Protecting customers when and where it matters. All in a day’s work at Zurich. For more information, see page 15.
About us Zurich Insurance Group (Zurich) is a leading multi-line insurer that serves its customers in global and local markets. With about 53,000 employees, it provides a wide range of property and casualty, and life insurance products and services in more than 210 countries and territories. Zurich’s customers include individuals, small businesses, and mid-sized and large companies, as well as multinational corporations. The Group is headquartered in Zurich, Switzerland, where it was founded in 1872.
4 The Z-ECM is an internal measure of capital adequacy and reflects midpoint estimates with an error margin of +/– 5 pts.
“Our industry is undergoing a profound change. We, too, must change if we are to meet our customers’ evolving needs. After restoring our ability to generate consistent returns, we are now well positioned to look to the future with confidence.” Mario Greco Group Chief Executive Officer 5 Impact investments in 2017 consisted of: green bonds (USD 2.41 billion), investments committed to private equity funds (USD 116 million, thereof 38 percent drawn down) and other investments (USD 303 million).
For Zurich, 2017 was a year of action. Our strategy – to drive simplification and innovation to better serve our customers – has now taken hold and we are beginning to see the results.
We also purchased leading travel insurance services and assistance provider Cover-More. This makes Zurich the third-largest global travel insurance provider. Cover-More’s clear customer focus makes it an ideal addition. Just as one example, they were the only travel insurance provider to send a team and aircraft to Nepal to help rescue earthquake survivors in 2015.
And as digitalization transforms our value chain and customer expectations, Zurich is responding to the challenge. This includes acquisitions such as Bright Box, a global telematics solutions provider. We are also establishing a new business that will focus on developing state-of-the-art mobile insurance solutions across our Group.
Delivering sustainably Our customers expect us to deliver sustainably. Zurich’s continued corporate responsibility focus ensures we meet these expectations. We have committed to further actions on our flood resilience program, divestment, disengagement and dialogue around thermal coal and reduction of our own carbon footprint. We have also recommitted to our responsible investment program, where we will be increasing our impact investments to USD 5 billion. And in 2017, Zurich was extremely proud to be one of only six companies worldwide to achieve a prestigious EDGE ‘Move’ certification – both in Switzerland and Austria – for gender equality.
The Board will propose to shareholders at the Annual General Meeting to elect Michel Liès as my successor. I am very pleased with the choice of Michel and am convinced he would be an excellent chairman.
Zurich Insurance Group Annual Report 2017 Group overview Governance Risk review Financial review3
“We are in the midst of a revolution affecting every aspect of our business. We must adapt. We are fortunate to enter this period of change in a strong, competitive position.” Mario Greco Group Chief Executive Officer
The forces driving change in our industry are diverse. For us, the transformative power that they give to customers is key. This is, above all, a customer-led revolution. Customers today can easily compare insurance products and providers, consult peers and ultimately determine how they protect themselves against risk. Customers may even bypass conventional insurance all together.
Underlying our confident outlook are our clear strengths: our unique business mix balanced across products and geographies; a talent base with a heritage of innovative customer focus; a strong balance sheet; and a highly regarded brand. Our focus is now on using all of our skills, knowledge, expertise and resources to ensure we continue to meet customers’ needs and deliver the best possible experience.
In anticipation of this journey, Zurich has been proactively repositioning itself to capture these opportunities. We have divested non-core businesses, targeted growth to further diversify our portfolio, and focused on a strategy that gives us a clear mandate. We have simplified our structure and unified our business to give us a clearer line of sight to our customers. And we have systematically built on our core capabilities by expanding our service offerings, distribution reach and customer engagement platforms.
Recognizing that change demands leadership, we have also made senior appointments that will help to drive our transformation. Starting in 2018, Kathleen Savio, who has been responsible for a very significant part of Zurich North America’s business, has taken over as CEO of Zurich North America.
A more personalized approach We are using targeted acquisitions to gain knowledge and expertise. In 2017, Zurich solidified its position as a leading global travel services provider by completing the acquisition of Cover-More, whose sophisticated online platform and digital reach allow it to provide tailored services to millions of customers on a real-time basis. Similarly, we acquired Bright Box HK Limited, which provides telematics solutions linking vehicles, drivers, dealers and manufacturers. Both acquisitions deepen our understanding of future customer needs, and both provide Zurich with critical new tools to expand our ability to meet their needs.
With a growing service offering, we are also looking for ways to reach customers across different channels, which is why we continue to expand our distribution arrangements with banks, retailers and other sectors. Banks are especially suited to distributing life insurance, and customers benefit from the flexibility and personalized services banks offer.
Michel Liès proposed to succeed Tom de Swaan as Chairman in 2018, pending shareholder approval.
Zurich reports BOP increase of 55 percent to USD 4.5 billion for 2016.
Zurich acquires Cover-More to become a top-three global travel insurance provider, while gaining sophisticated platform to serve customers.
Zurich estimates USD 700 million net claims related to hurricanes Harvey, Irma and Maria.
Zurich enters agreement to acquire ANZ’s life insurance businesses in Australia.
Augmenting the over 70 agreements we already have in place worldwide to distribute our products through banks, in December 2017 we announced plans to acquire the life insurance business of Australia and New Zealand Banking Group (ANZ) in Australia. The agreement, subject to regulatory approval, will make us the leading retail life insurer in that country. The ANZ deal includes a 20-year agreement in Australia to distribute life insurance products through the bank’s network, giving us access to ANZ’s six million customers.
Building on our travel offerings, we have also begun offering travel insurance solutions to customers of easyJet, which served more than 80 million passengers in 2017. There are many other areas to explore and we believe there is a great deal of untapped potential here.
The importance of our people An organization can only succeed if it is able to attract and retain talented, skilled and motivated individuals. I am grateful to all our employees for their contributions, ideas and hard work. To make sure we continue to have the right people in the right roles, and to help them to further develop, we are constantly looking at ways to support them. You can read more about how we are doing this on page 24.
Changing our culture Our strategy calls for us to focus on customers, simplify our business, and take an innovative approach. To make a difference to our customers means to completely rethink the way we do business. This will include adopting the right mindset to succeed. We must get even better at putting customers first. To ensure we are able to do this, we are transforming our culture. By introducing a clearer approach to our purpose and values (see next page), we can broaden our understanding of our relevance to customers and all our stakeholders.
Based on our performance in 2017, we can look ahead with great confidence that we have the right approach, mindset and culture to compete in this exciting, customercentric world.
We have an important responsibility to our millions of customers around the world, particularly as we enter a new era of digital empowerment. That is why it is critical that we be clear about our identity, what we stand for and the fundamental value we provide our customers. Only by understanding our core beliefs will we truly understand the role that we can play in improving our customers’ lives.
In December 2017, Zurich introduced a new, simplified approach to the way we articulate our purpose and values. These will serve as a constant reminder of what we stand for, no matter where these transitional forces shaping our industry take us.
But we also understand that our obligations go beyond our daily business; we have a valuable role to play in society. To deliver on this responsibility, we make sure that we stand behind the purpose and values that define our business and our role in the world.
“We have introduced a new, simplified approach to how we articulate our purpose and values.” Mario Greco Group Chief Executive Officer
Zurich Insurance Group Annual Report 2017 Group overview7 Governance Risk review Financial review www.zurich.com/corporate-responsibility
Our shareholders and bondholders provide the financial capital that sustains our business. We maintain a strong balance sheet. Standard & Poor’s financial strength rating of Zurich Insurance Company Ltd was AA- as of December 31, 2017.
Zurich’s competitive advantage rests on our knowledge, skills and expertise. This includes critical components of our business model, such as customer service and claims, underwriting, risk engineering and investment management.
Our approximately 53,000 employees include some of the most talented people in the insurance industry. A merit-based approach, and diversity and inclusion, are key to ensuring we have the right mix of talent to succeed.
Our business relies on the relationships we have built with our stakeholders. These include our customers and suppliers; the agents, banks, brokers and others that make up our distribution network; as well as financial markets, regulators, government agencies and civil society organizations.
We recognize the risk that issues such as climate change pose to all our stakeholders, as well as our business performance. Zurich’s policy is to manage environmental risks and opportunities through the progressive integration of environmental considerations into our core business processes, investment decisions and operations.
We help our personal and business customers to protect themselves from risks. Freed from these risks, individuals and families can flourish and businesses can grow and prosper. Our customers transfer risks to us, and in return pay us premiums, policy fees and deposits. We are also increasingly generating revenue from activities and services that aim to mitigate customers’ risks.
Serve customers and distribute through multiple channels We access our customers through a wide range of channels, both directly and through distribution partners such as agents, banks, brokers, independent financial advisers, retailers, automobile dealers and employee benefit consultants. We have seen steadily increasing demand for digital distribution – a channel that is set to transform our industry. We focus our efforts on delivering great customer service, whatever the channel.
Underwrite and manage risk Our core competencies are insuring and managing risk. With investment returns at an historic low, the core skill underwriting is an ever more important part of our business model. Our ability to understand, measure and model risk enables us to price risk fairly and accurately, resulting in competitive premiums that represent value for our customers.
Helping our retail and commercial customers to understand and protect themselves from risk
We create value for our investors by paying an attractive and sustainable dividend, and seeking to increase the value of the company by carrying out our strategy.
Invest and deliver returns to our stakeholders We invest premiums, policy fees and deposits received from customers in a range of high-quality assets, including government and corporate bonds, equities and real estate assets. We manage our assets relative to liabilities, thereby securing our obligations to policyholders. We then focus on delivering consistent and sustainable excess returns to our policyholders and shareholders.
Insurers face numerous challenges, ranging from those that encompass our business risks, markets and economies to new types of hazards with systemic implications. New technologies have opened the market to new competitors. However, the biggest changes taking place are those affecting how customers approach us, how we interact with them, and what they expect from our industry.
Regulation and governments Enhanced and at times fractured supervision and new consumer protection legislation is underscoring the importance of keeping a focus on customers. It is also influencing how insurers interact with agents, brokers and customers.
Governments may demand more direct oversight and seek to promote domestic industries. Insurers need to be alert to these developments, which can affect where and how we develop our business.
Technology and analytics Vast pools of data are changing the way insurers analyze risk, while the internet of things poses potential new opportunities and risks. These developments are having an impact on the type of products insurers provide – even more so on how customers understand and mitigate risks.
Motor telematics and automated cars are examples of the many developments changing our business. Vehicles will be more connected to their environment, increasing safety for the driver and other cars, providing data that will also deepen our understanding of mobility risks.
Our business customers must adapt to meet the needs of an aging workforce with adequate retirement and benefits programs. At the same time, customers’ expectations today include hyper convenience: insurers need to adjust their business models to succeed.
Technological advances and abundant capital, together with changes in how customers interact and perceive insurers, how they choose products and providers, are driving a transformation in our industry. Broker consolidation, and new capabilities among large global brokers like data analytics, are reshaping traditional roles.
And while the U.S. Federal Reserve began to normalize policy, government bonds continued to benefit from the benign inflationary environment and central banks’ asset purchase programs.
Zurich Insurance Group Annual Report 2017 Group overview Governance Risk review Financial review11
We are one team and value the diversity and potential of every individual.
Long term Our strategy to deliver long-term competitive advantage focuses on continuing to increase profitability and consolidating the Group’s position as a leading global underwriter for property and casualty (P&C) and life insurance. The Group will expand customer relationships, simplify the business and significantly reduce costs. At the operating level, Zurich will continue to reduce complexity and improve accountability. Zurich will enhance technical excellence and strengthen its go-to-marketapproach for commercial customers. It will also seek to enhance its offerings to individuals by monitoring and aiming to increase customer satisfaction and retention. The Farmers Exchanges 1 will continue to focus on improving customer satisfaction and retention rates.
2 Business operating profit (after-tax) return on shareholders’ equity. Excludes unrealized gains and losses.
3 The Zurich Economic Capital Model (Z-ECM) is an internal measure of capital adequacy.
Our brand is strong and reinforces our reputation for being able to understand the risks our customers face and to structure offerings that meet their unique needs.
Zurich Insurance Group Annual Report 2017 Group overview Governance Risk review Financial review13 www.zurich.com/strategy
“ Insuring electric vehicles helps the environment and also makes perfect business sense.”
Got a smartphone? Get a life insurance quote. One of the most common reasons people don’t buy life and income protection insurance is that they overestimate the price. A smartphone application Zurich introduced in the UK in 2017, ‘FaceQuote’, estimates the user’s age based on a photo and calculates a premium for life or income protection insurance. Apart from getting customers thinking about protection, they might also find that the cost is lower than they assumed.
Business review 2017 (continued) Meeting changing customer needs: Smarter personalized solutions
Faster, better claims response We are working with technology companies to make our claims handling faster and more accurate. For example, by using artificial intelligence we can better understand and process claims, helping us to become faster and more efficient. In the UK we were able to speed up the responses to medical injury claims – in some cases from over an hour to just seconds – reducing repetitive paperwork to let us focus on customers’ needs. In the U.S., we improved how we evaluate claims to serve customers more effectively and efficiently.
An approach to innovation that puts our customers at the center.
“ We are keen to find and support ways to develop and encourage new digital talent.”
Zurich Insurance Group Annual Report 2017 Group overview Governance Risk review Financial review17 www.zurich.com/safer-lives
Customers through a bank adviser’s eyes In some countries including Spain, banks are a major retail insurance channel. Our partner in Spain, Banco Sabadell S.A., is going beyond traditional service. In 2017 it introduced a system that helps to ensure its customers have the right insurance, and the right amount. Cristina García Villamor (shown right), an adviser in the Cerdanyola del Vallès branch of Banco Sabadell S.A., says customer response has been enthusiastic. After she helped one bank customer he was so impressed that he soon returned with his wife to make sure that she, too, had adequate coverage.
Many channels to reach customers By cooperating with different providers and businesses, we gain access to over 100 million potential customers through collaboration agreements, for example via retailers, the travel industry and banks.
Did you know that Zurich has over 70 agreements worldwide to distribute our products through banks? Banks typically have a strong relationship with customers. They can provide products and services – including insurance – through secure digital platforms. Our most significant relationships include joint ventures with Banco Santander S.A. in Latin America and Banco Sabadell S.A. in Spain, as well as a strategic cooperation with Deutsche Bank in Germany, Italy and Spain. These three major agreements contributed more than USD 500 million to Zurich’s business operating profit in 2017 across Life and Property & Casualty. In December 2017 we announced we will purchase ANZ’s life insurance business in Australia, pending regulatory approval. This agreement includes a long-term distribution arrangement that will give Zurich access to ANZ’s six million customers.
Significant events in 2017 included a powerful earthquake in central Mexico and wildfires in California. But it was also a year of major storms. Cyclone Debbie hit Australia’s northeast coast in March 2017. There were devastating storms and typhoons in South East Asia, major storms in Mexico and Latin America, and in Europe. In the Atlantic Basin there were an above-average 16 named storms including hurricanes.
When it matters, we’re there In 2017, Zurich North America received approximately 4,000 business claims related to hurricanes Harvey, Irma and Maria. One of those who knows first-hand about the destruction storms can cause is Steve Sherin (shown below), an executive general adjuster for Zurich North America. He helps businesses to recover from storms, floods and other events. He may spend many days with customers, logging thousands of miles per year. Some of Steve’s tips for businesses? Shut down elevators and bring them to top floors before a flood; remember that floodwater can be contaminated and may conceal live electrical wires, snakes, even alligators; and check roads before sending employees to the office. Thinking with our customers to help reduce risk – all in a day’s work for an expert like Steve.
Insuring workers’ futures Zurich’s employee benefits solutions cover over four million people worldwide. Our Corporate Life & Pensions (CLP) team helps multinationals and domestic companies cover their employees with benefits packages that include group risk and group savings solutions. We also take an active role in making sure employers and policymakers address the risks of ‘income protection gaps’ – when money available in the event of disability or illness falls short of what is needed. As people live longer and social safety nets come under pressure, income protection gaps are truly an issue that affects every member of society.
Important for customers and their employees Our customers include L’Oréal, which provides benefits to employees in over 60 countries. A range of benefits offered through L’Oréal’s ‘Share & Care’ program is an important way to attract and keep talent, including young adults (‘millennials’), according to Sonia Rossi, Social Relations Specialist at L’Oréal.
Directly or through their subsidiaries, the Farmers Exchanges offer home and car insurance, commercial insurance and financial services throughout the U.S. They insure small businesses as well as individuals. Established in 1928, today the Farmers Exchanges are proud to serve more than 10 million households with more than 19 million individual policies across all 50 U.S. states.
Farmers Exchanges encourages safer driving A new mobile application introduced by the Farmers Exchanges in 2017 is helping customers keep an eye on the road. It aims to address concerns about safety by reducing driving distractions. The new app, Signal, monitors distracted driving by providing ongoing feedback to drivers, allowing them to see when and where they get distracted. Signal was introduced in five states in 2017. The Farmers Exchanges are the first insurer to include mobile phone use as part of an overall driving ‘score’ that can affect a discount drivers might receive on their insurance. Thus, it can link safe driving habits to a reward. Equipping drivers with knowledge of their driving habits allows them to make smarter choices about their behavior behind the wheel.
Zurich Insurance Group Annual Report 2017 Group overview Governance Risk review Financial review23
An organization is only as strong and as good as its people. We continue to focus on identifying the right people for the right roles at the right time, helping them to unleash their full potential through targeted development. This benefits our employees and our customers.
Attracting and retaining talent Keeping talent is critical to ensuring continuity that helps to keep customers safe and their businesses running. Maintaining long-term ties to customers also gives us better insights into what customers want and need.
We are working to improve retention. As part of our efforts, we have adopted an integrated view on talent management and simplified how we identify and promote high performers, and ensure all our professional talent get access to the right development in support of their career objectives. We have also introduced strategic talent reviews to help talented individuals meet their goals. And we have built the architecture of critical roles and development roles to develop and deploy talent.
Notes: Farmers Exchanges and Bolivia are not in scope for all the above KPIs 1 Chile sales force agents excluded. 2 Technical functions include claims, underwriting and risk engineering.
These efforts are helping us to support and motivate talent, including the many individuals who help us to succeed. For example, Michael Richards; introduced here, who shows how interesting and rewarding working in insurance can be.
“ The best part of my job is being able to showcase Zurich’s zero-tolerance approach and capabilities in detecting fraud.”
Our corporate responsibility strategy aims to create value for our company and for society as a whole. We use our core skills, risk and investment management expertise (see table) to address issues and, where possible, measure outcomes for the benefit of our customers, our business and society.
Shifting to a low-carbon world As a leading commercial insurer, we believe we have a role to play in shifting to a lowcarbon economy. In 2017, Zurich decided to apply enhanced risk screening criteria for investments in thermal coal companies and apply our existing environmental, social and governance (ESG) risks in business transactions process to that sector.
Committed to minimizing our global environmental footprint, we achieved a 53-percent reduction in carbon emissions per employee and a 43-percent reduction in energy consumption per employee in 2016 (based on a 2007 baseline), ahead of our targeted schedule. In 2017, we defined new reduction targets to achieve and maintain an at least 20-percent reduction in energy and carbon, based on a new 2015 baseline, until 2025.
External asset managers who are signatories to PRI (%) 1 71.0% 74.1% (3.1 pts)
Group assets managed by PRI signatories (%) 2 97.2% 97.7% (0.5 pts)
1 The United Nations supported Principles for Responsible Investment (PRI). 2 Including assets managed by Zurich. 3 Impact investments in 2017 consisted of: green bonds (USD 2.41 billion), investments committed to private equity funds
(USD 116 million, thereof 38 percent drawn down) and other investments (USD 303 million). 4 Starting in 2017, the investment portfolio is calculated on a market basis, and is different from the total Group investments reported in the consolidated financial statements, which is calculated on an accounting basis and doesn't include cash and cash equivalents.
Mitigation mindset for floods In 2017 we continued to work within the Zurich flood resilience alliance to help communities. One example is work we are doing with alliance member Practical Action in Peru’s Rimac river basin on flood early warning systems to monitor risks of ‘huaycos’ – dangerous mudflows. In this photo, Michael Szoenyi, Zurich’s flood resilience program lead, tends to a warning system camera while Miguel Arestegui of Practical Action, who developed the simple, cost-effective technology, checks the camera image on his cellphone.
Continued strong performance indices, ratings In the 2017 Dow Jones Sustainability Indices review, Zurich achieved a score of 83 and outperformed 98 percent of the other companies in the insurance industry group. In addition, through CDP, each year we provide information on our greenhouse gas emissions, energy use and the risks and opportunities from climate change. In our annual CDP Climate Change response Zurich improved its score to ‘A-’ Leadership level in 2017 from ‘B’ Management level in 2016. In October 2017, Zurich also became a signatory of the United Nations Environment Programme Finance Initiative’s ‘Principles for Sustainable Insurance.’
Industry-leading capital levels Zurich is ‘AA’ range rated by three internationally-recognized rating agencies. The estimated Zurich Economic Capital Model (Z-ECM) ratio 2 stands at a very strong 132 percent (calibrated to AA). Zurich’s financial flexibility is strong, with a conservative ‘Aa’-level leverage as defined by Moody’s.
Stable, consistent and conservatively-managed balance sheet based on disciplined risk management and producing stable cash flows. A key element of the Group’s capital management strategy is to minimize the risk of limited capital fungibility by pooling risk, capital and liquidity centrally as much as possible. Zurich’s investment portfolio is generally conservative with an asset allocation comprising mainly fixed income (79 percent) and a small amount of equity (5 percent).
Opportunities to grow and enhance returns through capital allocation The Group intends to maintain its current attractive dividend policy and proposes a target payout ratio of around 75 percent of net income attributable to shareholders, subject to a minimum of CHF 17, with dividend increases subject to sustainable earnings growth.
Zurich’s annual financial results are published in printed and electronic form. Detailed information is published for the half and full year. For first and third quarters, the Group provides highlights for the quarter and qualitative comments on trading and market trends, capital, and notable exceptional items. Zurich’s management hosts an analysts’ call each quarter. Quarterly updates and current publication dates can also be found online.
Zurich Insurance Group Annual Report 2017 Group overview Governance Risk review Financial review29 www.zurich.com/en/investor-relations www.zurich.com/en/investor-relations/our-shares/registered-share-data
Zurich Insurance Group Annual Report 2017 Group overview Governance Risk review Financial review31
We also reviewed our remuneration structure. You can find more information about this in the remuneration report in this Annual Report.
In 2017, Zurich achieved our multi-year goal of investing USD 2 billion in green bonds, part of its impact investing portfolio. Going forward we will target USD 5 billion for the entire portfolio of impact investments. We will also establish a measurement framework to track the impact of these investments, with the goals of avoiding five million tons of CO2 equivalent emissions annually and improving the lives of five million people per year.
Zurich also achieved its carbon emission and energy consumption reduction targets ahead of schedule (for further details see page 26).
In the 2017 Dow Jones Sustainability Indices review, Zurich achieved a score of 83 and outperformed 98 percent of other companies in the insurance industry group.
Changes to Board and Executive Committee At the Annual General Meeting (AGM) on March 29, 2017, you elected Catherine Bessant as new member of the Board of Directors. As already communicated, I will not stand for re-election at the AGM on April 4, 2018. As announced July 6, 2017, the Board will propose that shareholders elect Michel M. Liès as Chairman at the next AGM. Fred Kindle, due to reaching maximum tenure of office of 12 years, will not stand for re-election. In addition, Susan Bies, after 10 years on our Board, will not stand for re-election.
Zurich stakeholders It is important for Zurich to engage in a dialogue with all our stakeholders. I’d like to thank you for your continued support and engagement.
We have a diverse Board and Executive Committee I am proud of the diverse composition of our Board and executive team.
Country/BU Policies e Group Policy manuals e Business/Region/Function Management rules e Business/Region/Function Policies & Policy manuals
An effective structure is in place providing for cooperation between the Board of Directors of Zurich Insurance Group Ltd, management and internal control functions. This structure establishes checks and balances and is designed to provide for institutional independence of the Board from the Group Chief Executive Officer (Group CEO) and the ExCo who together are responsible for managing the Group on a day-to-day basis. Before December 1, 2015, the Board was composed entirely of non-executive members, independent from the management. The roles of Chairman of the Board and CEO were split, until the Chairman of the Board, Tom de Swaan, took over the role of Chief Executive Officer ad interim on December 1, 2015. In January 2016, Mario Greco was appointed Group CEO, effective March 7, 2016, when the roles of Chairman and CEO were again split so that the Board consists, as before, entirely of nonexecutive members. While the Chairman of the Board served as Chief Executive Officer ad interim, Fred Kindle, Vice-Chairman of the Board, took on certain additional responsibilities to ensure continued good governance.
During 2016 a new structure was created by combining the life and non-life insurance businesses under common leadership structures, thereby providing a unified go-to-market approach. The Group also combined its mid-sized commercial and large corporate businesses into Commercial Insurance, bringing global corporate and commercial insurance expertise together under a single umbrella.
The Group’s operating structure reflects the businesses operated by the Group and how these are strategically managed to offer different products and services to specific customer groups. The operational group structure became fully effective in the financial year 2017. The Group’s reportable segments for 2017 are as follows: kk Regions (EMEA, North America, Latam and APAC): segments through which the Group provides a variety of property and casualty and life products to retail and commercial customers as well as reinsurance propositions. Commercial Insurance brings together corporate and commercial insurance expertise worldwide under a single umbrella.
• The life business pursues a strategy with market-leading propositions in unit-linked and protection products as well as fee-based solutions managed through three global pillars (Bank Distribution, Corporate Life & Pensions and Other Retail) to develop leading positions in its target markets.
A detailed review of the results of the business segments as reported for 2017 can be found in the Operating and Financial review starting on page 158. Furthermore, an overview of the Group’s business activities is contained in the Annual Review, available on Zurich’s website www.zurich.com (www.zurich.com/en/investor-relations/results-and-reports).
Significant shareholders According to the rules regarding the disclosure of significant shareholdings of Swiss companies listed in Switzerland, disclosure has to be made if certain thresholds starting at 3 percent are reached or if the shareholding subsequently falls below those thresholds. Options and other financial instruments are added to any share position, even if they allow for cash settlement only. Disclosure must be made separately for purchase positions (including shares, long call options and short put options) and sale positions (including long put options and short call options). The percentage thresholds are calculated on the basis of the total amount of voting rights according to the number of shares issued as disclosed in the commercial register.
Zurich Insurance Group Ltd is obliged to announce shareholdings by third parties in its shares when notification is received from a third party that a threshold has been reached. During 2017, the Group received several new notifications.
As of December 31, 2017, Zurich Insurance Group Ltd was not aware of any person or institution, other than BlackRock, Inc., New York (> 5 percent) and The Capital Group Companies, Inc., Los Angeles (> 3 percent), which, directly or indirectly, had an interest as a beneficial owner in shares, option rights and/or conversion rights relating to shares of Zurich Insurance Group Ltd exceeding the relevant thresholds prescribed by law.
The announcements related to these notifications can be found via the search facility on the SIX Disclosure Office’s platform: www.six-exchange-regulation.com/de/home/publications/significant-shareholders.html.
Zurich Insurance Group Ltd is not aware of any person or institution which, as of December 31, 2017, directly or indirectly, alone or with others, exercised or was a party to any arrangements to exercise control over Zurich Insurance Group Ltd.
Number of shares held as of December 31, 2017 Number of registered shareholders registered share capital
Registered shareholders by type as of December 31, 2017 Registered shareholders in %
Individual shareholders 96.0 27.3 Legal entities 3.9 27.9 Nominees, fiduciaries 0.1 44.8 1 of registered shareholders.
Registered shareholders by geography as of December 31, 2017 Registered shareholders in %
Share capital As of December 31, 2017, the ordinary share capital of Zurich Insurance Group Ltd amounted to CHF 15,133,985.10 divided into 151,339,851 fully paid registered shares with a nominal value of CHF 0.10 each. The Board will propose to the shareholders at the Annual General Meeting on April 4, 2018 a dividend of CHF 18 per share. It is planned that the dividend will be paid out of the available earnings with a deduction of 35 percent Swiss withholding tax.
Up to and including March 29, 2019, the Board of Zurich Insurance Group Ltd is authorized to increase the authorized share capital (Art. 5bis) by an amount not exceeding CHF 4,500,000 by issuing up to 45,000,000 fully paid registered shares with a nominal value of CHF 0.10 each. This authorized share capital equates to about 30 percent of the current total registered shares issued. Share issuances out of authorized share capital where the shareholders’ subscription rights are restricted or excluded are limited to 15,000,000 shares (i.e., less than 10 percent of the current total registered shares issued).
Up to and including March 29, 2019, the total number of new shares which could be issued from (i) authorized share capital under Art. 5bis where the subscription rights are restricted or excluded and (ii) contingent share capital in connection with financial instruments under Art. 5ter 1a where the advance subscription rights are restricted or excluded is limited to 30,000,000 shares (i.e., less than 20 percent of the current total registered shares issued).
Changes to share capital during 2017 During 2017, a total of 732,445 shares were issued to employees out of contingent share capital. As a result, on December 31, 2017, the share capital amounted to CHF 15,133,985.10 (151,339,851 shares). The authorized share capital (Art. 5bis 1) amounted to CHF 4,500,000 (45,000,000 shares). The contingent share capital for Financial Instruments (Art. 5ter 1a) amounted to CHF 3,000,000 (30,000,000 shares) and the contingent share capital for employees (Art. 5ter 2a) amounted to CHF 495,540.80 (4,955,408 shares).
Limitations on transferability and nominee registrations The Articles of Association do not provide for any limitations on transferability except for the following: Registration as a shareholder requires a declaration that the shareholder has acquired the shares in his or her own name and for his or her own account. Nominees holding Zurich Insurance Group Ltd shares may for the benefit of, or as nominee for another person, be registered for up to 200,000 shares with voting rights, notwithstanding that the nominee does not disclose the identity of the beneficial owner. A nominee, however, is entitled to be registered as a shareholder with voting rights of more than 200,000 shares if the nominee discloses the identity of each beneficial owner and informs the beneficial owners about corporate actions, consults as to the exercise of voting rights and pre-emptive rights, transfers dividends and acts in the interests of and in accordance with the instructions of the beneficial owner.
The governance structure that controls relations between our Board and our management is designed to help both bodies to fulfill their mandates. This structure provides checks and balances including the institutional independence of the Board of Directors from the Group Chief Executive Officer and the Executive Committee.
Committee membership: Governance, Nominations and Corporate Responsibility Committee (chairman), Remuneration Committee
Other directorships within the Group: Zurich Insurance Company Ltd, Zurich American Insurance Company
Committee membership: Remuneration Committee (chairman), Governance, Nominations and Corporate Responsibility Committee
The Board, under the leadership of the Chairman, is responsible for determining the overall strategy of the Group and supervising senior management. It holds the ultimate decision-making authority for Zurich Insurance Group Ltd, except for decisions on matters reserved for the shareholders.
Fred Kindle Kishore Mahbubani * Chairman of Board or Board Committee, respectively.
The term of office of a Board member ends after completion of the next AGM. As a consequence, each member of the Board must be re-elected at the AGM each year.
Fritz Gerber is the Honorary Chairman of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd. He was Chairman of Zurich Insurance Company Ltd from 1977 to 1995 and its Chief Executive Officer from 1977 to 1991. In recognition of his leadership and services to these companies, he was appointed Honorary Chairman. Such designation does not confer Board membership or any Director’s duties or rights, nor does it entitle him to any Directors’ fees.
As of December 31, 2017, the Board included members of six nationalities. Board members’ business experience covers a broad range of jurisdictions, giving the Board profound collective knowledge of international business practices. The Board also benefits from the broad cultural, educational and professional backgrounds of its members, which include financial services, manufacturing, engineering, and legal and regulatory experience.
External appointments In his capacity as a partner of Clayton, Dubilier & Rice, Mr. Kindle served from 2008 until 2015 as chairman of the board of Exova plc, UK, and as a member of Exova’s board until June 2017. Mr. Kindle has been a member of the board of VZ Holding Ltd, Zurich since 2002, and was elected chairman in April 2014. He has served on the board of privately-held Stadler Rail AG since 2008 and has been a member of the board of Schneider Electric since 2016.
Skills and experience Catherine Bessant is chief operations and technology officer at Bank of America and a member of the Bank of America’s executive management team. Since joining Bank of America in 1982 as a corporate banker, she has held numerous senior leadership positions within that company: president of Global Product Solutions and Global Treasury Services; chief marketing officer; president of Consumer Real Estate and Community Development Banking; national Small Business Segment executive; and market president of Bank of America, Florida. Prior to being appointed to her current position, Ms. Bessant served as president of Global Corporate Banking. Ms. Bessant has led Bank of America’s Global Technology and Operations since 2010. In that role she is responsible for endto -end technology and operating services across the company, overseeing nearly 95,000 employees and contractors in more than 35 countries. She became a member of the Board of Zurich Insurance Group Ltd and Zurich Insurance Company Ltd in March 2017.
External appointments Ms. Bessant is a director for Florida Blue, formerly Blue Cross and Blue Shield of Florida and she sits on the advisory board for the Ross School of Business at the University of Michigan.
External appointments Ms. Bies has served as a member of the board of directors of The Bank of America Corporation since June 2009. She joined the board of directors of Merrill Lynch International, London, a subsidiary of Bank of America Corporation, in 2013 and was appointed its chairman in 2014.
Committee membership Audit Committee (chairman), Governance, Nominations and Corporate Responsibility Committee, Risk and Investment Committee
External appointments Ms. Carnwath has been a senior advisor of Evercore Partners since 2011. She has been chairman of the board of Land Securities Group plc since 2008 and a member of the board of PACCAR Inc. since 2005. In September 2013, she was appointed to the advisory council of the St. George’s Society of New York. Since May 2014 she has been a member of the supervisory board of BASF SE and Chairman of the Audit Committee of BASF SE.
Committee membership Remuneration Committee (chairman), Governance, Nominations and Corporate Responsibility Committee
External appointments David Nish is a non-executive director of HSBC Holdings plc, Vodafone Group plc and of the London Stock Exchange Group plc. He is a member of the Council of the Institute of Chartered Accountants of Scotland. His former appointments include non-executive directorships at UK Green Investment Bank plc, HDFC Life (India), Northern Foods plc, Thus plc, and the Royal Scottish National Orchestra.
Educational background Mr. Nish holds a bachelor’s degree in accountancy from the University of Glasgow and is a chartered accountant with the Institute of Chartered Accountants of Scotland.
External appointments In September 2017 he was appointed nonexecutive chairman of the board of Aggregate Asset Management. Since January 2016 he has also been an independent director of the board of Wilmar International Limited, Singapore. In addition, he serves on boards and councils of several institutions in Singapore, Europe and North America, including Yale’s President’s Council on International Activities (PCIA), the University of Bocconi International Advisory Committee, the World Economic Forum’s Global Agenda Council on Geoeconomics, and as chairman of the Lee Kuan Yew World City Prize Nominating Committee.
The Governance, Nominations and Corporate Responsibility Committee reviews the Board members’ independent status annually and reports its findings to the Board for final determination. Board members are also subject to rules and regulations to avoid conflicts of interest and prevent any misuse of insider information.
Elections As required by Swiss law, directors are elected annually. Directors are elected by an absolute majority of the votes represented.
Mr. Tom de Swaan, Mr. Fred Kindle and Ms. Susan Bies have decided to retire from the Board as of AGM 2018 and will not stand for re-election.
The Board proposes to shareholders that they elect or re-elect as follows: kk as members: Mr. Michel M. Liès, Ms. Joan Amble, Ms. Catherine Bessant, Dame Alison Carnwath, Mr. Christoph Franz, Mr. Jeffrey Hayman, Ms. Monica Mächler, Mr. Kishore Mahbubani and Mr. David Nish kk as Chairman: Mr. Michel M. Liès kk as members of the Remuneration Committee: Ms. Catherine Bessant, Mr. Christoph Franz, Mr. Michel M. Liès and Mr. Kishore Mahbubani kk as independent voting rights representative: Mr. lic. iur. Andreas G. Keller, attorney at law
Joan Amble 11/12 – – 4/4 5 8/8 Susan Bies 12/12 – – 9/9 8/8 Catherine Bessant 3 10/10 – – – 7/7 4
Tom de Swaan 12/12 4/4 5/5 – – Christoph Franz 12/12 4/4 5/5 – – Jeffrey Hayman 12/12 3/3 4 – 9/9 – Fred Kindle 10/12 3/4 4/5 Monica Mächler 11/12 – – 9/9 8/8 Kishore Mahbubani 12/12 – 5/5 9/9 David Nish 10/12 – – – 6/8 1 Until March 29, 2017, the Board had 10, the Governance, Nominations & Corporate Responsibility Committee 4, the Audit Committee 4, the Remuneration Committee 4 and the Risk & Investment Committee 6 members.
The Board is responsible for the ultimate management of Zurich Insurance Group Ltd and of the Group as a whole as well as for the supervision of management. In particular, it is responsible for taking actions in the following areas: kk Group strategy: The Board regularly reviews and discusses, in particular, the Group’s business portfolio including its target market, acquisitions, customer and intermediaries strategy and its human resources strategy.
kk Finance: The Board particularly approves the financial and operating plan annually, establishes guidelines for capital allocation and financial planning. Further, the Board reviews and approves the annual and half year consolidated financial statements of the Group as well as the three months and nine months interim management statements. Above certain thresholds, the Board approves major lending and borrowing transactions.
kk Structure and organization of the Group: The Board determines and regularly reviews the basic principles of the Group’s structure and major changes in the Group’s management organization including major changes to Group functions. In this respect, the Board particularly discusses the Group’s corporate governance framework and its remuneration system. The Board also adopts and regularly reviews the Group’s basic principles of conduct, compliance and risk management. Further, as part of its duty to convene the shareholders’ meeting and submit proposals to the shareholders’ meeting, it discusses the dividend policy and the Board’s proposal for the payment of dividends. Within its authorities the Board also makes resolutions on capital increases and the certification of capital increases and respective amendments to the Articles of Association.
kk Business Development: Above certain thresholds, the Board regularly discusses and approves acquisitions and disposals of businesses and assets, investments, new businesses, mergers, joint ventures, co-operations and restructurings of business units or books of businesses.
Committees of the Board of Directors The Board has the following standing committees, which regularly report to the Board and submit proposals for resolution by the Board: Governance, Nominations & Corporate Responsibility Committee Composition and membership: The Governance, Nominations & Corporate Responsibility Committee consists of at least four Board members. Currently, the committee comprises Tom de Swaan (Chairman), Dame Alison Carnwath, Christoph Franz, Jeffrey Hayman and Fred Kindle.
Key tasks and responsibilities: In general, the Governance, Nominations & Corporate Responsibility Committee: kk oversees the Group’s governance and measures it against best practice with a view to ensuring that the shareholders’ rights are fully protected kk develops and proposes guidelines to the Board for corporate governance and reviews them kk ensures compliance with corporate governance disclosure requirements and legal and regulatory requirements kk is entrusted with succession planning for the Board, the Group CEO and members of the ExCo. It proposes the principles for the nomination and ongoing qualification of members of the Board and makes proposals to the Board on the composition of the Board, the appointment of the Chairman, the Vice-Chairman, the Group CEO and members of the ExCo. Final decisions for nominations and appointments are made by the Board, subject to shareholder approval, where required. When identifying and proposing candidates as new Board members, preserving and increasing of the Board’s diversity is a key factor. This includes diversity in many respects, such as gender, culture, technical and interpersonal skills, education and viewpoints, experience, geographical origins and a variety of complementary backgrounds, which should enable the Board to meet the Group’s current and future challenges. Notwithstanding the specific profile, every individual candidate should possess integrity, be of good standing, and be capable and available to fulfill his or her duty of care by serving, in close collaboration with the other Board members, in the best interests of the Group’s stakeholders kk reviews the system for management development and supervises progress made in succession planning kk reviews and approves the Group’s corporate responsibility strategy and objectives
Activities 2017: During 2017, the following topics were discussed in particular: kk Chairman of the Board succession kk Board committee composition and succession kk ExCo succession kk developments affecting corporate governance, including changes to Swiss and international laws and regulations kk adapting corporate governance documents to a new organizational structure and reviewing Board members’ independence kk corporate responsibility strategy and related initiatives kk biannual updates on Zurich’s corporate responsibility efforts and, at its most recent meeting, discussed Zurich’s new sustainable business approach, including climate change as a focus area thereof
The Governance, Nominations & Corporate Responsibility Committee meets at least twice per year. In 2017 it met four times.
Activities 2017: During 2017, the following topics were discussed in particular: kk performance of the Group, the countries and the ExCo, as well as the approval of the STIP award level and the LTIP vesting level for the period ending December 31, 2016 kk approval of the total variable remuneration pool for 2016 kk the regulatory environment regarding remuneration, as well as external developments and the implications for Zurich kk the Ordinance AEC, including the maximum amounts of total remuneration for the Board and the ExCo for the shareholder vote at the AGM on March 29, 2017, as well as the results of the vote kk in the annual joint meeting with the Risk and Investment Committee, risk management aspects of the Group’s remuneration architecture, as well as key activities with respect to identified key risk taker (KRT) positions, e.g. risk-based assessment of KRTs kk the remuneration report and the Board of Directors report on the approval of the remuneration for the Board of Directors and the ExCo kk Zurich’s remuneration rules and the Committee Charter were reviewed and approved by the Board of Directors; kk discussion about the annual Corporate Governance Roadshow kk compensation of the Board and the ExCo kk activities of the Group Pensions Committee kk implementation of the new STIP architecture in 2017 and review of the incentive architecture for 2018
The Remuneration Committee meets at least twice per year. In 2017 it met five times.
For more information on the supervision and control of the external audit process, see page 76.
Key tasks and responsibilities: In general, the Audit Committee: kk serves as a focal point for communication and oversight regarding financial accounting and reporting, internal control, actuarial practice, and financial and regulatory compliance kk reviews the Group’s auditing process (including establishing the basic principles relating to and making proposals for the audit of Zurich Insurance Group Ltd and the Group)
Activities 2017: During 2017, the following topics were discussed in particular: kk annual and half year reporting with a strong focus on accounting and reserving matters as well as the three months and nine months interim management statements kk the effectiveness of the internal control framework, including SOX
Risk and Investment Committee Composition and membership: Zurich Insurance Group Ltd’s Organizational Rules require the Risk and Investment Committee to consist of at least four non-executive Board members independent from management. Currently, the committee comprises Susan Bies (Chairman), Dame Alison Carnwath, Jeffrey Hayman, Monica Mächler and Kishore Mahbubani.
Activities 2017: From an enterprise risk management perspective, during 2017 the Risk and Investment Committee particularly discussed the following topics: kk the effectiveness of the enterprise risk management (ERM) approach, including the annual revision of the Group risk appetite kk progress made in implementing the Group Risk Management strategy kk results of the Group Total Risk Profiling™ (TRP) assessment including risk ownership and mitigation actions kk the Group’s Own Risk and Solvency Assessment 2017 kk the Group’s Recovery Plan 2017, which included a recovery exercise under conditions of stress kk the Group’s risk profile and economic and regulatory capital, including development of the internal capital model and risk-based capital limits kk revision of the Zurich Risk Policy (ZRP)
Areas of responsibility of the Board and management The Board decides on the strategy of the Group, supervises senior management and addresses key matters in the area of strategy, finance, and organization. In particular, the Board approves the Group’s strategic plan and the annual financial plans developed by management and reviews and approves the annual and half-year financial statements of the Group and the annual financial statements of Zurich Insurance Group Ltd as well as the three months and nine months interim management statements. For more details with regard to the responsibilities of the Board see pages 54 to 55.
The Group has adopted and implemented a coordinated, formalized and consistent approach to risk management and control. Information concerning the Group’s risk management and internal control processes is included in the risk review starting on page 120. The internal audit function, the external auditors and the compliance function also assist the Board in exercising its controlling and supervisory duties. Information on these functions’ major areas of activity is set out on pages 75 to 78.
Changes to the ExCo On October 1, 2017, Alison Martin and Kathleen Savio were appointed Group Chief Risk Officer-Designate and CEO-Designate North America respectively and became members of the ExCo. Cecilia Reyes, Group CRO, and Mike Foley, CEO North America, decided to step down from their roles as of January 1, 2018. In order to ensure a smooth transition in connection with 2017 reporting, Cecilia Reyes and Mike Foley will retire from the ExCo as of March 1, 2018.
Management committees Group Balance Sheet Committee (GBSC) Members: Group CFO (Chairman), Group CEO, Group CRO, Group CIO. The Group General Counsel attends ex officio but is not a voting member.
The Group Risk Committee (GRC) Members: Group CRO (Chairman), Group CFO, Group CIO, Group COO, Group General Counsel. The Head of Group Audit is invited ex officio, but is not a voting member. The Head of Group Compliance attends ex officio at the request of the Group General Counsel without voting rights.
kk regulatory developments affecting the Group’s risk management, as well as the Group’s regulatory reporting kk the Group’s TRP assessment and related actions kk prospective changes to capital models and methodologies that have a significant impact on economic solvency ratios kk the Group’s model validation policy, and validation findings related to capital models and significant valuation models, including remedial actions kk market and credit risk internal model consumption relative to the Group’s capital allocation, including remedial actions kk any significant deviations from established target solvency levels by subsidiaries, and proposing remedial actions if needed
Technical committees In addition to management committees the Group’s governance structure provides for committees of a more technical nature to support further aspects of Zurich’s business activities; among them are: The Asset/Liability Management Investment Committee, chaired by the Group CIO, acts as a cross-divisional body and has primary responsibility for monitoring and reviewing the Group’s asset/liability management and the strategic asset allocation of Zurich’s invested assets.
The Disclosure Committee, chaired by the Head of Group Financial Accounting and Reporting (FAR), is responsible for reviewing all external communications and disclosures that contain information material to the financial position and/or performance of the Group. In particular it reviews half-year and year-end IFRS financial results as well as the three months and nine months interim management statements and related documents, e.g., related news releases and analysts’ information. It reviews other external communications that contain material information as to the financial position and performance of the Group, proposals from Group Compliance regarding projects that have an impact on the Group and respective dealing restrictions as well as controls and procedures regarding the effectiveness of the Group’s internal controls over financial reporting. It makes recommendations to the Group CFO.
Educational background Ms. Dill holds an MBA from the Universities of Rochester in the U.S. and Bern, Switzerland, and a master’s degree in economics from the University of St. Gallen, Switzerland.
Skills and experience Alison Martin has extensive management, financial and commercial experience within the insurance sector. In October 2017, she joined Zurich as Group Chief Risk Officer-Designate and became a member of the Executive Committee. She assumed the role of Group Chief Risk Officer in January 2018. A qualified accountant, Ms. Martin began her career at PwC, where from 1995 to 2003 she worked with insurance clients in audit and advisory roles. She then served in leading executive positions at Swiss Re, starting in 2003 as Finance Director, Life & Health. She was appointed Chief Financial Officer (CFO) of Swiss Re’s UK Life & Health business unit in 2005. From 2006 to 2010 she was responsible for Swiss Re’s Global Life & Health Risk Transformation team. Starting in January 2011 she served as Group Managing Director of Swiss Re’s Life & Health Products Division. She was appointed Swiss Re’s Head of Life & Health Business Management in 2013, a position she held until joining Zurich in 2017.
Educational background Ms. Martin earned a Bachelor’s Degree in law, with honors, from the University of Birmingham in 1995. In 1998 she qualified with the Institute of Chartered Accountants in England and Wales as an associate member, and in 2010 she completed the Chartered Financial Analyst investment management certificate.
Skills and experience Cecilia Reyes has over 20 years’ experience in international financial markets. Ms. Reyes worked from 1990 until 1995 for Credit Suisse in Zurich in various roles in asset management, global treasury and securities trading. In 1995, she started working with ING Barings in London and in 1997 she became a director and head of quantitative risk analysis. She moved to Amsterdam in 2000 as the head of risk analytics for ING Asset Management to develop risk management methods for the asset management operation. Ms. Reyes joined Zurich in 2001 as Head of Group Investments for North America and became Head of Group Investments for Europe/International Businesses in 2004. From March 2006 until March 2010 she was Head of Investment Strategy Implementation. Ms. Reyes was appointed Chief Investment Officer and member of the Executive Committee effective April 2010. In July 2015 she assumed the role of Group Chief Risk Officer, which she held until the end of 2017. In January 2018 she assumed the role of Senior Adviser, and will continue in that position until February 28, 2018.
External appointments Ms. Savio is a member of The Chicago Network, an organization of Chicago’s leading professional women.
Skills and experience Gary Shaughnessy was appointed CEO EMEA (Europe, Middle East & Africa) in July 2016, after joining the Executive Committee in January 2016 as CEO Global Life. Before his promotion to the Executive Committee, he was CEO of Zurich UK Life, a role he held from June 2012. In 2014 he assumed the additional role of Country Head for Zurich in the UK. Prior to joining Zurich, Mr. Shaughnessy worked at Fidelity Worldwide Investment, where he was managing director for the UK defined contribution and retail business. His previous experience includes nearly a decade in senior roles within the Prudential Group, including the role of UK managing director, retail life & pensions, and CEO UK retail at M&G Investments. Mr. Shaughnessy’s background is in marketing and distribution, with previous roles spanning the broad financial services market at AXA, the Automobile Association and the Bank of Scotland.
Educational background Mr. Shaughnessy studied Sports Science at Liverpool John Moores University in the UK.
Skills and experience Kristof Terryn began his career in 1993 in the banking industry, where he worked in capital markets. In 1997, he joined McKinsey & Company where he held various positions within the financial services practice in Brussels and Chicago. He joined Zurich in 2004 in the Finance department. In 2007 he became Chief Operating Officer (COO) for the Global Corporate business division and in January 2009 was named COO for General Insurance. Mr. Terryn became a member of the Executive Committee in 2010 upon his appointment as Group Head Operations. In September 2013 he was appointed CEO Global Life, and after becoming CEO General Insurance in October 2015, continued to serve as CEO Global Life on an ad interim basis until the end of December 2015. He was appointed Group Chief Operating Officer effective July 2016.
Changes to the ExCo since January 1, 2018 Cecilia Reyes, former Group Chief Risk Officer, and Mike Foley, former CEO North America, have retired from the ExCo effective March 1, 2018.
In accordance with Swiss law and practice, Zurich Insurance Group Ltd informs all shareholders at the beginning of the shareholders’ meeting of the aggregate number of shares represented by shareholders and the number of shares represented by the independent voting rights representative. Zurich Insurance Group Ltd provided electronic voting devices to its shareholders for all the resolutions taken at the AGM on March 29, 2017.
Statutory quora Pursuant to the Articles of Association, the AGM constitutes a quorum irrespective of the number of shareholders present and shares represented. Resolutions and elections generally require the approval of an absolute majority of the votes represented, unless respective provisions in the Articles of Association (of which there are currently none) or mandatory legal provisions stipulate otherwise. Article 704 of the Swiss Code of Obligations provides for a two-thirds majority of votes represented and an absolute majority of the nominal value of shares represented for certain important matters, such as a change of the company’s purpose or domicile, a dissolution of the company and certain matters relating to capital increases.
As of December 31, 2017, Zurich Insurance Group Ltd had 127,184 shareholders registered in its share register, ranging from private individuals to large institutional investors. Each registered shareholder receives an invitation to a shareholders’ meeting. A Letter to Shareholders provides an overview of the Group’s activities as the year progresses and outlines its financial performance. A more comprehensive Annual Review, the Annual Report and half-year reports are available on Zurich’s website (www.zurich.com/en/investor-relations) and the Annual Review and the Annual Report are also available in printed form on request. Information on the three months and nine months interim Management Statements is also available on Zurich’s website (www.zurich.com/en/investor-relations/results-and-reports). News Releases are distributed in accordance with the Directive on Ad hoc Publicity and available on Zurich’s website www.zurich.com (www.zurich.com/en/media).
Three lines of defense at Zurich Insurance Group as of December 31, 2017
Mark Humphreys of PwC is the lead auditor and auditor in charge for the statutory audit work since the business year 2014. Stephen O’Hearn, the Global Relationship Partner, co-signs the auditors’ report for 2017. Ray Kunz is the auditor in charge for the regulatory audit work starting in 2017.
Zurich policy has been a 5-year required rotation of the Global Relationship Partner and Lead Audit Partner, whereas Swiss law is a 7-year required rotation. In 2015 Zurich approved an exception to the Group policy extending the tenure of the Global Relationship Partner to 7 years as allowed under Swiss law. Stephen O’Hearn, current PwC Global Relationship Partner, began in 2012 and will rotate in 2018. Alex Finn will take over as the Global Relationship Partner, lead auditor, and auditor in charge for the statutory audit work for 2018 through 2020.
Audit fees Total audit fees (including expenses and value added taxes) charged by PwC in the year 2017 amounted to USD 46.3 million (USD 48.8 million in 2016).
Non-audit fees were as follows: Audit and non-audit fee amounts in USD millions, as of December 31 2017 2016
Supervision and control over the external audit process The Audit Committee regularly meets with the external auditors at least four times a year. During 2017, the Audit Committee met with the external auditors eight times. The external auditors regularly have private sessions with the Audit Committee without management present. Based on written reports, the Audit Committee and the external auditors discuss the quality of the Group’s financial and accounting function and any recommendations that the external auditors may have. Topics considered during such discussions include strengthening of internal financial controls, applicable accounting principles and management reporting systems. In connection with the audit, the Audit Committee obtains from the external auditors a timely report relating to the audited financial statements of Zurich Insurance Group Ltd and the Group.
The Audit Committee oversees the work of the external auditors. It reviews, at least annually, the qualification, performance and independence of the external auditors and reviews any matters that may impair their objectivity and independence based on a written report by the external auditors describing the firm’s internal quality control procedures, any material issues raised and all relationships between the external auditors and the Group and/or its employees that could be considered to bear on the external auditors’ independence. The Audit Committee evaluates the performance of the external auditors during their audit examination. It elicits the comments of management regarding the auditors’ performance (based on criteria such as their understanding of Zurich’s business, technical knowledge and expertise, etc.) and the quality of the working relationship (responsiveness of the external auditors to the needs of Zurich Insurance Group Ltd and the Group and the clarity of communication). The Audit Committee reviews, prior to the commencement of the annual audit, the scope and general extent of the external audit and suggests areas requiring special emphasis.
The Audit Committee has approved a written policy on the use of external auditors for non-audit services, which sets out the rules for providing such services and related matters (including a list of prohibited services). Allowable nonaudit services may include tax advice, comfort and consent letters, certifications and attestations, and due diligence and audit support in proposed transactions, to the extent that such work complies with applicable legal and regulatory requirements and does not compromise the independence or objectivity of the external auditors. In order to avoid conflicts of interest, all allowable non-audit services need pre-approval from the Audit Committee (Chairman), the Group CFO or the local CFO, depending on the level of the expected fee. This policy further requires, among other things, an engagement letter specifying the services to be provided.
The Audit Committee approves the Group Audit Plan annually, and reviews reports from the function on its activities and significant risk, control and governance issues, at least three times per annum. The Head of Group Audit reports functionally to the Chairman of the Audit Committee and administratively to the Group CEO, and meets regularly with the Chairman of the Board and the Chairman of the Audit Committee. Group Audit has no operational responsibilities over the areas it reviews and, to ensure independence, all Group Audit staff report (via audit managers) to the Head of Group Audit. In some instances, country audit managers also have a reporting line to the local CEO to comply with regulatory requirements.
The Directors are satisfied that, having reviewed the performance of the Group and forecasts for the forthcoming year, the Group has adequate resources to enable it to continue in business for the foreseeable future. For this reason, the Directors have adopted the going concern basis for the preparation of the consolidated financial statements.
Performance 2017 In a year of historic weather events, our focus and discipline delivered strong performance. We improved underwriting, achieved USD 700 million in cost savings, expanded our service offerings, while growing premiums and improving our customer retention levels. 2017 showed strong underlying performance, with BOP up 6 percent versus the prior year after adjusting for the impact of the hurricanes Harvey, Irma and Maria, the impact of charges related to the Group’s restructuring taken through business
operating profits, and the impact of the change to the UK capital gains tax indexation relief announced in the 2017 budget.
Under the Group long-term incentive plan (LTIP), the overall vesting level is 83 percent of target, reflecting the actual achievements for total shareholder return (TSR), net income attributable to shareholders return on common shareholders’ equity (NIAS ROE) and cash remittance over the performance period 2015 to 2017. As in 2016, the Committee did not apply any discretion in determining this vesting level. The comparable LTIP vesting level was 121 percent of target for the previous performance period 2014 to 2016.
1 Consists of USD 49,114 million gross written premiums and policy fees as well as USD 2,892 million Farmers management fees and other related revenues in 2017. Farmers Group, Inc., a wholly owned subsidiary of Zurich Insurance Group, provides certain non-claims administrative and management services to the Farmers Exchanges as attorney-in-fact and receives fees for its services. The Farmers Exchanges are owned by their policyholders.
Each performance criteria has an equal weighting. Based on the achievements under the three predefined performance criteria over the three-year period 2015 to 2017, the calculated vesting level in 2018 is 83 percent, compared to 121 percent vesting last year. No discretionary adjustment has been made to the calculated vesting level.
1 The key factors driving individual awards for 2016 were the Group’s NIAS for members of the Leadership Team, the control functions, Investment Management, support functions and Group Operations; the overall BOP results for General Insurance and Global Life respectively; specific growth and profitability measures for Farmers.
2 The adjusted BOP is the amount before interest and variable remuneration.
kk The value of the target share allocations made in 2017 on the assumption that the allocations will vest at 100 percent of the target level in 2020 for performance over the three years 2017, 2018 and 2019.
kk The total amount of sign-on payments 1 committed in 2017, regardless of when the payments are due, for people taking up their employment in 2017.
Total remuneration 1 Includes the portion paid in sales-restricted shares to Directors. 2 The cash incentives earned for the year for all employees. 3 Represents the value of the target share allocations made in 2017, which assumes vesting levels in 2020 at 100 percent of target. 4 Can include employee benefits such as perquisites and benefits-in-kind, international assignment allowances, service costs for pension benefits and any other payments due under employment contracts.
2 Payments that are provided in connection with the termination of an employment relationship. Zurich does not include under the term Severance Payments, garden leave or similar payments for employees in jurisdictions where such payments are required by applicable law, or where they are based on contractual notice periods which conform with recognized market practice, or where they are non-contractual, but in line with recognized market practice. However, Zurich does include garden leave or similar payments that go beyond recognized market practice, irrespective of whether these are provided pursuant to an agreement or are ex gratia. Severance Payments are not paid to members of the Board or the ExCo.
Outlook summary for 2018 kk Remuneration framework: Further refinements to STIP to support strategy execution. Following implementation of the changes outlined in the remuneration report 2016 (alignment of STIP architecture and STIP funding metrics, and recalibration of the cash remittance metric for LTIP vesting), the overall remuneration framework continues to be refined to reinforce the remuneration principles and support achievement of the strategic goals. Key changes effective January 1, 2018, include incorporating quantitative customer metrics into the assessment of business performance to determine STIP funding in selected markets and at the Group level. This is outlined in more detail in the outlook section of the remuneration report.
kk Board: No changes are proposed to the fee structure of the Board for the period AGM 2018 – AGM 2019. A benchmarking analysis was carried out; however it was decided not to implement any changes to the fee structure of the Board at this time.
Legal and regulatory requirements This remuneration report provides all the information that is required by the following regulations with which Zurich complies: kk Chapter 5 of the Directive on Information Relating to Corporate Governance of the SIX Exchange Regulation (as of December 13, 2016).
kk Information as required by Article 663c para 3 of the Swiss Code of Obligations.
Zurich’s approach to implementing the requirements of the Ordinance AEC The Ordinance AEC came into effect on January 1, 2014 with a two-year transition period. During this time Zurich has amended its Articles of Association as approved by shareholders at the AGM in 2014. Since the AGM in 2015, shareholders are authorized to vote and approve the maximum total amount of remuneration for the Board for the one-year period from AGM to AGM and the maximum total amount of remuneration for the ExCo for the subsequent financial year (Article 18 para 1 Articles of Association: www.zurich.com/en/investor-relations/our-shares/articles-ofassociation ). Details of the votes can be found in the Board of Directors Report accompanying the invitation to the AGM 2018 (www.zurich.com/en/investor-relations/shareholder-area/annual-general-meeting).
According to the Ordinance AEC and Article 18 para 4 Articles of Association, the Group and/or its subsidiaries are authorized to make payments to any member who joins the ExCo during a period for which the AGM has already approved the remuneration of the ExCo, of a supplementary amount for the period(s) in question, where the total amount already approved for such remuneration is not sufficient. The sum of all supplementary amounts may not exceed, during any one remuneration period, 30 percent of the respective total amount of approved maximum remuneration of the ExCo. Details on the votes on pay, on performance-related remuneration for the ExCo, allocation of shares as well as the approach regarding loans and credits can be found in Articles 18, 28 and 34 of the Articles of Association (www.zurich.com/en/investor-relations/our-shares/articles-of-association).
Total remuneration for an individual employee is influenced by factors including the scope and complexity of the role, business performance and affordability, individual performance, internal relativities, external competitiveness, geographic location and legal requirements. Target opportunities are benchmarked to median levels in clearly defined markets and take into account the internal remuneration structures. Depending on the role, the relevant market can be global, regional or local, and reflecting practices in either insurance, financial services or general industry. Remuneration is delivered through an overall framework overseen by the ExCo, the Remuneration Committee and the Board itself. Reward decisions are made on the basis of merit – performance, skills, experience, qualifications and potential – and are free from discrimination toward or against particular diverse backgrounds. The remuneration system and practices ensure all employees have equal opportunities.
In addition, Zurich has a clearly defined global performance management process which supports the achievement of the overall business strategy and operating plans, and links individual pay with business and individual performance. Actions of Zurich employees continue to be guided by Zurich’s values. Performance management objectives are therefore assessed not only in terms of what has been achieved, but also in terms of how they have been achieved according to the behaviors underlying Zurich’s values.
Organizational Rules (Annex A – Charter of the Committees, Chapter 7: Remuneration Committee)
Remuneration Committee Board and ultimately from shareholders via a vote as an aggregate maximum amount.
Remuneration and risk The Remuneration and Risk and Investment Committees meet jointly once a year to discuss a risk review of the remuneration architecture and the remuneration governance framework. Group Risk Management evaluated the remuneration architecture in 2017 and reported that the remuneration architecture is consistent with effective risk management and does not encourage inappropriate risk-taking that exceeds the Group’s level of tolerated risk.
Group Risk Management reviews the processes and criteria for identifying the key risk taker roles annually. The criteria are based on factors that materially affect risk-taking within the Group, such as overall governance, capital consumption for each risk type as determined by the internal model, strategy and reputation. The criteria are then applied to those who take, and those who control, the specific risks at the level of the Group where the risks are most material. When applying the criteria in 2017, the number of key risk taker roles remained similar to the previous year.
Group Audit regularly assesses the operational implementation of Zurich’s Remuneration Rules to verify that the remuneration architecture is adhered to across the Group.
Share ownership guidelines To align the interests of the Board and the ExCo with those of shareholders, Directors and members of the ExCo are required to meet certain levels of share ownership as follows: kk Members of the Board: at the level of one times the basic annual fee.
Share dilution The impact on share dilution resulting from Zurich’s LTIP is considered moderate and is in line with market practice. Zurich is taking measures against share dilution however, by cancelling repurchased shares to reverse dilution from the vesting of shares in recent years as part of the LTIP, and intends to purchase shares on the market instead of issuing new shares for the LTIP in future years.
Share dilution Registered shares as of December 31 151,339,851 150,607,406 Shares issued during the year 732,445 202,442 – as percentage of share capital based on the registered shares 0.48% 0.13%
2 These expired in 2017, so there are no further outstanding shares under option as of December 31, 2017.
Total remuneration Target total remuneration is set around the relevant market median 3 and includes the following elements: Remuneration elements
Award is driven by: – Group and/or country and/or business unit profitability achievements. – Individual performance on personal objectives and behavior in line with Zurich’s values as assessed through the performance management process.
Vesting is determined based on (i) the position of the TSR compared with an international peer group of insurance companies derived from the Dow Jones Insurance Titans 30 Index, (ii) the NIAS ROE and (iii) cash remittance.
Award of 0 to 200 percent of an individual’s target amount.
Vesting level of 0 – 200 percent of the individual target shares allocated.
Clawback framework established for members of the ExCo to allow for recovery, forfeiture and/or clawback, subject to specific conditions. Malus conditions to reduce or eliminate awards applicable to all LTIP participants. Individual hedging of sharebased remuneration prohibited.
3 To assist decisions regarding remuneration structures and amounts, a review of internal relativities is carried out, along with benchmarking analyses within the relevant market, with a view to position toward the market median. The relevant market is dependent on the nature of an individual’s role and considers, amongst other factors, geographical location and scope, and peer companies based on industry and size.
Variable remuneration Incentive plans are designed to provide a range of award opportunities linked to levels of performance. Business and individual performance may result in remuneration levels above target for superior performance, and reduced levels that are below target for performance below expectations. Variable remuneration opportunities are provided, in markets where this is the norm, to motivate employees to achieve key short-term and long-term business goals to increase shareholder value. Variable remuneration opportunities may include both short-term and long-term incentives.
Changes to Zurich’s short-term and long-term incentives effective January 1, 2017: In 2016, it was communicated that Zurich was moving to a simpler, more customer-oriented structure, reducing complexity, creating greater accountability and empowering teams to deliver products and services in a unique and differentiated way. Combining life and non-life insurance under one leadership team, taking a comprehensive customer view and applying a unified go-to-market approach, help to achieve this.
Zurich took the opportunity to make changes to the incentive plans to align with the new organizational structure and accountabilities, and the strategic direction. The key changes as outlined in the remuneration report 2016 and effective from January 1, 2017, were: kk Alignment of the STIP architecture to the new organizational structure whereby segment STIP pools have been replaced by a number of Group, country and business unit STIP pools.
kk Recalibration of cash remittance goals for the LTIP vesting in line with the targets set out at the Investor Day held in November 2016 for the performance period 2017 – 2019.
The key driver for determining the STIP award levels per STIP pool is the relevant financial performance during the year, including a qualitative assessment of the results.
The individual STIP award, as determined by the relevant financial performance, resulting STIP award levels and individual performance, is paid in cash and capped at 200 percent of the individual STIP target.
At year-end the key financial figures are evaluated in relation to the business plan which was approved by the Board in the December prior to the relevant performance year. A qualitative assessment of the financial performance also takes place to ensure a holistic evaluation of performance, including the remuneration review carried out by the Group CRO. Depending on the outcome of this assessment, the funding of the STIP pools can vary between 0 percent and 175 percent of target, however typically, the funding varies in the range of 80 percent to 120 percent of target.
The Group CEO makes recommendations to the Remuneration Committee on the proposed funding for the STIP pools and on the aggregate amount required for STIP award payments across the Group. Following review and analysis, the Remuneration Committee discusses their final recommendations with the Board and seeks the Board’s approval.
STIP award The financial performance and the resulting STIP award levels, together with the individual performance assessment, determine the final individual STIP award for the year which can vary between 0 percent and 200 percent of the individual’s STIP target. In this way, STIP awards are differentiated based on financial and individual performance.
Short-term incentives are delivered primarily through STIP, although there are also local plans in a small proportion of countries. The Group plan is utilized across the organization and in many countries covers all employees in the respective country who are selected to participate. In other countries, based on market practice in that location, only the most senior individuals participate in STIP. Where local plans exist, they broadly follow the same principles as the Group STIP.
In alignment with the Group’s risk profile and business strategy and taking into account best practice principles among insurance companies, views from proxy advisers and shareholders, long-term incentives are provided with a deferral element that takes into account material risks and their time horizon. Such deferred remuneration is structured to promote the risk awareness of participants and to encourage participants to operate the business in a sustainable manner. An illustrative example of the LTIP for the performance period 2017 to 2019 is set out below.
LTIP award The LTIP award is distributed to participants on April 3, three years after the target shares were allocated to the participant. In no circumstances can the LTIP award for an individual be more than 200 percent of the aggregate number of target shares and dividend equivalent target shares noted below.
LTIP vesting levels To increase transparency for the reader, a table with the vesting levels under the LTIP is provided below.
Basic fee for the Chairman of the Board 2 750 750 1,500 1,500 Basic fee for the Vice-Chairman of the Board 2 200 200 400 400 Basic fee for a Member of the Board 120 120 240 240
Chair fee for the Audit Committee 80 – 80 80 Chair fee for the Remuneration Committee 60 – 60 60 Chair fee for the Risk and Investment Committee 60 – 60 60 Chair fee for the Governance, Nominations and Corporate Responsibility Committee 4 60 – 60 60 1 Table excludes other fees for board memberships of subsidiary boards of Zurich (AGM to AGM). 2 Neither the Chairman nor the Vice-Chairman receive any additional fees for their committee work on the Board of Zurich. 3 Amount remains the same irrespective of the number of committees on which a member of the Board serves. 4 For 2017 and 2016 no such fees were paid as the Chairman of the Board has been chairing the Governance, Nominations and Corporate Responsibility Committee.
The information provided according to Articles 14 –16 of the Ordinance AEC contained in the remuneration report needs to be externally audited following the audit requirements of the Ordinance AEC (Article 13 para 1 and Article 17 of the Ordinance AEC). In addition, the information according to Article 663c of the Swiss Code of Obligations is being audited and disclosed as such in the remuneration report. All audited sections have been highlighted accordingly.
Where a Director is also a member of one or more subsidiary boards of Zurich, the Director is entitled to an additional fee of CHF 50,000 in 2017 (CHF 50,000 in 2016) per annum plus CHF 10,000 in 2017 (CHF 10,000 in 2016) per annum if he or she also chairs an audit committee of such a board. The fee structure for subsidiary boards can be modified if certain circumstances, for example, the additional time commitment to discharge the duties of a board member, warrant it.
Other fees 4 1 The remuneration shown in the tables is gross, based on the accrual principle and does not include any business-related expenses incurred in the performance of the Directors’ services.
2 Members of a committee receive a cash fee of CHF 60,000 (CHF 60,000 in 2016) for all committees on which they serve, irrespective of the number. The committees on which the Directors serve are set out in the corporate governance report.
3 Committee chairs receive an annual fee of CHF 60,000 (CHF 60,000 in 2016) and the chair of the Audit Committee receives an additional CHF 20,000 (CHF 20,000 in 2016). The committees on which the Directors serve and the chairs are set out in the corporate governance report.
4 In addition to the fees received as Directors of Zurich Insurance Group Ltd, Susan Bies in 2016 and 2017, and Don Nicolaisen in 2016, earned fees for their board memberships of the subsidiary board Zurich American Insurance Company. Recognizing the Chairman’s long service and outstanding contribution to Zurich, Tom de Swaan received a farewell present worth CHF 27,000. The resulting Swiss tax obligations were met by the company.
5 The shares allocated to the Directors are not dependent on the achievement of performance criteria and are sales-restricted for five years. 6 As of June 16, 2017 Tom de Swaan was allocated 2,623 shares, Fred Kindle was allocated 700 shares, and the other members of the Board were allocated 420 shares.
The share price (CHF 285.90) as of June 15, 2017 was adopted to calculate the number of shares based on the fixed portion of the fee allocated in shares for the respective members. Where the value of the allocated shares did not equal the value of the portion of the fee to be allocated in shares, the difference was paid in cash.
11 As of June 16, 2016, Tom de Swaan was allocated 3,364 shares, Fred Kindle was allocated 897 shares, and the other members of the Board were allocated 538 shares each. The share price as of June 15, 2016 (CHF 222.90) was adopted to calculate the number of shares based on the fixed portion of the fee allocated in shares for the respective members. Where the value of the allocated shares did not equal the value of the portion of the fee to be allocated in shares, the difference was paid in cash.
12 Tom de Swaan was appointed Chief Executive Officer a. i. effective December 1, 2015. In 2015 no payments were made to Tom de Swaan for this role nor as a member of the ExCo. In 2016, the Board decided that additional remuneration will be paid to Tom de Swaan to recognize the period where he held the position of Chief Executive Officer a. i. This remuneration was disclosed as compensation for management and included in the maximum total amount of remuneration approved for the ExCo by shareholders at the AGM in 2015 or in accordance with Article 18 para. 4 of the Articles of Association. Further details can be found in the section Executive Committee – Remuneration of the ExCo, for 2016.
13 At the AGM on March 30, 2016, Jeffrey Hayman and David Nish were elected to the Board, and Rafael del Pino, Thomas Escher and Don Nicolaisen retired from the Board. Fred Kindle and Kishore Mahbubani were newly elected as members of the Remuneration Committee.
Audited Special payments and termination arrangements, additional honoraria and remuneration and personal loans for Directors At the AGM on March 29, 2017, Catherine Bessant was elected as a new member of the Board. No Replacement Payments or other benefits were provided. No member of the Board stood down.
Share plans and shareholdings of Directors The shareholdings of the Directors who held office at the end of 2017, in shares of Zurich Insurance Group Ltd are shown in the following table. All interests shown include the portion of shares allocated to the Directors as part of their fee, shares acquired in the market by the Directors and shares held by parties related to the Directors.
T. de Swaan, Chairman 12,452 9,829 F. Kindle, Vice-Chairman 20,010 19,310 J. Amble, Member 1,375 955 C. Bessant, Member 420 n / a S. Bies, Member 3,640 3,220 A. Carnwath, Member 2,300 1,880 C. Franz, Member 1,601 1,181 J. Hayman, Member 958 538 M. Mächler, Member 1,923 1,503 K. Mahbubani, Member 1,375 955 D. Nish, Member 958 538 1 None of the Directors together with parties related to them held more than 0.5 percent of the voting rights of Zurich Insurance Group Ltd shares as of December 31, 2017 or 2016, respectively.
Remuneration of the ExCo A number of key elements are in place to provide a well-balanced and effectively managed remuneration architecture. These elements include a Group-wide remuneration philosophy, robust short- and long-term incentive plans, effective governance, and strong links to the business planning and risk policies of the Group.
The Remuneration Committee reviews this peer group regularly. This analysis is supplemented by additional benchmarking studies as appropriate, e.g., by reviewing practices of large SMI companies in Switzerland or similarly sized companies in other countries. The Remuneration Committee regularly reviews the benchmarking approach.
Elements and amounts of remuneration for the ExCo The individual remuneration elements and the corresponding amounts are described in more detail below (the amounts for the highest-paid executive and comparative figures for 2016 are also included).
See remuneration elements, page 92. The total amount of base salaries for all members of the ExCo paid in 2017 was USD 11.3 million compared to USD 10.0 million in 2016.
The total amount of annual cash incentive awards to be paid in 2018 for the 2017 performance year for all members of the ExCo is USD 14.4 million compared to USD 12.8 million for 2016. The annual cash incentive awards are determined individually and are performance-based.
Members of the ExCo participate in the pension plan arrangements of the entities where they are employed. The Group’s philosophy is to provide pension benefits through cash balance and/or defined contribution plans where funds are accumulated throughout a career to provide retirement benefits. The majority of members of the ExCo participate in such plans and over time, all future members of the ExCo will participate in such plans. The remaining members of the ExCo participate in defined benefit plans that provide retirement benefits based on final pensionable earnings and the number of years of service. Normal retirement ages vary from 60 to 65.
Members of the ExCo received other remuneration in 2017 in relation to employee benefits, expatriate allowances, perquisites, benefits-in-kind and any other payments due under each member’s employment contract.
The total value of other remuneration in 2017 was USD 1.5 million (compared to USD 1.4 million in 2016). Benefits-in-kind have been valued using market rates.
ExCo STIP performance assessment This section provides further insight into the assessment of the individual STIP awards of the members of the ExCo.
The individual STIP award is determined in a similar way as for all employees, taking into account financial performance, the resulting STIP award levels and individual performance.
With regard to objective setting, each member of the ExCo receives a target card for their area of responsibility at the beginning of the year. The target cards include objectives related to the execution of the strategy in particular in the area of financial measures, customers and relevant strategic projects, with a significant weighting on financial measures.
In a similar way, the Remuneration Committee and the Board review the performance achievements of the Group CEO.
7 Other payments and share allocations are extraordinary and include payments and share allocations to compensate incentive plan forfeitures with previous employers. The amount for 2017 has been translated into USD at the relevant exchange rates throughout the year and at the year-end rate for payments in 2018 and later.
8 The amount relates to contractually agreed remuneration for the period of employment in 2017 after stepping down from the ExCo and during the notice period. Such remuneration includes pro-rated base salaries, cash incentives and LTIP target allocations for the financial year 2017.
The amount of LTIP included in the total of USD 47.1 million above, is the value of target share allocations of USD 16.7 million allocated in 2017 and assumed to vest at 100 percent of target in 2020. As mentioned above, the vesting level for the allocations from previous years vesting in 2018 is 83 percent (compared to 121 percent last year), reflecting the performance levels for the three performance metrics over the three-year performance period. The value of the shares vesting in 2018 from the regular LTIP allocations made in prior years to all members of the ExCo who served in full or for part of the year is USD 7.8 million. As a result, the actual earned total remuneration for the period ending December 31, 2017 was USD 38.2 million compared to the total remuneration of USD 47.1 million shown above.
Member of the ExCo with the highest remuneration The highest-paid individual in 2017 was Mario Greco, Group CEO, with his total remuneration of CHF 8.6 million representing the base salary, cash incentive awards earned for the year, the value of target shares allocated in 2017 under the LTIP, the value of pension benefits and other remuneration including employee benefits. The remuneration for Mario Greco is disclosed for the full year in 2017, compared to pro rata for 2016 reflecting his start date with Zurich in the position of Group CEO on March 7, 2016. There were no changes to his compensation structure in 2017.
Base salary 1.6 1.3 Cash incentive awards earned for the year 2.8 2.6 Value of target share allocations 3.6 3.4 Service costs for pension benefits 0.5 0.4 Value of other remuneration 0.1 0.1 Total in CHF 8.6 7.8 Total in USD 2 8.7 7.9 in CHF millions, for the years ended December 31 2017 2016
2 The remuneration is paid in Swiss francs. The amounts have been translated from Swiss francs to U.S. dollars at the relevant exchange rates throughout the year. The cash incentive to be paid in 2018 has been translated at the year-end rate in 2017.
The amount of LTIP included in the total of CHF 8.6 million above is the value of the target share allocation of CHF 3.6 million allocated in 2017 and assumed to vest at 100 percent of target in 2020. There are no shares vesting in 2018 from prior allocations and therefore the actual earned total remuneration for the period ending December 31, 2017 was CHF 5.0 million compared to the total remuneration of CHF 8.6 million shown above.
Special payments and termination arrangements, additional honoraria and remuneration, and personal loans for members of the ExCo During 2017, there was one new member appointed to the ExCo as an internal appointment, and one new member as an external appointment. No one relinquished their responsibilities as a member of the ExCo in 2017.
There were no termination payments (golden parachutes) or payments in advance made and no other benefits, such as agreements concerning special notice periods or longer-term employment contracts (exceeding 12 months in duration), waiver of lock-up periods for equities, shorter vesting periods or additional contributions to occupational pension schemes, provided.
Remuneration and personal loans for former members of the ExCo Former members of the ExCo are eligible to continue their mortgage loans following retirement on similar terms to those when they were employed, in line with the terms available to employees in Switzerland. As of December 31, 2017 and 2016, no former member of the ExCo had any outstanding loans, advances or credits.
No former member of the ExCo received remuneration in 2017, other than disclosed in the remuneration report 2017.
Share and share option holdings of the members of the ExCo This section provides a summary of total outstanding share commitments under the LTIP, transition arrangements following the change to cliff vesting in the LTIP from 2014, restricted share allocations and the total outstanding share options for members of the ExCo as of December 31, 2017.
A summary of the unvested target share allocations as at December 31, 2017 under the LTIP, the transition arrangement and restricted shares is set out in the following table: Summary of unvested target share allocations for the ExCo as of December 31
Year of vesting 1 Dividend equivalent target shares are credited within the regular LTIP. At the vesting date, the original number of target shares allocated, plus the dividend equivalent target shares, will be assessed for vesting in aggregate based on the performance achievements against the vesting grid. No dividends will accrue on the dividend equivalent target shares.
2 With effect from January 1, 2014, the Board approved a transition to three-year cliff vesting in the LTIP. To maintain target earning opportunities during the transition period, an allocation of supplementary target shares was made to all current LTIP participants in 2014 of which the final tranche vested in 2017. To ensure members of the ExCo further align their long-term interests with those of shareholders, the transition allocation was provided in two installments for the ExCo, with the final installment in 2015, assessed for vesting in 2016, 2017 and 2018.
Within the context of the regular LTIP allocations made in 2017, these performance based share allocations will be considered for vesting in 2020 with one-half of the resulting vested shares being sales-restricted for a further threeyear period.
Audited Share option allocations Under the share option program for senior management, the Group issued share options in the past to individuals within defined rules. Since 2011, share option allocations are no longer made. Prior to this, the option allocations were made each year on the third working day in April. Further, the exercise price for the options allocated in the past was set at the market price on the day prior to the date of allocation. The performance-based option allocations were considered for vesting in one-third installments during the three years after the allocation.
Under the share option program, the total number of shares under option for members of the ExCo as at December 31, 2016 is set out in the following table. These expired in 2017 and there are no further outstanding shares under option as at December 31, 2017.
All options shown above entitled the holder to purchase one share of Zurich Insurance Group Ltd at the exercise price stated with normal voting and dividend rights.
3 Alison Martin was appointed Group Chief Risk Officer-Designate as an external appointment effective October 1, 2017. Kathleen Savio was appointed CEO North America-Designate as an internal appointment effective October 1, 2017.
4 Mario Greco was appointed Group CEO effective March 7, 2016. Claudia Dill, CEO Latin America, Jack Howell, CEO Asia Pacific, and James Shea, CEO Commercial Insurance, became members of the ExCo effective October 1, 2016. Gary Shaughnessy became a member of the ExCo effective January 1, 2016 and was appointed CEO EMEA effective July 1, 2016. Kristof Terryn was appointed Group Chief Operating Officer effective July 1, 2016.
The following section includes information regarding the total remuneration earned by employees for the financial year 2017 and 2016 across the Group, including remuneration for members of the ExCo.
Base salaries 3,740 3,722 Value of other remuneration including employee benefits 1 476 601 Service costs for pension benefits 2 401 477
Value of outstanding deferred remuneration The Group’s remuneration system includes instruments for the deferral of remuneration. The following table provides an overview of the overall value of outstanding deferred remuneration as of December 31, 2017 and 2016: Value of outstanding deferred remuneration for all employees in USD millions, for the years ended December 31 2017 2016
Unvested target share allocations 1 408 380 Unvested restricted share allocations 18 17 Vested but sales-restricted allocations 138 117 Value of overall outstanding deferred remuneration 564 514 1 This excludes the value of target share allocations from transition arrangements made in the past.
kk Sign-on Payments are payments that are agreed on the execution of an employment contract (whether paid immediately or over time). Sign-on Payments may include compensation made prior to a person joining the company and providing any services (Payments in Advance) or compensation for benefits foregone with a previous employer (Replacement Payments). Payments in Advance are not paid to members of the Board or the ExCo. Any Replacement Payments for members of the ExCo including the Group CEO have to be approved by the Board based on a proposal by the Remuneration Committee.
The following table discloses Sign-on and Severance Payments committed to key risk takers. For key risk taker roles where the incumbent is a member of the ExCo, no Payments in Advance and/or Severance payments have been made. Replacement Payments for the ExCo in 2017 and 2016 are included.
kk Senior executive target card framework: The target card framework for the ExCo and the Leadership Team in 2018 has been revised and focuses on three objective categories covering financials, customers and people. In these three objective categories, quantitative measures and relevant strategic projects are incorporated. Achievement against the predefined targets will be taken into account to evaluate overall individual performance. In addition to operational excellence activities and other projects, the objective categories are also relevant for all employees across the Group.
The Remuneration Committee will continue to seek dialogue with investors and proxy advisers in 2018. Further, the Committee will ensure that the remuneration framework is aligned with the strategy, is embedded in the risk framework and complies with legal and regulatory requirements. As in previous years, the Committee enforces the governance framework and carefully monitors the link between key performance factors and variable remuneration awards.
To the General Meeting of Zurich Insurance Group Ltd on the remuneration report 2017
We have audited the sections on pages 102 to 104 and pages 108 to 112 of the accompanying remuneration report of Zurich Insurance Group Ltd for the year ended December 31, 2017.
Auditor’s Responsibility Our responsibility is to express an opinion on the accompanying remuneration report. We conducted our audit in accordance with Swiss Auditing Standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the remuneration report complies with Swiss law and articles 14 –16 of the Ordinance.
An audit involves performing procedures to obtain audit evidence on the disclosures made in the remuneration report with regard to compensation, loans and credits in accordance with articles 14 –16 of the Ordinance. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatements in the remuneration report, whether due to fraud or error. This audit also includes evaluating the reasonableness of the methods applied to value components of remuneration, as well as assessing the overall presentation of the remuneration report.
“Managing risks means keeping our eye on the here and now, and on the long term.” Alison Martin Group Chief Risk Officer
As an insurer, we help our customers manage their risks and are accountable for managing our own. By effectively managing our risks, we make sure we are there when our customers need us.
Introduction I became Zurich’s Group Chief Risk Officer January 1, 2018, and so it is my great pleasure to introduce the 2017 risk review, which presents Zurich’s major risks and describes how we manage them.
I am pleased to have joined Zurich for many reasons. One is the Group’s commitment to sustainability, including managing the risks posed by climate change. In this regard I am proud that we are committed to the recommendations from the Task Force on Climate-related Financial Disclosures (TCFD) and provide in this report our initial disclosure on the risks we face from climate change.
121 Zurich Insurance Group Annual Report 2017 Group overview Governance Risk review Financial review
Other credit risk The overall credit quality of the reinsurance assets portfolio remains high and stable.
Market risk Market risk remained broadly stable during 2017 following a period of active de-risking in the second half of 2016.
Total Z-ECM capital required: USD 30.5 billion %, as of July 1, 2017
The major risk management objectives at Zurich Insurance Group (Zurich, or the Group) are to: kk Support achievement of the Group strategy and protect capital, liquidity, earnings and reputation by monitoring that risks are taken within the Group’s risk tolerance kk Enhance value creation by embedding disciplined risk taking in the company culture and contribute to an optimal risk-return profile where risk reward trade-offs are transparent, understood, and risks are appropriately rewarded kk Efficiently and effectively diversify risk and mitigate unrewarded risks kk Encourage openness and transparency to enable effective risk management kk Support decision-making processes by providing consistent, reliable and timely risk information kk Protect Zurich’s reputation and brand by promoting a sound culture of risk awareness, and disciplined and informed risk taking
Risk-based remuneration Based on the Group’s remuneration rules, the Board of Directors designs and structures remuneration arrangements that support the achievement of strategic and financial objectives and ensures they do not encourage inappropriate risk taking. With regard to the latter, the Group Chief Risk Officer (Group CRO) consults with the other assurance, control and governance functions to provide the CEO with a review of risk factors to consider in the annual variablecompensation process. In consultation with these functions, the Group CRO also provides an individual assessment of Group key risk takers as part of their annual individual performance assessment. For more information on Zurich’s remuneration system, see the ‘remuneration report.’
The risk function is independent of the business by being a vertically integrated function where all risk employees globally directly report into the Group CRO. Risk officers are embedded in the business, positioning them to support and advise, and independently challenge, business decisions from a risk perspective. As business advisers on risk matters, the risk officers, equipped with technical risk skills as well as business skills, help foster a risk-aware culture in the business.
Internally, the Group uses its Zurich Economic Capital Model (Z-ECM), which also forms the basis of the Swiss Solvency Test (SST) model. Z-ECM targets a total capital level that is calibrated to an ‘AA’ financial strength. Zurich defines the Z-ECM capital required as being the capital required to protect the Group’s policyholders in order to meet all of their claims with a confidence level of 99.95 percent over a one-year time horizon.
The chart below shows an analysis of the composition of the Group’s Z-ECM available financial resources as of July 1, 2017.
Analysis of the Group’s Z-ECM available financial resources USD billions, as of July 1, 2017 1 Shareholders’ intangible assets including deferred tax assets less deferred front-end fees and deferred tax liabilities 2 All debt issues (senior and subordinated) excluding those classified as operational debt or maturing within one year
The total allocated capital as of July 1, 2017 equaled USD 30.5 billion Z-ECM capital required plus USD 0.8 billion allocated to Farmers. As of July 1, 2017 the largest proportions of Z-ECM capital required were allocated to Property & Casualty with 51 percent and Life with 36 percent of the total. The following chart shows the Z-ECM capital required allocated to the businesses as of July 1, 2017 and January 1, 2017.
Market risk sensitivities show the estimated impact on the Group’s Z-ECM ratio of a one percentage point increase/ decrease in yield curves, a 10 percent appreciation in the U.S. dollar, a 20 percent rise/decline in all stock markets, and a one percentage point change in credit spreads, with and without European sovereigns. The sensitivities are considered as separate but instantaneous scenarios. They are a best estimate and non-linear, i.e., a change in the scenario input could result in disproportionally higher (or lower) impact on the Z-ECM ratio depending on the prevailing market conditions at the time.
Scenarios are defined as events that have a very small probability of occurring but that could, if realized, negatively affect the Group’s Z-ECM AFR. The impact of insurance-specific scenarios on the required capital is not taken into account.
Impact on the Z-ECM ratio from sensitivities to financial market conditions: Risk tolerance level 100–120% ‘AA’ target range
Europe windstorm 1 Z-ECM is calibrated at 99.95% Value at Risk (equivalent to an ‘AA’ rating). 2 Credit spreads (CS) include mortgages and incl./excl. Euro sovereign spreads. Sensitivity is net of profit sharing with policyholders. 3 The insurance risk-specific scenarios relate to natural catastrophe events that are estimated on a modeled 250-year net aggregate loss (equivalent to a 99.6% probability of non-exceedance).
The Group maintained its strong rating level in 2017. On Dec 8, 2017, AM Best modified the rating outlook from negative to stable while reaffirming the A+ (Superior) Financial Strength Rating (FSR) and aa- Issuer Credit Rating (ICR) of the Group and of its subsidiaries rated by AM Best. With this, AM Best recognized “the positive impact of the strong corrective actions management has taken on the Group’s Property & Casualty (P&C) operations.” This change is also based on the recognition of the Group’s diversified sources of earnings in terms of businesses and geographies, as well as the strength of the balance sheet.
Standard & Poor’s sees Zurich’s ERM as ‘very strong,’ based on a positive view of our risk management culture, risk controls, emerging risk management, risk models and strategic risk assessment.
In 2017, Zurich enhanced its internal model and submitted it to FINMA for approval. Enhancements include changes that were necessary to meet evolving FINMA requirements. The changes are expected to reduce the Group’s SST ratio by 10 to 25 percentage points (unaudited).
Regulatory requirements in the European Economic Area (EEA) The complete Solvency II framework was introduced on January 1, 2016. Solvency II is more risk-sensitive and sophisticated in its approach than Solvency I. Solvency II capital requirements also take into account all material risks and how these interact.
Regulatory requirements in Asia Pacific, Latin America, and Middle East and Africa Every country has a capital standard for insurance companies. Several jurisdictions (e.g., Chile, Brazil, Mexico and Japan) have taken approaches similar to Solvency II.
Insurance risk is the inherent uncertainty regarding the occurrence, amount or timing of insurance cashflows. The profitability of insurance business is also susceptible to business risk in the form of unexpected changes in expenses, policyholders’ behavior, and fluctuations in new business volumes. The exposure is transferred to Zurich through the underwriting process. Zurich actively seeks to write those risks it understands and that provide a reasonable opportunity to earn an acceptable profit. Zurich manages the customer risks it assumes, and minimizes unintended underwriting risks, through such means as: kk Establishing limits for underwriting authority kk Requiring specific approvals for transactions above established limits or new products kk Using a variety of reserving and modeling methods kk Ceding insurance risk through external proportional or non-proportional reinsurance treaties and facultative single-risk placement. The Group centrally manages reinsurance treaties.
kk Special lines include directors and officers, credit and surety, crime and fidelity, travel, accident and health, and crop.
To arrive at their reserve estimates, the actuaries take into consideration, among other things, the latest available facts, historical trends and patterns of loss payments, exposure growth, court decisions, economic conditions, inflation, and public attitudes that may affect the ultimate cost of claim settlement. Inflation is monitored on a country basis; the monitoring process relies on both Zurich’s economic view on inflation and specific claims activity, and feeds into actuarial models and Zurich’s underwriting processes and pricing. To ensure a common understanding of business insights and new trends for reserve analysis, financial plans, underwriting and pricing decisions, the Group has established a culture of continuous cross-functional collaboration. For this, underwriting, actuarial (pricing and reserving), claims, finance, sales and distribution, risk engineering and risk management contribute to quarterly meetings on local and Group level.
Insurance risk sensitivity for the Property & Casualty business – prior period in USD millions, for the year ended December 31, 2016
In the life annuity business, medical advances and improved social conditions that lead to increased longevity are the most significant insurance risk. Annuitant (beneficiary) mortality assumptions include allowance for future mortality improvements.
The Group is also exposed to risks posed by policyholder behavior, and fluctuating expenses. Policyholder behavior risk is mitigated by designing products that, as closely as possible, match revenue and expenses associated with the contract. Expense risk is reduced by carefully controlling expenses, and through regular expense analysis and allocation exercises.
Observing best-estimate assumptions on cash flows related to benefits of insurance contracts gives some indication of the size of the exposure to risks and the extent of risk concentration. Table 3 shows the Group’s concentration of risk within Life by region and line of business based on reserves for life insurance on a net basis. These reserves for life insurance also include policyholder surplus reserves with a loss absorbing capacity, predominantly in Germany (USD 8.2 billion) and the UK (USD 0.6 billion). The Group’s exposure to life insurance risks varies significantly by geographic region and line of business and may change over time. See note 8 of the consolidated financial statements for additional information on reserves for insurance contracts.
Life of which: Rest of Europe, Middle East & Africa 349 302 2,131 1,694 2,480 1,996 1 In 2017, the Group transferred a portfolio of stable value products (SVP) marketed with life insurance policies (Bank Owned Life Insurance, BOLI) from Non-Core Businesses (part of Other businesses) to Life. The change resulted in a transfer of USD 8.3 billion of investments for unit-linked contracts and of reserves for unit-linked contracts.
Analysis of sensitivities for life insurance risk The Group uses market-consistent embedded value reporting principles, which allow Zurich to increase its understanding of, and report on, the risk profile of its life products, and how these risks would change under different market conditions. Embedded value is a measure that markets use to value life businesses. For more information, see the ‘embedded value report 2017’ (unaudited but subject to assurance review) at www.zurich.com/ investor-relations/results-and-reports.
Risks from man-made catastrophes Man-made catastrophes include such risks as industrial accidents, terrorism and cyber attacks. Zurich’s experience in monitoring potential exposures to natural catastrophes is also applicable to threats posed by man-made catastrophes.
For terrorism, the Group reviews and aggregates worker injury, property and life risk exposures to identify areas of significant concentration and assesses other lines of business, such as liability and auto, although the potential exposure is not as significant. The data allow underwriters to evaluate how insuring a particular customer’s risk might affect Zurich’s overall exposure. Zurich uses a vendor-provided catastrophe model to evaluate potential exposures in every major U.S. city and selected cities in Europe. The Group undertakes more detailed and frequent analyses for cities in which Zurich has greater exposure. The Group’s analysis for the property and casualty business has shown that its exposures outside of North America are lower, in a large part due to government-provided pools; even so, the Group assesses the risk for countries with the potential for significant net exposure. The Group periodically monitors accumulation limits for these and other areas. Outside the modeled areas, exposure concentrations are identified directly on Zurich’s Risk Exposure Data Store (REDS), a system that stores information about Zurich’s location-based exposure to risk in a single place. Exposure concentrations for location-based man-made scenarios other than terrorism include, for example, industrial explosions at global ports, which are also identified in REDS.
Reinsurance for Property & Casualty and Life The Group’s objective in purchasing reinsurance is to provide market-leading capacity for customers while protecting the balance sheet, supporting earnings volatility management, and achieving capital efficiency. The Group follows a centralized reinsurance purchasing strategy for both Property & Casualty (P&C) and Life, and bundles programs, where appropriate, to benefit from diversification and economies of scale. In support of the Group’s empowermentbased management model and to align risk-bearing capacities between the Group and individual country operations, a new internal reinsurance vehicle was introduced in 2017. In addition, to actively manage and reduce potential claims-recovery risks on facultative cessions and to support the strategy on operational excellence, the Group started to tailor specific facultative property and casualty facilities. Operational excellence was also the driver for the consolidation of several individual ‘property per risk’ treaties into one global protection.
Major changes in 2017 included the significantly decreased attachment point of the Global Aggregate Catastrophe treaty, which supports a superior earnings protection for higher-frequency catastrophe scenarios, and the increased attachment point of the U.S. catastrophe towers which was counterbalanced by an increased cession of the inuring U.S. Property Quota Share treaty.
2017 Group catastrophe reinsurance protection USD millions, as of December 31, 2017 1 This cover can be used only once, either for aggregated losses or for an individual occurrence or event. 2 Franchise deductible of USD 25 million, i.e. losses greater than USD 25 million count toward the erosion of the retention (annual aggregate deductible).
The Asset/Liability Management Investment Committee reviews and monitors Group strategic asset allocation and tactical boundaries, and monitors Group asset/liability exposure. The Group oversees the activities of local asset/ liability management investment committees and regularly assesses market risks at both Group and local business levels. The economic effect of potential extreme market moves is regularly examined and considered when setting the asset allocation.
The Group may use derivative financial instruments to mitigate market risks arising from changes in currency exchange rates, interest rates and equity prices, from credit quality of assets, and from commitments to third parties. The Group enters into derivative financial instruments mostly for economic hedging purposes and, in limited circumstances, the instruments may also meet the definition of an effective hedge for accounting purposes. The latter instruments include cross-currency interest rate swaps in fair value hedges and cross-currency swaps in cash flow hedges of Zurich’s borrowings used to mitigate exposure to foreign currency and interest-rate risk. In compliance with Swiss insurance regulation, the Group’s policy prohibits speculative trading in derivatives, meaning a pattern of ‘in and out’ activity without reference to an underlying position. The Group addresses the risks arising from derivatives through a stringent policy that requires approval of a derivative program before transactions are initiated, and by subsequent regular monitoring by Group Risk Management of open positions and annual reviews of derivative programs.
The Group manages its risks from equity securities and real estate as part of the overall investment risk management process, and applies limits as expressed in policies and guidelines. Specifically, Zurich limits holdings in equities, real estate and alternative investments. To realize an optimal level of risk diversification, the strategy for equities is defined through a composite of market benchmark indices. The Group has the capability and processes in place to change the exposure to the key equity markets within a short time frame through the use of derivatives.
The Group manages credit-spread risk, which describes the sensitivity of the values of assets and liabilities due to changes in the level or the volatility of credit spreads over the risk-free interest rate yield curves. Movements of credit spreads are driven by expected probability of default, expected losses in cases of defaults of issuers, the uncertainty of default probabilities and losses.
Tables 4, 5 and 6 show the estimated economic market risk sensitivities of the net impact. Positive values represent an increase in the balance, and values in parentheses represent a decrease. Mismatches in changes in value of assets relative to liabilities represent an economic risk to the Group. The net impact – the difference between the impact on Group investments and liabilities – represents the economic risk related to changes in market risk factors that the Group faces.
In determining the sensitivities, investments and liabilities are fully re-valued in the given scenarios. Each instrument is re-valued separately, taking the relevant product features into account. Non-linear effects, where they exist, are reflected in the model. The sensitivities are shown before tax. They do not include the impact of transactions within the Group.
In USD millions, as of December 31 2017 2016 100 basis point increase in the interest rate yield curves Property & Casualty Net impact before tax (278) (323) Life 1 Net impact before tax 244 (414) Rest of the business Net impact before tax (275) (150) 100 basis point decrease in the interest rate yield curves Property & Casualty Net impact before tax 100 204 Life 1 Net impact before tax (1,127) (553) Rest of the business Net impact before tax 236 166 1 Modeling enhancements introduced in 2017 for the Life business reflect model revisions to allow for the introduction of negative interest rates. 2016 sensitivities presented are based on replicating portfolios calibrated to embedded value models using floored interest rate models.
Analysis of economic sensitivities for equity risk Table 5 shows the estimated impacts from a 10 percent decline in stock markets, after consideration of hedges in place, as of December 31, 2017 and 2016.
In USD millions, as of December 31 2017 2016 10% decline in stock markets Property & Casualty Net impact before tax (642) (558) Life Net impact before tax (422) (283) Rest of the business Net impact before tax (74) (50)
In USD millions, as of December 31 2017 2016 100 basis point increase in credit spreads Property & Casualty Net impact before tax (1,694) (1,642) Life Net impact before tax (3,095) (3,197) Rest of the business Net impact before tax (564) (384)
* Limitations of the economic sensitivities: same limitations apply as for Group investments sensitivities except that the above sensitivities are based on economic net assets including liability representation see ‘basis of representation.’
Debt securities The Group is exposed to credit risk from third-party counterparties where the Group holds securities issued by those entities. The default risk is controlled by Group counterparty concentration risk limits keeping the size of potential losses to an acceptable level.
Debt securities by rating of issuer as of December 31 2017 2016
The third-largest concentration in the Group’s debt securities portfolio is in structured finance securities (mortgage- backed securities (MBS)/asset-backed securities (ABS) and similar).
Cash and cash equivalents To reduce concentration, settlement and operational risks, the Group limits the amount of cash that can be deposited with a single counterparty. The Group also maintains an authorized list of acceptable cash counterparties.
The credit risk arising from other loans is assessed and monitored together with the ‘debt securities’ portfolio. Reported loans to governments, supranationals and similar represent 59.6 percent, of which 94.2 percent are to the German central government or the German federal states. As of December 31 2017, USD 5.1 billion were rated as ‘AAA’ (58.1 percent) compared with 3.9 billion as of December 31, 2016, USD 0.7 billion as ‘AA’ (7.7 percent) compared to 0.6 billion as of December 31, 2016, USD 0.6 billion as ‘A’ (6.8 percent) compared to with 3.3 billion as of December 31, 2016, USD 1.2 billion as ‘BBB’ and below (13.5 percent) compared with 1.3 billion as of December 31, 2016, and USD 1.2 billion as unrated (14.0 percent) compared with none as of December 31, 2016.
The sensitivities show the effects of a change of the exchange rates only, while other assumptions remain unchanged. The sensitivity analysis does not take into account management actions that might be taken to mitigate such changes. The sensitivities do not indicate a probability of such events occurring in the future. They do not necessarily represent Zurich’s view of expected future market changes. While table 9 shows the effect of a 10 percent increase in currency exchange rates, a decrease of 10 percent would have the converse effect.
Zurich Insurance Group Annual Report 2017 Group overview Governance Risk review Financial review147
Credit risk related to reinsurance assets The Group’s Corporate Reinsurance Security Committee manages the credit quality of cessions and reinsurance assets. The Group typically cedes new business to authorized reinsurers with a minimum rating of ‘A–.’ As of December 31, 2017 and 2016 respectively, 52 percent and 66 percent of the exposure ceded to reinsurers that are rated below ‘A–’ or are not rated is collateralized. Of the exposure ceded to reinsurers that are rated below ‘A–’ or are not rated, 51 percent was ceded to captive insurance companies, in 2017 and 32 percent in 2016.
Reinsurance assets included reinsurance recoverables (the reinsurers’ share of reserves for insurance contracts) of USD 21 billion and USD 18.4 billion, and receivables arising from ceded reinsurance of USD 1.2 billion and USD 1.4 billion as of December 31, 2017 and 2016, respectively, gross of allowance for impairment. Reserves for potentially uncollectible reinsurance assets amounted to USD 94 million as of December 31, 2017 and 2016. The Group’s policy on impairment charges takes into account both specific charges for known situations (e.g., financial distress or litigation) and a general, prudent provision for unanticipated impairments.
Table 10 shows reinsurance assets and unsecured reinsurance assets split by rating.
Z-ECM capital required for operational risk, split by risk scenario clusters as of July 1, 2017
Other scenarios, e.g., project management, employment malpractice, record retention, licensing, outsourcing
In 2017, the Group further enhanced specific areas of the internal control framework, focusing on significant financial reporting controls as well as controls to ensure the integrity of our regulatory and internal capital calculations. Significant controls are assessed for their design and operating effectiveness. Significant control issues or issues affecting more than one business unit may be categorized as having Group-level significance. The Risk and Investment Committee of the Board and the Audit Committee of the Board monitor resolution of such issues.
The Risk and Investment Committee of the Board has reviewed the effectiveness of the Group’s risk management system, including the Group’s risk tolerance and enterprise-wide risk governance framework, and the Audit Committee of the Board has reviewed the effectiveness of the system of control over financial reporting for the calendar year 2017 and has reported to the Board accordingly. Issues identified have been communicated to the Board and have been or are being addressed by the Group.
The Group has committed to contribute capital to subsidiaries and 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. See note 22 of the consolidated financial statements.
Zurich defines the strategy as the long-term plan of action designed to allow the Group to achieve its goals and aspirations.
The Group works to reduce unintended risks of strategic business decisions through its risk assessment processes and tools, including the Total Risk Profiling™ (TRP) process. As part of the regular TRP process, in 2017 the Executive Committee (ExCo) assessed the key strategic risk scenarios, looking at 2018 and beyond. The Group TRP identified and assessed risks from both external and internal factors. External risks include changes in inflation or interest rates beyond expected forecasts; geopolitical uncertainties such as Brexit; looming European banking crisis; insurance market trends, and changing customer expectations. Internally, key risks include Zurich’s ability to engage and provide service to customers at the desired level; technical excellence in underwriting; information security and cyber threats; challenges related to Zurich’s workforce, and managing the growing requirements and complexity of the global regulatory landscape. Mitigation actions have been assigned to executive owners and their status is reviewed at least quarterly.
Zurich uses the framework of the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD) to distinguish between two types of climate-related risks: kk Transition risk – risks associated with the transition to a low-carbon economy kk Physical risks – risks associated with physical manifestations of excessive warming
Overall the Group considers its near-term (less than five years) climate change-related risks to be manageable and foreseeable, whereas long-term (more than 10 – 15 years) risks to be elevated and highly uncertain.
• Transition risks: Specific lines of business may be at risk from transition effects. Initial assessment suggests that this risk is contained. Zurich has considerable expertise in providing insurance solutions for green assets but not all types of ‘green’ assets represent, to date, profitable business opportunities.
kk Investment risks: Zurich analyzed physical and transition risks for selected parts of its investment portfolio. While Zurich is exposed to both near-term transition and long-term physical risk, initial analysis suggests that very significant impairments would be required for the Zurich portfolio to be materially impacted. The Group does not consider such impairments currently likely, and exposure is expected to be further mitigated with ongoing implementation of Zurich’s responsible investment and climate change investment strategies.
Efforts are underway to further assess climate chang-related risk exposures for underwriting and investment portfolios. Among its follow-up actions, the Group plans to further analyze its underwriting portfolio for transition risk, amend its governance requirements to reflect climate risk in catastrophe modeling, and monitor and assess opportunities in green assets.
Zurich Insurance Group Annual Report 2017 Group overview Governance Risk review Financial review155 www.zurich.com/en/knowledge/articles/2017/11/me-topic-navigating-climate-change
The Group further reduced expenses, with overall savings of USD 700 million achieved to date since the start of the program, and with further savings expected to be delivered in 2018. This represents good progress toward the goal to reduce expenses by USD 1.5 billion versus the 2015 baseline, a further proof of execution against the Group targets.
A strong capital position During the year, management continued to improve the Group’s focus and optimize how we use capital. Zurich has made considerable progress in refocusing on its core business, exiting under-performing or non-strategic units while building capabilities in select growth markets through targeted acquisitions totaling USD 2.7 billion in 2017.
2017 – 2019 financial targets On track to meet our 2017 – 2019 financial targets This strong capital position is reflected in a Z-ECM ratio estimated at 132 percent as of December 31, 2017, with an error margin of +/–5 percentage points, which is above the 100 –120 percent target range. The Group also delivered USD 3.7 billion of net cash remittances in 2017, consistent with our target of more than USD 9.5 billion for the 2017 – 2019 period.
The Life business continued to build on its unit-linked and protection strategy. The combination of portfolio growth, improved product mix and cost improvements has led to strong growth in BOP of 22 percent,1 as well as 28 percent growth in new business value.
Business operating profit 3,803 4,495 (15%) Net income attributable to shareholders 3,004 3,211 (6%)
Life business operating profit 1,258 1,130 11% Life gross written premiums, policy fees and insurance deposit 33,242 29,323 13% Life new business annual premium equivalent (APE) 2 4,868 4,686 4% Life new business margin, after tax (as % of APE) 2 23.3% 19.4% 3.9 pts Life new business value, after tax 2 999 782 28%
Net investment result on Group investments 7,249 7,034 3% Net investment return on Group investments 4 3.8% 3.8% – Total return on Group investments 4 4.1% 4.4% (0.4 pts)
5 As of December 31, 2017 and December 31, 2016, respectively. 6 Ratios as of December 31, 2017 and December 31, 2016, respectively. Ratio for December 31, 2017 reflects midpoint estimate with an error margin of +/–5 pts. 7 Shareholders’ equity used to determine ROE and BOPAT ROE is adjusted for net unrealized gains/(losses) on available-for-sale investments and cash flow hedges.
Net cash remittances by business for the year ended December 31, 2017 (in USD millions)
The Group completed the acquisition of all the shares in Cover-More Group Limited (Cover-More), a travel insurance and assistance solutions provider listed on the Australian Securities Exchange, with main operations in Australia, India and the U.S. In conjunction with this acquisition, the Group also acquired Halo Insurance Services Limited (Halo), a distributor of vehicle hire-related insurance in the UK. The final purchase price for Cover-More and Halo was USD 580 million.
Building on these positions, Zurich has begun offering travel insurance to customers of easyJet and in December acquired a majority stake in FitSense, an analytics company that uses data from mobile applications and online devices to provide customized insurance products. The Group also strengthened its proposition to drivers and the automobile industry with the acquisition in December 2017 of Bright Box HK Limited, a provider of telematics solutions linking drivers, dealers and manufacturers.
Also in December, Zurich announced plans to strengthen its leadership in distributing insurance products through banks with the acquisition of OnePath Life, the Australian life insurance business of Australia and New Zealand Banking Group (ANZ), for AUD 2.85 billion (USD 2 billion). The agreement, which is subject to regulatory approval, will make the company the leading retail life insurer in Australia.
Zurich is subject to strict regulations and is a significant tax contributor, both on taxes borne and taxes that we collect on behalf of the tax administrations in the jurisdictions in which we operate.
A non-exhaustive list of taxes paid (either borne or collected) by Zurich includes: kk Corporate income taxes kk Employment taxes kk Insurance premium taxes kk Value added taxes kk Stamp taxes and other transactional taxes kk Real estate and other asset taxes kk Excise taxes kk Withholding taxes.
See more details on our tax strategy in our Corporate Responsibility pages at www.zurich.com.
The shareholders’ effective tax rate increased to 33.2 percent for the period ended December 31, 2017 compared with 30.7 percent for the same period of 2016. This increase is explained by adverse impacts catastrophe events (mainly Hurricanes Harvey, Irma and Maria), several non-recurring charges in 2017, which did not attract tax relief and changes in the geographical profit mix. This was partially offset by the one-off US tax reform impact from the re-measurement of the deferred tax position of Zurich’s U.S. entities.
Solid investment results delivered in a challenging environment Our investment portfolio benefited in 2017 from the strong performance of higher-risk assets, in particular equities. Credit markets began to lag equities in the final six months of the year, while spreads fell to cycle lows.
Our investment approach includes disciplined underwriting of credit and real estate risk, while continuing invest in sound, less-liquid assets such as corporate loans and infrastructure debt. During 2017, our portfolio of private debt increased by USD 1 billion
We executed on our strategy to invest in high quality real estate in core locations and acquired USD 1 billion of direct real estate partly offset by disposals of USD 0.5 billion of non-core assets.
We are a responsible investor for Zurich We take a long-term view that integrates environmental, social and governance factors in our investment decisions. In 2017 we achieved a milestone in our responsible investment strategy by exceeding the target of USD 2 billion in green bond investments. See more details on our responsible investment strategy in our ‘CR highlights’ at www.zurich.com.
P&C Business operating profit (BOP) in USD millions, for the years ended December 31
in USD millions, for the years ended December 31 Total Of which Commercial 1
Business operating profit decreased by USD 892 million to USD 1.5 billion, heavily affected by catastrophe losses beyond a normal level, in particular hurricanes Harvey, Irma and Maria during the third quarter of 2017, with a total net loss of USD 700 million impacting North America, EMEA and Group Reinsurance. Adjusted for the U.S. hurricanes and the impact of measures related to the Group’s restructuring of USD 99 million, business operating profit decreased by USD 93 million compared with the prior year. Non-technical expenses increased compared with 2016, impacted by lower foreign exchange gains, and other negative non-recurring items. This was partly offset by an improvement in net investment result due to hedge fund gains, mostly in North America.
EMEA business operating profit decreased by USD 795 million, due to higher catastrophe and weather related losses, and was further affected by lower volumes and higher non-technical expenses, the latter reflecting mainly the impacts of measures related to the Group’s restructuring. In North America, business operating profit decreased by USD 407 million, reflecting improved underlying loss experience, lower other underwriting expenses and higher hedge fund gains compared with 2016, only partly offsetting the impact of the hurricane losses. In Asia Pacific, business operating profit decreased by USD 115 million, as 2016 benefited from higher favorable development of loss reserves established in prior years. This was only partly offset by improved underlying loss experience mostly in Australia and Japan. Latin America declined by USD 19 million, as foreign exchange gains decreased compared with 2016, in particular in Venezuela. The improvement in Group Reinsurance reflected mainly a recovery on hurricane losses.
P&C Net underwriting result in USD millions, for the years ended December 31
The net underwriting result decreased by USD 716 million to a loss of USD 231 million, with an overall combined ratio of 100.9 percent, 2.7 percentage points higher than in 2016. Adjusted for the impact of the U.S. hurricanes Harvey, Irma and Maria of USD 700m, the combined ratio was 98.2 percent, with the loss ratio in line with prior year. An improvement in the underlying loss experience was offset by higher other catastrophe and weather-related losses and lower favorable development of loss reserves established in prior years. The other underwriting expense ratio improved by 1.2 percentage points compared with 2016, benefiting from a lower expense base as a result of initiatives to reduce costs, while commissions increased across the segments, reflecting changes in the business mix, resulting in a slightly lower expense ratio.
Life Business operating profit (BOP) in USD millions, for the years ended December 31
Life in USD millions, for the years ended December 31 2017 2016 Change
Gross written premiums and policy fees 14,070 14,657 (4%) Net investment income on Group investments 2,925 2,993 (2%) Insurance benefits and losses, net of reinsurance (9,259) (11,130) 17% Business operating profit 1,258 1,130 11%
Business operating profit increased by USD 129 million to USD 1.3 billion, or 11 percent both in U.S. dollar terms and on a local currency basis, with increases on a local currency basis in all segments except EMEA. Adjusted for USD 121 million reflecting both the impact of the UK capital gains tax indexation relief and measures related to the Group’s restructuring, business operating profit increased by USD 250 million compared to prior year, or 22 percent in U.S. dollar terms, with increases in all segments. A significant portion of the increase occurred in North America, driven by improved claims experience, in addition 2016 was impacted by an adverse variance resulting from a review of expected persistency in certain universal life books of business. Asia Pacific benefited from both organic and inorganic growth across the region, as well as improved persistency in Hong Kong. In Latin America higher overall volumes were the main contributors on a local currency basis. These positive contributions were partly offset by a deterioration in EMEA, largely due to the effect of the change to UK capital gains tax indexation relief.
1 Each line represents the Group’s interest after deducting non-controlling interests, amounting in total to USD 289 million in 2017 and USD 255 million in 2016 in business operating profit.
Viewed by profit sources and on a local currency basis, business operating profit benefited from growth resulting in higher loadings and fees net of acquisition costs, as well as improvements in the investment margin and the technical margin. Expense savings were more than offset by an increase in policyholder taxes leading to higher operating costs.
NBV, APE and NBM by segment in USD millions, for the years ended December 31
NBV, APE and NBM by line of business in USD millions, for the years ended December 31
(as % of APE) (NBM) 3 1 New business value is calculated on embedded value principles net of non-controlling interests. 2 APE is shown gross of non-controlling interests. 3 New business margin is calculated using new business value as a percentage of APE based on figures net of non-controlling interests for both metrics.
New business margin improved by 3.9 percentage points to 23 percent, with improvements in all segments except North America. The most notable improvements occurred in Asia Pacific following the positive impact of assumptions changes in Japan. In Latin America, declining interest rates in Brazil resulted in an improved margin on individual protection business. In EMEA, improvements in Italy and Spain, resulting from a shift in sales away from individual savings, were partly offset by an overall increase in sales of lower margin corporate business.
Farmers Business operating profit (BOP) in USD millions, for the years ended December 31
Farmers Management Services in USD millions, for the years ended December 31 2017 2016 Change
The managed gross earned premium margin remained unchanged at 7.0 percent.
Gross written premiums and policy fees 995 1,587 (37%) Net underwriting result (1) (51) 97% Loss ratio 68.1% 71.3% 3.2 pts Expense ratio 32.0% 32.0% – Combined ratio 100.1% 103.3% 3.2 pts
Gross written premiums and policy fees decreased by USD 592 million to USD 995 million, or by 37 percent, mainly due to a portfolio transfer as a result of the reduced participation in the All Lines quota share reinsurance agreement with the Farmers Exchanges to 1.0 percent effective December 31, 2017 from 8.0 percent previously.
Farmers Life in USD millions, for the years ended December 31 2017 2016 Change
New business annual premium equivalent (APE) 91 94 (3%) New business value (NBV) 100 85 18%
2 As of December 31, 2017 and December 31, 2016, respectively.
Farmers Exchanges Financial information about the Farmers Exchanges, which are owned by their policyholders, is proprietary to the Farmers Exchanges, but is provided to support an understanding of the performance of Farmers Group, Inc. and Farmers Re.
The Farmers Exchanges are owned by their policyholders. Farmers Group Inc., a wholly owned subsidiary of the Group, provides certain non-claims administrative and management services to the Farmers Exchanges as attorney-in-fact and receives fees for its services.
Gross written premiums 19,908 19,714 1% Gross earned premiums 19,841 19,528 2%
Group Functions and Operations in USD millions, for years ended December 31 2017 2016 Change
Consolidated statements of changes in equity 182 1. Basis of presentation 184 2. New accounting standards and amendments to published accounting standards 186 3. Summary of significant accounting policies 188 4. Critical accounting judgments and estimates 195 5. Acquisitions and divestments 199 6. Group investments 203 7. Group derivative financial instruments and hedge accounting 206 8. Liabilities for insurance contracts and reinsurers’ share of liabilities for insurance contracts 210 9. Liabilities for investment contracts 216 10. Gross and ceded insurance revenues and expenses 218 11. Deferred policy acquisition costs and deferred origination costs 219 13. Property and equipment 221 14. Attorney-in-fact contracts, goodwill and other intangible assets 222 15. Receivables and other assets 224 16. Other liabilities 225 17. Income taxes 227 18. Senior and subordinated debt 230 19. Shareholders’ equity, dividends and earnings per share 232 20. Employee benefits 235 21. Share-based compensation and cash incentive plans 243 22. Commitments and contingencies, legal proceedings and regulatory investigations 245 23. Fair value measurement 247 24. Analysis of financial assets 255 25. Related-party transactions 257 26. Relationship with the Farmers Exchanges 258 27. Segment information 260 28. Interest in subsidiaries 275 29. Events after the balance sheet date 279
Less premiums ceded to reinsurers (7,977) (7,843) Net written premiums and policy fees 41,136 42,772
Net change in reserves for unearned premiums 10 (79) (150) Net earned premiums and policy fees 41,057 42,622 Farmers management fees and other related revenues 26 2,892 2,867
Net investment income on Group investments 5,215 5,474 Net capital gains/(losses) and impairments on Group investments 2,034 1,560
Net income after taxes 3,309 3,478 attributable to non-controlling interests 305 268 attributable to shareholders 3,004 3,211 in USD
Change (before reclassification, tax and foreign currency translation effects and after allocation to policyholders) 1,307 163 (767) 703 9 (1,615) (1,606) (903) Reclassification to income statement (before tax, foreign currency translation effects and allocation to policyholders) (899) (7) 141 (765) – – – (765) Deferred income tax (before foreign currency translation effects) (38) (23) – (62) (2) 272 270 208 Foreign currency translation effects (116) (8) – (124) – 349 349 224
Comprehensive income for the period 3,004 269 (9) 1,211 1,471 (7) 341 334 1,805 4,809 462 5,271 Details of movements during the period
Change (before reclassification, tax and foreign currency translation effects and after allocation to policyholders) 1,484 (23) 1,191 2,651 15 1,018 1,034 3,685 Reclassification to income statement (before tax, foreign currency translation effects and allocation to policyholders) (1,554) (18) 20 (1,552) – – – (1,552) Reclassification to retained earnings – – – – (22) – (22) (22) Deferred income tax (before foreign currency translation effects) 132 14 – 146 – (392) (392) (245) Foreign currency translation effects 207 18 – 225 – (286) (286) (61)
Assets Cash and cash equivalents 8,228 7,197 Total Group investments 6 194,084 182,611
Equity securities 17,787 15,908 Debt securities 148,261 140,181 Investment property 12,238 10,562 Mortgage loans 7,047 6,794 Other loans 8,730 9,146 Investments in associates and joint ventures 21 20
Investments for unit-linked contracts 120,699 125,907 Total investments 314,782 308,518 Reinsurers’ share of liabilities for insurance contracts 8 20,918 18,347 Deposits made under reinsurance contracts 1,269 1,764 Deferred policy acquisition costs 11 18,663 17,796 Deferred origination costs 11 460 426 Receivables and other assets 15 18,195 17,755 Deferred tax assets 17 1,076 1,448 Assets held for sale 1 5 29,371 530 Property and equipment 13 961 953 Attorney in fact contracts 14 1,025 1,025
Other intangible assets 14 4,762 4,795 Total assets 422,065 382,348 1 In 2017, the Group reclassified USD 29 billion of assets to held for sale based on agreements signed to sell businesses in the UK (see note 5). In addition, assets held for sale include land and buildings formerly classified as investment property and held for own use amounting to USD 41 million and USD 9 million, respectively. In 2016, the Group reclassified USD 456 million of assets to held for sale based on agreements signed to sell businesses in Taiwan and Middle East (see note 5). In addition, assets held for sale include land and buildings formerly classified as investment property and held for own use amounting to USD 67 million and USD 7 million, respectively.
Deferred tax liabilities 17 4,357 4,562 Liabilities held for sale 1 5 29,271 290
Consolidated statements of cash flows in USD millions, for the years ended December 31 2017 2016
Net capital (gains)/losses on total investments and impairments (12,201) (13,569) Net change in derivatives (229) (240) Net change in money market investments (1,528) (195) Sales and maturities
Other interest income received 4,783 4,876 Dividend income received 1,710 1,837 Other interest expense paid (936) (861) Income taxes paid (1,589) (1,461)
For the periods ending December 31, 2017 and 2016, cash and cash equivalents held to meet local regulatory requirements were USD 652 million and USD 625 million, respectively.
Issuance of share capital – 198 – – – – – 198 – 198
Change in ownership interests with no loss of control – – – – – – – – – – Reclassification from revaluation reserves – – – – – – 17 17 – 17 Total comprehensive income for the period, net of tax – – 269 (9) 1,211 (7) 3,345 4,808 462 5,270
Other adjustments Change in the Group’s BOP policy As of January 1, 2017, the Group amended its policy relating to Business Operating Profit (BOP). The amendments mainly relate to certain litigation, earn-out and acquisition expenses which will no longer be eligible for exclusion from BOP. Prior year comparative figures have been revised accordingly, resulting in a reduction in BOP of USD 36 million for the period ended December 31, 2016.
Amended standards IAS 7 Disclosure Initiative January 1, 2017 IAS 12 Recognition of Deferred Tax Assets for Unrealized Losses January 1, 2017
New standards/interpretations IFRS 15 Revenue from Contracts with Customers January 1, 2018 IFRS 16 Leases January 1, 2019 IFRS 9 Financial Instruments January 1, 2021 IFRS 17 Insurance Contracts January 1, 2021 IFRIC 22 Foreign Currency Transactions and Advance Consideration January 1, 2018 IFRIC 23 Uncertainty over Income Tax Treatments January 1, 2019
Amended standards IFRS 2 Classification and Measurement of Share-based Payment Transactions January 1, 2018 IFRS 4 Applying IFRS 9 with IFRS 4 January 1, 2018 IAS 40 Transfers of Investment Property January 1, 2018 IAS 28 Long-term Interests in Associates and Joint Ventures January 1, 2019 IFRS 9 Prepayment Features with Negative Compensation January 1, 2021
In order to further evaluate the effects of adopting IFRS 17 in the consolidated financial statements, a joint IFRS 17 and IFRS 9 Group Implementation Program (Program) has been set up sponsored by Group Chief Financial Officer. A steering committee comprised of senior management from various functions (finance, risk, operations and investment management) oversees the work performed by individual work streams. The methodology work stream covers Group accounting policies, actuarial methodologies and disclosure requirements to be consistently implemented throughout the Group. The implementation work stream takes responsibility for analyzing systems implications and data flows. In 2017 significant progress was made in defining Group methodologies and data requirements. In 2018, the focus of the Program will be on local and central implementation efforts and preparation for a dry run simulation scheduled for 2019.
The Group is currently assessing the impact of the application of both IFRS 17 and IFRS 9. At the date of publication of these consolidated financial statements, it was not practicable to quantify what the potential impact would be on the Group consolidated financial statements once these standards will be adopted.
IFRS 16 ‘Leases’ IFRS 16 ‘Leases’ will have an impact on the accounting for contracts where the Group acts as a lessee (and intermediate lessor), especially on real estate rental contracts. The Group intends to apply the modified retrospective approach for transition to IFRS 16 and make use of the optional exemption for short-term leases and leases of low-value assets. Further, the impact on the Group balance sheet as of January 1, 2019 will depend on the use of transition options available on a lease-by-lease basis. Based on the volume of in-force non-cancellable operating leases as of December 31, 2017 (see Table 22.2) the recognition of a right-of-use asset and a corresponding lease liability under IFRS 16 would result in an increase of both assets and liabilities of the Group of less than USD 2 billion. No material impact is expected in the consolidated statements of comprehensive income.
Foreign currency transactions and balances Foreign currency transactions are translated into the functional currency using the spot exchange rate at the date of the transaction or, for practical reasons, a weighted average rate, if exchange rates do not fluctuate significantly. Foreign currency monetary items and foreign currency non-monetary items that are carried at fair value are translated at end-of-period exchange rates. The resulting foreign currency translation differences are recorded in income, except for the following: kk Foreign currency translation differences that are recognized in OCI in conjunction with the recognition of unrealized gains or losses on available-for-sale investments kk Foreign currency translation differences arising on monetary items that form part of net investments in foreign operations, as well as foreign currency translation differences arising from monetary items that are designated as hedging instruments in a qualifying net investment hedge relationship, are included directly in OCI as CTA.
The Group also issues products containing embedded options that entitle the policyholder to switch all or part of the current and future invested funds into another product issued by the Group. Where this results in the reclassification of an investment product to a product that meets the definition of an insurance contract, the previously held reserve and the related deferred origination costs are also reclassified and are accounted for in accordance with the accounting policy that is to be applied to the new product on a prospective basis. As a consequence, no gain or loss is recognized when a contract is reclassified from investment to insurance.
Amounts collected as premiums from investment-type insurance contracts such as universal life, unit-linked and unitized with-profits contracts are reported as deposits. Revenue from these contracts consists of policy fees for the cost of insurance, administration and surrenders during the period. Front-end fees charged to the customer at inception, particularly for single premium contracts, are deferred and recognized over the estimated life of the contracts on a straight-line basis. Regular fees charged to the customer periodically (monthly, quarterly or annually) either directly or by making a deduction from invested funds are billed in advance and recognized on a straight-line basis over the period in which the service is rendered. Fees charged at the end of the period are accrued over the service period as a receivable and are offset against the financial liability when charged to the customer.
Policyholder contract deposits represent the estimated policy benefits for investment type insurance contracts invested in non unit-linked funds. This liability comprises the accumulation of premiums received, less charges, plus declared policyholder dividends.
Property & Casualty For property & casualty contracts, unearned premiums are tested to determine whether they are sufficient to cover related expected losses, loss adjustment expenses, policyholder dividends, unamortized DAC and maintenance expenses, using current assumptions and considering anticipated investment returns. If a premium deficiency is identified, the DAC asset for the respective grouping of contracts is written down by the amount of the deficiency. If, after writing down the DAC asset to nil, a premium deficiency still exists for the respective grouping of contracts, then a premium deficiency reserve is established for the amount of the remaining deficiency.
g) Attorney-in-fact contracts (AIF) The AIF reflects the ability of the Group to generate future revenues based on the Group’s relationship with the Farmers Exchanges, which are managed but not owned by Farmers Group, Inc. (FGI), a wholly owned subsidiary of the Group. In determining that these relationships have an indefinite useful life, the Group took into consideration the organizational structure of inter-insurance exchanges, under which subscribers exchange contracts with each other and appoint an attorney-in-fact to provide non-claims management services, and the historical AIF between FGI and the Farmers Exchanges. The AIF is tested for impairment at least annually.
Defined benefit plan obligations and contributions are determined annually by qualified actuaries using the projected unit credit method. The Group’s expense related to these plans is accrued over the employees’ service periods based on the actuarially determined cost for the period. Net interest and service costs are determined using the spot rate approach. Actuarial gains and losses are recognized, in full in the period in which they occur, in OCI. Past service costs, which result from plan amendments and curtailments, are recognized in income on the earlier of the date on which the plan amendment or curtailment occurs (which is the date from which the plan change is effective) and the date on which a constructive obligation arises. Settlement gains or losses are recognized in income when the settlement occurs.
The application of certain accounting policies necessitates critical accounting estimates that involve discretionary judgments and the use of assumptions which are susceptible to change due to inherent uncertainties. Because of the uncertainties involved, actual results could differ significantly from the assumptions and estimates made by management. Such critical accounting estimates are of significance to insurance reserves and deferred acquisition costs, the determination of fair value for financial assets and liabilities, impairment charges, deferred taxes and employee benefits.
a) Reserves for insurance contracts and deferred acquisition costs Property & Casualty The Group is required to establish reserves for payment of losses and loss adjustment expenses that arise from the Group’s property & casualty products and the run-off of its former third party reinsurance operations. These reserves represent the expected ultimate cost to settle claims occurring prior to, but still outstanding as of, the balance sheet date. The Group establishes its reserves by product line, type and extent of coverage and year of occurrence. There are two categories of loss reserve: reserves for reported losses and reserves for incurred but not reported (IBNR) losses. Additionally, reserves are held for loss adjustment expenses, which contain the estimated legal and other expenses expected to be incurred to finalize the settlement of the losses.
The Group’s reserves for reported losses and loss adjustment expenses are based on estimates of future payments to settle reported claims. The Group bases such estimates on the facts available at the time the reserves are established. These reserves are generally established on an undiscounted basis to recognize the estimated costs of bringing pending claims to final settlement. The reserve calculation takes into account inflation, as well as other factors that can influence the amount of reserves required, some of which are subjective and some of which are dependent on future events. In determining the level of reserves, the Group considers historical trends and patterns of loss payments, pending levels of unpaid claims and types of coverage. In addition, court decisions, economic conditions and public attitudes may affect the ultimate cost of settlement and, as a result, the Group’s estimation of reserves. Between the reporting and final settlement of a claim circumstances may change, which may result in changes to established reserves. Items such as changes in law and interpretations of relevant case law, results of litigation, changes in medical costs, as well as costs of vehicle and home repair materials and labor rates can substantially impact ultimate settlement costs. Accordingly, the Group reviews and re-evaluates claims and reserves on a regular basis. Amounts ultimately paid for losses and loss adjustment expenses can vary significantly from the level of reserves originally set.
Life insurance The reserves for future life policyholder benefits and policyholder contract deposits and other funds contain a number of assumptions regarding mortality or longevity, lapses, surrenders, expenses, discount rates and investment returns. These assumptions can vary by country, year of policy issuance and product type and are determined with reference to past experience adjusted for new trends, current market conditions and future expectations. As such the liabilities for future life policyholder benefits and policyholder contract deposits may not represent the ultimate amounts paid out to policyholders. For example: kk The estimated number of deaths determines the value of the benefit payments. The main source of uncertainty arises because of the potential for pandemics and wide-ranging lifestyle changes, such as changes in eating, smoking and exercise habits, which could result in earlier deaths for age groups in which the Group has significant exposure to mortality risk.
b) Fair value measurement In determining the fair values of financial debt instruments and equity instruments traded on exchanges and in over-the-counter (OTC) markets, the Group makes extensive use of independent, reliable and reputable third party pricing providers and only in rare cases places reliance on prices that are derived from internal models.
The Group determines that there is objective evidence of impairment of an available-for-sale equity security, if at the reporting date: kk its fair value is below the weighted-average cost by an amount significantly exceeding the volatility threshold determined quarterly for the respective equity market (such as North America, Asia Pacific, UK, Switzerland and other European countries)
The recoverable amounts of AIF contracts and goodwill are determined on the basis of value-in-use calculations. These calculations use cash flow projections based on business plans which are approved by management and typically cover a three-year period. The basis for determining the values assigned to the key assumptions are current market trends and earnings projections.
Table 4.1 sets out for the major CGUs the applied discount rates and the perpetual nominal growth rates beyond the projection period that depend on expectations about country-specific growth rates and inflation as of the date of valuation, as well as the value of goodwill and AIF as of December 31, 2017. No impairment was identified.
Discount and perpetual growth rates for goodwill and AIF for major CGUs Business in USD
Sensitivity tests have been performed on goodwill and AIF, and typically comprise an analysis for either a decrease in cash flows of up to 30 percent, a decrease in the perpetual growth rate of up to 1.0 percentage point or an increase in the discount rate of up to 3.5 percentage points, so as to capture potential future variations in market conditions. The recoverability of the Latin America P&C CGU goodwill is very sensitive to key assumptions such as macroeconomic conditions, industry and market growth considerations, and cost factors in particular in Brazil and Mexico.
See notes 3, 6, 13, 14 and 15 for further information on impairment of assets.
e) Employee benefits The Group provides defined benefit plans and other post-employment plans. In assessing the Group’s liability for these plans, critical judgments include estimates of mortality rates, rates of employment turnover, disability, early retirement, discount rates, future salary and pension increases and increases in long-term healthcare costs. Discount rates for significant plans are based on a yield curve approach. The Group sets the discount rate by creating a hypothetical portfolio of high-quality corporate bonds for which the timing and amount of cash outflows approximate the estimated payouts of the defined benefit plan. These assumptions may differ from actual results due to changing economic conditions, higher or lower withdrawal rates, or longer or shorter life spans of participants. These differences may result in variability of pension income or expense recorded in future years.
ANZ’s life and consumer credit insurance businesses On December 11, 2017, the Group announced it has entered into an agreement to acquire 100 percent of the Australian life insurance and consumer credit businesses (OnePath Life) of Australia and New Zealand Banking Group Limited (ANZ) for AUD 2.85 billion (USD 2 billion) subject to a purchase price adjustment. Both parties expect the transaction, which is subject to regulatory approvals, to be completed by the end of 2018.
Cover-More On April 13, 2017, the Group completed the acquisition of all the shares in Cover-More Group Limited (Cover-More), a travel insurance and assistance solutions provider listed on the Australian Securities Exchange, with main operations in Australia, India and the U.S. In conjunction with this acquisition, the Group also acquired Halo Insurance Services Limited (Halo), a distributor of vehicle hire related insurance in the UK.
The final purchase price for Cover-More and Halo amounted to USD 580 million gross of a pre-closing dividend of USD 14 million. Based on the initial purchase accounting, the fair value of net tangible assets acquired amounted to negative USD 99 million and identifiable intangible assets estimated at USD 163 million, gross of related deferred tax liabilities of USD 49 million. Residual goodwill amounted to USD 566 million which represents the future growth potential of the travel insurance assistance business, the value of the workforce with their distribution capabilities and related know-how and synergies with the Group.
Cash and cash equivalents 38 Receivables and other assets 34 Property and equipment 4 Goodwill 566 Other intangible assets 163 Assets acquired 804
Cover-More’s net income after taxes for the nine months since the acquisition date, as included in the Group consolidated income statements for the year ended December 31, 2017, amounts to USD 17 million including transaction-related costs. Pro-forma net income after taxes for the full twelve months ended December 31, 2017, amounts to approximately USD 24 million, adjusted for transaction-related costs incurred by Cover-More.
Divestments Held for sale During the twelve months ended December 31, 2017, the Group entered into various agreements to sell Property & Casualty (P&C) and Life businesses in the UK. On January 2, 2018, the Group announced the sale of the Endsleigh group of companies to A-Plan Holdings (except for Endsleigh Financial Services Limited and Endsleigh Pension Trustee Limited), subject to regulatory approval. On October 12, 2017, the Group announced a strategic deal under which Lloyds Banking Group (LBG) will acquire the UK workplace pensions and savings business. The assets and liabilities of both transactions have been reclassified to held for sale. As of December 31, 2017, the total assets and total liabilities reclassified were USD 29 billion and USD 29 billion, respectively. Re-measurements of assets held for sale resulted in a pre-tax loss of USD 97 million which is recorded within net gains/(losses) on divestment of businesses. These transactions are expected to close during 2018.
Acquisitions Macquarie Life Insurance Business On October 1, 2016, the Group completed the acquisition of a part of the Australian Macquarie Life insurance business from the Macquarie Group, a financial group based in Australia. The transaction involved the transfer of Macquarie’s retail life insurance protection business together with its assets, liabilities and employees for a total consideration of USD 307 million subject to a price adjustment mechanism. Based on the purchase accounting the net tangible assets acquired amounted to USD 109 million and identifiable intangible assets, net of related deferred tax, amounted to USD 49 million consisting of the present value of profits of acquired insurance contracts. Goodwill amounted to USD 148 million and mainly reflects future growth opportunities.
MAA Takaful Berhad On June 30, 2016, the Group completed the acquisition of 100 percent of MAA Takaful Berhad, a family and general takaful operator incorporated in Malaysia, from MAA Group Berhad (MAA) and Solidarity Group Holding BSC (Closed), for a total purchase price of USD 118 million of which an amount of approximately USD 30 million will be retained by the Group for three years. Based on the purchase accounting the net tangible assets acquired amounted to USD 26 million and identifiable intangible assets, net of related deferred tax, amounted to USD 30 million consisting of the present value of profits of acquired takaful contracts. Goodwill amounted to USD 63 million and mainly reflects the takaful business know-how and future growth opportunities.
Table 5.2 shows the main balance sheet line items as of the acquisition date, representing the final fair value of RCIS net tangible assets acquired, intangible assets and goodwill, excluding the impact of the 25 percent quota share reinsurance contract.
RCIS final balance sheet as of the acquisition date in USD millions, as of March 31, 2016 Total
Table 5.3 shows the result for the nine months since the acquisition date as included in the Group consolidated income statement for the year ended December 31, 2016. Furthermore, the table shows information related to the full twelve month period to December 31, 2016. This information is based on the local statutory accounts which includes a reinsurance contract with the Group which was eliminated in the consolidated figures.
Divestments On December 7, 2016, the Group closed the sale of its insurance business in South Africa to Fairfax Financial Holdings Limited. The contractually agreed sales price amounted to USD 128 million. A pre-tax loss of USD 200 million has been recorded within net gains/(losses) on divestment of businesses.
On November 3, 2016, the Group closed the sale of its insurance business in Morocco to Allianz Group. The contractually agreed sales price amounted to USD 289 million. A pre-tax gain of USD 101 million has been recorded within net gains/(losses) on divestment of businesses.
Group investments are those for which the Group bears part or all of the investment risk. They also include investments related to investment contracts with discretionary participation features. Net investment result on Group investments includes investment related cash, which is included in cash and cash equivalents on the consolidated balance sheets.
Investments in associates and joint ventures 3 3 – 3 3 6 – –
1 Rental operating expenses for investment property amounted to USD 91 million and USD 88 million for the years ended December 31, 2017 and 2016, respectively.
Details of Group investments by category as of December 31 2017 2016
Debt securities: Fair value through profit or loss 5,699 2.9 5,672 3.1
Debt securities maturity schedule in USD millions, as of December 31 Fair value through profit or loss Available-for-sale Held-to-maturity Total Total
As of January 1 10,562 9,865 Additions and improvements 1,124 938 Acquisitions/(divestments) (2) (28)
Market value revaluation 243 281 Transfer from/to assets held for own use 51 (5) Transfer to assets held for sale (70) (84) Foreign currency translation effects 749 (222) As of December 31 12,238 10,562
Gross unrealized gains/(losses) on Group investments 11,932 11,447 Less amount of unrealized gains/(losses) on investments attributable to: Life policyholder dividends and other policyholder liabilities (6,779) (6,500) Life deferred acquisition costs and present value of future profits (702) (696) Deferred income taxes (928) (1,006) Non-controlling interests (36) (17)
Securities lending agreements Securities lent under securities lending agreements 1 970 3,465 Collateral received for securities lending 1,082 3,744 of which: Cash collateral 153 126 of which: Non-cash collateral 2 929 3,619 Liabilities for cash collateral received for securities lending 153 126 Repurchase agreements Securities sold under repurchase agreements 3 1,397 1,284 Obligations to repurchase securities 1,394 1,280 Reverse repurchase agreements Securities purchased under reverse repurchase agreements 4 156 973 Receivables under reverse repurchase agreements 153 970 1 The Group’s counterparties had the right to sell or repledge, in the absence of default, assets pledged as collateral with a fair value of USD 970 million and USD 3.5 billion as of December 31, 2017 and 2016, respectively. The majority of these assets were debt securities.
2 The Group had the right to sell or repledge, in the absence of default by its counterparties, securities received as collateral with a fair value of USD 818 million and USD 3.3 billion as of December 31, 2017 and 2016, respectively.
3 The Group’s counterparties had the right to sell or repledge, in the absence of default, assets pledged as collateral with a fair value of USD 797 million and USD 724 million as of December 31, 2017 and 2016, respectively. The majority of these assets were debt securities.
The Group uses derivative financial instruments mainly for economic hedging purposes to mitigate risks. Such risks result from changes in interest rates, equity prices and exchange rates. Derivative financial instruments with a positive fair value are reported in receivables and other assets (see note 15) and those with a negative fair value are reported in other liabilities (see note 16).
Total Group derivative financial instruments 18,924 4,728 3,007 26,659 297 (119) 27,636 381 (202)
Other contracts Other contracts predominantly include stable value products (SVPs) issued to insurance company separate accounts in connection with certain life insurance policies (Bank Owned Life Insurance (BOLI) and Company Owned Life Insurance (COLI)) with an account value of USD 10.8 billion and USD 9.0 billion as of December 31, 2017 and 2016, respectively and with a market value of the underlying investments of USD 10.7 billion and USD 8.9 billion as of December 31, 2017 and 2016, respectively (not included in the table above). The Group includes the likelihood of surrender as one of the input parameters to determine the fair value of the SVPs which was nil as of December 31, 2017 and 2016.
Maturity profile of notional amounts and fair values of Group derivative financial instruments in USD millions, as of December 31 2017 2016
Net investment hedges: 1 Includes USD 667 million and USD 325 million notional related to derivatives centrally cleared as of December 31, 2017 and 2016, respectively.
Changes in the fair value of the derivative financial instruments designated as fair value hedges and changes in the fair value of the hedged item in relation to the risk being hedged are both recognized in income.
Gains/(losses) arising from fair value hedges in USD millions, for the years ended December 31 2017 2016
The Group also uses interest rate swaps and cross currency swaps for cash flow hedging to protect against the exposure to variability of cash flows attributable to interest rate and currency risk. The hedging instrument is measured at fair value, with the effective portion of changes in its fair value recognized in OCI. The effective portion, related to spot rate changes in the fair value of the hedging instrument, is reclassified to profit or loss within administrative and other operating expense as an offset to foreign currency revaluation on the underlying hedged debt. The ineffective portion of the change in fair value is recognized directly in income within administrative and other operating expense.
The Group recognized gains of USD 33 million and USD 3 million in the consolidated income statement within net investment income on Group investments for the years ended December 31, 2017 and 2016, respectively. The Group also recognized net gains/(losses) of USD 15 million and USD 4 million within administrative and other operating expense for the years ended December 31, 2017 and 2016, respectively, as an offset to the foreign currency revaluation on the underlying hedged items.
No ineffectiveness of net investment hedges was recognized in net capital gains/(losses) and impairments for the years ended December 31, 2017 and 2016.
Policyholder contract deposits and other funds 2 24,944 22,785 (3,533) (1,958) 21,411 20,827 Reserves for unit-linked contracts 75,413 65,530 – – 75,413 65,530
Total liabilities for insurance contracts 4 261,335 239,369 (20,971) (18,411) 240,364 220,958 1 The Group’s life operations in the UK finalized the transfer of USD 1.6 billion of insurance assets and liabilities, associated with an annuities portfolio as of June 30, 2017. 2 Farmers New World Life Insurance Company entered into a retrospective reinsurance agreement to transfer the risk of certain annuity portfolios with effect from April 1, 2017, which resulted in an initial increase of USD 1.6 billion in ceded policyholder contract deposits and other funds and USD 362 million of ceded future life policyholder benefits. The net gain of the transaction will be amortized over the remaining life of the underlying annuity contracts which is estimated to be between 30 to 50 years.
4 Total liabilities for insurance contracts ceded are gross of allowances for uncollectible amounts of USD 53 million and USD 64 million as of December 31, 2017 and 2016, respectively.
Reserves for losses and loss adjustment expenses 65,368 61,155 (11,070) (9,777) 54,298 51,378
The increase in current year incurred losses versus the previous year mainly relates to catastrophe events during 2017, most notably the hurricanes in North America during the third quarter of 2017.
Net favorable reserve development emerged from reserves established in prior years amounting to USD 326 million mainly related to the following: kk In North America, favorable prior year development of USD 344 million driven by workers’ injury; kk In EMEA, excluding the Ogden impact mentioned above, favorable prior year development for the retail segment driven by motor, largely offset by the unfavourable prior year development for commercial liability.
For the year ended December 31, 2016, the decrease of USD 2.4 billion in net reserves for losses and loss adjustment expenses is driven by a decrease of USD 1.4 billion due to foreign currency translation effects as well as a net decrease of USD 430 million related to acquisitions/(divestments) and transfers (see table 8.3). In addition, net favorable reserve development emerged from reserves established in prior years amounting to USD 479 million largely driven by: kk In North America, favorable prior year development of USD 293 million driven by property and motor; kk In APAC, favorable prior year development of USD 186 million driven by property.
Gross reserves for losses and loss adjustment expenses (undiscounted) 65,218 68,126 68,274 67,762 69,986 68,312 64,472 62,971 62,254 66,715
Net undiscounted reserves re-estimated 1: Seven years later 50,014 53,315 54,073 Eight years later 50,103 53,341 Nine years later 50,164
Table 8.4 presents changes in the historical reserves for losses and loss adjustment expenses, net of reinsurance, that the Group established in 2008 and subsequent years. Reserves are presented by financial year, not by accident year. The reserves (and the development thereon) are for all accident years in that financial year. The top line of the table shows the estimated gross reserves for unpaid losses and loss adjustment expenses as of each balance sheet date, which represents the estimated amount of future payments for losses incurred in that year and in prior years. The cumulative paid portion of the table presents the cumulative amounts paid through each subsequent year in respect of the reserves established at each year end. Similarly, the cumulative incurred losses section details the sum of the cumulative paid amounts shown in the triangle above and the changes in loss reserves since the end of each financial year. The net undiscounted reserves re-estimated portion of the table shows the re-estimation of the initially recorded reserve as of each succeeding year end. Reserve development is shown in each column. Changes to estimates are made as more information becomes known about the actual losses for which the initial reserves were established. The cumulative deficiency or redundancy is equal to the initial net reserves less the liability re-estimated as of December 31, 2017. It is the difference between the initial net reserve estimate and the last entry of the diagonal in the net undiscounted reserves re-estimated portion of the table. Conditions and trends that have affected the development of reserves for losses and loss adjustment expenses in the past may or may not necessarily occur in the future, and accordingly, conclusions about future results cannot be derived from the information presented in table 8.4.
Losses and loss adjustment expenses incurred 62 34 (13) (17) Losses and loss adjustment expenses paid (118) (102) (145) (125) Foreign currency translation effects 178 153 (345) (299)
For the year ended December 31, 2017, reserves for asbestos claims increased by USD 121 million gross and USD 85 million net. The increase in the gross reserves primarily arose from foreign currency translation effects of USD 178 million and incurred losses of USD 62 million mainly in the UK partly offset by payments of USD 118 million mainly in the UK and North America.
Increase/(decrease) recorded in other comprehensive income (65) (12) – – (65) (12)
The amount of policyholder dividends to be paid is determined annually by each life insurance subsidiary. Policyholder dividends include life policyholder share of net income and unrealized appreciation of investments that are required to be allocated by the insurance contract or by local insurance regulations. Experience adjustments related to future policyholder benefits and policyholder contract deposits vary according to the type of contract and the country. Investment, mortality and morbidity results may be passed through by experience credits or as an adjustment to the premium mechanism, subject to local regulatory provisions.
The net impact of changes in assumptions on future life policyholder benefits by type of assumption is shown in table 8.7.
Interest rates 2 152 Investment return (154) 8 Changes in modeling – 12
Universal life and other contracts 12,987 12,126 Policyholder dividends 11,957 10,658
Fee income and other expenses (401) (460) (13) (6) (414) (466) Interest and bonuses credited to policyholders 1,295 1,002 (114) (75) 1,181 927 Acquisitions/(divestments) and transfers 2 – 6 – – – 6 Increase/(decrease) recorded in other comprehensive income (456) 894 – – (456) 894 1 Farmers New World Life Insurance Company entered into a retrospective reinsurance agreement to transfer the risk of certain annuity portfolios with effect from April 1, 2017, which resulted in an initial increase of USD 1.6 billion in ceded policyholder contract deposits and other funds.
Tables 8.10a and 8.10b provide an analysis of the expected maturity profile of reserves for insurance contracts, net of reinsurance, based on expected cash flows without considering the surrender values as of December 31, 2017 and 2016. Reserves for unit-linked insurance contracts amounting to USD 75 billion and USD 66 billion as of December 31, 2017 and 2016, respectively, are not included, as policyholders can generally surrender their contracts at any time, at which point the underlying unit-linked assets would be liquidated. Risks from the liquidation of unit-linked assets are largely borne by the policyholders of unit-linked contracts.
Expected maturity profile for reserves for insurance contracts, net of reinsurance – current period in USD millions, as of December 31, 2017 Reserves for losses and loss adjustment expenses
Expected maturity profile for reserves for insurance contracts, net of reinsurance – prior period in USD millions, as of December 31, 2016 Reserves for losses and loss adjustment expenses
Unit-linked investment contracts 1 45,484 60,233 Investment contracts (amortized cost) 510 506 Investment contracts with DPF 9,633 8,374 1 In 2017, the Group reclassified USD 29 billion of unit-linked investment contracts to liabilities held for sale based on agreements to sell businesses in the UK (see note 5).
Expected maturity profile for liabilities for investment contracts – current period in USD millions, as of December 31, 2017
Losses and loss adjustment expenses 23,842 22,352 (4,748) (3,868) 19,094 18,484 Life insurance death and other benefits 11,053 12,771 (1,504) (814) 9,548 11,957 Total insurance benefits and losses 34,894 35,123 (6,252) (4,682) 28,643 30,441
Policyholder dividends and participation in profits in USD millions, for the years ended December 31 2017 2016
Amortization of deferred acquisition costs 6,777 6,145 (583) (620) 6,193 5,524 Amortization of deferred origination costs 74 75 – – 74 75 Commissions and other underwriting and acquisition expenses 1 3,027 3,325 (255) (387) 2,772 2,938 Total underwriting and policy acquisition costs 9,877 9,545 (838) (1,007) 9,039 8,538 1 Net of additions related to deferred acquisition and origination costs.
Change in reserves for unearned premiums 295 319 (217) (168) 79 150
1 Net of eliminations from inter-segment transactions. 2 In July 2017, Bansabadell Vida signed a reinsurance agreement on its individual life risk portfolio which resulted in an initial increase of USD 755 million of reinsurance deferred acquisition costs.
Expenses in USD millions, for the years ended December 31 2017 2016
Buildings held for own use and equipment are carried at cost less accumulated depreciation and any accumulated impairment loss. These assets are depreciated usually on a straight-line basis to income over the following estimated useful lives: kk buildings 25 to 50 years; kk furniture and fixtures 5 to 10 years; kk computer equipment 3 to 6 years; kk other equipment 6 to 10 years (or determined by the term of lease).
Group Functions and Operations – – – – 70 – 70
Amortization charged to shareholders’ equity – – (21) – – – (21)
As of December 31, 2016, intangible assets related to non-controlling interests were USD 78 million for the present value of future profits (PVFP) of acquired insurance contracts, USD 1.2 billion for distribution agreements and USD 14 million for software.
Following a review, software was identified, which was not utilized as originally expected, resulting in USD 41 million of impairments, primarily in Property & Casualty.
Receivables are carried at notional amounts, and are generally settled within one year. The notional and fair value amounts are not significantly different.
Other liabilities in USD millions, as of December 31 2017 2016
Other financial liabilities Group derivative liabilities 214 345 Unit-linked derivative liabilities 15 9 Amounts due to policyholders 726 694 Amounts due to insurance companies, agents and intermediaries 1,040 1,141 Amounts due to reinsurers 1,477 1,827 Liabilities for cash collateral received for securities lending 153 126 Amounts due to investment brokers 1,096 1,155 Deposits from banking activities 1 22 Collateralized bank financing for structured lease vehicles 518 541 Liabilities for defined benefit plans 1 3,590 4,317 Other liabilities for employee benefit plans 141 130 Accrued liabilities 2,078 1,716 Other financial liabilities 5,563 4,988 Other non-financial liabilities Current income tax payables 953 567 Restructuring provisions 269 334 Other non-financial liabilities 629 698 Total other liabilities 18,463 18,609 1 See note 20
Table 16.2 shows the maturity schedule of other financial liabilities excluding liabilities for defined benefit plans as of December 31, 2017 and 2016. The allocation to the time bands is based on the expected maturity date for the carrying value and the earliest contractual maturity for the undiscounted cash flows.
As of January 1 334 386 Provisions made during the period 192 257 Increase of provisions set up in prior years 56 90 Provisions used during the period (296) (355) Provisions reversed during the period (42) (33) Foreign currency translation effects 24 (10) As of December 31 269 334