Impairment of financial assets General The Group assesses at each reporting date whether there is objective evidence that loss events occurred that negatively affect the estimated future cash flows of a financial asset or a group of financial assets.
Available-for-sale financial assets When there is objective evidence that an available-for-sale debt security is impaired, the cumulative loss that had been recognized in OCI is reclassified to income as an impairment loss. If the fair value of a debt security increases in a subsequent period, and the increase can be objectively related to an event occurring after the impairment loss was recognized, the impairment loss is reversed through income, up to the amortized cost amount calculated as if no impairment had been recognized at the date of reversal. Any further gains are recognized in OCI. Any subsequent losses, to the extent that they do not represent further impairment losses, are also recognized in OCI.
Cash flow hedges The effective portion of the gain or loss on the re-measurement of the cash flow hedging instrument is recognized in OCI. The ineffective portion is recognized immediately in income. The accumulated gains and losses on the hedged instrument in OCI are reclassified to income in the same period in which gains or losses on the hedged item are recognized in income.
When fair value hedge accounting is applied to borrowings, the carrying values of the borrowings are adjusted for changes in fair value attributable to the risk being hedged.
Repurchase and reverse repurchase transactions Securities sold under agreements to repurchase at a specified later date (repurchase agreements) and securities purchased under agreements to resell (reverse repurchase agreements) are accounted for as collateralized financing transactions.
Under a reverse repurchase agreement, the securities received are not recognized on the balance sheet, as long as the risk and rewards of ownership have not been transferred to the Group. The cash delivered is derecognized and a corresponding receivable is recorded and reported within receivables and other assets. Interest income is recognized in income using the effective interest rate method over the life of the agreement.
Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Assets are grouped on a cash generating unit (CGU) level if the recoverable amount cannot be separately determined.
j) Intangible assets Intangible assets include goodwill, present value of future profits (PVFP) from acquired insurance contracts, attorney- in-fact (AIF) relationships, distribution agreements and other intangible assets, such as computer software licenses and capitalized software development costs.
Intangible assets with finite lives are carried at cost less accumulated amortization and impairments. They are amortized using the straight-line method over their useful lives and reviewed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Goodwill on the acquisition of associates and joint ventures is included in the value of equity method accounted investments and is tested for impairment as part of the overall measurement of the carrying amount of those investments.
Present value of future profits from acquired insurance contracts (PVFP) An intangible asset representing the PVFP arises from the acquisition of life insurance businesses. Such an asset has a finite life and is amortized over the expected life of the acquired contracts, following the same rules outlined for deferred acquisition costs. The carrying value of the PVFP asset is tested periodically for impairment as part of the liability adequacy test for insurance contracts.
Attorney-in-fact relationships (AIF) The AIF reflects the ability of the Group to generate future revenues based on the Group’s relationship with the Farmers Exchanges, which are managed but not owned by Farmers Group, Inc. (FGI), a wholly owned subsidiary of the Group. In determining that these relationships have an indefinite useful life, the Group considered the organizational structure of inter-insurance exchanges, under which subscribers exchange contracts with each other and appoint an attorney-in-fact to provide non-claims management services, and the historical AIF between FGI and the Farmers Exchanges. The AIF is reviewed for impairment at least annually.
The useful lives of computer software licenses and capitalized internal software development costs generally do not exceed five years. In some circumstances, capitalized software development costs may be amortized over a period of up to ten years, taking into account the effects of obsolescence, technology, competition and other economic and legal factors.
Other fees and commission income Revenues from investment management and distribution fees are based on contractual fee arrangements applied to assets under management and recognized as earned when the service has been provided. For practical purposes, the Group recognizes these fees on a straight-line basis over the estimated life of the contract.
The Group charges its customers for asset management and other related services using the following approaches: • Front-end fees charged to the customer at inception are used particularly for single premium contracts. The consideration received is deferred as a liability and recognized over the life of the contract on a straight-line basis.
n) Net investment income Net investment income includes investment income earned net of investment expenses incurred.
Non-market vesting conditions (for example, profitability and revenue growth targets) are included in assumptions to determine the number of shares that are expected to be issued. At each balance sheet date, the Group revises its estimates of the number of shares that are expected to be issued. It recognizes the impact of the revision to original estimates, if any, in income with a corresponding adjustment to additional paid-in capital. However, no subsequent adjustment to total additional paid-in capital is made after the vesting date.
The proceeds received when the shares are delivered are credited, net of any directly attributable transaction costs, to share capital (nominal value) and additional paid-in capital.
Defined benefit plan obligations and contributions are determined annually by qualified actuaries using the projected unit credit method. The Group’s expense relating to these plans is accrued over the employees’ service periods based upon the actuarially determined cost for the period. Actuarial gains and losses are recognized, in full in the period in which they occur, directly in other comprehensive income (OCI). Past service costs, which result from plan amendments and curtailments are recognized in income on the earlier of the date on which the plan amendment or curtailment occurs (which is the date from which the plan change is effective) and the date on which a constructive obligation arises. Settlement gains or losses are recognized in income when the settlement occurs.
Zurich Insurance GroupAnnual Report 2013Financial information206 4. Critical accounting judgments and estimates
The evaluation of whether an available-for-sale debt security is impaired requires analysis of the credit standing of a particular issuer and involves management judgment. When assessing impairment of available-for-sale debt securities, the Group places emphasis on issuer specific factors, such as significant financial difficulty, default or delinquency on interest or principal payments. A credit rating downgrade, worsened liquidity or decline in fair value is not by itself considered a loss event, but rather incorporated in the impairment analysis along with other available information.
The Group defines that there is objective evidence of impairment of an available-for-sale equity security, if at the reporting date: • its fair value is below the weighted-average cost by an amount significantly exceeding the volatility threshold determined quarterly for the respective equity market (such as North America, UK, Switzerland, other European countries and Asia Pacific), or
Value-in-use is determined using the present value of estimated future cash flows expected to be generated from the CGU. Cash flow projections are based on financial budgets, which are approved by management, typically covering a three-year period or, if appropriate and adequately justified, a longer period, which may be necessary to more accurately represent the nature of the cash flows used to test the goodwill. Cash flows beyond this period are extrapolated using, amongst others, estimated perpetual growth rates, which are a reflection of the expected inflation of the geographical areas where the cash flows supporting the goodwill are generated. If cash flows are generated in different geographical areas with different expected inflation rates, weighted averages are used. The discount rates applied reflect the respective risk free interest rate adjusted for the relevant risk factors to the extent they have not already been considered in the underlying cash flows.
Table 4.1 sets out the value of goodwill and AIF for the major CGUs, applied discount rates and the perpetual nominal growth rates (PGRs) beyond the projection period which are dependent on country specific growth rate and inflation expectations.
Global Life Germany Global Life 272 8.6 6.7 1.9 2.0 Zurich Assurance Ltd and Openwork Holdings Ltd Global Life 102 7.8 5.9 – –
Table 4.2 sets out the applied discount rates and the PGR beyond the projection period which are dependent on country specific growth rate and inflation expectations used for the major distribution agreements at the time of valuation.
Sensitivity tests have been performed on distribution agreements and typically comprised of an analysis for either a decrease in cash flows, a decrease in the perpetual growth rate or an increase in the discount rate, applying reasonably possible changes. An increase of approximately 2.6 percentage points in the discount rate or a decrease of approximately 30 percent in the cash flows of the distribution agreement of the Banco Sabadell S.A. entities would result in the recoverable amount being close to the carrying value. No such reasonably possible changes of key assumptions were identified for the remaining distribution agreements.
Fin an cial info rm atio n 5. Acquisitions and divestments
Transactions in 2012 Acquisitions On May 25, 2012, the Group increased its shareholding in Zurich Insurance Company South Africa Limited, a partially owned subsidiary, to 84.05 percent by purchasing a 25.1 percent shareholding from Royal Bafokeng Finance (Pty) Limited (RBF) for a purchase price of approximately USD 75 million. With this purchase of 25.1 percent the Group’s controlled interest for the Consolidated financial statements is now in line with its legal ownership. On this date, the put option right granted to RBF in 2010 to sell back its entire shareholding to the Group also ceased to exist.
Divestments and loss of control The Group lost control over one of its subsidiaries and consequently derecognized the assets and liabilities at their carrying value and recognized its retained investment in this entity as an equity security classified as available-for-sale as of September 30, 2012. A USD 38 million pre-tax loss was recorded within net gain/(loss) on divestments of businesses.
Impairment charges on Group investments included in net capital gains/(losses) on investments and impairments amounted to USD 201 million and USD 208 million, including impairment charges on mortgage loans and other loans of USD 141 million and USD 114 million, for the years ended December 31, 2013 and 2012, respectively.
Real estate held for investment 272 310 87 (342) 358 (32)
Securities at fair value through profit or loss: 11,431 8,596 (508) 924 10,923 9,520 Net capital gains/(losses) on Group investments 368 242 (384) 339 (16) 581 Net capital gains/(losses) for unit-linked contracts 11,062 8,354 (124) 584 10,939 8,938
Total net capital gains/(losses) and impairments 12,561 8,903 65 2,552 12,626 11,455
Table 6.1b in USD millions, for the years ended December 31Net investment result for Group investments
Cash and cash equivalents 8,162 2.4 10,208 3.1 Equity securities: Fair value through profit or loss 115,379 33.8 103,023 30.9
Investments (including cash and cash equivalents) with a carrying value of USD 5,853 million and USD 6,340 million were held to meet local regulatory requirements as of December 31, 2013 and 2012, respectively.
Securities lending, repurchase and reverse repurchase agreements As of December 31, 2013 and 2012, respectively, investments included USD 9,947 million and USD 7,751 million of loaned securities. These loaned securities were mainly debt securities. Liabilities for cash collateral received for securities lending comprised USD 332 million and USD 330 million as of December 31, 2013 and 2012, respectively. Non-cash collateral received for loaned securities comprised mainly equity and debt securities and amounted to USD 10,474 million and USD 8,085 million as of December 31, 2013 and 2012, respectively. The Group can sell or repledge the collateral only in the event of a default by a counterparty.
As of December 31, 2013 and 2012, respectively, debt securities with a carrying value of USD 1,694 million and USD 1,550 million have been sold to financial institutions under repurchase agreements. These securities continue to be recognized as investments in the Group’s consolidated balance sheets. Obligations to repurchase these securities amounted to USD 1,685 million and USD 1,539 million as of December 31, 2013 and 2012, respectively.
The Group retains the rights to the risks and benefits of loaned securities and securities under repurchase agreements. These risks and benefits include changes in market values and income earned.
As of December 31, 2013 and December 31, 2012, respectively, securities with a carrying value of USD 681 million and USD 990 million have been purchased from financial institutions under short-term reverse sale and repurchase agreements. Receivables under these agreements have been recognized in the Group’s consolidated balance sheets and amounted to USD 678 million and USD 988 million as of December 31, 2013 and December 31, 2012, respectively.
Mortgage and asset-backed securities: < 1 year – – 612 540 24 26
Other governments and supra-nationals 39,988 36,226 2,041 2,795 (224) (350) 41,805 38,672
As of January 1 11,962 12,246 Additions and improvements 794 360
1 Net unrealized gains/(losses) on Group Investments include net gains arising on cash flow hedges of USD 106 million and USD 238 million as of December 31, 2013 and 2012, respectively.
Table 6.9 in USD millions, as of December 31Net unrealized gains/(losses) on Group investments included in equity
The Group uses derivative financial instruments mainly for economic hedging purposes in order to mitigate risks. Such risks result from changes in interest rates, equity prices and exchange rates. Derivative financial instruments with a positive fair value are reported in other assets (see note 17) and those with a negative fair value are reported in other liabilities (see note 18).
Interest rate contracts: OTC Swaps 950 974 2,840 4,764 175 (178) 5,292 349 (45)
Other contracts: OTC Puts – – 397 397 – – 93 – –
Total Group derivative financial instruments 23,561 6,012 9,668 39,241 552 (682) 42,656 920 (494) Total unit-linked derivative financial instruments 1,885 225 – 2,110 45 (4) 2,113 62 (5)
The decrease in the notional amount of put options between December 31, 2012 and December 31, 2013 was mainly due to matured positions relating to a hedging program. Total return swaps, exchange traded options and futures are relating to the dynamic hedging strategy that has been put in place to reduce the volatility associated with a closed book of variable annuities products within the U.S. life business.
Foreign exchange contracts Forward contracts are used to hedge the Group’s foreign currency exposures and to manage balance sheet mismatches. As of December 31, 2013 there were no open cross currency swap positions.
The increase in notional amounts of foreign exchange forwards between December 31, 2012 and December 31, 2013 was mostly volume driven.
Other contracts Other contracts predominantly include stable value products (SVPs), which are designed to amortize on a quarterly basis investment gains and losses of the investment portfolios underlying certain life insurance policies, which are owned by banks (Bank Owned Life Insurance or BOLI) and other companies (Company Owned Life Insurance or COLI). The Group monitors the risk of surrender of those life insurance policies on an ongoing basis and considers the likelihood of surrender as an input factor to the model to determine the fair value of the SVPs. The notional SVP derived value was USD 397 million and USD 93 million as of December 31, 2013 and 2012, respectively, representing the total loss before surrender charges in the unlikely event that all policies would have been surrendered on those dates.
Fair value hedges Designated fair value hedges consist of interest rate swaps and cross currency interest rate swaps used to protect the Group against changes in interest rate exposure and foreign currency exposure of Swiss franc, euro and U.S. dollardenominated debt issued by the Group.
Information on debt issuances designated as hedged items in fair value hedge relationships is set out in note 20.
Table 7.3 sets out gains and losses arising from fair value hedges: Gains/(losses) on hedging instruments 1 (57) 20 on hedged items attributable to the hedged risk 52 (30)
The Group also uses interest rate swaps and currency swaps for cash flow hedging to protect against the exposure to variability of cash flows attributable to interest rate and currency risk. The hedging instrument is measured at fair value, with the effective portion of changes in its fair value recognized in other comprehensive income. The effective portion, related to spot rate changes in the fair value of the hedging instrument, is reclassified to income within administrative and other operating expense as an offset to foreign currency revaluation on the underlying hedged debt. The ineffective portion of the change in fair value is recognized directly in income within administrative and other operating expense.
The portion recognized in income was a gain of USD 86 million and USD 35 million before tax for the years ended December 31, 2013 and 2012, respectively, as an offset to the foreign currency revaluation on the underlying hedged debt.
A loss of USD 9 million and USD 7 million for the years ended December 31, 2013 and 2012, respectively, was recognized in net capital gains/(losses) and impairments due to hedge ineffectiveness.
Net gains/(losses) deferred in shareholders’ equity on net investment hedges were USD 4 million and USD (2) million before tax for the years ended December 31, 2013 and 2012, respectively.
Derivative financial instruments: offsetting of financial assets and liabilities Tables 7.4 and 7.5 show the net asset and liability position of derivative financial instruments subject to enforceable master netting arrangements and collateral agreements. Master netting arrangements are used by the Group to provide protection against loss in the event of bankruptcy or other circumstances that result in a counterparty being unable to meet its obligations. These arrangements commonly create a right of offset that becomes enforceable and affects the realization or settlement of individual financial assets and financial liabilities only following a specified event of default or other circumstances which would not be expected to arise in the normal course of business.
Zurich Insurance GroupAnnual Report 2013Financial information224 8. Reserves for insurance contracts and reinsurers’ share of reserves for insurance contracts
Reserves for losses and loss adjustment expenses 68,312 69,986 (10,993) (12,601) 57,319 57,385
Losses and loss adjustment expenses paid: Current year (10,350) (10,548) 745 694 (9,605) (9,853)
1 The 2013 net movement includes USD (49) million due to the reclassification of a subsidiary of Centre Group Holdings Limited to held for sale (see note 5). The 2012 net movement includes a transfer of USD 1,224 million from policyholders’ contract deposits and other funds, partially offset by USD (235) million relating to a reinsurance agreement which transferred the benefits and risks of some of the Group’s general insurance portfolio to RiverStone Insurance (UK) Limited, and by USD (33) million transferred to future life policyholders’ benefits (see note 1 of the Consolidated financial statements 2012).
The Group establishes loss reserves, which are estimates of future payments of reported and unreported claims for losses and related expenses, with respect to insured events that have occurred. Reserving is a complex process dealing with uncertainty, requiring the use of informed estimates and judgments. Any changes in estimates or judgments are reflected in the results of operations in the period in which estimates and judgments are changed.
The increase of USD 2,044 million during the year ended December 31, 2012 in net reserves for losses and loss adjustment expenses was mostly driven by the reclassification of USD 1,224 million transferred from policyholders’ contract deposits and other funds to reserves for losses and loss adjustment expenses (see note 1 of the Consolidated financial statements 2012), and the foreign currency impact of USD 693 million. Additionally, USD 571 million of favorable reserve development emerged from reserves established in prior years. Gross of reinsurance, the favorable development was USD 676 million. This favorable development was primarily attributable to the General Insurance business segment and mainly relates to the following movements by market-facing business, country and line of business: • In Global Corporate, favorable development of USD 199 million was driven by Europe essentially originating from Switzerland, the UK and Ireland. The development occurred mostly in the property and engineering lines of business; • In North America Commercial, favorable development of USD 203 million arose mostly from medical malpractice, general liability, errors and omissions and the Canadian operations; • The personal and commercial business in Europe reported favorable prior year development of USD 90 million. The favorable development was driven by USD 435 million in Switzerland, mostly in motor, and USD 96 million in the UK and Ireland, coming from many lines of business. Partially offsetting this, Germany reported an adverse development of USD 476 million arising mainly from the medical and professional liability lines of business.
Cumulative paid as of December 31: One year later (9,464) (11,423) (11,237) (12,551) (13,047) (12,716) (13,092) (13,525) (13,799) Two years later (16,273) (18,044) (18,362) (19,660) (19,909) (19,821) (21,073) (21,245) Three years later (21,234) (23,077) (23,421) (24,428) (24,693) (25,623) (27,137) Four years later (24,945) (26,850) (26,839) (27,735) (28,808) (30,127) Five years later (27,798) (29,425) (29,224) (30,690) (32,170) Six years later (29,810) (31,189) (31,483) (33,310) Seven years later (31,148) (33,030) (33,665) Eight years later (32,655) (34,896) Nine years later (34,267)
Cumulative incurred as of December 31: One year later 141 (218) (1,219) (1,271) (1,059) (1,378) (1,302) (571) (757) Two years later 1,520 (367) (2,171) (2,152) (2,350) (2,565) (1,819) (891) Three years later 1,839 (897) (2,686) (2,844) (3,048) (2,700) (2,028) Four years later 1,808 (945) (3,003) (3,533) (3,176) (2,770) Five years later 2,118 (1,044) (3,438) (3,580) (3,235) Six years later 2,194 (1,184) (3,279) (3,478) Seven years later 2,254 (841) (3,146) Eight years later 2,686 (681) Nine years later 2,815
Net reserves re-estimated as of December 31: One year later 43,627 45,976 49,594 53,441 51,927 54,565 54,878 54,770 56,628 Two years later 45,006 45,827 48,642 52,559 50,637 53,379 54,361 54,450 Three years later 45,325 45,297 48,127 51,868 49,939 53,243 54,152 Four years later 45,294 45,249 47,811 51,179 49,810 53,173 Five years later 45,604 45,150 47,376 51,131 49,752 Six years later 45,680 45,010 47,535 51,234 Seven years later 45,740 45,353 47,668 Eight years later 46,172 45,513 Nine years later 46,301
Cumulative (deficiency)/ redundancy of net reserves (2,815) 681 3,146 3,478 3,235 2,770 2,028 891 757 Cumulative (deficiency)/ redundancy as a percentage of initial net reserves (6.5%) 1.5% 6.2% 6.4% 6.1% 5.0% 3.6% 1.6% 1.3%
Gross reserves re-estimated as of December 31, 2013 61,784 60,425 60,893 63,365 60,921 63,984 65,472 66,413 68,799 Cumulative (deficiency)/ redundancy of gross reserves (4,019) – 3,642 4,525 4,297 4,143 2,802 1,349 1,187 Cumulative (deficiency)/ redundancy as a percentage of initial gross reserves (7.0%) 0.0% 5.6% 6.7% 6.6% 6.1% 4.1% 2.0% 1.7%
Table 8.3 presents changes in the historical non-life reserves, net of reinsurance, that the Group established in 2004 and subsequent years. Reserves are presented by financial year, not by accident year. The reserves (and the development thereon) are for all accident years in that financial year. The top line of the table shows the estimated gross reserves for unpaid losses and loss adjustment expenses as of each balance sheet date, which represents the estimated amount of future payments for losses incurred in that year and in prior years. The cumulative paid portion of the table presents the cumulative amounts paid through each subsequent year in respect of the reserves established at each year end. Similarly, the cumulative incurred losses section details the sum of the cumulative paid amounts shown in the triangle above and the changes in loss reserves since the end of each financial year. The net reserves re-estimated portion of the table shows the re-estimation of the initially recorded reserve as of each succeeding year end. Reserve development is shown in each column. Changes to estimates are made as more information becomes known about the actual losses for which the initial reserves were established. The cumulative deficiency or redundancy is equal to the initial net reserves less the liability re-estimated as of December 31, 2013. It is the difference between the initial net reserve estimate and the last entry of the diagonal. Conditions and trends that have affected the development of reserves for losses and loss adjustment expenses in the past may or may not necessarily occur in the future, and accordingly, conclusions about future results cannot be derived from the information presented in table 8.3.
Reserves for asbestos claims decreased by USD 178 million gross and USD 10 million net during 2013. The decrease in the gross reserve primarily relates to the transfer of a general insurance portfolio to RiverStone Insurance (UK) Limited, amounting to USD 152 million.
The net impact of changes in assumptions on net future life policyholders’ benefits by type of assumption is shown in table 8.6.
Table 8.6 in USD millions, for the years ended December 31Effect of changes in assumptions for future life policyholders’ benefits
Fee income and other expenses (1,885) (1,586) Interest and bonuses credited/(charged) to policyholders 6,444 6,270 Acquisitions/(divestments) and transfers 1 – 154 Foreign currency translation effects (123) 804 As of December 31 74,873 74,117 1 The 2012 movement includes USD 151 million transferred from liabilities for investment contracts (see note 1 of the Consolidated financial statements 2012).
Liabilities related to unit-linked investment contracts 59,469 50,229 Liabilities related to investment contracts (amortized cost) 1,030 1,305 Liabilities related to investment contracts with DPF 6,614 5,903
The value of financial liabilities at amortized cost is based on a discounted cash flow valuation technique. The initial valuation of the discount rate is determined by the current market assessment of the time value of money and risk specific to the liability.
Change in policyholders’ contract deposits and other funds 1,185 1,210 – (19) 1,185 1,190 Change in reserves for unit-linked products 6,290 6,153 – – 6,290 6,153 Change in liabilities for investment contracts – unit-linked 6,605 4,091 – – 6,605 4,091 Change in liabilities for investment contracts – other 218 233 – – 218 233 Change in unit-linked liabilities related to UK capital gains tax (352) (264) – – (352) (264) Total policyholder dividends and participation in profits 13,946 11,424 – (19) 13,946 11,405
Amortization of deferred acquisition costs 6,415 6,484 (456) (536) 5,959 5,948 Amortization of deferred origination costs 125 168 – – 125 168 Commissions and other underwriting and acquisition expenses 1 4,323 4,283 (366) (384) 3,957 3,898 Total underwriting and policy acquisition costs 10,863 10,934 (822) (920) 10,041 10,014 1 Net of additions related to deferred acquisition and origination costs.
Change in reserves for unearned premiums 971 845 54 (103) 1,025 741
Fin an cial info rm atio n 12. Deferred policy acquisition costs and deferred origination costs
(see note 1). The 2012 movement includes USD 5 million transferred to deferred origination costs in Global Life (see note 1 of the Consolidated financial statements 2012) and USD 3 million in General Insurance mainly as a consequence of the loss of control over one of the Group’s subsidiaries (see note 5).
The decision to stop offering life products through tied agents in Hong Kong triggered a reassessment of the recoverability of deferred policy acquisition costs, resulting in a USD 54 million impairment in 2013. The net impact on the Group is USD 30 million, including an impairment of deferred origination costs and the acceleration of the recognition of deferred front-end fees of USD 4 million and USD 27 million, respectively. An additional impairment of USD 34 million resulted from a reassessment of deferred policy acquisition costs in the Global Life business in Germany. Impairments in 2012 included USD 39 million, following a reassessment of the deferred policy acquisition costs in the General Insurance business in Germany.
Fin an cial info rm atio n 14. Farmers management fees and other related revenues
Gross carrying value as of January 1, 2013 320 1,060 506 520 645 3,050
Gross carrying value as of January 1, 2013 2,239 2,890 4,435 1,025 4,418 219 15,226
New distribution agreements in General Insurance operations in Brazil, to gain access to the mass consumer market, and in Global Life operations in the Middle East, resulted in additions of USD 36 million.
Other financial liabilities Derivative liabilities 733 542 Amounts due to policyholders 923 761 Amounts due to insurance companies, agents and intermediaries 1,437 1,360 Amounts due to reinsurers 1,226 1,398 Liabilities for cash collateral received for securities lending 332 330 Amounts due to investment brokers 1,068 1,334 Deposits from banking activities 344 672 Collateralized bank financing for structured lease vehicles 796 860 Liabilities for defined benefit plans 3,665 3,399 Other liabilities for employee benefit plans 123 108 Other liabilities 4,043 4,594 Other non-financial liabilities Current tax payables 1,246 1,101 Restructuring provisions 188 297 Premium prepayments and other advances 973 916 Other liabilities 806 694 Total other liabilities 17,904 18,368
Table 17 in USD millions, as of December 31Receivables and other assets
During the year ended December 31, 2013, restructuring programs with estimated costs of USD 62 million were announced and primarily impacted General Insurance in Middle East and Africa, Global Life in the UK and Ireland as well as Farmers. USD 34 million related to increases of provisions for restructuring which were initiated in prior years. In addition, the Group recorded USD 37 million of software impairments (see note 16), and USD 30 million for impairments of deferred policy acquisition costs and deferred origination costs, net of deferred front-end fees (see note 12), resulting from restructuring decisions.
Table 18.2 in USD millions, as of December 31Maturity schedule – other financial liabilities1
Total income tax expense/(benefit) attributable to policyholders 285 194 Total income tax expense attributable to shareholders 1,415 1,302 Total income tax expense 1,701 1,496
Net income before income taxes 5,960 5,472 less: income tax (expense)/benefit attributable to policyholders (285) (194) Net income before income taxes attributable to shareholders 5,674 5,277 Expected income tax expense attributable to shareholders computed at the Swiss statutory tax rate 22.0% 1,248 22.0% 1,161 Increase/(reduction) in taxes resulting from: Tax rate differential in foreign jurisdictions 158 238 Tax exempt and lower taxed income (107) (133) Non-deductible expenses 78 85 Tax losses previously unrecognized or no longer recognized 40 (12) Prior year adjustments and other (2) (37)
Table 19.3 in USD millions, for the years ended December 31Expected and actual income tax expense
Deferred tax assets 2,020 1,853 Deferred tax liabilities (5,110) (5,244) Net deferred tax liabilities (3,090) (3,390)
As of January 1 (3,390) (2,502) Net change recognized in the income statement (227) (463) Net change recognized in equity 555 (407) Net changes due to acquisitions/(divestments) – 44 Foreign currency translation effects (28) (64) As of December 31 (3,090) (3,390)
The net deferred tax liabilities relating to non-controlling interests amounted to USD 531 million and USD 577 million as of December 31, 2013 and 2012, respectively.
Net deferred tax liabilities attributable to policyholders (586) (321) Net deferred tax liabilities attributable to shareholders (2,504) (3,070) Net deferred tax liabilities (3,090) (3,390)
Tax loss carryforwards 572 – 484 – Gross deferred tax assets/(liabilities) before valuation allowance 3,791 (1,621) 3,514 (1,549) Valuation allowance (150) – (112) – Gross deferred tax assets/(liabilities) after valuation allowance 3,641 (1,621) 3,403 (1,549) Deferred tax assets 2,020 1,853
Tax loss carryforwards 77 – 127 – Gross deferred tax assets/(liabilities) before valuation allowance 3,784 (8,876) 3,992 (9,224) Valuation allowance (18) – (12) – Gross deferred tax assets/(liabilities) after valuation allowance 3,766 (8,876) 3,980 (9,224) Deferred tax liabilities (5,110) (5,244)
For which deferred tax assets have not been recognized, expiring 5 to 20 years 127 102 > 20 years or with no time limitation 658 629
Senior debt Zurich Insurance Company Ltd 3.75% CHF 500 million notes, due September 2013 5 – 545 2.25% CHF 500 million notes, due July 2017 5 559 543 2.375% CHF 525 million notes, due November 2018 5 585 568 1.50% CHF 400 million notes, due June 2019 4,5,6 443 440 1.125% CHF 400 million notes, due September 2019 4,5,6 450 – 2.875% CHF 250 million notes, due July 2021 5 277 269 3.375% EUR 500 million notes, due June 2022 4,5,6 687 682 1.875% CHF 100 million notes, due September 2023 4,5,6 112 – Zurich Finance (Luxembourg) S.A. 3.25% USD 750 million notes, due September 2013 4,5,6 – 757
Zurich Insurance Company Ltd 12.0% EUR 143 million perpetual capital notes, first callable July 2014 5 197 188 4.25% CHF 700 million perpetual notes, first callable May 2016 5 780 756 8.25% USD 500 million perpetual capital notes, first callable January 2018 5 496 495 4.625% CHF 500 million perpetual notes, first callable May 2018 5 555 539 7.5% EUR 425 million notes, due July 2039, first callable July 2019 5 582 557 4.25% EUR 1 billion notes, due October 2043, first callable October 2023 5 1,360 –
Zurich Finance (UK) plc 6.625% GBP 450 million perpetual notes, first callable October 2022 3,5 737 723
ZFS Finance (USA) Trust II Series II 6.45% USD 700 million Trust Preferred Securities (ECAPS), due December 2065, first callable June 2016 677 676
ZFS Finance (USA) Trust V Series V 6.5% USD 1 billion Trust Preferred Securities, due May 2067, first callable May 2017 498 498
Other Various debt instruments 74 73 Subordinated debt 6,342 5,861 Total senior and subordinated debt 12,386 12,521 1 The bond is part of a qualifying cash flow hedge (80 percent of the total) and fair value hedge (20 percent of the total). 2 The bond is part of a qualifying cash flow hedge (100 percent). 3 The holders of these notes benefit from the Replacement Capital Covenant which states that if Series V Fixed / Floating Trust Preferred Securities, issued by ZFS Finance (USA)
5 Issued under the Group’s Euro Medium Term Note Programme (EMTN Programme). 6 The Group applied the cash flow hedge methodology to hedge the foreign currency exposure and deferred the attributable basis spreads in shareholders’ equity, whereas the fair value hedge methodology was used to hedge the interest rate exposure with changes in the fair value being recorded through the income statement.
None of the debt instruments listed in table 20.1 were in default as of December 31, 2013 or 2012.
Table 20.1 in USD millions, as of December 31Senior and subordinated debt
ii) Subordinated debt Subordinated debt securities are obligations of the Group which, in case of liquidation of the Group, rank junior to all present and future senior indebtedness and certain other obligations of the Group.
Subordinated debt amounted to USD 6,342 million and USD 5,861 million as of December 31, 2013 and December 31, 2012, respectively.
The increase is mainly the result of the total of 4.25% EUR 1 billion notes due 2043 issued in March and July 2013 by Zurich Insurance Company Ltd under the Group’s EMTN Programme. Simultaneously with this new issuance, investors who held Zurich Finance (USA), Inc. 4.5% EUR 500 million subordinated notes due June 2025, were made an offer to switch part or all of their holdings against this new issue and, with regard to the notes issued in July 2013, were offered to deliver notes against cash. The total nominal of EUR 231 million of the Zurich Finance (USA), Inc. notes were cancelled. A further decrease was due to the early repayment of the 5.75% EUR 500 million notes due October 2023 issued by Zurich Finance (USA), Inc. on the first call date in October 2013. The remaining increase was due to the translation effects of the U.S. dollar against the currencies in which the notes were issued.
Description 12.00% EUR 143 million perpetual capital notes 12.00% payable annually up to July 15, 2014 and then reset quarterly to 3-month EURIBOR plus 10.33%. Quarterly on or after July 15, 2014 4.5% EUR 269 million notes, due June 2025 4.5% payable annually up to June 15, 2015 and then reset quarterly to 3-month EURIBOR plus 2.20%. Quarterly on or after June 15, 2015 4.25% CHF 700 million perpetual notes 4.25% payable annually up to May 26, 2016 and then reset quarterly to 3-month CHF-Libor plus 3.046%. Quarterly on or after May 26, 2016
Debt maturities reflect original contractual dates without taking early redemption options into account. For call/ redemption dates, see table 20.3. The total notional amount of debt due in each period is not materially different from the total carrying value disclosed in table 20.4. Undiscounted cash flows include interest and principal cash flows on debt outstanding as of December 31, 2013 and 2012. All debt is assumed to mature within 20 years of the balance sheet date without refinancing. Floating interest rates are assumed to remain constant as of December 31, 2013 and 2012. The aggregated cash flows are translated into U.S. dollars at end-of-period rates.
Table 20.5 in USD millions, for the years ended December 31Interest expense on debt
Issued share capital As of December 31, 2011 14,738,582 147,385,822 0.10 New shares issued from contingent capital in 2012 91,430 914,301 0.10
New shares issued from contingent capital in 2013 60,310 603,099 0.10
c) Contingent share capital Capital market instruments and option rights to shareholders The share capital of Zurich Insurance Group Ltd may be increased by an amount not exceeding CHF 1,000,000 by the issuance of up to 10,000,000 fully paid registered shares with a nominal value of CHF 0.10 each (i) by exercising conversion and/or option rights which are granted in connection with the issuance of bonds or similar debt instruments by Zurich Insurance Group Ltd or one of its Group companies in national or international capital markets; and/or (ii) by exercising option rights which are granted to current shareholders. When issuing bonds or similar debt instruments connected with conversion and/or option rights, the pre-emptive rights of the shareholders will be excluded. The current owners of conversion and/or option rights shall be entitled to subscribe for the new shares. The conversion and/or option conditions are to be determined by the Board.
d) Additional paid-in capital This reserve is not ordinarily available for distribution. However, as of January 1, 2011 a Swiss tax regulation based on the Swiss Corporate Tax reform II became effective, allowing for payments free of Swiss withholding tax to shareholders out of a so called capital contribution reserve, created out of additional paid-in capital. Therefore, amounts qualifying under this regulation can be paid out of additional paid-in capital.
Certain of the Group’s operating companies also provide post-employment benefit plans covering medical care and life insurance, mainly in the U.S. Eligibility for these plans is generally based on completion of a specified period of eligible service and reaching a specified age. The plans typically pay a stated percentage of medical expenses subject to deductibles and other factors. The cost of post-employment benefits is accrued during the employees’ service periods.
Governance of the Group’s pension and post-employment benefit plans is the responsibility of the Group Pensions Committee, a technical committee to the Board. The Group Pensions Committee provides oversight and guidance over the costs and risks of the Group’s overall benefits policy. This includes oversight of the impact of the Group’s principal defined benefit pension and post retirement benefit plans on the Group in terms of cash, expense, and balance sheet accounting impact and capital implications by the development and maintenance of policies on funding, asset allocation and assumption setting.
a) Defined benefit plans Employees of the Group’s companies are covered by various pension plans, the largest of which are in Switzerland, the UK, the U.S. and Germany, which together comprise over 90 percent of the Group’s total defined benefit obligation. The remaining plans in other countries are not individually significant, therefore no separate disclosure is provided.
Certain Group companies provide defined benefit pension plans, some of which provide benefits on retirement, death or disability related to employees’ service periods and pensionable earnings. Others provide cash balance plans where the participants receive the benefit of the accumulated employer and employee contributions together with additional cash credits in line with the rules of the plan. Eligibility for participation in the various plans is either immediate on commencement of employment or based on completion of a specified period of continuous service.
The pension plans typically expose the company to actuarial risks such as interest rate, price inflation, longevity and salary risks. To the extent the pension plans are funded, the assets held mitigate some of the liability risk but introduce investment risk.
The overall investment policy and strategy for the Group’s defined benefit pension plans is to achieve an investment return which, together with contributions, targets having sufficient assets to pay pension benefits as they fall due while also mitigating the various risks of the plans. The actual asset allocation is determined by reference to current and expected economic and market conditions and in consideration of specific asset class risk in the risk profile. The Group has a governance framework to ensure the trust/foundation board or committee considers how the asset investment strategy correlates with the maturity profile of the plan liabilities and the potential impact on the funding status of the plans, including short-term liquidity requirements. The investment strategies for each pension plan are independently determined by the governance body in each country, with oversight by the Group Pensions Committee. The pension assets are invested in diversified portfolios across geographical regions and asset classes to ensure diversified returns,
Swiss pension plans The Group has two pension plans in Switzerland both of which provide benefits that exceed the minimum benefit requirements under Swiss pension law. The plans provide a lifetime pension to members at the normal retirement age of 65 (age 62 for Executive Staff). Participants can draw retirement benefits early from age 60 (age 58 for Executive Staff). Alternatively, the benefit can be taken as a lump sum payment at retirement. Contributions to the plan are paid by the employees and the employer, both for retirement savings and to finance risk benefits paid out in the event of death and disability. The accumulated balance on the pension account is based on the employee and employer pension contributions and interest accrued. The interest rate credited is defined annually by the plans’ Foundation Board which is responsible for the governance of the plans. The amount of pension payable on retirement is a result of the conversion rate applied on the accumulated balance of the individual participant’s pension account at the retirement date. Although the Swiss plan operates like a defined contribution plan under local regulations, it is accounted for as a defined benefit plan under IAS 19 “Employee Benefits”, because of the need to accrue interest on the pension accounts and the payment of a lifetime pension at a fixed conversion rate under the plan rules.
Effective January 1, 2014, following a plan amendment, the fixed annuity conversion rates will be revised downwards to reflect the migration of the plan’s technical basis to a revised interest rate expectation and new mortality tables resulting in a curtailment gain. This change will be phased in over a period of four years. It has also been agreed that the two pension plans will be merged into a single plan at the end of 2014 or beginning of 2015.
Net post-employment benefit (expense)/income: Current service cost (344) – – (344) Interest (expense)/income (753) 629 – (124)
Past service (cost)/credit (11) – – (11) Net post-employment benefit (expense)/income (854) 418 – (436) Remeasurement effects included in other comprehensive income: Return on plan assets excluding interest income – 596 – 596 Experience gains/(losses) (127) – – (127) Actuarial gains/(losses) arising from changes in demographic assumptions (5) – – (5) Actuarial gains/(losses) arising from changes in financial assumptions (955) – – (955) Change in asset ceiling – – 3 3 Remeasurement effects included in other comprehensive income (1,087) 596 3 (488) Employer contributions – 452 – 452 Employer contributions paid to meet benefits directly 51 – – 51 Plan participants’ contributions (50) 50 – – Payments from the plan 628 (628) – – Foreign currency translation effects (576) 479 – (97)
Net post-employment benefit (expense)/income is recognized in other employee benefits, which are included in administrative and other operating expense.
Post-employment benefits are long-term by nature. However, short-term variations between long-term actuarial assumptions and actual experience may be positive or negative, resulting in actuarial gains or losses, which are recognized in full in the period in which they occur, and are included in other comprehensive income.
Total 1 Level 1 assets (see note 25) 2 Level 2 and 3 assets (see note 25) 3 UK annuity policies
Table 22.1b in USD millionsMovement in defined benefit obligation and fair value of assets – prior period
Fair value of plan assets 4,501 8,243 2,311 1,017 948 17,020 Net defined benefit asset/(liability) (433) (2,007) (736) (260) (229) (3,666) Net post-employment benefit (expense)/income (134) (150) (138) (25) (30) (477)
Table 22.3a as of December 31, 2013Key information by main country – current period
Country Mortality table for major plans Switzerland BVG 2010 Generational 21.29 23.08 23.76 25.52 United Kingdom PNXA00 with CMI_2012 projection 23.14 24.54 25.24 26.74
Switzerland BVG 2010 Generational, partially with projection 21.18 23.00 23.66 25.44
United States RP 2000 Generational, partially with projection 19.46 19.98 21.40 21.71
Table 22.5b as of December 31, 2012Mortality tables and life expectancies for major plans – prior period
Table 22.6 as of December 31Maturity profile of future benefit payments for major plans
b) Defined contribution pension plans Certain of the Group’s companies sponsor defined contribution pension plans. Eligibility for participation in such plans is either based on completion of a specified period of continuous service or the date of commencement of employment. The plans provide for voluntary contributions by employees and contributions by the employer which typically range from 2 percent to 10 percent of annual pensionable salary, depending on a number of factors. The Group’s contributions under these plans amounted to USD 143 million and USD 132 million for the years ended December 31, 2013 and 2012, respectively.
Employee share plans Share Incentive Plan for employees in the UK The Group established an Inland Revenue approved Share Incentive Plan and launched the Partnership Shares element of this plan in 2003, which enabled participating employees to make monthly purchases of Zurich Insurance Group Ltd shares at the prevailing market price out of their gross earnings. This plan was terminated in 2007. There were 138 and 181 participants in the plan as of December 31, 2013 and 2012, respectively.
A new Partnership Share Scheme was launched in March 2013. Participants also benefit from making the deductions from their gross salary up to a maximum of GBP 1,500 or 10 percent of their year to date earnings. There were 782 active participants in the plan as of December 31, 2013.
Share Incentive Plan for employees in Switzerland Under this plan, employees have the option to acquire sales-restricted shares at a 30 percent discount to the market value. The maximum permitted investment in shares is equivalent to CHF 3,500 per employee per annum. During 2013, 4,533 employees were eligible to participate in the share incentive plan for employees in Switzerland compared with 4,894 in 2012. For the years ended December 31, 2013 and 2012, 1,506 and 1,385 employees, respectively, purchased shares under the 2012 and 2011 share plans.
Table 23.1 in USD millions, as of December 31Expenses recognized in income
The average share price for Zurich Insurance Group Ltd shares in 2013 and 2012 was CHF 250.47 and CHF 221.56, respectively.
Table 23.5 for the years ended December 31Shares granted during the period
Guarantees and letters of credit USD 9,270 million of the USD 10,283 million and USD 9,104 million of the USD 10,565 million for financial guarantees and letters of credit as of December 31, 2013 and 2012, respectively, relate to guarantees in the aggregate amount of GBP 5,595 million provided to the directors of a fully owned subsidiary in connection with the rationalization of the Group’s top legal holding structure which resulted in the merger of Zurich Group Holding into Zurich Financial Services Ltd in December 2009. These guarantees will expire in August 2015. In 2013 and 2012, an additional USD 787 million and USD 773 million, respectively, relate to guarantees in the aggregate amount of GBP 475 million which were provided to the directors of a fully owned subsidiary in connection with the repatriation of capital. These guarantees have no expiry date.
Commitments under lease agreements The Group has entered into various operating leases as lessee for office space and certain computer and other equipment. Lease expenses totaled USD 92 million and USD 102 million for the years ended December 31, 2013 and 2012, respectively.
Pledged assets The majority of assets pledged to secure the Group’s liabilities relate to debt securities pledged under short-term sale and repurchase agreements. The total amount of pledged financial assets including the securities under short-term sale and repurchase agreements amounted to USD 11,752 million and USD 9,445 million as of December 31, 2013 and 2012, respectively.
The court issued a tentative decision on the initial bench trial on November 7, 2013, following which the parties had an opportunity to submit proposed corrections to nonsubstantive matters. The court issued its final decision on December 27, 2013. While the court found that plaintiffs had established that Home transferred certain assets to one of the defendants in connection with the 1995 recapitalization transaction, it held that plaintiffs’ fraudulent transfer claims, which all related to transfers allegedly made as part of the 1995 recapitalization, were time-barred. The court further held that Home’s liquidator had exclusive standing to bring fraudulent transfer claims involving Home’s assets. The effect of these holdings should be the dismissal of plaintiffs’ fraudulent transfer claims. In addition, the court accepted defendants’ arguments that the findings made by the regulators in approving the recapitalization transaction are binding on plaintiffs in the Fuller-Austin Case.
Fin an cial info rm atio n 25. Fair value measurement
Total available-for-sale securities 154,481 150,392 154,481 150,392 Fair value through profit or loss securities
Held-to-maturity debt securities 5,172 5,745 4,613 5,012 Investments in associates and joint ventures 129 85 129 85
Liabilities related to investment contracts (1,163) (1,540) (1,030) (1,305) Liabilities related to investment contracts with DPF (6,241) (5,663) (6,614) (5,903)
Table 25.1a in USD millions, as of December 31Fair value and carrying value of financial assets and financial liabilities – non unit-linked
Fair value through profit or loss securities Equity securities 111,954 99,478 111,954 99,478
All of the Group’s financial assets and financial liabilities are initially recorded at fair value. Subsequently, available-for sale financial assets, fair value through profit or loss financial assets and financial liabilities, and derivative financial instruments are carried at fair value as of the balance sheet date. All other financial instruments are carried at amortized cost and the valuation techniques used to determine their fair value measurement are described below.
Real estate held for Investment – 2,011 6,734 8,745 Reinsurers’ share of reserves for insurance contracts fair value option 1 – – 346 346
Within level 1, the Group has classified common stocks, exchange traded derivative financial instruments, investments in unit trusts that are actively traded in an exchange market and highly liquid debt securities.
Table 25.2a in USD millions, as of December 31, 2013Fair value hierarchy – Group
Over the counter derivative financial instruments are valued using internal models. The fair values are determined using dealer price quotations, discounted cash flow models and option pricing models, which use various inputs including current market and contractual prices for underlying instruments, time to expiry, correlations, yield curves, prepayment rates and volatility of underlying instruments. Prices are typically sourced from independent pricing providers, banks and brokers. Such instruments are classified within level 2 as the inputs used in pricing models are generally market observable or derived from market observable data.
• Certain options and long-dated derivative financial instruments with fair values determined using unobservable inputs such as historical volatilities, implied volatilities from the counterparty valuations or using other extrapolation techniques.
Transfer from assets held for own use – – – – – – 10 Transfer to assets held for sale – – – – – – (42)
For the year ended December 31, 2013, the Group transferred USD 57 million of available-for-sale debt securities into level 3. The transfers were mainly the result of higher price volatility and credit rating downgrades of certain asset-backed securities, resulting in a reduction of market activity in the instruments.
Fee income and other expenses 3 (1) 2 Interest and bonuses credited to policyholders (501) 75 (426) Changes in assumptions (167) 13 (154)
Table 25.3a in USD millionsDevelopment of assets and liabilities classified within level 3 – non unit-linked
Table 25.3b in USD millionsDevelopment of reserves for insurance contracts fair value option classified within level 3
For the year ended December 31, 2013, the Group has valued USD 691 million of mortgage loans at fair value on a non-recurring basis. The fair value measurement is classified within level 3 as it is based on internal pricing models, using significant unobservable inputs.
Sensitivity of fair values reported for level 3 instruments to changes to key assumptions Within level 3, the Group classified asset-backed securities amounting to USD 2,993 million and USD 84 million for Group investments and investments for unit-linked contracts, respectively, as of December 31, 2013.
The key assumptions driving the valuation of these investments include equity levels, discount rates, credit spread rates and prepayment rates. The effect on reported fair values of using reasonably possible alternative values for each of these assumptions, while the other key assumptions remain unchanged, is disclosed in table 25.4. While this table illustrates the overall effect of changing the values of the unobservable inputs by a set percentage, the significance of the impact and the range of reasonably possible alternative assumptions may differ significantly between investments, given their different terms and circumstances. Inter-relationships between those unobservable inputs are disclosed in table 25.5. The correlation is based on the historical correlation matrix derived from the risk factors which are assigned to each of the level 3 exposures (equity and debt securities). The main market drivers are equity markets and rate indicators and the impact of such changes on the other factors. The spread scenario has been added to analyze the impact of an increase of borrowing cost for entities.
Table 25.3c in USD millionsDevelopment assets and liabilities classified within level 3 – unit-linked
• Reinsurers’ share of reserves and reserves for insurance contracts fair value option amounting to USD 346 million and USD 3,306 million respectively, as of December 31, 2013. The significant unobservable inputs used in the fair value measurement are the policy decrement assumptions used in projecting cash flows. Significant increases/(decreases) in claim incidence rates and significant decreases/(increases) in claim termination rates would result in a significantly higher(lower) fair value measurement.
Table 25.4 as of December 31, 2013Sensitivity analysis of level 3 investments to changes in key assumptions
Fin an cial info rm atio n 26. Related party transactions
for the years ended December 31 2013 2012 Net earned premiums and policy fees 4 13 Net investment result on Group investments 10 12 Insurance benefits and losses, net of reinsurance (7) (9) Underwriting and policy acquisition costs, net of reinsurance – (1) Administrative and other operating expense (3) (2)
Table 26.2 summarizes related party transactions with key personnel reflected in the Consolidated financial statements. Key personnel includes members of the Board of Directors of Zurich Insurance Group Ltd and Zurich Insurance Company Ltd and members of the Group Executive Committee.
Table 26.2 in USD millions, for the years ended December 31Related party transactions – key personnel
Farmers Group, Inc. and its subsidiaries (FGI) provide certain administrative and non-claims management services to the Farmers Exchanges, which are managed by Farmers Group, Inc. a wholly owned subsidiary of the Group. The finances and operations of the Farmers Exchanges are governed by independent Boards of Governors. In addition, the Group has the following relationships with the Farmers Exchanges.
6.15% certificate of contribution, due June 2021 707 707 6.15% certificate of contribution, due June 2021 140 140 6.15% certificate of contribution, due June 2021 60 60 4.65% certificate of contribution, due December 2013 – 150 Various other certificates of contribution 23 23
Auto Physical Damage Quota Share reinsurance agreement The Auto Physical Damage (APD) Quota Share reinsurance agreement (APD agreement) with the Farmers Exchanges provides for annual ceded premiums of USD 1 billion with 20.0 percent originally assumed by Farmers Re Co (USD 200 million) and 80.0 percent assumed by ZIC (USD 800 million), with the ceding commission for acquisition expenses ranging between 27.1 percent and 29.1 percent, and the ceding commission for unallocated loss adjustment expenses ranging between 8 percent and 10 percent, both based on a previous 5 year average experience. In addition, Farmers Re Co and ZIC assume a quota share percentage of ultimate net losses sustained by the Farmers Exchanges in their APD lines of business. The APD agreement can be cancelled after 90 days’ notice by any of the parties.
Effective January 1, 2013, the APD agreement was amended such that Farmers Re Co assumed 12.5 percent of the ceded annual premiums (USD 125 million) while ZIC continues to assume USD 800 million of the annual ceded premiums. The remaining USD 75 million of the APD premiums is assumed by a third party on the same terms as Farmers Re Co and ZIC.
All Lines Quota Share reinsurance agreement Certain of the Farmers Exchanges participate in an All Lines Quota Share reinsurance agreement (All Lines agreement) with Farmers Re Co and ZIC which has been amended over the years, with the participation ratio at 20 percent as of December 31, 2011 and 18.5 percent as of December 31, 2012. The All Lines agreement provided for a cession of a quota share of the premiums written and the ultimate net losses sustained in all lines of business written by the Farmers Exchanges after the APD agreement has been applied. Under the All Lines agreement, which can be terminated after 90 days’ notice by any of the parties, Farmers Re Co and ZIC assumed a 4.0 percent and 16.0 percent respective quota share of the premiums written and the ultimate net losses sustained in all lines of business written by the Farmers Exchanges after the APD agreement has been applied. In addition, under the All Lines agreement, the Farmers Exchanges catastrophe losses are subject to a maximum of USD 1.2 billion. As a result, Farmers Re Co and ZIC are subject to a maximum annual catastrophe loss of USD 48.0 million and USD 192 million, respectively. The All Lines agreement also provides for the Farmers Exchanges to receive a provisional ceding commission of 26.7 percent, 9.0 percent of premiums for unallocated loss adjustment expenses and 5.3 percent of premiums for other expenses.
General Insurance is managed based on market-facing businesses, including: • Global Corporate
For external reporting purposes Latin America, Asia-Pacific and Middle East and Africa are aggregated into International Markets.
Global Life is managed on a regional-based structure within a global framework, including: • North America
The segment information includes the Group’s internal performance measure, business operating profit (BOP). This measure is the basis on which business units are managed. It indicates the underlying performance of the business units, after non-controlling interests, by eliminating the impact of financial market volatility and other non-operational variables. BOP reflects adjustments for shareholders’ taxes, net capital gains on investments and impairments (except for the capital markets and property lending/banking operations included in Non-Core Businesses and investments in hedge funds, certain securities held for specific economic hedging purposes and policyholders’ share of investment results for the life businesses) and non-operational foreign exchange movements. Significant items arising from special circumstances, including restructuring charges, charges for litigation outside the ordinary course of business, gains and losses on divestments of businesses, impairments of goodwill and the change in estimates of earn-out liabilities (with the exception of experience adjustments, which remain within BOP) are also excluded from BOP.
Business operating profit attributable to non-controlling interests 72 52 233 133 – – (16) (22) – 1 288 164 Net income before shareholders’ taxes 3,135 3,065 1,417 1,725 1,510 1,423 (474) (1,104) 86 169 5,674 5,277 Income tax expense/(benefit) attributable to policyholders – – 285 194 – – – – – – 285 194
Net income before income taxes 3,135 3,065 1,702 1,919 1,510 1,423 (474) (1,104) 86 169 5,960 5,472 Income tax expense (1,701) (1,496)
Net income after taxes 4,259 3,975 attributable to non-controlling interests 231 89 attributable to shareholders 4,028 3,887 1 Includes USD 37 million of software impairments relating to a restructuring program (see notes 16 and 18). 2 Includes USD 75 million of foreign exchange movements relating to operations which were liquidated or substantially liquidated.
Table 28.2 in USD millions, for the years ended December 31Reconciliation of BOP to net income after income taxes
Investments in associates and joint ventures 7 7 65 69 – – 55 9 2 1 – – 129 85
Investments for unit-linked contracts – – 122,423 112,036 – – – – 11,844 11,877 – – 134,267 123,913
Equity Shareholders’ equity 32,503 34,505 Non-controlling interests 2,231 2,369 Total equity 34,734 36,874 Total liabilities and equity 415,053 408,831 Supplementary information Additions and capital improvements to property, equipment and intangible assets 344 331 157 150 169 120 81 150 – – – – 752 751
Real estate held for investment 3,159 2,827 5,239 5,334 76 101 – 43 272 256 – – 8,745 8,561
Reinsurers’ share of reserves for insurance contracts 13,008 13,901 2,068 1,983 – – – – 3,013 4,042 (111) (174) 17,978 19,753 Deposits made under assumed reinsurance contracts 56 46 49 29 2,376 2,319 – – 165 194 (2) – 2,645 2,588
Total assets (after cons. of investments in subsidiaries) 124,675 124,916 265,493 254,059 9,640 9,834 19,765 20,520 26,203 30,583 (30,723) (31,081) 415,053 408,831 Liabilities Liabilities for investment contracts – – 67,113 57,437 – – – – – – – – 67,113 57,437 Reserves for insurance contracts, gross 82,148 82,693 161,131 158,533 2,820 2,841 35 36 19,416 21,303 (111) (174) 265,440 265,233
Gross written premiums and policy fees 9,264 8,609 10,215 10,003 11,799 11,882 5,700 5,603 390 345 (930) (832) 36,438 35,610 Net earned premiums and policy fees 6,077 5,499 7,633 7,634 11,583 11,772 4,465 4,282 12 9 – – 29,769 29,195 Insurance benefits and losses, net 4,471 4,291 5,193 5,453 7,804 8,225 2,757 2,583 96 (25) – – 20,321 20,527 Policyholder dividends and participation in profits, net – 1 5 3 – – – – – – – – 6 4
Table 28.4 in USD millions, for the years ended December 31General Insurance – Customer segment overview
North America United States 12,736 12,223 Canada 904 928 Bermuda 11 10 North America 13,651 13,160 3,632 3,343 Europe United Kingdom 3,920 3,899 Germany 3,134 3,110 Switzerland 3,330 3,243 Italy 1,896 1,879 Spain 1,398 1,438 Austria 595 544 Ireland 357 376 Portugal 326 339 France 433 410 Rest of Europe 1,088 1,049 Europe 16,477 16,287 4,555 4,279 Latin America Argentina 422 393 Brazil 1,112 920 Chile 324 470 Mexico 685 600 Venezuela 287 257 Rest of Latin America 33 34 Latin America 2,864 2,674 – – Asia-Pacific Australia 1,163 1,178 Hong Kong 246 210 Japan 702 780 Taiwan 130 129 Malaysia 176 156 Rest of Asia-Pacific 279 264 Asia-Pacific 2,695 2,717 601 581
Table 28.5 in USD millions, for the years ended December 31General Insurance – Revenues by region
Table 28.7 in USD millions, for the years ended December 31Global Life – Overview
Net investment result on unit-linked investments 71 24 591 1,175 11,253 7,538 726 761 90 131 – – 12,731 9,629
1 Includes business written under freedom of services and freedom of establishment in Europe. 2 Mainly includes business written through licenses into Asia-Pacific and Middle East. 3 Includes business written through licenses into all regions.
North America United States 161 165 North America 161 165 Latin America Chile 403 472
Table 28.9 in USD millions, as of December 31Global Life – Non-current assets by region
Farmers Management Services Management fees and other related revenues 2,810 2,846 Management and other related expenses 1,457 1,480 Gross management result 1,353 1,366 Other net income (excl. items not included in BOP) 38 62 Business operating profit before non-controlling interest 1,390 1,428 Business operating profit 1,390 1,428 Farmers Re Gross written premiums and policy fees 4,045 4,361 Net earned premiums and policy fees 4,099 4,418 Insurance benefits and losses, net (2,823) (3,198) Total net technical expenses (1,285) (1,383) Net underwriting result (9) (163) Net non-technical result (excl. items not relevant for BOP) 68 65 Net investment income 66 72 Business operating profit before non-controlling interests 125 (26) Business operating profit 125 (26) Farmers business operating profit 1,516 1,402
Insurance benefits and losses, incl. PH dividends, net 50 57 (1) (1) – – 49 56 Administrative and other operating expense (excl. depreciation / amortization) 237 169 972 1,154 (216) (169) 993 1,155 Other expenses and items not included in BOP (55) (14) (3) (4) – – (58) (18) Depreciation, amortization and impairments of property, equipment and intangible assets – 8 130 86 – – 130 94
Gross written premiums and policy fees 535 475 Net earned premiums and policy fees 504 455 Insurance benefits and losses, net (162) 380 Policyholder dividends and participation in profits, net 121 694 Total net technical expenses 44 56 Net underwriting result 501 (675) Net investment income (1) 138 Net capital gains/(losses) and impairments on investments (365) 816 Net non-technical result (excl. items not included in BOP) (64) (150) Business operating profit before non-controlling interests 72 129 Non-controlling interests – 1 Business operating profit 73 129
Table 28.12 in USD millions, for the years ended December 31Non-Core Businesses – Overview
Fin an cial info rm atio n 29. Interests in subsidiaries
Zurich Minas Brasil Seguros S.A. Belo Horizonte General Insurance / Global Life 100 100 BRL 1,312.4
Chile Chilena Consolidada Seguros de Vida S.A. Santiago Global Life 98.98 98.98 CLP 24,484.0 Zurich Santander Seguros de Vida Chile S.A. Santiago Global Life 51 51 CLP 100,707.5 Cyprus Zurich Insurance Holding (Cyprus) Ltd. 3 Nicosia General Insurance 100 100 RUB 7.4 Germany Deutscher Herold Aktiengesellschaft 4 Bonn Global Life 79.83 79.83 EUR 18.4 Zürich Beteiligungs-Aktiengesellschaft (Deutschland) Frankfurt General Insurance 100 100 EUR 152.9 Zurich Deutscher Herold Lebensversicherung Aktiengesellschaft Bonn Global Life 86.37 86.37 EUR 68.5 Ireland Zurich Life Assurance plc Dublin Global Life 100 100 EUR 17.5 Zurich Financial Services EUB Holdings Limited Dublin Non-Core Businesses 100 100 GBP 0.001 Zurich Insurance plc Dublin General Insurance 100 100 EUR 8.2
Italy Zurich Investments Life S.p.A. Milan Global Life 100 100 EUR 164.0 Zurich Life and Pensions S.p.A. Milan Global Life 100 100 EUR 40.5 Zurich Life Insurance Italia S.p.A. Milan Global Life 100 100 EUR 85.8 Luxembourg Zurich Eurolife S.A. Bertrange Global Life 100 100 EUR 12.0 Malaysia
Zurich Insurance Malaysia Berhad Kuala Lumpur General Insurance / Global Life 100 100 MYR 579.0
Zurich Santander Seguros México, S.A. Mexico City General Insurance / Global Life 51 51 MXN 190.0
South Africa Zurich Insurance Company South Africa Limited 5 Johannesburg General Insurance 84.05 84.05 ZAR 3.0 Spain Bansabadell Pensiones, E.G.F.P, S.A. 2 Barcelona Global Life 50 50 EUR 7.8 Bansabadell Seguros Generales, S.A. de Seguros y Reaseguros 2 Barcelona General Insurance 50 50 EUR 10.0 Bansabadell Vida S.A. de Seguros y Reaseguros 2 Barcelona Global Life 50 50 EUR 43.9 Zurich Latin America Holding S.L. – Sociedad Unipersonal Barcelona
Zurich Santander Holding (Spain), S.L. Madrid Global Life 51 51 EUR 94.3 Zurich Santander Holding Dos (Spain), S.L. Madrid Global Life 51 51 EUR 40.0 Zurich Santander Insurance America, S.L. Madrid Global Life 51 51 EUR 177.0 Zurich Vida, Compañía de Seguros y Reaseguros, S.A. – Sociedad Unipersonal Madrid Global Life 100 100 EUR 56.4 Switzerland Genevoise Real Estate Company Ltd Geneva Global Life 100 100 CHF 20.4
Zurich Financial Services (UKISA) Limited Swindon, England Other Operating Businesses 100 100 GBP 1,652.1
Zurich Holdings (UK) Limited Fareham, England Other Operating Businesses 100 100 GBP 137.3
United States of America Farmers Group, Inc. 8 Reno, NV Farmers 100 100 USD 0.001
Farmers Reinsurance Company 8 Los Angeles, CA Farmers 100 100 USD 58.8 Farmers Services LLC 9 Wilmington, DE Farmers 100 100 USD – Zurich American Corporation Wilmington, DE Non-Core Businesses 100 100 USD 0.00001
Zurich American Life Insurance Company Schaumburg, IL Global Life / Non-Core Businesses 100 100 USD 2.5
ZFS Finance (USA) LLC V 9 Wilmington, DE Other Operating Businesses 100 100 USD –
Zurich Finance (USA), Inc. Wilmington, DE Other Operating Businesses 100 100 USD 0.000001
1 The segments are defined in note 28. 2 Relates to Bansabadell insurance entities which are controlled by the Group. 3 Zurich Insurance Holding (Cyprus) Limited indirectly holds 99.9% of Zurich Insurance Company Limited in Russia which is a wholly owned subsidiary of the Zurich Insurance
Other Operating Businesses. 7 The results of the operating activities are included in the Global Life segment, whereas the headquarter’s activities are included in Other Operating Businesses. 8 The ownership percentages in Farmers Group, Inc. and its fully owned subsidiaries have been calculated based on the participation rights of Zurich Insurance Group in a situation of liquidation, dissolution or winding up of Farmers Group, Inc.
9 These entities are LLCs and have no share capital. 10 Shares have no nominal value in accordance with the company’s articles of incorporation and local legislation.
For Zurich Santander Insurance America, S.L. and its subsidiaries, certain protective rights exist, amongst others around liquidation, material sale of assets, transactions impacting the legal ownership structure, dividend distribution and capital increase, distribution channel partnerships and governance, which are not quantifiable.
For details on the Group’s capital restrictions, see the capital management section in the Risk review, which forms an integral part of the Consolidated financial statements.
As statutory auditor, we have audited the Consolidated financial statements of Zurich Insurance Group Ltd, which comprise the consolidated income statement, consolidated statement of comprehensive income, consolidated balance sheet, consolidated statement of cash flows, consolidated statement of changes in equity, and notes (pages 128 to 168 and 181 to 301), for the year ended December 31, 2013.
Opinion In our opinion, the Consolidated financial statements for the year ended December 31, 2013 give a true and fair view of the financial position, the results of operations and the cash flows in accordance with the International Financial Reporting Standards (IFRS) and comply with Swiss law.
Zurich produces and reports embedded value in accordance with the Market Consistent Embedded Value (MCEV) Principles and Guidance issued by the European Insurance CFO Forum (CFO Forum) in October 2009 to provide an economic view of the value of the life business to shareholders and to support financial management and strategic decision making. This report provides an overview of the movement in the MCEV over the calendar year 2013 and new business value added from new sales during the year, including further splits into constituent parts and geographical regions.
of which new business value 1,251 890 361 1 As of December 31, 2012, Zurich Santander businesses were included in embedded value. New business for 2012 did not include Zurich Santander or new operations in Asia. See Annual Report 2012 for details.
Embedded value operating earnings were USD 855 million. The earnings were negatively impacted by management changes to expense methodology, most of the impact of which is reflected in development expenses. The earnings included USD 689 million of expected emergence of value from business in-force and USD 1,251 million of new business value, offset by USD 1,084 million of operating variances.
Embedded value earnings were USD 1,240 million. The earnings were negatively impacted, as noted above for embedded value operating earnings, by management changes to expense methodology.
The graph and table below show how embedded value has increased from USD 18,861 million to USD 19,499 million during 2013. Each movement is described in its own section of the report, as detailed on the graph below.
Dividends in the last six months of the year 1 – (342) (342) – (342) 1,059 Capital and other movements in the last six months of the year 1 75 120 195 13 208 New business value non-controlling interests (174) 227 53 (243) (190) (46)
In North America, embedded value increased by USD 40 million, as operating earnings were partially offset by operating assumption changes.
In Latin America, embedded value decreased by USD 300 million mainly as a result of a change in the valuation interest rate used in Chile, exchange rate impacts and management changes to expense methodology.
In Switzerland, embedded value increased by USD 660 million as a result of strong operating earnings and positive economic variances that were partially offset by dividend payments.
In Asia-Pacific and Middle East, embedded value decreased by USD 336 million mainly as a result of assumption changes and management changes to expense methodology.
Required capital is the amount of shareholders’ net assets required to cover the target capital requirement, covering both minimum solvency margin and target excess solvency margin. Free surplus is shareholders’ net assets less required capital.
In the UK, free surplus increased by USD 697 million mainly due to expected transfer of profits from business in-force exceeding the strain of writing new business and changes to the treatment of internal reinsurance.
In Asia-Pacific and Middle East, free surplus decreased by USD 65 million due to various operating variances exceeding capital injections into the region.
In Other, free surplus decreased by USD 247 million due to expenses charged to Global Life’s central unit, in part resulting from management changes to expense methodology, and dividend payments made to the Group.
The graph below shows how the free surplus value has increased from USD 2,280 million to USD 2,790 million during 2013.
Dividends and capital and other movements decreased free surplus by USD 427 million as dividends of USD 806 million paid to the Group exceeded capital and other movements of USD 379 million into the life business.
Present value of new business premiums (PVNBP) 2 8,917 9,166 12,207 10,296 40,586 8,055 7,808 8,617 10,815 35,296
Overall in Europe, APE decreased by USD 162 million or 7 percent on a local currency basis. The main reductions were in the UK and Germany. Margins increased strongly in Switzerland and Spain, contributing to the increase in new business value of USD 36 million or 6 percent on a local currency basis.
In the UK, APE decreased by USD 176 million or 14 percent on a local currency basis as a result of reduced sales of individual savings business following the implementation of new regulation on intermediary commission payments, partially offset by increased sales of corporate pensions business in the third quarter. Margins were stable with the positive impact of lower corporation tax rates offset by lower profitability from corporate business. Overall new business value decreased by USD 28 million or 13 percent on a local currency basis.
In Asia-Pacific and Middle East, APE increased by USD 66 million or 17 percent on a local currency basis. The increase arose from the inclusion of Zurich Insurance Malaysia Berhad (ZIMB) in new business reporting and from new local life insurance businesses in Singapore, Indonesia and Taiwan in 2013. New business value increased by USD 53 million or 47 percent on a local currency basis.
In Other, APE increased by USD 26 million or 15 percent on a local currency basis. New business value decreased by USD 4 million or 5 percent on a local currency basis due to a reduction in margins.
Zurich Insurance GroupAnnual Report 2013Financial information314 5. Expected contribution and expected transfer to shareholders’ net assets
Other non-operating variances of which: Asia-Pacific and Middle East – (226) (225) (28) (54)
• Persistency experience decreased embedded value by USD 53 million. The main negative experience was USD 51 million in Latin America.
Embedded value split of operating assumption changes in USD millions, for the year ended December 31, 2013
• Persistency assumption updates negatively impacted embedded value by USD 237 million. The main drivers were North America, Asia-Pacific and Middle East and the UK contributing USD 138 million, USD 87 million and USD 85 million respectively, partially offset by an increase in Switzerland of USD 133 million.
• Expense assumption changes reduced embedded value by USD 199 million. The main contributors were Asia-Pacific and Middle East and Ireland contributing USD 163 million and USD 33 million respectively.
• Other assumption changes decreased embedded value by USD 265 million. The main contributors were a decrease of USD 82 million in North America, mainly due to a reduction in the assumed take-up rate of policy loans, and a decrease of USD 63 million in Germany, partly as a result of policyholder dividend declaration impacts.
• Modeling changes increased embedded value by USD 276 million. In Germany, modeling changes increased embedded value by USD 189 million. The major changes related to risk, reducing the cost of residual non-hedgeable risk. In Switzerland, enhancements to the valuation models, in particular the disability model, increased embedded value by USD 47 million.
• Development expenses reduced embedded value by USD 992 million. During 2013 there were management changes to expense methodology in embedded value reporting. These changes reduced embedded value as of December 31, 2013, and the impact of these changes is included in development expenses. The major impacts were USD 246 million for the capitalized value of future projected excess maintenance expenses for start-up operations and associated regional office expenses and USD 347 million for the capitalized value of certain central overhead expenses now treated as a recurring maintenance expense.
Development expenses also include USD 134 million for the excess of initial and maintenance expenses over the long-term expense assumptions incurred during 2013 by start-up operations in North America, Latin America and Asia-Pacific and Middle East and their associated regional offices, and USD 173 million charged against the shareholders’ net assets of region Other during 2013.
North America 10 Latin America (173) of which: Zurich Santander (203) Europe (388)
United Kingdom 55 Germany (78) Switzerland (161) Ireland 13 Spain (37) Rest of Europe (180)
Changes in value for Global Life arising from dividends and capital and other movements are offset by equal and opposite value changes in the non-covered businesses of the Group and therefore have no impact on Group MCEV as shown in section 11, except as noted below.
North America paid a dividend of USD 136 million to the Group, partially offset by a capital transfer from non-covered business.
Foreign currency translation effects represent the impact of adjusting opening embedded value, and movements during the year which are translated at average exchange rates during the year, to end-of-year exchange rates. The net effect of the change of the U.S. dollar against other currencies increased the U.S. dollar embedded value by USD 71 million.
in USD millions, for the year ended December 31, 2013Dividends and capital and other movements
Value of business in-force of which: Asia-Pacific and Middle East 1,746 (80) (12) (118) 1,536 1,766 1 CE is the certainty equivalent value of business in-force. 2 FC is the frictional costs. 3 TVFOG is the time value of financial options and guarantees including the application of a liquidity premium. 4 CRNHR is the cost of residual non-hedgeable risk (see section 12 d) for further details).
2 Pension scheme liabilities are deducted from shareholders’ equity but are not deducted from embedded value shareholders’ net assets. 3 Primarily from non-controlling interests in Zurich Santander and Spain. 4 Other adjustments include tax differences, policyholders’ share of intangibles, reserving differences and asset valuation differences including the write-off in embedded value shareholders’ net assets of an intangible asset to which certain project-based costs were related.
in USD billions, as of December 31, 2013Reconciliation of shareholders’ equity to embedded value
Economic sensitivities 100 basis points increase in risk free yield curve (2%) (1%) 100 basis points decrease in risk free yield curve 2 2% (1%) 10% fall in equity market values (1%) n / a 10% fall in property market values (1%) n / a 25% increase in implied volatilities for risk free yields (1%) – 25% decrease in implied volatilities for risk free yields 1% 1% 25% increase in implied volatilities for equities and properties (1%) – 25% decrease in implied volatilities for equities and properties 1% –
1 Values used to calculate the sensitivities exclude a liquidity premium and are net of new business value non-controlling interests. These adjustments for the sensitivity calculations reduce the reported embedded value and new business value by USD 386 million and USD 347 million, respectively.
Non-operating MCEV earnings 0.4 0.0 0.4 Total MCEV earnings 1.2 3.1 4.3
Closing Group MCEV 19.5 14.7 34.2 1 For non-covered businesses this is set equal to the Net Income After Tax over the period. 2 For covered business this is equal to new business value non-controlling interests. For non-covered businesses this is equal to the change in non-controlling interests and unrealized gains and losses excluding the foreign currency translation effects over the period. 3 Adjustments include dividends, capital and other movements and foreign currency translation effects.
All amounts shown in U.S. dollars are rounded. All ratios and variances are calculated using the underlying amounts rather than the rounded amounts.
a) Covered business Covered business includes all business written by companies that are included in Global Life, unless otherwise stated. In particular: • life and critical illness; • savings (with profit, non-profit and unit-linked); • pensions and annuity; and
c) Shareholders’ net assets Shareholders’ net assets represent the market value of net assets held in respect of the covered business, and consist of the required capital and free surplus. The level of required capital reflects the amount of capital considered by the directors of each legal entity to be appropriate to manage the business. This is set at least at the level equal to the regulatory required capital of each legal entity, at which the regulator would intervene to request a capital injection and in addition, for the main companies, an adequate buffer to cover short-term volatilities in solvency due to financial and non-financial risks or to achieve the capital required to maintain the desired credit rating.
In the UK, insurers are required to assess capital requirements on two separate bases, Pillar 1 and Pillar 2. For Zurich Assurance Ltd, Pillar 2 was more onerous at December 31, 2012, and Pillar 1 was more onerous at December 31, 2013. The amounts of required capital and free surplus shown in this report as of December 31, 2012 and December 31, 2013 applicable to Zurich Assurance Ltd reflect those positions. The required capital modelled for embedded value is based on the Group’s target Pillar 1 required capital, and the analysis of change is performed on a Pillar 1 basis.
Shareholders’ net assets are based on local statutory and regulatory accounting. Adjustments are made to embedded value where appropriate, for example in respect of any unrealized gains attributable to shareholders. Any such adjustments are made consistently with the calculation of the value of business in-force.
Certainty equivalent (CE) value is the value calculated using discount rates consistent with those applied to the underlying cash flows in the capital markets. It includes the intrinsic value but excludes the time value of financial options and guarantees which is allowed for separately, as described below.
• dynamic policyholder behavior, for example changes in surrender behavior as interest rates rise or fall, or take-up rates of guaranteed annuity options.
Expenses that form the unit cost base for assumption setting are split into initial expenses and maintenance expenses. The initial expenses impact the new business value directly. The maintenance expenses form the basis for the maintenance expense assumptions and impact the new business value and value of business in-force directly.
Expenses excluded from the unit cost base for embedded value reporting are split into development expenses and one-off expenses. Development expenses relate to expenses incurred to improve the long-term capacity of the business or to reduce its future unit costs, and include certain expenses for start-up operations, certain expenses for regional offices, and certain central overhead expenses not reflected in the long-term assumptions of the business units. They also include certain project-based costs and certain distribution expenses. One-off expenses are those that are not expected to recur and are short-term in nature. Development expenses and one-off expenses do not impact the new business value.
The expenses of start-up operations and of regional offices focused on developing or supporting new businesses are likely to exceed the levels of expense that can be absorbed by the initial level of business generated in those business units. In these cases, expenses included in the unit cost base are based on long-term initial and maintenance expense assumptions which are then the basis for new business value. Expenses incurred in excess of those in the long-term assumptions are written off substantially as development expenses. The value of business in-force reflects the long-term maintenance expense assumptions and the projected excess of maintenance expenses over the long-term maintenance expense assumptions relating to business in-force. The value of such excess is written off to other operating variances as development expenses. This is a management change to expense methodology in 2013 and the projected excess maintenance expenses for start-up operations and regional office expenses is USD 246 million, reported as a development expense. In previous years, such expenses were reported annually as incurred.
In previous years, certain project-based costs related to intangible assets were reported as variances in line with amortization. In 2013, as part of the management changes to expense methodology, all such intangible assets were written off through development expenses in embedded value. This reduced embedded value by USD 83 million as of December 31, 2013. This is not an impairment of value of these intangible assets.
Certain payments to distributors or sales agents are made in exchange for an expectation of new business production over a period longer than one year. Such payments, whether up-front or payable in stages, are reported as development expenses.
l) Debt Where a loan exists between a company in Global Life and a Group company outside Global Life, the loan is included in embedded value at the same value included in the balance sheet of the other Group company.
In Switzerland, an investment management company provides asset management services to pension schemes written in foundations and other pension funds. The present value of the net asset management fees, after tax, is included in embedded value and new business value.
q) Sensitivities The key assumption changes represented by each of the sensitivities in section 10 are as follows: Operating sensitivities
Liquidity premiums The CFO Forum engaged Barrie & Hibbert who estimated a liquidity premium proxy to be equal to 50 percent times the credit spread over swaps less 40 basis points where credit spreads over swaps are equal to the credit spread on a representative corporate bond index less the swap rate for each particular currency.
The liquidity premium is applied to the following lines of business: • 100 percent for annuities; • 75 percent for contracts with participating features, universal life contracts and fixed interest annuities in the U.S.; • 0 percent for all other lines of business.
Taxation Current income tax legislation and rates have been assumed to continue unaltered, except where changes in future such tax rates or practices have been announced.
As of December 31, 2013 the valuation approach for some group savings schemes and group pension schemes was changed from the individual member approach to the scheme approach. Under the scheme approach, it is assumed members leaving the scheme will be replaced by members joining the scheme and hence the scheme population will remain on average stable over time; however, an assumption for the entire scheme lapsing is made. The scheme approach is considered appropriate when it is clear that the negotiation and pricing activity is carried out at a scheme level. This change increased the value of business in-force, and hence embedded value, as of December 31, 2013 by USD 42 million. For each scheme, measurements of future new business volumes and values will be consistent with the valuation approach used for the value of business in-force.
The maintenance expense assumptions allow for the expected cost of providing future service benefits in respect of the Group staff pension schemes. An adjustment to embedded value is noted in section 12 n) for pension scheme liabilities and no allowance is made in the expense assumptions for any contributions as a result of past service benefits.
Zurich is liable for payments to be made to various distributors, each payment being dependent on preceding sales volumes or profits or other factors, in accordance with distribution agreements. As part of the economic valuation, for each such agreement, a liability is included in embedded value shareholders’ net assets for the best estimate of the next potential payment attributable to the business issued to date.
Embedded value information: Opening embedded value 2,594 2,780 1,615 683 820 – 11,298 9,701 3,043 2,465 312 217 18,861 15,846 Dividends in the first six months of the year 1 (68) (109) (24) (5) (22) – (347) (365) – (11) (26) (45) (465) (534) Capital and other movements in the first six months of the year 1 1 (20) (35) 43 93 (1) 116
Embedded value information: Opening embedded value 4,130 3,692 2,589 2,058 2,286 2,126 1,204 1,156 281 164 808 506 11,298 9,701 Dividends in the first six months of the year 1 – 6 (4) (1) (163) (355) – 13 (27) (19) (153) (8) (347) (365) Capital and other movements in the first six months of the year 1 55 3 4 13 (6) (27) 43
New business margin (% of APE) 16.4% 16.4% 11.8% 8.2% 26.7% 11.5% 16.1% 18.5% 75.4% 62.9% 17.9% 21.5% 20.6% 17.9% New business margin (% of PVNBP) 1.1% 1.4% 1.5% 0.8% 2.3% 1.0% 1.9% 2.2% 8.3% 7.0% 2.1% 2.4% 1.8% 1.7%
Expected contribution from in-force 61 176 54 236 139 166 19 22 66 17 52 40 392 658
New business information: Annual premiums 652 583 307 382 111 107 117 116 84 69 128 116 1,398 1,374
Board of Directors’ Responsibility The Board of Directors is responsible for the preparation of the Embedded value report in accordance with the MCEV Principles and Guidance, including consistency of the applied methodology and the assumptions used and for such internal controls as determined necessary to enable the preparation of the Embedded value report that is free from material misstatement, whether due to fraud or error.
Opinion In our opinion, the Embedded value report of the Company for the year ended December 31, 2013 is prepared, in all material respects, in accordance with the MCEV Principles and Guidance.
Zurich Insurance Group Ltd was incorporated on April 26, 2000, and is the holding company of the Zurich Insurance Group with the principal activity of holding subsidiary companies. The company is listed on the SIX Swiss Exchange.
Net income after taxes for the year was CHF 2,327 million compared with CHF 2,382 million in 2012. The result was mainly driven by the lower dividend income from its subsidiary Zurich Insurance Company Ltd which paid a dividend of CHF 2,200 million in 2013, compared with CHF 2,400 million in 2012 and by higher interest income of CHF 307 million compared with CHF 101 million in the previous year. In 2013, other financial expenses of CHF 207 million included impairments on investments in subsidiaries of CHF 160 million, compared with CHF 190 million in 2012, thereof CHF 75 million related to impairments on investments in subsidiaries.
Total revenues 2,572,408 2,598,766 Expenses Administrative expense 6 (19,768) (19,365) Other financial expense 7 (207,372) (190,330)
Total long-term liabilities 503,103 535,096 Total liabilities 561,539 618,150 Shareholders’ equity (before appropriation of available earnings) Share capital 12 14,890 14,830 Legal reserves: 8,660,644 11,029,552
General capital contribution reserve 7,997,448 10,359,588 Reserve for treasury shares 14 322,056 328,824
Unless otherwise stated all amounts in these financial statements including the notes are shown in Swiss franc thousands, rounded to the nearest thousand.
3. Interest income Interest income is earned mainly on the Company’s subordinated loan of CHF 4,832 million with its subsidiary Zurich Insurance Company Ltd. The increase of CHF 207 million compared to 2012 is the result of higher interest earned in 2013 on this loan.
4. Other financial income Other financial income primarily includes realized foreign exchange gains and net gains on derivatives with subsidiaries.
The investment in Zurich Financial Services EUB Holdings Limited was impaired by CHF 160 million in 2013 compared with an impairment of CHF 75 million in the previous year.
11. Commitments and contingencies Zurich Insurance Group Ltd has provided unlimited guarantees in support of various entities belonging to the Zurich Capital Markets group of companies. The Company has also entered into various support agreements and guarantees for the benefit of certain of its subsidiaries and their directors. They amounted to CHF 11,448 million as of December 31, 2013, and CHF 11,587 million as of December 31, 2012. CHF 8,256 million out of the total of CHF 11,448 million relate to guarantees in the aggregate amount of GBP 5,595 million provided to a fully owned subsidiary and certain of its directors in connection with the restructuring of the Group’s top legal holding structure which resulted in the merger of Zurich Group Holding into Zurich Insurance Group Ltd (formerly known as Zurich Financial Services Ltd) in December 2009. These guarantees will expire in August 2015. Furthermore, the Zurich Insurance Group Ltd has issued an unlimited guarantee in favor of the Institute of London Underwriters in relation to business transferred to Zurich Insurance plc from a group company which no longer has insurance licenses.
12. Shareholders’ equity a) Issued share capital In 2013, there was no change to the ordinary share capital. At the Annual General Meeting on March 29, 2012, the shareholders approved an extension of authorized share capital with the number of shares remaining unchanged at 10,000,000 fully paid registered shares with a nominal value of CHF 0.10 each until March 29, 2014. In 2012, there were no changes to the ordinary share capital or to the authorized share capital.
c) Contingent share capital Capital market instruments and option rights to shareholders The share capital of Zurich Insurance Group Ltd may be increased by an amount not exceeding CHF 1,000,000 by the issuance of up to 10,000,000 fully paid registered shares with a nominal value of CHF 0.10 each (i) by exercising of conversion and/or option rights which are granted in connection with the issuance of bonds or similar debt instruments by Zurich Insurance Group Ltd or one of its Group companies in national or international capital markets; and/or (ii) by exercising option rights which are granted to current shareholders. When issuing bonds or similar debt instruments connected with conversion and/or option rights, the pre-emptive rights of the shareholders will be excluded. The current owners of conversion and/or option rights shall be entitled to subscribe for the new shares. The conversion and/or option conditions are to be determined by the Board.
The conversion rights may be exercisable during a maximum of ten years and option rights for a maximum of seven years from the time of the respective issue. The conversion or option price or its calculation methodology shall be determined in accordance with market conditions, whereby for shares of Zurich Insurance Group Ltd, the quoted share price is to be used as a basis.
Employee participation On January 1, 2012, the contingent share capital, to be issued to employees of Zurich Insurance Group Ltd and its subsidiaries, amounted to CHF 390,943.70 or 3,909,437 fully paid registered shares with a nominal value of CHF 0.10 each. On January 1, 2013, the contingent share capital, to be issued to employees of Zurich Insurance Group Ltd and its subsidiaries, amounted to CHF 299,513.60 or 2,995,136 fully paid registered shares with a nominal value of CHF 0.10 each.
Average purchase price of additions, in CHF – 155 Average selling price, in CHF 247 229 1 in CHF thousands 15. Shareholders The shares registered in the share ledger as of December 31, 2013, were owned by 127,992 shareholders of which 122,403 were private individuals holding 26.2 percent of the shares (or 16.3 percent of all outstanding shares), 2,046 were foundations and pension funds holding 6.9 percent of the shares (or 4.3 percent of all outstanding shares), and 3,543 were other legal entities holding 66.9 percent of the shares (or 41.5 percent of all outstanding shares).
According to information available as of December 31, 2013, Zurich Insurance Group Ltd is not aware of any person or institution, other than BlackRock, Inc., New York, (4.97%) and Norges Bank, Oslo, (3.07%) which, directly or indirectly, had an interest as a beneficial owner in shares, option rights and/or conversion rights relating to shares of Zurich Insurance Group Ltd representing three percent or more of its issued shares.
The remuneration paid to the Directors for their Board membership of Zurich Insurance Group Ltd, the holding company of the Group, and Zurich Insurance Company Ltd is paid entirely by Zurich Insurance Group Ltd. The fees for Mr. de Swaan’s additional Board membership in Zurich Insurance plc (ZIP) and for the additional Board memberships of Ms. Bies and Mr. Nicolaisen in Zurich Holding Company of America (ZHCA) are paid by the respective companies. Remuneration paid to the members of the GEC is not paid by Zurich Insurance Group Ltd, but by the Group entities where they are employed. The remuneration shown below includes the remuneration that the members of the Board and the GEC received for all their functions in the Group. As the financial statements of the holding company are presented in Swiss francs, all figures are shown in Swiss francs, with totals also presented in U.S. dollars. The remuneration paid to the members of the Board is presented in Swiss francs. The remuneration of the members of the GEC is paid in local currency and therefore year-on-year comparisons are affected by movements in exchange rates.
Remuneration of Directors The following tables set out the total fees paid to Directors of Zurich Insurance Group Ltd. All the Directors are also Directors of Zurich Insurance Company Ltd. The Directors receive a combined fee for their work in connection with Zurich Insurance Group Ltd and Zurich Insurance Company Ltd. In addition, Mr. de Swaan is a member of the Board of ZIP and Ms. Bies and Mr. Nicolaisen are members of the Board in ZHCA. The fee structure for Directors was reviewed and no changes were made for 2013. The fees are set out in the Remuneration report on page 84.
Of which allocated in shares 4, 5 in CHFDirectors’ fees 2013
Of which allocated in shares 4, 13 1 The remuneration shown in the tables is gross, based on the accrual principle and does not include any business-related expenses incurred in the performance of the Directors’ services.
2 Committee members receive a cash fee of CHF 50,000 (CHF 50,000 in 2012) for all committees on which they serve, irrespective of the number. The committees on which the Directors serve are set out in the Corporate Governance Report on page 38.
3 Committee chairs receive an annual fee of CHF 30,000 (CHF 30,000 in 2012) and the chair of the Audit Committee receives an additional CHF 10,000 (CHF 10,000 in 2012). Ms. Bies took on the role of the Risk Committee Chair as of September 11, 2013. The committees on which the Directors serve and the chairs are set out in the Corporate Governance Report on page 38.
6 Neither the Chairman nor the Vice-Chairman receive any additional fees for their committee work. 7 In addition to the fees received as Directors of Zurich Insurance Group Ltd, Ms. Bies, Mr. Nicolaisen and Mr. de Swaan earned fees for their board memberships of the following of Zurich Insurance Group companies: – In both 2013 and 2012, Ms. Bies and Mr. Nicolaisen earned CHF 50,000 for their membership of the board of Zurich Holding Company of America (ZHCA). – In 2013, Mr. de Swaan earned CHF 75,000 for his membership of the board of Zurich Insurance plc. He also earned an annual fee of CHF 5,000 for being chair of the audit committee of this company. In 2012, Mr. de Swaan earned CHF 75,000 in respect for his work on the board of Zurich Insurance plc and Zurich Life Assurance plc. He also earned an annual fee of CHF 10,000 for being chair of the audit committees of these two companies.
12 The amounts have been translated from Swiss francs to US dollars at the relevant exchange rates throughout the year. 13 As of June 16, 2012, Mr. Ackermann was allocated 1,365 shares, Mr. de Swaan was allocated 550 shares, and the other Board members were allocated 386 shares.
The share price (CHF 207.10) as of June 16, 2012 was adopted to calculate the number of shares based on the fixed portion of the fee allocated in shares for the respective members. Where the value of the allocated shares did not equal the value of the portion of the fee to be allocated in shares, the difference was paid in cash.
Remuneration of Group Executive Committee The total remuneration of the members of the GEC for 2013 comprised the value of cash compensation, pensions, other remuneration and the value of the target equity grants made under the Group’s Long-Term Incentive Plan in 2013 and is calculated based on the same methodology as in 2012. Overall compensation of the GEC members in total and the overall compensation of the highest paid executive are set out in the following tables: Base salaries 10.70 11.30 Cash incentive awards earned for the year 10.80 11.20 Value of target performance share grants 4 15.30 15.20 Service costs for pension benefits 5 3.00 3.10 Value of other remuneration 6 2.70 1.80 Total in CHF million 7 42.50 42.60 Total in USD million 8 46.30 46.40 1 The remuneration shown in the table is gross, based on the accrual principle and does not include any business related expenses incurred in the performance of the members’ services.
6 Includes employee benefits, expatriate allowances, perquisites, benefits-in-kind and any other payments due under employment contracts. Benefits-in-kind have been valued using market rates.
7 In line with applicable laws where the executives are employed, Zurich paid the company-related portion of contributions to social security systems, which amounted to CHF 1.5 million in 2013 and CHF 1.6 million in 2012. Since the contributions are based on full earnings, whereas benefits are capped, there is not a direct correlation between the costs paid to the social security system and the benefits received by the executives.
2 The share grants will vest in the future according to the achievement of defined performance conditions. The value of the shares assumes that the grant will vest in the future at 100 percent of the target level with the valuation of the target performance share grants based on the share price on the day prior to the grants (CHF 267.30 for 2013 and CHF 225.90 for 2012).
During 2013, one member of the GEC left the Group and one other member died. In these circumstances, the remuneration provided was in line with terms of their employment contracts. No termination payments (i.e. “golden parachutes”) were made and no other benefits such as agreements concerning special notice periods or longer term contracts (exceeding 12 months in duration), waiver of lock-up periods for equities, shorter vesting periods or additional contributions to occupational pension schemes were provided. No former members of the GEC received remuneration in 2013. In addition, as of December 31, 2013 and 2012 no former member of the Group Executive Committee had any outstanding loans, advances or credits.
in CHF millions1 , for the years ended December 31Highest paid executive, Chief Executive Officer, Martin Senn
All interests are beneficial and include Zurich Insurance Group Ltd shares or share options held by parties related to the members of the GEC. One vested option gives the right to one share with normal voting and dividend rights. Further details on the overall number of share options allocated under the Group’s Long-Term Incentive Plan and the terms of the options are set out in the tables “Summary of outstanding options”. With effect from 2011, share option grants were discontinued. Those option grants made in the period up to and including 2010 continue to earn out in accordance with the terms and conditions of those grants.
Year of expiry as of December 31, 2013Summary of outstanding options, 2013 as of December 31, 2012Summary of outstanding options, 2012
The Board of Directors proposes to the shareholders at the Annual General Meeting on April 2, 2014, to carry forward retained earnings of CHF 7,648,444,276 as shown in the above table.
If this proposal is approved, a payment of CHF 17.00 per share exempt from Swiss withholding tax is expected to be paid starting from April 9, 2014.
As statutory auditor, we have audited the financial statements of Zurich Insurance Group Ltd, which comprise the income statement, balance sheet and notes (pages 341–354), for the year ended December 31, 2013.
On your instructions, we have audited in accordance with Art. 653f, paragraph 1 Swiss Code of Obligations the issuance of new shares, which took place during the period of January 1, 2013, to December 31, 2013, according to the resolution of the general meeting of March 30, 2010.
It is the duty of the Board of Directors to perform the issuance of new shares in accordance with the requirements of the Company’s statutes. Our responsibility is to perform audit procedures designed to test whether the issuance was performed in accordance with the law and requirements of the Company’s statutes. We confirm that we meet the licensing and independence requirements as stipulated by Swiss law.
In our opinion, the issuance of 603,099 registered shares with a par value of CHF 0.10 complies with Swiss law and the Company’s articles of incorporation.
Number of shares issued 148,903,222 148,300,123 Number of dividend-bearing shares 1 148,903,222 148,300,123 Market capitalization (in CHF millions at end of period) 38,491 36,096 Authorized capital, number of shares 10,000,000 10,000,000 Contingent capital, number of shares 12,392,037 12,995,136 1 Treasury shares are not entitled to dividends.
Basic earnings per share 25.33 24.84 Diluted earnings per share 25.23 24.72 Book value per share, as of December 31 196.14 214.86 Nominal value per share 0.10 0.10 Price at end of period 258.50 243.40 Price period high 270.30 245.00 Price period low 228.80 193.10 1 Proposed dividend, subject to approval by shareholders at the Annual General Meeting 2014; expected payment date as from April 9, 2014. As the dividend payment will be paid from the capital contribution reserve, it will be exempt from Swiss withholding tax.
Dividend / nominal value reduction 2005 7.00 July 4, 2006 Nominal value reduction 2004 4.00 July 4, 2005 1 Proposed dividend, subject to approval by shareholders at the Annual General Meeting 2014; expected payment date as from April 9, 2014.
Zurich Insurance Group Ltd shares are listed on the SIX Swiss Exchange and traded on the SIX Swiss Exchange Blue Chip Segment; ticker symbol: ZURN; the Swiss security number (Valorennummer) is 1107539. Trading in Zurich Insurance Group Ltd shares on the Blue Chip Segment is conducted in Swiss francs.
As of December 31, 2013 Zurich Insurance Group Ltd is not aware of any person or institution, other than BlackRock, Inc., New York, and Norges Bank, Oslo, which, directly or indirectly, had an interest as a beneficial owner in shares, option rights and/or conversion rights relating to shares of Zurich Insurance Group Ltd representing three percent or more of its issued shares. The related announcements of these notifications can be found via the search facility on the SIX Disclosure Office’s platform: com/obligations/disclosure/major_shareholders_en.html
Annual Review 2013 The Annual Review provides an overview of Zurich’s businesses and strategy, and its performance in 2013. It is available in English, German, and French.
Corporate Responsibility Zurich Insurance Group Ltd, Switzerland Telephone: +41 (0)44 625 24 04 Email: corporate.responsibility@zurich.com
American Depositary Receipts Zurich Insurance Group Ltd has an American Depositary Receipt program with The Bank of New York Mellon (BNYM). For information relating to an ADR account, please contact BNY Mellon’s Shareowner Services in the U. S. on +1 888 BNY ADRS or outside the U.S. on +1 201 680 6825 or by email to shrrelations@bnymellon.com. General information on the company’s ADR-program can be obtained from The Bank of New York Mellon at www.adrbnymellon.com
Combined ratio is a performance measure that indicates the level of claims and net technical expenses during the period relative to earned premiums and policy fees. It is calculated as the sum of loss ratio and expense ratio.
New business value, after tax is a measure that reflects the value added by new business written during the period, including allowing for frictional costs, time value of options and guarantees, and the cost of non-market risk, and is valued at the point of sale. It is calculated as the present value of the projected after-tax profit from life insurance contracts sold during the period using a valuation methodology consistent with the EV principles, before the effect of non-controlling interests.
North America In North America, Zurich is a leading commercial property-casualty insurance provider serving the global corporate, large corporate, middle market, specialties and programs sectors.
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