Further information For more information about Zurich Insurance Group, visit us online at: www.zurich.com
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Our cover: We aim to meet growing demand from customers for ways to encourage health and ‘wellness.’ That includes an app we have introduced in Australia, LiveWell, that is motivating life customers to adopt healthier lifestyles.
Throughout this year’s report, we have used this icon to highlight our sustainability-centric approach in action.
Over 1 million Number of customers interviewed through Zurich’s NPS program 9 1.9 tons CO2e emissions per employee (tons per FTE) 8
Z-ECM 129% Zurich Economic Capital Model (Z-ECM) ratio estimated as of December 31, 2019 6
AA-/positive Standard & Poor’s financial strength rating of Zurich Insurance Company Ltd as of December 31, 2019 1 Business operating profit (BOP) indicates the underlying performance of the Group’s business units by eliminating the impact of financial market volatility and other nonoperational variables.
7 Impact investments in 2019 consisted of: green bonds (USD 3.1 billion), social and sustainability bonds (USD 539 million), and investments committed to private equity funds (USD 163 million, thereof 36 percent drawn down) and impact infrastructure private debt (USD 747 million).
Creating value for all stakeholders Zurich has a long history of going above and beyond for the people who put their trust in us. It has been the foundation of our success over the past 150 years.
Today many people – particularly the younger generations – are facing an uncertain future. As an insurance company whose core business is protection, we have a special responsibility in creating an environment where all can prosper.
With the pace of change in the industry accelerating, our success in the last three years gives us confidence of thriving in this fast-moving environment. We have therefore set ambitious new financial targets for 2020 – 2022, and the Board is working closely with management to turn firm commitments into tangible impact.
Together, and with our people, we can make the 2020s a standout chapter in Zurich’s proud history. Thank you for your continuing support in this journey.
Property & Casualty Property and casualty insurance and services, risk insights.
USD 33.5 bn Gross written premiums, policy fees and insurance deposits
Our performance over the past few years puts us in an excellent position to pursue our customer-focused strategy with energy and deliver on our ambitious new targets for the next three years.” Mario Greco Group Chief Executive Officer our journey continues
Our goal as an insurer is to protect people. Traditionally, this has meant paying claims promptly. Now, technology is creating the possibility to protect you before an incident occurs: warning you, for example, when a storm is heading your way or a weakness appears in your supply chain.
To provide the best service and solutions for customers, we need to have the best talent. We also introduced an innovative training program for leaders and have won awards for diversity. We are proud that we have increased our measure of employee loyalty, and promote a culture based on merit.
Surpassing customer expectations At its core, the journey of transformation that we are on is about putting customers at the heart of everything we do. It is about listening to people’s needs. We conduct regular surveys of customer satisfaction and in 2019 received over one million responses from customers. In 2019, we also set up a Customer Office to further improve our customers’ experience.
Over the next three years, we plan to accelerate these efforts and surpass expectations of what insurance can be. Customers increasingly live within connected ecosystems, and we aim to grow our presence in these environments by providing more smart services for travelers, business and home-protection, and health and well-being programs.
Reinforcing leadership in Commercial Insurance In commercial, we will build on our position as the world’s third-largest insurer to corporate customers. We insure over 400 of the Global Fortune 500 companies, as well as numerous small and mid-sized enterprises. To provide the best service to all our business customers, we have simplified and invested into building a stronger underwriting culture and given our underwriters better tools and insights to more effectively manage our customers’ exposures, while further optimizing our portfolio.
Customers have become more sophisticated – they are looking for solutions to manage and prevent risks, as well as transfer them to their insurer. Our unmatched experience and data on risk, losses and loss prevention position us well. We’re scaling up and refreshing select products, and expanding product and service offerings that answer changing customer needs. As global warming changes weather patterns, for example, we plan to launch a new Climate Risk Advisory Service to help customers understand the risks they face.
We listen to our employees because the best way to deliver memorable customer service is to ensure that employees are happy. Thanks to their efforts, we have, for example, vastly reduced the number of meetings and significantly shortened the time needed to respond to commercial customers’ queries. Employees have also encouraged us to become a more sustainable business while encouraging entrepreneurs with a social purpose to work with Zurich.
Second, we understand that the workplace is changing. From digitalization to intelligent automation, our employees are having to adapt to fresh challenges, new ways of working and a new set of tools. In response, we set out our Work Sustainability principles to help our employees adapt to these changes by developing the skills they need to build a path for their future.
And third, we recognize that trust is at the core of our business. Our customers trust us to protect them and settle their claims fairly and quickly. That trust also extends to how we manage their personal data. That is why we issued a data commitment, which goes beyond legal requirements, and promises to keep our customers’ personal data secure and only use it in an ethical and transparent manner.
Our solid financial position, the loyalty of our customers and the ingenuity of our employees give us great confidence as we embark on the next phase of this journey to become one of the world’s most responsible and impactful companies.
Compound organic earnings per share growth 2 at least 5% per annum 1 Business operating profit after tax return on equity, excluding unrealized gains and losses. 2 Before capital deployment.
Our understanding of the risks our customers face and ability to structure offerings that meet their needs reinforce our global brand, one of the most valuable in the insurance industry. Our strong reputation allows us to attract the best talent worldwide.
Our transformation to become a truly customer-led company is well underway and we have established a platform from which to evolve and grow.
In 2019, to improve customer satisfaction and to drive profitable growth, we established a Customer Office.
We expanded our net promoter score (NPS) program to more countries and customer responses increased to about one million.
Besides growing organically and through targeted acquisitions, we have signed new distribution agreements giving access to over 80 million potential new distribution customers from 2016 through 2019.
To ensure an increased focus on customers across the organization we announced two customer key performance indicators (KPIs) to complement our financial targets.
We delayered our organization, reduced corporate center expenses, and reduced the number of steering committees by one third.
We simplified our products and services, which included significantly reducing the number of products in some markets. After focusing on infrastructure and applications we are shifting our focus to simplifying products and processes directly related to customers.
We launched several new solutions for retail customers. And in the U.S., Farmers launched an innovative renters’ insurance, ToggleSM.
We have tested and launched many propositions to offer customers holistic solutions around mobility, wellcare, property, and travel, and introduced products and services to support these.
Cover-More, our travel assistance provider, is introducing a mobile platform for customers providing simple, personalized access to our global team of experts, providers and personalized travel offers.
To learn more about how Zurich’s travel assistance provider, Cover-More, can also help to make traveling a little safer, see page 15
We take many routes to find innovative solutions We work with startups specialized in digital technology, and we sometimes make strategic acquisitions to gain expertise, seize business opportunities, increase our scale and expand in attractive markets. We also develop solutions in-house, based on our experience and insights. At Zurich, all new ideas must pass one test: They must ultimately benefit our customers. Here are just a few of the many innovative solutions we’ve introduced to make customers’ lives better.
Sharing new ideas across markets What do you get when you develop a good idea in one market, and transfer it to a second one? Two good solutions. That’s what Zurich did with Zurich klinc, a product we developed and introduced in Spain targeting younger customers who want insurance they can turn on and off to cover items like mobile devices and headphones, computers, cameras, e-bikes, smart watches and scooters. Launched in Spain in 2018, klinc sold over 10,000 policies in that market, mostly to new customers. And, in 2019 Zurich’s business in Argentina introduced a product based on klinc called Zurich Now covering smart phones, tablets and notebooks. Since launch in April 2019 in Argentina, Zurich Now has achieved strong sales with over two-thirds of customers aged 25 to 45. And received more than 20,000 inquiries online from potential customers in the first months after introduction, helping us to promote our brand more widely in Argentina.
In the business of protecting against risk Our customers include over 400 of the Global Fortune 500 companies. Our 1,250 risk engineers and risk specialists located in 40 countries are deployed where needed to help customers identify and mitigate risks.
Zurich risk engineer Marc Leblanc is known to colleagues and customers for being meticulous.
Giving Germans more choices to save for retirement An occupational pension reform introduced in Germany in 2018 has opened the door to new approaches to pension savings in that country. For Zurich, the changes in the law led it to agree to a new joint initiative with German insurer Talanx. The new collaboration, called ‘Die Deutsche Betriebsrente,’ or ‘The German Occupational Pension,’ aims to provide supplementary pensions to groups of employees who are members of trade unions or similar associations. In 2019, ‘Die Deutsche Betriebsrente’ reached a milestone agreement with the German union, Verdi, which has about two million members, to provide a second-pillar pension plan for Talanx’s own 12,000 employees. A first but very important step for ‘Die Deutsche Betriebsrente,’ which could be a blueprint for similar success stories in the future.
Farmers 1 Insurance® continues to grow innovative offerings The Farmers Insurance usage-based automobile insurance offering, which aims to be more closely aligned with actual driving behaviors, is now available in 34 states and recently surpassed one billion miles of driver data, while ToggleSM, its next-generation customer digital renters insurance offering, has generated more than 20,000 sales across 23 states. In late fourth quarter 2019, Farmers also began preparations to add to its successful eastern U.S. expansion efforts with a new automobile insurance offering in South Carolina. 1 Zurich Insurance Group has no ownership interest in the
Farmers Exchanges. Farmers Group, Inc., a wholly owned subsidiary of the Group, provides certain non-claims services and ancillary services to the Farmers Exchanges as attorneyin -fact and receives fees for its services.
It could be any beach, anywhere. Your experiences will make it special.
Finding new solutions for travelers Zurich acquired travel assistance provider Cover-More in 2017, and in 2018 expanded the business through targeted acquisitions in Latin America, the UK and Ireland to make it one of the largest travel assistance providers worldwide. We are now developing a mobile platform for Cover-More customers that will provide simple, personalized access to our global team of travel experts and providers. Along with individual travel offers, it will augment our role in helping customers travel confidently and stress-free by providing timely and proactive travel and medical assistance. Using geolocation data and advanced analytics, we have extensive insights into our travelers’ individual needs, and provide proactive security alerts in the event of risks.
Growing through targeted acquisitions In Australia, in 2019 Zurich completed the acquisition of OnePath Life in Australia from ANZ to become one of the leading life insurers for retail customers in that country. We also enhanced our access through an agreement with ANZ to allow Zurich to distribute life insurance products through bank channels, giving Zurich potential to attract six million new customers in Australia.
In 2018, we acquired the operations of Australian insurer QBE in Latin America, positioning Zurich as the leading insurer in Argentina and increasing its business in Brazil, Colombia, Mexico and Ecuador. We also acquired the individual and group life businesses and long-term savings operations of EuroAmerica in Chile. All businesses are expected to contribute new customers to support our organic growth in Latin America.
Gaining access to millions of potential new customers In 2019 alone, we gained access to over 40 million potential customers through new distribution agreements (and have gained access to over 80 million since 2016). These agreements include, besides those mentioned above, distribution agreements with Brazilian retailer Havan and Tokyo Gas in Japan, as well as an exclusive agreement with Eni gas e luce to make it easier for its customers in Italy to get insurance. We also agreed with MediaMarkt Saturn to make purchase protection available to its customers in Germany. And we entered an agreement to provide insurance and takaful products through Alliance Bank in Malaysia.
Introducing the NEXT generation at Zurich At Zurich over 40 percent of our employees were born after 1981. Growing up in an age of increasing digitalization and concerns about climate change has shaped these employees’ beliefs, needs and expectations. In 2019, a group of 12 Zurich employees representing our four regions and a variety of businesses founded NEXT, giving them a unified voice, and allowing them to actively address pressing issues society is facing. NEXT has already taken an active part in shaping the future. For example, its members attended the One Young World summit in London in 2019 along with 12 young entrepreneurs whose attendance the Z Zurich Foundation sponsored. These entrepreneurs included Damola Morenikeji, Chief Operating Officer at Joy, Inc., which runs walk-in centers in Nigeria for young people dealing with depression and anxiety.
Employees ‘Make the Difference’ In 2018 Zurich launched ‘Make the Difference,’ which actively seeks to engage employees in promoting a more entrepreneurial culture. So far over 1,250 employees from 28 countries have participated in this in-house program, initiating 60 of the over 700 ideas for improvement submitted by our employees thus far. Thanks to their efforts, we have, for example, vastly reduced the number of meetings, launched the Zurich Innovation Championship, and significantly shortened the time needed to respond to commercial customers’ queries. Make the Difference also encouraged us all to become a more sustainable business, introducing paperless meetings and equipping agents with tablets, while encouraging entrepreneurs with a social purpose to work with Zurich.
After extensive renovation our historic Zurich headquarters will soon be ready to provide a perfect place to develop new ideas. A few younger employees, shown, held a first brainstorming session while touring the building’s auditorium.
Intellectual Our expertise, including in risk management and investment, contributes to our success.
Human Our approximately 55,000 employees include some of the most talented people in the insurance industry.
Social and relationship We maintain strong social ties and relationships with customers, intermediaries, regulators, policymakers and others.
Natural In our daily business we use natural resources as part of doing business. We conserve them and use them wisely.
What we do: How our stakeholders benefit: We create value for our customers by helping them understand and protect themselves from risk.
Invest and deliver returns Our income includes returns from invested premiums, policy fees and deposits. Our success as a business is important to those who depend on us to reliably pay claims, as well as investors who look to us to deliver savings returns and operate our business responsibly.
We are keenly aware of the impact that the changing nature of work has on people’s financial security. Our studies on this topic, which we call ‘agile workforce protection,’ help us, as well as employers, governments and individuals, to find flexible and innovative ways to keep insurance relevant as new ways of working evolve alongside traditional job models.” Stefan F. Kroepfl Global Head of Life Business Analysis Life Technical Functions
Read Zurich and Oxford’s studies on workforce protection here: www.zurich.com/agileprotection #WorkforceProtection
Our customers are the heart of our business. They are the focus of our strategy. In 2019 we further enhanced the way we serve and engage millions of customers.
We gained expertise by collaborating with insurtech start-ups, developed innovative solutions in-house, and gained wider access to customers through new distribution agreements.
Exceeding customers’ expectations We are making further progress on our global approach to collect and use the information and feedback customers provide to enhance their experience with us. This Group-wide approach has already resulted in an aggregate 10-point improvement of the NPS score from 2018. More importantly the program is helping us understand what really drives customer satisfaction, allowing us to make meaningful improvements across the company. For example, in Spain we introduced a modular motor product to address customer needs for flexible coverage and increased NPS by 11 points; in Italy we digitalized our motor claims offering and increased NPS by 8 points; in Japan we conducted intense training in our claims call center and improved NPS by 6 points.
Measuring our progress Our customers – operational KPIs Through the customer insights we get using the net promoter system (NPS) and follow-up calls with customers, we can increase customer loyalty and attract new customers.
We are also growing our business in attractive markets through targeted acquisitions and distribution agreements. In 2019 alone we signed cooperation agreements with both start-ups and established companies to gain access to over 40 million potential new customers, which are in addition to the more than 70 agreements we have in place worldwide.
As a leading global employer, Zurich is an attractive place to work. We demonstrate our care for employees through our long-term vision and strong sense of purpose. We are making work sustainability our top priority by empowering our people to become fit for the future and take ownership of a life-long approach to learning.
In 2019, our measure of employee loyalty, the employee net promoter score (ENPS) rose, indicating higher levels of employee satisfaction.
We aim to make sure that our employees’ contributions are recognized and rewarded equitably, while making good progress in promoting a truly diverse and inclusive work environment.
Preparing for the future Zurich wants to invest in and equip employees across all generations, while being ready to meet the needs of future generations. Our purpose is to protect employees, to inspire confidence, and to help them reach their full potential. We want to put in place shared commitments that lead to a sense of security and trust in the workplace as we continue to grow.
Catalyst is one of the most innovative and far-reaching executive development programs that Zurich has pioneered.” Arnold Dhanesar Chief Talent Officer at Zurich talks about his role and what Zurich wants to achieve with its programs like Catalyst.
Zurich launched ‘Catalyst’ in 2019. An immersive 12-month executive development program, in its first year it brought together 26 participants to gain exposure to best practices while developing new capabilities. Besides working with IMD, one of the world’s top business schools, participants visit companies considered industry leaders in areas we aspire to excel at within Zurich.
Group-wide feedback channels. This KPI refers to the average participation rate in the two occurrences of the employee net promoter score survey.
Participation in these surveys is high with 75 percent of employees taking the ENPS survey in April 2019, and 77 percent in October 2019. Examples of changes we have made based on employee feedback include putting more focus on individual development, getting consistent feedback, supporting employee wellbeing and making sure we measure performance in a fair, objective and transparent way.
To learn more about other ways Zurich is encouraging younger employees to take an active role see page 17
Measuring our progress Our employees – operational KPIs To be successful, Zurich needs to attract, select, develop and retain talented and diverse people. Our employees are one of our greatest strengths – they make our goals a reality.
Investor relations team Our investor relations team comprises nine individuals, who are responsible for communicating with investors.
Zurich has a highly cashgenerative business model supporting an attractive and growing dividend.
As part of its pledge, it has updated its position on some of the most carbonintense fossil fuels. In line with Zurich’s prior thermal coal policy, Zurich has engaged with both clients and investee companies with more than 30 percent exposure to thermal coal, oil sands and oil shales in a dialogue over a two-year period with the aim to drive a deeper conversation regarding their credible mid to long-term transition plans. Further, Zurich will use only renewable energy as power by 2022, and as such has formally joined the RE100, a global leadership initiative bringing together influential businesses committed to 100 percent renewable electricity. Zurich’s sustainable track record is demonstrated by its ‘AA’ rating from MSCI and by its outperformance to 99 percent of other companies in the insurance industry group of the Dow Jones Sustainability Indices in 2019.
Investor Day 2019 Zurich has announced a range of ambitious targets for the 2020 – 2022 period, which were presented to investors at an Investor Day in November together with an update on our strategic objectives. The new financial targets will continue to support Zurich’s attractive dividend policy, which is unchanged.
Zurich is rated in the ‘AA’ range by three internationally recognized rating agencies. The estimated Zurich Economic Capital Model (Z-ECM) ratio stands at a very strong 129 percent 2 (calibrated to AA). Zurich’s financial flexibility is strong, with a conservative ‘Aa’-level leverage as defined by Moody’s.
The Group’s consistent and conservatively managed balance sheet is based on disciplined risk management and producing stable cash flows. A key element of the capital management strategy is to maximize capital fungibility by pooling risk, capital and liquidity centrally as much as possible. Zurich’s investment portfolio is generally conservative with an asset allocation comprising mainly publicly traded fixed income securities, with moderate investments in other asset classes.
The Group’s ambition is to be one of the most responsible and impactful businesses in the world. Zurich is the first insurance company having committed to setting targets in the framework of the UN Global Compact Business Ambition Pledge that aims at limiting global temperature rise to 1.5°C above pre-industrial levels.
1 Zurich Insurance Group has no ownership interest in the Farmers Exchanges. Farmers Group, Inc., a wholly owned subsidiary of the Group, provides certain non-claims services and ancillary services to the Farmers Exchanges as attorney-in-fact and receives fees for its services.
2 Reflects midpoint estimates as of December 31, 2019 with an error margin of +/– 5 pts.
Swiss Market Index Stoxx Europe 600 Insurance Index Source: Thomson Reuters Datastream
Increasing resilience to floods We established our Zurich Flood Resilience Alliance with funding from the Z Zurich Foundation in 2013. Its disaster risk reduction activities have so far directly benefited 225,000 people across 13 programs in nine countries, helping them to survive and even thrive despite risk of repeated flooding. The Alliance members are committed to advocating for increased investment into building resilience before a flood strikes, seeking to generate an additional USD 1 billion from public and private sources for ‘pre-event’ mitigation and helping make two million people worldwide more flood resilient. Its Post Event Review Capability (PERC) methodology won an outstanding achievement award from the U.S. National Hurricane Conference in 2019, recognizing our approach to evaluating how natural hazard events turn into community disasters.
Zurich is proud to make a difference in the lives and futures of our customers, employees, investors, communities and society at large. In 2019 we made some significant commitments to align our business to a low-carbon future by addressing climate risk.
We continued to disengage and divest our exposure to harmful fossil fuels including thermal coal.
We increased our commitment to help society understand and protect against climate risks, including through our Flood Resilience Alliance.
Stakeholder report 2019 – Communities and society 1 Environmental performance results for 2019 will be available after this Report is published.
To read about our award from the U.S. National Hurricane Conference see: www.zurichna.com/about/awards- and-recognitions
Practical benefits of impact investing In 2019, Zurich introduced an innovative framework for measuring the impact of social and environmental investments. Zurich believes the approach is the first of its kind to measure CO2-equivalent emissions avoided and the number of people who benefited from its investments, across asset classes and investment instruments.
Planting a forest, one policy at a time In the UK, for every life or travel insurance policy bought online, we’ve pledged to plant one tree to help reduce carbon emissions. We planted almost 50,000 trees by the end of 2019.
See our sustainability highlights for more information about how we support communities: www.zurich.com/sustainability
To learn more about our responsible investment approach: www.zurich.com/en/sustainability/ responsible-investment 1 Impact investments in 2019 consisted of: green bonds (USD 3.1 billion), social and sustainability bonds (USD 539 million), and investments committed to private equity funds (USD 163 million, thereof 36 percent drawn down) and impact infrastructure private debt (USD 747 million).
Besides the Zurich-led award-winning global Flood Resilience Alliance, which the Foundation funds, it supports a variety of local projects around the world, for example, helping an organization train teachers in Turkey to run schools, to supporting ‘Beyond Empathy’ in Australia by participating in a film to bring the stories of young indigenous people to the attention of a wider audience.
The Foundation’s success rests on the commitment of Zurich’s employees who give their time, money and skills, including through organizations that work with Zurich. Part of our efforts include helping vulnerable people often overlooked by traditional insurance.
“The Foundation and Zurich help communities to build resilience, either directly or through charities we work with,” says Gary Shaughnessy, Chair of the Board of Trustees of the Zurich Foundation.
Using Zurich’s skills and expertise, the Z Zurich Foundation (the Foundation), a private foundation funded by Zurich,1 has made a tangible difference to the lives of people in thousands of communities over nearly 50 years and is continuing to develop new ways to make a difference to people in many parts of the world. It aims to improve the lives of more than 1 million vulnerable people and have a wider positive impact on 10 million other people by 2024.
Total time volunteered by Zurich’s workforce (business hours) Of which skills-based hours
Contents We are including in our Annual Report information on a comprehensive set of ‘non-financial’ measures that we use to monitor and report information related to our four key stakeholder groups. The information is based on the requirements some of our subsidiaries and branches are required to follow since 2017, as stipulated by the Directive on the disclosure of non-financial and diversity information by certain large undertakings and groups (Directive 2014/95/EU). We believe that providing these metrics gives a more complete overview of our business, and shows how we monitor our effectiveness in these areas pertaining to social information and employees, customers, responsible investment, the environment, and our tax contributions. We have also used references to the Global Reporting Initiative (GRI) as an index to help our stakeholders find the information relevant to them throughout the Annual Report and on our Group website without adhering to the standards listed in the index in its entirety. PricewaterhouseCoopers AG performed limited assurance procedures on the indicators for social and environmental matters as well as those related to responsible investment as outlined in their independent assurance report at the end of this section.
The information contained within the consolidated non-financial statements is based on the consolidated results of the Group for the years ended December 31, 2019 and 2018. Amounts are rounded to the nearest million unless otherwise stated, with the consequence that the rounded amounts may not always add up to the rounded total. All ratios and variances are calculated using the underlying amounts rather than the rounded amounts. This document should be read in conjunction with the stakeholders reports from the Group overview section of this Annual Report, and with the Sustainability Highlights 2019 report of the Group which is available on www.zurich.com.
Number of customers interviewed through Zurich’s NPS program 1 1,047,000 763,000 37%
1 In 2019, Zurich interviewed over one million customers (including Zurich Santander) in 25 countries through its NPS (Net Promoter System) program.
Our global net promoter system (NPS) program provides us with insights on how to grow and retain existing as well as attract new customers by creating excellent customer experiences. Ultimately the aim is to increase the share of promoters we have among our customers. We measure NPS by sending surveys to our customers across 25 countries and are now covering 90 percent of our business (in revenue terms). We always close the loop with our detractors, a process in which all of our executives are also involved.
Total number of employees – FTE (full time equivalents) 54,030 52,267 3%
Employee participation in Group-wide feedback channels 3 76.0% 70.0% 6.0 pts
Notes: For 2019, the heading of this section was changed to ‘people indicators’ to better reflect the content. The ‘active learners’ key performance indicator is not reported for 2019 due to a change in reporting systems. Bolivia and the Farmers Exchanges are not in scope of any above key performance indicators (KPIs). The Farmers Exchanges are owned by their policyholders. Farmers Group, Inc., a wholly owned subsidiary of the Zurich Insurance Group, provides certain non-claims services and ancillary services to the Farmers Exchanges as attorney-in-fact and receives fees for its services. 1 Turnover figures only consider regular and inpatriate employees.
2 Technical functions include Claims, Underwriting and Risk Engineering. 3 Group-wide feedback channels include organization health surveys, employee net promoter scores (ENPS) and any other Group-wide feedback channels. This KPI refers to the average participation rate in the two occurrences of the employee net promoter score survey.
of which matching by Zurich business units (USD millions) 1 1 1 n.m.
2 In 2019, we reinstated our KPI for measuring the number of unique Zurich employees who participated in one or more volunteering events throughout the year. 3 This includes the matching by Zurich business units amount in the fundraising and donations. 4 Previously, charitable contributions of the Z Zurich Foundation were valued on a cash-out basis for the purposes of the key performance indicators. Starting from 2019, contributions cover the total charitable donations made by various legal entities of the Zurich Insurance Group to the Z Zurich Foundation on a cash-out basis. The previously reported 2018 figures have been restated based on that new approach.
External asset managers who are signatories to PRI (%) 1 81.3% 74.2% 7.1 pts
Group assets managed by PRI signatories (%) 2 97.5% 97.2% 0.3 pts
1 The United-Nations supported Principles for Responsible Investment (PRI). 2 Including assets managed by Zurich. 3 Impact investments in 2019 consisted of: green bonds (USD 3.1 billion), social and sustainability bonds (USD 539 million), investments committed to private equity funds
(USD 163 million, thereof 36 percent drawn down) and impact infrastructure private debt (USD 747 million). 4 The investment portfolio is calculated on a market basis, and is different from the total Group investments reported in the consolidated financial statements, which is calculated on an accounting basis and doesn’t include cash and cash equivalents.
Impact of real estate investment: Energy consumption (kWh per sqm) 1, 2 113 114 (1%)
Impact of real estate investment: CO2e emissions (kg per sqm) 1, 2 27 28 (4%)
Own operations: CO2e emissions per employee (metric tons per FTE) 2, 3 1.9 2.1 (6%)
2 CO2e emissions per employee data 2019 will be available in Q2 2020, and Impact of real estate investment data 2019 will be available in Q1 2021. 3 Includes emissions from own-use real estate (electricity and heat), from air travel, rail and cars (rental cars and car fleet).
1 Numbers based on IFRS excluding deferred income tax. 2 Tax contributions for 2019 will be available in Q2 2020.
Top 10 countries with the highest total tax contribution in 2018
Number Disclosure name Reference and page number 102-1 Name of the organization AR inside front cover (ifc)
AR 5 to 7, 10 to 17, 175 and 205 to 207 102-11 Precautionary principle or approach
AR inside back cover 102-12 External initiatives AR 20 to 28; SR 11 and 38 to 39 102-13 Membership of associations CDP
AR 78 102-18 Governance structure AR 41 to 43; SR 10; CDP
Management Approach 103-1 Explanation of the material topic and its boundary
SR 7 to 9 103-3 Evaluation of the management approach AR 62 to 63; SR 7 to 9
Emissions 305-1 Direct (Scope 1) GHG emissions AR 1 and 31; SR 37; CDP
Supplier Environmental Assessment 308-1 New suppliers that were screened using environmental criteria
Occupational Health and Safety 403-1 Occupational health and safety management system
Scope and Subject matter Our limited assurance engagement focused on selected non-financial indicators published in the Annual Report 2019 of ZIG: a) The 2019 “People indicators” on page 30, the 2019 “Community investment” indicators on page 30, the 2019 “Responsible investment” indicators on page 31 and the 2018 “Environmental performance” indicators on page 31 (“the non-financial indicators”); and b) The management and reporting processes with respect to the selected non-financial indicators as well as the control environment in relation to the aggregation of these non-financial indicators.
We planned and performed our procedures in accordance with the International Standard on Assurance Engagements (ISAE) 3000 (revised) ‘Assurance engagements other than audits or reviews of historical financial information’ and with ISAE 3410 ‘Assurance Engagements on Greenhouse Gas Statements’. These standards require that we plan and perform the assurance engagement to obtain limited assurance on the identified nonfinancial indicators.
– Performing tests on a sample basis of evidence supporting the non-financial indicators as outlined in the scope and subject matter section concerning completeness, accuracy, adequacy and consistency
With a clear strategy and a strong commitment to sustainability, we embed ESG issues across our business.” Michel M. Liès Chairman of the Board of Directors
Insurance is perfectly placed to support society on environmental, social and governance (ESG) challenges, and Zurich has accelerated its contribution in the area of investments and insurance products and offerings. Furthermore, we are committed to work sustainability through our aims to build employability – making sure we provide our employees and others in the community with skills needed to keep pace with change – while playing our part in creating a sustainable future for all our stakeholders.
Dear Shareholder Good corporate decision-making is key to our organization. We continued to strengthen our governance structure in 2019.
Insurance is perfectly placed to support society on ESG challenges, and Zurich has accelerated its contribution. Key moments in 2019 included becoming the first insurer to sign up to the UN’s Business Ambition for 1.5°C Pledge and joining the UNconvened Asset Owner Initiative for Net Zero Portfolios’. These commit us to tackling climate change and facilitating transition to a low carbon environment through our operations, our relationships with customers and in the way we invest our assets.
And, in a fast-changing world marked by challenges such as climate change, cyber risks and new skillsets, sustainability is more than an objective. It is a principle that underpins everything we do so that future generations can thrive.
Good governance supports our sustainable business To add sustainable value, a business must also sustain itself. The Board’s traditional governance and oversight functions are therefore crucial, with frameworks regularly reviewed to ensure robustness. As management continues to pursue transformation of the business, the Board is focusing on the long term perspective and planning. And, as we move into a new strategic cycle in 2020, the Board will encourage a learning culture within the business and further tangible impacts from our sustainability strategy.
Amanda Blanc, former CEO EMEA and Bank Distribution, decided to step down from her role as of July 2, 2019, and Alison Martin took over the role as CEO EMEA and Bank Distribution effective July 9, 2019, while continuing as Group Chief Risk Officer (Group CRO) until September 30, 2019. On October 1, 2019, Peter Giger took up the role of Group CRO and became a member of the Executive Committee (ExCo).
The Zurich Insurance Group, consisting of Zurich Insurance Group Ltd and its subsidiaries (the Group or Zurich), is committed to effective corporate governance for the benefit of its shareholders, customers, employees and other stakeholders based on the principles of fairness, transparency and accountability. Structures, rules and processes are designed to enable proper conduct of business by defining the powers and responsibilities of its corporate bodies and employees.
Zurich is subject to insurance group supervision by the Swiss Financial Market Supervisory Authority FINMA (FINMA). The Joint Committee of the European Supervisory Authorities has also designated the Group as an insurance group and not as an insurance conglomerate because of the small size of its non-insurance activities. The Swiss Insurance Supervision Act (ISA) requires Swiss insurance companies and groups to establish and maintain strong governance and risk management systems as well as effective internal control systems that are appropriate to their business activities. It prescribes the calculation of a risk-based solvency margin on a Group-wide basis and at legal entity level pursuant to the Swiss Solvency Test (SST). All material intra-group transactions must be reported to FINMA. In addition to the group supervision exercised by FINMA and its insurance supervision of the legal entities Zurich Insurance Company Ltd, Zurich Life Insurance Company Ltd, Zurich Reinsurance Company Ltd and Orion Legal Expenses Insurance Ltd., the insurance subsidiaries and remaining financial services entities of the Group are supervised by the respective local supervisory authorities.
Alison Martin, CEO EMEA (Europe, Middle East & Africa) and Bank Distribution (as of July 9, 2019), former Group CRO
Key governance developments in 2019 – at a glance as of December 31, 2019
Michael Halbherr, elected as member of the Board (as of April 3, 2019)
Jasmin Staiblin, elected as member of the Board (as of April 3, 2019)
This report essentially follows the recommended structure outlined in the Directive on Information Relating to Corporate Governance of the SIX Exchange Regulation. The information on compensation, shareholdings and loans to Board members and members of the ExCo is contained in a separate report, the remuneration report (see pages 90 to 121), which supplements this corporate governance report and also includes the information as required by the Circular 2010/1 on remuneration schemes (minimum standards for remuneration schemes of financial institutions) issued by FINMA on October 21, 2009 as amended on June 1, 2012, December 3, 2015 and September 22, 2016, as well as the Ordinance Against Excessive Compensation (Ordinance AEC) of November 20, 2013.
Remuneration Governance The Board is responsible for the design and implementation of Zurich’s Remuneration Rules 1, which include the overall remuneration philosophy, principles, system and practices. To support the Board in performing these duties, the Board has established a Remuneration Committee. Under the Ordinance AEC and as reflected in the Articles of Association, the members of the Remuneration Committee are elected individually at the AGM. Their term of office ends with the conclusion of the next AGM with re-election being possible. The Remuneration Committee consists of at least three members of the Board, all of whom are experienced in the area of remuneration. As of the AGM in 2019, there are five members in the Committee.
While reviewing the remuneration structures and practices on a regular basis, the Remuneration Committee and the Board receive independent advice from the executive compensation practices at Meridian Compensation Partners LLC (Meridian) and New Bridge Street, part of Aon Corporation (Aon Hewitt). The Remuneration Committee reviews their mandates and fees, and evaluates ongoing performance. Both Meridian and New Bridge Street provide advice to the Board, with the lead consultant employed by Meridian. Meridian does not provide any other services to the Group. Although certain practice areas within Aon Hewitt – a large, international brokerage and human resources firm – undertake work for the Group from time to time, the Remuneration Committee does not consider that the independence and integrity of the advice it receives from New Bridge Street is compromised by these separate assignments.
Operational Group structure Zurich Insurance Group Ltd, the Group’s holding company, is a Swiss corporation organized in accordance with the laws of Switzerland. Zurich’s business is focused on providing best-in-class property and casualty, and life insurance products and services to individuals, small businesses, mid-sized and large companies.
• Property & Casualty is the business through which the Group provides a variety of motor, home and commercial products and services for individuals, as well as small, mid-sized and large businesses.
• 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 businesses as reported for 2019 can be found in the financial review starting on page 164. An overview of the Group’s business activities is also available within the Group overview section of this Report. Additionally, we will provide information about our business throughout the year on our Group website, including on the ‘about us’ pages (www.zurich.com/en/about-us).
Committee membership: Risk and Investment Committee (Chairman), Governance, Nominations and Sustainability Committee, Audit Committee
The Board, under the leadership of the Chairman, is responsible for determining the overall strategy of the Group, including a strong commitment to sustainability. It holds the ultimate decision-making authority for Zurich Insurance Group Ltd, except for decisions on matters reserved for the shareholders.
Board of Directors and its Committees as of December 31, 2019
The members of the Board are elected by the shareholders at the AGM. The Board constitutes itself in its first meeting after the AGM, except for the Chairman and the members of the Remuneration Committee who, as required by the Ordinance AEC, in force since January 1, 2014, are elected by the shareholders.
As of December 31, 2019, the Board included members of six different nationalities. Board members’ business experience covers a broad range of industries and 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, technology and legal and regulatory experience.
The composition as of December 31, 2019 in terms of length of tenure, gender, background, experience, knowledge and skills, as well as nationality, was as follows and average length of tenure was 3.5 years: Board by length of tenure %, as of December 31, 2019
Board by background, experience, skills and knowledge %, as of December 31, 2019
External appointments Mr. Liès is a member of the board of the Institute of International Finance (IIF), advisory board member of the Beirat Zukunft Finanzplatz, trustees board member of Avenir Suisse and of The Swiss Institute of International Studies. He is also a member of the European Financial Services Round Table and a member of the board of trustees of the Lucerne Festival and a member of the steering committee of the Insurance Development Forum.
Skills and experience Christoph Franz started his professional career in 1990 at Deutsche Lufthansa AG. From 1994 until 2003 he held different executive functions at Deutsche Bahn AG, including as member of the executive board and CEO of the passenger transport division. In 2004 he became CEO of Swiss International Air Lines Ltd, and in 2009 he was promoted to the role of deputy chairman of the executive board of Deutsche Lufthansa AG and CEO Passenger Airlines. From 2011 to 2014, Mr. Franz was chairman of the executive board and CEO of Deutsche Lufthansa AG. He became a member of the boards of Zurich Insurance Group Ltd and Zurich Insurance Company Ltd in April 2014. He was elected Vice-Chairman in April 2018.
Skills and experience Joan Amble has substantial financial industry experience. She started her professional career as an accountant with Ernst & Ernst (currently Ernst & Young) in 1977. From 1984 to 1989 she served at the Financial Accounting Standards Board (FASB), specializing in pensions, derivatives and other financial instruments. She then spent 14 years with the General Electric Company (GE) in various leadership roles, including CFO GE Real Estate, COO and CFO GE Capital Markets, and as vice president and chief accounting officer GE Financial Services. From 2004 to May 2011, Ms. Amble served as executive vice president and principle accounting officer, and until the end of 2011 as executive vice president, Finance, of the American Express Company. In December 2011, Ms. Amble completed a four-year term as a member of the Financial Accounting Standards Advisory Council (FASAC). She has been a member of the Boards of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd since April 2015.
Educational background Ms. Bessant holds a Bachelor of Business Administration from the University of Michigan Ross School of Business.
Committee membership Audit Committee (Chairman), Governance, Nominations and Sustainability Committee, Risk and Investment Committee
Skills and experience Michael Halbherr has extensive experience in the technology industry, serving as an investor, active board member and advisor for young, aspiring companies in many different areas including digital mapping, mobility technology, mobile operating systems, and industrial applications. He held leadership roles in Nokia Corporation from 2006 to 2014, including serving from 2011 to 2014 as member of Nokia’s leadership team and later as CEO of HERE BV, a fully owned Nokia company and a leading company in automotive location technologies. From 2001 to 2006 he served as CEO of gate5, a Berlin-based mobile phone software startup, which Nokia acquired in 2006. From 2000 to 2001 he was a managing director at Europeatweb, an investor into gate5 and venture arm of Groupe Arnault. Prior to that he was a manager at the Boston Consulting Group (BCG) from 1994 to 2000, in the company’s Zurich and Boston offices, where he was an active member of BCG’s technology practice. He began his career at the Laboratory for Computer Science at Massachusetts Institute of Technology (MIT), where he worked as a visiting scientist and post-doctoral researcher from 1992 to 1994 with a focus on programming paradigms for massively parallel computers. He joined the boards of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd in April 2019.
External appointments Mr. Halbherr is a non-executive director and chairman of German Bionic Systems GmbH in Augsburg, Trafi Ltd. in Vilnius, FATMAP Ltd. in Berlin, and a strategic advisor of Zeotap GmbH. He is chairman of the board of trustees of the Institute for Mobility Research (ifmo), a research facility of the BMW Group.
Educational background Mr. Halbherr holds a Ph.D. in electrical engineering from the Swiss Federal Institute of Technology (ETH) in Zurich.
Educational background Ms. Mächler earned her J.D. at the University of Zurich’s Law School and complemented her studies by attending programs on UK, U.S. and private international law. She is admitted to the bar of the Canton of Zurich.
Skills and experience Kishore Mahbubani began his career in 1971 as a diplomat with the Singapore Foreign Service, in which he served until 2004, with postings in Cambodia, Malaysia, Washington D.C. and New York. He served two postings as Singapore’s ambassador to the UN and as President of the UN Security Council in January 2001 and May 2002. Mr. Mahbubani was permanent secretary of the Singapore Foreign Ministry from 1993 to 1998. He served as Founding Dean at the Lee Kuan Yew School of Public Policy of the National University of Singapore (NUS) from 2004 until the end of 2017. In July 2019 he became a Distinguished Fellow at the Asia Research Institute (ARI) of NUS. He has spoken and published extensively on geopolitical and economic issues. In 2013 the Financial Times chose one of his books, ‘The Great Convergence: Asia, the West and the Logic of One World,’ as one of the best books about economics in that year. His latest book, ‘Has the West Lost It?,’ published in London in April 2018, was described by Martin Wolf as “a compelling warning.” He has been a member of the Boards of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd since April 2015.
External appointments In September 2017 he was appointed non-executive 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 has served on boards and councils of several institutions in Singapore, Europe and North America, and is currently a member of Yale’s President’s Council on International Activities (PCIA), the World Economic Forum’s Global Agenda Council on China and the Singapore Social Science Research Council.
Skills and experience Jasmin Staiblin brings to her role extensive knowledge of how business sectors transform and the growing importance of digitalization and sustainability as a competitive differentiator. She is recognized as one of Europe’s top experts in the field of energy and served as CEO of Alpiq, a leading Swiss energy services provider and electricity producer in Europe, until December 31, 2018. She began her career in 1997 at the ABB Group, the Swedish-Swiss global technology company. She served in various global functions as a member of the management team for ABB’s power technologies division. She held the position of CEO of ABB Switzerland from 2006 to 2012. In 2013 she became CEO of Alpiq Holding Ltd. She joined the boards of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd in April 2019.
Educational background Ms. Staiblin studied physics and electrical engineering at the Karlsruhe Institute of Technology, Germany and the Royal Institute of Technology in Stockholm, Sweden. She completed her studies with a degree in physics and has a Master of Science in electrical engineering.
Skills and experience Barry Stowe has extensive business experience and knowledge gained through executive roles in the insurance industry in North America and Asia. Between 2006 and 2018 he was a member of the board of directors and the group executive committee of Prudential plc. From 2015 to 2018 he served as chairman and CEO of Jackson Holdings Ltd, a subsidiary of Prudential plc, and from 2006 to 2015, as CEO of Prudential Corporation Asia. From 1995 to 2006 he held senior executive positions at American International Group (AIG), including serving as president of AIG Life Companies Accident & Health Worldwide based in Hong-Kong from 2001 to 2006. From 1992 to 1995 he served as president of NISUS, a subsidiary of Pan-American Life Insurance Group. From 1980 to 1992 he held several positions at Willis Corroon Group plc in the U.S., an insurance and reinsurance brokerage services company. He joined the boards of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd in April 2019.
External appointments Mr. Stowe acts as senior advisor to Prudential plc. He is co-chair of the Retirement Income Institute in Washington, D.C., vice chair of Cheekwood Estate & Gardens in Nashville, Tennessee, and a member of the Tennessee Business Leadership Council.
Educational background Mr. Stowe has a Bachelor of Arts in politics and classical studies from Lipscomb University in Nashville, Tennessee.
Independence of the members of the Board of Directors Zurich considers the independence of its Board members an essential feature of good corporate governance. Zurich’s independence criteria comply with applicable laws and reflect best-practice standards such as the SIX Exchange Regulation Directive on Information relating to Corporate Governance and the Swiss Code of Best Practice.
The Governance, Nominations and Sustainability Committee reviews Board members’ independence status annually and reports its findings to the Board for final determination. In particular, the Governance, Nominations and Sustainability Committee checks the following independence criteria before recommending a new Board member for election and, thereafter, for re-election on an annual basis. It confirms that: 33 No Board member, member of their immediate family, or any other related party, received – either directly or indirectly – any consulting or advisory fee or other compensation and/or material benefits from a member of the Zurich Insurance Group other than in their capacity as Board or Committee member in 2019 or the past three years; 33 No Board members or any member of their immediate family, is or was employed by a member of Zurich Insurance Group in 2019 or the past three years.
Board members are also subject to rules and regulations to avoid conflicts of interest and prevent any misuse of insider information.
David Nish did not stand for re-election at the AGM on April 3, 2019 (please see his biography in the Annual Report 2018, page 48 under the following link: All other Board members were re-elected for another one-year term. Michael Halbherr, Jasmin Staiblin and Barry Stowe were newly elected as members of the Board. As members of the Remuneration Committee, the AGM elected Catherine Bessant, Christoph Franz, Michel M. Liès, Kishore Mahbubani and Jasmin Staiblin. As independent voting rights representative, the shareholders elected Mr. lic. iur. Andreas G. Keller, attorney at law.
The Board proposes to shareholders that they re-elect as follows: 33 as members: Michel M. Liès, Joan Amble, Catherine Bessant, Dame Alison Carnwath, Christoph Franz, Michael Halbherr, Jeffrey Hayman, Monica Mächler, Kishore Mahbubani, Jasmin Staiblin, and Barry Stowe 33 as Chairman: Michel M. Liès 33 as members of the Remuneration Committee: Catherine Bessant, Christoph Franz, Michel M. Liès, Kishore Mahbubani and Jasmin Staiblin 33 as independent voting rights representative: Mr. lic. iur. Andreas G. Keller, attorney at law
Internal organizational structure The Board is chaired by the Chairman, or in his absence, by the Vice-Chairman. The Vice-Chairman is appointed by the Board. The Board also appoints its secretary. The Board has a standard set of topics that is presented at its meetings throughout the year. It is regularly informed of developments relevant to the Group and is provided with timely information in a form and of a quality appropriate to the discharge of its duties in accordance with the standards of care set out in Article 717 of the Swiss Code of Obligations.
The Board is required to meet at least six times each year. During 2019 it held 11 meetings (of which six were partly attended by tele-/videoconference and four were held over two days). One meeting was fully dedicated to the discussion of strategy. Four meetings lasted four or more hours during the course of a day and five meetings lasted less than three hours on average. In addition, the Board approved three circular resolutions.
4 Joined Committee on April 3, 2019. 5 Left Committee as of April 3, 2019.
Board 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: 33 Group strategy: The Board approves the Group strategic plan and the overall Group targets upon the recommendation of the Group CEO and receives reports by the Group CEO on the implementation of and progress towards the Group Strategy.
An external assessment of the full Board and its committees was carried out in 2019. It considered key aspects of the effectiveness of the Board and its committees, such as its size, culture, composition, available skill sets and qualifications, dynamics within the board and with management, the work of the Board and its committees on strategy, governance, competition and peer comparison and performance management, the use of time and process (planning quality and allocation) etc. The Board considered a report identifying key strengths and challenges produced for it. The Board is taking steps to put findings of its assessment into practice.
Key tasks and responsibilities: In general, the Governance, Nominations & Sustainability Committee: 33 supports the Board, in line with the Group’s commitment to good corporate governance, sustainable business conduct and value creation, by establishing best practices in corporate governance across the Group with a view to ensuring that the shareholders’ and other important stakeholders’ rights are fully protected 33 assists the Board in setting an appropriate tone at the top to promote key values and behaviors, and to ensure a sound and open culture throughout the organization 33 develops and proposes guidelines to the Board for corporate governance and reviews them 33 ensures compliance with corporate governance disclosure requirements and legal and regulatory requirements 33 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 consideration. This includes diversity in many respects, and goes beyond gender, to include culture, technical and interpersonal skills, education and viewpoints, experience, nationality and a variety of backgrounds, which should enable the Board to meet the Group’s current and future challenges. Apart from specific qualifications, every 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, the best interests of the Group’s stakeholders (see Nomination Principles in article 15 ff. of the Annex to the Organizational Rules under 33 reviews the system for management development and supervises progress made in succession planning 33 reviews and approves the Group’s sustainability strategy and objectives 33 reviews and proposes to the Board for approval targets on matters related to environmental, social and governance (ESG) that have a material impact on business strategy, underwriting or business performance.
Remuneration Committee Composition and membership: Zurich Insurance Group Ltd’s Organizational Rules require the Remuneration Committee to consist of at least three independent non-executive Board members. Currently, the committee comprises Christoph Franz (Chairman), Catherine Bessant, Michel M. Liès, Kishore Mahbubani and Jasmin Staiblin.
Key tasks and responsibilities: In general, the Remuneration Committee: 33 regularly evaluates the Group’s remuneration architecture and system, as well as Zurich’s remuneration rules, and proposes amendments to the Board, which is responsible for the design, implementation and monitoring of the Group’s remuneration framework (further details of the Group’s remuneration framework, including the remuneration philosophy are set out in the remuneration report on pages 90 to 121)
33 discusses the regulatory environment and risk management aspects regarding remuneration, and prepares the remuneration report annually in accordance with applicable laws and regulations.
The external auditors, the internal auditors, members of the ExCo and other executives attend Audit Committee meetings to, among other things, discuss auditors’ reports, review and assess the auditing concept and the examination process and to assess the activities of both external and internal auditors. Private sessions with external and internal auditors are scheduled at the majority of Audit Committee meetings, to enable discussion without Management members being present. For more information on the supervision and control of the external audit process, see page 76.
Activities 2019: During 2019, the following topics were in particular focus in the Committee’s discussions: 33 annual and half year reporting with a strong focus on accounting and reserving matters as well as the Group’s updates for the first three months and first nine months of the year 33 the effectiveness of the internal control framework, including internal controls over financial reporting (ICFR)
33 Group Audit work plans, Group Audit findings and management implementation of remedial actions 33 the work of the external auditors, the terms of their engagement and the external auditor’s findings on key judgments and estimates in financial statements 33 the annual Group Compliance Plan, activities to support management managing compliance risks, compliance policy updates and enhancements, compliance findings, the result of the annual Code of Conduct training as well as the evolving regulatory expectations.
The Audit Committee meets at least four times per year. In 2019 it met eight times.
Risk and Investment Committee Composition and membership: Zurich Insurance Group Ltd’s Organizational Rules require the Risk and Investment Committee to consist of at least four non-executive Board members independent from management. Currently, the committee comprises Jeffrey Hayman (Chairman), Joan Amble, Dame Alison Carnwath, Michael Halbherr and Kishore Mahbubani.
• oversee the Group’s risk portfolio, and the Group’s enterprise-wide risk governance framework
• receiving updates on the Group’s annual strategic asset allocation, the market risk consumption relative to allocated market risk capital and limit and major market risk drivers, the accounting investment result, the economic investment return relative to liabilities, and the performance of asset managers 33 Risk management and investment management functions: • assessing the independence and objectivity of the risk management function
• approving the terms of reference for the risk management function; • reviewing the key risk management principles and procedures
Activities 2019: From an enterprise risk management perspective, during 2019 the Risk and Investment Committee in particular discussed the following topics: 33 Enterprise Risk Management update, including Quarterly Risk Reports, strategic risk assessment (Group TRP), and scenario analysis results 33 Key Risk Management Principles and Procedures 33 Group Risk Appetite and Tolerance Statement 2020 33 The Group’s Own Risk and Solvency Assessment (ORSA), including self-assessment of the effectiveness of the risk management system 33 Group Recovery Plan 2020 33 Scope of Internal Control Framework and Management Report on Internal Controls 33 Approval of ZRP Level II Limits 33 Group Reinsurance Update 33 Approach to managing accumulation risk, including Nat Cat and Cyber/Casualty Cat update and exposure limit monitoring (P&C)
Areas of responsibility of the Board and management The Board decides on the strategy of the Group, supervises senior management and addresses key matters in the area of strategy, finance, and organization. In particular, the Board approves the Group’s strategic plan and the annual financial plans developed by management. It reviews and approves the Annual Report and the half-year financial reporting of the Group, as well as the Group’s updates for the first three months and first nine months of the year, and the annual financial statements of Zurich Insurance Group Ltd. For more details with regard to the responsibilities of the Board see page 57.
Subject to the powers reserved for the Board, the Board has delegated management of the Group to the Group CEO and, under the Group CEO’s supervision, to the ExCo and its members. The Group CEO is the most senior executive officer in the Group and has responsibility and accountability for the Group’s management and performance. The Group CEO represents the overall interests of the Group toward third parties to the extent such interests are not represented by the Board. The Group CEO is responsible for developing and implementing the strategic and financial plans approved by the Board. The Group CEO has specific powers and duties pertaining to strategic, financial and organizational matters and manages, supervises and coordinates the activities of the members of the ExCo and of his other direct reports.
Executive Committee focused on new strategic cycle and sustainable business development Our Executive Committee in its experienced and diverse composition is well prepared for the new strategic cycle, our journey to transforming the industry and creating a new customer experience, and for becoming one of the most socially and environmentally responsible businesses worldwide.
Alison Martin CEO EMEA (Europe, Middle East & Africa) and Bank distribution
The ExCo is chaired by the Group CEO. As of December 31, 2019, to reflect both lines of business and geography, members of the ExCo included the CEO EMEA (Europe, Middle East & Africa) and Bank Distribution, the CEO North America, the CEO Latin America, the CEO Asia Pacific, the CEO of Farmers Group, Inc. and the CEO Commercial Insurance. The Group CFO, the Group CIO, the Group COO and the Group CRO were also members of the ExCo as of December 31, 2019.
The following cross-functional committees have been established for key areas to facilitate the coordination and alignment of recommendations to the Group CEO for approval on specific subjects.
Management committees Group Balance Sheet Committee (GBSC) Members: Group CFO (Chairperson), Group CEO, Group CRO, Group CIO. The Group General Counsel attends the meetings ex officio but is not a voting member.
The Committee has oversight of all of the main levers of the balance sheet, including but not limited to transactions, capital management, reinsurance, asset and liability management, dividend and share buyback programs, liquidity, leverage, rating agencies and other balance sheet related matters and topics as measured among other by the Internal Economic Capital Model, including Z-ECM, RBC and related models, such as SST and Solvency II.
Oversight is exercised through regular review of plans, policies and specific transactions related to these areas and recommending appropriate actions the Group CEO and, where appropriate, to the relevant decision-making bodies and management committees of the Group.
The Group Risk Committee (GRC) Members: Group CRO (Chairman), Group CFO, Group CIO, Group COO, Group General Counsel. The Head of Group Audit and the Group Chief Compliance Officer are invited ex officio to attend the meetings, but are not voting members.
The GRC reviews and recommends on topics such as: 33 the overall Group risk appetite, risk tolerance and risk limits, including exceptions to limits over specified thresholds 33 requests to enter new lines of insurance business or types of insurance coverage that would have a significant impact on the risk profile of the Group 33 requests for exemptions from the Zurich Risk Policy (ZRP) for a particular transaction or product in case of a ratings or credit trigger 33 the Group’s TRP assessment and related actions 33 changes to the Group Policy Framework and the ZRP
Panels To enhance its understanding and assessment of the challenges and risks Zurich may face, the Group seeks external expertise and perspectives. As of December 31, 2019, the Group had access to one panel of leading academics and experts from business and industry which provides feedback and insights. Panels are not corporate bodies of the Group and have no decision-making powers. They provide expertise and advice to senior management or certain functions of the Group. The Advisory Council for Catastrophes (formerly Natural Catastrophe Advisory Council) provides insights into the patterns of occurrence, predictability and destructiveness of catastrophes and gives feedback about Zurich’s approach to such catastrophes to help improve the effectiveness of its underwriting and reinsurance purchasing.
Skills and experience Mario Greco joined Zurich in March 2016 as Group Chief Executive Officer and member of the Executive Committee. Mr. Greco started his professional career in management consulting, working in McKinsey & Company’s Milan office from 1986 until 1994, where he became a partner in 1992 and subsequently a partner leader in the insurance segment. In 1995, he joined RAS (Allianz Group) in Milan as head of the claims division. He became general manager in charge of the insurance business the following year. In 1998, he was appointed managing director and in 2000, he became the company’s CEO. At the end of 2004, Mr. Greco joined Allianz AG’s executive board, with responsibility for France, Italy, Spain, Portugal, Greece and Turkey. In April 2005, he joined the Sanpaolo IMI Group in Milan as CEO of EurizonVita and in October 2005, he was appointed CEO of Eurizon Financial Group. From 2007 to 2012, he served at Zurich, first as CEO Global Life and from 2010, as CEO General Insurance. In 2012 he was appointed CEO of Generali.
External appointments Mr. Greco is a member of the board of directors of the Swiss-American Chamber of Commerce. He is also a member of the International Advisory Council of Bocconi University, a member of the advisory board of the Department of Economics at the University of Zurich and a member of the EMBA X advisory board at the University of St. Gallen.
Educational background Mr. Greco holds a bachelor’s degree in economics from the University of Rome and a master’s degree in international economics and monetary theory from Rochester University.
Skills and experience Jeff Dailey began his career in 1980 with Mutual Service Insurance Company. He also worked for Progressive Insurance Company. He went on to form Reliant Insurance Company, an auto insurance start-up owned by Reliance Group Holdings, which was sold to Bristol West Holdings, Inc. in 2001. From 2001 until 2003 Mr. Dailey was Chief Operating Officer (COO) of Bristol West Holdings, Inc. and, in 2003 he was named President and COO of Bristol West Holdings, Inc., in conjunction with the firm’s initial public offering (IPO) on the New York Stock Exchange. In 2006, he became CEO of Bristol West Holdings, Inc. Mr. Dailey joined Farmers Group, Inc. in 2007 as Vice President when Farmers acquired Bristol West Holdings, Inc., and he was promoted in 2008 to Executive Vice President of Personal Lines. In January 2011, he was promoted to the position of President and COO of Farmers Group, Inc. He became a member of the Board of Farmers Group, Inc. in February 2011 and has been its Chairman since October 2015. Mr. Dailey was appointed to his current role of CEO of Farmers Group, Inc. and became a member of the Executive Committee in January 2012.
Alison Martin CEO EMEA (Europe, Middle East & Africa) and Bank Distribution
Skills and experience Alison Martin has extensive management, financial and commercial experience within the insurance sector. She was appointed Chief Executive Officer Europe, Middle East & Africa (EMEA) and Bank Distribution in July 2019. Prior to that, she served as Group Chief Risk Officer from January 2018 to September 2019. 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. 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 as Group Chief Risk Officer-designate and a member of the Executive Committee in October 2017.
External appointments Ms. Savio is a board member and serves on the Executive Committee of the American Property Casualty Insurance Association (APCIA). She is also a board member for The Institutes and sits on the NYU Stern Center for Sustainable Business Advisory Board. She is a member of The Chicago Network, an organization of Chicago’s leading professional women.
Educational background Ms. Savio earned a master’s degree in communication and a bachelor’s degree in speech communication from Illinois State University. She is also a graduate of the Harvard Business School Advanced Management Program and has participated in executive management programs at Northwestern University’s Kellogg School of Management.
Changes to the ExCo since January 1, 2020 There were no changes to the ExCo since January 1, 2020.
3rd line: Group Audit The third line of defense consists of the assurance function
Duration of the mandate and term of office of the auditor-in-charge PricewaterhouseCoopers AG (PwC), Birchstrasse 160, in 8050 Zurich, is Zurich Insurance Group Ltd’s external auditor.
PwC assumes all auditing functions which are required by law and by the Articles of Association of Zurich Insurance Group Ltd. The external auditors are appointed by the shareholders of Zurich Insurance Group Ltd annually. At the Annual General Meeting on April 3, 2019, PwC was re-elected by the shareholders of Zurich Insurance Group Ltd. The Board proposes that PwC be re-elected at the Annual General Meeting on April 1, 2020 as external auditors for the financial year 2020. PwC fulfills all necessary requirements under the Swiss Federal Act on the Admission and Oversight of Auditors and has been admitted as a registered auditing company by the Federal Audit Oversight Authority.
Alex Finn of PwC is the Global Relationship Partner and lead auditor since the business year 2018. Mark Humphreys, audit engagement partner, co-signs the auditors’ report for 2019 and is the auditor in charge for the statutory audit work since 2018. Ray Kunz is the auditor in charge for the regulatory audit work since 2017.
Audit fees Total audit fees (including expenses and value added taxes) charged by PwC in the year 2019 amounted to USD 43.8 million (USD 45.3 million in 2018).
External audit fees are reviewed annually by the Group’s Audit Committee. Once the fees are agreed, they are further allocated to the countries and reporting units via a global allocation process with the allocations communicated to local CFOs and FAR Controllers. As the year comes to a close, actual fees charged are reviewed and agreed with the local CFOs. At all levels – Group and local – there is a clear understanding of the basis for the current year fee including the impacts of changes in scope or other factors. Unplanned overruns are reviewed and agreed with the business (responsible CFO or audit contact).
Non-audit fees were as follows: Audit and non-audit fee amounts in USD millions, as of December 31 2019 2018
Total non-audit fees 19.4 16.2 – Tax advice 1.6 0.9 – Audit-related, including MCEV 4.7 5.0 – Other, primarily related to the IFRS 17/9 projects 13.1 10.3
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. The review is 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 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 year. 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 for 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.
As of December 31, 2019, 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 (> 5 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.
Number of shares held as of December 31, 2019 Number of registered shareholders registered share capital
Registered shareholders by type as of December 31, 2019 Registered shareholders in %
Individual shareholders 96.0 25.7 Legal entities 3.9 28.3 Nominees, fiduciaries 0.1 46.0 1 of registered shareholders.
Registered shareholders by geography as of December 31, 2019 Registered shareholders in %
In accordance with Swiss law and practice, Zurich Insurance Group Ltd informs all shareholders at the beginning of the shareholders’ meeting of the aggregate number of shares represented by shareholders and the number of shares represented by the independent voting rights representative. Zurich Insurance Group Ltd provided electronic voting devices to its shareholders for all the resolutions taken at the AGM on April 3, 2019.
Zurich Insurance Group Ltd will hold its Annual General Meeting on April 1, 2020. The meeting will be held at the Hallenstadion in Zurich-Oerlikon. An invitation setting out the agenda for this meeting and an explanation of the proposed resolutions is issued to shareholders at least 20 days before the meeting.
For addresses see information on page 313 and further upcoming important dates, see investor section starting on page 24 (financial calendar on page 25).
Therefore, we put in place shared commitments that lead to a sense of security and trust in the workplace, as we continue to grow: developing our employees for new job opportunities rather than hiring externally, prioritizing our in-house local skills over outsourcing solutions and offering career choices that match the employees’ talents and ambitions and meet the market needs of today and tomorrow.
Nationalities Average Tenure 2 Average Turnover 3 Boomer 4 Gen X 4 Gen Y 4 1 Excluding Cover-More and parts of Germany. 2 Average tenure as per 31.12.2019. 3 Annualized turnover in 2019.
4 Boomer, <1964; Gen X, 1965 –1979; Gen Y, 1980 –1994.
Our commitment to a positive employee value proposition has been greatly assisted by the deployment of a number of ‘listen and act’ initiatives such as organizational health and employee net promoter score (ENPS) to deliver the improvements our employees want to see.
As an employer we see diversity and inclusion as being of primary importance, and recent efforts to improve employee engagement have resulted in a strong improvement in ENPS.
As an insurer, we systematically identify sustainability risks and deliver solutions that can enhance the social and environmental impact of our customer. We proactively engage with customers to support their transition to a low carbon economy. We work continuously to develop relevant products and solutions for customers that have a positive social and environmental impact, and support well-being, enhance resilience and facilitate the transition to a low-carbon economy. Some of the ways we have achieved this recently include: ESG in insurance – specific solutions with sustainable impact
Examples of Zurich’s environmental, social and governance (ESG) products around the world
Supporting communities 8 Savings product 5 Spain 3 9 Medical expenses 5 Mexico 4 10 Pension fund 5 Spain 3 11 One Tree for One Policy UK/Hong Kong/Switzerland
1 The Farmers Exchanges are owned by their policyholders. Farmers Group, Inc., a wholly owned subsidiary of Zurich Insurance Group, provides certain non-claims services and ancillary services to the Farmers Exchanges as attorney-in-fact and receives fees for its services.
2 Zurich Insurance Group is one of the founding members of Blue Marble Microinsurance, a consortium of eight companies collaborating to innovate solutions that protect the underserved.
Communities – our role in society We are investing in our communities to create social impact, enhance resilience and provide engagement opportunities for our employees outside of their daily jobs.
There is a growing gap between natural hazards protection of the total economic losses and the portion of those losses that is insured. This needs to be tackled both by traditional risk transfer mechanisms such as insurance, and by leveraging the insurance industry’s knowledge on risk management and risk reduction. By using Zurich’s risk expertise as a global insurer, we can help customers and communities reduce the devastating impacts of floods – even before a flood hits – and build community flood resilience in a more integrated way.
We help communities dealing with floods through the Flood Resilience Alliance which is a program designed together with other members to lessen the prevalence of floods and allow communities to recover quickly. The Group provides the following contributions to the Alliance: 33 secondment projects of Zurich employees with the relevant skills and expertise (flood/hydrological expertise and risk engineering expertise skills)
Share capital As of December 31, 2019, the ordinary share capital of Zurich Insurance Group Ltd amounted to CHF 14,960,802.70 divided into 149,608,027 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 1, 2020 a dividend of CHF 20 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.
Authorized and contingent share capital as of December 31, 2019 Up to and including April 4, 2020, the Board of Zurich Insurance Group Ltd is authorized to increase the share capital 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 (Art. 5bis). This authorized share capital corresponds to about 30 percent of the total registered shares issued as of December 31, 2019. Share issuances from authorized share capital where the shareholders’ subscription rights are restricted or excluded are limited to 15,000,000 shares (i.e., about 10 percent of the total registered shares issued as of December 31, 2019).
Up to and including April 4, 2020, 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., about 20 percent of the total registered shares issued as of December 31, 2019).
Moreover, there is an additional contingent share capital (Art. 5ter 2a) of CHF 494,723.20, representing 4,947,232 fully paid registered shares with a nominal value of CHF 0.10 each, which may be issued to employees of Zurich Insurance Group Ltd or one of its Group companies. For further information on the capital structure and the authorized and contingent share capital, see the audited consolidated financial statements, note 19 on pages 239 to 241. This contingent share capital compares to about 3.3 percent of the current total registered shares issued as of December 31, 2019.
Newly issued shares from contingent capital 0.00 – 0.10 Capital reduction June 2019 174,000.00 1,740,000
Shares and participation certificates Zurich Insurance Group Ltd’s shares are registered shares with a nominal value of CHF 0.10 each. The shares are fully paid in. Pursuant to article 14 of the Articles of Association (www.zurich.com/IR-articles-of-association), each share carries one vote at shareholders’ meetings, entitles all shareholders to dividend payments (excluding treasury shares) and the registered holder to exercise all other membership rights in respect of that share.
Some interests in shares are held by investors in the form of American Depositary Receipts (ADRs) 1. As of December 31, 2019, investors held 21’244’780 ADRs (representing 2’124’478 Zurich Insurance Group Ltd shares).
Convertible bonds and options Zurich Insurance Group Ltd had no public convertibles or options outstanding as of December 31, 2019. For information on employee share plans, see the audited consolidated financial statements, note 21 on pages 250 to 251.
The Group’s share-based compensation programs include regulations regarding the impact of a change of control. These regulations provide that in the case of a change of control, the plan administrator (the Remuneration Committee or the Group CEO, as applicable) has the right to roll over the existing share obligations into new share rights or to provide consideration for such obligations that are not rolled over. Participants who lose their employment as a result of a change of control have the right to the vesting of share obligations. No other benefits are provided to members of the ExCo in case of a change of control. No benefits are provided for the members of the Board in case of a change of control.
For information regarding the Group’s risk management and internal control framework, see the risk review of this Annual Report 2019 on pages 126 to 161. The Group no longer separately describes risk management and internal control information in this governance report.
Looking ahead With the next strategic cycle commencing this year, the performance criteria for the long-term incentive plan (LTIP) have been aligned to the targets beginning as of the allocation in 2020. Further information is provided in the outlook section of this report.
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Zurich’s remuneration architecture puts a greater emphasis on variable remuneration elements, with a higher weighting on average towards the long term for our most senior employees. The variable remuneration is largely determined by the achievements against predefined measures which are aligned with the Group’s strategy and financial targets.
Zurich’s remuneration Zurich operates a remuneration system which aims to provide competitive total remuneration opportunities and variable remuneration awards based on results achieved and good outcomes for all stakeholders. The remuneration system is closely integrated with the Group’s risk management framework and is designed to not encourage or reward inappropriate risk-taking.
2019 remuneration in light of the business results Expenditure on remuneration is considered in the context of Zurich’s overall revenues, capital base and profitability. The key financial figures in the following table show an increase in profitability and net income in 2019 compared with 2018.
Key financial figures in USD millions, for the years ended December 31 2019 2018
Gross written premiums and fees 1 54,305 52,689 Business operating profit (BOP) 5,302 4,566 Net income attributable to shareholders (NIAS) 4,147 3,716 Shareholders’ equity 35,004 30,189 Return on common shareholders’ equity (ROE) 14.4% 13.1% Dividends paid to shareholders 2 2,819 2,805 Total variable remuneration for all employees gross before tax 3 716 693 – as a percentage of gross written premiums and fees 1% 1% – as a percentage of shareholders’ equity 2% 2% – as a percentage of dividends paid to shareholders 25% 25%
1 Consists of USD 50,525 million gross written premiums and policy fees, as well as USD 3,780 million Farmers management fees and other related revenues in 2019. Farmers Group, Inc., a wholly owned subsidiary of Zurich Insurance Group, provides certain non-claims services and ancillary services to the Farmers Exchanges as attorney-in-fact and receives fees for its services. The Farmers Exchanges are owned by their policyholders.
2 Dividend at transaction day exchange rate in 2019 and 2018, respectively. 3 The corresponding amount of total variable remuneration in Swiss francs is CHF 697m for 2019 and CHF 678m for 2018.
As can be seen from the metrics in the previous table, relative to Zurich’s overall revenues and shareholders’ equity, expenditure on variable remuneration remains relatively small, also in relation to the amount of dividends payable to shareholders.
33 The value of the target share allocations made in 2019 on the assumption that the allocations will vest at 100 percent of the target level in 2022 for performance over the three years 2019, 2020 and 2021.
33 The total amount of sign-on payments 1 committed in 2019, regardless of when the payments are due, for people taking up their employment in 2019.
Commission payments made to employed sales agents are not included in the total variable remuneration amount.
In determining the amount of the total variable remuneration for all employees, the Board considers the long-term economic performance of the Group as well as other relevant factors. The average economic profit is calculated by subtracting the required return on economic capital, based on the weighted average cost of capital, from the adjusted BOP (the amount before interest and variable remuneration) after tax. In this respect, the Group has continued to generate economic profit over the long-term which exceeds the actual expenditure on variable pay.
The overall STIP awarded is a reflection of the relevant performance achievements against plan for 2019. Based on these results and along with a qualitative assessment, the overall STIP funding as a percentage of the STIP target amount, for plan participants across the Group (more than 39,000 employees), is the same as the previous year.
Context The key factors driving the vesting level in 2020, for the three-year performance period from 2017 to 2019, are the Group’s: 33 relative TSR against an international peer group of insurance companies, 33 NIAS ROE and 33 cash remittance.
3 Represents the value of the target performance share allocations made in 2019, which assumes vesting in 2022 at 100 percent of target, and for all employees, also includes any other target share allocations such as sign-on payments in shares.
Outlook summary for 2020 33 Performance management and short-term incentives: Enhancements to the performance management and incentive approach that were implemented in 2019 will continue to be reviewed and refined to ensure they support the achievement of the Group’s strategic goals and consider the interests of shareholders, customers, employees and other stakeholders. In addition, the customer net promoter score (NPS), a global best practice standard for measuring customer experience, has been rolled out to further markets to assess business performance, along with financial metrics, for STIP funding purposes. The customer NPS now covers the majority of STIP participants and will continue to be expanded to additional markets as sufficiently robust data becomes available.
More on page 120 33 ExCo: No changes are proposed to the structure of remuneration for the ExCo in 2020. A benchmarking analysis including a review of best practices, market data, internal relativities and alignment with the strategy, will be carried out again in 2020.
33 The role of risk in Zurich’s overall remuneration architecture and approach.
33 A review of the impact of Zurich’s long-term compensation awards on possible share dilution.
33 Articles 14 – 16 of the Ordinance Against Excessive Compensation (AEC) (replacing the information in the notes to the consolidated financial statements according to Article 663bbis of the Swiss Code of Obligations).
Zurich’s approach to implementing the requirements of the Ordinance AEC Since the AGM in 2015, binding votes are held where shareholders vote on and approve the maximum total amount of remuneration for the Board for the next 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-of-association). Details on the votes can be found in the Board of Directors Report accompanying the invitation to the AGM 2020 (www.zurich.com/en/investor-relations/shareholder-area/ annual-general-meeting). Additionally, details regarding the votes on pay, supplementary amounts for any new members of the ExCo during a period for which the remuneration for the ExCo has already been approved, 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).
Remuneration and risk The Remuneration and the Risk and Investment Committees meet jointly once a year to discuss a risk review of the remuneration architecture and the remuneration governance framework. The assessment of risk in making reward decisions, and the ability to apply risk adjustments and exercise malus and clawback, if required, are features of Zurich’s remuneration framework. Group Risk Management evaluated the remuneration architecture in 2019 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. All leadership team roles are included in the analysis.
The variable remuneration of employees in control functions is structured to avoid conflicts of interest, by linking to Group profitability metrics rather than the profitability of the business controlled by such functions.
Group Audit periodically assesses the operational implementation of Zurich’s Remuneration Rules to verify that the remuneration architecture is adhered to across the Group.
Share dilution In 2018, Zurich began purchasing its own shares on the market to fulfill share obligations for share-based compensation awards and currently the intention is to continue doing this. Zurich has also taken additional measures to offset the impact of dilution from previously vested long-term share plans in the past few years with the completion of its public share buyback program for cancellation purposes in 2018. On April 3, 2019, the Annual General Meeting approved the cancellation of the 1,740,000 own shares of Zurich Insurance Group Ltd with a nominal value of CHF 0.10 repurchased under the public share buy-back program. The corresponding reduction of the share capital of Zurich Insurance Group Ltd from 151,348,027 to 149,608,027 fully paid registered shares with a nominal value of CHF 0.10 each through cancellation of the repurchased own shares, was completed in June 2019.
Share dilution Shares issued during the year 1 – 8,176 Shares cancelled during the year 1,740,000 – Registered shares as of December 31 149,608,027 151,348,027
LTIP Total number of unvested target shares 2 1,736,154 1,912,087 – as a percentage of the registered shares 1.16% 1.26%
Guiding principles of the remuneration philosophy The guiding principles of the remuneration philosophy as set out in Zurich’s Remuneration Rules are as follows: 33 The remuneration architecture is simple, transparent, can be put into practice and considers the interests of key stakeholders such as customers, shareholders and employees.
33 Remuneration is tied to long-term results for individuals who have a material impact on the Group’s risk profile.
33 Variable remuneration awards are linked to key performance factors which include the performance of the Group, countries, business units, functions, as well as individual achievements.
33 The structure of the LTIP links remuneration with the future development of performance and risk by including features for deferred remuneration.
Elements of remuneration Total remuneration Total remuneration for an individual employee and its composition is influenced by factors including the scope and complexity of the role, level of responsibility, risk exposure, business performance and affordability, individual performance, professional experience, internal relativities, external competitiveness, geographic location and legal requirements. Remuneration is benchmarked towards median levels in clearly defined markets which can be local, regional or global, and reflects practices in either insurance, financial services or general industry depending on the role.
Description Fixed pay for the role performed to attract and retain employees. It is reviewed annually.
Annual target share allocations, subject to vesting in accordance with predefined performance criteria. Designed to support Zurich’s longer-term goals, encourage participants to operate the business in a sustainable manner and align the Group’s long-term interests with those of shareholders.
Award is driven by: – The relevant business profitability achievements, as well as customer experience where applicable. – Individual performance on personal objectives and behavior in line with Zurich’s values, as assessed through the performance management process.
Eligibility All employees. Country specific (more than 39,000 plan participants in 2019).
Clawback framework established for members of the ExCo, and in some jurisdictions for additional LTIP participants, 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 share-based remuneration is prohibited.
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 to motivate employees to achieve key short-term and long-term business goals. Further information on the Group’s STIP and LTIP are set out below.
Short-term incentives Short-term (one-year) incentives are performance-driven based on the following design for 2019: Short-term incentives support employees to focus their performance on the achievement of key financial, customer and individual objectives set at the beginning of the year. The main enhancements outlined in last year’s remuneration report and implemented in 2019 3 were: 33 Simplification of the performance assessment approach with a move from a five-point rating scale to three performance categories. These are merit-based and are assigned on the basis of an individual’s personal achievement on objectives and the behaviors demonstrated. Each performance category has further differentiation levels to define where on the range of performance an individual’s performance lies. For STIP participants, the differentiation levels also allow for more flexible and differentiated award outcomes. In some markets the differentiated STIP awards only apply to employees above a certain job level.
33 Use of the customer net promoter score (NPS), a global best practice standard for measuring customer experience, was extended to additional markets in 2019 to assess the overall business performance for a STIP pool in addition to the existing financial metrics. The customer metrics now cover the majority of STIP participants, supporting continuous improvement of customer experience.
STIP participants have a STIP target amount established for the performance year at a maximum of 100 percent of base salary, unless otherwise approved by the Board.
Key measures 1 Covering the leadership team, control functions, Group and regional employees. 2 The customer net promoter score (NPS) is one of the key measures (20 percent weight) used to determine business performance in markets where there is sufficiently robust data. The customer NPS currently applies to the majority of STIP participants and extending the metric to further markets will continue to be reviewed. 3 Including a separate pool for Farmers New World Life.
Short-term incentives are delivered primarily through the Group’s STIP which is utilized across the organization and in many countries covers all employees. In some countries, based on market practice in that location, only the most senior individuals participate in STIP. In a small number of countries where local plans exist, they broadly follow the same principles as the Group’s STIP.
Long-term incentives Long-term (three- to six-year) incentives are performance-driven based on the following design for the performance period 2019 to 2021: To support the achievement of the Group’s longer-term financial goals, long-term incentives are utilized for a defined group of the most senior positions in the Group, those that have a significant influence on the risk profile of the Group, as well as individuals considered suitable for participation, for example due to market competitiveness given their skills and areas of expertise. This group generally contains the individuals with the highest levels of total remuneration. The LTIP aligns the incentives and behaviors of participants with the interests of the Group and its shareholders. To further support this purpose, the individual hedging of any shares of Zurich Insurance Group Ltd is prohibited.
Key component of Zurich’s �nancial targets ensuring Zurich generates suf�cient cash and demonstrates a commitment to creating liquidity for the business and shareholder requirements.
12th − 10th 9th − 7th 6th − 4th 3rd − 1st
At the vesting date, the number of target shares plus the accrued DEUs are assessed for vesting. In this way, only the number of target shares vesting are eligible for the accrual of DEUs. The final LTIP award for an individual is capped at 200 percent of the aggregate number of target shares and DEUs. For the ExCo, half of the vested shares, including vested DEUs, are sales-restricted for an additional three-year period after the date of vesting. This brings the overall vesting and sales-restriction period to a six-year holding period for this part of the award.
Any vesting of shares for the LTIP award takes place on April 3, three years after the target shares were allocated to the participant.
Exceptional adjustments The Board may exercise discretion when determining the vesting level to prevent unreasonable outcomes, or to reflect the financial impact of decisions taken to implement the strategy, or to deal with exceptional circumstances. An adjustment of +/–25 percent to the calculated vesting level may be applied and this can be positive or negative. No discretionary adjustment was made to the 2020 calculated vesting level.
The right to modify awards to reflect individual circumstances is reserved for the Group CEO except for modifications regarding members of the ExCo where this right is reserved for the Remuneration Committee and the Board. An adjustment of +/–25 percent to the calculated final vesting level may be applied on an individual level prior to vesting. However, if performance under exceptional or unusual circumstances warrants it, exceptions to the +/–25 percent adjustment may be made. In this respect Zurich reserves the right to adjust and even set the vesting level to 0 percent for an individual to reflect specific circumstances (e.g. in connection with a breach of internal or external rules) during the period prior to vesting. Any such adjustment is reserved exclusively for the Remuneration Committee and the Board.
Pensions The Group provides a range of pension benefits to employees, which are designed to reflect local market practices. Benefit levels are positioned toward the relevant market median. The Group Pensions Committee oversees the management of the Group’s pension arrangements within the de-risking frameworks established for benefit design, investments, funding and accounting. On a regular basis, the Group Pensions Committee and the local countries assess the competitive environment with regard to pensions. In recent years, there has been a significant shift away from final salary defined benefit pension arrangements such that almost all new employees are now enrolled in defined contribution and/or cash balance type arrangements.
Chair fee for the Audit Committee 80 – 80 80 Chair fee for the Remuneration Committee 4 60 – 60 60 Chair fee for the Risk and Investment Committee 60 – 60 60 Chair fee for the Governance, Nominations and Sustainability Committee 5 60 – 60 60 1 These amounts are for the period from AGM to AGM. The table excludes other fees for board memberships of subsidiary boards of Zurich. 2 Neither the Chairman nor the Vice-Chairman receive any additional fees for their committee work on the Board of Zurich. 3 Amount remains the same irrespective of the number of committees on which a member of the Board serves. 4 No Chair fee has been paid for the Remuneration Committee since the end of the first quarter in 2018, following the designation of the Vice-Chairman of the Board as
Chair of the Remuneration Committee. 5 For 2019 and 2018 no Chair fee has been paid for the Governance, Nominations and Sustainability Committee, as the Chairman of the Board has been chairing this committee.
The total aggregate fees allocated to the Directors of Zurich and Zurich Insurance Company Ltd for the calendar year ended December 31, 2019, amounted to CHF 4,650,000. This included CHF 2,620,000 in cash and CHF 2,030,000 in five-year sales-restricted shares. The share price at the allocation date was CHF 337.30. The corresponding amount for 2018 was CHF 4,257,500, which comprised CHF 2,467,500 in cash and CHF 1,790,000 in five-year sales-restricted shares. The share price at the allocation date in 2018 was CHF 297.20.
F. Kindle, former Vice-Chairman 6,11 50,000 n.a. n.a. – 50,000 – 50,000 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.
Jasmin Staiblin was newly elected as a member of the Remuneration Committee. 8 In line with applicable laws, Zurich paid the company-related portion of contributions to social security systems, which amounted to CHF 191,738 in 2019. The corresponding contributions in 2018 were CHF 192,690. Any personal contributions of the Directors to social security systems are included in the amounts shown in the table above. Swiss-based Directors are eligible for selected employee benefits.
9 In addition to the fees received as a Director of Zurich Insurance Group Ltd, Susan Bies earned fees for her board membership of the subsidiary board Zurich American Insurance Company on a pro rata basis for her time in the role in 2018.
None of the Directors received any additional honoraria, remuneration or benefits-in-kind from the Group or from any of the Group’s companies other than what is set out earlier. In addition none of the Directors had any outstanding loans, advances or credits as of December 31, 2019 and 2018.
Share plans and shareholdings of Directors The shareholdings of the Directors who held office at the end of 2019, 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 fees, shares acquired in the market by the Directors and shares held by parties related to the Directors.
The core peer group is regularly reviewed by the Remuneration Committee. Further, the analysis is supplemented by additional benchmarking studies as appropriate, for example reviewing practices of large SMI companies in Switzerland or similarly-sized companies in other countries.
Other payments and share allocations – – 0.0 2.5 Contractually agreed remuneration after stepping down and during notice period in the respective year – – 4.8 5.6 1 The remuneration shown is gross, based on the accrual principle, for the time employees are members of the ExCo during the year and does not include any business-related expenses incurred in the performance of the members’ services.
CHF 4.6 million in 2019 and CHF 2.0 million in 2018. Since the contributions are based on full earnings, whereas benefits are capped, there is no direct correlation between the costs paid to social security systems and the benefits received by the executives.
7 The remuneration shown is gross, based on the accrual principle and does not include any business-related expenses incurred in the performance of the members’ or former members’ services.
Explanations of the elements of remuneration for the ExCo The individual remuneration elements shown in the previous table are described in more detail below.
33 Short-term incentives: The amount shown in the table relates to the total cash incentives earned under the Group’s STIP. The individual STIP awards for members of the ExCo are determined in a similar way as for all employees (see the overview on page 103), taking into account: • Business performance: For the ExCo, including the Group CEO, the key metrics defined for the Group STIP pool determine the funding available. These are the Group’s BOP with an 80 percent weight and the overall customer NPS with a 20 percent weight, followed by an overall qualitative assessment of the results. The BOP for 2019 was USD 5.3 billion reflecting a 16 percent increase compared with 2018. The overall customer NPS for the year was above plan and higher compared with 2018, also considering the additional markets included in the assessment for the first time in 2019. This stems from efforts to continuously improve the customer experience and transform the culture towards becoming truly customer led.
• Individual performance: At the beginning of the year, each member of the ExCo receives a target card for their area of responsibility. The target cards include objectives related to the execution of the strategy, in particular in the areas of financial measures, customers, people and relevant strategic projects. At the end of the year, each member of the ExCo conducts a self-assessment of their performance in relation to the targets set. Group Risk Management, together with other control and assurance functions, provide risk and compliance information to be considered as part of the ExCo members’ individual performance assessment. A discussion is subsequently held between each member of the ExCo and the Group CEO. In a rigorous process, the Group CEO and the Remuneration Committee review the individual performance achievements of each member of the ExCo, including behavior and risk aspects. For the Group CEO, the review is conducted by the Remuneration Committee.
33 Long-term incentives: The total number of target performance shares allocated under the Group’s LTIP to members of the ExCo in 2019 for the three-year performance period 2019–2021, was 52,666. This reflects a value of target performance share allocations of CHF 17.5 million using the closing share price of CHF 332.80 on the day prior to the allocation (second working day in April), and assumes a vesting level of 100 percent in 2022. This compares with 57,555 target shares allocated in 2018 at a value of CHF 17.8 million. This does not include dividend equivalent target shares that may accrue during the performance period.
33 Value of other remuneration: Members of the ExCo receive other remuneration in relation to employee benefits, expatriate allowances, perquisites, benefits-in-kind and any other payments due under each member’s employment contract. Benefits-inkind have been valued using market rates.
In extraordinary circumstances where payments are made to new hires to replace forfeitures under the incentive plans of the previous employer, the payments tend to mirror the type and timing of the forfeited payments and can include cash payments and/or awards of restricted or performance shares. Where payments are made in cash, there is typically a clawback period if the employee leaves the company voluntarily during the first two years of employment. Restricted share allocations typically vest over three to five years following the date of allocation and may also be credited with DEUs during the vesting period to compensate for any dividend paid. Restricted shares and associated DEUs are typically forfeited if the holder of such allocations leaves the company before the vesting date and the employment relationship terminates.
33 Contractually agreed remuneration after stepping down and during notice period in the respective year: The amount shown in the table relates to contractually agreed remuneration for the period of employment in 2019 or 2018 as applicable, after stepping down from the ExCo and during the notice period. Such remuneration may include base salaries, cash incentives, LTIP target allocations, pension service costs and other remuneration including employee benefits, on a pro rata basis for the relevant financial year, for members that have stood down from the ExCo.
There were no termination payments (golden parachutes) or payments in advance made, nor any other benefits, such as agreements concerning special notice periods or longer-term employment contracts (exceeding 12 months in duration), or additional contributions to occupational pension schemes, provided.
As of December 31, 2019 and 2018, there were no loans, advances or credits outstanding for members of the ExCo.
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, 2019 and 2018, no former member of the ExCo had any outstanding loans, advances or credits.
No former member of the ExCo received remuneration in 2019 other than disclosed in the remuneration report 2019.
Shareholdings of the members of the ExCo This section provides a summary of total outstanding share commitments under the LTIP and from restricted share allocations for members of the ExCo as of December 31, 2019.
Target share allocations under the LTIP and from restricted share allocations As of December 31, 2019, the total number of unvested target share allocations under the LTIP was 171,320 (218,142 as of December 31, 2018). Further, the number of unvested restricted shares was 3,683 in 2019 (13,616 in 2018).
A summary of the unvested target share allocations as of December 31, 2019, under the LTIP and from restricted share allocations is set out in the following table: Summary of unvested target share allocations for the ExCo as of December 31
1 Dividend equivalent target shares are credited within the regular LTIP and are included in these amounts where they have already accrued. At the vesting date, the original number of target shares allocated, plus the dividend equivalent target shares, will be assessed for vesting in aggregate based on the performance achievements against the predefined vesting grid. No dividends will accrue on the dividend equivalent target shares.
2 No performance conditions are applicable for vesting. As of July 1, 2018, dividend equivalent shares are credited during the vesting period and included in these amounts where they have already accrued.
In addition to any shares acquired in the market, the numbers also include vested shares, whether sales-restricted or not, received under the LTIP. The table does not however, include the share interests of the members of the ExCo that are currently unvested target shares or unvested restricted shares. All interests include shares held by related parties to members of the ExCo.
M. Greco, Group CEO 61,929 2,000 U. Angehrn, Group Chief Investment Officer 16,086 7,289 J. Dailey, CEO of Farmers Group, Inc. 19,117 12,055 C. Dill, CEO Latin America 14,825 13,865 P. Giger, Group Chief Risk Officer 2 – n.a. J. Howell, CEO Asia Pacific 8,092 5,046 A. Martin, CEO EMEA and Bank Distribution 2 3,747 2,487 G. Quinn, Group Chief Financial Officer 44,680 31,779 K. Savio, CEO North America 6,352 4,723 J. Shea, CEO Commercial Insurance 4,412 – K. Terryn, Group Chief Operating Officer 15,332 14,136 1 None of the members of the ExCo, together with parties related to them, held more than 0.5 percent of the voting rights as of December 31, 2019 or 2018. 2 Peter Giger was appointed as Group Chief Risk Officer as an external appointment effective October 1, 2019. A. Martin was appointed as CEO EMEA and Bank
Remuneration of all employees Please refer to the remuneration framework section on page 100 for the key elements of remuneration and the benchmarking approach for all employees. The benchmarking analysis is mainly carried out and approved at a local level. The Group had 54,030 full-time equivalent employees as of December 31, 2019 (52,267 in 2018).
Variable remuneration Cash incentive awards earned for the year 4 558 538 Value of target share allocations made in the year 5 139 140
Total remuneration 5,638 5,231 1 The 2018 amounts have been restated from the U.S. dollar amounts disclosed in the remuneration report 2018, to Swiss francs using the relevant exchange rates. 2 Other remuneration includes amounts for employee benefits and any other payments due under employment contracts. 3 This represents the present value of the defined benefits from pension and post-retirement benefit plans, plus employers’ contributions to defined contribution plans, arising from employee service over the accounting period. The amount included in this figure for defined benefit plans is calculated using actuarial factors and can vary year-on-year as economic conditions change. These numbers are explained in greater detail in note 20 of the consolidated financial statements.
4 Includes the amounts under the Group’s STIP, as well as other cash incentive awards such as those from local plans which are subject to local Board approval and any sign-on and severance payments in cash.
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, 2019 and 2018.
Value of outstanding deferred remuneration for all employees in CHF millions, for the years ended December 31 2019 2018 1
The value of the deferred and unvested remuneration has been determined by multiplying the number of outstanding shares by the relevant share price at the original date of allocation and reflects the assumption of a future vesting level of 100 percent. The value of the vested, but sales-restricted shares considers the taxable value at the time of vesting.
Key risk takers The following definition and principles for sign-on and severance payments apply.
Sign-on and severance payments for key risk takers in CHF millions, for the years ended December 31 2019 2018
33 Long-term incentive plan: • The performance criteria of the LTIP have been aligned to the targets of the next strategic cycle as set out at the Investor Day in November 2019. Increases to both the NIAS ROE and cash remittance performance metrics are outlined in the vesting grid below and show a commitment to higher performance expectations as of the next performance period 2020–2022.
Vesting grid relevant for LTIP allocations made from 2020 and applicable for vesting decisions from 2023: Vesting grid for the new strategic cycle 1 Subject to change following adoption of IFRS 17. Refer to note 2 of the consolidated financial statements for further information.
Performance criteria 0% vesting 50% vesting 100% vesting 150% vesting 200% vesting
18th – 13th 12th – 10th 9th – 7th 6th – 4th 3rd – 1st
Cash remittance < USD 10.5 bn USD 10.5 bn USD 11.5 bn USD 12.0 bn ≥ USD 12.5 bn
33 Board fee structure: • As part of the regular review and monitoring of Zurich’s Board fees, the independent adviser to the Board’s Remuneration Committee carried out a benchmarking analysis of Board fees at similarly-sized companies in the SMI and Dow Jones Insurance Titans 30 Index.
• The basic fee for members of the Board remains the same. In addition, the amount for the committee fee continues to be paid only once, irrespective of the number of committees on which a member of the Board serves.
In addition to the topics outlined above, the enhancements to the performance management and incentive approach that were implemented in 2019 will continue to be reviewed and refined as needed. Incorporating customer metrics to assess business performance, along with existing financial metrics, for STIP funding purposes, will also be expanded to include additional markets once sufficiently robust data is available.
The Remuneration Committee will continue to seek dialogue with investors and proxy advisers in 2020. Further, the Remuneration Committee will ensure that the remuneration framework, including reviews of the framework and any subsequent changes proposed, are aligned with the strategy, embedded in the risk framework and comply with legal and regulatory requirements. As in previous years, the Remuneration Committee enforces the governance framework and carefully monitors the link between key performance factors and variable remuneration awards.
We have audited the accompanying remuneration report of Zurich Insurance Group Ltd for the year ended December 31, 2019. The audit was limited to the information according to articles 14–16 of the Ordinance against Excessive Compensation in Stock Exchange Listed Companies (Ordinance) contained in the tables labeled ‘audited’ on pages 108 to 110 and pages 112, 115 and 117 of the remuneration report.
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.
Opinion In our opinion, the remuneration report of Zurich Insurance Group Ltd for the year ended December 31, 2019 complies with Swiss law and articles 14–16 of the Ordinance.
Connecting business strategy to risk taking Rejoining Zurich as the Group Chief Risk Officer on October 1, 2019, I have inherited a sound risk management organization, evidenced by our strong Standard and Poor’s rating for enterprise risk management.
Total Z-ECM capital required: USD 34.4 billion %, as of July 1, 2019
In this report, we present the Zurich Economic Capital Model (Z-ECM) results as well as sensitivity analysis to adverse scenarios. Zurich’s very strong Z-ECM capital position and cash remittances support the resilience of the Group’s dividend strategy to external events.
Peter Giger Group Chief Risk Officer and helps protect capital, liquidity, earnings, and reputation.
In determining the Group’s exposure to risks resulting from digital transformation, the Group assesses risks in cyber, information technology, data security and risks arising from emerging technologies and innovation to ensure our business remains resilient in the future.
Financial strength supports the Group’s new strategic cycle Rewarding shareholders through our attractive dividend policy based on sustainable earnings growth, a strong capital base and cash generation is part of our customercentered strategy.
The Group’s Z-ECM ratio decreased from 124 percent as of January 1, 2019 to 118 percent as of July 1, 2019. The January 1, 2020 estimate is 129 percent with an error margin of +/–5 percentage points. The development of the Z-ECM ratio in 2019 was driven mainly by continued economic profit generation, net of dividend accrual, which was partially offset by an increase in market risk due to the low interest rate environment.
The risk review information marked ‘audited’ is an integral part of the consolidated financial statements.
Taking and managing risk is an integral part of the insurance business. Zurich manages and takes risks in an informed and disciplined manner and within a pre-determined risk appetite and tolerance.
Zurich’s goal is to maintain capital consistent with a ‘AA’ financial strength rating for the Group. The Group translates that goal into a quantified risk tolerance. The primary metric used to steer business is the Zurich Economic Capital Model (Z-ECM) which provides a key input into the Group’s planning process as an assessment of the Group’s risk profile against the Group’s risk tolerance. The Z-ECM forms the basis for optimizing the Group’s risk-return profile by providing consistent risk measurement across the Group.
<90% Z-ECM ratio below Group risk tolerance level, requiring appropriate remedial actions 100–120% ‘AA’ target range
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 do not encourage inappropriate risk-taking. Group Risk Management’s role in respect to remuneration and its interaction with Board committees is described in the remuneration report.
The Swiss Code of Obligations stipulates that dividends may only be paid out of freely distributable reserves or retained earnings. Apart from what is specified by the Swiss Code of Obligations, Zurich Insurance Group Ltd faces no legal restrictions on dividends it may pay to its shareholders. As of December 31, 2019, the amount of the statutory general legal reserve was more than 30 times the paid-in share capital. The ability of the Group’s subsidiaries to pay dividends may be restricted or indirectly influenced by minimum capital and solvency requirements imposed by insurance and other regulators in the countries in which the subsidiaries operate. Other limitations or considerations include foreign exchange control restrictions in some countries, and rating agencies’ methodologies.
The chart below shows the Z-ECM capital required, split by risk type, as of July 1, 2019 and as of January 1, 2019. As of July 1, 2019, the largest proportion of Z-ECM capital required pertained to market risk which comprised 49 percent of the total. Z-ECM capital required for premium and reserve risk was the second-largest, comprising 19 percent. The increase in Z-ECM required capital between January 1, 2019 and July 1, 2019 is principally due to an increase in market risk and life insurance risk, mainly as a result of a falling interest rate environment. 1 Remaining risk types saw smaller movements between January 1, 2019 and July 1, 2019. However, in relative terms, they contribute less to the Group required capital due to larger market and life insurance risks. The increase in Z-ECM required capital is mainly attributable to the Life business, which as a result replaced Property and Casualty as the largest business segment as of July 1, 2019.
1 The acquisition of OnePath, see note 5 in the consolidated financial statements, has been recognized as a preliminary estimate in Z-ECM required capital in July 1, 2019, contributing to the increase in life insurance risks and market risk
Analysis of the Group’s Z-ECM available financial resources in USD billions, as of July 1, 2019
Net Z-ECM available �nancial resources 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 classi�ed as operational debt whereby, since the second quarter of 2019, excluding net new issued senior debt.
Market risk sensitivities show the estimated impact on the Group’s Z-ECM ratio of a one percentage point (100 basis points or bps) increase or decrease in yield curves, a 10 percent appreciation in the U.S. dollar, a 20 percent rise or decline in all stock markets, and a one percentage point change in credit spreads, with and without euro-denominated sovereign bonds. 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.
2 Includes direct allocation of USD 0.2 billion to Farmers.1 Includes direct allocation of USD 0.2 billion to Farmers.
The Group has interactive relationships with three global rating agencies: S&P Global Ratings, Moody’s, and AM Best. The insurance financial strength rating (IFSR) of the Group’s main operating entity, Zurich Insurance Company Ltd, is an important element of Zurich’s competitive position, particularly for the commercial customer segment. The Group’s credit ratings derived from the financial strength ratings also affect the cost of capital.
Regulatory requirements in the European Economic Area (EEA) The main regulatory framework governing the Group’s subsidiaries in the EEA is Solvency II. This is a risk-based capital framework which covers capital requirements (pillar 1), governance and risk management (pillar 2) and reporting (pillar 3). All EEA-based legal entities of the Group use the Solvency II standard formula for their pillar 1 requirements with the exception of Zurich Insurance plc (Ireland) that applies an approved internal model.
Regulatory requirements in the U.S. In the U.S., required capital is determined to be ‘company action level risk-based capital’ calculated using the National Association of Insurance Commissioners’ risk-based capital model. This method, which builds on regulatory accounts, measures the minimum amount of the capital for an insurance company to support its overall business operations by taking into account its size and risk profile.
Management of Property & Casualty business insurance risk The Group’s underwriting strategy takes advantage of the diversification of Property & Casualty (P&C) risks across lines of business and geographic regions. Zurich’s underwriting governance is applicable throughout the Group. Underwriting discipline is a fundamental part of managing insurance risk. The Group sets limits on underwriting capacity and delegates authority to individuals based on their specific expertise, and sets appropriate underwriting and pricing guidelines. Technical reviews assure that underwriters perform within authorities and adhere to underwriting philosophies and policies.
Actions continue to rebalance the portfolio, reducing exposure to long tail lines. Governance is in place to ensure appropriate top-line targets and profitability. Reinsurance is deployed to help manage insurance risk. Group Risk Management also provides independent assurance through risk reviews.
Natural catastrophes The Group uses third-party models (adjusted to Zurich’s view) to manage its underwriting, ensure accumulations stay within intended exposure limits and assess the capital requirement due to natural catastrophes. The same view Zurich has on natural catastrophe risk also underpins profitability assessment and strategic capacity allocation and guides the type and quantity of reinsurance Zurich buys.
For terrorism, worker injury and property risk exposures are analyzed to identify areas with significant risk concentration. Other lines of business are assessed, although the potential exposure is not as significant. A vendor-provided catastrophe model is used to evaluate potential exposures in every major U.S. city and selected cities in Europe. The Group’s analysis for the P&C business has shown that its exposures outside of North America are lower, in a large part due to government-provided pools. Outside the modeled areas, exposure concentrations are identified in Zurich’s Risk Exposure Data Store (REDS). Exposure concentrations for location-based man-made scenarios, other than terrorism, are also identified in REDS, for example, industrial explosions at global ports.
The Group uses third-party models to manage its underwriting and accumulations for cyber and casualty catastrophe. The Group actively monitors and manages its cyber exposure and continue to refine products to ensure their appropriateness. Improving modeling capabilities and data capture for cyber and casualty catastrophe risks are key focus areas.
Insurance risk sensitivity for the Property & Casualty business – current period in USD millions, for the year ended December 31, 2019
Insurance risk sensitivity for the Property & Casualty business – prior period in USD millions, for the year ended December 31, 2018
Life business risk 33 Policyholder behavior risk – on average, the policyholders discontinue or reduce contributions or withdraw benefits prior to the maturity of contracts at a rate that is different from expected 33 Expense risk – expenses incurred in acquiring and administering policies are higher than expected 33 New business risk – volumes of new business are insufficient to cover fixed acquisition expenses
Market risk 33 Market risk – the risk associated with the Group’s balance sheet positions where the value or cash flow depends on financial markets, which is analyzed in the ‘market risk, including investment credit risk’ section
A more diversified portfolio of risks is less likely than an undiversified portfolio to be affected across the board by a change in any subset of the risks. Diversification across regions and businesses (between unit-linked and other business including protection and life annuity products, as shown in Table 3 below) contributes to reducing the impacts of the risks associated with the Life business listed above.
Management of Life business insurance risk The Group has local product development committees and a Group-level committee to analyze potential new life products that could significantly increase or change the nature of its risks. The Group regularly reviews the continued suitability and the potential risks of existing life products to ensure sustainability of the business.
Unit-linked products are designed to reduce much of the market and credit risk associated with the Group’s traditional business. Risks that are inherent in these products are largely passed on to the policyholder, although a portion of the Group’s management fees is linked to the value of funds under management, and hence is at risk if fund values decrease. To the extent that there are guarantees built into the product design, unit-linked products carry mortality/morbidity risk and market risk. Contracts may have minimum guaranteed death benefits where the sum at risk depends on the fair value of the underlying investments. For certain contracts, these risks are mitigated by mortality and morbidity charges.
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 to ensure responsible and sustainable business practices.
Lower interest rates have led to an increase in both Life business risks and Life liability risks (especially Longevity risk).
Furthermore, interest rate guarantees (with concentration in traditional, guaranteed business in Germany and Switzerland and variable annuity business in the U.S. containing minimum guaranteed death benefits) expose Zurich to financial losses that may arise as a result of adverse movements in interest rates. These guarantees are managed through a combination of asset-liability management and hedging.
Observing best-estimate assumptions on cash flows related to benefits of insurance contracts gives some indication of the size of the exposure to risks and the extent of risk concentration. Table 3 shows the Group’s concentration of risk within Life by region and line of business based on reserves for life insurance on a net of reinsurance basis. The life insurance reserves also include policyholder surplus reserves with a loss absorbing capacity 1, predominantly in Germany for an amount of USD 9.4 billion in 2019 (2018: USD 7.4 billion) and in the UK for an amount of USD 0.5 billion in 2019 (2018: USD 0.5 billion). The Group’s exposure to life insurance risks varies significantly by geographic region and line of business and may change over time. See note 8 of the consolidated financial statements for additional information on reserves for insurance contracts. 1 Policyholder surplus reserves with loss-absorbing capacity refer to funds allocated to the policyholders that can be used by the shareholders, which, under certain conditions, may require regulatory approval.
Life of which: Rest of Europe, Middle East & Africa 392 342 2,043 1,946 2,435 2,288
The Group structures and aligns its external reinsurance protection to its capital position to achieve an optimum risk-return ratio. This includes participation in the underlying risks through self-retentions. The Group manages its central reinsurance purchasing according to these principles. The cession rate for P&C was 23.0 percent as of December 31, 2019 and 21.0 percent as of December 31, 2018. The cession rate for Life was 8.0 percent as of December 31, 2019 and 7.0 percent as of December 31, 2018.
The Group uses traditional and collateralized reinsurance markets to protect itself against extreme single events, multiple event occurrences across regions, or increased frequency of events. Specifically, to protect the Group against man-made and natural catastrophe scenarios, per event Zurich arranges an annual aggregate global cover as illustrated on the graph on the next page.
The Group participates in the underlying risks through its retention and through its co-participation in excess layers. The natural catastrophe reinsurance covers are on a loss-occurrence basis except the global aggregate catastrophe cover, which operates on an annual aggregate basis. The in-force natural catastrophe covers renew annually, with the exception of the global catastrophe cover, which renewed on January 1, 2019, for a three-year term.
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). 3 This USD 200 million cover can be used only once, either for aggregated losses or for an individual occurrence or event. The attachment point for a U.S. Hurricane event is USD 2,315 million; for any other event USD 2,200 million.
The Group has policies and limits to manage market risk and keep its strategic asset allocation in line with its risk capacity. Zurich centrally manages certain asset classes to control aggregation of risk and provides a consistent approach to constructing portfolios and selecting external asset managers. It diversifies portfolios, investments and asset managers, and regularly measures and manages market risk exposure. The Group has set limits on concentration in investments in single issuers and certain asset classes, as well as by how much asset interest rate sensitivities can deviate from liability interest-rate sensitivities. The Group regularly reviews its capacity to hold illiquid investments.
In compliance with Swiss insurance regulation, the Group’s policy prohibits speculative trading in derivatives, meaning a pattern of so called 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 related to 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 key equity markets through the use of derivatives or purchase or sale of securities within a short time frame.
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 several factors including changes in expected default probability, default losses, risk premium, liquidity and other effects.
Group investments sensitivities The economic market risk sensitivities of the fair value for Group investments before tax as of 2019 was a negative USD 10.9 billion (negative USD 9.9 billion as of 2018) for a 100-basis-point increase in interest rate. For a 100-basispoint decrease in interest rate, the sensitivity was USD 12.7 billion in 2019 (USD 11.1 billion as of 2018). For a 10 percent decline in equity market, Group investments dropped in value by USD 1.3 billion in 2019 compared with USD 1.1 billion as of 2018. A 100-basis-point increase in credit spreads resulted in a decrease of USD 5.7 billion in 2019 compared with USD 5.2 billion as of 2018.
In USD millions, as of December 31 2019 2018 100 basis point increase in the interest rate yield curves Property & Casualty (61) (180)
in USD millions, as of December 31 2019 2018 10% decline in stock markets Property & Casualty (598) (593)
in USD millions, as of December 31 2019 2018 100 basis point increase in credit spreads Property & Casualty (1,629) (1,614)
* 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 Note 1 of the consolidated financial statements.
Table 7 shows the credit-risk exposure of debt securities, by credit rating. As of December 31, 2019, 95.5 percent of the Group’s debt securities was investment grade and 24.5 percent was rated ‘AAA.’ As of December 31, 2018, 95.2 percent of debt securities was investment grade and 25.2 percent was rated ‘AAA.’
Debt securities − credit risk concentration by industry %, as of December 31
The second-largest concentration in the Group’s debt securities portfolio is securitized, including structured finance securities and covered bonds.
In addition to debt exposure, the Group had loan exposure of USD 4.1 billion and USD 4.4 billion to the German central government or the German federal states as of December 31, 2019 and 2018, respectively. For more information, see the ‘mortgage loans and other loans’ section.
Mortgage loans and other loans Mortgage loans amounted to USD 5.9 billion as of December 31, 2019 and USD 6.6 billion as of December 31, 2018. The Group’s largest mortgage loan portfolios are held in Switzerland (USD 3.2 billion) and in Germany (USD 1.9 billion); these are predominantly secured against residential property but also include mortgages secured by commercial property. The Group invests in mortgages in the U.S. (USD 0.6 billion); these are mainly participations in large mortgage loans secured against commercial property.
The credit risk arising from other loans is assessed and monitored together with the debt securities portfolio. Out of the USD 8.3 billion reported loans as of December 31, 2019, 54 percent are government-related, of which 92 percent are to the German central government or the German federal states. As of December 31, 2019, USD 4.5 billion were rated as ‘AAA’ (55 percent) compared with 4.7 billion as of December 31, 2018; USD 1.6 billion as ‘AA’ (20 percent) compared with 0.7 billion as of December 31, 2018; USD 0.3 billion as ‘A’ (3 percent) compared with 0.3 billion as of December 31, 2018; USD 1.3 billion as ‘BBB’ and below (16 percent) compared with 1.2 billion as of December 31, 2018; and USD 0.5 billion as unrated (6 percent) compared with 0.7 billion as of December 31, 2018.
Risk from currency exchange rates Currency risk is the risk of loss resulting from changes in exchange rates. The Group operates internationally and therefore is exposed to the financial impact of changes in the exchange rates of various currencies. The Group’s presentation currency is the U.S. dollar, but its assets, liabilities, income and expenses are denominated in many currencies, with significant amounts in euro, Swiss franc and British pound, as well as the U.S. dollar.
Sensitivity of the Group’s total IFRS equity to exchange rate fluctuations in USD millions, as of December 31 2019 2018 10% increase in EUR/USD rate 382 336 GBP/USD rate 270 215 CHF/USD rate 1 529 482 BRL/USD rate 178 163 AUD/USD rate 2 308 130 Other currencies/USD rates 1 510 439 1 The 2018 figures have been updated. 2 AUD/USD rate sensitivity has been included in 2019 due to the impact of the OnePath acquisition on the Group.
Credit risk is the risk associated with a loss or potential loss from counterparties failing to fulfill their financial obligations. See section ‘risks from defaults of counterparties’ for market-risk-related asset categories. The Group’s exposure to other credit risk is derived from the following main categories of assets: 33 Reinsurance assets 33 Receivables
The Group actively uses collateral to mitigate credit risks. Nevertheless, underlying credit risks are managed independently from the collateral. The Group has limits and quality criteria to identify acceptable letter-of-credit providers. Letters of credit enable Zurich to limit the risks embedded in reinsurance, captives, deductibles, trade credit and surety.
On-balance sheet exposures are the main source of credit risk. Off-balance sheet credit exposures are related primarily to certain insurance products, reinsurance and collateral used to protect underlying credit exposures on the balance sheet. The Group also has off-balance sheet exposures related to undrawn loan commitments of USD 1.5 million and USD 2.0 million as of December 31, 2019 and 2018, respectively. See note 22 of the consolidated financial statements for undrawn loan commitments.
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, 2019 and 2018 respectively, 57 percent and 52 percent of the exposure ceded to reinsurers that are rated below ‘A–’ or are not rated, was collateralized. Of the exposure ceded to reinsurers that are rated below ‘A–’ or are not rated, 65 percent was ceded to captive insurance companies in 2019, and 50 percent in 2018.
Reinsurance assets included reinsurance recoverables (the reinsurers’ share of reserves for insurance contracts) of USD 22.8 billion and USD 21.3 billion, and receivables arising from ceded reinsurance of USD 1.5 billion and USD 1.1 billion as of December 31, 2019 and 2018, respectively, gross of allowance for impairment. Reserves for potentially uncollectible reinsurance assets amounted to USD 119 million as of December 31, 2019 and USD 113 million as of December 31, 2018. 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 9 shows reinsurance assets and unsecured reinsurance assets split by rating.
Reinsurance assets and unsecured reinsurance assets by rating of reinsurer and captive as of December 31 2019 2018
Credit risk related to receivables The Group’s largest credit-risk exposure to receivables is related to third-party agents, brokers and other intermediaries. It arises where premiums are collected from customers to be paid to the Group, or to pay claims to customers on behalf of the Group. The Group has policies and standards to manage and monitor credit risk related to intermediaries. The Group requires intermediaries to maintain segregated cash accounts for policyholder money. The Group also requires that intermediaries satisfy minimum requirements of capitalization, reputation and experience, and provide short-dated business credit terms.
Receivables that are past due but not impaired should be regarded as unsecured, but some of these receivable positions may be offset by collateral. The Group reports internally on Group past-due receivable balances and strives to keep the balance of past-due positions as low as possible, while taking into account customer satisfaction.
33 Documents and reviews operational events exceeding a threshold determined per Zurich’s risk policy manuals. Remedial action is taken to avoid the recurrence of such operational events.
33 Conducts risk assessments where operational risks are identified for key business areas. Risks identified and assessed above a certain threshold must have a risk response. Risk mitigation plans are documented and tracked on an ongoing basis. In the assessments, the Group uses sources of information such as the Total Risk Profiling™ process, internal control assessments, and audit findings, as well as scenario modeling and operational event data.
The Group has specific processes and systems in place to focus on high-priority operational matters such as managing information security and operational resilience (see sub-section digital and resilience risk, information security and operational resilience), as well as combating fraud.
Preventing, detecting and responding to fraud are embedded in Zurich’s business processes. Both claims and non-claims fraud are included in the common framework for assessing and managing operational risks. For Z-ECM calculations, claims fraud is part of insurance risk and non-claims fraud is part of operational risk.
Management, as the first line of defense, is responsible for identifying, evaluating and managing risk, and designing, implementing and maintaining internal control. Key processes and controls in the organization are subject to review and challenge by management, Group Risk Management, Group Compliance and Group Audit. Control issues of Group-level significance and associated mitigation actions are reported regularly to the Audit Committee of the Board. The Risk and Investment Committee of the Board reviews the effectiveness of the Group’s risk management system, including the Group’s risk tolerance and enterprise-wide risk governance framework, in accordance with the charter for each committee.
The Group’s Disclosure Committee, chaired by the Head of Group Financial Accounting and Reporting, assesses the content, accuracy and integrity of the disclosures and the effectiveness of the internal controls over financial reporting. The conclusions result in a recommendation to the Group Chief Financial Officer to release the financial disclosures to the Audit Committee of the Board, who may then challenge further. The Board reviews and approves the announcement of the results and the annual report before they are made public.
The internal and external auditors also regularly report conclusions, observations and recommendations that arise as a result of their independent reviews and testing of internal controls over financial reporting and operations.
The Group regularly analyzes the liquidity of the investment assets and ensures that the liquidity of assets stays in line with liquidity requirements. During 2019, the Group was within its capacity to hold illiquid assets.
For more information on debt obligation maturities, see note 18 of the consolidated financial statements, and for information on commitments and guarantees, 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 based on Zurich’s purpose and values and strategic options.
The Group aims to preserve its reputation by adhering to applicable laws and regulations, by following the core values and principles of the Group’s code of conduct that promote integrity and good business practice, and by living up to its sustainability commitments. The Group centrally manages certain aspects of reputation risk, for example, communications, through functions with the appropriate expertise. Potential risks to Zurich’s reputation are included in its risk assessment processes and tools, including the TRP process.
Sustainability risks are also becoming more complex and interconnected as a result of these trends. Insurers are increasingly expected to be agents of change and play a more impactful role in addressing these societal issues and interconnected risks.
Clear roles and responsibilities, starting with the Zurich Insurance Group Ltd Board of Directors and including the Zurich management, aim to ensure effective oversight and action with respect to climate change and other sustainability risks.
Zurich’s Sustainability Leaders Council ensures that its approach to sustainability is effectively integrated in the way business is conducted and enables Zurich to live up to its code of conduct, its purpose and values, and the United Nations (UN) Global Compact. The Council comprises senior executives from across the business and is chaired by the Group Head of Public Affairs and Sustainability.
Climate strategy Zurich’s climate strategy is guided by its commitment to the business ambition for 1.5°C pledge aimed at limiting average global temperature increases to 1.5°C. A comprehensive climate road-map to transform Zurich into a 1.5°C compatible company is under development, with the goal to protect the Group’s balance sheet, capture climaterelated service and product revenues by supporting our customers and society to build resilience to climate impacts and transition to a zero-carbon economy.
Zurich is exposed to physical risk of climate change through the underwriting and real estate investment portfolios. While assessing and managing the impact of extreme weather events is part of Zurich’s core business competency, changes in frequency and severity of events caused by climate change add to the challenges in accurately measuring expected impacts. As commercial catastrophe models are typically based on historical data and hence backwardlooking, they might not sufficiently account for climate risks already materializing. Potential model gaps are addressed as part of Zurich’s model validation process and the Zurich view approach provides further review for impacts that Zurich considers under-represented in the standard models. Generally, annual policy renewals provide a degree of insulation against increasing physical risks for short-tail business. However, the ability to isolate gradual changes to the risk (e.g., a change in frequency, severity or correlations), and therefore capture the impacts of a changing climate, become more pressing over a longer time-frame, especially for long-tail lines of business.
There is also a risk that physical events reduce the profitability of investments across asset classes (e.g., equities, real estate, sovereign or corporate bonds), though analysis suggests that very significant impairments would be required for Zurich’s portfolio to be materially impacted.
Zurich could be exposed to transition risks if it fails to manage changing market conditions and customer needs as part of the transition to a low-carbon economy, resulting in asset impairment, opportunity cost and lost market share. In a transition scenario, industries unable to de-carbonize could experience declining profitability and lack of re-financing, which could lead to a lack of maintenance with increasing rates of outages and equipment break-downs that translate into higher insurance losses. Failure to manage transition risk could also lead to reputational impacts, both internal and external, resulting from a failure to deliver on publicly stated commitments. Although not considered material in the near-term, the increasing frequency of climate-related legal action suggests climate-related litigation could represent a significant potential risk in the long term.
As an investor, Zurich has established responsible investment and climate-change investment strategies, including impact investments, green bonds, and a comprehensive approach to ESG integration. Impact investments can help mitigate climate change through their targeted, positive impact, and also offer a financial return commensurate with risks. Zurich will consider impact investments that help increase energy efficiency, generate renewable energy or mitigate climate change or protect the environment in other ways. Through its commitment to the green bonds market, Zurich is seeking to capture opportunities across the universe of environmental oriented, social and sustainable bonds.
Risk management Zurich’s approach to managing climate risk is embedded within its multi-disciplinary Group-wide risk management processes. As such, climate risk is managed in a manner consistent with how other risks to the Group are managed. Under the sponsorship of the Group CRO, Zurich conducts an annual Group-wide assessment of climate-changerelated risks using the Total Risk Profile (TRPTM) approach. This assessment, involving subject matter experts from relevant business areas, includes identifying management actions appropriate to the risks identified.
Internal scenarios representing an archetypical-transition path and a physical-risk path provide the assumptions underlying the assessment. Zurich developed a climate-change scorecard, which aims to measure developments in a range of climate-transition-related areas. It uses quantitative data and draws on various climate-change scenarios constructed by the Intergovernmental Panel on Climate Change (IPCC) and the International Energy Agency (IEA). To assess financial impacts of potential climate scenarios, climate risks are also assessed as part of its Own Risk and Solvency Assessment (ORSA) and this year it included a scenario based on the rapid implementation of economic and other policies to stress-test potential transition risk exposure.
For more information on how Zurich manages its liability exposure to climate-related natural catastrophes, see sub-section ‘Insurance risk’.
Third-party and transformation risk Outsourcing and the engagement with third parties introduces risks relevant to the delivery of our strategy, such as data loss or disclosure, disruption to critical customer services and regulatory compliance. Digitization has accelerated the complexity and changes to the Group’s third party ecosystem. Zurich looks to address risks associated with third-party engagements along its supply and value chain. Applying a consistent Group-wide approach to outsourcing governance is among Zurich’s key priorities.
Business resilience risk Zurich, along with the rest of the insurance industry, is going through a period of transformation in order to meet changing customer expectations. In addition, increasing automation of processes, development of advanced analytics capabilities, and fragmented supply chains have contributed to an increasingly complex operating environment. In response to these challenges and to better protect the interests of our stakeholders, Zurich has initiated a business resilience program which clearly defines resilience-action-plan responsibility, identifies critical business services susceptible to systemic technology failure, integrates its response frameworks, and provides enhanced transparency through a set of KRIs addressing resilience across the organization.
Full year 2019 results show strong performance across all businesses, with business operating profit (BOP) up 16 percent and a BOPAT ROE of 14.2 percent. Net income increased 12 percent to the highest level in a decade. A dividend increase of 5 percent has been proposed.
2017 to 2019 targets exceeded The Group has exceeded the ambitious targets set in 2016, resulting in a simpler, more agile and efficient company. The business has been further strengthened through targeted acquisitions in key geographies.
2019 APE share of non-traditional products (%) GWP growth (in USD millions)
4 In local currency and adjusted for closed acquisitions and disposals.
Progress made across all businesses Property & Casualty results showed further strong year-on-year progress with BOP up 38 percent, driven by an improved underwriting performance and higher investment results, which more than compensated for a challenging year in the Group’s North American crop business.
Gross written premiums increased 2 percent with growth strengthening over the year, led by hardening pricing and underlying growth, with current positive pricing trends expected to continue through 2020.
The results also continued to demonstrate the strength of the Group’s reserves, with prior year reserve development of 2.3 points at the same level as in 2018.
The Group’s Life business delivered a strong performance against a high 2018 result with BOP declining 4 percent due to adverse currency movements. On a like-for-like basis adjusting for acquisitions, disposals and currency movements, growth was 2 percent, despite a lower contribution from favorable one-time items.
The Group’s strategy of focusing on protection business and capital-efficient savings products positions it well for a continuation of low investment yields, with 85 percent of annual premium equivalent (APE) sales from protection and capital-efficient savings products.
Farmers delivered business operating profit growth of 4 percent, reflecting fee growth and favorable mark-to-market movements on a deferred compensation plan at Farmers Management Services, as well as a strong performance at Farmers Life. The Farmers Exchanges continued to deliver steady and consistent growth supported by Farmers strategy to deepen customer relationships, broaden product offerings and expand in the eastern U.S.
In addition to the figures stated in accordance with International Financial Reporting Standards (IFRS), the Group uses business operating profit (BOP), new business metrics and other performance indicators to enhance the understanding of its results. Details of these additional measures are set out in the separately published glossary. These should be viewed as complementary to, and not as substitutes for, the IFRS figures. For a reconciliation of BOP to net income attributable to shareholders (NIAS), see note 27 (table 27.4) of the audited consolidated financial statements for the years ended December 31, 2019.
Farmers business operating profit 1,707 1,643 4% Farmers Management Services management fees and other related revenues 3,780 3,204 18% Farmers Management Services managed gross earned premium margin 7.0% 7.0% (0.0 pts) Farmers Life new business annual premium equivalent (APE) 2 82 84 (3%)
Return on common shareholders’ equity (ROE) 6 14.4% 13.1% 1.3 pts Business operating profit (after tax) return on common shareholders’ equity (BOPAT ROE) 6 14.2% 12.1% 2.2 pts 1 Parentheses around numbers represent an adverse variance.
2 Details of the principles for calculating new business are included in the embedded value report in 2019. New business value and new business margin are calculated after the effect of non-controlling interests, whereas APE is presented before non-controlling interests. 3 Including investment cash. 4 Calculated on average Group investments.
5 Ratio for December 31, 2019 reflects midpoint estimate with an error margin of +/- 5 pts. 6 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.
The contribution of other items, which include the net non-technical result and non-controlling interests, was USD 158 million higher than in the previous year, mainly driven by the absence of major restructuring charges included within business operating profit and a foreign exchange gain of USD 29 million.
The EMEA combined ratio of 94.3 percent for 2019 was 1.5 percentage points lower than in 2018, with improvement in the expense ratio and higher prior year reserve releases the main drivers.
The Asia Pacific combined ratio reduced by 5.3 percentage points to 94.2 percent, mainly due to improvements in other underwriting expenses and a lower level of natural catastrophes and weather-related events.
In EMEA, business operating profit increased 3 percent in U.S. dollars and 9 percent on a like-for-like basis. Underlying growth was driven by a combination of business mix, expense savings, together with a number of favorable one-off items amounting to USD 54 million.
In Latin America, business operating profit decreased 16 percent in U.S. dollars compared to an increase of 6 percent on a like-for-like basis as a result of the devaluation of several Latin American currencies. Growth in the largest market Brazil was partially offset by higher claims in corporate protection business in Chile.
In North America, earnings decreased by USD 61 million due to a combination of higher mortality claims and unfavorable assumption updates which offset a positive change in reserving methodology.
Net inflows decreased 15 percent compared to the prior year. The decline was primarily driven by lower volumes of savings business in EMEA which were only partially offset by higher volumes of unit-linked business in Latin America.
Assets under management increased 8 percent, mainly due to favorable market movements compared to 2018.
Life business operating profit (BOP) in USD millions, for the years ended December 31
In EMEA, like-for-like APE was flat as strong growth in the corporate pension business in Switzerland, higher unit linked sales in Italy, and higher retail protection sales in the UK were offset by the absence of a large corporate protection scheme concluded in 2018.
In Latin America APE sales decreased 15 percent on a like-for-like basis. Strong growth in Brazil was more than offset by the absence of a large corporate protection scheme in Chile written in 2018 and which is offered for tender every two years.
North America APE grew 30 percent on a like-for-like basis with growth in all product lines.
EMEA and Latin America saw a decrease of NBV mainly due to adverse changes in economic assumptions and unfavorable foreign exchange movements.
In APAC, the increase in NBV was largely driven by positive operating assumption changes. The North America NBV increased due to higher volumes and a favorable business mix.
The new business margin improved by 1.8 percentage points to 25.8 percent driven by the improvement in NBV.
Farmers Management Services (FMS) business operating profit grew 2 percent in 2019. This was driven by 1 percent growth in the gross management result, in line with the development of the Farmers Exchanges’ gross earned premiums, and a USD 19 million favorable mark-to-market impact on a deferred compensation plan, compared with a USD 10 million unfavorable impact in 2018. The managed gross earned premium margin remained stable at 7.0 percent.
Financial information about the Farmers Exchanges is proprietary to the Farmers Exchanges, but is provided to support an understanding of the performance of Farmers Group, Inc. and Farmers Re.
The Farmers Exchanges showed continued growth in top-line through 2019. Gross written premiums increased by 2 percent with growth across all lines of business. Growth was also supported by the expansion of the Farmers Exchanges in the Eastern U.S., with gross written premiums up 6 percent in the expansion states, and a broadening of the agreement with Uber to provide commercial rideshare insurance in twelve additional states and the District of Columbia, building on the experience in the two states of Pennsylvania and Georgia.
The business operating loss reported under Group Functions and Operations improved by USD 36 million to USD 716 million. This was driven by a USD 43 million reduction in headquarter expenses, while Holding and Financing costs remained in line with the prior year.
Zurich Legacy Solutions (49) 43 nm Other run-off (3) (7) 59% Total business operating profit (52) 37 nm
Non-Core Businesses, which comprise run-off portfolios that are managed with the intention of proactively reducing risk and releasing capital, reported an operating loss of USD 52 million. The loss primarily reflected the net impact of previously announced transactions to exit legacy portfolios related to UK employers’ liability, U.S. asbestos and environmental business, and German professional architects’ and engineers’ professional indemnity, as well as reserve strengthening in selected portfolios.
The total assets for the Group increased to USD 405 billion in 2019 from USD 395 billion in 2018. In 2019, there was an increase in total investments as market valuations improved, particularly in debt and equity securities and investments for unit-linked contracts. This is partially offset by a reduction in other assets as assets held for sale decreased following the divestment of certain businesses in the UK. Additionally, upon adoption of IFRS 16 ‘Leases’ in January 2019, the Group recognized a Right-of-use asset (RoU) of USD 1.4 billion and the Group’s 2019 acquisitions added USD 977 million of goodwill.
Group assets Total assets as of December 31, 2019 (in USD millions)
The Group’s shareholder equity increased to USD 35 billion in 2019 from USD 30 billion in 2018. The increase primarily resulted from unrealized gains on available-for-sale investments. The Group’s 2019 net income attributable to shareholders of USD 4.1 billion was offset by a dividend payment of USD 2.8 billion.
Solid net investment income of USD 5.3 billion and exceptional total investment return of 8.2 percent contributed strongly to Group financial performance in 2019.
Policy easing drives markets higher 2019 was an extraordinary year in capital markets. Many asset classes posted new records despite slowing global growth, social unrest and geopolitical friction. Government bonds, credit, equities and real estate all performed strongly, driven in large part by a profound shift toward policy easing by central banks. Amid fears of a manufacturing recession and escalating trade tensions, yields decreased markedly, with some sovereign bond yield curves dropping below zero. As a result, the levels of negative-yielding debt reached an alltime high. For institutional investors such as Zurich, with about 80 percent of assets invested in fixed income, such developments presented challenges when investing their cash flow and managing assets against liabilities. We continue delivering attractive returns while maintaining discipline and focusing on the quality of our investment portfolios.” Urban Angehrn Group Chief Investment Officer
Net capital gains totaled USD 2.1 billion, USD 1.2 billion higher than in 2018. The increase was largely driven by turnover in the equity portfolio in a rallying market, and by gains realized from several real estate transactions. Overall, full-year total investment return reached an exceptional level of 8.2 percent.
Consolidated income statements in USD millions, for the years ended December 31 Notes 2019 2018
Less premiums ceded to reinsurers (9,274) (8,255) Net written premiums and policy fees 41,251 41,230
Net investment income on Group investments 5,298 5,387 Net capital gains/(losses) and impairments on Group investments 2,093 901
Net investment result on Group investments 6 7,391 6,288 Net investment result on unit-linked investments 19,485 (4,374) Net gains/(losses) on divestment of businesses 5 (295) (24) Other income 1,129 1,080 Total revenues 71,792 47,180 Benefits, losses and expenses Insurance benefits and losses, gross of reinsurance 10 33,620 33,483 Less ceded insurance benefits and losses 10 (6,051) (5,837) Insurance benefits and losses, net of reinsurance 10 27,570 27,646 Policyholder dividends and participation in profits, net of reinsurance 10 20,582 (2,736) Underwriting and policy acquisition costs, net of reinsurance 10 8,529 8,565 Administrative and other operating expense 12 8,020 7,761 Interest expense on debt 401 402 Interest credited to policyholders and other interest 590 433 Total benefits, losses and expenses 65,692 42,070 Net income before income taxes 6,100 5,110 of which: Attributable to non-controlling interests 356 400 Income tax (expense)/benefit 17 (1,716) (1,134)
Basic earnings per share 19 28.01 25.10 Diluted earnings per share 19 27.69 24.83 in CHF
Basic earnings per share 19 27.84 24.55 Diluted earnings per share 19 27.51 24.28
Comprehensive income for the period 4,147 3,336 91 (103) 3,323 13 (41) (28) 3,295 7,442 478 7,921 Details of movements during the period
Change (before reclassification, tax and foreign currency translation effects and after allocation to policyholders) 4,924 126 154 5,204 9 49 58 5,262 Reclassification to income statement (before tax, foreign currency translation effects and allocation to policyholders) (1,042) (39) (258) (1,338) – – – (1,338) Reclassification to retained earnings – – – – – – – – Deferred income tax (before foreign currency translation effects) (580) (3) – (583) 4 (28) (24) (607) Foreign currency translation effects 34 7 – 41 – (62) (62) (22)
Assets in USD millions, as of December 31 Notes 2019 2018
Assets: Cash and cash equivalents 7,880 8,649 Total Group investments 6 193,312 182,647
Equity securities 18,296 16,220 Debt securities 147,507 139,870 Investment property 13,261 12,351 Mortgage loans 5,935 6,556 Other loans 8,274 7,614 Investments in associates and joint ventures 39 36
Liabilities and equity in USD millions, as of December 31 Notes 2019 2018
Liabilities Liabilities for investment contracts 9 61,761 51,439 Deposits received under ceded reinsurance contracts 994 612 Deferred front-end fees 5,173 5,177 Liabilities for insurance contracts 8 264,140 249,208 Obligations to repurchase securities 977 1,316
Deferred tax liabilities 17 4,533 3,915 Liabilities held for sale 2 5 1,996 25,539
Consolidated statements of cash flows in USD millions, for the years ended December 31 2019 2018
Underwriting activities: 19,597 (8,726) Liabilities for insurance contracts, gross 11,073 (1,547) Reinsurers’ share of liabilities for insurance contracts (2,423) (744) Liabilities for investment contracts 11,159 (5,424) Deferred policy acquisition costs (761) (1,506) Deferred origination costs 18 19 Deposits made under assumed reinsurance contracts 154 365 Deposits received under ceded reinsurance contracts 377 110
Net capital (gains)/losses on total investments and impairments (20,006) 5,274 Net change in derivatives (347) (7) Net change in money market investments (584) 563 Sales and maturities
Net changes in sale and repurchase agreements (361) (19) Movements in receivables and payables 718 (1,103) Net changes in other operational assets and liabilities (636) (294) Deferred income tax, net 302 15 Net cash provided by/(used in) operating activities 4,884 4,388
Cash and cash equivalents in USD millions, as of December 31 2019 2018
Cash and cash equivalents comprise the following: Cash at bank and in hand 7,989 8,535 Cash equivalents 537 575
Net income – – – – – – 3,716 3,716 Net unrealized gains/(losses) on available-for-sale investments – – (2,428) – – – – (2,428) Cash flow hedges – – – (47) – – – (47) Cumulative foreign currency translation adjustment – – – – (914) – – (914) Revaluation reserve – – – – – (17) – (17) Net actuarial gains/(losses) on pension plans – – – – – – 582 582
Net changes in capitalization of non-controlling interests – – – – – – – – (145) (145)
1 Effect of adoption of IFRS 15 ’Revenue from Contracts with Customers.’ 2 Share buy-back program reflecting the purchase value of 1.74 million shares. 3 Effect of adoption of IFRS 16 ’Leases’ (see note 2). 4 Effect of adoption of IAS 29 ’Financial Reporting in Hyperinflationary Economies’ (see note 3). 5 Current year effect of IAS 29 ’Financial Reporting in Hyperinflationary Economies’ (see note 3).
Balance as of December 31, 2017 as previously reported 11 1,162 3,078 410 (8,762) 228 36,936 33,062 1,831 34,893
Balance as of January 1, 2018 after the adoption of IFRS 15 11 1,162 3,078 410 (8,762) 228 36,866 32,993 1,831 34,824 Issuance of share capital – 2 – – – – – 2 – 2
On February 12, 2020, the Board of Directors of Zurich Insurance Group Ltd authorized these consolidated financial statements for issue. These financial statements will be submitted for approval to the Annual General Meeting of Shareholders to be held on April 1, 2020.
General information The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) and comply with Swiss law. Where IFRS does not contain clear guidance governing the accounting treatment of certain transactions, including those that are specific to insurance and reinsurance products, IFRS permits reference to another comprehensive body of accounting principles that uses a similar conceptual framework. The Group’s accounting policies for insurance and reinsurance contracts are therefore based on those developed by the Group before the adoption of IFRS 4 in areas where IFRS 4 did not include specific requirements. Before the adoption of IFRS 4, the Group typically applied U.S. GAAP pronouncements issued by the Financial Accounting Standards Board (FASB) on insurance and reinsurance contracts. Any changes to such pronouncements subsequent to this adoption are not reflected in the Group’s accounting policies. In case of business combinations, the Group may decide to maintain the local statutory treatment if this does not distort the fair presentation of the financial position of the Group. If significant, the impact of such cases would be described elsewhere in the notes to these consolidated financial statements.
The accounting policies applied by the reportable segments are the same as those applied by the Group. The Group accounts for inter-segment revenues and transfers as if the transactions were with third parties at current market prices. Dividends, realized capital gains and losses as well as gains and losses on the transfer of net assets are eliminated within the segment, whereas all other intercompany gains and losses are eliminated at Group level. In the consolidated financial statements, inter-segment revenues and transfers are eliminated.
Maturity tables have been provided for the following balances: debt securities (table 6.4), derivative assets and derivative liabilities (tables 7.1 and 7.2), reserves for insurance contracts (tables 8.9a and 8.9b), liabilities for investment contracts (tables 9.3a and 9.3b), finance lease receivables (table 13.6), other financial liabilities (table 16.2), lease liabilities (table 16.3) and outstanding debt (table 18.2).
All amounts in the consolidated financial statements, unless otherwise stated, are shown in U.S. dollars, rounded to the nearest million with the consequence that the rounded amounts may not add to the rounded total in all cases. All ratios and variances are calculated using the underlying amounts rather than the rounded amounts.
Table 1 summarizes the principal exchange rates used for translation purposes. Net gains/(losses) on foreign currency transactions included in the consolidated income statements were USD (70) million and USD 63 million for the years ended December 31, 2019 and 2018, respectively. Foreign currency exchange forward and swap gains/(losses) included in these amounts were USD 40 million and USD 168 million for the years ended December 31, 2019 and 2018, respectively. In 2019, a cumulative foreign currency translation adjustment loss of USD 258 million was recognized upon closure of the sale of the Group’s Venezuelan operations (see note 5).
IFRS 16 ‘Leases’ IFRS 16 introduces new requirements for lease accounting which have an impact on contracts where the Group acts as a lessee (and intermediate lessor). Under IFRS 16, the Group recognized a right-of-use asset and a lease liability for real estate rental contracts which were mainly classified as operating leases under IAS 17 ‘Leases.’
IFRS 16: Lessee – Transition disclosures in USD millions, as of December 31 2018
Operating lease commitments applying IAS 17 2,149 in USD millions, as of January 1 2019
Property and Equipment 1,381 Deferred Tax Assets 26 Other Liabilities 1 (1,543) Deferred Tax Liabilities 5 Retained earnings 130 1 Includes derecognition of onerous lease provisions amounted to USD 76 million.
IFRS 17 ‘Insurance contracts’ and IFRS 9 ‘Financial Instruments’ IFRS 17 ‘Insurance contracts’ was published on May 18, 2017 with an effective date of January 1, 2021 (retrospective application). IFRS 17 provides comprehensive guidance on accounting for insurance contracts and investment contracts with discretionary participation features. For non-life and short-term life insurance contracts IFRS 17 introduces mandatory discounting of loss reserves as well as a risk adjustment for non-financial risk, for which confidence level equivalent disclosure will be required. Further, IFRS 17 will change the presentation of insurance contract revenue, as gross written premium will no longer be presented in the statements of comprehensive income.
For long-duration life insurance contracts, IFRS 17 is expected to have a significant impact on actuarial modeling as granular cash flow projections and regular updates of all assumptions will be required resulting in either profit or loss volatility or affecting ‘contractual service margin,’ a separate component of the insurance liability representing unearned profits from in-force contracts. Further, IFRS 17 introduces different measurement approaches for the insurance contract liabilities reflecting a different extent of policyholder participation in investment or insurance entity performance (non-participating, indirect participating, direct participating).
In September 2016, the IASB issued an amendment to IFRS 4 introducing a temporary exemption from the adoption of IFRS 9 for reporting entities that have not previously applied any version of IFRS 9 and whose activities are predominantly related to insurance. Based on the analysis performed as of December 31, 2015, the Group was eligible to apply the temporary exemption as the predominance ratio reflecting the share of liabilities connected with insurance to total liabilities exceeded 90 percent. No reassessment of eligibility was required during subsequent annual periods up to and including 2019 as there was no significant change in the activities performed by the Group. We refer to the Annual Report 2016 for further details on the eligibility assessment. Due to the strong interaction between underlying assets held and the measurement of participating insurance contracts, the Group decided to use the option to defer the full implementation of IFRS 9 until IFRS 17 becomes effective.
In order to adopt IFRS 17 in the consolidated financial statements, a joint IFRS 17 and IFRS 9 Group Implementation Program (Program) sponsored by the Group Chief Financial Officer has been operating since 2017. A steering committee comprised of senior management from various functions (Finance, Risk, IT, Operations and Investment Management) oversees the work performed by individual work streams.
In June 2019, the IASB issued an Exposure Draft with limited amendments to IFRS 17, including a proposal to defer by one year, to January 1, 2022, the effective date of IFRS 17 and the fixed expiry date for the temporary exemption in IFRS 4 from applying IFRS 9, so that both standards can be applied simultaneously. The Group completed the analysis of the proposed amendments and will closely monitor the IASB re-deliberations while continuing Program delivery according to the current implementation plan.
Other standards, amendments and interpretations shown in table 2.4 are expected to have no or an insignificant impact on the Group’s financial position or performance.
Non-controlling interests are shown separately in equity, consolidated income statements, consolidated statements of comprehensive income and consolidated statements of changes in equity.
The consolidated financial statements are prepared as of December 31 based on individual company financial statements at the same date. In some cases, information is included with a time lag of up to three months. The consequent effect on the Group’s consolidated financial statements is not material.
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: 33 Foreign currency translation differences that are recognized in OCI in conjunction with the recognition of unrealized gains or losses on available-for-sale investments; and 33 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.
Hyperinflation The Group considers various factors to determine whether an economy in a country where a foreign operation is situated is hyperinflationary, including the cumulative three-year inflation rate. If an economy becomes hyperinflationary, the financial statements of foreign operations with the functional currency of the hyperinflationary economy are restated to reflect the current purchasing power at the end of the reporting period using the official consumer price indices commonly used in the respective country. The restatement includes all balance sheet amounts that are not expressed in terms of the measuring unit current at the balance sheet date and items of comprehensive income for the current year by applying the change in the price index from the dates when the items of income and expense were originally recorded. The restated financial statements of a foreign operation are translated into the Group’s presentation currency at closing rates. Any translation adjustment resulting from initial application of the hyperinflationary accounting is recognized directly in equity.
Amounts collected as premiums from investment-type insurance contracts such as universal life, unit-linked and unitized with-profits contracts are generally 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 following the same pattern that is applied to deferred acquisition costs and addressed below. 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.
Cash flows from certain universal life-type contracts in the Group’s Spanish operations are recognized as gross written premiums and insurance benefits and losses and not as deposits.
Reserves for losses and loss adjustment expenses Losses and loss adjustment expenses are charged to income as incurred. Reserves for losses and loss adjustment expenses represent estimates of future payments of reported and unreported claims for losses and related expenses, with respect to insured events that have occurred. Any changes in estimates are reflected in the results of operations in the period in which estimates are changed. The Group does not discount its loss reserves, other than for claims with payment patterns which are fixed and reasonably determinable, and claims in economies determined to be hyperinflationary where inflation constitutes a significant input in the reserving process.
Reserves for life benefits Future life policyholder benefits represent the estimated future benefit liability for traditional life insurance policies and include the value of accumulated declared bonuses or dividends that have vested to policyholders.
For products containing guarantees in respect of minimum death benefits (GMDB), retirement income benefits (GRIB) and/or annuitization options (GAO), additional liabilities are recorded in proportion to the receipt of the contracted revenues which are subject to a loss adequacy test taking into account policyholder behavior and current market conditions.
DAC for other traditional life insurance and annuity contracts is amortized over the life of the contracts, based on expected premiums. Expected premiums are estimated at the date of policy issue for application throughout the life of the contract unless a premium deficiency subsequently occurs.
Reinsurance is recorded gross in the consolidated balance sheet. Reinsurance assets include balances expected to be recovered from reinsurance companies for ceded paid and unpaid losses and loss adjustment expenses, ceded unearned premiums and ceded future life policy benefits. Amounts recoverable from reinsurers are estimated in a manner consistent with the assumptions used for the liabilities associated with the underlying insurance contracts.
Group investments include the following in cash and cash equivalents: cash on hand, deposits held at call with banks, cash collateral received, and other highly liquid investments with maturities of three months or less from the date of acquisition that are readily convertible into cash and are subject to an insignificant risk of change in fair value. Cash and cash equivalents are stated at current redemption value.
Derivative financial instruments that qualify for hedge accounting Derivative financial instruments are used by the Group to economically hedge risks. In limited circumstances derivative financial instruments are designated as hedging instruments for accounting purposes in: 33 Fair value hedges which are hedges of the exposure to changes in the fair value of a recognized asset or liability 33 Cash flow hedges, which are hedges of the exposure to variability in cash flows attributable to a particular risk either associated with a recognized asset or liability, or a highly probable forecast transaction that could affect profit or loss 33 Net investment hedges, which are hedges of a net investment in a foreign operation
g) Attorney-in-fact (AIF) contracts The AIF contracts reflect the ability of the Group to generate future revenues through Farmers Group Inc. (FGI) based on the FGI’s relationship with the Farmers Exchanges. The Farmers Exchanges are not owned by 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 services, and the historical AIF relationship between FGI and the Farmers Exchanges. The value of the AIF contracts is tested for impairment at least annually.
h) Goodwill Goodwill on the acquisition of subsidiaries is capitalized and tested for impairment annually, or more frequently if there are indications of impairment. For the purpose of impairment testing, goodwill is allocated to cash-generating units (CGUs) based on the level at which management monitors operations and makes decisions related to the continuation or disposal of assets and operations. If goodwill has been allocated to a CGU and an operation within that unit is disposed of, the carrying amount of the operation includes attributable goodwill when determining the gain or loss on disposal.
Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire and bring the specific software into use.
Subsequently, depending on the underlying performance metrics, the Group revises its estimates of the number of shares that are expected to be issued and recognizes the impact of the revision, if any, in income with a corresponding adjustment to additional paid-in capital. However, no subsequent adjustment is made after the vesting date.