Highlights 1 Business operating profit indicates the underlying performance of the Group’s business units by eliminating the impact of financial market volatility and other non-operational variables. Total Group business volumes comprises gross written premiums, policy fees, insurance deposits and management fees generated within General Insurance, Global Life and Farmers.
2 Shareholders’ equity used to determine ROE and BOPAT ROE is adjusted for net unrealized gains/(losses) on available-for-sale investments and cash flow hedges.
Business operating profit after tax return on equity (BOPAT ROE) 2
AA–/stable Standard & Poor’s financial strength rating of Zurich Insurance Company Ltd as of December 31, 2016
Zurich Insurance Group is a leading multi-line insurer that serves its customers in global and local markets. With about 54,000 employees, it provides a wide range of property and casualty, and life insurance products and services in more than 210 countries and territories. Zurich’s customers include individuals, small businesses, and mid-sized and large companies, as well as multinational corporations. The Group is headquartered in Zurich, Switzerland.
At Zurich, our focus is on long-term, sustainable value. Founded in 1872, today we are one of the world’s leading insurers. With our knowledge and experience, we help our customers to understand and protect themselves from risk. Our success is tied to principles of sound corporate governance. Our Board and management focus on delivering highquality results. Merit-based incentives encourage our people to do their best. Through our products, services and expertise we can benefit society as a whole. We are mindful of our responsibilities to all our stakeholders. Now and in the future.
Challenges and opportunities 2016 saw persisting challenges in the external environment, including the transformative effects of digitalization. This means insurers must disrupt or be disrupted. Meeting this challenge is a considerable task, compounded by a low-yield environment, which poses particular problems for the insurance industry. Meanwhile, a shifting political landscape creates uncertainties for future legislation and regulation governing globally active insurance companies such as Zurich.
The economic outlook remains challenging. Growth is likely to be soft, particularly in the developed markets in which we operate. Interest rates and, consequently, returns on investments, are likely to remain low. In this context of uncertainty about the world economy and financial markets, we are intensifying our focus on our core business.
We also have a good mix of revenues between Property & Casualty, Life and Farmers. Such diversification, together with our strong capital base, expertise and highly regarded brand, positions us well for the future.
Zurich introduces a simpler, more customer-oriented approach, supporting our global and local businesses.
We will also reduce the gap to peers on the cost side in both commercial and retail businesses. For this reason, we expect to deliver USD 1.5 billion in net expense savings by end of 2019 relative to our 2015 cost base.
To sustain and improve our competitive position, working on profitability is not enough: we will further enhance the way we interact with customers, especially in retail. We will become simpler: our customers will experience dedicated and tailor-made service, we will shorten decision and response times, and streamline internal and client-facing processes to create a seamless customer experience.
To achieve these goals, we must continue the work we started in 2016: adopting a simpler and leaner group structure, improving accountability throughout the organization and focusing even more on our core business.
To successfully capture these opportunities and decrease our cost base in a sustainable way, we will continue investing in transforming the way we operate.
Our strategy will focus on four key objectives that will help us build on this competitive position: Our highest priority lies in further enhancing technical excellence. There is a clear opportunity to improve profitability in commercial lines through our underwriting performance. We will achieve this by being more disciplined in the use of our underwriting tools, through initiatives to reduce portfolio volatility by limiting our risk exposures, and through talentmanagement initiatives, which include new performance incentive structures, training and career development.
Net Promoter Scores have proven to be a very effective tool in cross selling and retention. We will implement a unified ‘NPS’ process, which will improve a customer’s journey from first encounter to final claims, and help our employees target better opportunities. The Farmers Exchanges’ model has also demonstrated the need to offer simpler, more transparent products and to be more accessible.
To become more customer focused, in June 2016 we combined the former General Insurance and Life segments into one market-facing unit in every country, moving the organization from being product-oriented to one that is more centered on customers and local markets. Country heads, who are at the forefront of managing customer relationships, now have full responsibility for local units and for implementing the new strategy.
This will position us well to continue generating strong cash flows with which to reward our investors, while making us more competitive.
A strategy designed by Zurich To develop our new strategy we relied on a team of highly knowledgeable experts – our own people.
Many have multiple academic degrees ranging from actuarial science, mathematics, accounting, finance and management, to civil engineering, law, and physics. All team members contributed to a better understanding of the world Zurich operates in and how it can best shape the business for the future. For example, Rodrigo Hayvard, a lawyer for Zurich Chile, helped the team to better comprehend the complex environment in which multinational insurers operate. Dave Savoy, an online marketing manager at Farmers New World Life in Seattle, brought knowledge of digital marketing and web design. The team also benefited from analytical skills provided by its members, including Katja Trümpler, a trained mathematician based in Switzerland.
“I wanted to help reinforce a sense of truly liking to work for Zurich and a feeling of responsibility toward its success.” Eric Chandler Senior corporate counsel in Zurich North America
3D printing Advances in additive manufacturing, using a widening range of materials and methods; innovations include 3D bioprinting of organic tissues.
Artificial intelligence and robotics Development of machines that can substitute for humans, increasingly in tasks associated with thinking, multitasking, and fine motor skills.
Energy capture, storage and transmission Breakthroughs in battery and fuel cell efficiency; renewable energy through solar, wind, and tidal technologies; energy distribution through smart grid systems, wireless energy transfer and more.
Blockchain and distributed ledger Distributed ledger technology based on cryptographic systems that manage, verify and publicly record transaction data; the basis of ‘cryptocurrencies’ such as bitcoin.
Geoengineering Technological intervention in planetary systems, typically to mitigate effects of climate change by removing carbon dioxide or managing solar radiation.
Ubiquitous linked sensors Also known as the ‘Internet of Things.’ The use of networked sensors to remotely connect, track and manage products, systems, and grids.
Neurotechnologies Innovations such as smart drugs, neuroimaging, and bioelectronic interfaces that allow for reading, communicating and influencing human brain activity.
New computing technologies New architectures for computing hardware, such as quantum computing, biological computing or neural network processing, as well as innovative expansion of current computing technologies.
Globalization versus retrenchment, slower growth Society is changing in ways that affect us all. Globalization has encouraged trade, facilitated cross-border financial flows and contributed to freer movement of labor. Yet lately, sluggish growth in many major markets has increased protectionist sentiment, fueling a more fragmented approach and encouraging regulation at a national level that complicates the environment in which international insurers do business.
For insurers, fixed-income markets are a major source of investment returns. Slow growth has kept interest rates in major markets at or near historic lows. In this environment, our industry must stay efficient and focused on risk assessment and pricing to keep delivering on promises to all stakeholders.
Addressing the challenges of companies and aging societies Employee benefits programs help companies to compete by attracting talent. Insurers can make a difference to businesses by working with them to ensure their benefits programs (for example, life insurance, medical and disability cover) are best suited to companies’ and employees’ needs.
As societies age, the term ‘mature’ economies is taking on new meaning. Aging populations require more resources for pensions and healthcare. Where public pension systems are in place, supporting an aging population can also mean proportionately less funding available for other public expenditures. Insurers can provide ways to achieve more financial security, helping people to save and protect themselves if they become disabled, thus benefiting society as a whole.
Risks of being interconnected According to the World Economic Forum’s 2016 Global Risks Perception Survey, rising cyber dependency is one of the top five trends determining global developments. Respondents to the Survey saw large-scale cyber attacks as sixth among risks most likely to occur in the next 10 years. Based on the Survey, some technological advances are likely to play a key role in future (see box).
Technological advances are also providing our industry with ways to become more efficient. It offers many possibilities, including ‘blockchain’ technology used to share information securely. In Europe, a group of insurers including Zurich is exploring uses of blockchain technology that could help to deliver products and processes more price-efficiently in the future.
Better equipped to deal with the ‘sharing economy’ Advances in technology and data science have enabled many new business models. One example is the rise of the so-called ‘sharing economy,’ which has also brought with it new challenges for regulators and insurers.
In 2016, the European Commission issued guidelines to European Union member states to encourage an orderly development of this new market; in 2016, Zurich representatives met members of the European Parliament and the European Commission to discuss the importance of the sharing economy. We highlighted the challenges to transacting business in this segment and how the Commission could help to address them. Zurich continues to design and test insurance solutions for the sharing economy.
Regulations that protect insurance customers Regulatory developments aim to protect customers and their data and safeguard financial markets. While the largest insurers operate globally, regulation is still mainly focused on national markets. In November 2016, the Financial Stability Board updated its list of global systemically important insurers (G-SIIs) – those it considers ‘too big to fail.’ In 2016, Zurich was not designated as systemically important. We believe this decision recognizes our focus on traditional insurance business and our view that it poses no systemic risk.
Building on our strengths Our strategy announced in November 2016 calls for us to build on our strong market position and our trusted brand to serve our customers in a way that is distinctly ‘Zurich.’ Strong performance is the outcome of a clear strategy, enabled by the right culture and demonstrated through actions and behaviors.
Long term Our strategy to deliver long-term competitive advantage focuses on continuing to increase profitability and consolidating the Group’s position as a leading global underwriter for property and casualty (P&C) and life insurance. The Group will expand customer relationships, simplify the business and significantly reduce costs. At the operating level, Zurich will continue to reduce complexity and improve accountability. Zurich will enhance technical excellence and strengthen its go-to-market-approach for commercial customers. It will also seek to enhance its offerings to individuals by monitoring and aiming to increase customer satisfaction and retention. The Farmers Exchanges1 will continue to focus on improving customer satisfaction and retention rates.
Strengthening our relationships by building a stronger go-to-market commercial approach with clear accountability to customers and brokers and a single point of contact to support this experience. In retail, we are using customer-centric key performance indicators (KPIs) in addition to our financial metrics to ensure we provide customers with the desired solutions. We will continue to develop our use of these metrics in the future.
Our ability to reduce complexity and increase efficiency is inherent in these actions and will enable us to deliver on our overall strategy.
Strong performance is the outcome of a clear strategy, enabled by the right culture.
Our global reach Zurich is a financially strong global insurance company, serving customers in more than 210 countries and territories.
Our balanced portfolio Our portfolio is healthy, and balanced between property and casualty, and life insurance. Both are sustainable and profitable businesses. Farmers is performing well, providing stable income in line with expectations.
Our trusted brand Our brand is strong and reinforces our reputation for being able to understand the risks our customers face and to structure offerings that meet their unique needs.
Our talented people We have, and continue to attract, the most talented people in the industry.
Globally and in local markets, we serve those who depend on us. We aim to become a more efficient and responsive company, tailoring our solutions to best meet the needs of all our customers. Here are some examples of how we are doing this.
A unified approach to commercial insurance In 2016 we brought together our Global Corporate and Commercial businesses to form Commercial Insurance. Combining the businesses makes it easier for our commercial customers and distributors to have a single point of contact within Zurich for commercial risks. Our customers get the same quality wherever they do business with us. We can provide them with clear views on pricing and risk management services within a given country and across the globe.
Commercial Insurance offers products and risk engineering capabilities and works with our customers through our global property, casualty and specialty lines. Specialty lines includes accident and health, marine, trade credit, political risk, surety and financial lines.
Making benefits programs easier for multinationals Zurich International Programs for Employees was launched in 2016. It gives multinational companies a centralized way to make it easier for them to manage their employee benefits. Our program relies on our knowledge about life insurance and the expertise we have acquired through managing over 7,000 international programs for property and casualty business customers worldwide.
The Zurich International Programs for Employees is directed at centralized multinational companies. Customers and distributors have welcomed the program, in particular those that have experience with our property and casualty international programs.
REDS already consolidates data from all markets except for North America, the UK and Brazil. We plan to integrate these remaining markets over the next 18 months. This will provide us with a more complete picture of our accumulated risks wherever they are, helping us to continue to improve the quality of our insurance portfolios, benefiting both us and our customers.
“CLP bases its success on intimate knowledge of clients and distributors, and an experienced executive team with an average of 27 years in the employee benefits industry,” says Hanno Mijer, Global Head CLP.
To gain more in-depth knowledge about customers’ needs, we are applying a common metric called the Net Promoter Score (NPS) to measure whether customers not only choose to stay with us, but also recommend us to others. The Farmers Exchanges 1 are an excellent example of what can be achieved. By implementing and tracking customer metrics like the NPS, the Farmers Exchanges have focused on areas to improve, for example, customer retention and satisfaction (see story on opposite page).
Bank customers gain access to better protection, savings and retirement products Zurich can reach to over 60 million customers in major markets in 15 countries through our bank distribution networks. This approach is particularly popular in southern Europe and Latin America for customers seeking life insurance and savings products, as well as general insurance products. Many banks also see this as a way to develop key products to meet the needs of their customers.
Our retail business contributes significantly to our operating profit. In 2016, we announced that we are changing how we approach the segment. The changes we are introducing include adopting a simpler, more customer-oriented structure.
In 2016, Zurich’s UK business paid about GBP 2 billion in claims. Our UK life business (which includes critical illness) paid 94 percent of claims. The UK property and casualty business paid 99 percent of personal lines motor claims, 94 percent of personal lines property claims, and 99 percent of commercial claims.
Apart from providing more transparency, we also believe there is more the industry can do to help people understand what their insurance covers, and to ensure that they have the right coverage. We are helping to inform policymakers and customers through discussions, dialogue and our publications.
We could review customers’ claims in Fort McMurray just two days after fires forced the town’s evacuation, and long before anyone could enter the site. We linked the pictures of the damage using imagery from satellites and aircraft and cross referenced this with our risk modeling data and underwriting information. We also learned about the status of evacuations, and how rapidly the fires were spreading, by monitoring social media like Twitter and Facebook. To get early information, and get it faster, we have also used drones for events such as floods and other individual large losses.
An online ‘Advisor’ for businesses Zurich Risk Advisor offers businesses a simple way to understand and prioritize risks. In 2016, business users downloaded our award-winning Risk Advisor application more than 2,750 times: the online platform hosted over 10,000 online sessions over the year.
The app allows any business to do a risk self-assessment online or on a mobile device or tablet. Using the ‘What If’ feature, Zurich corporate customers can simulate the impact of improvements that our risk engineers recommend.
Innovations helping customers in Switzerland and Germany In Switzerland we have introduced an online service allowing customers to get their claims resolved quickly. They can replace an insured item through an online order using a coupon Zurich supplies, or buy something new, or take a cash payment. Customer satisfaction rates have been high for this service, which was introduced in August.
In Germany we set up small ‘Champion’ teams within the company to help us become more agile and innovative. These teams already have achieved results. One example is a new travel insurance product designed specifically for younger travelers planning a long-term stay abroad. It took the team just two months to design and launch of the new product. As an example of thinking ‘out of the box,’ Zurich Germany also staged its first InsurHack in 2016: more than 130 computer ‘hackers’ were given the job of coming up with innovative ideas for ways to make our service more personal and efficient. The best solutions won awards.
We are also building on our position in Asia Pacific. We have announced plans to acquire Cover-More, a major travel insurance provider based in Australia, which has strong market positions in New Zealand, India and the U.S. In Australia, we also finished acquiring a portfolio of active life policies (in-force life business) from the Macquarie Group. In Malaysia, we completed acquiring MAA Takaful Berhad, a family and general takaful (Shariacompliant ) insurer. We also acquired Kono Insurance Limited, a general insurance company incorporated in Hong Kong.
We exited retail and commercial property and casualty businesses in South Africa and Botswana, Morocco, and Taiwan, but we remain committed to our corporate business in these markets. In the Middle East, we have exited our retail and commercial property and casualty lines, but remain committed to our life and corporate property and casualty businesses in the region.
We can best support our customers by being effective and efficient. There are a number of ways we do this, including through sound capital management, a streamlined operational approach, and building our position in profitable markets.
Efficiency that benefits customers and Zurich In 2016 we achieved our expense savings target of USD 300 million, and aim for a total of USD 1.5 billion in net savings by the end of 2019 relative to 2015 expenses.
Our businesses and shared service teams plan to jointly achieve that through simplifying products and business processes, consolidating information technology (IT) systems and creating more flexible shared services options that provide higher quality at lower cost. We are also using new automation technologies like robotics and cognitive computing, which, for example, can support decision-making in underwriting and claims.
These initiatives not only make us more efficient – above all, they help us to create a differentiated customer experience, and become faster and more agile in the market.
We will continue to significantly reduce costs by standardizing IT systems. We use such systems for everything from underwriting and pricing, to policy administration, claims and billing. Today we have approximately 3,000 IT systems. By 2019 we aim to have reduced this number by 500.
Several initiatives and businesses contributed. For example, our Irish corporate claims team has increased its focus on early-stage job absences, working with employers and employees to support faster recoveries and get people back on the job sooner. In the Middle East, we are applying data analytics to our existing business to help increase customer satisfaction and retention. In Australia, to win back customers, we are offering them more suitable coverage by sending them SMS text messages within 20 days after they give a termination notice. In Spain, our dedicated team has contacted over 25,000 customers over the last three years, aiming to retain them by offering better-targeted solutions. In Switzerland, we are contacting pension customers just before retirement with personalized financial planning, aimed at improving loyalty and generating new business in retail insurance.
A more targeted approach to CR Through our approach to corporate responsibility (CR), we are striving to create value for both our stakeholders and our business. We are also taking into consideration long-term environmental, social and governance issues within our products and services, investments, operations and technology, while continuing to help communities.
Through the Z Zurich Foundation and our award-winning flood resilience program, we are working to make communities more resilient by sharing our resources and expertise. Through our responsible investment approach we are investing to have an impact and helping to shape responsible investment practices in financial markets.
Recognizing Zurich’s progress in corporate responsibility In 2016, Zurich achieved its highest score of 85 in the Dow Jones Sustainability Index (DJSI) review and outperformed 97 percent of other companies in the insurance industry group. The annual review conducted by S&P Dow Jones Indices and sustainability investment services firm RobecoSAM, assesses companies against 19 environmental, social and governance (ESG) criteria. Zurich is a member of the DJSI World and DJSI Europe Indices.
Our responsible investment approach was recognized by fellow German, Austrian and Swiss institutional investors with the Institutional Investor Institute Peer-to-Peer Award for ‘Best ESG Programme’ in 2016.
Total amount of impact investments (USD millions) 3 1,697 1,031 65%
1 The United-Nations supported Principles for Responsible Investment (PRI). 2 Including assets managed by Zurich. 3 Impact investments in 2016 consisted of: green bonds (USD 1.39 billion); investments committed to private equity funds
(USD 105 million, thereof 28 percent drawn down); and other investments (USD 199 million).
Through our corporate responsibility approach we not only benefit communities, we also encourage sustainable business practices and generate returns. Our award-winning flood resilience program aims to help customers and communities to reduce the devastating impact of floods.
Our flood resilience alliance includes the International Federation of Red Cross and Red Crescent Societies (IFRC) and non-governmental organization Practical
To read more about our work underway in Peru to protect communities from floods, see www.zurich.com/early-warning-systems
Reinforcing a merit-based approach to jobs We want to give people equal opportunity to deliver, and we aim to compensate our people fairly through pay, promotions and opportunities. To support these aims, in 2016 we introduced our ‘Global Job Model,’ which provides our employees with access to their role profiles and career levels, and gives clear information about what is expected in their role and career options, making it easier for them to build successful careers at Zurich.
Recognizing the advantages of diversity in our businesses By reflecting the diversity of our customers we can best meet their needs. And by recognizing our peoples’ individuality we achieve better business results, while creating an environment that allows all our people to feel motivated, valued and able to excel.
We need to make sure we have the skills and talent to achieve our goals. A merit-based approach, and diversity and inclusion, are key to ensuring that we have the right mix of talent to succeed.
We believe encouraging new talent is the best way to ensure strong leadership for the future. With that in mind, in 2016 we introduced Zurich Oxygen, a comprehensive program to develop leadership skills among our employees. All our managers took part in this program in 2016. Over 6,500 people managers, from line managers to country CEOs, also participated in over 120 one-day events to help them better understand the skills good managers need. Recognizing our efforts, in September 2016, Harvard Business Review featured Zurich in several case studies, including how Zurich is changing its culture by strengthening its focus on people in the organization.
Preparing tomorrow’s insurers We are helping to train people in skills for tomorrow’s insurance industry. Our apprenticeship programs include a new two-year course introduced in the U.S.
Based on the Swiss ‘apprentice’ model, 20 participants took part in the first year of this program in 2016. It is offered through William Rainey Harper College, situated near Zurich’s North American headquarters in Schaumburg, Illinois. We expect that at least 100 apprentices will take part in the program by the end of 2020.
We have further reviewed and monitored our remuneration structure, about which you can find further information in the remuneration report, which follows this section of our Annual Report.
The Board proposes to the shareholders that they re-elect all current members of the Board at the Annual General Meeting on March 29, 2017 and that they elect Catherine P. Bessant as new member.
I served as Chief Executive Officer ad interim up to March 7, 2016. During this time, Fred Kindle, Vice-Chairman of the Board, took on additional responsibilities to ensure continued good governance.
New organizational structure and strategy We communicated our Group strategy for 2017 through 2019 on November 17, 2016. We shall consolidate our position as a leading global underwriter for property and casualty, and life business and will focus on increasing profitability in a difficult market environment. Based on our trusted brand, we will further build on our customer relationships and simplify the business to be able to serve our customers even better. Our goal is to ensure that our employees, particularly those dealing directly with our customers, are empowered to take decisions and understand their role in securing new business, delivering profitability and facilitating our success. Our new operational Group structure provides an important basis to help us achieve this.
Corporate responsibility At Zurich, doing business responsibly is at the core of our culture. Corporate responsibility is a driver of sustainable value creation for all our stakeholders. We also proactively determine ways to address environmental, social and governance issues in our day- to-day activities. The Zurich flood resilience program is a concrete example of how corporate responsibility can help create new customer solutions, initiate public policy discussions and advance awareness.
The ExCo and the Board take an active role in our approach to corporate responsibility. In 2016, the Governance and Nominations Committee’s mandate was extended to include corporate responsibility more broadly, reviewing and approving the Group’s corporate responsibility strategy and objectives. It was renamed the Governance, Nominations & Corporate Responsibility Committee.
The Zurich Insurance Group consisting of Zurich Insurance Group Ltd and its subsidiaries (the ‘Group’ or ‘Zurich’), is committed to effective corporate governance for the benefit of its shareholders, customers, employees and other stakeholders based on the principles of fairness, transparency and accountability. Structures, rules and processes are designed to provide proper organization and conduct of business within Zurich and to define the powers and responsibilities of its corporate bodies and employees.
This report describes the Group’s approach to corporate governance and illustrates the key elements of corporate governance within the Group. It includes the information required under the following rules, with which Zurich complies: kk Directive on Information Relating to Corporate Governance of the SIX Exchange Regulation (as of September 1, 2014).
Zurich is subject to insurance group supervision by the Swiss Financial Market Supervisory Authority (FINMA). As set out in its decree of December 28, 2011, FINMA stated that Zurich is subject to insurance group supervision according to art. 64 et seq. of the Swiss Insurance Supervision Act (ISA) and no longer qualified as a conglomerate. The Joint Committee of the European Supervisory Authorities has also designated the Group as an insurance group and not as an insurance conglomerate because of the small size of its non-insurance activities. The ISA requires Swiss insurance companies and groups to establish and maintain strong governance and risk management systems as well as effective internal control systems that are appropriate to their business activities. It prescribes the calculation of a risk-based solvency margin on a Group wide basis and at legal entity level pursuant to the Swiss Solvency Test (SST) and, to the extent this is required by state treaties between Switzerland and other countries, also a Solvency I margin. All major intra-group transactions must be reported to FINMA. In addition to the group supervision exercised by FINMA and its supervision of the legal entities Zurich Insurance Company Ltd, Zurich Life Insurance Company Ltd, Zurich Reinsurance Company Ltd and Orion Rechtsschutz-Versicherung AG, the insurance subsidiaries and remaining financial services entities of the Group are supervised by relevant regional and local supervisory authorities.
This report essentially follows the recommended structure outlined in the Directive on Information Relating to Corporate Governance of the SIX Exchange Regulation. The information on compensation, shareholdings and loans to Board members and members of the ExCo is contained in a separate report, the remuneration report (see pages 74 to 111), which supplements this corporate governance report and also includes the information as required by the Circular 2010/1 on remuneration schemes (minimum standards for remuneration schemes of financial institutions) issued by FINMA on October 21, 2009 as amended on June 1, 2012 and December 3, 2015 as well as the Ordinance against Excessive Compensation (Ordinance AEC) as of November 20, 2013.
Mario Greco, Group Chief Executive Officer (as of March 7, 2016)
Gary Shaughnessy, CEO EMEA (Europe, Middle East & Africa) as of July 1, 2016, former CEO Global Life (as of January 1, 2016)
Kristof Terryn, Group Chief Operating Officer (as of July 1, 2016), former CEO General Insurance
Key governance developments in 2016 – at a glance as of December 31, 2016
Jeffrey Hayman, elected as a new member (as of March 30, 2016)
David Nish, elected as a new member (as of March 30, 2016)
* As of July 1, 2016, the Group General Counsel and the Group Human Resources Officer were no longer members of the ExCo. The Group General Counsel attends all ExCo meetings ex officio.
kk The new structure is organized on a regional basis with the countries as the main business units.
The following two charts visualize the change in the operational group structure in 2016, which will become fully effective in 2017.
Consisting of five market facing businesses: 1. Global Corporate (covering all regions)
2. North America Commercial 3. Asia Pacific 4. Latin America 5. Europe, Middle East & Africa
The other businesses are: kk Other Operating Businesses predominantly consist of the Group’s headquarters and Holding and Financing activities. In addition, certain alternative investment positions not allocated to business operating segments are included within Holding and Financing.
kk Non-Core Businesses include insurance businesses that the Group does not consider core to its operations and that are therefore mostly managed to achieve a beneficial run-off. Non-Core Businesses also include the Group’s remaining banking activities. Non-core businesses are mainly situated in the U.S., Bermuda, the United Kingdom and Ireland.
kk Regions (EMEA, North America, LATAM and APAC): business units through which the Group provides a variety of property and casualty and life products to retail and commercial customers. Commercial Insurance brings together corporate and commercial insurance expertise worldwide under a single umbrella.
A detailed review of the results of the business segments as reported for 2016 can be found in the operating and financial review starting on page 148. Furthermore, an overview of the Group’s business strengths and activities is contained in the Annual Review, available on Zurich’s website www.zurich.com (www.zurich.com/en/ investor-relations/results-and-reports).
A list of the Group’s significant subsidiaries can be found on pages 264 to 266. For further information on the share listing of Zurich Insurance Group Ltd, see the shareholder information on pages 294 to 297.
Significant shareholders According to the rules regarding the disclosure of significant shareholdings of Swiss companies listed in Switzerland, disclosure has to be made if certain thresholds starting at three percent are reached or if the shareholding subsequently falls below those thresholds. Call options and other financial instruments are added to any share position, even if they allow for cash settlement only. Disclosure must be made separately for purchase positions (including shares, long call options and short put options) and sale positions (including long put options and short call options). The percentage thresholds are calculated on the basis of the total amount of voting rights according to the number of shares issued as disclosed in the commercial register.
As of December 31, 2016, Zurich Insurance Group Ltd is not aware of any person or institution, other than BlackRock, Inc., New York (> 5%) and Norges Bank, Oslo (> 3%), 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 announcements related to these notifications can be found via the search facility on the SIX Disclosure Office’s platform: Zurich Insurance Group Ltd is not aware of any person or institution which, as of December 31, 2016, directly or indirectly, alone or with others, exercised or was a party to any arrangements to exercise control over Zurich Insurance Group Ltd.
Registered shareholders by geography as of December 31, 2016 Registered shareholders in %
For information on changes of share capital during 2014, see the Annual Report 2015 of Zurich Insurance Group, page 30, pages 166 to 167 and pages 214 to 215.
Profit-sharing certificates Zurich Insurance Group Ltd has not issued any profit-sharing certificates.
Convertible bonds and options Zurich Insurance Group Ltd had no public convertibles or options outstanding as of December 31, 2016. For information on employee share option plans, see the audited consolidated financial statements, note 21 on pages 233 to 234.
1 Zurich Insurance Group Ltd has established an American Depositary Share, or ADS, level 1 program in the U.S. Under this program, The Bank of New York Mellon Corporation issues the ADSs. Each ADS represents the right to receive one-tenth of one share of Zurich Insurance Group Ltd. Each ADS also represents securities, cash or other property deposited with The Bank of New York Mellon Corporation but not distributed to ADS holders. Zurich’s ADSs are traded over the counter (OTC) and are evidenced by American Depositary Receipts, or ADRs. Since 1st July 2010, Zurich’s ADRs have been traded on “OTCQX”, an electronic platform operated by OTC Markets Group Inc. under the symbol ZURVY. ADS holders are not treated as shareholders of Zurich Insurance Group Ltd and are not able to directly enforce or exercise shareholder rights. Only The Bank of New York Mellon Corporation as Depositary of the level 1 program may exercise voting rights with respect to instructions received from beneficial owners of ADRs.
Committee membership: Governance, Nominations and Corporate Responsibility Committee (chairperson), Remuneration Committee
Committee membership: Governance, Nominations and Corporate Responsibility Committee, Remuneration Committee (chairperson)
Born: Committee membership: Governance, Nominations and Corporate Responsibility Committee, Remuneration Committee
Fritz Gerber is the Honorary Chairman of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd. He was Chairman of Zurich Insurance Company Ltd between 1977 and 1995 and its Chief Executive Officer between 1977 and 1991. In recognition of his leadership and services to that company, he was appointed Honorary Chairman. Such designation does not confer Board membership or any Director’s duties or rights, nor does it entitle him to any Directors’ fees.
Board of Directors and its Committees as of December 31, 2016
Board Composition Diversity is a key success factor in today’s fast-changing global environment. Zurich’s Board consists of individuals with wide-ranging relevant backgrounds, experiences, skills and knowledge resulting in a favorable balance that enables the Board as a group to exercise its tasks and responsibilities while fully taking into account contemporary business needs.
As of December 31, 2016, the Board included members of six nationalities. The Board members gained their business experience in a broad range of jurisdictions resulting in a profound collective knowledge of international business practices. The Board also benefits from the broad cultural, educational and professional backgrounds of its members, which collectively include financial services, manufacturing, engineering, as well as legal and regulatory experience.
External appointments Mr. de Swaan is vice-chairman of the supervisory board of Royal DSM, a Netherlands-based global life sciences and material sciences group.* In addition, Mr. de Swaan is chairman of the board of the Netherlands Cancer Institute, chairman of the board of trustees of the Van Leer Jerusalem Institute and acts as director of certain other non-profit organizations. He is also a member of the IIF Board of Directors, the European Financial Services Round Table (EFR) and the advisory board of the China Banking Regulatory Commission in Beijing.
External appointments In his capacity as a partner of Clayton, Dubilier & Rice, Mr. Kindle served from 2008 until 2015 as chairman of the board of Exova plc, UK, and as a member of Exova’s board since 2016. Mr. Kindle has been a member of the board of VZ Holding Ltd, Zurich since 2002, and was elected chairman in April 2014. He has served on the board of privately-held Stadler Rail AG since 2008 and has been a member of the board of Schneider Electric since 2016.
Skills and experience Joan Amble has substantial financial industry experience. She started her professional career as an accountant with Ernst & Young in 1977. From 1984 to 1989 she served at the Financial Accounting Standards Board (FASB), specializing in pensions, derivatives and other financial instruments. She then spent 14 years with General Electric Company (GE) in various leadership roles, including CFO GE Real Estate, COO and CFO GE Capital Markets, and as vice president and chief accounting officer GE Financial Services. From 2004 to May 2011, Ms. Amble served as executive vice president and principle accounting officer, and until the end of 2011 as executive vice president, Finance, of the American Express Company. In December 2011, Ms. Amble completed a four-year term as a member of the Financial Accounting Standards Advisory Council (FASAC). She has been a member of the Boards of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd since April 2015.
Skills and experience Dame Alison Carnwath has substantial financial industry experience. She began her career with Peat Marwick Mitchell, now KPMG, where she practiced as a chartered accountant from 1975 to 1980. From 1980 to 1982, she worked as a corporate financier for Lloyds Bank International. From 1982 to 1993, she was assistant director, then director, at J. Henry Schroder Wagg & Co in London and New York. From 1993 to 1997, Ms. Carnwath was a senior partner at the financial advisory firm Phoenix Partnership. The firm was taken over by Donaldson, Lufkin & Jenrette (DLJ) in late 1997; she continued working for DLJ until 2000. Ms. Carnwath has held several board offices. From 2000 to 2005, she was the chairman of the board of Vitec Group plc, from 2001 to 2006 a director of Welsh Water, from 2004 to 2007 of Friends Provident plc, from 2004 to 2007 of Gallaher Group and from 2007 to 2010, she was the independent chairman of MF Global Inc. She also served on the boards of directors of Barclays from 2010 to 2012, and of Man Group plc from 2001 to 2013. She has been a member of the boards of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd since March 2012. She was made a Dame of the British Empire (DBE) for services to business in the 2014 New Year Honours List in the UK.
Committee membership Governance, Nominations and Corporate Responsibility Committee, Risk and Investment Committee
Skills and experience Monica Mächler has substantial legal, regulatory and governance expertise in a national and international context. She served as vice-chair of the board of directors of the integrated Swiss Financial Market Supervisory Authority (FINMA) from 2009 to 2012, after having been the director of the Swiss Federal Office of Private Insurance from 2007 to 2008. From 2010 to 2012, Ms. Mächler chaired the Technical Committee of the International Association of Insurance Supervisors (IAIS). She assumed the roles of Group General Counsel and Head of the Board Secretariat of Zurich Insurance Group from 1999 to 2006 and was appointed a member of the Group Management Board in 2001 after joining in 1990. During the years 1985 to 1990 she was in private practice specializing in banking and business law. Ms. Mächler has been a member of several Swiss federal expert commissions on regulatory projects and regularly speaks, lectures and publishes on matters related to international business law and regulation, and their impact. She has been a member of the boards of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd since April 2013.
External Mandates In line with the Ordinance AEC, art. 33 of Zurich’s Articles of Incorporation, contains rules regarding the number of mandates members of the Board and of the ExCo are permitted to hold, as shown in the table below. Board and ExCo members’ individual mandates, which are in line with those rules, are shown in their respective biographies.
The Board proposes to the shareholders that they re-elect all current members of the Board at the AGM, which will take place on March 29, 2017, and that they elect Catherine P. Bessant as new member.
The Board proposes to the shareholders that they elect or re-elect as follows: kk As members: Mr. Tom de Swaan, Mr. Fred Kindle, Ms. Joan Amble, Ms. Susan Bies, Dame Alison Carnwath, Mr. Christoph Franz, Mr. Jeffrey Hayman, Ms. Monica Mächler, Mr. Kishore Mahbubani, Mr. David Nish and Catherine P. Bessant.
kk As members of the Remuneration Committee: Mr. Christoph Franz, Mr. Tom de Swaan, Mr. Fred Kindle and Mr. Kishore Mahbubani.
kk As independent voting rights representative: Mr. lic. iur. Andreas G. Keller, Attorney at Law.
The Group CEO attends Board meetings ex officio. Members of the ExCo are regularly invited by the Board to attend meetings. Other executives also attend meetings from time to time at the invitation of the Board. Most Board meetings include private sessions of the Board without the participation of management.
The Board is required to meet at least six times each year. During 2016 it held twelve meetings (of which seven were partly attended by tele-/videoconference and five were held over two days). One meeting was fully dedicated to the discussion of strategy. Six meetings lasted four or more hours during the course of a day, two meetings took about three hours on average and four meetings lasted less than three hours. In addition, the Board approved eight circular resolutions.
Committee 1 Until March 30, 2016, the Board had 11 and the Audit Committee, the Remuneration Committee and the Risk and Investment Committee each 5 members.
In 2016, the Board specifically focused on the following topics: kk Group CEO succession; kk Reorganization of Group structure and ExCo composition; kk 2014 – 2016 strategy implementation and execution including a detailed General Insurance review; kk Development of new strategy for 2017 and forwards; kk Detailed reviews of various regional business operations; kk Customer trends, structural industry changes and disruptive technologies; kk Merger & acquisition transactions; kk Board external assessment and resulting recommendations.
The Board may establish committees for specific topics, terms of reference and rules with respect to delegated tasks, responsibilities and reporting to the Board. Except for the Remuneration Committee, the Board constitutes such committees from among its members at its own discretion. The members of the Remuneration Committee are elected by the shareholders’ meeting. The committees assist the Board in performing its duties. They discuss and propose matters to the Board in order that it may take appropriate actions and pass resolutions unless they are authorized to take resolutions in specific areas on their own. In 2016, committee meetings lasted over an hour on average.
External assessment An external assessment of the full Board and its committees is carried out every three years. In 2016 it considered the following key aspects of the effectiveness of the Board and its committees: a) the Board and committee environment (culture and composition, skill set and definition and delineation of tasks); b) the work of the Board and its committees (strategy, risk and control, and performance management); and c) the use of time and process (planning and allocation). A detailed report identifying key strengths and challenges was produced for, and considered by the Board. A respective action plan decided by the Board is currently being implemented.
Key tasks and responsibilities: In general, the Governance, Nominations & Corporate Responsibility Committee: kk oversees the Group’s governance and measures it against best practice with a view to ensuring that the rights of shareholders are fully protected; kk develops and proposes guidelines to the Board for corporate governance and reviews them from time to time; kk ensures compliance with corporate governance disclosure requirements as well as legal and regulatory requirements; kk is entrusted with succession planning for the Board, the Group CEO and members of the ExCo. In this regard, it proposes the principles for the nomination and ongoing qualification of members of the Board and makes proposals to the Board on the composition of the Board, the appointment of the Chairman, the Vice-Chairman, the Group CEO and members of the ExCo. Final decisions for nominations and appointments are made by the Board, subject to shareholder approval, where required. When identifying and proposing candidates as new Board members, the preservation and improvement of the Board’s diversity is a key factor. This includes diversity in many respects, such as gender, culture, technical and interpersonal skills, education and viewpoints, experience, geographical origins and a variety of complementary backgrounds, which should enable the Board to meet the Group’s current and future challenges. Notwithstanding the specific profile, every individual candidate should possess integrity, be of good standing, and be capable and available to fulfill his or her duty of care by serving, in close collaboration with the other Board members, in the best interests of the Group’s stakeholders; kk reviews the system for management development and supervises progress made in respect of succession planning; kk reviews and approves the Group’s corporate responsibility strategy and objectives.
Key tasks and responsibilities: In general, the Remuneration Committee: kk regularly evaluates the Group’s remuneration system and Zurich’s remuneration rules and proposes amendments to the Board, which is responsible for the design, implementation and monitoring of the Group’s remuneration framework (further details of the Group’s remuneration framework, including the remuneration philosophy and the remuneration governance are set out in the remuneration report on pages 74 to 111); kk reviews and proposes to the Board annually the terms of remuneration of the members of the Board; kk based on Zurich’s remuneration rules, reviews and proposes to the Board the terms and conditions of employment of the Group CEO and reviews those of other members of the ExCo, as proposed by the Group CEO, before submitting them to the Board for approval; kk liaises with the Group CEO on other important employment, salary and benefit matters; kk reviews and proposes to the Board the total variable remuneration pool and reviews the performance relating to short-term and long-term incentive plans (STIP and LTIP), and also makes a qualitative assessment of the performance, reviews and makes proposals to the Board for submission to the Annual General Meeting (AGM) on the approval of the Board’s and ExCo’s remuneration; kk and prepares the remuneration report annually in accordance with applicable laws and regulations.
Audit Committee Composition and membership: Zurich Insurance Group Ltd’s Organizational Rules require the Audit Committee to consist of at least four non-executive Board members, independent from management. Currently, Joan Amble (Chairperson), Susan Bies, Monica Mächler and David Nish, all of whom meet the relevant requirements for independence and qualification, serve on this committee.
The Audit Committee meets at least four times in each year. In 2016 it met nine times, including joint meetings of the Audit Committee and Risk and Investment Committee.
To facilitate an ongoing exchange of information between the Risk and Investment Committee and the Audit Committee, the Chairperson of the Audit Committee is a member of the Risk and Investment Committee and a member of the Risk and Investment Committee is a member of the Audit Committee.
For further information on risk governance, see the risk review on pages 114 to 147.
Areas of responsibility of the Board and management The Board decides on the strategy of the Group, supervises senior management and addresses key matters in the area of strategy, finance, and organization. In particular, the Board approves the Group’s strategic plan and the annual financial plans developed by management and reviews and approves the annual, half-year and quarterly financial statements of the Group and the annual financial statements of Zurich Insurance Group Ltd. For more details with regard to the responsibilities of the Board see pages 47 to 48.
Subject to the powers reserved to the Board, the Board has delegated the management of the Group to the Group CEO and, under his supervision, to the ExCo and its members. The Group CEO is the highest executive officer of the Group and has responsibility and accountability for the management and performance of the Group. He represents the overall interests of the Group towards third parties to the extent such interests are not represented by the Board. The Group CEO is responsible for the development and implementation of the strategic and financial plans approved by the Board. He has specific powers and duties relating to strategic, financial and organizational matters and manages, supervises and coordinates the activities of the members of the ExCo and of his other direct reports.
To the extent not reserved to the Board, management is delegated to the Group CEO. The Group CEO has overall responsibility and accountability for the management and the performance of the Group. The Executive Committee (ExCo) serves the Group CEO as the core management team with regard to strategic, financial and business policy issues of Group-wide relevance, including consolidated performance, capital allocation and mergers and acquisitions.
The ExCo is chaired by the Group CEO. As of December 31, 2016, members of the ExCo included the Group CFO, the Group CIO, the Group COO and the Group CRO; and in order to reflect both lines of business and geography, the CEO EMEA (Europe, Middle East & Africa), the CEO North America, the CEO Latin America, the CEO Asia Pacific, the CEO of Farmers Group Inc. and the CEO Commercial Insurance are also members of the ExCo.
Management Committees Following the review of Group governance, effective November 1, 2016, the existing Management Committees (Finance Committee and Risk and Control Committee) were replaced by the Group Balance Sheet Committee and the Group Risk Committee.
Group Balance Sheet Committee (GBSC) Members: Group CFO (Chairperson), Group CEO, Group CRO, Group CIO. The Group General Counsel attends ex officio but is not a voting member.
Key tasks and responsibilities: The GBSC acts as a cross-functional advisory body for matters that could materially affect the balance sheets of Zurich and/or the Group as a whole. The committee issues recommendations to the Group CEO. Core topics are: kk capital management on capital allocations and lending and borrowing decisions; kk balance sheet planning on liquidity, solvency, investment and asset/liability management strategies and associated capital allocation, including changes to investment strategy; kk business development matters on corporate transactions with third parties, internal restructuring, investments, including real estate, and entry into new types of business and markets; kk material group reinsurance strategy and reinsurance programs; kk other topics and matters that may have a material impact on the balance sheet of the Group as determined by the Chairperson.
The GRC reviews and recommends such topics as: kk the overall Group risk appetite, risk tolerance and risk limits, including exceptions to limits over specified thresholds; kk requests to enter new lines of insurance business or types of insurance coverage that would have a significant impact on the risk profile of the Group; kk changes to the Group Policy Framework and the Zurich Risk Policy (ZRP); kk regulatory developments impacting the risk management of the Group, as well as the Group’s regulatory reporting; kk the Group TRP assessment and related actions; kk prospective changes to capital models and methodologies that have a significant impact on economic solvency ratios; kk the Group’s model validation policy, and validation findings related to capital models and significant valuation models, including remedial actions; kk market and credit risk internal model consumption relative to the Group’s capital allocation, including remedial actions; kk significant deviations from established target solvency levels of subsidiaries and proposes remedial actions.
Skills and experience Mario Greco has broad experience in the insurance industry, having successfully served in senior executive positions for more than 20 years. He joined Zurich in March 2016 as Group Chief Executive Officer and member of the Executive Committee.
Mr. Greco started his professional career in management consulting, working in McKinsey & Company’s Milan office from 1986 until 1994, where he became a partner in 1992 and subsequently a partner leader in the insurance segment. In 1995, he joined RAS (Allianz Group) in Milan as head of the claims division. He became general manager in charge of the insurance business the following year. In 1998, he was appointed managing director and in 2000, he became the company’s CEO. At the end of 2004, Mr. Greco joined Allianz AG’s executive board, with responsibility for France, Italy, Spain, Portugal, Greece and Turkey. In April 2005, he joined the Sanpaolo IMI Group in Milan as CEO of EurizonVita and in October 2005, he was appointed CEO of Eurizon Financial Group. From 2007 to 2012, he served at Zurich, first as CEO Global Life and from 2010, as CEO General Insurance. In 2012, he was appointed CEO of Generali.
Skills and experience Urban Angehrn joined the Executive Committee as Group Chief Investment Officer in July 2015. Before taking his current position he served as Head of Alternative Investments and prior to that, from 2010 to 2012, as Head of Strategy Implementation in Investment Management. He joined Zurich in 2007 as Regional Investment Manager Europe. Before joining Zurich he held various positions in capital markets-related roles in the insurance and investment banking industries, including as Head of Allocation & Strategy in asset management at the Winterthur Group. He also served as an adviser to Swiss institutional clients in the use of derivatives, and held positions in derivatives marketing and fixed income sales at Credit Suisse and J.P. Morgan.
External appointments Mr. Angehrn is the Chairman of the Board of Trustees of the Zurich Insurance Group Swiss Pension Plan.
Skills and experience Mike Foley joined the financial management training program of Armtek Corporation in 1984. After graduating from J.L. Kellogg Graduate School of Management in 1989, Mr. Foley joined the Deerpath Group in Lake Forest, Illinois. He later became vice president responsible for managing a portfolio of equity investments in various acquired businesses. In 1993 he joined Electrocal, Inc. in Connecticut as president. In 1996, Mr. Foley joined McKinsey & Company, where he later became a principal and led its North American property & casualty insurance practice. He joined Zurich in 2006 as Chief Operating Officer of its North America Commercial business division and in January 2008 was appointed CEO of that division and a member of the Executive Committee. Mr. Foley is Chairman of the Board of Zurich Holding Company of America, Inc.
Skills and experience Gary Shaughnessy was appointed CEO EMEA (Europe, Middle East & Africa) in July 2016, after joining the Executive Committee in January 2016 as CEO Global Life. Before his promotion to the Executive Committee, he was CEO of Zurich UK Life, a role he held from June 2012. In 2014 he assumed the additional role of Country Head for Zurich in the UK. Prior to joining Zurich, Mr. Shaughnessy was at Fidelity Worldwide Investment, where he was managing director for the UK defined contribution and retail business. His previous experience includes nearly a decade in senior roles within the Prudential Group, including the role of UK managing director, retail life & pensions and CEO UK retail at M&G Investments. Mr. Shaughnessy’s background is in marketing and distribution, with previous roles spanning the broad financial services market at AXA, the Automobile Association and the Bank of Scotland.
Educational background Mr. Shaughnessy studied sports science at Liverpool John Moores University in the UK.
Changes to the ExCo since January 1, 2017 There have been no changes to the ExCo since January 1, 2017.
Zurich Insurance Group Ltd may under certain circumstances authorize the beneficial owners of shares that are held by professional persons as nominees (such as a trust company, bank, professional asset manager, clearing organization, investment fund or another entity recognized by Zurich Insurance Group Ltd) to attend shareholders’ meetings and exercise votes as proxy of the relevant nominee. For further details, see page 36 of this report.
In accordance with Swiss law and practice, Zurich Insurance Group Ltd informs all shareholders at the beginning of the shareholders’ meeting of the aggregate number of shares represented by shareholders and the number of shares represented by the independent voting rights representative. Zurich Insurance Group Ltd provided electronic voting devices to its shareholders for all the resolutions taken at the AGM on March 30, 2016.
Convening of shareholders’ meetings Shareholders’ meetings are convened by the Board or, if necessary, by the auditors and other bodies in accordance with the provisions set out in articles 699 and 700 of the Swiss Code of Obligations. Shareholders with voting rights representing at least 10 percent of the share capital may call a shareholders’ meeting, indicating the matters to be discussed and the corresponding proposals. The invitation to shareholders is mailed at least 20 calendar days before the meeting is held and, in addition, is published in the Swiss Official Gazette of Commerce and in several newspapers.
As of December 31, 2016, Zurich Insurance Group Ltd had 131,035 shareholders registered in its share register, ranging from private individuals to large institutional investors. Each registered shareholder receives an invitation to a shareholders’ meeting. A Letter to Shareholders provides an overview of the Group’s activities as the year progresses and outlines its financial performance. A more comprehensive Annual Review, the Annual Report and half-year reports are available on Zurich’s website www.zurich.com (www.zurich.com/en/investor-relations) and the Annual Review and the Annual Report are also available in printed form on request. Information on the quarterly results reporting is also available on Zurich’s website.
In ve st m en t C ommitte e Board of Directors
Group Management Group Management owns processes, controls and technical reviews related to assurance activities. This includes and is supported by assurance work provided by the management's review functions (e.g., underwriting, actuarial, claims) and the legal and finance functions.
Oversight Group Risk Management is responsible for Zurich's Enterprise Risk Management framework. The Group Chief Risk Officer regularly reports risk matters to the Group CEO, senior management committees and the Risk and Investment Committee of the Board.
Group Compliance is responsible for providing assurance to management that compliance risks within its mandate are appropriately identified and managed. The Group Compliance Officer regularly reports to the Audit Committee and has also an additional reporting line to the Chairperson of the Audit Committee and appropriate access to the Chairman of the Board.
Independent Assurance Group Audit is responsible for auditing risk management, control and governance processes. The Head of Group Audit regularly meets with the Chairman of the Board and the Chairperson of the Audit Committee and attends each meeting of the Audit Committee.
Board – Audit Committee and Risk and Investment Committee The Board is ultimately responsible for the supervision of the assurance activities. Its Audit and Risk and Investment Committees receive regular updates from Group Risk Management, Group Audit, External Audit and Group Compliance throughout the year.
Mark Humphreys of PwC is the lead auditor and auditor in charge for regulatory and statutory audit work since the business year 2014. Mr. Stephen O’Hearn, the Global Relationship Partner, co-signs the auditors’ report for 2016.
Audit fees Total audit fees (including expenses and value added taxes) charged by PwC in the year 2016 amounted to USD 48.8 million (USD 47.2 million in 2015).
Non-audit fees Total fees (including expenses and value added taxes) in the year 2016 for additional services, such as tax advice and services, internal control advice or special audits required by local law or regulatory bodies performed by PwC and parties associated with them for Zurich Insurance Group Ltd or a Group company amounted to USD 9.3 million (USD 10.3 million in 2015). Non-audit fees were as follows: Audit and non-audit fee amounts in USD millions, as of December 31 2016 2015
Total non-audit fees 9.3 10.3 – Tax advice 1.7 1.6 – Audit-related advice, including MCEV 6.9 5.6
The Audit Committee, boards and audit committees of subsidiary companies and Group CEO are regularly informed of important audit findings, including ineffective opinions, mitigation actions and attention provided by management. Group Audit is responsible for ensuring that issues identified by Group Audit, that could have an impact on the Group’s operations are brought to the attention of the Audit Committee and appropriate levels of management and that timely follow-up action occurs. This is supported by the attendance of the Head of Group Audit at each meeting of the Audit Committee.
The Group’s core values are founded on the principle that it acts lawfully and seeks to do what is right. Sound compliance in everything the Group does, helps to protect Zurich’s reputation and supports the achievement of the Group’s ambitious goals.
With regard to the variable incentive plans, the overall assessment of business profitability in 2016 leads to an average award under the Group short-term incentive plan (STIP) of 109 percent of target, relative to an average award of 65 percent of target for 2015. Under the Group long-term incentive plan (LTIP), the overall vesting level is 121 percent of target reflecting the achievements on the three pre-defined performance criteria over the three-year performance period 2014 to 2016. This compares to a vesting level of zero percent of target last year.
“Our strong pay for performance alignment leads to higher variable remuneration awards.”
Remuneration structure Zurich’s remuneration architecture is structured in a way that puts more emphasis on variable remuneration elements, with a higher weighting on average towards the long-term for our most senior employees. The variable remuneration is largely determined by the achievements against pre-defined financial measures which are aligned with the Group’s strategy.
In light of this, we have taken the opportunity to make changes to align and simplify our STIP architecture with our strategic direction for 2017. The key changes are outlined in more detail in the 2017 outlook section of the report.
Details on the binding remuneration votes of the Board of Directors (Board) and of the ExCo are included in the 2017 Board of Directors Report of Zurich Insurance Group Ltd (Board of Directors Report), which is istributed with the invitation to the AGM 2017.
Christoph Franz Chairman of the Remuneration Committee 2016 Remuneration structure and weighting of elements1
This summary provides an overview of the 2016 remuneration of Zurich Insurance Group Ltd (Group or Zurich), including details regarding the link between business performance and variable pay decisions for 2016.
Gross written premiums and fees1 53,482 53,784 Business operating profit (BOP) 4,530 2,916 Net income attributable to shareholders (NIAS) 3,211 1,842 Shareholders’ equity 30,660 31,178 Return on common shareholders’ equity (ROE) 11.8% 6.4% Dividends paid to shareholders 2 2,643 2,705 Total variable remuneration pool for all employees gross before tax 3 691 505 – as a percentage of gross written premiums and fees 1% 1% – as a percentage of shareholders’ equity 2% 2% – as a percentage of dividends paid to shareholders 26% 19%
1 Consists of USD 50,615 million gross written premiums and policy fees as well as USD 2,867 million Farmers management fees and other related revenues. 2 Dividend at transaction day exchange rate in 2016 and 2015, respectively. 3 This excludes the value of target performance share allocations made in 2015 from transition arrangements which amount to USD 6 million.
The following table provides details regarding the overall STIP award and LTIP vesting level in relation to the performance achievements under each plan and the aggregated amount of variable remuneration for the entire Group. For further information on STIP and LTIP, see the remuneration elements described later in the report.
Based on the achievements under the three pre-defined performance criteria, TSR, NIAS ROE and Cash remittance over the three-year period 2014 to 2016, the calculated vesting level in 2017 is 121 percent, compared to a zero percent vesting last year. All three performance criteria met the threshold levels of performance required for vesting to occur. No discretionary adjustment was made to the calculated vesting level.
The total variable remuneration pool includes the following elements: kk The total expenditure on cash incentives to be paid for the performance year comprising the amount of the aggregated funding pools under the STIP, and the amounts to be paid under local short-term incentive plans.
kk The total amount of severance payments 2 committed in 2016, regardless of when the payments are due.
For 2016, the remuneration amounts were as follows: Remuneration amounts in USD millions, for the years ended December 31 Base salary/
STIP architecture: The STIP architecture is aligned with the new organizational structure along reporting lines and accountabilities which results in a simpler structure and a significant reduction in the number of pools and sub-pools.
The new STIP architecture is aligned with the new organizational structure and accountabilities.
STIP pool architecture: Funding for each pool is based primarily on BOP ensuring that the funding criteria are consistent across the Group. In determining the final awards under each pool, there is a qualitative assessment of the performance achievements and the awards are also considered in relation to the overall Group results. There are pools at the Group level for members of the Leadership Team, Control Functions and employees working for the Group or Region, pools for Commercial Insurance, Investment Management and Farmers, and country pools. Funding is required for any pay-out to be made.
To align with strategic goals set out at the Investor Day.
kk Articles 14 –16 of the Ordinance Against Excessive Compensation (AEC) (replacing the information in the notes to the consolidated financial statements according to Article 663bbis of the Swiss Code of Obligations).
kk Requirements of the Circular 2010/1 on minimum standards for remuneration schemes of financial institutions, issued by the Swiss Financial Market Supervisory Authority (FINMA) on October 21, 2009 as amended on June 1, 2012 and December 3, 2015, as well as further guidance issued on January 19, 2011 (FINMA Circular on Remuneration Schemes).
Zurich’s approach to implementing the requirements of the Ordinance AEC The Ordinance AEC came into effect on January 1, 2014 with a two-year transition period. During this time Zurich has amended its Articles of Incorporation as approved by shareholders at the AGM in 2014. Since the AGM in 2015, shareholders are authorized to vote and approve the maximum total amount of remuneration for the Board for the one-year period from AGM to AGM and the maximum total amount of remuneration for the ExCo for the subsequent financial year (Article 18 para 1 Articles of Incorporation).
Remuneration philosophy The remuneration philosophy is an integral part of the overall employment offering to employees. Zurich operates a balanced and effectively-managed remuneration system, which is aligned with risk considerations and provides for competitive total remuneration opportunities that attract, retain, motivate and reward employees to deliver outstanding performance.
Total remuneration for an individual employee is influenced by factors including the scope and complexity of the role, business performance and affordability, individual performance, internal relativities, external competitiveness, geographic location and legal requirements. Target opportunities are benchmarked to median levels in clearly defined markets and take into account the internal remuneration structures. Depending on the role, the relevant market can be global, regional or local and reflecting practices in either insurance, financial services or general industry. Remuneration is delivered through an overall framework overseen by the ExCo, the Remuneration Committee and the Board itself. Reward decisions are made on the basis of merit – performance, skills, experience, qualifications and potential – and are free from discrimination toward or against particular diverse backgrounds. The remuneration system and practices ensure all employees have equal opportunities.
kk Variable remuneration awards are linked to key performance factors which include the performance of the Group, the business segments, business units, functions, as well as individual achievements.
kk The structure of the LTIP links remuneration with the future development of performance and risk by including features for deferred remuneration.
In reviewing remuneration structures and practices on a regular basis, the Remuneration Committee and the Board receive independent advice from the executive compensation practices at Meridian Compensation Partners LLC (Meridian) and New Bridge Street, part of Aon Corporation (Aon Hewitt). The Remuneration Committee reviews the mandates and fees, and evaluates ongoing performance. Both Meridian and New Bridge Street provide advice to the Board, with the lead consultant employed by Meridian. Meridian does not provide any other services to the Group. Although certain practice areas within Aon Hewitt – a large, international brokerage and human resources firm – undertake work for the Group from time to time, the Remuneration Committee does not consider the independence and integrity of the advice it receives from New Bridge Street to be compromised by these separate assignments.
Remuneration to the Group CEO Remuneration Committee Board and ultimately from shareholders via a vote as an aggregate maximum amount.
Total variable remuneration pool Remuneration Committee Board STIP funding pools Remuneration Committee based on proposals by the Group CEO taking into account a risk assessment by Group Risk Management.
The STIP and the LTIP designs are regularly reviewed by the Remuneration Committee and the Board. Moreover, the Board reviews the implementation of the plans on a regular basis. The incentive plans are discretionary and can be terminated, modified, changed or revised at any time.
The results of benchmarking studies are taken into account in setting the fee levels for Directors and the remuneration structure and levels for the Group CEO and the other members of the ExCo. In analyzing the results of the benchmarking studies, market practices in the various countries and internal relativities between positions are taken into account. Overall positioning of target remuneration packages is toward the median levels. Management is supported in these activities by a variety of firms operating in the field of international executive compensation.
To help align remuneration with the Group’s risk-taking capacity, Group Risk Management consulted with other control, governance and assurance functions to provide the Group CEO with a review of risk factors to consider when assessing overall performance for the annual funding of incentive awards. The Group Chief Risk Officer (Group CRO) is available to discuss these findings with the Remuneration Committee and the Board. The Group CEO takes into account Group Risk Management’s assessment, among other factors, when proposing the STIP awards to the Remuneration Committee, which in turn makes its recommendation to the Board for final approval.
Group Audit regularly assesses the operational implementation of Zurich’s Remuneration Rules to verify that the remuneration architecture is implemented across the Group.
kk Other members of the ExCo: vested awards at two-and-a-half times base salary.
Directors achieve this requirement through part of their fee being made in five-year sales-restricted shares and market purchases. Members of the ExCo achieve this through their participation in the LTIP and market purchases. Directors, the Group CEO and other members of the ExCo have a period of five years to meet their ownership requirements and the Remuneration Committee monitors compliance with these guidelines on an annual basis.
As of December 31, 2016, Directors held 39,909 shares and members of the ExCo held 78,786 vested shares and 47,885 vested options. At the end of 2016, all Directors and all members of the ExCo, who have served at least five years on the Board or the ExCo respectively, have met the required share ownership level.
Share dilution Registered shares eligible for dividends as of December 31 150,607,406 150,404,964 shares issued during the year 202,442 768,128 – as percentage of share capital based on the registered shares 0.13% 0.51%
Annual performance based target share allocations, subject to vesting according to pre-defined performance criteria. Designed to support Zurich’s longer term goals, encourage participants to operate the business in a sustainable manner and align the Group’s long term interests with those of shareholders.
Pension plans are designed and managed in line with the Group guidelines.
Award is driven by: – Group and/or segment and/or country profitability achievements.
Clawback, malus and hedging n.a. Clawback framework established for members of the ExCo to allow for recovery, forfeiture and/or clawback, subject to specific conditions. Malus conditions to reduce or eliminate awards applicable to all STIP participants.
1 The total variable remuneration pool includes short- and long-term incentives, and Sign-on and Severance Payments provided in cash and/or shares to employees who either joined or who left Zurich in 2016. However, it excludes the value of target share allocations from transition arrangements.
2 Includes target share allocations from transition arrangements, however note that with regard to the total variable remuneration pool, such allocations are excluded.
Each participant has a STIP target award level established for the performance year, which is determined by the base salary and the STIP target percentage. The participant is allocated to one of the STIP pools. Unless otherwise approved by the Board, the maximum STIP target award level is set at 100 percent of the base salary at the end of the performance year.
Financial performance The STIP pool architecture is reviewed and approved by the Board annually and is aligned with the organizational structure of Zurich. In 2016 there were a number of STIP pools based on the NIAS result for members of the Leadership Team, the Control Functions, Investment Management, Support Functions and Group Operations. In addition, there were segment pools based on the overall BOP results of General Insurance and Global Life and based on specific growth and profitability measures for Farmers.
The Group CEO makes recommendations to the Remuneration Committee on the proposed size of the various STIP pools and on the aggregate amount required for STIP award payments across the Group. Following review and analysis, the Remuneration Committee discusses their final recommendations with the Board and seeks the Board’s approval.
STIP award structure The financial performance defines the funding available for each STIP pool and the resulting range of potential STIP awards for each level of individual performance. If the financial performance meets expectations then the award structure for an individual that successfully achieves his or her individual objectives, is set at the target level. If the financial performance only partially meets expectations however, then the STIP award for an individual who successfully achieves his or her individual objectives will be set at a level lower than target and can be zero percent. Within General Insurance and Global Life, there are a number of sub-pools, for example at the country level, where the award structure is specifically defined to reflect the overall results of the segment and also the sub-pool.
Individual performance At the beginning of the year each individual jointly, with his or her line manager defines and agrees on annual objectives. The individual performance achievements are then assessed during and at the end of the year through the Group performance management process. This process utilizes a rating scale between 1 and 5, with 5 being the highest rating. There is a target distribution and payout guideline for each of the ratings. Any violations of internal or external rules or requirements by an individual are taken into account in the individual performance rating.
Long-term (three- to six-year) incentives are performance-driven based on the following design: To support the achievement of the Group’s longer term financial goals, long-term incentives are utilized for a defined group of executives and the most senior roles whose specific focus is on the performance drivers of long-term shareholder value. This group contains the individuals with the highest levels of total remuneration, as well as those individuals whose activities have a significant influence on the risk profile of the Group. In addition, the LTIP aligns the incentives and behaviors with the interests of the Group and its shareholders. To further support this purpose, the individual hedging of any shares of Zurich Insurance Group Ltd is prohibited.
In alignment with the Group’s risk profile and business strategy and taking into account best practice principles among insurance companies, views from proxy advisors and shareholders, long-term incentives are provided with a deferral element that takes into account material risks and their time horizon. Such deferred remuneration is structured to promote the risk awareness of participants and to encourage participants to operate the business in a sustainable manner. Certain transition arrangements were implemented. An illustrative example of the underlying plan is set out below.
The performance criteria for the period 2016 to 2018 comprise: (i) The position of the TSR compared with an international peer group of insurance companies derived from the Dow Jones Titan Insurance Index. The Remuneration Committee reviews the peer companies to be included in the relative TSR assessment regularly to ensure that the peer group exhibits a strong TSR correlation and reflects the Group’s business profile and geographic spread. The resulting industry peer group includes the following companies: AIG, Allianz, Allstate, Aviva, AXA, Chubb, Generali, Legal & General, Manulife Financial Corp., MetLife, Munich Re, Progressive Ohio, Prudential Plc, QBE, Swiss Re, The Hartford and Travelers Cos. Inc.,
LTIP award The LTIP award is distributed to participants on the third of April three years after the target shares were allocated to the participant. In no circumstances can the LTIP award for an individual be more than 200 percent of the aggregate number of target shares and dividend equivalent target shares noted below.
One-half of any vested shares are sales-restricted for a further three-year period following the date of vesting. This takes the overall vesting and sales restriction period to a six year holding period for this part of the award.
1 For the 2015 and 2016 allocations, the vesting level will be known in 2018 and 2019 respectively. 2 The calculated vesting level in 2016 of zero percent of target also applies to the relevant parts of the transition allocations made in 2014 and 2015, which were assessed for vesting in 2016. 3 The calculated average for the allocation made in 2014 is based on a weighted average of the vesting levels in 2016 and 2017, at one third and two thirds respectively.
Directors’ fees As a global insurance provider, Zurich’s Directors’ fees need to be established at a level which enables the Group to attract and retain high caliber individuals with diverse backgrounds. To assist in determining Board remuneration, an independent adviser carries out benchmarking studies on a regular basis. Zurich aims to set the remuneration of its members of the Board at the relevant median levels using the Swiss Market Index (SMI) as a basis. Based on the role and the fee structure, fee levels are established for each member of the Board. Fees are paid in cash and in shares, with approximately half of the basic fee provided in five-year sales-restricted Zurich shares. The fees paid to Directors (including the portion provided in sales restricted shares) are not subject to the achievement of any specific performance conditions.
Fee structure for members of the Board1 Fee elements in cash
Chair fee for the Audit Committee 80 – 80 80 Chair fee for the Remuneration Committee 60 – 60 60 Chair fee for the Risk and Investment Committee 60 – 60 60 Chair fee for the Governance, Nominations and Corporate Responsibility Committee 4 60 – 60 60 1 Table excludes other fees for board memberships of subsidiary Boards of Zurich (AGM to AGM). 2 Neither the Chairman nor the Vice-Chairman receive any additional fees for their committee work on the Board of Zurich. 3 Amount remains the same irrespective of the number of committees on which a member of the Board serves. 4 For 2016 and 2015 no such fees were paid as the Chairman of the Board has been chairing the Governance, Nominations and Corporate Responsibility Committee.
This ‘audited’ symbol indicates that the information contained within the shaded panel is audited and forms an integral part of the holding company financial statements.
Where a Director is also a member of one or more subsidiary boards of Zurich, the Director is entitled to an additional fee of CHF 50,000 in 2016 (CHF 50,000 in 2015) per annum plus CHF 10,000 in 2016 (CHF 10,000 in 2015) per annum if he or she also chairs an audit committee of such a board. The fee structure for subsidiary boards can be modified if certain circumstances, for example, the additional time commitment to discharge the duties of a board member, warrant it.
Based on this structure, the total aggregate fees allocated to the Directors of Zurich and Zurich Insurance Company Ltd for the calendar year ended December 31, 2016, amounted to CHF 4,607,500. This included CHF 2,697,500 in cash and a value at the allocation date of CHF 1,910,000 in five-year sales-restricted shares. The share price at the allocation date was CHF 222.90. The corresponding amount for 2015 was CHF 4,816,625, which comprised CHF 2,786,625 in cash and a value at the allocation date of CHF 2,030,000 in five-year sales-restricted shares. The share price at the allocation date in 2015 was CHF 287.10. The Directors’ fees are not pensionable.
The following tables set out the actual fees paid to the Directors for 2016 and 2015 in Swiss francs. In 2016, eight members served for the full year and five members served for part of the year. In 2015, nine members served for the full year and two members served for part of the year.
3 Committee chairs receive an annual fee of CHF 60,000 (CHF 60,000 in 2015) and the chair of the Audit Committee receives an additional CHF 20,000 (CHF 20,000 in 2015). The committees on which the Directors serve and the chairs are set out in the Corporate Governance Report.
12 At the AGM on April 1, 2015, Joan Amble and Kishore Mahbubani were elected to the Board, and Christoph Franz was elected as a member of the Remuneration Committee.
Remuneration and personal loans for former Directors No benefits (or waiver of claims) or loans have been provided to former Directors during the year 2016 at conditions which are not at arm’s length, nor were any provided during the year 2015.
Related parties to the Directors or to former Directors No benefits (or waiver of claims) have been provided to related parties of the Directors or related parties of former members of the Board during the years 2016 and 2015, nor had any related party of the Directors or of former members of the Board any outstanding loans, advances or credits as of December 31, 2016 and 2015.
Number of Zurich Insurance Group Ltd shares1 as of December 31 Ownership of shares
Remuneration of the ExCo A number of key elements are in place to provide a well-balanced and effectively managed remuneration architecture. These elements include a Group-wide remuneration philosophy, robust short-term and long-term incentive plans, effective governance, and strong links to the business planning and risk policies of the Group.
To assist decisions on the remuneration of the ExCo, the Board conducts benchmarking studies on a regular basis. The remuneration structures and practices of a selected industry peer group of the largest insurance companies are analyzed based on relevant companies in the Dow Jones Insurance Titans 30 Index. This index is comprised of the largest insurance companies throughout the world, predominantly in Europe and in the U.S.
The core peer group consists of the following insurance and reinsurance firms: AIG, Allianz, Allstate, Aviva, AXA, Chubb, Generali, Legal & General, Manulife Financial Corp., MetLife, Munich Re, Progressive Ohio, Prudential Plc, QBE, Swiss Re, The Hartford and Travelers Cos. Inc.
The remuneration structure and the mix of the individual remuneration elements for members of the ExCo are determined by taking into account relevant market practices and internal relativities.
The total remuneration of the members of the ExCo for 2016 comprised the value of base salaries, short-term cash incentives, the target share allocations made under the LTIP in 2016, pensions and other remuneration including employee benefits.
The distribution of the total remuneration in 2016 for the ExCo between the individual remuneration elements is set out in the following chart and is based on the target values for the performance-related remuneration.
As shown in the chart above, there is an appropriate balance of remuneration elements with a significant emphasis on performance-related remuneration through both STIP and LTIP. The distribution of the target values between short- term (one-year) and long-term incentives (three- to six-years) reflects an emphasis on long-term incentives.
Base salaries/Fees Short-term incentives Service cost for pension benefits Other remunerationLong-term incentives
See remuneration elements, page 86. The total amount of base salaries for all members of the ExCo paid in 2016 was USD 10.0 million compared to USD 11.6 million in 2015.
For members of the ExCo the STIP target percentages for 2016 vary between 75 percent and 100 percent of the base salary. The maximum STIP award for all members of the ExCo is 200 percent of the individual target amount. Further information regarding STIP is set out below.
In 2016, each member of the ExCo received an annual allocation of target shares under the LTIP for the three-year performance cycle 2016 – 2018. For members of the ExCo the LTIP target percentages in 2016 vary between 90 percent and 225 percent of base salary. As in previous years, the allocations of target shares for 2016 were based on the closing share price from the second working day in April, i.e. on April 4, 2016. The value of target share allocations does not include dividend equivalent target shares or transition allocations. The maximum vesting level, to be assessed in 2019, is 200 percent of the target number of shares allocated.
The total number of target shares allocated in 2016 to members of the ExCo was 81,146 which reflects a value of USD 17.2 million on the second working day in April. This is based on the assumption of 100 percent vesting in 2018, a share price of CHF 203.20 (2015: CHF 330.50) and an exchange rate of CHF 1 = USD 1.04215. This compares with 50,771 target shares allocated in 2015 and a respective value of USD 17.5 million for the allocations made in 2015.
ExCo STIP performance assessment This section provides further insights into the assessment of the individual STIP awards of the members of the ExCo.
For the ExCo, the key financial metric for determining the award structure is the Group’s NIAS performance during the year. In evaluating the NIAS performance, an overall qualitative assessment of the results is carried out. NIAS for 2016 was USD 3.2 billion reflecting a 74 percent increase compared to 2015. With regard to the assessment of individual performance, the Group CEO set clear targets for 2016 for all ExCo member relating to their area of responsibility. A substantial portion of these targets reflects the key financial goals. In addition, each member was set qualitative goals relating to the execution of the strategy. For competitive reasons, Zurich does not disclose more detail on the individual objectives of the members of the ExCo. In a rigorous process, the Remuneration Committee reviews the individual performance achievements of each member of the ExCo in relation to the targets set for the year. The Remuneration Committee and the Board also review the performance of the Group CEO using a similar process at the year-end. As a result of this rigorous process, individual STIP awards for each member of the ExCo are determined and approved by the Board.
Replacement Payments were made to the new members of the ExCo who took up their employment with the Group during 2016. The payments comprise a cash payment of CHF 2.5 million, restricted share allocations with a value of CHF 1.4 million and performance share allocation in the 2016 to 2018 LTIP with a value of CHF 4.0 million. The restricted share allocations vest in 2017, 2018 and 2019 and the performance share allocations vest in 2019. The overall value of Replacement Payments made in 2016 was therefore CHF 7.9 million, or USD 8.1 million when translated into U.S. dollars at the exchange rates at the time they were made.
USD 1.2 million in 2016 and USD 2.2 million in 2015. Since the contributions are based on full earnings, whereas benefits are capped, there is no direct correlation between the costs paid to the social security system and the benefits received by the executives.
8 To maintain the target earning opportunities during the LTIP transition period, an allocation of supplementary performance shares was made to all current LTIP participants in 2014. To ensure that the members of the ExCo further align their long-term interests with those of shareholders, the transition allocation was provided in two installments for the members of the ExCo (2014 and 2015). No transition allocations were made in 2016.
Based on these figures, the value of the total remuneration for all members of the ExCo comprises 33 percent (42 percent in 2015) in fixed remuneration (comprising base salaries, service costs for pension benefits and other remuneration including employee benefits) and 67 percent (58 percent in 2015) in performance related elements (comprising the cash incentive awards under the STIP and the value of the target share allocations under the LTIP). The emphasis within variable remuneration lies on the deferred part, with 57 percent represented by target performance shares under the LTIP and 43 percent as cash incentive awards under the STIP. The total amount of remuneration of USD 44.9 million increased compared to last year’s amount due to the improved overall business performance in 2016.
Base salary 1.3 1.6 Cash incentive awards earned for the year 2.6 0.4 Value of target share allocations 3.4 3.6 Service costs for pension benefits 0.4 0.4 Value of other remuneration 0.1 0.1 Total in CHF 3 7.8 6.1 Total in USD 3,4 7.9 6.3 in CHF millions, for the years ended December 31 2016 2 2015 2
5 To maintain the target earning opportunities during the transition period an allocation of supplementary target shares was made. 6 Other payments and share allocations are extraordinary and were made to compensate incentive plan forfeitures with previous employer. Included in the amount of
CHF 4.2 million is a value of CHF 4.0 million which was allocated as additional target performance shares in the 2016 – 2018 LTIP, to be assessed for vesting in 2019.
With regard to the LTIP, the amount included in the total of CHF 7.8 million above is the value of target share allocation of CHF 3.4 million allocated in 2016 and assumed to vest at 100 percent of target in 2019. There are no shares vesting in 2017 from prior allocations and therefore the actual earned total remuneration for the period ending December 31, 2016 was CHF 4.4 million compared to the total remuneration of CHF 7.8 million shown above.
None of the members of the ExCo received any remuneration from the Group or from any of the Group’s companies in 2016 and 2015 other than as set out in the tables above.
Share and share option holdings of the members of the ExCo This section provides a summary of total outstanding share commitments under the LTIP, transition arrangements, restricted share allocations and the total outstanding share options for members of the ExCo as at December 31, 2016.
Target share allocations under LTIP including transition arrangements and restricted share allocations As of December 31, 2016, the total number of unvested target share allocations under LTIP was 175,114 (102,196 as of December 31, 2015). Further, the total number of unvested target share allocations under the LTIP transition arrangement was 11,755 and the number of unvested restricted shares was 18,170 in 2016 (18,950 in 2015).
3 To maintain the target earning opportunities during the transition period an allocation of supplementary target shares was made to all current LTIP participants. To ensure members of the ExCo further align their long-term term interests with those of shareholders, the transition allocation is provided in two installments for the ExCo.
Within the context of the regular LTIP allocations made in 2016, these performance based share allocations will be considered for vesting in 2019 and one-half of the resulting vested shares are sales-restricted for a further three-year period.
Audited Share option allocations Under the share option program for senior management, the Group issued share options in the past to individuals within defined rules. From 2011, share option allocations were no longer made. Prior to this, the option allocations were made each year on the third working day in April. Further, the exercise price for the options allocated in the past was set at the market price on the day prior to the date of allocation. The performance-based option allocations were considered for vesting in one-third installments during the three years after the allocation.
Under the share option program, the total number of shares under option for members of the ExCo as at December 31, 2016, and 2015, respectively, is set out in the following tables.
Share and vested share option holdings of the members of the ExCo1
Number of vested shares and vested share options, as of December 31 2016 2015
2 The distribution of vested options according to the allocations identified in the tables Summary of unexercised options. 3 Mario Greco was appointed Group CEO effective March 7, 2016.
Audited The following tables show how the totals of the vested share options owned by members of the ExCo are distributed according to the allocations identified in the tables labeled Summary of unexercised options as of December 31, 2016 and 2015, respectively.
Distribution of vested share options of members of the ExCo 2016
Number of vested share options as of December 31, 2016 Year of allocation
1 Mario Greco was appointed Group CEO effective March 7, 2016, Mike Foley was appointed CEO North America effective July 1, 2016, Gary Shaughnessy was appointed CEO EMEA effective July 1, 2016 and Kristof Terryn was appointed Group Chief Operating Officer effective July 1, 2016.
Number of vested share options as of December 31, 2015 Year of allocation
Variable remuneration Cash incentive awards earned for the year 3 542 363 Value of target share allocations made in the year 4 148 142
Unvested target share allocations1 380 307 Unvested restricted share allocations 17 14 Vested but sales-restricted allocations 117 167 Value of overall outstanding deferred remuneration 514 488 1 This excludes the value of target share allocations made in 2014 and 2015 from transition arrangements which amounts to USD 75 million of which USD 23.6 million is still unvested.
Impact on net income in 2016 and 2015 from remuneration made in prior years Under the LTIP, the vesting level is used to determine the actual number of shares to be awarded to participants relative to the target shares initially allocated. Differences in value between the target shares allocated and the actual shares vesting is reflected in the consolidated income statement in the year of vesting in line with the accounting principles. For shares vesting in 2017 and 2018 there was no adjustment to the expense recognized in the 2016 income statement to reflect actual performance compared to original estimates. In 2015, a USD 65 million reduction in expense was recognized.
kk Sign-on Payments are payments that are agreed on the execution of an employment contract (whether paid immediately or over time). Sign-on Payments may include compensation made prior to a person joining the company and providing any services (Payments in Advance) or compensation for benefits foregone with a previous employer (Replacement Payments). According to the Ordinance AEC, Payments in Advance are prohibited to be paid to members of the Board and the ExCo. Any Replacement Payments for members of the ExCo including the Group CEO have to be approved by the Board based on a proposal by the Remuneration Committee.
kk Severance Payments are provided in connection with the termination of an employment relationship. Zurich does not include under the term Severance Payments garden leave or similar payments for employees in jurisdictions where such payments are required by applicable law, or where they are based on contractual notice periods which conform with recognized market practice, or where they are non-contractual but in line with recognized market practice. Zurich does include garden leave or similar payments however, that go beyond recognized market practice, irrespective of whether these are provided pursuant to an agreement or are ex gratia. Severance Payments are prohibited to be paid to members of the Board and the ExCo.
The Group as a principle does not make any Sign-on or Severance Payments, however if circumstances in the Group’s interest warrant such payments, these can be approved through a clear governance process. Any such payment with a value of CHF 1 million or more is approved by the Chair of the Remuneration Committee prior to the time the employment offer is made or prior to the time the Severance Payment is committed to.
2 Payments that are provided in connection with the termination of an employment relationship. Zurich does not include under the term Severance Payments garden leave or similar payments for employees in jurisdictions where such payments are required by applicable law, or where they are based on contractual notice periods which conform with recognized market practice, or where they are non-contractual but in line with recognized market practice. However, Zurich does include garden leave or similar payments that go beyond recognized market practice, irrespective of whether these are provided pursuant to an agreement or are ex gratia. Severance Payments are prohibited to be paid to members of the Board and the ExCo.
STIP architecture for 2017 The key change is the elimination of the segment STIP pools and sub-pools to be replaced by a number of country STIP pools. The overall STIP pool architecture for 2017 is as follows: kk Group pools: covering Leadership Team, Control Functions and Group and Region employees.
LTIP performance objectives 2017 – 2019 cycle The only change in the LTIP is to recalibrate the cash remittance goals to be in line with the targets set out at the Investor Day held in November 2016, such that the vesting grid for the 2017 – 2019 performance cycle is as follows: The calculated vesting level is applied to all LTIP participants and defines the percentage of target shares that will ultimately vest. Half of the vested shares are sales restricted for an additional three-year period after the date of vesting.
Cash remittance 0% vesting 50% vesting 100% vesting 150% vesting 200% vesting 13th – 18th 10th – 12th 7th – 9th 4th – 6th 1st – 3rd
As in 2016, shareholders will receive the Board of Directors Report 2017. This includes information regarding the two remuneration votes on the total maximum amounts of remuneration for the Board and for the ExCo, which will take place at the AGM on March 29, 2017. The votes allow shareholders to have a say on the prospective remuneration for the Board and for the ExCo arising from Zurich’s remuneration policies. Shareholders will also be given the opportunity to express their opinion on our remuneration report, through a consultative, non-binding vote at the AGM on the remuneration report 2016.
The Remuneration Committee will continue to seek the dialogue with investors and proxy advisors in 2017. Further, the Committee will ensure that the remuneration framework is aligned with the strategy, is embedded in the risk framework and complies with legal and regulatory requirements. As in previous years, the Committee enforces the governance framework and carefully monitors the link between key performance factors and variable remuneration awards.
To the General Meeting of Zurich Insurance Group Ltd on the remuneration report 2016
Responsibility of the Board of Directors The Board of Directors is responsible for the preparation and overall fair presentation of the remuneration report in accordance with Swiss law and the Ordinance against Excessive Compensation in Stock Exchange Listed Companies (Ordinance). The Board of Directors is also responsible for designing the remuneration system and defining individual remuneration packages.
Opinion In our opinion, the remuneration report of Zurich Insurance Group Ltd for the year ended December 31, 2016 complies with Swiss law and articles 14 –16 of the Ordinance.
Mark Humphreys Peter Bieri Audit expert Audit expert Auditor in charge
Enterprise risk management Our enterprise risk management framework (ERM) supports achievement of the Group’s strategy and helps protect capital, liquidity, earnings and reputation.
In 2016, we expanded our risk appetite statement to cover additional dimensions, enhanced our governance of model risk, and deepened our technical risk expertise. With that expertise, our risk function has improved its ability to independently challenge the business and to strengthen analyses of such topics as inflation risk and risk accumulations.
Also in 2016, Standard & Poor’s upgraded its rating of Zurich’s ERM from ‘strong’ to ‘very strong,’ noting a positive view of our risk management culture, risk controls, emerging risk management, risk models and strategic risk assessment.
External and internal challenges The external environment continues to present challenges, including political uncertainty, market volatility and increasing cyber risk across all sectors. Our financial plan is primarily driven by internal efforts, relying on our staff’s technical skills and capabilities, with a strong focus on cost discipline. The plan does not rely on factors Zurich does not control.
kk Market risk: The Group began implementing a strategy to reduce market risk in order to reduce the risk of pro-cyclical behavior, mainly by reducing equity investments.
kk Operational risk: By mitigating and responding to cyber risks and threats to data security, we are better able to protect data and information in a rapidly evolving external environment.
Financial condition tested under stressed perspective Stress scenarios demonstrate the capital resilience of the Group. Zurich uses sensitivity and scenario analyses to assess the potential impact of conditions under stress.
Economic risk profile As of July 1, 2016, market risk, including investment credit risk, contributed 55% of the Z-ECM capital required, and insurance risk contributes 41%. Other credit risk and operational risk each contribute 2%. The increase in market risk from 49% in the previous year was the result of higher risk-taking in the first half of 2016 in light of market conditions. In the second half of the year, the Group adopted a strategy to reduce the market risk.
Taking risk is inherent to the insurance business, but such risk-taking needs to be made in an informed and disciplined manner, and within a pre-determined risk appetite and tolerance.
The Group assesses risks systematically and from a strategic perspective through its proprietary Total Risk Profiling™ (TRP) process, which allows Zurich to identify and evaluate the probability and severity of a risk scenario. The Group then develops, implements and monitors improvements. The TRP process is integral to how Zurich deals with change, and is particularly suited to evaluate strategic risks as well as risks to Zurich’s reputation. At Group level, this process is ongoing, with regular reviews with senior management.
In 2016, S&P upgraded its rating of Zurich’s enterprise risk management (ERM) from ‘strong’ to ‘very strong’, reflecting its positive view of Zurich’s risk management culture, risk controls, emerging risk management and strategic risk assessment. The ‘very strong’ ERM assessment is also a result of the ‘good’ rating of the Group economic capital model (Z-ECM).
Audited In 2016, the Group extended its risk appetite statement with additional capital, liquidity, earnings volatility and non-financial metrics. The primary metric used to steer business remains the Z-ECM.
The Group Risk Management function is a global function. It consists of teams at the Group, regional and business unit levels. Staff at Group level focus on model risk management; quantitative assessments of insurance, credit and operational risks; risk management frameworks, tools and methodologies; risk reporting; and risk governance. Chief Risk Officers at the business unit level focus on implementing Zurich’s risk management framework locally, including early identification of risks with follow-up monitoring and mitigation actions. They report to the regional Heads of Risk, who in turn report to the Group’s Chief Risk Officer. The CROs for the Group’s largest business units report directly to the Group Chief Risk Officer.
The Group’s capital management program comprises various actions to optimize shareholders’ total return and to meet capital needs, while enabling Zurich to take advantage of growth opportunities. Such actions include dividends, capital repayments, share buy-backs, issuance of shares, issuance of senior and hybrid debt, securitization and purchase of reinsurance.
The Swiss Code of Obligations stipulates that dividends may only be paid out of freely distributable reserves or retained earnings. Apart from what is specified by the Swiss Code of Obligations, Zurich Insurance Group Ltd faces no legal restrictions on dividends it may pay to its shareholders. As of December 31, 2016, the amount of the general legal reserve exceeded 20 times the paid-in share capital.
The following chart shows the Z-ECM capital required allocated to the segments as of July 1, 2016 and January 1, 2016. As of July 1, 2016 the largest proportions of Z-ECM capital required were allocated to General Insurance with 45 percent and to Global Life with 44 percent of the total. Total allocated capital as of July 1, 2016 equaled USD 33.9 billion Z-ECM capital required plus USD 1.2 billion allocation to Farmers.
Regulatory requirements in the European Economic Area The directive on Solvency II was adopted on November 25, 2009. The complete framework was introduced on January 1, 2016. Solvency II is designed to be more risk-sensitive and sophisticated in its approach than Solvency I. Solvency II capital requirements also take into account all material risks and how these interact. Under Solvency II, every insurance and reinsurance entity is required to conduct its own risk and solvency assessment, including taking into account specific risk profiles. Under disclosure provisions, companies will have to publicly report their solvency and financial condition for the first time in 2017, based on 2016 figures.
Zurich Insurance plc (Ireland) applies the internal model, which aligns the Solvency II approach with that used for Z-ECM, and has received approval from the Central Bank of Ireland accordingly. Other EEA subsidiaries use the Solvency II standard formula.
kk Property includes fire risks (e.g., fire, explosion and business interruption), natural perils (e.g., earthquake, windstorm and flood), engineering lines (e.g., boiler explosion, machinery breakdown and construction) and marine (e.g., cargo and hull).
kk Special lines include directors and officers, credit and surety, crime and fidelity, accident and health, and crop.
The Group monitors potential new emerging risk exposures. Zurich has an Emerging Risk Group, with cross-functional expertise from core insurance functions such as underwriting, claims and risk management to identify, assess and recommend actions for such risks.
In addition to the specific risks insured, the Group is exposed to losses that could arise from natural and man-made catastrophes. The main concentrations of risks arising from such potential catastrophes are regularly reported to executive management. The most important peril regions and natural catastrophes are U.S. and Caribbean tropical cyclone, Europe windstorm and California earthquake.
General Insurance – Direct written premiums and policy fees by line of business – current period in USD millions, for the year ended December 31, 2016 Motor Property Liability
General Insurance – Direct written premiums and policy fees by line of business – prior period in USD millions, for the year ended December 31, 2015 Motor Property Liability
+1% in net loss ratio Net income before tax (60) (80) (107) (34)
kk Mortality risk – when on average, the death incidence among the policyholders is higher than expected kk Longevity risk – when on average, annuitants live longer than expected kk Morbidity risk – when on average, the incidence of sickness or disability among the policyholders is higher or recovery rates from disability are lower than expected kk Policyholder behavior risk – on average, the policyholders discontinue or reduce contributions or withdraw benefits prior to the maturity of contracts at a rate that is different from expected kk Expense risk – expenses incurred in acquiring and administering policies are higher than expected kk New business risk – volumes of new business are lower than sufficient to cover fixed acquisition expenses kk Market risk – the risk associated with the Group’s balance sheet positions where the value or cash flow depends on financial markets, which is analyzed in the ‘market risk, including investment credit risk’ section kk Credit risk – the risk associated with a loss or potential loss from counterparties failing to fulfill their financial obligations, which is analyzed in the ‘market risk, including investment credit risk’ and ‘other credit risk’ sections
Audited A more diversified portfolio of risks is less likely than an undiversified portfolio to be affected across the board by a change in any subset of the risks. As a result, the offsetting effects between unit-linked and traditional business reduce some of the risk associated with the Global Life business.
The Group has local product development committees and a Group-level product approval committee to analyze potential new life products that could significantly increase or change the nature of its risks. The Group regularly reviews the continued suitability and the potential risks of existing life products.
Analysis of sensitivities for life insurance risk The Group uses market-consistent embedded value reporting principles, which allow Zurich to increase its understanding of, and report on, the risk profile of its life products, and how these risks would change under different market conditions. Embedded value is a measure that markets use to value life businesses. For more information, see the ‘embedded value report 2016’ at www.zurich.com/investor-relations/results-and-reports.
To have a consistent approach and form a global perspective on accumulations, the Group models general insurance exposures in a center of excellence, which works with local businesses to help improve the overall quality of data. The Group models potential losses from property policies in hazard-prone areas with material exposure and from workers’ compensation policies covering earthquakes in California, the U.S. Pacific Northwest and New Madrid (U.S. states of Arkansas, Illinois, Indiana, Kentucky, Louisiana, Michigan, Mississippi, Missouri, Ohio, Tennessee, Wisconsin). Other non-property-related losses are estimated based on adjustments. Risk modeling mainly addresses climate-induced perils such as windstorms, river floods, tornadoes, hail storms, and geologically induced perils such as earthquakes.
The Group constantly seeks to improve its modeling, fill in gaps in models with additional assessments, and increase the granularity of data collection. It uses internal and external knowledge in modeling accumulations. One such source of external knowledge is the Natural Catastrophe Advisory Council, a group of scientists associated with leading research organizations such as the U.S. National Center for Atmospheric Research, the U.S. Geological Survey and the Intergovernmental Panel on Climate Change. Furthermore, Zurich is a Governor Sponsor of the Global Earthquake Model (GEM) Foundation, a shareholder of PERILS AG, and a member of the Risk Prediction Initiative (RPI) and the Oasis Loss Modeling Framework. Zurich validates modeling results by comparing them with claims experience.
Risks from man-made catastrophes Man-made catastrophes include such risks as industrial accidents and terrorism attacks. Zurich’s experience in monitoring potential exposures to natural catastrophes is also applicable to threats posed by man-made catastrophes.
Audited The Group reviews and aggregates worker injury, property and life risk exposures to identify areas of significant concentration and assesses other lines of business, such as liability and auto, although the potential exposure is not as significant. The data allow underwriters to evaluate how insuring a particular customer’s risk might affect Zurich’s overall exposure. Zurich uses a vendor-provided catastrophe model to evaluate potential exposures in every major U.S. city and selected cities in Europe. The Group undertakes more detailed and frequent analyses for cities in which Zurich has greater exposure. Outside the modeled areas, exposure concentrations are identified directly on Zurich’s Risk Exposure Data Store (REDS), a system that stores information about our location-based exposure to risk in a single place.
Reinsurance for general insurance and life insurance The Group’s objective in purchasing reinsurance is to provide market-leading capacity for customers while protecting the balance sheet, supporting earnings volatility management, and achieving capital efficiency. The Group follows a centralized reinsurance purchasing strategy for both General Insurance and Global Life, and bundles programs, where appropriate, to benefit from diversification and economies of scale.
The Group uses traditional and collateralized reinsurance markets and other alternatives to protect itself against extreme single events, multiple event occurrences across regions, or increased frequency of events. Specifically, to protect the Group against man-made and natural catastrophe scenarios, Zurich arranges per event and annual aggregate global covers as illustrated on the graph on the next page.
USD millions, as of December 31, 2016 1 The Global Aggregate Cat Treaty renewed on January 1, 2016; the U.S. and the Global Cat Treaty renewed on April 1, 2016; the Europe Cat Treaty and International Cat Treaty renewed on July 1, 2016. 2 Europe Cat Treaty calculated with EUR/USD exchange rate as of June 30, 2016. 3 This USD 200m cover is the same combined global occurrence/aggregate treaty presiding over the global catastrophe treaty. This cover can be used only once, either for aggregated losses or for an individual occurrence or event.
Single global USD 200 million treaty, which can be applied to any region3
The Group manages the market risk of assets relative to liabilities on an economic total balance sheet basis. This is done to achieve the maximum risk-adjusted excess return on assets relative to the liability benchmark, while taking into account the Group’s risk apetite and tolerance and local regulatory constraints.
Risk assessment reviews include the analysis of the management of interest rate risk for each major maturity bucket and adherence to the aggregate positions with risk limits. The Group applies processes to manage market risks and to analyze market risk hotspots. Actions to mitigate risk are taken if necessary to manage fluctuations affecting asset/liability mismatch and risk-based capital.
Audited The Group uses derivative financial instruments to limit market risks arising from changes in currency exchange rates, interest rates and equity prices, from credit quality of assets and liabilities and commitments to third parties. The Group enters into derivative financial instruments mostly for economic hedging purposes and, in limited circumstances, the instruments may also meet the definition of an effective hedge for accounting purposes. The latter instruments include cross-currency interest rate swaps in fair value hedges and cross-currency swaps in cash flow hedges of Zurich’s borrowings, in order to mitigate exposure to foreign currency and interest rate risk. In compliance with Swiss insurance regulation, the Group’s policy prohibits speculative trading in derivatives, meaning a pattern of ‘in and out’ activity without reference to an underlying position. The Group addresses the risks arising from derivatives through a stringent policy that requires approval of a derivative program before transactions are initiated, and by subsequent regular monitoring by Group Risk Management of open positions and annual reviews of derivative programs.
Risk from interest rates and credit spreads Interest rate risk is the risk of loss resulting from changes in interest rates, including changes in the shape of yield curves. The Group is exposed to interest-rate risk including from debt securities, reserves for insurance contracts, liabilities for investment contracts, employee benefit plans, and loans and receivables.
Zurich has limits on holdings in real assets and limits on deviations of asset interest rate sensitivities from liability interest rate sensitivities. The Group also manages credit-spread risk, which describes the sensitivity of the values of assets and liabilities due to changes in the level or the volatility of credit spreads over the risk-free interest rate yield curves. Movements of credit spreads are driven by expected probability of default, expected losses in cases of defaults of issuers, the uncertainty of default probabilities and losses, as well as actual defaults of issuers.
Audited Analysis of market risk sensitivities for interest rate, equity and credit spread risks
Basis of presentation – General Insurance and rest of the business The basis of the presentation for tables 4, 5, and 6 is an economic valuation represented by the fair value for Group investments, IFRS insurance liabilities are discounted at risk-free market rates to reflect the present value of insurance liability cash flows and other liabilities, for example own debt. (Note: the Group describes risk-free market rates as swap rates). In the sensitivities, own debt does not include subordinated debt, which Zurich considers available to protect policyholders in a worst-case scenario.
Tables 4, 5 and 6 show the estimated economic market risk sensitivities of the net impact for General Insurance and the rest of the business. Positive values represent an increase in the balance, and values in parentheses represent a decrease. Mismatches in changes in value of assets relative to liabilities represent an economic risk to the Group. The net impact – the difference between the impact on Group investments and liabilities – represents the economic risk related to changes in market risk factors that the Group faces.
In determining the sensitivities, investments and liabilities are fully re-valued in the given scenarios. Each instrument is re-valued separately, taking the relevant product features into account. Non-linear effects, where they exist, are reflected in the model. The sensitivities are shown after tax. They do not include the impact of transactions within the Group.
For more information, see the ‘embedded value report 2016’ at www.zurich.com/investor-relations/ results-and-reports.
Audited Analysis of economic sensitivities for interest rate risk Table 4 shows the estimated impacts of a 100 basis point increase/decrease in yield curves after consideration of hedges in place, as of December 31, 2016 and 2015, respectively.
Analysis of economic sensitivities for equity risk Table 5 shows the estimated impacts from a 10 percent decline in stock markets, after consideration of hedges in place, as of December 31, 2016 and 2015, respectively.
– The sensitivities do not indicate a probability of such events occurring in the future. They do not necessarily represent the Group’s view of expected future market changes. In addition to the sensitivities, management uses stress scenarios to assess the impact of more severe market movements on the Group’s financial condition. For more information on stress scenarios, see ‘impact of market, credit, and insurance scenarios on Z-ECM (unaudited).’
Debt securities The Group is exposed to credit risk from third-party counterparties where the Group holds securities issued by those entities.
Debt securities by rating of issuer as of December 31 2016 2015
Table 7 shows the credit risk exposure of debt securities, by issuer credit rating. As of December 31, 2016, 95.5 percent of the Group’s debt securities was investment grade and 20.3 percent was rated ‘AAA.’ As of December 31, 2015, 96.9 percent of debt securities was investment grade and 21.2 percent was rated ‘AAA.’
Audited The risk-weighted average issuer credit rating of the Group’s debt securities portfolio is ‘BBB+’ in 2016, compared with ‘BBB’ in 2015.
As of December 31, 2016, the largest concentration in the Group’s debt securities portfolio was in governments, supranationals and similar at 47.5 percent. In all other categories, a total of USD 22.0 billion or 29.9 percent was secured. As of December 31, 2015, 46.6 percent of the Group’s debt portfolio was invested in governments, supranationals and similar. In all other categories, a total of USD 24.5 billion or 33.3 percent was secured.
The Group’s debt exposure to eurozone governments and supranationals & similar in USD millions, as of December 31 2016 2015
Rest of eurozone 742 794 Eurozone supranationals and similar 917 665
Audited Cash and cash equivalents To reduce concentration, settlement and operational risks, the Group limits the amount of cash that can be deposited with a single counterparty. The Group also maintains an authorized list of acceptable cash counterparties.
In 2016 the Group started investing in mortgages in the U.S. (USD 0.6 billion). These are mainly participations in large mortgage loans secured against commercial property.
Business units are required to clearly state criteria for determining borrower and collateral quality in their local investment guidelines. The Group sets requirements for local investment guidelines, and monitoring and reporting standards. The Group closely monitors performance of portfolios with respect to impairments and losses.
Other loans The credit risk arising from other loans is assessed and monitored together with the ‘debt securities’ portfolio. 50.4 percent of the reported loans are to governments, supranationals and similar, of which 94.2 percent are to the German Central Government or the German Federal States. Table 9 shows the composition of the loan portfolio by rating class. As of December 31, 2016, a total of USD 5.5 billion or 60.4 percent of loans are secured. As of December 31, 2015, a total of USD 5.0 billion or 52.6 percent of loans were secured.
Audited Derivatives The positive replacement value of outstanding derivatives represents a credit risk to the Group. These instruments include interest rate and cross-currency swaps, forward contracts and purchased options. A potential exposure also arises from possible changes in replacement values. The Group regularly monitors credit risk exposures arising from derivative transactions. Outstanding positions with external counterparties are managed through an approval process embedded in derivative programs.
To limit credit risk, derivative financial instruments are typically executed with counterparties rated ‘A–‘ or better by an external rating agency, unless collateral is provided as per the Zurich Risk Policy. The Group’s standard practice is to only transact derivatives with those counterparties for which the Group has in place an ISDA Master Agreement, with a Credit Support Annex. This mitigates credit exposures from over-the-counter transactions due to close-out netting and requires the counterparty to post collateral when the derivative position exceeds an agreed threshold. The Group further mitigates credit exposures from derivative transactions by using exchange-traded instruments whenever possible.
Sensitivity of the Group’s total IFRS equity to exchange rate fluctuations in USD millions, as of December 31 2016 2015 10% increase in EUR/USD rate 515 584 GBP/USD rate 208 220 CHF/USD rate 457 153 BRL/USD rate 139 97 Other currencies/USD rates 546 525
Credit risk is the risk associated with a loss or potential loss from counterparties failing to fulfill their financial obligations. See section ‘risks from defaults of counterparties’ for market-risk-related asset categories. The Group’s exposure to other credit risk is derived from the following main categories of assets: kk Reinsurance assets kk Receivables
Credit risk concentration The Group has counterparty limits, which are regularly monitored. Exposure to counterparties’ parent companies and subsidiaries is aggregated to include reinsurance assets, investments, derivatives, and for the largest counterparties, certain insurance products. There was no unapproved material exposure in excess of the Group’s limits for counterparty aggregation as of December 31, 2016 or December 31, 2015.
Audited Credit risk related to reinsurance assets The Group’s Corporate Reinsurance Security Committee manages the credit quality of cessions and reinsurance assets. The Group typically cedes new business to authorized reinsurers with a minimum rating of ‘A–.’ As of December 31, 2016 and 2015 respectively, 66 percent and 73 percent of the business ceded to reinsurers that fall below ‘A–’ or are not rated is collateralized. Of the business ceded to reinsurers that fall below ‘A–’ or are not rated, 32 percent was ceded to captive insurance companies, in 2016 and in 2015.
Table 11 shows reinsurance premiums ceded and reinsurance assets split by rating.
Reinsurance premiums ceded and reinsurance assets by rating of reinsurer and captive as of December 31 2016 2015
Rating 1 The value of the collateral received amounts to USD 8.4 billion and USD 9.0 billion as of December 31, 2016 and 2015, respectively.
Audited Credit risk related to receivables The Group’s largest credit-risk exposure to receivables is related to third-party agents, brokers and other intermediaries. It arises where premiums are collected from customers to be paid to the Group, or to pay claims to customers on behalf of the Group. The Group has policies and standards to manage and monitor credit risk related to intermediaries. The Group requires intermediaries to maintain segregated cash accounts for policyholder money. The Group also requires that intermediaries satisfy minimum requirements of capitalization, reputation and experience, and provide short-dated business credit terms.
Receivables from ceded reinsurance are part of reinsurance assets and are managed accordingly. See notes 15 and 24 of the consolidated financial statements for additional information on receivables.
Total Z-ECM capital required: USD 33.9 billion %, as of July 1, 2016
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people, systems or from external events such as external fraud, catastrophes, or failure in outsourcing arrangements.
kk Conducts risk assessments where operational risks are identified for key business areas. Risks identified and assessed above a certain threshold must be mitigated. Risk mitigation plans are documented and tracked on an ongoing basis. In the assessments, the Group uses such sources of information as the Total Risk Profiling™ process, internal control assessments, and audit findings, as well as scenario modeling and loss event data.
The Group has specific processes and systems in place to focus on high-priority operational matters such as managing information security and third-party suppliers, as well as combating fraud.
As part of Z-ECM, the Group uses a scenario-based approach to assess, model and quantify the capital required for operational risk under extreme circumstances and with a very slight probability of occurrence. The chart below shows the operational risk scenarios that have the highest impact on Z-ECM capital required.
Z-ECM capital required for operational risk, split by risk scenario clusters as of July 1, 2016
Market abuse, mis-selling and conduct of business: This risk cluster relates to the possibility that staff, processes or systems may operate in ways that lead to inappropriate conduct of business in relation to the customer. It includes the possibility of investigations, sanctions and fines imposed on Zurich as a company or any member of staff as a result of market abuse, mis-selling practices leading to regulatory breach or increased compensation.
The Group promotes risk awareness and understanding of controls with communication and training. Primary risk management and internal control systems are designed at Group level and implemented Group-wide.
In 2016, the Group enhanced specific areas of the internal control framework, focusing on significant financial reporting controls as well as controls to ensure the integrity of our regulatory and internal capital calculations. Internal control certification processes are conducted regularly by local business units throughout the Group.
The Group’s Disclosure Committee, chaired by the Group Controller, assesses the content, accuracy and integrity of the disclosures and the effectiveness of the internal controls over financial reporting. The conclusions result in a recommendation to the Group Chief Financial Officer to release the financial disclosures to the Board Audit Committee, which may challenge further. The Board reviews and approves results announcements and the Annual Report. This ensures that both the Board and management have sufficient opportunity to review and challenge the Group’s financial statements and other significant disclosures before they are made public.
For more information on the Group’s other financial liabilities, see note 16 of the consolidated financial statements. See note 6 of the consolidated financial statements for information on the maturity of debt securities for total investments.
The Group works to reduce unintended risks of strategic business decisions through its risk assessment processes and tools, including the Total Risk Profiling™ (TRP) process. As part of the regular TRP process, in 2016 the Executive Committee (ExCo) assessed the key strategic risk scenarios, looking at 2017 and beyond. The Group TRP identified and assessed risks in executing the Group’s operational transformation, maintaining customer focus and execution of technical excellence, information security and cyber risks, adverse Brexit outcomes, euro banking crisis, and adverse reserve development arising from accelerating inflation and inflation expectations. Mitigation actions have been assigned to executive owners and their status is reviewed at least quarterly.
In addition to the figures stated in accordance with International Financial Reporting Standards (IFRS), the Group uses business operating profit (BOP), new business measures and other performance indicators to enhance the understanding of its results. Details of these additional measures are set out in the separately published glossary. These should be viewed as complementary to, and not as substitutes for the IFRS figures. For a reconciliation of BOP to net income attributable to shareholders (NIAS), see table 27.2 in note 27 of the consolidated financial statements.
General Insurance business operating profit 2,435 864 182% General Insurance combined ratio 98.4% 103.6% 5.1 pts
Average Group investments 190,523 198,049 (4%) Net investment result on Group investments 7,045 7,462 (6%) Net investment return on Group investments 3 3.7% 3.8% (0.1 pts) Total return on Group investments 3 4.3% 1.7% 2.6 pts
Diluted earnings per share (in USD) 21.36 12.33 73% Diluted earnings per share (in CHF) 21.04 11.86 77% Book value per share (in CHF) 4 208.44 209.27 –
Net income attributable to shareholders of USD 3.2 billion increased by USD 1.4 billion, or by 74 percent in U.S dollar terms and 82 percent on a local currency basis. The increase arose mainly from the increase in business operating profit, as well as the impairment of goodwill in 2015 and lower restructuring charges.
The Group’s capital and solvency positions remained strong and enabled the Board of Directors to propose a dividend of CHF 17 per share. Solvency measured on an economic basis as determined under the Zurich Economic Capital Model (Z-ECM) was estimated at 122 percent as of December 31, 2016, above the target range of 100 to 120 percent and remained stable. Shareholders’ equity decreased by USD 518 million to USD 30.7 billion during 2016. This decrease resulted from the cost of the dividend approved in March 2016, net actuarial losses on pension plans and negative currency translation adjustments, partly offset by the net income and net unrealized gains on investments.
Business operating profit increased by USD 1.6 billion to USD 4.5 billion, or by 55 percent in U.S. dollar terms and increased 62 percent on a local currency basis.
kk Global Life business operating profit increased by USD 44 million to USD 1.3 billion, or 3 percent in U.S. dollar terms and 9 percent on a local currency basis. Improvements on a local currency basis in Latin America, EMEA and Asia Pacific were offset by a lower contribution from North America. Lower overall costs net of deferrals and improvements in investment margin were partly offset by a deterioration in the technical margin.
Business volumes for the core business segments, comprising gross written premiums, policy fees, insurance deposits and management fees, decreased by USD 65 million to USD 67.9 billion, broadly flat in U.S. dollar terms, but increased 4 percent on a local currency basis.
kk General Insurance gross written premiums and policy fees decreased by USD 898 million to USD 33.1 billion, or 3 percent in U.S. dollar terms, but remained flat on a local currency basis. 2016 includes the acquisition of Rural Community Insurance Services (RCIS) in North America Commercial beginning April 1, 2016. Excluding RCIS, gross written premiums decreased by 4 percent on a local currency basis, with decreases across all regions except Latin America.
kk Global Life gross written premiums, policy fees and insurance deposits increased by USD 1.3 billion to USD 30.3 billion, or 5 percent in U.S. dollar terms and 10 percent on a local currency basis. The increase on a local currency basis occurred predominantly in EMEA, driven by higher sales of Corporate Life & Pensions and individual savings business, and in Latin America, which included the effect of a large corporate contract in Chile.
General Insurance in USD millions, for the years ended December 31 2016 2015 Change
Gross written premiums and policy fees 33,122 34,020 (3%) Net earned premiums and policy fees 26,102 28,051 (7%) Insurance benefits and losses, net of reinsurance 17,394 20,152 14% Net underwriting result 412 (1,002) nm Net investment result 2,086 2,002 4% Net non-technical result (excl. items not included in BOP) 70 (29) nm Non-controlling interests 133 108 (23%) Business operating profit 2,435 864 182% Loss ratio 66.6% 71.8% 5.2 pts Expense ratio 31.8% 31.7% (0.1 pts) Combined ratio 98.4% 103.6% 5.1 pts in USD millions, for the years ended December 31 Business operating profit (BOP) Combined ratio
Business operating profit increased by USD 1.6 billion to USD 2.4 billion, resulting mainly from an improvement in the net underwriting result of USD 1.4 billion across all regions. The non-technical result improved largely due to foreign exchange gains and the sale of own-use real estate in Germany. The net investment result benefited from higher hedge fund gains compared with 2015, mostly in North America.
Gross written premiums and policy fees decreased by USD 898 million to USD 33.1 billion, or 3 percent in U.S. dollar terms, but remained flat on a local currency basis. Excluding RCIS in the North America Commercial result, gross written premiums overall decreased by 4 percent on a local currency basis, with decreases across all regions except Latin America. The decreases were a result of the focus on profitability, the impact of soft market conditions and exiting business in South Africa and Morocco. Overall, rates rose by around 2 percent in 2016.
Global Corporate in USD millions, for the years ended December 31 2016 2015 Change
Gross written premiums and policy fees 7,681 8,670 (11%) Net underwriting result (209) (835) 75% Business operating profit 322 (345) nm Loss ratio 80.8% 91.2% 10.4 pts Expense ratio 23.4% 22.7% (0.7 pts) Combined ratio 104.2% 113.9% 9.7 pts
North America Commercial in USD millions, for the years ended December 31 2016 2015 Change
Business operating profit increased by USD 205 million to USD 973 million, or by 27 percent, due to the improved net underwriting result and a higher net investment result mainly driven by hedge-fund gains.
Business operating profit increased by USD 613 million to USD 1.0 billion, as a result of an improvement in the net underwriting result, supported by an improved non-technical result.
The net underwriting result improved by USD 595 million to USD 458 million, reflected in the positive development in the combined ratio of 5.9 percentage points to 95.4 percent. The loss ratio improved by 5.2 percentage points resulting from a lower current accident year loss ratio. The expense ratio improved by 0.7 percentage points, as a result of initiatives to reduce costs and the effect of positive non-recurring items in 2016.
International Markets in USD millions, for the years ended December 31 2016 2015 Change
The net underwriting result improved by USD 257 million to USD 145 million, reflected in the 7.9 percentage points improvement in the combined ratio to 95.4 percent. The loss ratio improved by 7.4 percentage points, mainly as a result of an improvement in the current accident year loss ratio, as well as higher levels of favorable development of loss reserves established in prior years compared with 2015. The expense ratio improved by 0.5 percentage points as a result of initiatives to reduce costs and the effect of positive non-recurring items in 2016.
Gross written premiums and policy fees 15,530 14,446 7% Net investment income on Group investments 3,244 3,320 (2%) Insurance benefits and losses, net of reinsurance (11,510) (8,612) (34%) Business operating profit 1,344 1,300 3%
Total reserves for life insurance contracts, net of reinsurance, and liabilities for investment contracts (net reserves) 3 209,118 207,542 1%
New business annual premium equivalent (APE)1 4,779 4,772 – New business margin, after tax 2 21.0% 21.6% (0.6 pts) New business value, after tax 3 866 912 (5%)
1 APE is shown gross of non-controlling interests. 2 New business margin is calculated using new business value as a percentage of APE based on figures net of non-controlling interests for both metrics. 3 New business value is calculated on embedded value principles net of non-controlling interests.
Impact of deferrals 274 376 (27%) Business operating profit 1,344 1,300 3%
1 Each line represents the Group’s interest after deducting non-controlling interests, amounting in total to USD 255 million in 2016 and USD 223 million in 2015 in business operating profit.
Investment margin improved by USD 60 million to USD 571 million, or 12 percent in U.S. dollar terms, and 18 percent on a local currency basis. The improvement largely occurred in EMEA and Latin America. In EMEA the increase arose mainly from lower policyholder crediting rates in Switzerland and in Germany, consistent with market conditions, and higher asset bases in Spain and Italy, where business has been growing. In Latin America, local currency improvements were driven by higher investment returns, mostly in Brazil and Mexico.
Insurance deposits increased by USD 227 million to USD 14.8 billion, or 2 percent in U.S. dollar terms and 8 percent on a local currency basis. On a local currency basis, increases occurred in EMEA driven by Corporate Life & Pensions products in the UK, partly offset in Ireland, where a small number of large contracts boosted volumes in 2015.
Gross written premiums and policy fees increased by USD 1.1 billion to USD 15.5 billion, or by 7 percent in U.S. dollar terms and 11 percent on a local currency basis. The increase on a local currency basis arose predominantly in EMEA and Latin America, from higher sales of individual savings products in Spain, individual protection products in Zurich Santander and a large corporate contract in Chile, with a partial offset due to lower sales of single premium products in Germany.
of which: Europe, Middle East & Africa (EMEA) 501 526 3,191 3,422 17.2% 16.3% 911 892
Farmers Management Services in USD millions, for the years ended December 31 2016 2015 Change
Business operating profit increased by USD 118 million to USD 1.5 billion driven by growth in gross earned premiums of the Farmers Exchanges and a one-time USD 86 million favorable impact as a result of a pension curtailment gain from changes to the Farmers pension plan, effective December 31, 2018.
Management fees and other related revenues of USD 2.9 billion increased USD 81 million, or 3 percent, due to growth in gross earned premiums of the Farmers Exchanges across most lines of business. Management and other related expenses of USD 1.5 billion grew 4 percent. Other net income of USD 112 million increased USD 89 million primarily due to the favorable impact of a pension curtailment gain from changes to the Farmers pension plan.
The managed gross earned premium margin was 7.0 percent compared with 7.1 percent for 2015.
The net underwriting result deteriorated by USD 24 million to a loss of USD 51 million reflected in the 2.2 percentage points deterioration in the combined ratio. The loss ratio increased by 1.2 percentage points as a result of higher catastrophe losses, mainly related to Texas storms. The expense ratio, based on ceded reinsurance commission rates payable to Farmers Exchanges, increased 0.9 percentage points due to the termination of the APD quota share reinsurance agreement which had a lower ceding commission rate.
in USD millions, for the years ended December 31 2016 2015 Change
Gross written premiums 19,714 19,077 3% Gross earned premiums 19,528 18,885 3%
Gross written premiums in the Farmers Exchanges increased by USD 637 million to USD 19.7 billion, or by 3 percent. Growth in most lines of business from continuing operations was partially offset by decreases in discontinued 21st Century operations.
Other Operating Businesses in USD millions, for the years ended December 31 2016 2015 Change
Non-Core Businesses in USD millions, for the years ended December 31 2016 2015 Change
Other run-off, which largely comprises U.S. life insurance and annuity portfolios, reported a business operating profit of USD 10 million, a decrease of USD 91 million. This deterioration resulted from a higher release of long-term reserves in 2015 compared with 2016, as a consequence of a buy-back program for a variable annuity product in the U.S.
Policy fees 2,407 2,508 Gross written premiums and policy fees 50,615 50,998
Net change in reserves for unearned premiums 10 (150) (296) Net earned premiums and policy fees 42,622 42,624 Farmers management fees and other related revenues 26 2,867 2,786 Net investment result on Group investments 6 7,045 7,462
Net investment income on Group investments 5,484 5,572 Net capital gains/(losses) and impairments on Group investments 1,561 1,891
Net income after taxes 3,478 2,047 attributable to non-controlling interests 268 205 attributable to shareholders 3,211 1,842 in USD
Basic earnings per share 19 21.51 12.36 Diluted earnings per share 19 21.36 12.33 in CHF
Basic earnings per share 19 21.18 11.89 Diluted earnings per share 19 21.04 11.86
Comprehensive income for the period 1,842 (1,512) (12) (3,034) (4,558) 9 629 639 (3,919) (2,078) (173) (2,251) Details of movements during the period
Change (before reclassification, tax and foreign currency translation effects and after allocation to policyholders) 17 23 (3,034) (2,994) 12 649 661 (2,333) Reclassification to income statement (before tax, foreign currency translation effects and allocation to policyholders) (1,777) (16) (1,793) – – – (1,793) Deferred income tax (before foreign currency translation effects) 397 (15) – 382 (2) (162) (164) 218 Foreign currency translation effects (149) (4) – (153) – 142 142 (11)
Cash and cash equivalents 7,197 8,159 Equity securities 15,908 18,873 Debt securities 140,181 137,730 Investment property 10,562 9,865 Mortgage loans 6,794 7,024 Other loans 9,146 9,569 Investments in associates and joint ventures 20 18
Investments for unit-linked contracts 125,907 126,728 Total investments 315,715 317,966 Reinsurers’ share of reserves for insurance contracts 8 18,347 17,774 Deposits made under assumed reinsurance contracts 1,764 1,708 Deferred policy acquisition costs 11 17,796 17,677 Deferred origination costs 11 426 506 Accrued investment income1 1,653 1,727 Receivables and other assets 15 16,434 14,930 Deferred tax assets 17 1,448 1,455 Assets held for sale 2 530 10 Property and equipment 13 953 1,140 Attorney-in-fact contracts 14 1,025 1,025
Other intangible assets 14 4,795 4,766 Total assets 382,679 381,972 1 Accrued investment income on unit-linked investments amounts to USD 91 million and USD 106 million as of December 31, 2016 and December 31, 2015, respectively. 2 As of December 31, 2016, includes USD 456 million of assets reclassified based on agreements signed to sell businesses in Taiwan and Middle East (see note 5).
Consolidated statements of cash flows in USD millions, for the years ended December 31 2016 2015
Net capital (gains)/losses on total investments and impairments (13,569) (6,261) Net change in derivatives (240) 200 Net change in money market investments (195) 1,415 Sales and maturities
in USD millions, for the years ended December 31 2016 2015
Other interest income received 4,876 5,150 Dividend income received 1,837 1,999 Other interest expense paid (861) (997) Income taxes paid (1,461) (1,400)
1 The movement for the year ended December 31, 2016, includes USD 42 million of cash and cash equivalents reclassified to assets held for sale, which has been recognized in net changes in other operational assets and liabilities (see note 5).
Cash and cash equivalents in USD millions, as of December 31 2016 2015
Share-based payment transactions – (124) – – – – 113 (11) – (11)
Change in ownership interests with no loss of control – – – – – – (12) (12) – (12) Total comprehensive income for the period, net of tax – – (1,512) (12) (3,034) 9 2,471 (2,078) (173) (2,251)
1 The number of common shares issued as of December 31, 2016 was 150,607,406 (December 31, 2015: 150,404,964, December 31, 2014: 149,636,836). 2 As approved by the Annual General Meeting on April 1, 2015, the dividend of CHF 17 per share was paid out of the capital contribution reserve. The difference of USD 1,022 million between the dividend at transaction day exchange rates amounting to USD 2,705 million and the dividend at historical exchange rates amounting to USD 1,683 million is reflected in the cumulative foreign currency translation adjustment.
3 The number of treasury shares deducted from equity as of December 31, 2016 amounted to 1,203,523 (December 31, 2015: 1,243,931, December 31, 2014: 1,292,220). 4 As approved by the Annual General Meeting on March 30, 2016, the dividend of CHF 17 per share was paid out of the capital contribution reserve on April 5, 2016.
Issuance of share capital1 – 47 – – – – – 47 – 47
The difference between the respective amounts of the dividend at transaction day exchange rates amounting to USD 2,643 million and at historical exchange rates are reflected in the cumulative foreign currency translation adjustment.
5 Certain investment and insurance contracts sold by the Group contain benefit features for which the amount and timing of declaration and payment are at the discretion of the Group. Where that discretion has not been exercised, the total amount of undeclared funds surplus is included in equity. Mandated allocations related to unrealized results and earnings are included in policyholder liabilities and, upon declaration, discretionary bonuses are allocated to policyholders. The balances of unallocated gains and retained earnings after charging discretionary bonuses to policyholder liabilities amounted to USD 3,217 million and USD 2,965 million as of December 31, 2016 and 2015, respectively.
Zurich Insurance Group Ltd, a Swiss corporation, is the holding company of the Group and its shares are listed on the SIX Swiss Exchange. Zurich Insurance Group Ltd was incorporated on April 26, 2000, in Zurich, Switzerland. It is recorded in the Commercial Register of the Canton of Zurich under its registered address at Mythenquai 2, 8002 Zurich.
Table 1.1 summarizes the principal exchange rates used for translation purposes. Net gains/(losses) on foreign currency transactions included in the consolidated income statements were USD 118 million and USD 245 million for the years ended December 31, 2016 and 2015, respectively. Foreign currency exchange forward and swap gains/(losses) included in these amounts were USD (131) million and USD (126) million for the years ended December 31, 2016 and 2015, respectively.
Amended Standards IAS 7 Disclosure Initiative January 1, 2017 IAS 12 Recognition of Deferred Tax Assets for Unrealised Losses January 1, 2017 IFRS 2 Classification and Measurement of Share-based Payment Transactions January 1, 2018 IFRS 4 Applying IFRS 9 with IFRS 4 January 1, 2018
In order to further evaluate the effects of adopting IFRS 17 in the consolidated financial statements, a joint IFRS 17 and IFRS 9 Group Implementation Program (Program) has been set up sponsored by Group Chief Financial Officer. A steering committee comprising senior management from Finance, Risk, Operations and Investment Management oversees the work performed by individual work streams, with a technical committee defining Group accounting policies and methodologies to be consistently applied throughout the Group and a transformation committee taking responsibility for systems implications and data flows. In 2017, the focus of the Program will be on preliminary impact analysis for significant legal entities as well as documentation of Group accounting policies.
IFRS 9 ‘Financial Instruments’ Upon implementation of IFRS 9, all equity securities and fund investments are expected to be measured at fair value through profit or loss. Similarly , a portion of debt instruments that are currently classified as available-for-sale will be classified as at fair value through profit or loss under IFRS 9 because the characteristics of the contractual cash flows from such instruments are not solely payments of principal and interest on the principal amount outstanding. We do not expect any significant impact on financial assets accounted for at amortized cost (such as mortgage and other loans) from the adoption of IFRS 9 classification requirements.
The Group is currently assessing the impact of the application of both IFRS 17 and IFRS 9. As at the date of the publication of these consolidated financial statements it is not practicable to quantify the potential effect on the Group consolidated financial statements at the time when these standards are adopted.
IFRS 16 ‘Leases’ The Group expects IFRS 16 to impact the accounting of contracts where it acts as a lessee (and intermediate lessor), especially on real estate rental contracts. It is not expected that recognition of a right-of-use asset with a corresponding lease liability will have a material impact on the total amount of assets or liabilities or on net income.
The Group also issues products containing embedded options that entitle the policyholder to switch all or part of the current and future invested funds into another product issued by the Group. Where this results in the reclassification of an investment product to a product that meets the definition of an insurance contract, the previously held reserve and the related deferred origination costs are also reclassified and are accounted for in accordance with the accounting policy to be applied to the new product on a prospective basis. As a consequence, no gain or loss is recognized as a result of the reclassification of a contract from investment to insurance.
Life insurance Premiums from traditional life insurance contracts, including participating contracts and annuity policies with life contingencies, are recognized as revenue when due from the policyholder. For single premium and limited pay contracts, premiums are recognized as revenue when due, with any excess profit deferred and recognized in income in a constant relationship to the insurance in-force or, for annuities, the amount of expected benefit payments.
Amounts collected as premiums from investment type insurance contracts such as universal life, unit-linked and unitized with-profits contracts are reported as deposits. Revenue from these contracts consists of policy fees for the cost of insurance, administration and surrenders during the period. Front-end fees charged to the customer at inception, particularly for single premium contracts, are deferred and recognized over the estimated life of the contracts on a straight-line basis. Regular fees charged to the customer periodically (monthly, quarterly or annually) either directly or by making a deduction from invested funds are billed in advance and recognized on a straight-line basis over the period in which the service is rendered. Fees charged at the end of the period are accrued over the service period as a receivable and are offset against the financial liability when charged to the customer.
Reinsurance The Group’s insurance subsidiaries cede risk in the normal course of business in order to limit the potential for losses arising from certain exposures. Reinsurance does not relieve the originating insurer of its liability. Certain Group insurance companies assume reinsurance business incidental to their normal business.
The majority of Group investments are accounted for at fair value through OCI (available-for-sale financial assets) and include debt and equity securities as well as fund investments. Such assets are carried at fair value, with changes in fair value recognized in OCI, until the securities are either sold or impaired. Interest income determined using the effective interest method and dividend income from financial assets at fair value through OCI is included in net investment income. The cumulative unrealized gains or losses recorded in OCI are net of cumulative deferred income taxes, certain related life policyholder liabilities and deferred acquisition costs. When available-for-sale financial assets are sold, impaired or otherwise disposed of, the cumulative gains or losses are reclassified from OCI to income as net capital gains/(losses) on investments and impairments.
Group investments at fair value through profit or loss include debt and equity securities backing certain life insurance contracts with participation features, and financial assets evaluated on a fair value basis. The designation of these assets at fair value through profit or loss eliminates or significantly reduces a measurement inconsistency that would otherwise arise from measuring assets or recognizing the gains and losses on these assets on a different basis to the liabilities.
Realized and unrealized gains and losses arising from changes in the fair value are recognized in income, within net capital gains/(losses) on investments and impairments, in the period in which they arise. Interest income determined using the effective interest method and dividend income from financial assets at fair value through profit or loss is included in net investment income.
Derivative financial instruments that qualify for hedge accounting Derivative financial instruments are used by the Group to economically hedge risks. In limited circumstances derivative financial instruments are designated as hedging instruments for accounting purposes in: kk Fair value hedges which are hedges of the exposure to changes in the fair value of a recognized asset or liability; kk Cash flow hedges, which are hedges of the exposure to variability in cash flows attributable to a particular risk either associated with a recognized asset or liability, or a highly probable forecast transaction that could affect profit or loss; or kk Net investment hedges, which are hedges of a net investment in a foreign operation.
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 is amortized over the expected life of the acquired contracts, following the same rules as for DAC. The carrying value of the PVFP asset is tested periodically for impairment as part of the liability adequacy test for insurance contracts.
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 on the actuarially determined cost for the period. Net interest and service costs are determined using the spot rate approach. Actuarial gains and losses are recognized, in full in the period in which they occur, in OCI. Past service costs, which result from plan amendments and curtailments, are recognized in income on the earlier of the date on which the plan amendment or curtailment occurs (which is the date from which the plan change is effective) and the date on which a constructive obligation arises. Settlement gains or losses are recognized in income when the settlement occurs.
kk For contracts that insure the risk of longevity, such as annuity contracts, an appropriate allowance is made for people living longer. Continuing improvements in medical care and social conditions could result in further improvements in longevity in excess of those allowed for in the estimates used to determine the liability for contracts where the Group is exposed to longevity risk.
See note 8 for further information on reserves for insurance contracts and note 11 for deferred policy acquisition costs. Also refer to the insurance risk section of the Risk review.
Goodwill and attorney-in-fact contracts (AIF) Goodwill is allocated to a cash generating unit (CGU) as outlined in note 3. Based on consideration of Group organizational changes, the Group has redefined the CGUs according to regions, separating Property and Casualty (P&C) and Life businesses (see note 27). The CGUs under the new structure which carry the majority of goodwill and AIF are presented in table 4.1.
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 typically do not exceed the expected inflation of the geographical areas in which 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 for the major CGUs the applied discount rates and the perpetual nominal growth rates beyond the projection period which are dependent on country specific growth rate and inflation expectations as of the date of valuation as well as the value of goodwill and AIF as of December 31, 2016. No impairment was identified.
Asia Pacific Life 163 7.5 2.3 1 Discount rates used in 2015 are no longer applicable due to the change in CGU definition (see note 4 of the consolidated financial statements 2015). 2 Perpetual growth rates used in 2015 are no longer applicable due to the change in CGU definition (see note 4 of the consolidated financial statements 2015).
MAA Takaful Berhad On June 30, 2016, the Group completed the acquisition of 100 percent of MAA Takaful Berhad, a family and general takaful operator incorporated in Malaysia, from MAA Group Berhad (MAA) and Solidarity Group Holding BSC (Closed), for a total purchase price of approximately USD 118 million of which an amount of approximately USD 30 million will be retained by the Group for three years. Based on the initial purchase accounting the net tangible assets acquired amounted to USD 27 million and identifiable intangible assets, net of related deferred tax, amounted to USD 30 million consisting of the present value of profits of acquired takaful contracts. Goodwill amounted to USD 62 million and mainly reflects the takaful business know-how and future growth opportunities.
Total acquisition costs 692 1 Includes USD 980 million of balances which will be settled net.
The seasonal nature of crop insurance results in the majority of gross written premiums being written in the first six months of each year, however, the premiums are then earned during the second six months of that year.
On November 3, 2016, the Group closed the sale of its insurance business in Morocco to Allianz Group. The contractually agreed sales price amounted to approximately USD 290 million and is subject to a purchase price adjustment. A pre-tax gain of USD 101 million has been recorded within net gain/(loss) on divestments of businesses.
Investments in associates and joint ventures 3 8 3 31 6 39 – –
Investment result, gross, for Group investments 5,726 5,827 1,561 1,891 7,287 7,718 (176) (224) Investment expenses for Group investments1 (241) (256) – – (241) (256) – – Investment result, net, for Group investments 5,484 5,572 1,561 1,891 7,045 7,462 (176) (224)
1 Rental operating expenses for investment property included in investment expenses for Group investments amounted to USD 88 million and USD 81 million for the years ended December 31, 2016 and 2015, respectively.
Details of Group investments by category as of December 31 2016 2015
Cash and cash equivalents 7,197 3.8 8,159 4.3 Equity securities: Fair value through profit or loss 3,359 1.8 3,519 1.8
Investments (including cash and cash equivalents) with a carrying value of USD 6,809 million and USD 6,492 million are held to meet local regulatory requirements as of December 31, 2016 and 2015, respectively.
Debt securities: Government and supra-national bonds 3,041 3,373 60,941 56,458 2,342 3,146 66,325 62,976
Mortgage and asset-backed securities 487 561 16,671 17,695 – – 17,158 18,256 Redeemable preferred stock – – – 6 – – – 6
4 The Group had the right to sell or repledge, in the absence of default by its counterparties, securities received as collateral with a fair value of USD 845 million and USD 99 million as of December 31, 2016 and 2015, respectively.
Fair value hedges: Cash flow hedges: Net investment hedges: 1 Includes USD 325 million notional principal amounts related to derivatives centrally cleared as of December 31, 2016.
Fair value hedges Designated fair value hedges consist of interest rate swaps used to protect the Group against changes in interest rate exposure and foreign currency exposure of debt issued by the Group.
Table 7.3 sets out gains and losses arising from fair value hedges: Table 7.3
Gains/(losses) on hedging instruments1 (12) (47) on hedged items attributable to the hedged risk 11 21 1 Excluding current interest income, which is recognized as an offset on the same line as the interest expense of the hedged debt.
Cash flow hedges Designated cash flow hedges, such as interest rate swaptions and forwards are used to protect the Group against variability of future cash flows due to changes in interest rates associated with expected future purchases of debt securities (during the years 2021 and 2026) required for certain life insurance policies. The effective portion of the gains and losses on these swaptions are initially recognized in OCI. Subsequently the gains or losses will be recycled to income within net investment income on Group investments over the period to December 31, 2036. The gains and losses relating to the ineffective portion of these hedges are recognized immediately in income within net capital gains/(losses) on investments and impairments.
The Group also uses interest rate swaps and cross currency swaps for cash flow hedging to protect against the exposure to variability of cash flows attributable to interest rate and currency risk. The hedging instrument is measured at fair value, with the effective portion of changes in its fair value recognized in OCI. The effective portion, related to spot rate changes in the fair value of the hedging instrument, is reclassified to 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.
As of December 31, 2016, there were no debt issuances designated as hedged items in a cash flow hedge relationship (see note 18).
A nil amount for the years ended December 31, 2016 and 2015, respectively, was recognized in net capital gains/(losses) and impairments due to hedge ineffectiveness.
The net change of gains/(losses) deferred in OCI were USD (58) million and USD (47) million before tax for the years ended December 31, 2016 and 2015, respectively as a result of a hedge relationship through foreign exchange forwards and swaps.
The Group has also designated certain debt issuances as hedging instruments on a non-derivative net investment hedge relationship. The notional amount of these financial instruments was USD 4.2 billion and 3.2 billion for the years ended December 31, 2016 and 2015, respectively. The net gains/(losses) deferred in OCI were USD (16) million and USD 4 million before tax for the years ended December 31, 2016 and 2015, respectively.
No ineffectiveness of net investment hedges was recognized in net capital gains/(losses) and impairments for the years ended December 31, 2016 and 2015.
Related amounts not offset (142) (109) 141 110 Cash collateral (received)/pledged (720) (919) 79 55 Non-cash collateral (received)/pledged (22) (25) 22 62
Reserves for losses and loss adjustment expenses1 61,155 62,971 (9,777) (9,231) 51,378 53,739
Policyholder contract deposits and other funds 22,785 22,076 (1,958) (1,956) 20,827 20,121 Reserves for unit-linked contracts 65,530 64,393 – – 65,530 64,393 Total reserves for insurance contracts 3 238,326 237,622 (18,411) (17,885) 219,915 219,737 1 Includes on a net basis USD 2.5 billion of discounted reserves for losses and loss adjustment expenses as of December 31, 2016 and 2015, respectively. 2 The Group’s life operations in the UK entered into a reinsurance agreement to transfer the risk associated with a significant annuities portfolio with effect from April 1, 2015, supplemented with three further transfers of risk relating to additional annuity policies with effect from October 1, 2015, April 1, 2016 and October 1, 2016, respectively. The gain resulting from these transactions is being recognized on a linear basis over the lifetime of the underlying agreement, which is assumed to end on June 30, 2017.
For the year ended December 31, 2015, the decrease of USD 964 million in net reserves for losses and loss adjustment expenses was mostly driven by the effect of foreign currency translation of USD 2,349 million. Excluding this effect, reserves for losses and loss adjustment expenses increased by USD 1,385 million. Underlying unfavorable reserve development arising from reserves established in prior years amounted to USD 149 million during the year ended December 31, 2015, and mainly related to the following: kk In North America, adverse prior year development of USD 264 million was driven by auto liability and certain lines of business; kk Favorable prior year development of USD 121 million driven by Swiss motor third party liability; kk Adverse prior year development of USD 110 million in Non-Core Businesses from latent diseases and other discontinued portfolios.
Development of insurance losses, net in USD millions, as of December 31 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Cumulative paid as of December 31: Seven years later (35,188) (36,480) (37,324) Eight years later (36,717) (37,798) Nine years later (37,793)
Cumulative incurred as of December 31: Seven years later (3,215) (2,973) (2,610) Eight years later (3,271) (2,866) Nine years later (3,183)
Net reserves re-estimated as of December 31: Seven years later 51,497 50,014 53,334 Eight years later 51,441 50,121 Nine years later 51,529
Table 8.3 presents changes in the historical reserves for losses and loss adjustment expenses, net of reinsurance, that the Group established in 2007 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, 2016. It is the difference between the initial net reserve estimate and the last entry of the diagonal in the net reserves re-estimated portion of the table. Conditions and trends that have affected the development of reserves for losses and loss adjustment expenses in the past may or may not necessarily occur in the future, and accordingly, conclusions about future results cannot be derived from the information presented in table 8.3.
Fee income and other expenses (3,694) (3,652) 151 180 (3,543) (3,472) Interest and bonuses credited to policyholders 2,177 2,239 (117) (115) 2,060 2,125
1 The Group’s life operations in the UK entered into a reinsurance agreement to transfer the risk associated with a significant annuities portfolio with effect from April 1, 2015, supplemented with three further transfers of risk relating to additional annuity policies with effect from October 1, 2015, April 1, 2016 and October 1, 2016, respectively. The gain resulting from these transactions is being recognized on a linear basis over the lifetime of the underlying agreement, which is assumed to end on June 30, 2017.
2 The 2016 net movement of USD (32) million relates to acquisitions and divestments (see note 5). The 2015 net movement relates to USD (425) million transferred to Banco Santander S.A., which was previously managed on a fiduciary and ring-fenced basis, and USD (381) million reclassified to policyholder contract deposits and other funds, partially offset by USD 90 million reclassified from other liabilities and USD 48 million reclassified from reserves for unit-linked insurance contracts and liabilities for investment contracts.
Effect of changes in assumptions for future life policyholder benefits in USD millions, for the years ended December 31 2016 2015
Policyholder contract deposits and other funds gross in USD millions, as of 12/31/16 12/31/15
Universal life and other contracts 12,126 12,120 Policyholder dividends 10,658 9,957
Tables 8.9a and 8.9b provide an analysis of the expected maturity profile of reserves for insurance contracts, net of reinsurance, based on expected cash flows without considering the surrender values as of December 31, 2016 and 2015. Reserves for unit-linked insurance contracts amounting to USD 65.5 billion and USD 64.4 billion as of December 31, 2016 and 2015, respectively, are not included, as policyholders can generally surrender their contracts at any time, at which point the underlying unit-linked assets would be liquidated. Risks from the liquidation of unit-linked assets are largely borne by the policyholders of unit-linked contracts.
Expected maturity profile for reserves for insurance contracts, net of reinsurance – prior period in USD millions, as of December 31, 2015 Reserves for losses and loss adjustment expenses
Liabilities for investment contracts in USD millions, as of December 31 2016 2015
Unit-linked investment contracts 60,233 62,245 Investment contracts (amortized cost) 506 754 Investment contracts with DPF 8,374 7,629
Fee income and other expenses (430) (465) Interest and bonuses credited to policyholders 8,149 3,277 Acquisitions/(divestments) and transfers1 (2,545) (29) Increase/(decrease) recorded in other comprehensive income (12) 152 Foreign currency translation effects (8,775) (5,115) As of December 31 69,113 70,627 1 The 2016 movement relates to the sale of unit-linked Private Banking Solutions business in Luxembourg. The 2015 movement relates to USD (29) million reclassified to future life policyholder benefits.
Policyholder dividends and participation in profits in USD millions, for the years ended December 31 2016 2015
Change in policyholder contract deposits and other funds 856 1,439 Change in reserves for unit-linked products 5,776 3,241 Change in liabilities for investment contracts – unit-linked 7,930 3,092 Change in liabilities for investment contracts – other 230 191 Change in unit-linked liabilities related to UK capital gains tax (273) (101) Total policyholder dividends and participation in profits 14,519 7,863
Change in reserves for unearned premiums in USD millions, for the years ended December 31 Gross Ceded Net
Change in reserves for unearned premiums 319 648 (168) (352) 150 296
Development of deferred policy acquisition costs in USD millions General Insurance Global Life Other segments1 Total
As of December 31, 2016 and 2015, deferred policy acquisition costs relating to non-controlling interests were USD 407 million and USD 326 million, respectively.
Administrative and other operating expenses 7,478 8,659 Other underwriting and policy acquisition costs1 2,291 2,406 Claims handling expenses 2 1,343 1,425 Other investment expenses 3 134 145 of which: Personnel and other related costs 5,445 5,715 Amortization and impairments of intangible assets 4 416 1,004 Depreciation and impairments of property and equipment 174 198 Building and infrastructure costs 553 582 Brand and marketing expenses 401 439 Life recurring commission 398 400 Asset and other non-income taxes 82 81 IT expenses 1,439 1,391 Restructuring costs 309 457 Outsourcing and professional services 876 1,078 Foreign currency translation (118) (245)
USD 206 million for the year ended December 31, 2015 (see note 14).
Buildings held for own use and equipment are carried at cost less accumulated depreciation and any accumulated impairment loss. These assets are depreciated usually on a straight-line basis to income over the following estimated useful lives: kk Buildings 25 to 50 years; kk Furniture and fixtures 5 to 10 years; and kk Computer equipment 3 to 6 years.
Gross carrying value as of January 1, 2016 217 737 366 365 759 2,444
Net carrying value as of December 31, 2016 162 251 154 67 319 953
Gross carrying value as of January 1, 2016 1,025 1,667 2,501 3,715 4,672 173 13,753 Less: accumulated amortization/
Net carrying value as of December 31, 2016 1,025 1,795 504 2,713 1,450 128 7,615 Plus: accumulated amortization/
For the year ended December 31, 2016, divestments and transfers include a USD 7 million reclassification to assets held for sale and remeasurements of goodwill and distribution agreements for Zurich Insurance Middle East of USD 33 million and USD 3 million, respectively (see note 5).
Intangible assets by segment – current period in USD millions, as of December 31, 2016
Other Operating Businesses – – – – 99 – 99 Net carrying value as of December 31, 2016 1,025 1,795 504 2,713 1,450 128 7,615
Net carrying value as of January 1, 2015 1,025 1,661 556 3,577 1,543 53 8,415
Net carrying value as of December 31, 2015 1,025 1,289 466 2,752 1,505 43 7,080 Plus: accumulated amortization/
Additions to goodwill of USD 8 million relate to the acquisition of Tennyson Insurance Limited, which is a general insurance company based in the UK.
Other liabilities in USD millions, as of December 31 2016 2015
Other financial liabilities Group derivative liabilities 345 362 Unit-linked derivative liabilities 9 7 Amounts due to policyholders 694 730 Amounts due to insurance companies, agents and intermediaries 1,141 1,022 Amounts due to reinsurers 1,827 1,285 Liabilities for cash collateral received for securities lending 126 93 Amounts due to investment brokers 1,155 1,185 Deposits from banking activities 22 141 Collateralized bank financing for structured lease vehicles 541 736 Liabilities for defined benefit plans1 4,317 3,248 Other liabilities for employee benefit plans 130 127 Other liabilities 3,667 3,662 Other non-financial liabilities Current tax payables 567 629 Restructuring provisions 334 386 Premium prepayments and other advances 866 864 Other liabilities 698 572 Total other liabilities 16,437 15,051 1 See note 20.
Table 16.2 shows the maturity schedule of other financial liabilities as of December 31, 2016 and 2015.
As of January 1 386 125 Provisions made during the period 257 467 Increase of provisions set up in prior years 90 11 Provisions used during the period (355) (181) Provisions reversed during the period (33) (20) Foreign currency translation effects (10) (15) As of December 31 334 386
During the year ended December 31, 2015, restructuring programs were initiated with estimated costs of USD 467 million impacting mainly Europe, for both General Insurance and Global Life. In addition, net adjustments were made of USD (9) million to provisions for restructuring programs initiated in the years prior to 2015.
Income tax expense – current/deferred split in USD millions, for the years ended December 31 2016 2015
Actual income tax expense attributable to shareholders 30.7% 1,539 36.6% 1,183 plus: income tax expense/(benefit) attributable to policyholders 304 110 Actual income tax expense 34.6% 1,843 38.7% 1,294
Taxes paid by certain of the Group’s life insurance businesses are based on the investment result less allowable expenses. To the extent these taxes exceed the amount that would have been payable in relation to the shareholders’ share of taxable profits, it is normal practice for certain of the Group’s businesses to recover this portion from policyholders. While the relevant company has the contractual right to charge policyholders for the taxes attributable to their share of the investment result less expenses, the obligation to pay the tax authority rests with the company and therefore, the full amount of tax including the portion attributable to policyholders is accounted for as income tax. Income tax expense therefore includes an element attributable to policyholders. In addition, deferred tax on unrealized gains related to certain investment contracts with DPF is included as income tax expense recognized in OCI and an accrual for future policy fees to recover the tax charge is included in policy fee revenue.
Tax loss carryforwards 667 – 617 – Gross deferred tax assets/(liabilities) before valuation allowance 3,512 (1,712) 3,352 (1,562) Valuation allowance (352) – (334) – Gross deferred tax assets/(liabilities) after valuation allowance 3,160 (1,712) 3,017 (1,562) Deferred tax assets 1,448 1,455 Gross deferred tax Deferred acquisition and origination costs 27 (2,189) 42 (2,282) Depreciable and amortizable assets 113 (1,964) 129 (1,980) Life policyholders’ benefits and deposits1 1,350 (793) 1,286 (840) Unrealized (gains)/losses on available-for-sale investments and cash flow hedges 165 (1,038) 210 (1,029) Accruals and deferred income 124 (92) 133 (119) Reserves for losses and loss adjustment expenses 56 (85) 87 (87) Reserves for unearned premiums 31 (40) 33 (90) Deferred front-end fees 471 – 468 – Pensions and other employee benefits 616 (319) 594 (269)
The Group’s deferred tax assets and liabilities are recorded by its tax paying entities throughout the world, which may include several legal entities within each tax jurisdiction. Legal entities are grouped as a single taxpayer only when permitted by local legislation and when deemed appropriate. The first part of table 17.3 includes single taxpayers with a net deferred tax asset position and the second part includes single taxpayers with a net deferred tax liability position.
As of January 1 (3,042) (3,458) Net change recognized in the income statement (355) (24) Net change recognized in equity 208 217 Net changes due to acquisitions/(divestments) (12) (1) Foreign currency translation effects 87 223 As of December 31 (3,114) (3,042)
Tax loss carryforwards and tax credits in USD millions, as of December 31 2016 2015
Management assesses the recoverability of the deferred tax asset carrying values based on future years taxable income projections and considers that the carrying values of the deferred tax assets as of December 31, 2016, are recoverable.
Senior and subordinated debt in USD millions, as of December 31 2016 2015
Zurich Holding Comp. of America Inc Euro Commercial Paper Notes, due in less than 3 months 399 400 Zurich Santander Insurance America S.L. 7.5% EUR 61 million loan, due December 2035 44 74 Other Various debt instruments 24 29 Senior debt 4,162 4,471 Subordinated debt
Zurich Finance (UK) plc 6.625% GBP 450 million perpetual notes, first callable October 20221,4 551 658
ZFS Finance (USA) Trust V Series V 6.5% USD 501 million Trust Preferred Securities, due May 2067, first callable May 2017 501 501
Other Various debt instruments 16 41 Subordinated debt 7,050 5,614 Total senior and subordinated debt 11,212 10,086 1 Issued under the Group’s Euro Medium Term Note Programme (EMTN Programme).
Maturity schedule of outstanding debt in USD millions, as of December 31 2016 2015
Debt maturities reflect original contractual dates taking early redemption options into account. For call/redemption dates, see table 18.1. The total notional amount of debt due in each period is not materially different from the total carrying value disclosed in table 18.2. Undiscounted cash flows include interest and principal cash flows on debt outstanding as of December 31, 2016 and 2015. 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, 2016 and 2015. The aggregated cash flows are translated into U.S. dollars at end-of-period rates.
The Group also has access to three other revolving credit facilities totaling USD 425 million, which will expire in 2019 at the latest.
No borrowings were outstanding under any of these facilities as of December 31, 2016 or 2015.
Employee participation During 2016 and 2015, 202,442 shares and 768,128 shares, respectively, were issued to employees from contingent share capital. The remaining contingent share capital, which can be issued to employees of Zurich Insurance Group Ltd and its subsidiaries, amounted to CHF 68,785 and CHF 89,030 or 687,853 and 890,295 fully paid registered shares as of December 31, 2016 and 2015, respectively, with a nominal value of CHF 0.10 each. Pre-emptive rights of the shareholders, as well as the right for advance subscription, are excluded. The issuance of shares or respective option rights to employees is subject to one or more regulations to be issued by the Board and takes into account performance, functions, levels of responsibility and criteria of profitability. Shares or option rights may be issued to employees at a price lower than that quoted on the stock exchange.
Treasury shares number of shares, as of December 31 2016 2015
Basic earnings per share 3,211 149,285,218 21.51 21.18 Effect of potentially dilutive shares related to share-based compensation plans 1,012,384 (0.14) (0.14) Diluted earnings per share 3,211 150,297,601 21.36 21.04
The Group had 52,473 and 54,335 employees (full-time equivalents) as of December 31, 2016 and 2015, respectively. Personnel and other related costs incurred for the years ended December 31, 2016 and 2015, were USD 5,631 million and USD 5,986 million, including wages and salaries of USD 4,562 million and USD 4,790 million, respectively.
Governance of the Group’s pension and post-employment benefit plans is the responsibility of the Group Pensions Committee. This committee is responsible for developing, reviewing and advising on the Group governance framework for matters relating to pension and benefit plans, including the relevant policies and processes. The committee provides oversight and guidance over the Group’s principal pension and post-retirement benefit plans for benefit design, funding, investment purposes and accounting. This includes, but is not limited to: kk Oversight of the impact of the Group’s principal defined benefit pension and post-retirement benefit plans in terms of cash, expense, and balance sheet accounting impact and capital implications kk Development and maintenance of policies on funding, asset allocation and assumption setting
The Group Pensions Committee provides a point of focus and co-ordination on the topic of pensions and benefits at Group level for the supervision and exercise of company powers and obligations in relation to pension and benefit plans.
a) Defined benefit pension 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.
Actuarial valuations are completed regularly and if the plan becomes underfunded under local regulations, options for dealing with this include the Group paying additional contributions into the plan and/or reducing future benefits. At present, the plan is sufficiently funded, meaning that no additional contributions into the plans are expected to be required in the next year. The investment strategy of the Swiss plan is constrained by Swiss pension law including regulations relating to diversification of plan assets. Under IAS 19, volatility arises in the Swiss pension plan net liability because the fair value of the plan assets is not directly correlated to movements in the value of the plan’s defined benefit obligation in the short-term.
Net post-employment benefit (expense)/income (722) 442 – (280) Remeasurement effects included in other comprehensive income: Return on plan assets excluding interest income – 1,712 – 1,712 Experience gains/(losses) (44) – – (44) Actuarial gains/(losses) arising from changes in demographic assumptions 19 – – 19 Actuarial gains/(losses) arising from changes in financial assumptions (3,307) – – (3,307) Change in asset ceiling – – 7 7
For the classification of pension assets the Group follows the same principles as outlined in note 23 (Fair value measurement). Assets meeting the criteria of Level 1 are generally considered quoted in active markets, while assets meeting the criteria of Level 2 or Level 3 are generally considered other assets.
1 Following plan amendments in Farmers a one-off curtailment gain of USD 96 million has been reflected as a reduction in expenses.
Key financial assumptions used for major plans as of December 31 2016 2015
Mortality tables and life expectancies for major plans – prior period in years, as of December 31, 2015 Life expectancy at age 65 for a male currently
Duration of the defined benefit obligation (in years) 16.0 21.7 13.2 14.7 16.4 21.0 13.6 14.7
Discount rate +50 bps 1,897 1,742 Discount rate –50 bps (2,190) (1,997) Salary increase rate +50 bps (117) (155) Salary decrease rate –50 bps 109 148 Price inflation increase rate +50 bps (1,167) (1,322) Price inflation decrease rate –50 bps 1,034 1,161 Cash balance interest credit rate +50 bps (131) (121) Cash balance interest credit rate –50 bps 86 84 Mortality 10% increase in life expectancy (1,881) (1,527) Mortality 10% decrease in life expectancy 1,815 1,557 1 A negative number indicates an increase and a positive number indicates a decrease in the defined benefit obligation.