As of January 1 188 297 Provisions made during the period 104 62 Increase of provisions set up in prior years 17 34 Provisions used during the period (150) (154) Provisions reversed during the period (24) (55) Foreign currency translation effects (10) 5 As of December 31 125 188
Deferred tax assets/(liabilities) analysis by source in USD millions, as of December 31 2014 2013
Gross deferred tax Deferred acquisition and origination costs 20 (765) 20 (773) Depreciable and amortizable assets 33 (48) 49 (65) Life policyholders’ benefits and deposits 1 4 – 32 (13) Unrealized (gains)/losses on available-for-sale investments and cash flow hedges 176 (467) 368 (443) Accruals and deferred income 168 (1) 185 (1) Reserves for losses and loss adjustment expenses 477 (196) 614 (192) Reserves for unearned premiums 801 – 728 (37) Pensions and other employee benefits 632 (6) 604 –
Tax loss carryforwards 69 – 77 – Gross deferred tax assets/(liabilities) before valuation allowance 3,926 (8,924) 3,784 (8,876) Valuation allowance (22) – (18) – Gross deferred tax assets/(liabilities) after valuation allowance 3,904 (8,924) 3,766 (8,876) Deferred tax liabilities (5,020) (5,110)
As of December 31, 2014 and 2013, 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 24 billion and USD 20 billion, respectively. In the remote scenario in which 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 2014 2013
As of January 1 (3,090) (3,390) Net change recognized in the income statement (196) (227) Net change recognized in equity (586) 555 Net changes due to acquisitions/(divestments) (26) – Foreign currency translation effects 440 (28) As of December 31 (3,458) (3,090)
Development of deferred income taxes included in equity in USD millions 2014 2013
As of January 1 456 (113) Net unrealized gains/(losses) on available-for-sale investments (704) 596 Cash flow hedges (65) 40 Revaluation reserve (8) (4) Net actuarial gains/(losses) on pension plans 190 (76) Foreign currency translation effects 33 14 As of December 31 (98) 456
The tax rates applicable to tax losses for which a deferred tax asset has not been recognized are 19.2 percent and 18.3 percent for the years 2014 and 2013, respectively.
Fin an cial info rm atio n 19. Senior and subordinated debt Table 19.1
Senior and subordinated debt in USD millions, as of December 31 2014 2013
Senior debt Zurich Insurance Company Ltd Floating rate CHF 200 million notes, due June 2016 4 201 –
Zurich Finance (UK) plc 6.625% GBP 450 million perpetual notes, first callable October 2022 2,4 694 737
Other Various debt instruments 41 74 Subordinated debt 5,857 6,342 Total senior and subordinated debt 11,236 12,386 1 The bond is part of a qualifying cash flow hedge (100 percent). 2 The holders of these notes benefit from the Replacement Capital Covenant which states that if Series V Fixed/Floating Trust Preferred Securities, issued by ZFS Finance (USA)
Indebtedness in USD millions, as of December 31 Senior debt Subordinated debt Total 1 December 31, 2013 included operational senior and subordinated debt of USD 100 million for non-recourse debt, which was transferred to a third party as the underlying mortgaged property was sold in July 2014.
Maturity schedule of outstanding debt in USD millions, as of December 31 2014 2013
No borrowings were outstanding under any of these facilities as of December 31, 2014 or 2013.
Authorized, contingent and issued share capital a) Authorized share capital Until April 2, 2016, the Board of Zurich Insurance Group Ltd is authorized to increase the share capital by an amount not exceeding CHF 1,000,000 by issuing up to 10,000,000 fully paid registered shares with a nominal value of CHF 0.10 each. An increase in partial amounts is permitted. The Board would determine the date of issue of any such new shares, the issue price, type of payment, conditions for exercising pre-emptive rights, and the commencement of entitlement to dividends.
Treasury shares comprise shares acquired in the market, primarily held to cover employee share and share option plans.
Basic earnings per share 3,895 148,032,821 26.31 24.05 Effect of potentially dilutive shares related to share-based compensation plans 1,317,728 (0.23) (0.21) Diluted earnings per share 3,895 149,350,549 26.08 23.84
Basic earnings per share 4,028 147,404,623 27.33 25.33 Effect of potentially dilutive shares related to share-based compensation plans 568,876 (0.11) (0.10) Diluted earnings per share 4,028 147,973,499 27.22 25.23 1 The translation from USD to CHF is shown for information purposes only and has been calculated at the Group’s average exchange rates for the years ended December 31, 2014 and 2013.
Swiss pension plans The Group has two major pension plans in Switzerland both of which provide benefits that exceed the minimum benefit requirements under Swiss pension law. The plans provide a lifetime pension to members at the normal retirement age of 65 (age 62 for Executive Staff). Participants can draw retirement benefits early from age 60 (age 58 for Executive Staff). Alternatively, the benefit can be taken as a lump sum payment at retirement. Contributions to the plan are paid by the employees and the employer, both for retirement savings and to finance risk benefits paid out in the event of death and disability. The accumulated balance on the pension account is based on the employee and employer pension contributions and interest accrued. The interest rate credited is defined annually by the plans’ Board of Trustees which is responsible for the governance of the plans. The amount of pension payable on retirement is a result of the conversion rate applied on the accumulated balance of the individual participant’s pension account at the retirement date. Although the Swiss plans operate like defined contribution plans under local regulations, they are accounted for as defined benefit pension plans under IAS 19 “Employee Benefits”, because of the need to accrue interest on the pension accounts and the payment of a lifetime pension at a fixed conversion rate under the plan rules.
Actuarial valuations are completed regularly and if the plans become underfunded under local regulations, options for dealing with this include the Group paying additional contributions into the plan and/or reducing future benefits. At present, the plans are sufficiently funded, meaning that no additional contributions into the plans are expected to be required in the next year. The investment strategy of the Swiss plans is constrained by Swiss pension law including regulations relating to diversification of plan assets. Under IAS 19, volatility arises in the Swiss pension plan net liability because the fair value of the plan assets is not directly correlated to movements in the value of the plan’s defined benefit obligation in the short-term.
Effective January 1, 2014, following plan amendments, the fixed annuity conversion rates have been revised downwards to reflect the migration of the plans’ technical basis to a revised interest rate expectation and new mortality tables resulting in a one-off curtailment gain of USD 130 million which has been reflected as a reduction in expenses. This amendment results in a lower defined benefit obligation and therefore future service costs will be affected. This change will be phased in over a period of four years. It is also intended that the plans will be combined into a single legal entity in order to reduce complexity.
UK pension plan The major UK pension plan is a final salary plan and accrued benefits increase in line with salary increases. Normal retirement age for the plan is 60. The plan is split into distinct sections and the two defined benefit sections are closed to new entrants, who instead can participate in a defined contribution section within the same trust. The notes that follow consider only the defined benefit sections. There is a UK Pension Trustee Board, which is responsible for the governance of the plan. The employer contributions are determined based on regular triennial actuarial valuations which are conducted using assumptions agreed by the Trustee Board and the sponsoring company. A valuation was carried out during 2013 and the results were finalized on August 28, 2014. The local statutory valuation revealed a funding deficit and an asset backed funding arrangement was agreed with the Trustee Board.
Fair value of assets held in funded defined benefit pension plans in USD millions, as of December 31 2014 2013
Tables 21.3a and 21.3b provide a breakdown of the key information included in tables 21.1a and 21.1b for the main countries for the years ended December 31, 2014 and 2013 respectively.
Fair value of plan assets 4,524 9,162 2,676 1,092 1,007 18,461 Net defined benefit asset/(liability) (509) (1,977) (962) (244) (355) (4,046) Net post-employment benefit (expense)/income 1 25 (195) (111) (37) (25) (343)
1 Following plan amendments in Switzerland a one-off curtailment gain of USD 130 million has been reflected as a reduction in expenses.
Key financial assumptions used for major plans as of December 31 2014 2013
Country Mortality table for major plans Switzerland BVG 2010 Generational 21.39 23.16 23.86 25.59 United Kingdom PNXA00 with CMI_2012 projection 23.21 24.59 25.31 26.79
Mortality tables and life expectancies for major plans – prior period in years, as of December 31, 2013 Life expectancy at age 65 for a male currently
United States RP 2000 Generational, partially with projection 19.87 20.65 21.95 22.63
Maturity profile of future benefit payments for major plans as of December 31 2014 2013
Maturity analysis of benefits expected to be paid (in USD millions): < 1 year 149 251 163 49 155 248 141 54 1 to 5 years 643 1,182 719 203 661 1,171 631 212 5 to 10 years 923 1,936 1,087 273 978 1,942 964 295
Discount rate +50 bps 1,910 1,621 Discount rate –50 bps (2,161) (1,855) Salary increase rate +50 bps (172) (149) Salary decrease rate –50 bps 155 144 Price inflation increase rate +50 bps (1,430) (1,001) Price inflation decrease rate –50 bps 1,254 901 Cash balance interest credit rate +50 bps (118) (112) Cash balance interest credit rate –50 bps 81 109 Mortality 10% increase in life expectancy (1,617) (1,498) Mortality 10% decrease in life expectancy 1,635 1,419 1 A negative number indicates an increase and a positive number indicates a decrease in the defined benefit obligation.
Table 21.7 sets out the sensitivity of the defined benefit obligation to changes in key actuarial assumptions. The effect on the defined benefit obligation shown allows for an alternative value for each assumption while the other actuarial assumptions remain unchanged. Whilst this table illustrates the overall impact on the defined benefit obligation of the changes shown, the significance of the impact and the range of reasonably possible alternative assumptions may differ between the different plans that comprise the overall defined benefit obligation. In particular, the plans differ in benefit design, currency and average term, meaning that different assumptions have different levels of significance for different plans. The sensitivity analysis is intended to illustrate the inherent uncertainty in the evaluation of the defined benefit obligation under market conditions at the measurement date. Its results cannot be extrapolated due to non-linear effects that changes in the key actuarial assumptions may have on the overall defined benefit obligation. Furthermore, the analysis does not indicate a probability of such changes occurring and it does not necessarily represent the Group’s view of expected future changes in the defined benefit obligation. Any management actions that may be taken to mitigate the inherent risks in the post-employment defined benefit plans are not reflected in this analysis.
Expenses for share-based payments depend on various factors, including achievement of targets, and are subject to the discretion of the Remuneration Committee. The expenses may therefore vary significantly from year to year. The net amount of USD 202 million and USD 50 million for the years ended December 31, 2014 and 2013, respectively, reflects all aspects of share-based compensation, including adjustments made during the year.
The Partnership Share Scheme was launched in March 2013. Participants benefit from making deductions from their gross salary up to a maximum of GBP 1,500 or 10 percent of their year to date earnings. There were 905 and 782 active participants in the plan as of December 31, 2014 and 2013, respectively.
The Group Long-Term Incentive Plan (LTIP) Participants in this plan are allocated a target number of performance shares as notional shares of Zurich Insurance Group Ltd in April each year (Target Shares). The number of Target Shares is calculated as a percentage of the annual base salary.
On February 12, 2014 the Board has given approval to modify the LTIP with effect from January 1, 2014 to make the transition to a “three-year cliff-vesting” and to further align the performance criteria with the strategy. Target Shares allocated in 2015 will vest after a period of three years following the year of the allocation, with the actual level of vesting between 0 percent and 200 percent of the Target Shares allocated, depending on the achievement of pre-defined performance criteria. The performance criteria used to determine the level of vesting are the Group’s return on shareholders’ equity (ROE), the position of its relative total shareholder return (TSR) measured against an international peer group of insurance companies, and the achievement of cash remittance targets. All three pre-defined performance criteria are assessed over a period of three consecutive financial years starting in the year of allocation. One half of the shares that actually vest are sales-restricted for a further three year period. To further align the participants with the interests of the shareholders, effective from January 1, 2014, the Target Shares are credited dividend equivalents (“Dividend Equivalent Target Shares”) during the vesting period to compensate for any dividends paid to shareholders. As of December 31, 2014 and 2013 there were 1,256 and 1,138 participants in this plan, respectively.
The transition to the three-year cliff-vesting required a smooth implementation and therefore the new vesting schedule and performance framework is being phased-in. Target Shares allocated in 2014 are assessed for vesting one-third after two years in 2016 and two-thirds after 3 years in 2017. Further, for LTIP participants who joined the plan prior to 2014, additional performance share grants were allocated in 2014 to allow these participants the possibility to maintain their cumulative target earning opportunity during the transition period (for further information on the transition arrangements, please see the Remuneration report). Due to potential volatility in any one year, the assessment of cash remittance performance can only be meaningfully assessed over a three-year period. Therefore the cash remittance measure is replaced by the business operating profit (after tax) return on shareholders’ equity (BOPAT ROE) for the vesting decisions of the Target Shares allocated before 2015 that are assessed for vesting in 2015 and 2016.
The LTIP in 2013 and prior years included phased annual vesting of allocations in three equal tranches at the end of the first, second and third year after allocation, given the pre-defined performance criteria were met. One half of the vested shares were sales-restricted for a further three year period from each of the respective vesting dates.
Prior to 2011, for selected senior executives, performance shares and options in shares of Zurich Insurance Group Ltd were allocated. The last share options will expire in 2017. The number of shares allocated under option amount to 780,763 and 1,763,618 as of December 31, 2014 and 2013, respectively. For the years ended December 31, 2014 and 2013, 436,828 and 152,107 share options, respectively, have been exercised.
Consolidated financial statements continued 23. Commitments and contingencies, legal proceedings and regulatory investigations
Commitments under investment agreements The Group has committed to contribute capital to third parties that engage in making investments in direct private equity and private equity funds. Commitments may be called by the counterparty over the term of the investment (generally three to five years) and must be funded by the Group on a timely basis.
Guarantees and letters of credit USD 8,715 million of the USD 9,661 million and USD 9,270 million of the USD 10,283 million for financial guarantees and letters of credit as of December 31, 2014 and 2013, respectively, relate to guarantees in the aggregate amount of GBP 5,595 million provided to the directors of a wholly owned subsidiary in connection with the rationalization of the Group’s top holding structure which resulted in the merger of Zurich Group Holding into Zurich Financial Services Ltd in December 2009. These guarantees will expire in August 2015. In 2014 and 2013, an additional USD 740 million and USD 787 million, respectively, relate to guarantees in the aggregate amount of GBP 475 million which were provided to the directors of a wholly owned subsidiary in connection with the repatriation of capital. These guarantees have no expiry date.
Commitments under lease agreements The Group has entered into various non-cancelable operating leases as lessee for office space and certain computer and other equipment. Lease expenses totaled USD 123 million and USD 92 million for the years ended December 31, 2014 and 2013, respectively.
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 9,249 million and USD 11,814 million as of December 31, 2014 and 2013, respectively.
Legal proceedings and regulatory investigations The Group’s business is subject to extensive supervision, and the Group is in regular contact with various regulatory authorities. The Group is continuously involved in legal proceedings, claims and regulatory investigations arising, for the most part, in the ordinary course of its business operations. Specifically, certain companies within the Group are engaged in the following legal proceedings: Q4_2014_12_AR14_104_Consolidated_financial_statements_en.indd 225 23.02.2015 16:37:45
The governance framework and oversight of the Group standards and procedures regarding the valuation of financial instruments measured at fair value is the responsibility of the Valuation Forum, an independent committee composed of representatives from Group Risk Management, Investment Management and Group Finance. The Valuation Forum ensures the adequacy of valuation models, approves methodologies and sources to derive model input parameters, provides oversight over the selection of third party pricing providers, and on a quarterly basis reviews the classification within the fair value hierarchy of the financial instruments in scope.
Total fair value through profit or loss securities 10,740 10,546 10,740 10,546
Held-to-maturity debt securities 4,747 5,172 3,971 4,613 Investments in associates and joint ventures 70 129 70 129
Liabilities related to investment contracts (977) (1,163) (843) (1,030) Liabilities related to investment contracts with DPF (6,195) (6,241) (7,006) (6,614)
Fair values of held-to-maturity debt securities and senior and subordinated debt are obtained from third party pricing providers. The fair value received from these pricing providers may be based on quoted prices in an active market for identical assets, alternative pricing methods such as matrix pricing or an income approach employing discounted cash flow models. Such instruments are categorized within level 2.
Fair value hierarchy – non unit-linked – current period in USD millions, as of December 31, 2014 Level 1 Level 2 Level 3 Total
Reinsurers’ share of reserves for insurance contracts fair value option 1 – – 375 375
Fair value hierarchy – non unit-linked – prior period in USD millions, as of December 31, 2013 Level 1 Level 2 Level 3 Total
Fair value hierarchy – unit-linked – current period in USD millions, as of December 31, 2014 Level 1 Level 2 Level 3 Total
Investment property – – 4,100 4,100 Total investments for unit-linked contracts 1 89,011 39,882 4,366 133,259 Financial liabilities at FV through profit or loss
Investment property – – 3,661 3,661 Total investments for unit-linked contracts 1 85,412 44,109 3,809 133,330 Financial liabilities at FV through profit or loss
Within level 2, the Group has classified government and corporate bonds, investments in unit trusts, agency mortgagebacked securities (MBS) and ’AAA’ rated non-agency MBS and other asset-backed securities (ABS) where valuations are obtained from independent pricing providers. The fair value received from these pricing providers may be based on quoted prices in an active market for similar assets, alternative pricing methods such as matrix pricing or an income approach employing discounted cash flow models. If such quoted prices are not available, then fair values are estimated on the basis of information from external pricing providers or internal pricing models (for example, discounted cash flow models or other recognized valuation techniques).
• Unlisted stocks, private equity funds and certain hedge funds that are not actively traded. Such instruments are obtained from net asset value information and audited financial statements provided by the issuing hedge funds and private equity funds. Performance of these investments and determination of their fair value are monitored and reviewed closely by the Group’s in-house investment professionals and may be adjusted based on their understanding of the circumstances of individual investments.
No material transfers between level 1 and level 2 occurred for the years ended December 31, 2014 and 2013.
Realized gains/(losses) recognized in income 1 64 13 4 – – (33) 1 Unrealized gains/(losses) recognized in income 1,2 (6) (29) 283 10 (5) 23 140 Unrealized gains/(losses) recognized in other comprehensive income 78 16 – – – – 31
For the year ended December 31, 2014, the Group transferred derivatives with a market value of USD 297 million out of level 2 into level 3. The transfers resulted from certain significant input parameters used to derive the fair value (such as volatility) becoming unobservable.
Realized gains/(losses) recognized in income 1 71 30 (18) (2) – (37) 99 Unrealized gains/(losses) recognized in income 1,2 (5) (18) 252 4 (78) 41 26 Unrealized gains/(losses) recognized in other comprehensive income 53 (23) – – – – 15
Fee income and other expenses 3 (1) 2 Interest and bonuses credited to policyholders (501) 75 (426) Changes in assumptions (167) 13 (155)
Realized gains/(losses) recognized in income 1 – 3 (46) Unrealized gains/(losses) recognized in income 1 2 4 634
Transfers into Level 3 1 2 – Transfers out of Level 3 – – – Foreign currency translation effects (7) (5) (257)
Within level 3, the Group also classified investments in private equity funds, certain hedge funds and other securities which are not quoted on an exchange amounting to USD 3,347 million and USD 3,175 million for Group investments and USD 198 million and USD 64 million for investments for unit-linked contracts as of December 31, 2014 and 2013, respectively. These investments are valued based on regular reports from the issuing funds, and their fair values are reviewed by a team of in-house investment professionals and may be adjusted based on their understanding of the circumstances of individual investments.
The key assumptions driving the valuation of these investments include equity levels, discount rates, credit spread rates and prepayment rates. The effect on reported fair values of using reasonably possible alternative values for each of these assumptions, while the other key assumptions remain unchanged, is disclosed in tables 24.7a and 24.7b. While these tables illustrate the overall effect of changing the values of unobservable inputs by a set percentage, the significance of the impact and the range of reasonably possible alternative assumptions may differ significantly between investments, given their different terms and circumstances. Inter-relationships between those unobservable inputs are disclosed in tables 24.8a and 24.8b. The correlation is based on the historical correlation matrix derived from the risk factors which are assigned to each of the level 3 exposures (equity and debt securities). The main market drivers are equity markets and rate indicators and the impact of such changes on the other factors. The spread scenario has been added to analyze the impact of an increase of borrowing cost for entities.
Inter-relationship analysis of level 3 investments to changes in key assumptions – prior period as of December 31, 2013 Key assumptions Increase/decrease in reported fair value
Within level 3, the Group also classified: • Investment property amounting to USD 6,818 million and 6,734 million for Group investments and USD 4,100 million and USD 3,661 million for investments for unit-linked contracts as of December 31, 2014 and 2013, respectively. A large portion of this portfolio is valued using an internal income capitalization model. The model is asset specific and capitalizes the sustainable investment income of a property with its risk specific cap rate. This cap rate is an “all risk yield” with components such as asset class yield for core assets (lowest risk) plus additional premiums for additional risks, for example second tier location or deterioration risk. All cap rate components (risk premiums) are reviewed and, if necessary, adjusted annually before revaluations are performed. The model takes into consideration external factors such as interest rate, market rent and vacancy rate. The significant unobservable inputs which are outside this model, are estimated rental value, rental growth, long term vacancy rate and discount rate. Significant increases/(decreases) in rental value and rental growth, in isolation, would result in a significantly higher/(lower) fair value measurement. Significant increases/(decreases) in the long term vacancy rate and discount rate, in isolation, would result in a significantly lower/(higher) fair value measurement.
• USD 375 million and USD 346 million for reinsurers’ share of reserves fair value option and, USD 3,594 million and USD 3,306 million reserves for insurance contracts fair value option as of December 31, 2014 and 2013, respectively. The significant unobservable inputs used in the fair value measurement are the policy decrement assumptions used in projecting cash flows. Significant increases/(decreases) in claim incidence rates and significant decreases/ (increases) in claim termination rates would result in a significantly higher(lower) fair value measurement.
Table 25 summarizes related party transactions with key personnel reflected in the Consolidated financial statements. Key personnel includes members of the Board of Directors of Zurich Insurance Group Ltd and Zurich Insurance Company Ltd and members of the Group Executive Committee.
Remuneration of key personnel of the Group Cash compensation, current benefits and fees 27 27 Post-employment benefits 4 3 Share-based compensation 15 15 Other remuneration 5 3 Total remuneration of key personnel 50 48
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. 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 issued by the Farmers Exchanges As of December 31, 2014 and 2013, FGI and other Group companies held the following certificates of contribution issued by the Farmers Exchanges. Originally these were purchased by FGI in order to supplement the policyholders’ surplus of the Farmers Exchanges.
b) Quota share reinsurance treaties with the Farmers Exchanges The Farmers Exchanges ceded risk through quota share reinsurance treaties to Farmers Reinsurance Company (Farmers Re Co), a wholly owned subsidiary of FGI, and to Zurich Insurance Company Ltd (ZIC). These treaties can be terminated after 90 days’ notice by any of the parties.
The Auto Physical Damage (APD) Quota Share reinsurance agreement (APD agreement) with the Farmers Exchanges provides for annual ceded premiums of USD 1 billion. In addition, Farmers Re Co and ZIC assume a quota share percentage of ultimate net losses sustained by the Farmers Exchanges in their APD lines of business.
1 Farmers Re Co assumed 10 percent and ZIC assumed 80 percent. The remaining 10 percent was assumed by a third party on the same terms as Farmers Re Co and ZIC. 2 Farmers Re Co assumed 12.5 percent and ZIC assumed 80 percent. The remaining 7.5 percent was assumed by a third party on the same terms as Farmers Re Co and ZIC. 3 From January 1, 2014, Farmers Re Co and ZIC assumed a 2.0 percent and 16.0 percent respective quota share. Another 2.0 percent was assumed by a third party on the same terms as Farmers Re Co and ZIC. Subject to the approval of the California Department of Insurance, effective December 31 2014, Farmers Re Co and ZIC assumed a 1.0 percent and 9.0 percent respective quota share. Another 4.0 percent is assumed by a third party on the same terms as Farmers Re Co and ZIC.
The Group pursues a customer-centric strategy and is managed on a matrix basis, reflecting both businesses and geography. The Group’s operating segments have been identified on the basis of the businesses operated by the Group and how these are strategically managed to offer different products and services to specific customer groups. Segment information is presented accordingly. The Group’s segments are as follows: General Insurance provides a variety of motor, home and commercial products and services for individuals, as well as small and large businesses.
Farmers, through Farmers Group, Inc. and its subsidiaries (FGI), provides certain non-claims administrative and management services to the Farmers Exchanges. FGI receives fee income for the provision of services to the Farmers Exchanges, which are owned by their policyholders and managed by Farmers Group, Inc., a wholly owned subsidiary of the Group. 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..
For external reporting purposes Latin America and Asia-Pacific are aggregated into International Markets.
Global Life is managed on a regional-based structure within a global framework, including: • North America • Latin America • Europe • Asia-Pacific and Middle East
From January 1, 2015, the Global Life business will change its regional structure by establishing the regions Europe, Middle East & Africa (EMEA) and Asia Pacific. EMEA will include the current European business units, Zurich International Life and Luxembourg. This change has no impact on total Global Life or the Group.
Net investment result on unit-linked investments – – 10,457 12,731 – – – – 327 73 – – 10,784 12,805 of which: inter-segment revenues (356) (389) (450) (362) (30) (64) (1,022) (919) (46) (51) 1,904 1,785 – – Benefits, losses and expenses Insurance benefits and losses, net 1 20,048 20,321 10,685 9,167 2,650 2,823 (7) 49 988 (162) – – 34,364 32,198
Business operating profit by business segment in USD millions, for the years ended December 31 General Insurance Global Life Farmers Other Operating Businesses Non-Core Businesses Eliminations Total
Gross written premiums and policy fees 36,333 36,438 14,594 13,916 3,428 4,045 45 109 491 535 (110) (194) 54,781 54,849 Less premiums ceded to reinsurers (5,473) (5,959) (675) (693) – – (47) (55) (16) (33) 110 194 (6,101) (6,546)
Net investment income on Group investments 2,199 2,217 3,815 3,895 68 107 387 315 365 309 (628) (602) 6,206 6,240 Net capital gains/(losses) and impairments on Group investments 89 167 1,173 595 – – – – 347 (748) – – 1,610 14
Losses and loss adjustment expenses, net 20,051 20,323 – – 2,650 2,823 (1) – 171 (18) – – 22,871 23,128 Life insurance death and other benefits, net 1 (3) (1) 10,684 9,167 – – (6) 49 817 (144) – – 11,492 9,070
Net income after taxes 4,174 4,259 attributable to non-controlling interests 280 231 attributable to shareholders 3,895 4,028 1 General Insurance and Other Operating Businesses relate to the sale of the Group’s General Insurance retail business in Russia (see note 5). 2 For the year ended December 31, 2014, General Insurance includes property transfer tax of USD 40 million relating to the acquisition of non-controlling interests of
Deutscher Herold AG (see note 5). For the year ended December 31, 2013, Global Life includes USD 37 million of software impairments relating to a restructuring program (see notes 16 and 18 of the Consolidated financial statements 2013) and Other Operating Businesses includes USD 75 million of foreign exchange movements relating to operations which were liquidated or substantially liquidated.
Change in estimates of earn-out liabilities (19) (50) (31) 35 – – – – – – (50) (16)
Net income before income taxes 3,469 3,135 1,929 1,702 1,611 1,510 (1,015) (474) (150) 86 5,844 5,960 Income tax expense (1,670) (1,701)
Investments in associates and joint ventures 4 7 13 65 – – 51 55 2 2 – – 70 129
Reserves for losses and loss adjustment expenses, gross 61,094 65,629 – – 1,551 1,612 26 27 1,886 1,119 (84) (75) 64,472 68,312 Reserves for unearned premiums, gross 16,101 16,409 – – 680 1,208 3 3 14 17 (19) (21) 16,779 17,616 Future life policyholders’ benefits, gross 45 77 72,783 80,302 – – 2 5 4,823 4,107 – (14) 77,652 84,476 Policyholders’ contract deposits and other funds, gross 30 33 21,120 17,801 – – – – 2,265 2,328 (1) – 23,415 20,162 Reserves for unit-linked contracts, gross – – 59,431 63,028 – – – – 11,970 11,844 – – 71,400 74,873
Equity 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 Supplementary information Additions and capital improvements to property, equipment and intangible assets 781 344 409 157 144 169 51 81 – – – – 1,384 752 1 Farmers includes property, equipment and intangible assets of USD 2,314 million and USD 2,412 million as of December 31, 2014 and 2013, respectively.
Reserves for insurance contracts, gross 77,271 82,148 153,334 161,131 2,231 2,820 31 35 20,957 19,416 (104) (111) 253,719 265,440
Asia-Pacific and Middle East 1,039 935 1,547 1,634 76 84 Other
International Group Risk Solutions 3 187 191 – – – –
1 Includes business written under freedom of services and freedom of establishment in Europe, and the related assets. 2 Includes business written through licenses, mainly into Asia-Pacific and Middle East, and the related assets. 3 Includes business written through licenses into all regions.
Zurich Minas Brasil Seguros S.A. Belo Horizonte General Insurance/ Global Life 100 100 BRL 2,289.3
Chile Chilena Consolidada Seguros de Vida S.A. Santiago Global Life 98.99 98.99 CLP 24,484.0 Zurich Santander Seguros de Vida Chile S.A. Santiago Global Life 51 51 CLP 36,252.9 Germany Deutscher Herold Aktiengesellschaft Bonn Global Life 100 100 EUR 18.4 Zürich Beteiligungs-Aktiengesellschaft (Deutschland) Frankfurt General Insurance 100 100 EUR 152.9 Zurich Deutscher Herold Lebensversicherung Aktiengesellschaft Bonn Global Life 100 100 EUR 68.5 Zurich GI Management Aktiengesellschaft (Deutschland) Frankfurt General Insurance 100 100 EUR 10.0 Ireland Zurich Life Assurance plc Dublin Global Life 100 100 EUR 17.5 Zurich Financial Services EUB Holdings Limited Dublin Non-Core Businesses 100 100 GBP 0.001 Zurich Insurance plc Dublin General Insurance 100 100 EUR 8.2
Zurich Santander Seguros México, S.A. Mexico City General Insurance/ Global Life 51 51 MXN 190.0
Zurich Insurance Company Ltd 3 Zurich Other Operating Businesses 100 100 CHF 825.0
Zurich Life Insurance Company Ltd 4 Zurich Other Operating Businesses 100 100 CHF 60.0
Zurich Assurance Ltd Cheltenham, England Global Life 100 100 GBP 236.1
Zurich UK General Services Limited Fareham, England Other Operating Businesses 100 100 GBP 130.5
Zurich American Life Insurance Company Schaumburg, IL Global Life/ Non-Core Businesses 100 100 USD 2.5
ZFS Finance (USA) LLC V 6 Wilmington, DE Other Operating Businesses 100 100 USD –
Zurich American Insurance Company (and subsidiaries) New York, NY General Insurance 100 100 USD 5.0
South Africa Zurich Insurance Company South Africa Limited 2 Johannesburg General Insurance 84.05 84.05 ZAR 4.0 1 The segments are defined in note 27. 2 Listed on the Johannesburg Stock Exchange. On December 31, 2014, the company had a market capitalization of ZAR 3.2 billion (ISIN Number ZAE000094496).
Consolidated financial statements continued 29. Events after the balance sheet date
Board of Directors’ responsibility The Board of Directors is responsible for the preparation and fair presentation of the Consolidated financial statements in accordance with the International Financial Reporting Standards (IFRS) and the requirements of Swiss law. This responsibility includes designing, implementing and maintaining an internal control system relevant to the preparation and fair presentation of Consolidated financial statements that are free from material misstatement, whether due to fraud or error. The Board of Directors is further responsible for selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances.
Zurich produces and reports embedded value in accordance with the Market Consistent Embedded Value (MCEV) Principles and Guidance issued by the European Insurance CFO Forum (CFO Forum) in October 2009 to provide an economic view of the value of the life business to shareholders and to support financial management and strategic decision making. This report provides an overview of the movement in the MCEV over the calendar year 2014 and new business value added from new sales during the year, including further splits into constituent parts and geographical regions.
Embedded value key results in USD millions, for the years ended December 31 2014 2013 Change
Opening embedded value 19,499 18,861 638 Closing embedded value 19,290 19,499 (209) Embedded value operating earnings 1,507 665 842 of which new business value 1,022 1,060 (38) Embedded value earnings 2,060 1,049 1,010
New business value was USD 1,022 million, a decrease of USD 38 million or 2 percent on a local currency basis compared with 2013. This was mainly driven by Latin America, lower sales in International Group Risk Solutions (IGRS) and the revision of the expense methodology introduced at the end of 2013. There were lower margins on protection business in Zurich Santander and in North America due to changes to lapse assumptions and on individual annuities in Chile as a result of the change to the yield curve methodology. This was partially offset by high sales in corporate business in the UK, particularly in the last quarter of 2014.
Embedded value earnings were USD 2,060 million. The earnings were positively impacted by USD 386 million of economic variances, particularly in Italy, Ireland, Spain and North America partially offset by negative effect in Germany. The expected contribution from in-force was USD 764 million.
Dividends, injections and other movements together with the foreign currency translation effects were USD 2,268 million which resulted in an overall decrease in Embedded value compared to previous year. The foreign currency translation effects reduced the embedded value by USD 1,695 million.
The graph and table below show how embedded value has decreased from USD 19,499 million to USD 19,290 million during 2014. Each movement is described in its own section of the report, as detailed on the graph below.
Expected contribution at reference rate 2 106 108 160 268 199 Expected contribution in excess of reference rate 4 257 261 235 495 491 Expected transfer to shareholders’ net assets (416) 1,681 1,265 (1,265) – –
Dividends in the last six months of the year – (422) (422) – (422) (342) Injections in the last six months of the year 1 – 210 210 – 210 Other movements in the last six months of the year 1 – (27) (27) 2 (25) 208
Embedded value development in USD millions, for the year ended December 31, 2014
In North America, embedded value increased by USD 249 million, mainly as a result of new business value and positive economic variances. This was partially offset by a lapse assumption update in Farmers New World Life (FNWL) and modeling enhancements.
In Latin America, embedded value decreased by USD 234 million mainly as a result of dividends paid and exchange rate movements. Adverse lapse and expense experience and related assumption changes in the region were more than offset by new business value.
In the UK, embedded value increased by USD 17 million, as a result of high new business volumes in corporate pension business and generally favorable operating experience. These impacts, together with positive economic variances, were largely offset by dividend payments and foreign currency translation effects.
In Germany, embedded value decreased by USD 355 million mainly driven by negative economic variances and updated expense and persistency assumptions partially offset by model enhancements. Foreign currency translation effects were also negative.
In Ireland, economic variances and a capital injection were the main contributors to the increase in embedded value of USD 123 million.
In Spain, the continued strong new business performance and positive economic variances increased embedded value by USD 73 million.
In Italy, embedded value decreased by USD 37 million with economic variances more than offset by dividend payments and foreign currency translation effects.
In Asia-Pacific and Middle East, embedded value increased by USD 29 million mainly as a result of new business value and economic variances partially offset by updated operating assumptions and foreign currency translation effects.
In Other, embedded value increased by USD 5 million with new business value and positive economic variances offset by central expenses.
Embedded value by geographical region in USD millions, for the years ended December 31
New business margin 4 (% of APE) 25.8% 23.5% 24.1% 17.3% 22.1% 30.6% 28.6% 23.5% 25.8% 27.0% New business margin 4 (% of PVNBP) 2.6% 2.4% 2.3% 1.5% 2.1% 3.5% 3.1% 2.1% 2.9% 2.8%
New business value was USD 1,022 million, a decrease of USD 38 million or 2 percent on a local currency basis compared with 2013. This was mainly driven by Latin America, lower sales in IGRS and the revision of the expense methodology introduced at the end of 2013. There were lower margins on protection business in Zurich Santander and in North America due to changes to lapse assumptions and on individual annuities in Chile as a result of the change to the yield curve methodology. This was partially offset by the high sales in corporate business in the UK, particularly in the final quarter of 2014.
New business by geographical region in USD millions, for the years ended December 31 APE 1 PVNBP 1 New business value 2
of which: Asia-Pacific and Middle East 566 530 4,060 3,368 191 176 33.8% 33.4% 4.7% 5.2%
1 APE and PVNBP are reported gross of non-controlling interests. 2 New business value and new business margin are reported net of non-controlling interests.
Zurich Santander delivered an APE of USD 846 million, an increase of USD 25 million or 14 percent on a local currency basis. This came mainly from strong sales in individual protection and unit-linked business in Brazil. However new business value decreased by USD 24 million or 8 percent on a local currency basis as a result of a changed lapse assumption on protection business in Brazil.
New business value by geographical region in USD millions, for the years ended December 31
Overall in Europe, APE increased by USD 821 million or 31 percent on a local currency basis. The main increases were in the UK and Spain followed by Germany. In the UK, higher volumes of corporate business and individual saving business were partially offset by lower volumes of unit-linked business. In Spain, volumes increased mainly for individual saving products boosted by the current economic environment and the wider bank distribution network. Germany also experienced higher sales in saving products through the bank distribution channel. New business value increased by USD 48 million or 9 percent on a local currency basis, with lower margins reflecting the change in product mix.
In the UK, APE increased by USD 491 million or 41 per cent on a local currency basis, as a result of higher volumes of corporate business sold during the last quarter of the year, increased volumes in the retail wealth business offset by a drop in single premium unit linked. Higher profitability in corporate protection business was more than offset by reductions in margins for individual protection business. Despite the lower margins associated with changes in the mix of business, new business value increased by USD 38 million or 17 per cent on local currency basis.
In Ireland, APE increased by USD 32 million or 7 percent on a local currency basis, benefitting from increased sales of corporate products, including bulk annuities and corporate life and pensions. However the lower volumes of cross-border Italian business and the reductions in margins for unit-linked business reduced overall margins. As a result new business value decreased by USD 16 million or 23 percent on a local currency basis.
In Italy, APE increased by USD 24 million or 14 percent on a local currency basis, arising mainly from individual savings business. However margins reduced as a result of lower interest rates and as a result new business value decreased by USD 16 million or 54 percent on a local currency basis.
In Other, APE decreased by USD 101 million or 59 percent on a local currency basis as a result of lower sales of unit-linked products in Luxembourg and lower sales of corporate protection business in IGRS. As a result new business value decreased by USD 40 million or 41 percent on a local currency basis.
New business by pillar in USD millions, for the years ended December 31
APE in the Corporate Life and Pensions pillar was USD 1,908 million, an increase of USD 514 million compared with 2013. Most of the increase came from higher volumes of lower margin corporate investment contracts in UK. New business value was USD 303 million, an increase of USD 34 million, coming mainly from the corporate investment contracts in UK, partially offset by the decrease in IGRS due to lower sales.
The free surplus is the market value of any asset allocated to, but not required to, support the in-force covered business of Global Life at the valuation date. This means that components of the free surplus might be used to fund future new business growth or support group consolidation constraints or pension deficits. Free surplus is calculated as Shareholders’ net assets less the required capital. The required capital is the sum of the minimum amount of solvency capital required to satisfy local regulators and the additional capital that the management of the Company considers appropriate to hold in addition to minimum solvency capital. Some of the assets making up the free surplus are not available for distribution. Examples of constraints are group internal loans needed for liquidity, intangible assets and policyholder resources allowed under local regulation to cover solvency requirements and group internal reinsurance.
Shareholders’ net assets in USD millions, as of December 31 2014 2013
In the UK, free surplus increased by USD 108 million. New business strain was covered by in force cash emergence. The main driver of the increase was the introduction of lapses into the statutory liability calculation for protection business with a partial offset from dividend payments.
In Spain, free surplus decreased by USD 4 million with market returns more than offset by dividend payments.
In Asia-Pacific and Middle East, free surplus decreased by USD 42 million. In-force cash emergence was offset by new business strain and adverse operating variances.
In Other, free surplus decreased by USD 60 million mainly due to expenses charged to Global Life’s central unit.
Variances arising on operating and economic assumptions increased free surplus by USD 182 million. Variances represent the difference between actual experience during the period and that implied by assumptions. Economic variances were the largest component of this figure, with the main impacts in Chile, Germany and Italy.
Foreign currency translation effects decreased the U.S. dollar free surplus by USD 267 million.
Expected contribution at reference rate The expected contribution at reference rate is the projected change in embedded value over the year using risk free investment returns applicable at the start of the year. The expected contribution at reference rate was USD 268 million.
Expected transfer to shareholders’ net assets The expected transfer to shareholders’ net assets shows the profits expected to emerge during the year in respect of business in-force at the start of the year. The net effect on embedded value is zero, because the change in the value of business in-force is offset by an equal and opposite change in shareholders’ net assets.
Fin an cial info rm atio n 6. Operating, economic and other non-operating variances
Operating, economic and other non-operating variances in USD millions, for the year ended December 31, 2014
Operating experience variances Operating experience variances measure the difference between actual experience during the period and that implied by the operating assumptions. Experience variances occur in the normal course of business as short-term experience fluctuates around long-term assumptions.
Embedded value split of operating experience variance in USD millions, for the year ended December 31, 2014
Operating assumption changes Changes in assumptions about future operating experience also have an impact on operating variances.
• Mortality and morbidity assumption updates increased embedded value by USD 72 million. The main changes were in Switzerland and North America contributing USD 73 million and USD 23 million respectively, partially offset by a decrease in Asia-Pacific and Middle East of USD 43 million.
• Persistency assumption updates negatively impacted embedded value by USD 272 million. The main drivers were North America and Asia-Pacific and Middle East contributing USD 101 million and USD 135 million respectively.
Embedded value split of operating assumption changes in USD millions, for the year ended December 31, 2014
Other operating variances Other operating variances include modeling changes, development and one-off expenses and other operating variances not captured elsewhere.
• Modeling changes increased embedded value by USD 282 million. The main contributors were Germany with USD 195 million as a result of more granular product modeling and the UK with USD 59 million from the inclusion of an allowance for salary inflation in Group business.
• One-off expenses reduced embedded value by USD 94 million, mainly driven by Switzerland as a result of costs of implementing efficiency improvements and other projects, North America as a result of IT transformation costs, project costs in the Isle of Man and in expenses to close the agency sales force in Hong Kong.
• Other operating variances had a positive impact on embedded value of USD 92 million. The main contributions come from tax in UK and Group Life profits in Switzerland, partially offset by increased risk capital in Germany.
Outside Europe, decreased interest rates positively affected the economic variance on protection business in Asia-Pacific and Middle East and North America.
Other non-operating variances Other non-operating variances include the impact of legal, tax and regulatory changes implemented during the year as well as other one-off items.
Dividends, injections and other capital movements in USD millions, for the year ended December 31, 2014
Changes in value for Global Life arising from dividends, injections and other capital movements are offset by equal and opposite value changes in the non-covered businesses of the Group and therefore have no impact on Group MCEV as shown in section 11, except as noted below.
North America paid a dividend of USD 150 million to the Group, net of an injection of USD 158 million to fund new business in the IFA/Broker channel. Other movements include the impact from the transfer of a block of annuity business to Non-Core Businesses.
In Asia-Pacific and Middle East, the net dividends and capital movements increased embedded value by USD 31 million.
Pension scheme liabilities 2 1.2 Less non-controlling interests 3 0.1 Other adjustments 4 0.2 Embedded value shareholders’ net assets 8.3 Value of business in-force 11.0 Embedded value 19.3 1 Shareholders’ equity is the Global Life share of total shareholders’ equity as reported in the Consolidated financial statements prepared on the basis of the Group’s accounting policies set out in note 3 of the Consolidated financial statements.
2 Pension scheme liabilities are deducted from shareholders’ equity but are not deducted from embedded value shareholders’ net assets. 3 Primarily from non-controlling interests in Zurich Santander and Spain. 4 Other adjustments include tax differences, policyholders’ share of intangibles, reserving differences and asset valuation differences including consolidation differences with respect to certain trust assets.
Sensitivities in USD millions, as of December 31, 2014 Change in embedded value 1
Economic sensitivities 100 basis points increase in risk free yield curve – 1% 100 basis points decrease in risk free yield curve 2 (1%) (4%) 10% fall in equity market values (2%) n / a 10% fall in property market values (1%) n / a 25% increase in implied volatilities for risk free yields (1%) (1%) 25% decrease in implied volatilities for risk free yields 1% 1% 25% increase in implied volatilities for equities and properties (1%) – 25% decrease in implied volatilities for equities and properties – 1%
1 Values used to calculate the sensitivities exclude a liquidity premium. Eliminating the liquidity premium reduces the reported embedded value and new business value by USD 443 million and USD 16 million, respectively.
2 Risk free forward annual yields are decreased by 100 basis points at each duration. However, if a risk free forward annual yield at a given duration is less than 100 basis points, the decrease is to zero at that duration, not to a negative rate.
The key assumption changes represented by each of these sensitivities are given in section 12 p).
The Group MCEV is presented in the following table as the Global Life covered business valued using MCEV Principles and the non-covered businesses which are valued at the unadjusted shareholders’ equity. Non-covered businesses include the life businesses managed as part of Non-Core Businesses outside Global Life and all other Group businesses including General Insurance and Farmers.
Group MCEV in USD billions, for the year ended December 31, 2014
Non-operating MCEV earnings 0.6 0.0 0.6 Total MCEV earnings 2.1 2.7 4.8
Closing Group MCEV 19.3 16.8 36.1 1 For non-covered businesses this is set equal to the Net Income After Tax over the period. 2 For non-covered businesses this is equal to the change in non-controlling interests and unrealized gains and losses excluding the foreign currency translation effects over the period.
3 Adjustments include dividends, capital and other movements and foreign currency translation effects.
The Group has applied Market Consistent Embedded Value (MCEV) Principles and Guidance issued by the European Insurance CFO Forum in October 2009, for its Embedded value report for the companies and businesses in its Global Life segment (the covered business). The Embedded value report primarily relates to Global Life. Total Group MCEV is shown in section 11. The embedded value methodology adopted by the Group is based on a “bottom-up” market consistent approach to allow explicitly 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 capital markets, and options and guarantees are valued using market consistent models calibrated to observable market prices. Where markets exhibit a limited capacity, the valuation is based on historical averages. Embedded value excludes any value from future new business.
a) Covered business Covered business includes all business written by companies that are included in Global Life, unless otherwise stated. In particular: • life and critical illness; • savings (with profit, non-profit and unit-linked); • pensions and annuity; and • long-term health and accident.
The free surplus comprises the market value of shareholders’ net assets allocated to the covered business of the Global Life Segment in excess of the assets backing the required capital.
In the UK, insurers are required to assess capital requirements on two separate bases, Pillar 1 and Pillar 2. For Zurich Assurance Ltd, Pillar 1 was more onerous both at December 31, 2013 and at December 31, 2014. The amounts of required capital and free surplus shown in this report applicable to Zurich Assurance Ltd reflect those positions. The required capital modeled for embedded value is based on 125 percent of the Group’s target Pillar 1 required capital, and the analysis of change is performed on a Pillar 1 basis.
The allowance for FC is included both in the value of business in-force and in new business value. For new business value, FC is applied to the required capital to be held in respect of that business.
Time value of financial options and guarantees (TVFOG) represents additional costs in excess of the intrinsic value of options and guarantees which are already allowed for in the CE value. These are based on the variability of investment returns which need to be allowed for explicitly under MCEV Principles. The time value is calculated on a market consistent basis using stochastic modeling techniques, and after making allowance for expected management and policyholder behavior.
The cost of residual non-hedgeable risk (CRNHR) is an explicit deduction for non-hedgeable financial risks (non-hedgeable asset/liability management risks and reinsurance credit risk), and non-financial risks (mortality, persistency, expenses and operational risk). The CE value allows for best estimate shareholder cashflows. The CRNHR is largely an allowance for uncertainty in shareholder cashflows, and for risks which are not already considered in the CE value or the TVFOG, such as operational risk. Most residual non-hedgeable risks have a symmetric impact on embedded value apart from operational risk.
A 4 percent cost of capital charge has been applied to the diversified present value of non-hedgeable risk based capital.
New business amounts in the Embedded value report are reported after the effects of non-controlling interests.
Germany has followed an approach where liability model points are set up in advance, using the structure of a previous run, and then projected to the valuation date by scaling to match the expected balance sheet figures.
k) Debt Where a loan exists between a company in Global Life and a Group company outside Global Life, the loan is included in embedded value at the same value included in the balance sheet of the other Group company.
Expense assumptions for each life business include expected pension scheme costs in respect of future service entitlements.
o) Translation to Group presentation currency To align embedded value reporting with the Group’s Consolidated financial statements, relevant results have been translated to the Group presentation currency, U.S. dollar, using average exchange rates for the period. This applies to new business value and new business volumes (APE and PVNBP) for the current period and comparative figures. This approach has also been applied to the analysis of movement. Valuations as at a specified date are translated at end-of-period exchange rates.
A 10 percent increase in initial expenses was considered for new business value only.
For the purposes of calculating new business value, for each discrete quarter of new business, economic assumptions are based on market conditions at the start of the quarter. New business operating assumptions are reviewed annually and updated as appropriate with effect from the first quarter of the next calendar year. In general the operating assumptions remain unchanged throughout the year.
Choice of “risk free yield curve” The risk free yield curve is derived from mid-market swap rates applicable to each economy as of the valuation date. These curves were used to extract forward reinvestment yields that are used for all asset classes. The yield curves are consistent with the assumptions used by investment banks to derive their option prices and their use ensures consistency with the derivation of implied volatilities. They also have the advantage of being available for most of the markets in which the Group operates. Domestic yield curves are used by businesses in other countries, except Hong Kong and Argentina which use the U.S. dollar, as their liabilities are principally U.S. dollar-denominated.
Inflation Inflation assumptions have been derived from the yields on index linked government bonds relative to the corresponding nominal government yield curve, where such index linked government bonds exist. Where appropriate, allowance has been made for expense inflation to exceed the assumed level of price inflation reflecting the contribution of salary related expenses to life company expenses. In Switzerland, reference was made to Swiss Financial Market Supervisory Authority (FINMA) published rate.
All sensitivities in the report relate to the base yield curve with no liquidity premium.
Expected contribution The expected contribution for the analysis of embedded value earnings is based on a projection from the start of period to the end of period. This requires assumptions regarding the investment returns expected to be achieved over the period on different asset classes. The investment return assumptions (for this purpose only) are based on the “real world” returns expected by the Group. The use of “real world” investment assumptions gives a more realistic basis for the expected contribution calculation and allows for the risk underlying each asset. Any under or over performance will be reported through economic variance.
For property assets, the investment return assumptions are based on the one year swap rate at the start of period plus a margin to reflect the additional risk associated with investment in this asset class.
Expense assumptions Management expenses have been analyzed between expenses related to acquisition of new business, the maintenance of business in-force and, where appropriate, development expenses and one-off expenses. Future expense assumptions allow for expected levels of maintenance expenses. Headquarters’ expenses relating to covered business have been allocated to business units, or to Global Life’s central unit which is in region Other, and are reflected in assumed future expenses.
Expenses excluded from the unit cost base for embedded value reporting are split into development expenses and one-off expenses. Development expenses relate to expenses incurred to improve the long-term capacity of the business or to reduce its future unit costs, and include certain expenses for start-up operations, certain expenses for regional offices, and certain central overhead expenses not reflected in the long-term assumptions of the business units. They also include certain project-based costs and certain distribution expenses. One-off expenses are those that are not expected to recur and are short-term in nature.
Embedded value information: Dividends in the first six months of the year 1 (50) (68) (18) (24) (2) (22) (497) (347) – – (8) (26) (574) (465) Injections in the first six months of the year 1 97 38 6 32 37 – 203 Other movements in the first six months of the year 1 18 1 (39) (20) (39) (35) 24 43 33 93 (1) (1) 34 116
Present value of new business premiums (PVNBP) 1,869 1,406 5,623 6,158 4,090 4,381 40,744 27,751 4,060 3,368 658 1,903 52,954 40,586
Dividends in the last six months of the year 1 (46) – (67) (77) (20) – – – – – – – – – Injections in the last six months of the year 1 40 – – 53 – – Other movements in the last six months of the year 1 – – – – – (2) – – (18) (4) – – – –
New business margin (% of APE) 13.6% 16.4% 9.9% 12.0% 28.5% 26.7% 11.6% 16.1% 49.8% 67.1% 7.2% 17.9% 18.8% 18.3% New business margin (% of PVNBP) 0.8% 1.1% 1.0% 1.5% 2.5% 2.3% 1.4% 1.9% 5.4% 7.6% 0.9% 2.1% 1.9% 1.9%
The methodology and assumptions underlying the report are described in sections 12 and 13.
We have audited the Embedded value report of Zurich Insurance Group Ltd (“the Company”) included on pages 259 to 290 of the Annual Report 2014 for the year ended December 31, 2014. The embedded value information included in the Embedded value report has been prepared in accordance with the Market Consistent Embedded Value (“MCEV”) Principles and Guidance issued by the European Insurance CFO Forum, as described on pages 278 to 282.
Income statements in CHF thousands, for the years ended December 31 Notes 2014 2013
Assets in CHF thousands, as of December 31 Notes 2014 2013
Liabilities and shareholders’ equity in CHF thousands, as of December 31 Notes 2014 2013
Short-term liabilities Other liabilities to subsidiaries 496 – Other liabilities to third parties 20,438 12,507 Other liabilities to shareholders 950 810 Accrued liabilities to subsidiaries 2,048 1,836 Accrued liabilities to third parties 2,946 40,250 Derivatives with subsidiaries 127 3,033 Total short-term liabilities 27,005 58,436 Long-term liabilities Long-term loans from subsidiaries 520,150 466,229
Total long-term liabilities 540,895 503,103 Total liabilities 567,900 561,539 Shareholders’ equity (before appropriation of available earnings)
General capital contribution reserve 5,668,198 7,997,448 Reserve for treasury shares 14 315,122 322,056
General legal reserve 341,140 341,140 Free reserve: As of January 1 338,443 332,986 Transfer from capital contribution reserve 1,799 5,457
4. Other financial income Other financial income primarily includes realized and unrealized foreign exchange gains.
5. Other income Other income for 2014 mainly represents the partial release of CHF 20.7 million (prior year CHF 18.4 million) of the irrevocable commitment made by the Company on behalf of the Zurich Insurance Group to the Z Zurich Foundation in 2011, as another Group company made the payments for 2014 and 2013.
The investment in Zurich Financial Services EUB Holdings Limited was impaired by CHF 100 million in 2014 compared with an impairment of CHF 160 million in the previous year.
10. Subordinated loans to subsidiaries Subordinated loans have remained unchanged in local currency compared with 2013, and mainly include a loan to Zurich Insurance Company Ltd of CHF 4,832 million as of December 31, 2014 and 2013.
12. Shareholders’ equity a) Issued share capital In 2014, there was no change to the ordinary share capital. At the Annual General Meeting on April 2, 2014, the shareholders approved an extension of authorized share capital with the number of shares remaining unchanged at 10,000,000 fully paid registered shares with a nominal value of CHF 0.10 each until April 2, 2016. In 2013, there were no changes to the ordinary share capital or to the authorized share capital.
During the years 2014 and 2013, a total of 733,614 shares and 603,099 shares, respectively, were issued to employees out of the contingent capital.
Employee participation On January 1, 2013, the contingent share capital, to be issued to employees of Zurich Insurance Group Ltd and its subsidiaries, amounted to CHF 299,513.60 or 2,995,136 fully paid registered shares with a nominal value of CHF 0.10 each. On January 1, 2014, the contingent share capital, to be issued to employees of Zurich Insurance Group Ltd and its subsidiaries, amounted to 239,203.70 or 2,392,037 fully paid registered shares with a nominal value of CHF 0.10 each.
During 2014 and 2013, 733,614 and 603,099 shares, respectively, were issued to employees out of the contingent share capital. Of the total 733,614 registered shares issued to employees during the year 2014, 364,947 shares were issued in the period from January 1, 2014, to March 31, 2014, and 368,667 registered shares were issued as from April 1, 2014, to December 31, 2014. As a result, on December 31, 2014 and 2013, respectively, the remaining contingent share capital, which can be issued to employees of Zurich Insurance Group Ltd and its subsidiaries, amounted to CHF 165,842.30 and 239,203.70 or 1,658,423 and 2,392,037 fully paid registered shares, respectively, with a nominal value of CHF 0.10 each. The pre-emptive rights of the shareholders, as well as the right for advance subscription, are excluded. The issuance of shares to employees is subject to one or more regulations to be issued by the Board and take into account performance, functions, levels of responsibility and criteria of profitability. Shares or option rights may be issued to the employees at a price lower than that quoted on the stock exchange.
Average selling price, in CHF 255 247 1 in CHF thousands 15. Shareholders The shares registered in the share ledger as of December 31, 2014, were owned by 119,407 shareholders of which 114,204 were private individuals holding 25.8 percent of the shares (or 15.0 percent of all outstanding shares), 1,908 were foundations and pension funds holding 6.5 percent of the shares (or 3.8 percent of all outstanding shares), and 3,295 were other legal entities holding 67.7 percent of the shares (or 39.5 percent of all outstanding shares).
According to information available as of December 31, 2014, Zurich Insurance Group Ltd is not aware of any person or institution, other than BlackRock, Inc., New York, (5.03 percent of the shares) which, directly or indirectly, had an interest as a beneficial owner in shares, option rights and/or conversion rights relating to shares of Zurich Insurance Group Ltd representing three percent or more of its issued shares.
Fin an cial info rm atio n 16. Information on the risk assessment process Refer to the disclosures in the Risk review on pages 114 to 152 of this Annual Report.
18. Shareholdings of the Board of Directors and the Group Executive Committee The information on share and share option holdings of Directors and of the members of the GEC, who held office as of December 31, 2014, as required by article 663c paragraph 3 of the Swiss Code of Obligations is included and audited in the Remuneration report on pages 62 to 93 of this Annual Report.
Proposed appropriation of available earnings and capital contribution reserve as of December 31 2014 2013
Registered shares eligible for dividends Eligible shares 149,636,836 148,903,222 in CHF thousands 2014 2013
The Board of Directors proposes to the Annual General Meeting on April 1, 2015, to pay out a dividend of CHF 2,544 million from the capital contribution reserve.
If this proposal is approved, a payment of CHF 17.00 per share exempt from Swiss withholding tax is expected to be paid starting from April 9, 2015.
On behalf of the Board of Directors of Zurich Insurance Group Ltd
As statutory auditor, we have audited the accompanying financial statements of Zurich Insurance Group Ltd, which comprise the balance sheet, income statement and notes (pages 293 to 299), for the year ended December 31, 2014.
We further confirm that the proposed appropriation of available earnings complies with Swiss law and the Company’s articles of incorporation. We recommend that the financial statements submitted to you be approved.
Our audit was conducted in accordance with Swiss Auditing Standards, which require that an audit be planned and performed to obtain reasonable assurance about whether material violations against legal and statutory requirements are detected. We have performed audit procedures appropriate to the circumstances and we believe that our audit provides a reasonable basis for our opinion.
In our opinion, the issuance of 733,614 registered shares with a par value of CHF 0.10 complies with Swiss law and the Company’s articles of incorporation.
Number of shares issued 149,636,836 148,903,222 Number of dividend-bearing shares 1 149,636,836 148,903,222 Market capitalization (in CHF millions at end of period) 46,642 38,491 Authorized capital, number of shares 10,000,000 10,000,000 Contingent capital, number of shares 11,658,423 12,392,037 1 Treasury shares are not entitled to dividends.
Dividend/nominal value reduction 2005 7.00 July 4, 2006 1 Proposed dividend, subject to approval by shareholders at the Annual General Meeting 2015; expected payment date as from April 9, 2015.
Zurich Insurance Group LtdDJ Titans Insurance 30 Index Source: Thomson Reuters Datastream
As of December 31, 2014 Zurich Insurance Group Ltd is not aware of any person or institution, other than BlackRock, Inc., New York, 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. The related and additional announcements of such notifications can be found via the search facility on the SIX Disclosure Office’s platform: disclosure/major_shareholders_en.html
Share Register Services Zurich Insurance Group Ltd, Switzerland Telephone: +41 (0)44 625 22 55 E-mail: shareholder.services@zurich.com Website: www.zurich.com/shareholder-information
American Depositary Receipts Zurich Insurance Group Ltd has an American Depositary Receipt program with The Bank of New York Mellon (BNYM). For information relating to an ADR account, please contact BNY Mellon’s Shareowner Services at www.mybnymdr.com. In the U.S. call +1 888 BNY ADRS or outside the U.S. +1 201 680 6825, or email shrrelations@cpushareownerservices.com General information on the company’s ADR program can be obtained from The Bank of New York Mellon at www.adrbnymellon.com
Business operating profit (BOP) is a measure that 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 nonoperational variables. BOP reflects adjustments for shareholders’ taxes, net capital gains/(losses) and impairments on investments (except for the capital markets and property lending/banking operations included in Non-Core Businesses, investments in hedge funds, 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, charges for litigation outside the ordinary course of business, gains and losses on divestments of businesses, impairments of goodwill and the change in estimates of earn-out liabilities (with the exception of experience adjustments, which remain within BOP) are also excluded from BOP. Business operating profit before interest, depreciation and amortization (BOPBIDA) is BOP before interest expense on debt, depreciation and impairments of property and equipment and amortization and impairments of intangible assets, but including amortization of deferred policy acquisition costs and deferred origination costs.
Business operating profit (after-tax) return on shareholders’ equity (BOPAT ROE) indicates the level of BOP relative to resources provided by shareholders. It is calculated as BOP, annualized on a linear basis and adjusted for taxes, divided by the average value of shareholders’ equity, adjusted for net unrealized gains/(losses) on available-for-sale investments and cash flow hedges, on a simple basis using the value at the beginning and end of the period.
Return on shareholders’ equity (ROE) is a measure that indicates the level of profit or loss relative to resources provided by shareholders. It is calculated as net income after taxes attributable to shareholders, annualized on a linear basis, divided by the average value of shareholders’ equity, adjusted for net unrealized gains/(losses) on available-for-sale investments and cash flow hedges, on a simple basis using the value at the beginning and end of the period.
Combined ratio is a performance measure that indicates the level of claims and net technical expenses during the period relative to earned premiums and policy fees. It is calculated as the sum of the loss ratio and the expense ratio.
Insurance deposits are deposits, similar to customer account balances, not recorded as revenues. However, the fees charged on insurance deposits are recorded as revenue within gross written premiums and policy fees within the consolidated income statement. These deposits arise from investment contracts and insurance contracts that are accounted for under deposit accounting. They represent the pure savings part, which is invested.
New business value, after tax is a measure that reflects the value added by new business written during the period, including allowance for frictional costs, time value of options and guarantees, and the cost of non-market risk, and is valued at the point of sale. It is calculated as the present value of the projected after-tax profit from life insurance contracts sold during the period using a valuation methodology consistent with the EV principles, after the effect of non-controlling interests.
Loadings and fees include fund and non-fund based fees. The investment margin is the spread between the investment result and interest credited to policyholders, plus the return on free surplus. The technical margin shows the mortality, morbidity, and longevity premiums less benefits to the policyholders together with the reinsurance result.
Operating and funding costs include administrative and operating expenses, interest expense on debt, depreciation and amortization of fixed assets and non-acquisition related intangible assets. Acquisition expenses include commissions and other new business expenses, as well as costs related to business combinations, including amortization of acquisition related intangible assets. The impact of deferrals is the net effect of deferral and amortization of policy acquisition costs and front-end fees, which may be affected by movements in financial markets and changes in assumptions.
This communication does not constitute an offer or an invitation for the sale or purchase of securities in any jurisdiction.
North America In North America, Zurich is a leading commercial property-casualty insurance provider serving the global corporate, large corporate, middle market, specialties and programs sectors. It also serves life customers in the retail, affluent and corporate markets.