reserves for unearned premiums 20 (64) 31 (40) Deferred front-end fees 522 – 471 – Pensions and other employee benefits 352 (278) 616 (319)
Tax loss carryforwards 99 – 92 – Gross deferred tax assets/(liabilities) before valuation allowance 4,056 (8,361) 3,505 (8,067) Valuation allowance (52) – – – Gross deferred tax assets/(liabilities) after valuation allowance 4,005 (8,361) 3,505 (8,067) Deferred tax liabilities (4,357) (4,562)
As of December 31, 2017 and 2016, the aggregate amount of temporary differences associated with investments in subsidiaries, branches and associates and interests in joint ventures, for which deferred tax liabilities have not been recognized amount to approximately USD 22 billion and USD 20 billion, respectively. In the remote likelihood that these temporary differences were to reverse simultaneously, the resulting tax liabilities would be very limited due to participation exemption rules.
Development of net deferred tax liabilities in USD millions 2017 2016
The net deferred tax liabilities related to non-controlling interests amounted to USD 239 million and USD 338 million as of December 31, 2017 and 2016, respectively.
Tax loss carryforwards and tax credits in USD millions, as of December 31 2017 2016
For which deferred tax assets have been recognized, expiring > 20 years or with no time limitation 1,267 1,056
The tax rates applicable to tax losses for which a deferred tax asset has not been recognized are 22.8 percent and 23.0 percent as of December 31, 2017 and 2016, respectively.
Management assesses the recoverability of the deferred tax-asset carrying values based on future years’ taxable income projections and believes the carrying values of the deferred tax assets as of December 31, 2017, to be recoverable.
Senior and subordinated debt in USD millions, as of December 31 2017 2016
Senior debt Zurich Insurance Company Ltd 2.25% CHF 500 million notes, due July 2017 1 – 492 2.375% CHF 525 million notes, due November 2018 1 538 515 1.50% CHF 400 million notes, due June 2019 1,2 418 405 1.125% CHF 400 million notes, due September 2019 1,2 421 409 0.625% CHF 250 million notes, due July 2020 1,2 262 254 2.875% CHF 250 million notes, due July 2021 1 255 244 3.375% EUR 500 million notes, due June 2022 1,3 634 564 1.875% CHF 100 million notes, due September 2023 1,2 112 109 1.750% EUR 500 million notes, due September 2024 1,2,3 608 538 1.500% CHF 150 million notes, due July 2026 1,2 167 163
Zurich Finance (UK) plc 6.625% GBP 450 million perpetual notes, first callable October 2022 1,4 604 551
ZFS Finance (USA) Trust V Series V 6.5% USD 501 million trust preferred securities, due May 2067, first callable May 2017 – 501
(USA) Trust V, are called before 2047, the Group will issue a replacement debt instrument with terms and provisions that will be as or more equity-like than the replaced notes. Such replacement debt instrument was issued allowing the Group to call the Series V fixed/floating trust preferred securities, issued by ZFS Finance (USA) Trust V in May 2017.
As of January 1 11,212 10,086 Issuance of debt recognized in cash flows – 3,066 Repayment of debt recognized in cash flows (1,049) (1,652) Acquisitions/(divestments) and transfers 1 (18) – Changes in fair value (27) (4) Other changes 3 (14) Foreign currency translation effects 664 (270) As of December 31 10,784 11,212 1 The 2017 movement relates to the reclassification to liabilities held for sale based on agreements signed to sell businesses in the UK (see note 5).
The following information related to authorized share capital and contingent share capital is specified in article 5 of the Articles of Association.
c) Additional paid-in capital This reserve is not ordinarily available for distribution. However, as of January 1, 2011, a Swiss tax regulation based on the Swiss Corporate Tax Reform II became effective, allowing for payments free of Swiss withholding tax to shareholders out of the capital contribution reserve, created out of additional paid-in capital. Therefore, amounts qualifying under this regulation can be paid out of additional paid-in capital.
Treasury shares number of shares, as of December 31 2017 2016 2015
In 2016, the dividend of CHF 17 per share was paid out of the capital contribution reserve on April 5, 2016, as approved at the Annual General Meeting on March 30, 2016. The difference between the respective amounts of the dividend at transaction day exchange rates amounting to USD 2.6 billion and at historical exchange rates are reflected in the cumulative foreign currency translation adjustment.
Basic earnings per share 3,004 150,001,064 20.02 19.71 Effect of potentially dilutive shares related to share-based compensation plans 974,049 (0.13) (0.13) Diluted earnings per share 3,004 150,975,114 19.90 19.58
The Group had 51,633 and 52,473 employees (full-time equivalents) as of December 31, 2017 and 2016, respectively. Personnel and other related costs incurred were USD 5.6 billion for both years ended December 31, 2017 and 2016, including wages and salaries of USD 4.8 billion and USD 4.6 billion, respectively.
Governance of the Group’s pension and post-employment benefit plans is the responsibility of the Group Pensions Committee. This committee is responsible for developing, reviewing and advising on the Group governance framework for matters related to pension and post-retirement benefit plans, including the relevant policies and processes. The committee provides oversight and guidance over the Group’s principal pension and post-retirement benefit plans for benefit design, funding, investment purposes and accounting. This includes, but is not limited to: kk oversight of the impact of the Group’s principal defined benefit pension and post-retirement benefit plans in terms of cash, expense, and balance sheet accounting impact and capital implications kk development and maintenance of policies on funding, asset allocation and assumption setting
A separate arrangement was also established in 2010 to provide for retirement obligations that were in payment at that time. Consideration is given from time to time based on the fiscal efficiency of adding recent retirees to this arrangement and to adding assets to the contractual trust. On July 1, 2017 Germany transferred around USD 121 million (EUR 100 million) of retiree liabilities from the contractual trust arrangement to this separate arrangement with equivalent cash funding. These defined benefit plans provide benefits on either a final salary, career average salary or a cash balance basis. These plans are now closed to new entrants, who instead participate in a new cash balance arrangement, which has the characteristics of a defined contribution arrangement with a capital guarantee on members’ balances, which mirrors the capital guarantee given in a conventional life insurance arrangement in Germany.
Key information by main country – current period in USD millions, as of December 31, 2017
1 Switzerland and the U.S. include a past service credit of USD 35 million and USD 81 million, respectively.
Key information by main country – prior period in USD millions, as of December 31, 2016
Fair value of plan assets 4,711 8,488 2,687 1,014 983 17,883 Impact of asset ceiling – (9) – – – (9) Net defined benefit asset/(liability) (383) (2,570) (843) (246) (275) (4,317) Net post-employment benefit (expense)/income 1 (124) (65) (28) (34) (29) (280)
Key financial assumptions used for major plans as of December 31 2017 2016
Mortality tables and life expectancies for major plans – current period in years, as of December 31, 2017 Life expectancy at age 65 for a male currently
Mortality tables and life expectancies for major plans – prior period in years, as of December 31, 2016 Life expectancy at age 65 for a male currently
RP 2014 with MP-2016 Generational projection and white collar adjustment 22.36 23.92 25.57 27.14 RP 2014 with plan specific adjustments 20.65 20.65 22.67 22.67
Duration of the defined benefit obligation (in years) 14.5 21.2 12.8 14.7 16.0 21.7 13.2 14.7
Maturity analysis of benefits expected to be paid (in USD millions): < 1 year 215 563 214 54 213 219 215 45 1 to 5 years 891 2,067 876 229 856 996 907 197 5 to 10 years 1,143 2,194 1,077 307 1,085 1,602 1,168 257
The Group has adopted various share-based compensation and cash incentive plans to attract, retain and motivate executives and employees. The plans are designed to reward employees for their contribution to the performance of the Group and to encourage employee share ownership. Share-based compensation plans include plans under which shares and options to purchase shares, based on the performance of the businesses, are awarded. Share-based compensation plans are based on the provision of Zurich Insurance Group Ltd shares.
a) Cash incentive plans Various businesses throughout the Group operate short-term incentive programs for executives, management and, in some cases, for employees of that business. Awards are made in cash, based on the accomplishment of both organizational and individual performance objectives. The expense recognized for these cash incentive plans amounted to USD 485 million and USD 447 million for the years ended December 31, 2017 and 2016, respectively.
The cost of share-based payments depend on various factors, including achievement of targets, and are subject to the discretion of the Remuneration Committee. Costs may therefore vary significantly from year to year. The net amounts of USD 157 million and USD 98 million for the years ended December 31, 2017 and 2016, respectively, reflect all aspects of share-based compensation, including adjustments made during the year.
Prior to 2011, for selected senior executives, performance shares and options in shares of Zurich Insurance Group Ltd were allocated. All unexercised share options have expired in 2017. The number of shares allocated under option amount to 0 and 172,978 as of December 31, 2017 and 2016, respectively. For the years ended December 31, 2017 and 2016, 172,978 and 141,416 share options, respectively, were exercised.
Remaining commitments under investment agreements 1,820 2,009 Guarantees and letters of credit 1 871 799 Future operating lease commitments 2,127 1,962 Undrawn loan commitments 16 7 Other commitments and contingent liabilities 2 2,625 199 1 Guarantee features embedded in life insurance products are not included. 2 Other commitments include an agreement related to the acquisition of ANZ’s life insurance businesses (see note 5).
The Group has commitments to provide collateral on certain contracts in the event of a financial strength downgrading for Zurich Insurance Company Ltd from the current AA– by Standard & Poor’s. Should the rating by Standard & Poor’s fall to A+, then the additional collateral based on information available amounts to nil as of both December 31, 2017 and 2016.
In common with other insurance companies in Europe, the Group is mindful of the trend toward enhanced consumer protection. There is significant uncertainty about the ultimate cost this trend might have on our business. The main areas of uncertainty concern court decisions as well as the volume of potential customer complaints related to sales activities and withdrawal rights, and their respective individual assessments.
Pledged assets The majority of assets pledged to secure the Group’s liabilities relate to debt securities pledged under short-term sale and repurchase agreements. The total amount of pledged financial assets including the securities under short-term sale and repurchase agreements amounted to USD 2.4 billion and USD 4.9 billion as of December 31, 2017 and 2016, respectively.
Legal, compliance and regulatory developments In recent years there has been an increase in the number of legislative initiatives that require information gathering and tax reporting regarding the Group’s customers and their contracts, including the U.S. Foreign Account Tax Compliance Act (FATCA) and the expected introduction of other automatic tax information exchange regimes based on the Common Reporting Standard (CRS). The Group’s compliance activities in this area could result in higher compliance costs, remedial actions and other related expenses for its life insurance, savings and pension business. There has also been increased scrutiny by various tax and law enforcement officials regarding cross-border business activities, including in particular by U.S. government authorities looking into activities U.S. taxpayers with investments held outside the U.S. and activities of non-U.S. financial institutions that hold such investments.
Reserves for insurance contracts fair value option 2 – – (2,436) (2,436)
Fair value hierarchy – non unit-linked – prior period in USD millions, as of December 31, 2016 Level 1 Level 2 Level 3 Total
Reinsurers’ share of reserves for insurance contracts fair value option 1 – – 237 237
Total fair value through profit or loss securities 86,174 29,939 554 116,667
Investment property – – 3,410 3,410 Total investments for unit-linked contracts 1 86,178 29,954 3,963 120,096 Financial liabilities at FV through profit or loss
Fair value hierarchy – unit-linked – prior period in USD millions, as of December 31, 2016 Level 1 Level 2 Level 3 Total
kk Non-agency MBS and ABS rated below ’AAA’ that are valued by independent pricing providers using a variety of valuation techniques which may require use of significant unobservable input parameters such as asset prepayment rate, default rates and credit curves. Quantitative unobservable inputs are not developed by the Group when measuring fair value of these assets.
Realized gains/(losses) recognized in income 1 105 24 9 – – – 129 Unrealized gains/(losses) recognized in income 1,2 (15) (34) 154 – (31) (4) 236 Unrealized gains/(losses) recognized in other comprehensive income (9) 24 – – 59 38 9
For the year ended December 31, 2016, the Group transferred USD 228 million of available-for-sale debt securities out of level 3 into level 2. The transfers were mainly due to credit rating upgrades of certain asset-backed securities resulting in an increase in market activity of these instruments and a review of the classification of certain corporate bonds due to the observability of the inputs used in the valuation techniques to determine its fair value. The Group also transferred derivatives with a market value of USD 130 million out of level 3 into level 2. The transfers resulted from an increase in significance of certain observable input parameters used to derive the fair value.
Non-recurring fair value measurements of assets and liabilities Under certain circumstances, the Group may measure certain assets or liabilities at fair value on a non-recurring basis when an impairment charge is recognized.
Analysis of financial assets – current period in USD millions, as of December 31, 2017
Less: impairment allowance Impairment allowances on individually assessed financial assets – 2 11 92 105 Impairment allowances on collectively assessed financial assets – 5 – 167 172
Less: impairment allowance Impairment allowances on individually assessed financial assets – 46 20 71 137 Impairment allowances on collectively assessed financial assets – 5 – 159 164
Tables 24.2a and 24.2b show how the allowances for impairments of financial assets in tables 24.1a and 24.1b developed during the periods ended December 31, 2017 and 2016, respectively.
Remuneration of key personnel of the Group Cash compensation, current benefits and fees 28 21 Post-employment benefits 4 4 Share-based compensation 22 17 Other remuneration 3 2 Total remuneration of key personnel 56 43
Information required by art. 14 – 16 of the Swiss Ordinance against Excessive Compensation and art. 663c paragraph 3 of the Swiss Code of Obligations is disclosed in the Remuneration report.
Farmers Group, Inc. and its subsidiaries (FGI) provide certain non-claims administrative and management services to the Farmers Exchanges, which are managed by Farmers Group, Inc. a wholly owned subsidiary of the Group, including risk selection, preparation and mailing of policy documents and invoices, premium collection, management of the investment portfolios and certain other administrative and managerial functions. Fees for these management services are primarily determined as a percentage of gross premiums earned by the Farmers Exchanges. The finances and operations of the Farmers Exchanges are governed by independent Boards of Governors. In addition, the Group has the following relationships with the Farmers Exchanges.
a) Certificates of contribution/surplus notes issued by the Farmers Exchanges As of December 31, 2017 and 2016, FGI and other Group companies held the following certificates of contribution and surplus note issued by the Farmers Exchanges. Originally these were purchased by FGI in order to supplement the policyholders’ surplus of the Farmers Exchanges.
Conditions governing payment of interest and repayment of principal are outlined in the certificates of contribution and surplus note. Generally, repayment of principal and payment of interest may be made only when the issuer has an appropriate amount of surplus, and then only after approval is granted by the appropriate state insurance regulatory department in the U.S. Additionally, the approval by the issuer’s governing board is needed for repayment of principal.
The Auto Physical Damage (APD) Quota Share reinsurance agreement (APD agreement) with the Farmers Exchanges was not renewed in 2016.
Net earned premiums and policy fees – – 1,541 1,521 1,541 1,521 Insurance benefits and losses, net 5 – (1) (1,049) (1,084) (1,049) (1,085)
4 From January 1, 2016, ZIC assumed an 8.0 percent quota share. Another 12.0 percent was assumed by third parties. 5 Under the All Lines agreement the Farmers Exchanges catastrophe losses are subject to a provisional maximum of USD 1.3 billion dependent on loss experience and recoveries at a specified rate for each year. Based on the results for 2017, the total catastrophe recoveries subject to the All Lines agreement was USD 1.3 billion. 6 Under the All Lines agreement, the Farmers Exchanges receive a ceding commission of 26.7 percent, 8.1 percent of premiums for unallocated loss adjustment expenses
(8.2 percent in 2016) and 5.3 percent of premiums for other expenses.
The Group’s reportable segments comprise the following: P&C and Life regions kk Europe, Middle East & Africa kk North America kk Asia Pacific kk Latin America kk Group Reinsurance
P&C regions provide a variety of motor, home and commercial products and services for individuals, as well as small and large businesses on both a local and global basis. Products are sold through multiple distribution channels including agents, brokers and bank distribution.
Farmers, through Farmers Group, Inc. and its subsidiaries (FGI), provides certain non-claims administrative and management services to the Farmers Exchanges, which are owned by their policyholders. This segment also includes all reinsurance assumed from the Farmers Exchanges by the Group. Farmers Exchanges are prominent writers of personal and small commercial lines of business in the U.S. In addition, this segment includes the activities of Farmers Life, a writer of individual life insurance business in the U.S.
Group Functions and Operations comprise the Group´s Holding and Financing and Headquarters activities. Certain alternative investment positions not allocated to business operating segments are included within Holding and Financing. In addition, this segment includes operational technical governance activities relating to technology, underwriting, claims, actuarial and pricing.
Non-Core Businesses include insurance and reinsurance businesses that the Group does not consider core to its operations and that are therefore mostly managed to achieve a beneficial run-off. Non-core businesses are mainly situated in the U.S., Bermuda, and the UK.
Aggregations and additional information Regional P&C and Life results are further aggregated to show a total P&C and total Life business view.
For additional informational purposes, the Group also discloses income statement information for P&C Commercial Insurance and P&C Retail and Other Insurance results. Other Insurance include SME, direct market and other program business.
Business operating profit The segment information includes the Group’s internal performance measure, business operating profit (BOP). This measure is the basis on which the Group manages all of its business units. It indicates the underlying performance of the Group’s business units, after non-controlling interests, by eliminating the impact of financial market volatility and other non-operational variables. BOP reflects adjustments for shareholders’ taxes, net capital gains/(losses) and impairments on investments (except for certain non-insurance operations included in Non-Core Businesses, investments in hedge funds as at fair value through profit or loss, certain securities held for specific economic hedging purposes and policyholders’ share of investment results for the life businesses) and non-operational foreign exchange movements. Significant items arising from special circumstances, including restructuring charges, legal matters outside the ordinary course of business, gains and losses on divestment of businesses and impairments of goodwill are also excluded from BOP.
Net written premiums and policy fees 11,866 12,600 10,588 10,008 2,013 1,884 2,220 1,868 (155) (251) – – 26,532 26,108 Net change in reserves for unearned premiums (1) 179 (132) 11 (101) – (287) (224) 22 27 – – (499) (6)
Business operating profit before non-controlling interests 273 1,070 800 1,207 155 270 288 313 155 (289) – – 1,670 2,570
Net earned premiums and policy fees 11,865 12,779 10,456 10,019 1,912 1,884 1,933 1,644 (133) (224) – – 26,033 26,102 Net investment income on Group investments 647 732 964 922 60 76 161 144 15 15 – 1 1,847 1,891 Net capital gains/(losses) and impairments on Group investments 34 17 157 50 – – – – – – – – 191 67
Business operating profit before non-controlling interests 870 919 (2) (85) 129 73 549 477 1 – – – 1,548 1,385
Gross written premiums and policy fees 9,969 11,450 323 151 1,048 811 2,739 2,259 7 – (16) (14) 14,070 14,657 Net earned premiums and policy fees 9,239 10,917 301 132 792 688 2,478 2,116 1 – – – 12,810 13,854
Net investment result on Group investments 3,002 3,089 33 11 174 163 368 372 – – (2) (1) 3,574 3,633 Net investment income on unit-linked investments 1,301 1,385 (4) (3) 92 73 17 23 – – – – 1,406 1,478 Net capital gains/(losses) and impairments on unit-linked investments 7,978 10,436 80 40 110 5 1,319 1,300 – – – – 9,486 11,781
Life includes approximately USD 2.2 billion and USD 4 billion of gross written premiums and future life policyholder benefits for certain universal life-type contracts in the Group’s Spanish operations for the years ended December 31, 2017 and 2016, respectively (see note 3).
Net written premiums and policy fees 26,532 26,108 12,942 13,973 1,676 2,270 6 6 (19) 416 – – 41,136 42,772 Net change in reserves for unearned premiums (499) (6) (132) (119) 546 (65) – – 5 40 – – (79) (150)
Net investment result on Group investments 2,038 1,958 3,574 3,633 216 262 170 228 225 270 (175) (180) 6,048 6,171 Net investment result on unit-linked investments – – 10,892 13,259 136 39 – – 636 315 – – 11,664 13,613 of which: Inter-segment revenues (238) (283) (215) (263) (37) (35) (318) (1,196) (15) (5) 823 1,781 – – Benefits, losses and expenses
Revenues/(expenses) not included in BOP: Net capital gains/(losses) on investments and impairments, net of policyholder allocation 972 499 238 155 35 19 (55) 23 10 168 1,201 863 Net gains/(losses) on divestment of businesses 1 (96) (134) 7 47 – – 5 (2) – – (84) (89)
2 Other adjustments include USD 23 million and USD 256 million of non-operating charges for the years ended December 31, 2017 and 2016, respectively.
Add back: Business operating profit attributable to non-controlling interests 124 133 289 255 – – (2) (6) – – 411 382 Net income before shareholders’ taxes 2,361 2,631 1,689 1,366 1,705 1,734 (849) (864) 48 151 4,954 5,017 Income tax expense/(benefit) attributable to policyholders – – 171 304 – – – – – – 171 304
Investments in associates and joint ventures 2 5 15 13 – – – – 3 2 – – 21 20
Investments for unit-linked contracts 1 – – 115,659 114,362 807 677 – – 4,233 10,868 – – 120,699 125,907
Reinsurers’ share of liabilities for insurance contracts 13,414 11,852 1,858 2,749 2,319 698 – – 3,389 3,113 (61) (64) 20,918 18,347 Deposits made under assumed reinsurance contracts 158 142 70 82 771 1,476 – – 271 65 – – 1,269 1,764
Liabilities for insurance contracts, gross 77,831 72,688 161,256 137,072 7,682 8,138 27 28 14,600 21,508 (61) (64) 261,335 239,369
2 In 2017, the Group reclassified assets and liabilities of USD 29 billion respectively, to held for sale based on agreements to sell businesses in the UK (see note 5).
Net capital gains/(losses) and impairments on investments 149 51 42 16 Net non-technical result (excl. items not included in BOP) (45) 67 (59) 22 Business operating profit before non-controlling interests (26) 1,343 1,541 1,515 1 Commercial and Retail Insurance overview exclude Group Reinsurance
Middle East & Africa Middle East 87 122 – – Morocco – 92 – – South Africa – 208 – –
Taiwan – 109 – – Rest of Asia-Pacific 315 265 3 4
Spain Bansabadell Pensiones, E.G.F.P, S.A. 2 Barcelona 50 50 EUR 7.8 Bansabadell Seguros Generales, S.A. de Seguros y Reaseguros 2 Barcelona 50 50 EUR 10.0 Bansabadell Vida S.A. de Seguros y Reaseguros 2 Barcelona 50 50 EUR 43.9 Zurich Latin America Holding S.L. - Sociedad Unipersonal Barcelona 100 100 EUR 43.0 Zurich Santander Holding (Spain), S.L. Boadilla del Monte 100 100 EUR 94.3 Zurich Santander Holding Dos (Spain), S.L. Madrid 100 100 EUR 40.0 Zurich Santander Insurance America, S.L. Madrid 51 51 EUR 177.0 Zurich Vida, Compañía de Seguros y Reaseguros, S.A. - Sociedad Unipersonal Madrid 100 100 EUR 56.4 Switzerland Genevoise Real Estate Company Ltd Geneva 100 100 CHF 20.4 Zurich Finance Company AG Zurich 100 100 CHF 0.2 Zurich Insurance Company Ltd Zurich 100 100 CHF 825.0 Zurich Investment Management AG Zurich 100 100 CHF 10.0 Zurich Life Insurance Company Ltd Zurich 100 100 CHF 60.0 Zürich Rückversicherungs-Gesellschaft AG Zurich 100 100 CHF 11.7 Turkey Zurich Sigorta A.S. Istanbul 100 100 TRY 168.9 United Kingdom Allied Zurich Holdings Limited St. Hélier 100 100 GBP 90.7
Zurich UK General Services Limited Fareham, England 100 100 GBP 258.2
1 Includes reserves for premium refunds, liabilities for investment contracts, deposits received under ceded reinsurance contracts, deferred front-end fees and liabilities for insurance contracts.
Opinion We have audited the consolidated financial statements of Zurich Insurance Group Ltd and its subsidiaries (the Group), which comprise the consolidated balance sheet as at December 31, 2017 and the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of cash flows and consolidated statement of changes in equity for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.
We concluded full scope audit work at 19 business units in 9 countries. The full scope audit work addressed 68% and 78% of the Group’s gross written premiums and policy fees (GWP) and total assets, respectively. In addition, specific procedures were performed on a further 17 business units in 8 countries representing a further 8% and 2% of the Group’s GWP and total assets, respectively.
Our involvement included various site visits and component auditor working paper reviews across significant business units, together with discussions around audit approach and any audit results arising from the work, and regular conference calls with the component audit teams.
The Group’s valuation of the actuarially determined life insurance assets (including deferred policy acquisition costs, deferred origination costs, and present value of future profits) and liabilities (reserves for insurance contracts and deferred front-end fees) is based on complex actuarial methodologies and models and involves comprehensive assumption setting processes with regards to future events. Actuarial assumptions selected by the Group with respect to interest rates, investment returns, mortality, morbidity, longevity, persistency, expenses, stock market volatility and future policyholder behavior and the underlying methodologies and assumptions used may result in material impacts on the valuation of actuarially determined life insurance assets and liabilities.
– Involved our life insurance actuarial specialists to independently test management’s methodology and the assumptions used, with particular consideration of industry studies, the Group’s experience and management’s liability adequacy testing procedures.
– Assessed the consistency of the life actuarial methods used across the Group’s business units.
In relation to the particular matters set out opposite, our substantive testing procedures included the following: – Tested the completeness and accuracy of underlying claims data utilized by the Group’s actuaries in estimating property and casualty loss reserves.
– Utilized information technology audit techniques to analyze claims through claims data plausibility checks and recalculation of claims development patterns.
– Involved our actuarial specialists to independently test management’s property and casualty loss reserve studies and evaluate the reasonableness of the methodology and assumptions used against recognized actuarial practices and industry standards.
As detailed in Notes 3, 4 and 14 of the consolidated financial statements, the Group’s goodwill is allocated to cash generating units (CGUs) that are identified generally at a segment level. The valuation and recoverability of significant goodwill, distribution agreements and attorney-in-fact contracts involves complex judgments and estimates, including projections of future income, terminal growth rate assumptions, and discount rates. These assumptions and estimates can have a material impact on the valuations and impairment decisions reflected in the consolidated financial statements of the Group.
We assessed and tested the design and operating effectiveness of selected key controls over projections of future income, terminal growth rate assumptions, and discount rates related to the recoverability of goodwill, distribution agreements and attorney-in-fact contracts.
In preparing the consolidated financial statements, the Board of Directors is responsible for assessing the Group’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the Board of Directors either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Swiss law, ISAs and Swiss Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.
The Annual General Meeting on March 29, 2017, approved a total dividend of CHF 17.00 per share to be paid to the shareholders, whereof CHF 5.70 per share were paid out of the capital contribution reserve free of Swiss withholding tax and CHF 11.30 per share less 35 percent for Swiss withholding tax were paid out of the available earnings.
Shareholders’ equity increased by CHF 16 million to CHF 16,725 million as of December 31, 2017, from CHF 16,709 million as of December 31, 2016. The increase was mainly driven by net income after taxes for the year as well as by capital contributed through the issuance of new shares to employees out of contingent capital, partially offset by the dividend of CHF 2,552 million paid in 2017. The Board of Directors will propose a distribution of a dividend partially from the available earnings for 2017 and partially from the capital contribution reserve. The portion from the capital contribution reserve will be exempt from Swiss withholding tax.
Dividend income 2,300,000 1,400,000 Interest income 97,269 513,759 Other financial income 4,366 8,597
Assets in CHF thousands, as of December 31 Notes 2017 2016
Liabilities and shareholders’ equity in CHF thousands, as of December 31 Notes 2017 2016
Retained earnings: As of January 1 14,855,952 13,064,513 Dividends paid (1,696,301) – Net income after taxes 2,370,085 1,791,439
Retained earnings, as of December 31 15,529,736 14,855,952 Total shareholders’ equity (before appropriation of available earnings) 16,725,008 16,708,820 Total liabilities and shareholders’ equity 16,735,516 16,746,712 1 Dividends paid in the year, out of capital contribution reserve in respect of the 2016 result, amounting to CHF 855,656.
Notes to the financial statements 1. General information Zurich Insurance Group Ltd (the Company) is a public limited company domiciled in Zurich, Switzerland, and its shares are listed on the SIX Swiss Exchange. It was incorporated on April 26, 2000, and is the holding company of the Zurich Insurance Group with the principal activity of holding subsidiary companies. The Company does not employ staff, as employees work in a joint capacity for Zurich Insurance Company Ltd (ZIC).
c) Accrued income Income is accrued for interest which is earned but not yet due for payment at the end of the reporting period.
5. Depreciation and valuation adjustments to non-current assets In 2017, no impairment on investments in subsidiaries was recorded. In 2016, the investment in Zurich Financial Services EUB Holdings Limited was impaired by CHF 62 million.
8. Direct taxes Direct taxes include income and capital taxes in Switzerland.
Zurich Financial Services EUB Holdings Ltd 121,436 99.90 99.90 121,436 99.90 99.90 1 in CHF thousands.
In addition to the above mentioned directly held subsidiaries, the Company indirectly owns additional subsidiaries primarily through Zurich Insurance Company Ltd. Information regarding indirectly owned subsidiaries is included on pages 275 to 277 of this Annual Report.
12. Share capital a) Changes to the share capital At the Annual General Meeting of March 29, 2017, the shareholders approved to increase the authorized and contingent share capital. Furthermore, the shareholders approved an extension of the authorized share capital until March 29, 2019. The authorized share capital (Art. 5bis 1) amounted to 45,000,000 shares. The contingent share capital for Financial Instruments (Art. 5ter 1a) amounted to 30,000,000 shares and the contingent share capital for employees (Art. 5ter 2a) amounted to 4,955,408 shares. During the years 2017 and 2016, a total of 732,445 shares and 202,442 shares, respectively, were issued to employees out of the contingent capital.
During 2017 and 2016, 732,445 shares and 202,442 shares, respectively, were issued to employees from contingent share capital. At the Annual General Meeting of March 29, 2017, the shareholders approved to increase the contingent share capital that can be issued to employees of Zurich Insurance Group Ltd and group companies to CHF 500,000 by issuing up to 5,000,000 fully paid registered shares with a nominal value of CHF 0.10 each. The remaining contingent share capital, which can be issued to employees amounted to CHF 495,540.80 and CHF 68,785.30 or 4,955,408 and 687,853 fully paid registered shares as of December 31, 2017 and 2016, respectively, with a nominal value of CHF 0.10 each. Subscription rights of the shareholders, as well as advance subscription rights, are excluded. The issuance of new shares or respective option rights to employees is subject to one or more regulations to be issued by the Board and takes into account performance, functions, levels of responsibility and criteria of profitability. New shares or option rights may be issued to employees at a price lower than that quoted on the stock exchange.
18. Shareholdings of the Board of Directors and the Executive Committee The information on share and share option holdings of Directors and of the members of the Executive Committee (ExCo), who held office as of December 31, 2017, as required by article 663c paragraph 3 and article 959c paragraph 2 cif 11 of the Swiss Code of Obligations is included and audited in the remuneration report on pages 82 to 115 of this Annual Report.
19. Supplementary information Cash and cash equivalents of CHF 535 million include restricted cash of CHF 0.4 million as of December 31, 2017, compared to cash and cash equivalents of CHF 338 million and thereof restricted cash of CHF 0.4 million in the previous year.
Proposed appropriation of available earnings and capital contribution reserve as of December 31 2017 2016
The Board of Directors proposes to the shareholders at the Annual General Meeting on April 4, 2018, a total dividend of CHF 18.00 per share.
The Board of Directors proposes to the shareholders at the Annual General Meeting on April 4, 2018, to pay a dividend of CHF 212 million from the capital contribution reserve.
If these proposals are approved, a dividend of CHF 16.60 per share, less 35 percent for Swiss withholding tax, as well as a dividend of CHF 1.40 per share exempt from Swiss withholding tax are expected to be paid starting from April 10, 2018.
Opinion We have audited the financial statements of Zurich Insurance Group Ltd, which comprise the income statement for the year ended December 31, 2017, balance sheet as at December 31, 2017, and notes, including a summary of significant accounting policies.
As key audit matter the following area of focus has been identified: – Valuation of Investments in subsidiaries
We consider the investments in subsidiaries to be a key audit matter not only due to the judgment involved but also based on the magnitude of CHF 11.4 billion, which makes up more than 67% of the Company’s total assets.
We refer to note 3, para b) (“Summary of significant accounting policies”) and note 10 (“Investments in subsidiaries”) to the 2017 financial statements.
– Re-performed management’s impairment test on the carrying value of each investment in subsidiary, and challenged the impairment decisions taken.
An audit involves performing procedures to obtain audit evidence so that material breaches of the legal requirements and the Company’s articles of association for the issue of new shares may be identified with reasonable assurance. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material breaches of the requirements concerning the issue of new shares, whether due to fraud or error.
Book value per share is a measure that is calculated by dividing shareholders’ equity by the number of shares issued less the number of treasury shares as of the period end.
Business operating profit (BOP) is the Group’s internal performance measure , on which the Group manages all of its business units. It indicates the underlying performance, after non-controlling interests, by eliminating the impact of financial market volatility and other non-operational variables. BOP reflects adjustments for shareholders’ taxes, net capital gains/ (losses) and impairments on investments (except for certain non-insurance operations included in Non-Core Businesses, investments in hedge funds as at fair value through profit or loss, certain securities held for specific economic hedging purposes and policyholders’ share of investment results for the life businesses) and nonoperational foreign exchange movements. Significant items arising from special circumstances, including restructuring charges, legal matters outside the ordinary course of business, gains and losses on divestment of businesses and impairments of goodwill are also excluded from BOP. Business operating profit before interest, depreciation and amortization (BOPBIDA) excludes interest expense on debt, depreciation and impairments of property and equipment and amortization and impairments of intangible assets. BOPBIDA includes amortization of deferred policy acquisition costs, deferred origination costs and distribution agreements.
Net non-technical result includes expenses or income not directly linked to insurance operating performance, such as gains/losses on foreign currency translation and interest expense on debt. It includes the impact of financial market volatility and other non-operational variables that distort the ongoing business performance.
Embedded value (EV) principles is a methodology using a “bottom-up” market consistent approach, which explicitly allows for market risk. In particular, asset and liability cash flows are valued using risk discount rates consistent with those applied to similar cash flows in the capital markets. Options and guarantees are valued using market consistent models calibrated to observable market prices.
Annual Report 2017 The Annual Report contains detailed information about Zurich’s financial performance, executive bodies, risk management, corporate governance and remuneration in 2017, and its strategy. It is available in English and German, with the financial statements in English only.
Annual Review 2017 The Annual Review provides an overview of Zurich’s business and strategy, and its financial and operating performance in 2017. It is available in English and German.
For more information please contact the appropriate office below, or visit our website at www.zurich.com
Investor Relations Zurich Insurance Group Ltd, Switzerland Telephone: +41 (0)44 625 22 99 Email: investor.relations@zurich.com
For more information see page 29 of this report or website: www.zurich.com/en/investor-relations/calendar
Photography: Lee Mawdsley (Cover, 15, 24/25, 30/31), Ivan Stefania (2, 17, 32, 44/45, 62/63, 80, 118/119, 120, 156/157, 158, 164), Andreas Guntli (4, 11), Theo Solnik/Haikai Photo (7), Matthew Worden (62), Elisabeth Real (10, 14/15, 18/19), Bill Watson (19), Andy Wilson (20/21), Practical Action Peru (27).
Content printed on Superset, an environmentally friendly paper made from totally chlorine-free pulp also sourced from well-managed forests independently certified according to the rules of the Forest Stewardship Council ® (FSC).
All references to ‘Farmers Exchanges’ mean Farmers Insurance Exchange, Fire Insurance Exchange, Truck Insurance Exchange and their subsidiaries and affiliates. The three Exchanges are California domiciled interinsurance exchanges owned by their policyholders with governance oversight by their Boards of Governors. Farmers Group, Inc. and its subsidiaries are appointed as the attorneys-in-fact for the Farmers Exchanges and in that capacity provide certain non-claims administrative and management services to the Farmers Exchanges. Neither Farmers Group, Inc., nor its parent companies, Zurich Insurance Company Ltd and Zurich Insurance Group Ltd, have any ownership interest in the Farmers Exchanges. Financial information about the Farmers Exchanges is proprietary to the Farmers Exchanges, but is provided to support an understanding of the performance of Farmers Group, Inc. and Farmers Reinsurance Company.
Zurich Insurance Group Mythenquai 2 8002 Zurich, Switzerland Phone +41 (0) 44 625 25 25 www.zurich.com 48559–1802