Zurich Insurance Group (Zurich) 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, where it was founded in 1872.
3 Total revenues excluding net investment result on unit-linked investments. 4 Cash remittances for full year 2018.
Read more on our financial performance from our Group Chief Financial Officer on pages 152 – 153.
Our industry is in the midst of a profound transformation. Led by what customers need and expect, enabled by digital technologies, we are well positioned to adapt to these changes that will define our business not only today, but also tomorrow.” Mario Greco Group Chief Executive Officer
Our 2018 reporting suite The Annual Report provides comprehensive information on our business activities in 2018. The Annual Review offers similar information in a shorter, more visual format. Both are available online and in print.
USD 3.8 bn Total amount of impact investments (USD billions) 7 > 760,000 Number of customers interviewed through Zurich’s NPS program 9 2.1 tons CO2e emissions per employee (tons per FTE) 8
Read more about Property & Casualty on pages 156 – 157.
Embracing a customer-led transformation In a world undergoing such fundamental change, it is critical that organizations consciously choose their path, make clear commitments to how they will travel along that path, and then regularly examine their surroundings to ensure progress is being made. At Zurich, the path we have chosen is not to resist the digital revolution or to cling to old models. Instead, we are embracing a customer-led technology-enabled transformation that will redefine how we create value for our customers, shareholders, employees and society more broadly.
Positioned to succeed After two years of reshaping our business, Zurich is well-positioned to face this transformation from a position of strength. Our business portfolio reflects a better mix of risks, while reducing volatility and expanding our customer base.
We exhibit more underwriting discipline and manage our cost base more efficiently. We are meeting or even exceeding our 2017 to 2019 financial targets, including profitability, capital strength and cash remittances. And we are delivering one of the top total shareholder returns in the insurance sector.
Together with these accomplishments we are also achieving profitable growth through targeted acquisitions that build on our geographic footprint and differentiate ourselves from peers. In Latin America these actions position us as the top composite insurer in Argentina, the biggest life insurer in Chile and the fourth-largest insurer in the region. In the Asia Pacific region, we are acquiring 80 percent of Adira, making us the largest foreign P&C insurer in Indonesia. And we essentially globalized the Cover-More travel assistance business – after acquiring it only two years ago – through a series of bolt-on acquisitions in Latin America and Europe that now make Zurich the second-largest player globally in this fast-growing market.
Customers will define the path ahead As the balance shifts in customers’ favor, a critical part of the journey involves constantly measuring and improving customer satisfaction, with the aim being that our customers become our greatest promoters.
February 2018 Zurich to acquire Latin American operations of QBE to become leading insurer in Argentina.
Michel M. Liès as new Chairman and approve dividend of CHF 18 per share.
July 2018 Zurich extends its award-winning Flood Resilience Alliance program for another five years.
September 2018 Zurich to acquire 80 percent of Adira Insurance in Indonesia.
November 2018 Zurich strengthens its efforts on cyber security by becoming a partner of the World Economic Forum’s Global Centre for Cybersecurity.
To accelerate this customer journey we are also creating global capabilities to support our local businesses. For example, Zurich Insurance Mobile Services is creating digital platforms that can be used in any market, while Zurich Customer Active Management provides analytical support to better interpret customer needs, preferences and expectations. Both represent areas where skills and scale can create impact, and both are already creating value across the Group.
We are also listening more to our employees, using the ‘employee’ NPS, or ‘ENPS’ measure, to better understand employees’ needs. And we are increasingly being recognized for our efforts to promote diversity across our organization, while providing opportunities for all our people to work to the best of their ability and develop their careers.
Having an impact on the world around us The impact we are making goes beyond customers, shareholders and employees, though. We are also redoubling our efforts to share our expertise, spirit and energy with communities across the world. This commitment starts in Switzerland, where we provide about 4,600 people with fulfilling and rewarding careers, sponsor life-enriching programs like Vita Parcours, the music festival Lucerne Summer Festival and the Europa Institut, and educate children on computer coding and financial literacy.
Breaking down bureaucracy Simplifying our business is one of our strategy goals. To help us achieve it, in 2018 Zurich introduced ‘Make the Difference,’ a Group-wide initiative that challenges employees to come up with ways to make us more efficient, simpler and faster at driving necessary change.
By encouraging an entrepreneurial mindset, it lets those who know our business best – our people – work without barriers to challenge bureaucracy and break down silos.
Another example of a tangible success introduced through Make the Difference is a global platform to share ideas and solutions through the ‘Zurich Store.’
Our employees are helping our retail and commercial customers to understand and protect themselves from risk.
USD 22 billion in claims. To ensure that we provide a positive experience to customers who do business with us, we are systematically listening to customers through our Net
Promoter Score (NPS) system, not only as part of our claims process but throughout all customer touchpoints.
Social and relationship We maintain strong social ties and relationships with customers, intermediaries, regulators, policymakers and others, locally and globally.
We create value for communities and society including by mitigating risk and sharing knowledge and expertise.
Read more about how we create value for communities and society on pages 18–19.
Read more about how we create value for our investors on pages 20–21.
Zurich was founded in 1872 in response to the forces of industrialization that revolutionized the global economy. We are well positioned to help our customers face the risks of today's transformative forces.
Zurich’s approach We have expanded our businesses in potential growth markets by acquiring businesses in Latin America, Australia and Indonesia, expanding our Cover-More travel assistance platform globally and entering new bank distribution agreements. And we have launched a number of innovative solutions for retail and commercial customers.
Enhanced interconnectivity, ubiquitous mobile devices and new data capabilities are increasing customers’ expectations for convenience, flexibility and tailored solutions.
Zurich’s approach We have set up a separate company, Zurich Insurance Mobile Solutions to quickly develop and deploy new digital platforms on a commercial scale. We also established Zurich Customer Active Management to mine data and gather insights. Alongside in-house expertise we work with external tech companies and gain knowledge through targeted acquisitions.
Interconnectivity has ushered in a new era of risk, with cyber attacks seen as the top risk in the world’s largest economies.
Zurich’s approach We have launched an updated global cyber insurance policy and introduced services to help customers mitigate cyber risk. We opened a new Cyber Fusion Center in the U.S. and increased support for public and private efforts, including through the World Economic Forum, to combat cyber crime.
Digital customer experience in other consumerdriven industries raises the bar on what customers expect from insurers.
Zurich’s approach We have broadened our systematic approach to measure customer satisfaction and act on feedback through the ‘net promoter score’ (NPS) system, now used in over 20 countries representing over 90 percent of our business. Based on feedback we get across the entire ‘customer journey,’ we identify and implement initiatives and assess their impact. We have also included NPS metrics as measure to determine leaders’ incentive plans.
Sovereign and corporate bonds are a major element of insurers’ investment portfolios. Interest rates, at or near historic lows in major markets continue to pose a challenge to returns.
Zurich’s approach We aim to achieve superior returns relative to Zurich's insurance obligations. A systematic and disciplined investment approach is key. In 2018, our disciplined approach to risk-taking and managing assets relative to liabilities remained unchanged. We continued to employ a stable risk allocation well within the limits set for investment risk. Our sources of investment risk and return remained well-balanced. We also further increased allocations to less-liquid assets to capture liquidity premium.
We deliver on our promises and stand up for what is right.
Net savings USD 1.5bn by 2019 compared with 2015 baseline 1 The Farmers Exchanges are owned by their policyholders. Farmers Group, Inc., a wholly owned subsidiary of Zurich Insurance Group, provides certain non-claims administrative, management, and ancillary services to the Farmers Exchanges as attorney-in-fact and receives fees for its services.
We added distribution agreements giving us access to nearly 30 million new potential customers.
Simplify We continued to streamline our business by consolidating data centers and decommissioning hundreds of IT and business applications.
We launched a global program open to all employees, ‘Make the Difference,’ to simplify and improve how we work, receiving over 400 suggestions in the first year.
Innovate We set up a separate company, Zurich Insurance Mobile Solutions, to quickly develop and deploy digital platforms on a commercial scale.
In 2018 we also introduced a Zurich International Programs proposition specifically for mediumsized companies in the UK. Zurich International Programs is a tailored, full-service offering that allows multinational companies to manage property and casualty risks, making it easier to enter and thrive in new markets around the world.
Improving our service for retail customers We serve individuals and small businesses on a local basis, developing solutions around customers’ needs. For example, in Italy, we are developing ‘smart home’ solutions to allow people to monitor their homes via mobile devices, adding convenience and aiming to make homes safer. In Latin America, where we have an agreement with Via Varejo, the country’s largest retailer, we are offering new products and extended warranties. We have introduced an insurance ‘on demand’ product targeting younger customers in Spain, and in Indonesia, a travel insurance offering embedded with flight ticket booking with that country’s largest e-retailer.
Acquisitions to strengthen our customer proposition Supporting our strategy, we continued to grow our business in promising markets. In Latin America we completed the acquisition of QBE’s businesses, making us the fourth-largest insurer in that region and largest insurer in Argentina, as well as increasing our scale in Brazil, Colombia, Mexico and Ecuador. We also acquired the individual, group life, and long-term savings operations of EuroAmerica in Chile. In Australia, we acquired ANZ’s life and consumer credit business, OnePath Life, making us Australia’s largest retail life insurer. In Indonesia we acquired 80 percent of Adira Insurance to become the largest foreign property and casualty insurer in that market.
Our business is undergoing a revolution. Customers’ expectations are changing. Their opinions matter more than ever. They expect more from us, too. We are keen to ensure we meet the demands of all our customers. This is our most urgent priority.
A long-term approach For over 30 years, Felix Pfister has been a Zurich customer. He owns a gardening business, where he takes special pride in being close to his customers. Relationships need to grow. At Zurich, we are helping businesses large and small to protect against risk. So businesses can best serve their customers today and in the future.
“ The most important thing you can do is listen to your customers.” Felix Pfister Owner of a gardening business in Zurich
In 2018, our Property & Casualty and Life businesses handled 6.6 million claims on behalf of our customers and paid out more than USD 22 billion to our customers or on their behalf. Each claim represents an opportunity to interact with customers and learn from them, as just one among many touchpoints where we can collect valuable feedback. We are using the net promoter score (NPS) to systematically understand where we can improve across the customer journey.
View the film online Visit www.zurich.com/en/knowledge/articles/2018/12/ real-customers-real-lives-swiss-gardeners-who-grow-happiness 1 Farmers Group, Inc. provides certain non-claims administrative, management, and ancillary services to the Farmers Exchanges as its attorney-in-fact. The Farmers Exchanges are owned by their Exchanges offer home and car insurance, commercial insurance and financial services throughout the U.S.
This is an exciting time for Zurich. We are transforming our culture, guided by our purpose and values, with a focus on being a truly customer-led organization. Recognized as a leading global employer, we can attract, keep and motivate talent, helping us to remain successful even in a time of radical change in our industry.
Making a real difference to drive change To encourage a more flexible and agile mindset, in 2018 Zurich launched the ‘Make the Difference’ initiative to give employees a chance to challenge orthodoxy and propose changes to processes, policies or procedures, no matter how entrenched these might be. In 2018, employees across the Group submitted over 400 ideas to make us a better company. This approach is a good example of how we aim to cut through red tape to put our people above processes.
We are deepening our talent management discipline and introducing an integrated performance and development-cycle approach.
To ensure a customer focus, we have incorporated customer satisfaction measures into our senior leaders’ incentives.
We are recognized by independent organizations as a leading place to work and as a leader in promoting diversity and inclusion.
Strengthening customer focus, listening to our people We understand that we need to keep our customers in the center of all we do, 24/7. To achieve this, we are putting greater focus on how we interact with customers, including by increasing our emphasis on using the ‘net promoter score’ (NPS) to measure customer satisfaction, gain customer feedback and ‘close-the-loop’ through follow-up conversations with customers. In 2018, we collected over 760,000 such responses from customers, including through many calls to customers by senior management. And, we now include NPS metrics as part of the performance incentives for our senior leaders.
One way we can attract and keep the best talent is by listening to our people. We measure employee satisfaction through the ‘employee net promoter score’ (ENPS). Similar to how we listen to our customers with NPS, ENPS helps us build happier, more capable teams, which are equipped to enhance our customers’ experience. We are listening and acting on what we learn from ENPS feedback. And while the quest for full employee engagement is never complete, our ENPS results in 2018 reassure us that we are on the right track.
The advantages of diversity Our geographic footprint creates four major bases – in North America, Europe, the Middle East and Africa (EMEA), Latin America and Asia Pacific. With a great many different nationalities represented in our workforce, we reflect the diversity of our customers, benefit from local expertise, cultural awareness and different perspectives. As a further element of diversity, an increasing number of our employees are ‘millennials’ in their 20s to mid-30s. Our efforts to allow everyone in our workforce to work to his or her full capability is reflected in our certification by EDGE, the leading global assessment methodology and business certification standard for gender equality. Our efforts to promote workplace diversity were also recognized by Stonewall, Europe’s largest lesbian, gay, bi and trans (LGBT) charity, which included us as the first insurer in its Top Global Employers list in 2018.
Our industry is at an inflection point. Our employees are one of our greatest strengths. They are driving a transformation aimed at making us a truly customer-led insurer. We want to make sure we have the right people in place to meet the challenges of the future.
“ Our future employees might be at these events.” Mélina Carnal Zurich recruiting consultant who attends ‘hackathons’ as one way to meet prospective new employees
1 Turnover figures only consider regular and inpatriate employees. 2 Technical functions include claims, underwriting and risk engineering. 3 New KPI in 2018. Group-wide feedback channels include organizational health surveys, employee net promoter scores and any other group-wide feedback channels. Specifically in 2018 this KPI refers to the average participation rate in two employee net promoter score surveys.
Our many local community programs include those to promote mental well-being in Ireland and Australia, improve children’s nutrition and fight childhood obesity in Malaysia, and work to empower young people, especially in places with high youth unemployment.
We continued to make progress on our goals to reduce CO2 emissions, further build our impact investment portfolio, and benefit 5 million people annually.
Given the complexity and scale of challenges facing our world, simply being a ‘responsible’ company is no longer enough. Toward that end, working together with the Z Zurich Foundation, funded by Zurich, we have announced our ambition to become one of the most sustainable businesses in the world.
Our flood resilience alliance has directly benefited over people across our programs in countries
Focusing on mental health in communities Depression is the leading cause of ill health and disability worldwide, according to the World Health Organisation. That is why we focus on physical and mental health and support many local programs around the world, including in Ireland and Australia, where we have worked on programs to promote mental health. Another project we support is an initiative we launched with One Goal/World Vision Malaysia to fight child obesity and malnutrition, while raising awareness among children and parents on the importance of a healthy diet. In addition to offering football demonstrations and providing free healthy drinks and nutritional information, Zurich Malaysia has recruited 67 new community coaches for the program and 312 support volunteers.
Investing responsibly We continued to progress on our impact investment goals: to build a portfolio of impact investments of up to USD 5 billion, while avoiding 5 million tons of CO2 equivalent emissions, aiming to benefit 5 million people annually. By investing in additional green, social and sustainability bonds and committing to two additional impact private equity funds, our impact investment portfolio grew from USD 2.8 billion in 2017 to USD 3.8 billion in 2018. To broaden the scope of our impact investment portfolio, in 2018 for the first time we included investments in private debt to fund impact infrastructure projects, such as hospitals, schools or wind/solar energy farms in the portfolio. In 2018 we also developed a way to systematically aggregate and report the CO2 emissions we avoided and the number of people who benefited.
We want to be a leader in sustainability. We subscribe to that through our targeted impact investments, which include green, social and sustainability bonds, commitments to private equity funds, and impact infrastructure private debt.
“ If I can help people express their feelings without fear of judgment, then I’ve done the job.” Hannah Tyrrell Member of Ireland’s Rugby World Cup Sevens squad 2018, and ambassador for Tackle Your Feelings
Zurich is a leading global insurer, serving individuals, small businesses, and mid-sized and large companies, as well as multinational corporations. Zurich has significant market share in North America and Europe, a leading position in Latin America and a growing presence in Asia Pacific. With about 54,000 employees, Zurich provides a wide range of property and casualty, and life insurance products and services in more than 210 countries and territories. It also provides administration, management, and ancillary services to the Farmers Exchanges,1 a leading personal lines insurer in the U.S.
On track to achieve financial targets During the Investor Day in November 2018 the Group provided a number of examples of how the Group is delivering against the Group's stated financial targets.
For details, please refer to the financial review section of the Annual Report, and the Investor Day 2018 presentation.
Corporate governance and sustainability The balanced business profile of Zurich is also supported by best practice corporate governance. Its Board is independent and remarkably diverse in terms of gender and skills. Its remuneration principles align pay to performance and are an important element of the Group's risk management framework.
Zurich pro-actively addresses environmental, social and governance (ESG) factors as part of day-to-day business activity. This includes responsible investment, corporate responsibility in business transactions, minimizing its carbon footprint and helping the communities in which it operates. Zurich’s strong ESG track record is illustrated by a ‘AA’ rating from MSCI and our Bronze Class distinction in the Dow Jones Sustainability Indices (DJSI).
Consistent growth with scope to enhance returns through capital re-deployment 1 The Farmers Exchanges are owned by their policyholders. Farmers Group, Inc., a wholly owned subsidiary of Zurich Insurance Group, provides certain non-claims administrative, management, and ancillary services to the Farmers Exchanges as attorney-in-fact and receives fees for its services.
2 Reflects midpoint estimates as of December 31, 2018 with an error margin of +/– 5 pts.
Dialogue with investors Zurich engages regularly with its shareholders and proxy advisers to understand investors’ perspectives, exchange views about the Group’s strategy, financial performance, corporate governance and compensation and other matters of importance to the Group or its shareholders. Investor Relations is responsible for overseeing this communication.
Market capitalization (CHF millions) 44,360 44,670 1 Proposed total dividend, subject to approval by shareholders at the Annual General Meeting; expected payment date as from April 9, 2019.
Investor Day November 14, 2019 Note: all dates subject to change
Zurich has a level 1 American Depositary Receipt (ZURVY) program, which is traded over-the-counter on OTCQX. For further information on shareholders or capital structure, see the corporate governance report.
Number of customers interviewed through Zurich’s NPS program 1 763,000 573,000 33%
We are well underway to turn Zurich into a truly customer-led insurer. Our global net promoter system (NPS) program provides us with insights on how to retain and attract new customers. Ultimately the aim is to increase the share of promoters we have among our customers. NPS is serving us not only as a source of additional customer data and insights but also as a ‘leading KPI’ to better understand our customers’ needs and to form the basis for measuring how well we are delivering superior customer experiences throughout our customer journeys.
Significantly expanding the use of the net promoter system methodology, we are covering 90 percent of our business (in revenue terms) for a holistic reflection of how customers experience working together with us. We obtain responses across the whole customer journey from the quote, purchasing and onboarding process, to claims and renewals including multiple interactions for servicing reasons. We always close the loop with our detractors, a process in which all of our executives are involved as well. Most importantly, we identify customer-driven initiatives that we rigorously implement and measure the impact on customer advocacy altogether.
Notes: Bolivia, and the Farmers Exchanges, which are owned by their policyholders, are not in scope of any above key performance indicators (KPIs). 1 Turnover figures only consider regular and inpatriate employees. 2 Technical functions include Claims, Underwriting and Risk Engineering. 3 New KPI in 2018 with a larger scope than prior years: Group-wide feedback channels include organization health surveys, employee net promoter scores (ENPS) and any other Group-wide feedback channels.
Specifically in 2018 this KPI refers to the average participation rate in the two occurrences of the employee net promoter score survey. 4 ENPS is a new KPI introduced in 2018. It is calculated as the average of the two surveys carried out during the year, measuring employee loyalty through the likelihood to recommend the company as a place to work.
External asset managers who are signatories to PRI (%) 1 74% 71% 3 pts
Total amount of impact investments (USD millions) 3 3,790 2,830 34%
Investment portfolio (USD millions) 4 195,472 207,261 (6%) 1 The United-Nations supported Principles for Responsible Investment (PRI). 2 including assets managed by Zurich. 3 Impact investments in 2018 consisted of: green bonds (USD 2.68 billion), social and sustainability bonds (USD 425 million), investments committed to private equity funds (USD 145 million, thereof 45 percent drawn down)
The balance between ‘total tax collected’ and ‘tax borne by shareholders’ varies between regions and countries due to Zurich’s local footprint but also due to different characteristics of the various tax jurisdictions where Zurich operates.
Top 10 countries with the highest total tax contribution in 2017
AR ifc and 8 to 15; SR 10 to 12 102-3 Location of headquarters AR ifc 102-4 Location of operations 102-5 Ownership and legal form AR 176 and 285 102-6 Markets served 102-7 Scale of the organization AR ifc 102-8 Information on employees and other workers
102-14 Statement from senior decision-maker AR 2 to 6, 30 to 31, 78 to 79, 118 to 119, 152 to 153 and 164 to 165; SR 5 102-15 Key impacts, risks, and opportunities AR 10 to 11 and 118 to 119; CDP; SR 6 to 8 102-16 Values, principles, standards, and norms of behavior AR 6 to 7 and 12 to 13 102-17 Mechanisms for advice and concerns about ethics
AR 76 102-18 Governance structure AR 33 to 35; SR 9; CDP
Number Disclosure name Reference and page number 102-25 Conflicts of interest AR 49 and 72 to 76 102-26 Role of highest governance body in setting purpose, values, and strategy
AR 56 102-30 Effectiveness of risk management processes AR 147 102-31 Review of economic, environmental, and social topics 102-32 Highest governance body’s role in sustainability reporting
102-41 Collective bargaining agreements 102-42 Identifying and selecting stakeholders SR 6 102-43 Approach to stakeholder engagement AR 8 to 9; SR 6 102-44 Key topics and concerns raised SR 6 and 7 102-45 Entities included in the consolidated financial statements
AR 176 to 180 and 285 102-47 List of material topics SR 6 to 8 102-48 Restatements of information AR 177 102-49 Changes in reporting AR 178 to 180 102-50 Reporting period AR 176 to 177 and 285 102-51 Date of most recent report SR 1; CDP
Economic performance 201-1 Direct economic value generated and distributed AR 167 to 175 201-2 Financial implications and other risks and opportunities due to climate change
Indirect economic impacts 203-1 Infrastructure investments and services supported SR 15 and 21 to 23; CDP
Supplier environmental assessment 308-1 New suppliers that were screened using environmental criteria CDP
Diversity and equal opportunity 405-1 Diversity of governance bodies and employees AR 45
Key: AR: Annual Report 2018 SR: Sustainability highlights 2018* CDP: CDP submission 2018 : Link to Zurich Insurance Group website * The Sustainability highlights 2018 report includes the United Nations Global Compact communication on progress and our progress in implementing the UN Environment Programme Finance Initiative Principles for Sustainable Insurance.
To the Executive Committee of Zurich Insurance Group AG, Zurich We have been engaged to perform assurance procedures to provide limited assurance on the non-financial reporting of Zurich Insurance Group and its consolidated subsidiaries (‘ZIG‘) for the year ended 31 December 2018.
Scope and Subject matter Our limited assurance engagement focused on selected non-financial indicators published in the Annual Report 2018 of ZIG: a) The 2018 “Social indicators” on page 23, the 2018 “Responsible investment” indicators on page 24 and the 2017 “Environmental performance” indicators on page 24 (“the non-financial indicators”); and b) The management and reporting processes with respect to the selected non-financial indicators as well as the control environment in relation to the aggregation of these non-financial indicators.
Inherent limitations The accuracy and completeness of non-financial indicators are subject to inherent limitations given their nature and methods for determining, calculating and estimating such data. Our assurance report should therefore be read in connection with ZIG’s internal guidelines, definitions and procedures on non-financial reporting. Further, the greenhouse gas quantification is subject to inherent uncertainty because of incomplete scientific knowledge used to determine emissions factors and the values needed to combine emissions of different gases.
We planned and performed our procedures in accordance with the International Standard on Assurance Engagements (ISAE) 3000 (revised) ‘Assurance engagements other than audits or reviews of historical financial information’ and with ISAE 3410 ‘Assurance Engagements on Greenhouse Gas Statements’. These standards require that we plan and perform the assurance engagement to obtain limited assurance on the identified non-financial indicators.
A limited assurance engagement is substantially less in scope than a reasonable assurance engagement in relation to both the risk assessment procedures, including an understanding of internal control, and the procedures performed in response to the assessed risks. Consequently, the nature, timing and extent of procedures for gathering sufficient appropriate evidence are deliberately limited relative to a reasonable assurance engagement and therefore less assurance is obtained with a limited assurance engagement than for a reasonable assurance engagement.
Dear Shareholder Good corporate decision-making is key to our organization. We continued to strengthen our governance structure in 2018 with a strong focus on sustainable value creation.
This gives our Board and executive management the necessary insights to address a full range of business needs and contribute the necessary expertise.
Changes to our Board and Executive Committee At the Annual General Meeting (AGM) on April 4, 2018, I was elected to join the Board of Directors as Chairman. Susan Bies, Tom de Swaan and Fred Kindle did not stand for re-election.
The Board proposes to shareholders that they re-elect all other current members of the Board.
On October 5, 2018, Amanda Blanc took up the role of CEO EMEA (Europe, Middle East & Africa) and became a member of the Executive Committee ('ExCo'). Gary Shaughnessy, former CEO EMEA, decided to step down from his role as of the same date. To ensure a smooth transition, Gary Shaughnessy retired from the ExCo as of December 31, 2018.
Zurich stakeholders It is important for Zurich to engage in dialogue with all our stakeholders. Thank you for your continued trust, support and commitment.
We are supporting a workforce in transition: Zurich helps workers protect incomes and fund longer retirements through our life, savings and income protection products.
We improve career skills and digital skills in our workforce and communities, helping people to face transition.
We continue working to ensure Zurich is a diverse, fair and inclusive place to work.
The Zurich Insurance Group, consisting of Zurich Insurance Group Ltd and its subsidiaries (the ‘Group’ or ‘Zurich’), is committed to effective corporate governance for the benefit of its shareholders, customers, employees and other stakeholders based on the principles of fairness, transparency and accountability. Structures, rules and processes are designed to enable proper conduct of business by defining the powers and responsibilities of its corporate bodies and employees.
The principles of corporate governance and the standards described above are incorporated and reflected in a number of corporate documents, in particular the Articles of Association, the Organizational Rules and the Charter of the Committees of the Board of Directors of Zurich Insurance Group Ltd (www.zurich.com/en/about-us/corporate-governance/ corporate-documents). The Governance, Nominations and Sustainability Committee of the Board of Directors of Zurich Insurance Group Ltd regularly reviews the Group’s corporate governance against best practice standards and ensures compliance with corporate governance requirements.
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 81 to 113), which supplements this corporate governance report and also includes the information as required by the Circular 2010/1 on remuneration schemes (minimum standards for remuneration schemes of financial institutions) issued by FINMA on October 21, 2009 as amended on June 1, 2012, December 3, 2015 and September 22, 2016, as well as the Ordinance Against Excessive Compensation (Ordinance AEC) of November 20, 2013.
The Group pursues a customer-centric strategy and is managed by regions, and in addition, Farmers in the U.S. and Commercial Insurance globally. The ExCo is headed by the Group CEO. Six members of the ExCo represent the Group’s businesses: the CEOs of the regions (CEO North America, CEO Europe, Middle East & Africa (EMEA), CEO Latin America, CEO Asia Pacific), the CEO of Farmers and the CEO of Commercial Insurance. Four members of the ExCo represent Group functions: the Group Chief Financial Officer (Group CFO), the Group Chief Investment Officer (Group CIO), the Group Chief Risk Officer (Group CRO) and the Group Chief Operating Officer (Group COO). The Group COO has responsibility for operations and technology as well as underwriting, claims, and pricing, creating a unified sense of purpose and responsibility for technical excellence, efficiency and business transformation across all parts of the business. The Group CFO is responsible for Group Reinsurance. For further information on the ExCo see pages 60 to 70.
The Group’s operating structure reflects the businesses operated by the Group and how these are strategically managed to offer different products and services to specific customer groups. The Group’s reportable segments for 2018 comprised: 33 Regions (EMEA, North America, LatAm and APAC): segments through which the Group provides a variety of property and casualty and life products to retail and commercial customers as well as reinsurance propositions. Commercial Insurance brings together corporate and commercial insurance expertise worldwide under a single umbrella.
33 Farmers provides, through Farmers Group, Inc. (FGI) and its subsidiaries, non-claims related, administrative, management, and ancillary services to the Farmers Exchanges as attorney-in-fact. FGI receives fee income for the provision of services to the Farmers Exchanges, which are owned by their policyholders and managed by Farmers Group, Inc. a wholly owned subsidiary of the Group. Farmers also includes all reinsurance assumed from the Farmers Exchanges by the Group. Farmers Exchanges are prominent writers of personal and small commercial lines of business in the U.S.
33 Non-Core Businesses include insurance and reinsurance 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 are mainly situated in the U.S., Bermuda and the UK.
As of December 31, 2018, Zurich Insurance Group Ltd was not aware of any person or institution, other than BlackRock, Inc., New York (> 5 percent) and The Capital Group Companies, Inc., Los Angeles (> 3 percent), which, directly or indirectly, had an interest as a beneficial owner in shares, option rights and/or conversion rights relating to shares of Zurich Insurance Group Ltd exceeding the relevant thresholds prescribed by law.
Registered shareholders by type as of December 31, 2018 Registered shareholders in %
Registered shareholders by geography as of December 31, 2018 Registered shareholders in %
Cross-shareholdings Zurich Insurance Group Ltd has no interest in any other company exceeding 5 percent of the voting rights of that other company, where such other company has an interest in Zurich Insurance Group Ltd exceeding 5 percent of the voting rights in Zurich Insurance Group Ltd.
Share capital As of December 31, 2018, the ordinary share capital of Zurich Insurance Group Ltd amounted to CHF 15,134,802.70 divided into 151,348,027 fully paid registered shares with a nominal value of CHF 0.10 each. The Board will propose to the shareholders at the Annual General Meeting on April 3, 2019 a dividend of CHF 19 per share. It is planned that the dividend will be paid out of the available earnings with a deduction of 35 percent Swiss withholding tax.
Authorized and contingent share capital as of December 31, 2018 At the Annual General Meeting of April 4, 2018, shareholders approved to extend the validity period of the authorized share capital and the combined dilution limitations for authorized and contingent share capital as specified in Article 5bis and 5ter of the Articles of Association.
Up to and including April 4, 2020, the Board of Zurich Insurance Group Ltd is authorized to increase the authorized share capital (Art. 5bis) by an amount not exceeding CHF 4,500,000 by issuing up to 45,000,000 fully paid registered shares with a nominal value of CHF 0.10 each. This authorized share capital corresponds to about 30 percent of the total registered shares issued as of December 31, 2018. Share issuances out of authorized share capital where the shareholders’ subscription rights are restricted or excluded are limited to 15,000,000 shares (i.e., less than 10 percent of the total registered shares issued as of December 31, 2018).
The contingent share capital of Zurich Insurance Group Ltd (Art. 5ter 1a) may be increased by an amount not exceeding CHF 3,000,000 by issuing of up to 30,000,000 fully paid registered shares with a nominal value of CHF 0.10 each by the voluntary or mandatory exercise of conversion and/or option rights, which are granted in connection with the issuance of loans, bonds, similar debt instruments, equity-linked instruments or other financial market instruments (collectively, the ‘financial instruments’) by Zurich Insurance Group Ltd or one of its Group companies, or by mandatory conversion of financial instruments issued by Zurich Insurance Group Ltd or one of its Group companies, that allow for contingent mandatory conversion into shares of Zurich Insurance Group Ltd, or by exercising option rights which are granted to the shareholders. This contingent share capital corresponds to about 20 percent of the total registered shares issued as of December 31, 2018.
Up to and including April 4, 2020, the total number of new shares which could be issued from (i) authorized share capital under Art. 5bis where the subscription rights are restricted or excluded and (ii) contingent share capital in connection with financial instruments under Art. 5ter 1a where the advance subscription rights are restricted or excluded is limited to 30,000,000 shares (i.e., less than 20 percent of the total registered shares issued as of December 31, 2018).
On April 11, 2018, the Board of Directors launched a public share buy-back program of 1,740,000 of Zurich Insurance Group Ltd’s own shares for cancellation purposes, which was completed on May 18, 2018. The purchase value of the repurchased own shares corresponded to CHF 548,167,352. For further information, see the audited consolidated financial statements note 19 on pages 225 to 227.
Shares and participation certificates Zurich Insurance Group Ltd’s shares are registered shares with a nominal value of CHF 0.10 each. The shares are fully paid in. Pursuant to article 14 of the Articles of Association, each share carries one vote at shareholders’ meetings, entitles all shareholders to dividend payments (excluding treasury shares) and the registered holder to exercise all other membership rights in respect of that share.
Convertible bonds and options Zurich Insurance Group Ltd had no public convertibles or options outstanding as of December 31, 2018. For information on employee share plans, see the audited consolidated financial statements, note 21 on pages 236 to 237.
Nationality: Luxembourg Committee membership: Governance, Nominations and Sustainability Committee (Chairman), Remuneration Committee
Nationality: British Committee membership: Audit Committee (Chairman), Governance, Nominations and Sustainability Committee, Risk and Investment Committee
The composition as of December 31, 2018 in terms of length of tenure, gender, background, experience, knowledge and skills, as well as nationality, was as follows and average length of tenure was 3.5 years: Board by length of tenure %, as of December 31, 2018
External appointments Mr. Liès is a member of the board of the Institute of International Finance (IIF), advisory board member of the Beirat Zukunft Finanzplatz, trustees board member of Avenir Suisse and of The Swiss Institute of International Studies. He is also a member of the European Financial Services Round Table.
Educational background Mr. Liès holds a master’s degree in mathematics from the Swiss Federal Institute of Technology in Zurich (ETH).
Skills and experience Christoph Franz started his professional career in 1990 at Deutsche Lufthansa AG. From 1994 until 2003 he held different executive functions at Deutsche Bahn AG, including as member of the executive board and CEO of the passenger transport division. In 2004 he became CEO of Swiss International Air Lines Ltd, and in 2009 was promoted to the role of deputy Chairman of the executive board of Deutsche Lufthansa AG and CEO Passenger Airlines. From 2011 to 2014, Mr. Franz was Chairman of the executive board and CEO of Deutsche Lufthansa AG. He became a member of the boards of Zurich Insurance Group Ltd and Zurich Insurance Company Ltd in April 2014. He was elected Vice-Chairman in April 2018.
External appointments Ms. Amble is a member of the board of Sirius XM Satellite Radio, where she chairs the audit committee. In addition, she is a member of the board and the audit committee at Booz Allen Hamilton. In January 2015, Ms. Amble was appointed to the Public Company Accounting Oversight Board’s Standing Advisory Group, which advises on the development of auditing and professional practice standards. Since October 2016, Ms. Amble has been an independent adviser to the Control and Risk Committee of the Executive Committee of the U.S. affiliate of Société Générale S.A., a French multinational banking and financial services company. She is also involved in developing women in business, including as chair emeritus and co-founder of W.O.M.E.N in America, LLC and through her various speaking engagements. Ms. Amble also participates in forums and speaks on corporate governance.
Educational background Ms. Amble received a Bachelor of Science in accounting from The Pennsylvania State University, and later became a certified public accountant (currently inactive).
Skills and experience Catherine Bessant is chief operations and technology officer at Bank of America and a member of the Bank of America’s executive management team. Since joining Bank of America in 1982 as a corporate banker, she has held numerous senior leadership positions within that company: president of Global Product Solutions and Global Treasury Services; chief marketing officer; president of Consumer Real Estate and Community Development Banking; national Small Business Segment executive; and market president of Bank of America, Florida. Prior to being appointed to her current position, Ms. Bessant served as president of Global Corporate Banking. Ms. Bessant has led Bank of America’s Global Technology and Operations since 2010. In that role she is responsible for end-to-end technology and operating services across the company, overseeing nearly 95,000 employees and contractors in more than 35 countries. She became a member of the Board of Zurich Insurance Group Ltd and Zurich Insurance Company Ltd in March 2017.
External appointments Ms. Bessant is on the advisory board of the Ross School of Business at the University of Michigan. She previously served 16 years on the board of directors of Florida Blue, formerly Blue Cross Blue Shield of Florida, including serving as lead independent director.
External appointments Ms. Carnwath has been a senior advisor of Evercore Partners since 2011. She has been a member of the board of PACCAR Inc. since 2005 and since September 2013 a member of the advisory council of the St. George’s Society of New York. Since May 2014 she has been a member of the supervisory board of BASF SE and Chairman of the Audit Committee of BASF SE. In May 2018 she was appointed as independent non-executive director and member of the Audit Committee of BP plc.
Skills and experience Mr. Hayman began his career as a claims representative in the property and casualty department of Travelers Companies in the U.S. in 1983, where he later held several positions. In 1998 he joined AIG as regional vice president, personal lines at AIU Far East in Japan. Beginning in 2003, he held various leadership positions within AIG, including as Chairman of AIU Insurance Company in Japan and president and CEO of AIU Far East Holdings, Japan and Korea. From 2009 to 2011, Mr. Hayman served as senior vice president and chief administrative officer, and from 2011 to 2013 as executive vice president and CEO, Global Consumer Insurance, at AIG. In 2013 he served as president of international insurance operations at Starr Companies. He then became an independent consultant and advisor. He has been a member of the boards of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd since March 2016.
Committee membership Risk and Investment Committee (Chairman), Governance, Nominations and Sustainability Committee
External appointments Ms. Mächler has been a member of the board of directors of Cembra Money Bank AG since April 2015. In April 2018, she was elected to the board of directors of GAM Holding Ltd. She also chairs the advisory board of the International Center for Insurance Regulation at the Goethe University Frankfurt am Main and serves on the boards of the Stiftung für schweizerische Rechtspflege and of the Europa Institut at the University of Zurich.
External appointments In September 2017 he was appointed non-executive Chairman of the board of Aggregate Asset Management. Since January 2016 he has also been an independent director of the board of Wilmar International Limited, Singapore. In addition, he has served on boards and councils of several institutions in Singapore, Europe and North America, and is currently a member of Yale’s President’s Council on International Activities (PCIA), the World Economic Forum’s Global Agenda Council on Geo-economics and the Singapore Social Science Research Council.
External appointments Mr. Nish is a non-executive director of HSBC Holdings plc and of Vodafone Group plc. His former appointments include non-executive directorships at UK Green Investment Bank plc, HDFC Life (India), Northern Foods plc, Thus plc, the Royal Scottish National Orchestra and London Stock Exchange Group plc.
The Governance, Nominations and Sustainability Committee reviews the Board members’ independent status annually and reports its findings to the Board for final determination. Board members are also subject to rules and regulations to avoid conflicts of interest and prevent any misuse of insider information.
Size of Board and tenure The Articles of Association require in art. 21 that the Board shall consist of not less than seven and not more than thirteen members. According to the Group’s Organizational Rules (art. 4.4), in general, the maximum tenure of Board members may not exceed 12 years and no individual of 72 years of age or older shall be nominated or stay in office as a Director, although exceptions may be made under special circumstances ( corporate-governance/corporate-documents).
The Board proposes to shareholders that they re-elect all other current members of the Board at the AGM on April 3, 2019, and that they elect Jasmin Staiblin, Michael Halbherr and Barry Stowe as new members of the Board.
The Board proposes to shareholders that they elect or re-elect as follows: 33 as members: Michel M. Liès, Joan Amble, Catherine Bessant, Alison Carnwath, Christoph Franz, Jeffrey Hayman, Monica Mächler, Kishore Mahbubani, Jasmin Staiblin, Michael Halbherr and Barry Stowe 33 as Chairman: Michel M. Liès 33 as members of the Remuneration Committee: Catherine Bessant, Christoph Franz, Michel M. Liès, Kishore Mahbubani and Jasmin Staiblin 33 as independent voting rights representative: Mr. lic. iur. Andreas G. Keller, attorney at law
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 members.
The Board is required to meet at least six times each year. During 2018 it held 12 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. Five meetings lasted four or more hours during the course of a day and seven meetings lasted less than three hours on average. In addition, the Board approved one circular resolution.
Board responsibilities The Board is responsible for the ultimate management of Zurich Insurance Group Ltd and of the Group as a whole, as well as for the supervision of management. In particular, it is responsible for taking actions in the following areas: 33 Group strategy: The Board regularly reviews and discusses, in particular, the Group’s business portfolio including its target market, acquisitions, divestitures, customer and intermediaries strategy and its human resources strategy.
33 Finance: The Board approves the financial and operating plan annually, establishes guidelines for capital allocation and financial planning. Further, the Board reviews and approves the Annual Report and the half year financial reporting of the Group, as well as the Group's updates for the first three months and first nine months of the year. Above certain thresholds, the Board approves major lending and borrowing transactions.
33 Business Development: Above certain thresholds, the Board regularly discusses and approves acquisitions and disposals of businesses and assets, investments, new businesses, mergers, joint ventures, co-operations and restructuring of business units or books of businesses.
Activities 2018: During 2018, the following topics were discussed in particular: 33 succession of Board members 33 Board committee composition and succession 33 ExCo succession 33 developments affecting corporate governance, including changes to Swiss and international laws and regulations 33 sustainability strategy and related initiatives 33 biannual updates on Zurich’s sustainability efforts and, at its most recent meeting, discussed Zurich’s new sustainable business approach, including climate change as a focus area thereof
Key tasks and responsibilities: In general, the Remuneration Committee: 33 regularly evaluates the Group’s remuneration architecture 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 81 to 113)
33 reviews and proposes to the Board annually the terms of remuneration of the members of the Board 33 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, including the annual review of performance objectives and performance against these objectives, before submitting them to the Board for approval 33 liaises with the Group CEO on other important matters related to employment, salary and benefits 33 reviews and proposes to the Board the total variable remuneration pool, reviews the performance related to short-term and long-term incentive plans (STIP and LTIP), and also makes a qualitative assessment of the performance 33 reviews and makes proposals to the Board for submission to the AGM on the approval of the Board’s and ExCo’s remuneration 33 discusses the regulatory environment and risk management aspects regarding remuneration, and prepares the remuneration report annually in accordance with applicable laws and regulations
Activities 2018: During 2018, the following topics were discussed in particular: 33 performance of the Group, the countries and the ExCo, as well as the approval of the STIP award level and the LTIP vesting level for the period ending December 31, 2017 33 approval of the total variable remuneration pool for 2017 33 the regulatory environment regarding remuneration, as well as external developments and the implications for Zurich 33 the Ordinance AEC, including the maximum amounts of total remuneration for the Board and the ExCo for the shareholder votes at the AGM on April 4, 2018, and subsequently the results of the votes 33 in the annual joint meeting with the Risk and Investment Committee, risk management aspects of the Group’s remuneration architecture, as well as key activities with respect to identified key risk taker (KRT) positions, e.g., risk-based assessment of KRTs 33 the remuneration report and the Board of Directors report on the approval of the remuneration for the Board of Directors and the ExCo 33 Zurich’s remuneration rules and the Committee Charter were reviewed and approved by the Board of Directors 33 the annual Corporate Governance Roadshow 33 compensation of the Board and the ExCo, including share ownership in line with guidelines 33 activities of the Group Pensions Committee 33 review of the performance and incentive architecture for 2019
The Remuneration Committee meets at least twice per year. In 2018 it met five times.
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, the committee comprises Alison Carnwath (Chairman), Catherine Bessant, Monica Mächler and David Nish, all of whom meet the relevant requirements for independence and qualification.
The Charter for the Committees of the Board of Directors of Zurich Insurance Group Ltd (Committees Charter) requires that the Audit Committee, as a whole, should have (i) an understanding of IFRS and financial statements, (ii) the ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves, (iii) experience in preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to those of Zurich Insurance Group Ltd and the Group, or experience in actively supervising one or more persons engaged in these activities, (iv) an understanding of internal controls and procedures for financial reporting, and (v) an understanding of audit committee functions.
33 Group Audit work plans, Group Audit findings and management implementation of remedial actions 33 the work of the external auditors, the terms of their engagement and the external auditor’s findings on key judgments and estimates in financial statements 33 the annual Group Compliance Plan, against which it monitored progress during the year, and compliance issues and trends, such as evolving regulatory expectations 33 the tender process for the rotation of the external auditor
The Audit Committee meets at least four times per year. In 2018 it met eight times.
To facilitate an ongoing exchange of information between the Risk and Investment Committee and the Audit Committee, the Chairman 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.
Key tasks and responsibilities: In general, the Risk and Investment Committee: 33 supports the Board to ensure sound risk and investment management for the Group 33 oversees the Group’s risk portfolio, in particular the Group’s risk tolerance, including agreed limits that the Board regards as acceptable for Zurich, the aggregation of agreed limits across the Group, the measurement of adherence to agreed risk limits and the Group’s risk tolerance in relation to anticipated capital levels 33 further oversees the Group’s enterprise-wide risk governance framework, including risk management and control, risk policies and their implementation and the risk strategy and monitoring operational risks, including in particular IT and cyber risks 33 reviews the methodologies for risk identification 33 oversees the impact of various risk types on economic and regulatory capital 33 reviews, with business management and the Group risk management function, the Group’s general policies and procedures and satisfies itself that effective systems of risk management are established and maintained 33 receives periodic reports from the Group risk management function and assesses whether significant issues of a risk management and control nature are being appropriately addressed by management in a timely manner 33 reviews transactions above the pre-defined threshold 33 receives updates on the Group’s annual strategic asset allocation, market risk consumption relative to allocated market risk capital and limit and major market risk drivers, accounting investment result, economic investment return relative to liabilities, as well as updates on the performance of asset managers 33 assesses the independence and objectivity of the risk management function and reviews the activities, plans, organization and the quality of the risk management and investment management functions 33 oversees Zurich’s overall risk management framework and investment process
For further information on risk governance, see the risk review on pages 121 to 149
The Group has adopted and implemented a coordinated, formal and consistent approach to risk management and control. Information concerning the Group’s risk management and internal control processes is included in the risk review starting on page 121. The internal audit function, the external auditors and the compliance function also assist the Board in exercising its controlling and supervisory duties. Information on these functions’ major areas of activity is set out on pages 73 to 76.
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 Group’s management and the performance. The ExCo serves the Group CEO as the core management team in matters of Group-wide strategic, financial and business-policy relevance, including consolidated performance, capital allocation and mergers and acquisitions.
The ExCo is chaired by the Group CEO. As of December 31, 2018, to reflect both lines of business and geography, members of the ExCo included 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. The Group CFO, the Group CIO, the Group COO, the Group CRO and Gary Shaughnessy as former CEO EMEA were also members of the ExCo as of December 31, 2018.
Changes to the ExCo On October 5, 2018, Amanda Blanc was appointed CEO EMEA and became a member of the ExCo. Gary Shaughnessy, former CEO EMEA, decided to step down from his role as of the same date. To ensure a smooth transition, Gary Shaughnessy retired from the ExCo as of December 31, 2018.
Management committees Group Balance Sheet Committee (GBSC) Members: Group CFO (Chairman), Group CEO, Group CRO, Group CIO. The Group General Counsel attends the meetings 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 financial position of the Group as a whole. The committee issues recommendations to the Group CEO. Core topics are: 33 capital management on capital allocations and lending and borrowing decisions 33 balance sheet planning on liquidity, solvency, investment and asset/liability management strategies and associated capital allocation, including changes to investment strategy 33 business development matters on corporate transactions with third parties, internal restructuring, investments, including real estate, and entry into new types of business and markets 33 material Group reinsurance strategy and reinsurance programs 33 other topics and matters that may have a material impact on the balance sheet of the Group as determined by the Chairman
The GRC reviews and recommends on topics such as: 33 the overall Group risk appetite, risk tolerance and risk limits, including exceptions to limits over specified thresholds 33 requests to enter new lines of insurance business or types of insurance coverage that would have a significant impact on the risk profile of the Group 33 changes to the Group Policy Framework and the Zurich Risk Policy (ZRP)
Panels To enhance its understanding and assessment of the challenges and risks Zurich may face, the Group seeks external expertise and perspectives. As of December 31, 2018, the Group had access to one panel of leading academics and experts from business and industry which provides feedback and insights. Panels are not corporate bodies of the Group and have no decision-making powers. They provide expertise and advice to senior management or certain functions of the Group. The Advisory Council for Catastrophes (formerly Natural Catastrophe Advisory Council) provides insights into the patterns of occurrence, predictability and destructiveness of catastrophes and gives feedback about Zurich’s approach to such catastrophes to help improve the effectiveness of its underwriting and reinsurance purchasing.
Skills and experience Mario Greco joined Zurich in March 2016 as Group Chief Executive Officer and member of the Executive Committee.
Educational background Mr. Greco holds a bachelor's degree in economics from the University of Rome and a master's degree in international economics and monetary theory from Rochester University.
Skills and experience 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 for 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. He is also a member of the advisory board of the Department of Banking and Finance at the University of Zurich.
Educational background Ms. Blanc graduated with a bachelor’s degree in history, with honors, from the University of Liverpool in 1989, and qualified as an Associate of the Chartered Insurance Institute (ACII) in 1993. She received an MBA from Leeds University Business School in 1999.
External appointments Alison Martin became a member of the Swiss Federal Institute of Technology (ETH) Risk Center’s advisory board in September 2018.
Skills and experience Kathleen Savio is Chief Executive Officer for Zurich North America, a position she has held since January 2018. She has more than 25 years of experience working across several disciplines at Zurich. She became a member of the Executive Committee in October 2017 upon her appointment to the position of Chief Executive Officer-Designate for Zurich North America. From 2012 through 2017, she served as the Head of Alternative Markets for Zurich North America, which delivers products and services to customers through multiple distribution channels, including direct, program administrators, crop agents, captive consultants and brokers. Prior to that appointment Ms. Savio held the position of Chief Administrative Officer for North America Commercial. Before assuming that role, she led Corporate and Marketing Communications for North America Commercial, as well as Strategic Initiatives for Marketing and Distribution. She has also held roles in product underwriting and corporate marketing and within key business units. She joined Zurich in 1991.
External appointments Ms. Savio is vice chair of the Executive Committee of the America Insurance Association (AIA). She is a member of The Chicago Network, an organization of Chicago’s leading professional women. She also serves on the board of the St. John’s University School of Risk Management.
Educational background Ms. Savio earned a master's degree in communication and a bachelor's degree in speech communication from Illinois State University. She is also a graduate of the Harvard Business School Advanced Management Program and has participated in executive management programs at Northwestern University's Kellogg School of Management.
Skills and experience Gary Shaughnessy was appointed Chair of Zurich’s Community Investment Foundation in January 2018. He also maintains some other duties at the Group, including as a strategic advisor, and served as a member of the Executive Committee until December 31, 2018. Before his promotion to CEO Global Life and to the Executive Committee in January 2016 and to CEO EMEA in July 2016 (a position he stepped down from in early October 2018), he was CEO of Zurich UK Life, a role he held from June 2012. In 2014 he assumed the additional role of Country Head for Zurich in the UK. Prior to joining Zurich, Mr. Shaughnessy worked at Fidelity Worldwide Investment, where he was managing director for the UK defined contribution and retail business. His previous experience includes nearly a decade in senior roles within the Prudential Group, including the role of UK managing director, retail life and 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.
Statutory quora Pursuant to the Articles of Association (www.zurich.com/en/about-us/corporate-governance/corporate-documents), the AGM constitutes a quorum irrespective of the number of shareholders present and shares represented. Resolutions and elections generally require the approval of an absolute majority of the votes represented, unless respective provisions in the Articles of Association (of which there are currently none) or mandatory legal provisions stipulate otherwise. Article 704 of the Swiss Code of Obligations provides for a two-thirds majority of votes represented and an absolute majority of the nominal value of shares represented for certain important matters, such as a change of the company’s purpose or domicile, a dissolution of the company and certain matters relating to capital increases.
Registrations in the share register With a view to ensuring an orderly process, the Board determines the date on which a shareholder needs to be registered in the share register in order to exercise his or her participation rights by attending the shareholders’ meeting. That date is published, together with the invitation to the shareholders’ meeting, in the Swiss Official Gazette of Commerce.
The Group is committed to providing equal opportunities when recruiting and promoting people, whereby ability, experience, skills, knowledge, integrity and diversity are guiding principles. The Group actively encourages employee involvement in its activities through printed and online publications, team briefings and regular meetings with employees’ representatives. Further, the Group is party to an agreement with employee representatives of the Group’s companies in Europe. For further information on the Group’s people management activities, see see pages 16 and 17 of the Annual Report.
Group Audit is responsible for auditing risk management, control and governance processes. The Head of Group Audit reports functionally to the Chairman of the Audit Committee and administratively to the Group CEO, and meets regularly with the Chairman of the Board and the Chairman of the Audit Committee and attends each meeting of the Audit Committee.
External audit External audit is responsible for auditing the Group’s financial statements and for auditing Zurich’s compliance with specific regulatory requirements. The Audit Committee regularly meets with the external auditors.
PwC assumes all auditing functions which are required by law and by the Articles of Association of Zurich Insurance Group Ltd. The external auditors are appointed by the shareholders of Zurich Insurance Group Ltd annually. At the Annual General Meeting on April 4, 2018, PwC was re-elected by the shareholders of Zurich Insurance Group Ltd. The Board proposes that PwC be re-elected at the Annual General Meeting on April 3, 2019 as external auditors for the financial year 2019. PwC fulfills all necessary requirements under the Swiss Federal Act on the Admission and Oversight of Auditors and has been admitted as a registered auditing company by the Federal Audit Oversight Authority.
Non-audit fees Total fees (including expenses and value added taxes) in the year 2018 for additional services, such as tax advice, audit-related services (primarily for the MCEV review, control reports and actuarial regulatory reviews) and other services (primarily IFRS 17/9 projects and strategy) were USD 16.2 million (USD 8.9 million in 2017).
The Audit Committee has approved a written policy on the use of external auditors for non-audit services, which sets out the rules for providing such services and related matters (including a list of prohibited services). Allowable non-audit services may include tax advice, comfort and consent letters, certifications and attestations, and due diligence and audit support in proposed transactions, to the extent that such work complies with applicable legal and regulatory requirements and does not compromise the independence or objectivity of the external auditors. To avoid conflicts of interest, all allowable non-audit services need pre-approval from the Audit Committee (Chairman), the Group CFO or the local CFO, depending on the level of the expected fee. This policy further requires, among other things, an engagement letter specifying the services to be provided.
Group Compliance is a control function responsible for: 33 Enabling the business to manage its compliance risks 33 Being a trusted advisor 33 Providing independent challenge, monitoring and assurance 33 Assisting management to promote compliance culture and ethics
Each annual compliance plan (global, regional, local) is a risk-based plan and must be prepared on the basis of an independent forward-looking compliance risk assessment, taking into account both internal and external environment key risk drivers.
Group Compliance provides an independent compliance view on the key compliance risks to the business and performs independent risk-based monitoring and assurance activities, challenging the business. In addition, it provides compliance risk insight through relevant and targeted reporting.
The Group Chief Compliance Officer defines and issues compliance policies relevant to the Group and establishes appropriate processes and guidance.
The Group Chief Compliance Officer has direct access to the Group CEO and the Chairman of the Board’s Audit Committee and appropriate access to the Chairman of the Board. The Group Chief Compliance Officer has an additional reporting line to the Chairman of the Audit Committee, while maintaining functional independence as a second line of defense function.
Zurich encourages its employees to speak up and report improper conduct that they believe is illegal, unethical, or violates Zurich’s code of conduct or our Group’s policies. Employees are free to report their concerns to management, Human Resources, the Group’s legal department, its compliance function, or through the Zurich Ethics Line (or similar service provided locally), a phone and web-based service run by an external specialist provider. Zurich does not tolerate retaliation against any employee who reports such concerns in good faith.
Zurich operates a balanced and effectively managed remuneration system. The remuneration report provides further details on this, as well as the link between business performance and variable pay decisions for 2018.
Remuneration outcomes for 2018 reflect Zurich’s good progress on strategic and financial targets and strong performance.” Christoph Franz Chairman of the Remuneration Committee
Dear Shareholder On behalf of the Remuneration Committee of the Board of Directors (Board), I am pleased to share with you our remuneration report for 2018. Corporate governance in the area of remuneration remains a focal point for regulators, advisory bodies and investors globally. As such, we continue to monitor developments and best practices, and review Zurich’s remuneration approach to ensure it complies with regulatory requirements, supports our strategic objectives, incentivizes the right behaviors and considers the interests of our customers, shareholders and employees alike. We appreciate your ongoing input and engagement.
Rewards 2018 The remuneration outcomes detailed in this report reflect Zurich’s performance achievements and the Executive Committee’s (ExCo) progress against strategic targets. In 2018 Zurich showed continued execution on the four external targets, including 12.1 percent business operating profit after tax return on equity, expense savings of over USD 1.1 billion and cash remittance above expectations, while maintaining a very strong capital base. The business operating profit
(BOP) for 2018 is up by 20 percent versus the prior year BOP and is consistent with the prior year underlying BOP which considers the impact of the US storms Harvey, Irma and Maria.
Achievements in 2018 and looking ahead To further support our customer-led transformation, quantitative customer metrics were incorporated for the first time to assess the overall business performance and resulting STIP award levels in selected major markets and for our senior leaders. In addition, we implemented the revised target card framework for the ExCo and the wider leadership team. Targets include both quantitative measures and relevant strategic projects in the three categories of financial measures, customers and people.
Annual General Meeting 2019 I would like to thank you for your support at last year’s Annual General Meeting (AGM) and for the valuable feedback we received, especially at the corporate governance roadshow prior to our AGM in 2019.
USD 693 m The aggregate amount of variable remuneration for 2018 for the entire Group which is determined based on the Group’s long-term economic performance (2017: USD 669 m).
This summary provides an overview of the 2018 remuneration of Zurich Insurance Group Ltd and its affiliates (Group or Zurich), including details regarding the link between business performance and variable pay decisions for 2018.
Zurich’s remuneration Zurich operates a balanced and effectively managed remuneration system which ensures competitive total remuneration opportunities, for which the resulting awards are based on the results achieved. It is an important element of the Group’s risk management framework and is designed to not encourage inappropriate risk-taking.
1 Consists of USD 49,485 million gross written premiums and policy fees, as well as USD 3,204 million Farmers management fees and other related revenues in 2018. Farmers Group, Inc., a wholly owned subsidiary of Zurich Insurance Group, provides certain non-claims administrative and management services to the Farmers Exchanges as attorney-in-fact and receives fees for its services. The Farmers Exchanges are owned by their policyholders.
The following table provides details on 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 this report.
Group and regional employees. 33 The relevant BOP or other profitability metrics for countries, business units and Commercial
Insurance, as well as customer metrics in selected major markets. 33 Investment results for Investment Management. 33 Specific growth, profitability and customer-related metrics for Farmers.
Context The key factors driving the vesting level in 2019, for the three-year performance period from 2016 to 2018, are: 33 The Group’s relative TSR against an international peer group of insurance companies 33 NIAS ROE 33 Cash remittance
Each performance criteria has an equal weighting and no discretionary adjustment has been made to the calculated vesting level. Based on the achievements under the predefined performance criteria, the calculated vesting level is higher compared with the vesting level in 2018.
The total variable remuneration pool includes the following elements: 33 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.
33 The value of the target share allocations made in 2018 on the assumption that the allocations will vest at 100 percent of the target level in 2021 for performance over the three years 2018, 2019 and 2020.
33 The total amount of severance payments 2 committed in 2018, regardless of when the payments are due.
For 2018, the remuneration amounts were as follows: Remuneration amounts in USD millions, for the years ended December 31 Base salaries/
2 The cash incentives earned for the year for all employees comprising the amounts under the STIP, as well as payments under local incentive plans which are subject to approval by the applicable local Boards.
3 Represents the value of the target share allocations made in 2018, which assumes vesting in 2021 at 100 percent of target. 4 Can include employee benefits such as perquisites and benefits-in-kind, international assignment allowances, service costs for pension benefits and any other payments due under employment contracts.
33 Board: No changes are proposed to the fee structure of the Board for the period AGM 2019 – AGM 2020. Board fees will remain in line with the fee structure that has been in place since the AGM in 2015 with another benchmarking analysis planned later in 2019.
Remuneration philosophy The remuneration philosophy is an integral part of the overall employment offering to employees. Based on established remuneration principles, the Group operates a balanced and effectively managed remuneration system that provides competitive total remuneration opportunities which attract, retain, motivate and reward employees to deliver outstanding performance. The remuneration system and practices are embedded in the Group’s risk management framework and take into consideration legal and regulatory requirements, as well as market developments.
Guiding principles of the remuneration philosophy The guiding principles of the remuneration philosophy as set out in Zurich’s Remuneration Rules are as follows: 33 The remuneration architecture is simple, transparent and can be put into practice.
33 The structure and level of total remuneration are aligned with the Group’s risk policies and risk-taking capacity.
33 A high performance culture is promoted by differentiating total remuneration based on the relative performance of businesses and individuals.
33 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.
Zurich’s Remuneration Rules Remuneration Committee Board Remuneration report Remuneration Committee Board and consultative, non-binding vote by the shareholders Remuneration payable to Directors (including Chairman and Vice-Chairman)
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
Vesting levels under the LTIP Remuneration Committee based on proposals by the Group CEO taking into account a risk assessment by Group Risk Management
At Remuneration Committee and Board meetings where decisions are made on the individual remuneration of the Chairman, the Chairman is not present. In making decisions on the individual remuneration of the Group CEO, the Group CEO is not present. Where decisions are made on the individual remuneration of other members of the ExCo, those members are also not present at the meetings. See page 54 in the corporate governance report for further details on the Remuneration Committee’s responsibilities.
Remuneration and risk The Remuneration and Risk and Investment Committees meet jointly once a year to discuss a risk review of the remuneration architecture and the remuneration governance framework. The assessment of risk in making reward decisions, and the ability to apply risk adjustments and exercise malus and clawback, if required, are features of Zurich’s remuneration framework. Group Risk Management evaluated the remuneration architecture in 2018 and reported that the remuneration architecture is consistent with effective risk management and does not encourage inappropriate risk-taking that exceeds the Group’s level of tolerated risk.
To help align remuneration with the Group’s risk-taking capacity, Group Risk Management consults with other control 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, amongst other factors, when proposing the STIP awards to the Remuneration Committee, which in turn makes its recommendation to the Board for final approval.
Share ownership guidelines To align the interests of the Board and the ExCo with those of shareholders, Directors and members of the ExCo are required to meet the following levels of share ownership: 33 Members of the Board: once the basic annual fee.
Share dilution Registered shares as of December 31 151,348,027 151,339,851 Shares issued during the year 1 8,176 732,445 – as percentage of share capital based on the registered shares 0.01% 0.48%
LTIP Total number of unvested target shares 2 1,912,087 1,506,385 – as percentage of share capital based on the registered shares 1.26% 0.99%
Total remuneration Target total remuneration is set around the relevant market median 4 and includes the following elements: Remuneration elements
Award is driven by: – The relevant business profitability achievements and customer experience in selected major markets. – Individual performance on personal objectives and behavior in line with Zurich’s values, as assessed through the performance management process.
Certain enhancements to the performance and incentive framework, including STIP, are proposed for 2019. These are covered in the outlook section later in this report.
Primarily based on Group, country or business unit BOP and customer metrics in selected major markets
The key driver for determining the STIP award levels per STIP pool is the relevant financial performance during the year, including a qualitative assessment of the results. In addition, performance on customer metrics is considered in selected major markets.
Individual objectives relevant to the role of the employee are defined and agreed at the beginning of the year. The line manager assesses performance achievements, including alignment with Zurich‘s values, during and at the end of the year, supported by the Group performance management process.
33 The relevant BOP or other profitability metrics for countries, business units and Commercial Insurance, as well as TNPS in selected major markets.
Long-term incentives Long-term (three- to six-year) incentives are performance-driven based on the following design for the performance period 2018 to 2020: 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 of participants with the interests of the Group and its shareholders. To further support this purpose, the individual hedging of any shares of Zurich Insurance Group Ltd is prohibited.
Half of the vested shares are sales-restricted for an additional three-year period after the date of vesting. The final LTIP award for an individual is capped at 200 percent of the aggregate number of target shares and dividend equivalent shares.
Financial performance The financial performance is determined by the assessment of the performance criteria as per the vesting grid, which is set and reviewed by the Board annually in order to ensure alignment with the strategy and financial targets.
Exceptional individual adjustments The right to modify awards to reflect individual circumstances is reserved for the Group CEO except for modifications regarding members of the ExCo where this right is reserved for the Remuneration Committee and the Board. An adjustment of +/–25 percent to the calculated final vesting level may be applied on an individual level prior to vesting. However, if performance under exceptional or unusual circumstances warrants it, exceptions to the +/–25 percent adjustment may be made. In this respect Zurich reserves the right to adjust and even set the vesting level to 0 percent for an individual to reflect specific circumstances (e.g. in connection with a breach of internal or external rules) during the period prior to vesting. Any such adjustment is reserved exclusively for the Remuneration Committee and the Board.
Pensions The Group provides a range of pension benefits to employees, which are designed to reflect local market practices. Benefit levels are positioned toward the relevant market median. The Group Pensions Committee oversees the management of the Group’s pension arrangements within the de-risking frameworks established for benefit design, investments, funding and accounting. On a regular basis, the Group Pensions Committee and the local countries assess the competitive environment with regard to pensions. In recent years, there has been a significant shift away from final salary defined benefit pension arrangements such that almost all new employees are now enrolled in defined contribution and/or cash balance-type arrangements.
Audited The information provided according to Articles 14–16 of the Ordinance AEC contained in the remuneration report needs to be externally audited following the audit requirements of the Ordinance AEC (Article 13 para 1 and Article 17 of the Ordinance AEC). In addition, the information according to Article 663c of the Swiss Code of Obligations is being audited and disclosed as such in the remuneration report. All audited sections have been highlighted accordingly.
The following section sets out the remuneration and shareholdings of Directors and of members of the ExCo, as well as the remuneration of all employees.
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.
The committees on which the Directors serve are set out in the corporate governance report on page 44. In 2018, the Board consisted entirely of non-executive Directors independent from management.
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 per annum plus CHF 10,000 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.
2 Members of a committee receive a cash fee of CHF 60,000 for all committees on which they serve, irrespective of the number. The committees on which the Directors serve are set out in the corporate governance report.
3 Committee chairs receive an annual fee of CHF 60,000 and the chair of the Audit Committee receives an additional CHF 20,000. The committees on which the Directors serve and the chairs are set out in the corporate governance report.
4 In addition to the fees received as a Director of Zurich Insurance Group Ltd, Susan Bies earned fees for her board membership of the subsidiary board Zurich American Insurance Company on a pro rata basis for her time in the role in 2018 and for the full year in 2017. Also in 2017, recognizing the Chairman’s long service and outstanding contribution to Zurich, Tom de Swaan received a farewell present worth CHF 27,000. The resulting Swiss tax obligations were met by the company.
Michel Liès and Catherine Bessant were newly elected as members of the Remuneration Committee. At the constituent Board meeting following the AGM, the Board appointed Christoph Franz as Vice-Chairman of the Board.
11 Joan Amble stood down from her role as Chairman of the Audit Committee as of June 26, 2017. Alison Carnwath took on the role from this date. 12 At the AGM on March 29, 2017, Catherine Bessant was elected to the Board.
As disclosed in the Directors’ fees 2017 table, Tom de Swaan received a farewell present to the value of CHF 27,000 recognizing the Chairman’s service and outstanding contribution to Zurich. None of the Directors received any additional honoraria, remuneration or benefits-in-kind from the Group or from any of the Group’s companies other than what is set out earlier. In addition none of the Directors had any outstanding loans, advances or credits as of December 31, 2018 and 2017.
Remuneration and personal loans for former Directors No benefits (or waiver of claims), loans, advances or credits have been provided to former Directors during 2018 at conditions which are not at arm’s length, nor were any provided during 2017.
Share plans and shareholdings of Directors The shareholdings of the Directors who held office at the end of 2018, in shares of Zurich Insurance Group Ltd are shown in the following table. All interests shown include the portion of shares allocated to the Directors as part of their fees, shares acquired in the market by the Directors and shares held by parties related to the Directors.
M. Liès, Chairman 2,523 n.a. C. Franz, Vice-Chairman 2,338 1,601 J. Amble, Member 1,778 1,375 C. Bessant, Member 823 420 A. Carnwath, Member 2,703 2,300 J. Hayman, Member 1,361 958 K. Mahbubani, Member 1,778 1,375 M. Mächler, Member 2,326 1,923 D. Nish, Member 1,361 958 1 None of the Directors, including parties related to them, held more than 0.5 percent of the voting rights of Zurich Insurance Group Ltd shares as of December 31, 2018 or 2017, respectively.
Further, the analysis is supplemented by additional benchmarking studies as appropriate, e.g., by reviewing practices of large SMI companies in Switzerland or similarly sized companies in other countries. The Remuneration Committee also regularly reviews the benchmarking approach.
The total remuneration of the members of the ExCo for 2018 comprised the value of base salaries, short-term cash incentives, the target share allocations made under the LTIP in 2018, pensions and other remuneration including employee benefits.
The distribution of the individual elements making up the total remuneration of the ExCo in 2018, is set out in the following chart and is based on the target values for the performance-related remuneration.
Base salaries Short-term incentives Service costs for pension benefits Other remunerationLong-term incentives
Elements and amounts of remuneration for the ExCo (including the Group CEO)
See remuneration elements, page 90. The total amount of base salaries for all members of the ExCo paid in 2018 was USD 11.1 million compared to USD 11.3 million in 2017.
For members of the ExCo the STIP target percentages for 2018 are 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 on the next page.
The total amount of annual cash incentive awards to be paid in 2019 for the 2018 performance year for all members of the ExCo is USD 16.2 million compared to USD 14.4 million for 2017. The annual cash incentive awards are determined individually and are performance-based.
In 2018, each member of the ExCo received an annual allocation of target shares under the LTIP for the three-year performance cycle 2018 – 2020. For members of the ExCo the LTIP target percentages in 2018 varied between 125 percent and 225 percent of base salary. As in previous years, the allocations of target shares for 2018 were based on the closing share price from the second working day in April, i.e. on April 4, 2018. The value of target share allocations does not include dividend equivalent target shares. The maximum vesting level, to be assessed in 2021, is 200 percent of the aggregate number of target shares and dividend equivalent target shares.
The total value of pension benefits accruing to members of the ExCo during 2018, calculated on the basis of the service costs for the company as assessed under IAS 19 accounting principles, was USD 3.0 million (compared to USD 3.2 million in 2017). Service costs value the amount of the pension benefits accruing during the year and for defined contribution plans take the amount of the company contribution paid during the year.
Members of the ExCo received other remuneration in 2018 in relation to employee benefits, expatriate allowances, perquisites, benefits-in-kind and any other payments due under each member’s employment contract.
The total value of other remuneration in 2018 was USD 1.7 million (compared to USD 1.5 million in 2017). Benefits-in-kind have been valued using market rates.
With regard to objective setting, each member of the ExCo receives a target card for their area of responsibility at the beginning of the year. The target cards include objectives related to the execution of the strategy, in particular in the areas of financial measures, customers, people and relevant strategic projects, with a significant weighting on financial measures.
To assess performance against these objectives, a final review takes place at the end of the year. Each member of the ExCo conducts a self-assessment of their performance achievements in relation to the targets set for the year. Group Risk Management, together with other control and assurance functions, provide risk and compliance information to be considered as part of the ExCo members’ individual performance assessment. A discussion is subsequently held between each member of the ExCo and the Group CEO. In a rigorous process, the Group CEO and the Remuneration Committee review the individual performance achievements of each member of the ExCo in relation to the targets set for the year, taking into account behavior and risk aspects.
For the ExCo, including the Group CEO, the key metrics to determine the award structure for 2018 are the Group’s BOP performance during the year and the relevant customer TNPS. In evaluating the Group BOP performance, a qualitative assessment of the overall achievement is carried out. The BOP for 2018 is USD 4.6 billion reflecting a 20 percent increase compared with the BOP for 2017 and is consistent with the underlying BOP for the prior year. The overall customer TNPS result, including a qualitative assessment, is in line with the plan set for the year, and as this was the first year to include customer metrics for STIP purposes, the results will be used to determine appropriate baselines for the following year.
Replacement payments for members of the ExCo appointed in 2018 In extraordinary circumstances payments may be made to new hires to replace forfeitures under the incentive plans of the previous employer. In these circumstances, the payments mirror the type and timing of the forfeited payments and can include cash payments and/or awards of restricted or performance shares. Where payments are made in cash, there is typically a clawback period if the employee leaves the company voluntarily during the first two years of employment. Restricted share allocations typically vest over three to five years following the date of allocation. Effective July 1, 2018, the restricted share allocations are also credited with dividend equivalent shares as applicable during the vesting period to compensate for the dividend paid, similar to the treatment of performance share allocations under the LTIP. Restricted shares and associated dividend equivalent shares are forfeited if the holder of such share allocations leaves the company voluntarily before the vesting date and the employment relationship terminates.
Replacement payments were made to the new member of the ExCo who took up employment with the Group during 2018. The overall value of replacement payments for 2018 is USD 2.6 million at the relevant exchange rates throughout the year and at the year-end rate for payments in 2019 and later. They comprise payments in cash in 2019 and restricted share allocations that vest in 2020 and 2021. In 2017, the overall value of replacement payments made was USD 3.8 million.
in USD millions, for the years ended December 31 2018 1, 2 2017 1, 3
Base salaries 11.1 11.3 Cash incentive awards earned for the year 16.2 14.4 Value of target performance share allocations 18.6 16.7 Service costs for pension benefits 3.0 3.2 Value of other remuneration 4 1.7 1.5 Total in USD 5 50.6 47.1 in USD million, for the years ended December 31 2018 1, 2 2017 1, 3
2 On the basis of 14 members and former members of the ExCo, of whom 11 served during the full year in 2018. 3 On the basis of 14 members and former members of the ExCo, of whom 11 served during the full year in 2017. 4 Includes perquisites and benefits-in-kind. 5 In line with applicable laws where the executives are employed, Zurich paid the company-related portion of contributions to social security systems, which amounted to
USD 2.1 million in 2018 and USD 2.1 million in 2017. Since the contributions are based on full earnings, whereas benefits are capped, there is no direct correlation between the costs paid to social security systems and the benefits received by the executives.
6 The amounts have been translated from USD to CHF at the relevant exchange rates throughout the year and the cash incentive to be paid in 2019 has been translated at the year-end rate in 2018.
7 Other payments and share allocations are extraordinary and include payments and share allocations to compensate incentive plan forfeitures with previous employers. The amount for 2018 has been translated into USD at the relevant exchange rates throughout the year and at the year-end rate for payments in 2019 and later.
8 The amount relates to contractually agreed remuneration for the period of employment in 2018 after stepping down from the ExCo and during the notice period. Such remuneration includes pro-rated base salaries, cash incentives, LTIP target allocations, pension service costs and other remuneration including employee benefits, for the financial year 2018.
Based on these figures, the value of the total remuneration for all members of the ExCo comprises 31 percent (34 percent in 2017) in fixed remuneration (comprising base salaries, service costs for pension benefits and other remuneration including employee benefits) and 69 percent (66 percent in 2017) 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 53 percent represented by target performance shares under the LTIP and 47 percent as cash incentive awards under the STIP.
The amount of LTIP included in the total of USD 50.6 million above, is the value of target share allocations of USD 18.6 million allocated in 2018 and assumed to vest at 100 percent of target in 2021. The value of shares vesting in 2019 from the 2016 LTIP allocation (performance period ending December 31, 2018) for members of the ExCo who served in full or for part of the year, is estimated to be USD 33.7 million. This considers the vesting level of 149 percent for all LTIP participants (no discretion has been applied to the calculated vesting level), includes the associated dividend equivalent shares that have accrued during the performance period, uses the 2018 year-end share price of CHF 293.10 (compared to CHF 203.20 which was the share price on the second working day in April 2016 used to determine the initial number of target shares allocated), and the 2018 year-end foreign exchange rate. As a result, the value of actual earned total remuneration for the period ending December 31, 2018, is estimated to be USD 65.7 million compared to the total remuneration of USD 50.6 million shown above.
Member of the ExCo with the highest remuneration The highest-paid individual in 2018 was Mario Greco, Group CEO, with his total remuneration of CHF 8.8 million representing the base salary, cash incentive awards earned for the year, the value of target shares allocated in 2018 under the LTIP, the value of pension benefits and other remuneration including employee benefits. There were no changes to Mario Greco’s compensation structure in 2018. The difference between the total amounts of remuneration in 2018 compared to 2017 can be explained by the value of the STIP award.
Highest paid executive, Mario Greco in CHF millions, for the years ended December 31 2018 1 2017 1
2 The remuneration is paid in Swiss francs. The amounts have been translated from Swiss francs to U.S. dollars at the relevant exchange rates throughout the year. The cash incentive to be paid in 2019 has been translated at the year-end rate in 2018.
As of December 31, 2018 and 2017, there were no loans, advances or credits outstanding for members of the ExCo.
Related parties to members or former members of the ExCo No benefits (or waiver of claims) have been provided to related parties of members of the ExCo or related parties of former members of the ExCo during 2018 and 2017. No party related to members of the ExCo or former members of the ExCo had any outstanding loans, advances or credits as of December 31, 2018 and 2017.
Target share allocations under the LTIP and from restricted share allocations As of December 31, 2018, the total number of unvested target share allocations under the LTIP was 218,142 (202,749 as of December 31, 2017). Further, the number of unvested restricted shares was 13,616 in 2018 (15,719 in 2017).
Within the context of the regular LTIP allocations made in 2018, these performance-based share allocations will be considered for vesting in 2021, with half of the resulting vested shares being sales-restricted for an additional three-year period.
Audited Shareholdings of the members of the ExCo The following table sets out the actual shareholdings of each member of the ExCo as of December 31, 2018 and 2017. In addition to any shares acquired in the market, the numbers also include vested shares, whether sales-restricted or not, received under the LTIP. The table does not however, include the share interests of the members of the ExCo that are currently unvested target shares or unvested restricted shares.
All interests include shares held by related parties to members of the ExCo.
October 5, 2018, and as a member of the ExCo effective December 31, 2018. 3 Alison Martin was appointed Group Chief Risk Officer-Designate as an external appointment effective October 1, 2017. Kathleen Savio was appointed
Total remuneration 5,348 5,286 1 This represents the present value of the defined benefits from pension and post-retirement benefit plans, plus employers’ contributions to defined contribution plans, arising from employee service over the accounting period. The amount included in this figure for defined benefit plans is calculated using actuarial factors and can vary year-on-year as economic conditions change. These numbers are explained in greater detail in note 20 of the consolidated financial statements.
Value of outstanding deferred remuneration for all employees in USD millions, for the years ended December 31 2018 2017
Unvested target share allocations 413 408 Unvested restricted share allocations 20 18 Vested but sales-restricted shares 113 138 Value of overall outstanding deferred remuneration 546 564
Impact on net income in 2018 and 2017 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 the 2016 and 2017 plans with shares vesting in 2019 and 2020 respectively, there was an increase of USD 11 million in the expense recognized in the 2018 income statement to reflect actual performance compared to original estimates. In 2017, there was a reduction of USD 20 million to the expense recognized in the income statement to reflect the actual amounts.
33 Short-term incentive plan: • Zurich will continue with the current STIP approach, including the funding of STIP awards based on the relevant BOP results and customer metrics in certain markets, as well as a qualitative assessment of these results.
• The sales restrictions on half of the vested shares will continue to apply for members of the ExCo.
The Remuneration Committee will continue to seek dialogue with investors and proxy advisers in 2019. Further, the Committee will ensure that the remuneration framework, including reviews of the framework and any subsequent changes proposed, are aligned with the strategy, embedded in the risk framework and comply with legal and regulatory requirements. As in previous years, the Committee enforces the governance framework and carefully monitors the link between key performance factors and variable remuneration awards.
We have audited the accompanying remuneration report of Zurich Insurance Group Ltd for the year ended December 31, 2018. The audit was limited to the information according to articles 14–16 of the Ordinance against Excessive Compensation in Stock Exchange Listed Companies (Ordinance) contained in the tables labeled ‘audited’ on pages 100 to 102, pages 106 to 108 and page 110 of the remuneration report.
Opinion In our opinion, the remuneration report of Zurich Insurance Group Ltd for the year ended December 31, 2018 complies with Swiss law and articles 14–16 of the Ordinance.
Keeping a critical eye on the dynamic changes in the global risk landscape, their impact on our customers, our communities and our business, enables us to build a resilient future.“ Alison Martin Group Chief Risk Officer
Managing risk and opportunities Our enterprise risk management framework supports the achievement of the Group’s strategy by upholding an efficient and effective risk-based control environment and helps protect capital, liquidity, earnings and reputation. By effectively managing our risks, we maintain our resilience and make sure we are there when our customers need us. Zurich’s risk review describes our major risks and how we manage them.
As the Group continues to embrace technological and innovative solutions, risk management provides assurance by making use of our Total Risk Profiling TM (TRP) risk assessment process to stay on top of both external and internal risks to our strategy and financial plan.
In 2018 we published a white paper, ‘Managing the Impacts of Climate Change: Risk Management Responses.’ The paper highlights the interconnected nature of climate change risk and emphasizes its increasing relevance to businesses. Managing this risk is vitally important when considering exposure to both physical and transition risk. Provided in this report are a number of risk management tools and practices at companies' disposal to support customers in managing this systemic risk.
Finding ways of doing things differently, using digital capabilities and focusing on providing assurance, insight, and oversight for all our stakeholders are key factors driving our digitalization.
In this report, we present the Zurich Economic Capital Model (Z-ECM) results as well as sensitivity analysis to adverse scenarios. Zurich’s very strong Z-ECM capital position, together with strong cashremittances, demonstrates the resilience of the Group’s dividend strategy to external events.
Highlights by risk type Insurance risk The Group’s insurance risk is diversified by geography, line of business, product and customer, supported by our centralized purchase of reinsurance.
Operational risk We established a dedicated framework for key focus areas such as information security and cyber risk.
Economic risk profile The Group's Z-ECM ratio increased from 132 percent as of January 1, 2018 to 135 percent as of July 1, 2018. The January 1, 2019 estimate is 125 percent with an error margin of +/– 5 percentage points. The development of the Z-ECM ratio in 2018 was driven mainly by adverse financial market performance, economic profit generation, and selective acquisitions.
The major risk management objectives at Zurich Insurance Group (Zurich, or the Group) are to: 33 Support achievement of the Group strategy and protect capital, liquidity, earnings and reputation by monitoring that risks are taken within the Group’s risk tolerance 33 Enhance value creation by embedding disciplined risk-taking in the company culture and contribute to an optimal risk-return profile where risk reward trade-offs are transparent, understood, and risks are appropriately rewarded 33 Efficiently and effectively diversify risk and mitigate unrewarded risks 33 Encourage openness and transparency to enable effective risk management 33 Support decision-making processes by providing consistent, reliable and timely risk information 33 Protect Zurich’s reputation and brand by promoting a sound culture of risk awareness, and disciplined and informed risk taking
The Group regularly reports on its risk profile at local and Group levels. The Group has procedures to refer risk issues to senior management and the Board of Directors in a timely way. To foster transparency about risk, the Board receives quarterly risk reports and risk updates. In 2018, reporting was supplemented with in-depth risk insights into topics such as macroeconomic developments, information security management, climate change-related risks, and credit risk and country risk.
No action required as within stated objective and equivalent to ‘AA’ rating 90–100% Position may be tolerated for a certain length of time depending on the risk environment 120–140% Consider increased risk-taking or remedial actions >140% Z-ECM ratio indicating over-capitalization, requiring implementation of mitigating actions
Risk-based remuneration Based on the Group’s remuneration rules, the Board of Directors designs and structures remuneration arrangements that support the achievement of strategic and financial objectives, and ensures such arrangements do not encourage inappropriate risk-taking. With regard to the latter, the Group Chief Risk Officer (Group CRO) consults with the other assurance, control and governance functions to provide the Group CEO with a review of risk factors to consider in the annual variable-compensation process. In consultation with these functions, the Group CRO also provides an individual assessment of Group key risk takers as part of their annual individual performance assessment. For more information on Zurich’s remuneration system, see the ‘remuneration report.’
Risk management organization The Group Risk Management function is a global function, led by the Group CRO.
Each country has a dedicated risk management team co-located with the local management team for effective business partnering activities, serving both management and legal entity view.
1 Farmers Chief Risk Officer has a matrix reporting line into the Group CRO.
Staff at Group level focus on risk management frameworks, risk governance, risk reporting, methodologies and tools, and qualitative and quantitative assessments. They quantify the Group’s risk and economic capital position and monitor adherence to risk tolerance. They quantitatively assess insurance, market, credit and operational risk and focus on model validation.
The risk function is independent of the business by being a vertically integrated function where global risk employees directly report into the Group CRO, unless otherwise required by local laws or regulations. Risk officers are embedded in the business, positioning them to support and advise, and independently challenge, business decisions from a risk perspective. As business advisers on risk matters, the risk officers, equipped with technical risk skills as well as business skills, help foster a risk-aware culture in the business.
The Group manages its capital to maximize long-term shareholder value while maintaining financial strength within its ‘AA’ target range, and meeting regulatory, solvency and rating agency requirements. In particular, the Group endeavors to manage its shareholders’ equity under IFRS to balance maximization of shareholder value and constraints imposed by its economic framework, rating agencies and regulators. As of December 31, 2018, shareholders' equity of USD 30.2 billion, subordinated debt of USD 6.8 billion and senior financial debt not maturing within the next year of USD 2.4 billion (since the second quarter 2018, excluding net new issued senior debt) were part of the capital available in the Group’s economic framework. Further adjustments usually include such items as intangible assets, deferred tax assets and liabilities, allowing for discounting of liabilities and the value of in-force business or excluding new net issuances of senior debt. For more information, see ‘analysis of the Group’s Z-ECM available financial resources’ (unaudited).
The Group seeks to maintain a balance between higher returns for shareholders on equity held, and the security a sound capital position provides. Dividends, share buy-backs, and issuances and redemption of debt have a significant influence on capital levels. In 2018, the Group paid a dividend out of retained earnings and the capital contribution reserve, executed a share repurchase program, issued senior debt to finance redemptions and investments in the Group’s development, and called hybrid debt that was re-financed during 2018.
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, 2018, the amount of the statutory general legal reserve is more than 40 times the paid-in share capital. The ability of the Group’s subsidiaries to pay dividends may be restricted or indirectly influenced by minimum capital and solvency requirements imposed by insurance and other regulators in the countries in which the subsidiaries operate. Other limitations or considerations include foreign exchange control restrictions in some countries, and rating agencies’ methodologies.
At the Group level, Zurich compares Z-ECM capital required to the Z-ECM available financial resources (Z-ECM AFR) to derive an economic solvency ratio (Z-ECM ratio). Z-ECM AFR reflects financial resources available to cover policyholder liabilities in excess of their expected value. It is derived by adjusting the IFRS shareholders’ equity to reflect the full economic capital base available to policyholders to absorb any unexpected volatility in the Group’s business activities.
January 1, 2016 July 1, 2016 January 1, 2017 July 1, 2017 January 1, 2018 July 1, 2018
The chart below shows an analysis of the composition of the Group’s Z-ECM available financial resources as of July 1, 2018.
Analysis of the Group’s Z-ECM available financial resources USD billions, as of July 1, 2018 1 Shareholders’ intangible assets including deferred tax assets less deferred front-end fees and deferred tax liabilities 2 All debt issues (senior and subordinated) excluding those classified as operational debt or maturing within one year
Sensitivity and scenario analysis The Group evaluates sensitivities to, and stress scenarios on, the Z-ECM ratio, and presents results relative to Zurich’s risk tolerance and appetite. The sensitivities and stress scenarios in the following chart capture two key risks to the Group: market risk and insurance risk. For insurance risk, the chart shows the three largest natural catastrophe events to which the Group is exposed.
Market risk sensitivities show the estimated impact on the Group’s Z-ECM ratio of a one percentage point (100 basis points or bps) increase/decrease in yield curves, a 10 percent appreciation in the U.S. dollar, a 20 percent rise/decline in all stock markets, and a one percentage point change in credit spreads, with and without euro-denominated sovereign bonds. The sensitivities are considered as separate but instantaneous scenarios. They are a best estimate and non-linear, i.e., a change in the scenario input could result in disproportionally higher (or lower) impact on the Z-ECM ratio depending on the prevailing market conditions at the time.
The Group has interactive relationships with three global rating agencies: Standard & Poor’s, Moody’s, and AM Best. The insurance financial strength rating (IFSR) of the Group’s main operating entity, Zurich Insurance Company Ltd (ZIC), is an important element of Zurich’s competitive position. The Group’s credit ratings derived from the financial strength ratings also affect the cost of capital.
In October 2018, Standard & Poor's affirmed ZIC’s ‘AA–’ IFSR with a stable outlook and stated that “Zurich’s performance (...) proves its management's ability to control the strategic plan's execution and adjust it accordingly.” As a result, Standard & Poor's reassessed the management and governance factor in the rating analysis to strong from satisfactory.
Standard & Poor’s sees Zurich’s enterprise risk management as ‘very strong,’ based on a positive view of our risk management culture, risk controls, emerging risk management, risk models and strategic risk assessment.
Europe windstorm 1 Z-ECM is calibrated at 99.95 value at risk (equivalent to an ‘AA’ rating).
Regulatory requirements in the European Economic Area (EEA) The main regulatory framework governing the Group’s subsidiaries in the EEA is Solvency II. This is a risk-based capital framework which covers capital requirements (pillar 1), governance and risk management (pillar 2) and reporting (pillar 3). All EEA-based legal entities of the Group use the Solvency II standard formula for their pillar 1 requirements with the exception of Zurich Insurance plc (Ireland) that applies an approved internal model, which is aligned with the Z-ECM.
Total Z-ECM capital required: USD 30.7 billion %, as of July 1, 2018
Insurance risk is the inherent uncertainty regarding the occurrence, amount or timing of insurance cash flows. The profitability of insurance business is also susceptible to business risk in the form of unexpected changes in expenses, policyholders’ behavior, and fluctuations in new business volumes. Zurich manages insurance risk through: 33 Strong underwriting and claims standards and controls 33 Robust reserving processes 33 External reinsurance
Management of Property & Casualty business insurance risk The Group’s underwriting strategy takes advantage of the diversification of Property & Casualty (P&C) risks across lines of business and geographic regions. Zurich’s underwriting governance is applicable throughout the Group. Underwriting discipline is a fundamental part of managing insurance risk. The Group sets limits on underwriting capacity and delegates authority to individuals based on their specific expertise, and sets appropriate underwriting and pricing guidelines. Technical reviews confirm whether underwriters perform within authorities and adhere to underwriting philosophies and policies.
Property & Casualty insurance reserves are regularly estimated, reviewed and monitored by qualified and experienced actuaries at local, regional and Group levels. To arrive at their reserve estimates, the actuaries take into consideration, among other things, the latest available facts, trends and patterns of loss payments. Inflation is monitored with insights feeding into actuarial reserving models and Zurich’s underwriting processes and pricing.
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 emerging risks.
Actions are underway to rebalance the portfolio, reducing exposure to long tail lines. Governance is in place to ensure appropriate focus on top-line targets and profitability. Reinsurance is deployed to help manage insurance risk. Group Risk Management also provides independent assurance through risk reviews.
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. In 2018, risk-based capital (RBC) for catastrophe risk increased as a result of growth in short tailed lines of business. The most important peril regions and natural catastrophes (Nat Cat) continue to be U.S. and Caribbean windstorm, California earthquake and Europe windstorm.
To ensure global consistency, Nat Cat exposures are modeled centrally. Potential losses from property policies with material exposure in hazard-prone geographical areas and from worker injury policies with material exposure in U.S. seismic zones are probabilistically modeled. Losses for other lines of business are estimated based on adjustments to these modelled results. Risk modeling mainly addresses climate-induced perils such as windstorm, flood, tornado, and hail, and geologically-induced perils such as earthquake.
Man-made catastrophes include events such as industrial accidents, terrorism and cyber attacks.
For terrorism, worker injury and property risk exposures are analyzed to identify areas with significant risk concentration. Other lines of business are assessed, although the potential exposure is not as significant. A vendor- provided catastrophe model is used to evaluate potential exposures in every major U.S. city and selected cities in Europe. The Group’s analysis for the P&C business has shown that its exposures outside of North America are lower, in a large part due to government-provided pools. Outside the modeled areas, exposure concentrations are identified in Zurich’s Risk Exposure Data Store (REDS). Exposure concentrations for location-based man-made scenarios, other than terrorism, are also identified in REDS, for example industrial explosions at global ports.
Analysis of sensitivities for Property & Casualty business risks Tables 2.a and 2.b show the sensitivity of net income before tax and the sensitivity of net assets, using the Group effective income tax rate, as a result of adverse development in the net loss ratio by one percentage point. The sensitivities do not indicate a probability of such an event and do not consider any non-linear effects of reinsurance. Based on the assumptions applied in the sensitivity analysis in tables 2.a and 2.b, each additional percentage point increase in the loss ratio would have a linear impact on net income before tax and net assets. The Group also monitors insurance risk by evaluating extreme scenarios, taking into account the non-linear effects of reinsurance contracts.
Management of Life business insurance risk The Group has local product development committees and a Group-level committee to analyze potential new life products that could significantly increase or change the nature of its risks. The Group regularly reviews the continued suitability and the potential risks of existing life products.
The Group is also exposed to risks posed by policyholder behavior and fluctuating expenses. Policyholder behavior risk is mitigated by designing products that, as closely as possible, match revenue and expenses associated with the contract. Expense risk is reduced by carefully controlling expenses, and through regular expense analysis and allocation exercises.
The Group is also exposed to investment and surrender risks related to bank-owned life insurance contracts sold in the U.S. These risks have reduced significantly in recent years as several major clients have switched into less risky investment divisions. See heading ‘other contracts’ in note 7 of the consolidated financial statements for additional information.
Life of which: Rest of Europe, Middle East & Africa 342 349 1,946 2,078 2,288 2,427
Analysis of sensitivities for Life business 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 2018’ (unaudited but subject to assurance review) at www.zurich.com/ investor-relations/results-and-reports.
The Group uses traditional and collateralized reinsurance markets to protect itself against extreme single events, multiple event occurrences across regions, or increased frequency of events. Specifically, to protect the Group against man-made and natural catastrophe scenarios, Zurich arranges per event and annual aggregate global covers as illustrated on the graph on the next page.
The Group participates in the underlying risks through its retention and through its co-participation in excess layers. The contracts are on a loss-occurrence basis except the Global Aggregate Catastrophe cover, which operates on an annual aggregate basis. The current catastrophe covers are placed annually with the exception of the USD 750 million Global Catastrophe treaty, which is a three-year treaty expiring in 2019. In addition to these covers, the Group has some local catastrophe covers, a bilateral risk swap, and various line of business-specific risk treaties in place. These covers are reviewed continuously and are subject to change going forward.
Major changes in 2018 amongst others included the external protection of the Group’s financial lines portfolio to support and strengthen the commercial financial lines portfolio management and strategic execution. The structure chosen provides protection against extreme large loss experience.
Zurich Insurance Group Annual Report 2018 2018 Group catastrophe reinsurance protection USD millions, as of December 31, 2018 1 This cover can be used only once, either for aggregated losses or for an individual occurrence or event. 2 Franchise deductible of USD 25 million, i.e. losses greater than USD 25 million count toward the erosion of the retention (annual aggregate deductible). 3 Europe cat treaty calculated with EUR/USD exchange rate as of July 31, 2018.
Retention Regional cat treaties Global cat treaties U.S. wind swap Combined global cat treaty1
The Group has policies and limits to manage market risk and keep its strategic asset allocation in line with its risk capacity. Zurich centrally manages certain asset classes to control aggregation of risk, and provides a consistent approach to constructing portfolios and selecting external asset managers. It diversifies portfolios, investments and asset managers, and regularly measures and manages market risk exposure. The Group has set limits on concentration in investments in single issuers and certain asset classes, as well as by how much asset interest rate sensitivities can deviate from liability interest-rate sensitivities. The Group regularly reviews its capacity to hold illiquid investments.
Risk from equity securities and real estate The Group is exposed to risks from price fluctuations on equity securities and real estate. These could affect the Group’s liquidity, reported income, economic surplus and regulatory capital position. Equity risk exposure includes common stocks, including equity unit trusts, private equity, common stock portfolios backing participating-with- profit policyholder contracts, and equities held for employee benefit plans. Exposure to real estate risk includes direct holdings in property and property company shares and funds. Returns on unit-linked contracts, whether classified as insurance or investment contracts, may be exposed to risks from equity and real estate, but these risks are borne by policyholders. However, the Group is indirectly exposed to market movements from unit-linked contracts with respect to both earnings and economic capital. Market movements affect the amount of fee income earned when the fee income level is dependent on the valuation of the asset base. Therefore, the value of in-force business for unit-linked business can be negatively affected by adverse movements in equity and real estate markets.
The Group manages credit-spread risk, which describes the sensitivity of the values of assets and liabilities due to changes in the level or the volatility of credit spreads, over the risk-free interest rate yield curves. Movements of credit spreads are driven by expected probability of default, expected losses in cases of defaults of issuers, the uncertainty of default probabilities and losses.
The following describes limitations of the Group investment sensitivities. Group sensitivities show the effects of a change of certain risk factors, while other assumptions remain unchanged. The interest rate scenarios assume a parallel shift of all interest rates in the respective currencies. They do not take into account the possibility that interest rate changes might differ by rating class; these are disclosed separately as credit spread risk sensitivities. The sensitivity analysis is based on economic assets, and not on shareholders’ equity or net income as set out in the consolidated financial statements. The sensitivities only cover Group investments, not insurance or other liabilities. The equity market scenarios assume a concurrent movement of all stock markets. The sensitivity analysis does not take into account actions that might be taken to mitigate losses. Actions may involve changing the asset allocation, for example through selling and buying assets. 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.
Basis of presentation – Property & Casualty, Life, 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. 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.
Analysis of economic sensitivities for interest-rate risk Table 4 shows the estimated net impact before tax of a 100 basis point increase/decrease in yield curves after consideration of hedges in place, as of December 31, 2018 and 2017.
In USD millions, as of December 31 2018 2017 100 basis point increase in the interest rate yield curves Property and casualty (180) (278)
Rest of the business (192) (275) 100 basis point decrease in the interest rate yield curves Property and casualty (8) 100
In USD millions, as of December 31 2018 2017 100 basis point increase in credit spreads Property & Casualty (1,614) (1,694)
Table 7 shows the credit risk exposure of debt securities, by credit rating. As of December 31, 2018, 95.2 percent of the Group’s debt securities was investment grade and 25.2 percent was rated ‘AAA.’ As of December 31, 2017, 95.4 percent of debt securities was investment grade and 25.2 percent was rated ‘AAA.’
In addition to debt exposure, the Group had loan exposure of USD 4.4 billion and USD 4.9 billion to the German central government or the German federal states as of December 31, 2018 and 2017, respectively. For more information, see the ‘mortgage loans and other loans’ section.
Mortgage loans and other loans Mortgage loans amounted to USD 6.6 billion as of December 31, 2018 and USD 7.0 billion as of December 31, 2017. The Group’s largest mortgage loan portfolios are held in Switzerland (USD 3.4 billion) and in Germany (USD 2.3 billion); these are predominantly secured against residential property but also include mortgages secured by commercial property. The Group invests in mortgages in the U.S. (USD 0.6 billion); these are mainly participations in large mortgage loans secured against commercial property.
Derivatives The 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 could also arise 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 Zurich’s risk policy manuals. 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 or centrally cleared instruments whenever possible.
The Group’s objective in managing credit risk exposures is to maintain them within parameters that reflect the Group’s strategic objectives, and its risk appetite and tolerance. Sources of credit risk are assessed and monitored, and the Group has policies to manage specific risks within various subcategories of credit risk. To assess counterparty credit risk, the Group uses ratings assigned by external rating agencies, qualified third parties such as asset managers, and internal rating assessments. If external rating agencies’ ratings differ, the Group generally applies the lowest, unless other indicators justify an alternative, which may be an internal credit rating.
On-balance sheet exposures are the main source of credit risk. Off-balance sheet credit exposures are related primarily to certain insurance products, reinsurance and collateral used to protect underlying credit exposures on the balance sheet. The Group also has off-balance sheet exposures related to undrawn loan commitments of USD 2 million and USD 16 million as of December 31, 2018 and 2017, respectively. See note 22 of the consolidated financial statements for undrawn loan commitments.
Credit risk related to reinsurance assets The Group’s Corporate Reinsurance Security Committee manages the credit quality of cessions and reinsurance assets. The Group typically cedes new business to authorized reinsurers with a minimum rating of ‘A–.’ As of December 31, 2018 and 2017 respectively, 52 percent and 52 percent of the exposure ceded to reinsurers that are rated below ‘A–’ or are not rated, was collateralized. Of the exposure ceded to reinsurers that are rated below ‘A–’ or are not rated, 50 percent was ceded to captive insurance companies in 2018, and 51 percent in 2017.
Rating 1 The value of the collateral received amounts to USD 9.6 billion and USD 9.4 billion as of December 31, 2018 and 2017, respectively.
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. Zurich has a framework to identify, assess, quantify, mitigate, monitor and report operational risk within the Group. Within this framework, the Group: 33 Uses a scenario-based approach to assess, model and quantify the capital required for operational risk for business units under extreme circumstances. This approach allows information to be compared across the Group and highlights the main scenarios contributing to the Z-ECM capital required.
33 Documents and reviews loss events exceeding a threshold determined per Zurich’s risk policy manuals. Remedial action is taken to avoid a recurrence of such operational loss events.
The Group promotes risk awareness and understanding of controls with communication and training. Key risk management and internal control systems are designed at Group level and implemented Group-wide.
Management, as the first line of defense, is responsible for identifying, evaluating and addressing significant risks, and designing, implementing and maintaining internal control. Key processes and controls in the organization are subject to review and challenge by management, Group Risk Management, Group Compliance and Group Audit. Control issues of Group-level significance and associated mitigation actions are reported regularly to the Audit Committee of the Board. The Risk and Investment Committee of the Board reviews the effectiveness of the Group’s risk management system, including the Group’s risk tolerance and enterprise-wide risk governance framework, in accordance with the charter for each committee.
The Group’s Disclosure Committee, chaired by the Head of Group Financial Accounting and Reporting, assesses the content, accuracy and integrity of the disclosures and the effectiveness of the internal controls over financial reporting. The conclusions result in a recommendation to the Group Chief Financial Officer to release the financial disclosures to the Audit Committee of the Board, which may challenge further. The Board reviews and approves the announcement of the results and the annual report before they are made public.
The Group regularly analyzes the liquidity of the investment assets, and monitors that the liquidity of assets stays in line with the liquidity needs. During 2018, the Group was within its capacity to hold illiquid assets.
The Group works to reduce unintended risks of strategic business decisions through its risk assessment processes and tools, including the Total Risk Profiling™ process. As part of the annual assessment of strategic risks, the Executive Committee (ExCo) assessed potential risks from both external and internal factors, looking at 2019 and beyond. These include: macro-economic risks such as financial stress due to geopolitical uncertainties and monetary policy; long-term capital and liquidity impacts of new post-Brexit regulatory regime in the UK; changes affecting competitiveness in markets where Zurich is active; information security including cyber risks and digital transformation. The ExCo defined actions to respond as appropriate and reviews changes to the key risks and their status of actions at least quarterly.
The Total Risk Profiling TM is the Group's primary tool to assess strategic risks throughout the Group and in 2018 was used to update our climate risk assessment. The assessment confirmed that both physical and transition risks remain manageable and foreseeable near-term (less than five years), whereas long-term risks (5 –10 years and beyond) remain elevated and highly uncertain. In our current assessment, long-term risks are more likely to be driven by physical effects of climate change, in line with our climate risk score card which suggests that transition to a two-degree scenario became less likely in 2018.
More information can be found in Zurich’s TCFD disclosure and in our report Managing the impacts of climate change: risk management responses.
Full year 2018 results show strong performance in a challenging market and claims environment, with the business operating profit (BOP) up 20 percent. BOPAT ROE was 12.1 percent for the year.
The results position the Group to deliver fully on the targets for the 2017 to 2019 plan period, with progress across all areas of the business both from a financial, as well as from a strategic perspective.” George Quinn Group Chief Financial Officer 2017– 2019 financial targets
FY 2018 1 Business operating profit after tax return on equity, excluding unrealized gains and losses.
Zurich Insurance Group Annual Report 2018153 and with a negative headwind from mark-tomarket effects on assets held at fair value. The top line remained stable on a like-for-like basis. The accident year combined ratio excluding catastrophes reduced by a further 0.4 percentage points driven by an improved underwriting performance.
The Group’s Life business delivered an excellent performance, with growth across all regions reflecting the success of the Group’s strategy of focusing on protection and unit-linked business. Overall, Life’s business operating profit increased 23 percent in the year, driven by continued portfolio growth and further cost improvement. The quality and resilience of the Life performance remains high, with earnings driven largely by loadings and fees and technical margins.
As part of this, the Group achieved a further USD 400 million of cost savings over the course of 2018, with cumulative net savings of approximately USD 1.1 billion achieved to date, and with further savings expected to be delivered over the course of 2019.
A strong capital position and focus on cash generation During the year, management continued to improve the Group’s focus and optimize the use of capital. The Group’s internal economic capital model (Z-ECM) remained very strong at an estimated 125 percent ,2 and above the target range.
In line with the stated dividend policy, the board proposed a 6 percent increase in the dividend to CHF 19 per share.
Progress made across all businesses Property & Casualty results demonstrate further strong progress with a business operating profit up 35 percent in another year of elevated natural catastrophe events 3 Provided for informational purposes only. Zurich Insurance Group has no ownership interest in the Farmers Exchanges. Farmers Group, Inc., a wholly owned subsidiary of the Group, provides certain non-claims administrative, management, and ancillary services to the Farmers Exchanges as its attorney-in-fact and receives fees for its services.
4 In local currency and adjusted for closed acquisitions and disposals. 5 Continuing operations only, excludes discontinued operations (21st Century outside of California and Hawaii, Business Insurance Independent Agents, and other businesses).
The information contained within the financial review is unaudited and is based on the consolidated results of the Group for the years ended December 31, 2018 and 2017. All amounts are shown in U.S. dollars and rounded to the nearest million unless otherwise stated, with the consequence that the rounded amounts may not always add up to the rounded total. All ratios and variances are calculated using the underlying amounts rather than the rounded amounts. This document should be read in conjunction with the annual results 2018 of the Group and, in particular, with its consolidated financial statements and embedded value report for the year ended December 31, 2018.
In addition to the figures stated in accordance with International Financial Reporting Standards (IFRS), the Group uses business operating profit (BOP), new business metrics and other performance indicators to enhance the understanding of its results. Details of these additional measures are set out in the separately published glossary. These should be viewed as complementary to, and not as substitutes for the IFRS figures. For a reconciliation of business operating profit to net income attributable to shareholders (NIAS), see note 27 (table 27.4) of the audited consolidated financial statements.
Business operating profit 4,566 3,803 20% Net income attributable to shareholders 3,716 3,004 24%
P&C business operating profit 2,085 1,546 35% P&C gross written premiums and policy fees 33,505 33,024 1% P&C combined ratio 97.8% 100.9% 3.1 pts
Farmers business operating profit 1,643 1,691 (3%) Farmers Management Services management fees and other related revenues 3 3,204 2,892 11% Farmers Management Services managed gross earned premium margin 7.0% 7.0% – Farmers Re gross written premiums and policy fees 194 995 (81%) Farmers Life new business annual premium equivalent (APE) 2 84 91 (7%)
Average Group investments 4 190,235 189,723 – Net investment result on Group investments 4 6,288 7,249 (13%) Net investment return on Group investments 4,5 3.3% 3.8% (0.5 pts) Total return on Group investments 4,5 0.6% 4.1% (3.4 pts)
2 Details of the principles for calculating new business are included in the embedded value report in the annual results 2018. New business value and new business margin are calculated after the effect of non-controlling interests, whereas APE is presented before non-controlling interests. 3 An adjustment made related to the adoption of IFRS 15 ‘Revenue from Contracts with Customers’ resulted in a USD 289 million increase to revenues and a USD 287 million increase to expenses.
6 2017 balance includes adjustment for effect of adoption of IFRS 15 ‘Revenue from Contracts with Customers’. 7 Ratio as of December 31, 2018 reflects midpoint estimate with an error margin of +/–5 pts. 8 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.
Gross written premiums and policy fees 33,505 33,024 1% Net earned premiums and policy fees 26,431 26,033 2% Insurance benefits and losses, net of reinsurance 17,291 17,996 4% Net underwriting result 574 (231) nm Net investment result 1,884 2,038 (8%) Business operating profit 2,085 1,546 35% Loss ratio 65.4% 69.1% 3.7 pts Expense ratio 32.4% 31.8% (0.6 pts) Combined ratio 97.8% 100.9% 3.1 pts
Gross written premiums in Property & Casualty (P&C) for the full year of 2018 rose 1 percent in U.S. dollars and were flat in local currency and adjusting for the acquisitions, which were closed during the second half of the year.
The underwriting result increased strongly by USD 805 million due to a combination of underlying improvement in the combined ratio, lower natural catastrophe losses and more favorable development of reserves established in prior years. The combined ratio for 2018 improved by 3.1 percentage points to 97.8 percent from 100.9 percent for 2017.
In EMEA the combined ratio benefited from improvements in the underlying loss ratio and a lower level of catastrophes as well as more favorable prior year reserve development.
In North America the combined ratio improved largely due to lower levels of natural catastrophe losses with the underlying combined ratio excluding catastrophes at a similar level to the prior year.
In Latin America, the increase in the combined ratio was mainly driven by higher levels of exceptional large losses in Argentina and Mexico, the absence of a one-time benefit to the insurance premium tax in Brazil and very favorable prior year reserve development included in 2017.
Life Business Operating Profit increased by 23 percent to USD 1.6 billion and included USD 20 million of charges related to the Group’s restructuring.
In Latin America, higher business volumes supported earnings growth, with the Business Operating Profit increasing 8 percent in U.S. dollars and 28 percent in local currencies and reflects devaluation in a number of Latin American currencies. The result also includes a foreign exchange benefit of USD 36 million in Argentina, as a result of a portion of the domestic liabilities being backed by U.S. dollar denominated securities as well as integration costs of USD 8 million related to the acquisitions in Chile and Mexico.
Asia Pacific Business Operating Profit increased by USD 53 million, an increase of 40 percent in U.S. dollars and in local currencies. Growth was driven by portfolio growth across the region as well as a first time contribution of USD 27 million from the reinsurance agreement with OnePath Life, partially offset by initial integration costs of USD 16 million relating to the OnePath Life acquisition.
In North America, earnings increased by USD 33 million compared to the prior year due to favorable assumption updates and a one-time provision release.
Net inflows decreased by 4 percent compared to the prior year. The decrease was primarily driven by the absence of a single large additional contribution to an existing corporate protection scheme in North America.
In EMEA, like-for-like growth was 5 percent with underlying growth in most countries. Growth was driven in particular by corporate protection and a large longevity transaction in the UK.
New business value (NBV) increased 1 percent on a like-for-like basis after adjusting for currency, acquisitions and the disposal of the UK workplace savings business, and decreased 2 percent in U.S. dollars.
Underlying volume growth in EMEA, Latin America and Asia Pacific was offset by the absence of a large US corporate protection scheme in 2017.
EMEA saw an increase in new business value due to improvements in business mix and favorable currency translation effects.
Farmers Management Services (FMS) Business Operating Profit was broadly stable compared to the prior year, with growth in the gross management result driven by higher gross earned premiums at Farmers Exchanges offsetting USD 23 million of unfavorable mark-to-market impacts on a deferred compensation plan.
Farmers Re Business Operating Profit was USD 14 million lower than in the prior year, as a consequence of the announced reduction in the all lines quota share participation from 8 percent to 1 percent, effective December 31, 2017. The combined ratio was 1 percentage point lower, driven by improved underwriting results at the Farmers Exchanges.
The Farmers Exchanges are owned by their policyholders. Farmers Group, Inc., a wholly owned subsidiary of the Group, provides certain non-claims administrative, management, and ancillary services to the Farmers Exchanges as attorney-in-fact and receives fees for its services.
Gross written premiums 20,325 19,908 2% Gross earned premiums 20,171 19,841 2%
The Farmers Exchanges showed continued growth in top-line through 2018. Gross written premiums for continuing operations increased by 3.7 percent compared to prior year, with growth coming in all lines of business and driven by a combination of rate increases, improved retention as a result of Farmers’ customer focused strategy, further expansion into the eastern United States and the agreement with Uber to provide commercial rideshare insurance in Georgia and Pennsylvania. In the eastern United States, the Farmers Exchanges saw growth in gross written premiums of 33 percent year-on-year including the Uber rideshare business.
Top-line growth in continuing operations was partially offset by the run-off of discontinued operations, consisting primarily of two books of business: 21st Century outside of California and Hawaii and approximately USD 200 million of gross written premiums of business insurance distributed through independent agents, to which renewal rights were sold in February 2018. It is expected that the impact on growth from the run-off of this portfolio will be significantly reduced in 2019.
Non-Core Businesses in USD millions, for the years ended December 31 2018 2017 Change
Zurich Legacy Solutions 43 (8) nm Other run-off (7) 47 nm Total business operating profit 37 39 (6%)
Non-Core business operating profit was USD 37 million reflecting the completion of a number of transactions, including the transfer of the German med-mal portfolio to Catalina and the sale of an Australian compulsory thirdparty liability portfolio to Enstar Group, as well as some expenses related to the reinsurance of the UK employers liability portfolio to Catalina announced in December 2018.
The total assets for the Group decreased to USD 395 billion from USD 422 billion in 2017. The decrease was mainly driven by foreign exchange movements, whereby net assets predominantly denominated in the British pound and euro weakened against the U.S. dollar, and declines in market valuations on the Group’s investment portfolio. Additionally, assets related to certain UK businesses being held for sale decreased following the lapse of a larger portfolio included in this divestment. The Group’s 2018 acquisitions added USD 462 million of goodwill, partly offset by USD 180 million of negative foreign currency translation effect.
The Group’s balance sheet remains very strong, as demonstrated by S&P and Moody’s financial strength ratings for the Zurich Insurance Company Ltd of AA- and Aa3, respectively, both with a stable look. In addition, as of December 31, 2018, the Group’s estimated Z-ECM ratio remained very strong at 125 percent, with an error margin of +/–5 percentage points.
In September, the Group announced it had entered into agreements to acquire 80 percent of PT Asuransi Adira Dinamika (Adira Insurance) from PT Bank Danamon Indonesia (Bank Danamon) and a minority investor for approximately USD 414 million. The transaction includes two separate long-term strategic cooperation agreements in Indonesia with Bank Danamon and PT Adira Dinamika Multi Finance TbK. The transaction is expected to close in the first half of 2019, subject to regulatory approval.
Total tax contribution reflects Zurich’s economic contribution to the economy in taxes – the direct and indirect taxes paid by Zurich (‘tax borne by the shareholders’) and those taxes that Zurich is legally obliged to collect on behalf of the tax administrations (‘tax collected’): Taxes borne by Shareholders Total 2017: USD 2.9bn (all numbers based on IFRS excluding deferred income tax)
Contribution to total investment return by asset class (in basis points)
Our disciplined investment approach has again demonstrated its effectiveness, enabling us to achieve our mission of producing consistent, strong, risk-adjusted investment returns relative to liabilities for Zurich’s balance sheet and unit-linked customers.
We also made progress in building capabilities that deliver additional fee income to the Group. In Switzerland, we merged our real estate and mortgage capabilities into Zurich Invest AG to form an integrated asset management platform to serve mainly domestic institutional clients. At the end of 2018, Zurich Invest AG had USD 35 billion of assets under management.
During 2018, Zurich’s sources of investment risk remained well balanced. Equity, credit and real estate risk contributed approximately 80 percent to the total market risk, keeping unrewarded risk exposure low.
Overview of investment results The total investment return of 0.65 percent dropped by 3.5 percentage points versus 2017, mainly due to rising bond yields, widening credit spreads and negative returns from equities, offset by positive real estate returns. Gross unrealized gains decreased by USD 5.1 billion, reflecting negative market performance across many asset classes.
3 Risk drivers of market risk (at expected shortfall 99%) show marginal contribution to the total market risk. Numbers shown net of non-controlling interests.
Consolidated statements of changes in equity 174 1. Basis of presentation 176 2. New accounting standards and amendments to published accounting standards 178 3. Summary of significant accounting policies 181 4. Critical accounting judgments and estimates 188 5. Acquisitions and divestments 192 6. Group investments 196 7. Group derivative financial instruments and hedge accounting 199 8. Liabilities for insurance contracts and reinsurers’ share of liabilities for insurance contracts 203 9. Liabilities for investment contracts 209 10. Gross and ceded insurance revenues and expenses 211 11. Deferred policy acquisition costs and deferred origination costs 212 13. Property and equipment 214 14. Attorney-in-fact contracts, goodwill and other intangible assets 215 15. Receivables and other assets 217 16. Other liabilities 218 17. Income taxes 220 18. Senior and subordinated debt 223 19. Shareholders’ equity, dividends and earnings per share 225 20. Employee benefits 228 21. Share-based compensation and cash incentive plans 236 22. Commitments and contingencies, legal proceedings and regulatory investigations 238 23. Fair value measurement 241 24. Analysis of financial assets 249 25. Related-party transactions 253 26. Relationship with the Farmers Exchanges 254 27. Segment information 256 28. Interest in subsidiaries 271 29. Events after the balance sheet date 275
Net income after taxes 3,977 3,309 attributable to non-controlling interests 261 305 attributable to shareholders 3,716 3,004 in USD
Basic earnings per share 19 25.10 20.02 Diluted earnings per share 19 24.83 19.90 in CHF
Equity securities 16,220 17,787 Debt securities 139,870 148,261 Investment property 12,351 12,238 Mortgage loans 6,556 7,047 Other loans 7,614 8,730 Investments in associates and joint ventures 36 21
Other intangible assets 14 4,542 4,762 Total assets 395,342 422,065 1 In 2018, the Group reclassified USD 24 billion of assets to held for sale based on agreements signed to sell business in the UK, Venezuela and Germany (see note 5). In addition, assets held for sale include land and buildings formerly classified as investment property and held for own use amounting to USD 29 million. In 2017, the Group reclassified USD 29 billion of assets to held for sale based on agreements signed to sell business in the UK (see note 5). In addition, assets held for sale include land and buildings formerly classified as investment property and held for own use amounting to USD 50 million.
Liabilities and equity in USD millions, as of December 31 Notes 2018 2017
Liabilities Liabilities for investment contracts 9 51,439 55,627 Deposits received under ceded reinsurance contracts 612 512 Deferred front-end fees 5,177 5,429 Liabilities for insurance contracts 8 249,208 263,805 Obligations to repurchase securities 1,316 1,394
Consolidated statements of cash flows in USD millions, for the years ended December 31 2018 2017
Underwriting activities: (8,726) 14,255 Liabilities for insurance contracts, gross (1,547) 7,093 Reinsurers’ share of liabilities for insurance contracts (744) (1,543) Liabilities for investment contracts (5,424) 7,760 Deferred policy acquisition costs (1,506) 308 Deferred origination costs 19 15 Deposits made under assumed reinsurance contracts 365 705 Deposits received under ceded reinsurance contracts 110 (83)
Cash flows from investing activities Additions to tangible and intangible assets (1,152) (530) Disposals of tangible and intangible assets 292 29 (Acquisitions)/disposals of equity method accounted investments, net (17) 3 Acquisitions of companies, net of cash acquired (465) (578) Divestments of companies, net of cash divested (13) 220 Dividends from equity method accounted investments 1 1 Net cash provided by/(used in) investing activities (1,352) (856) Cash flows from financing activities Dividends paid (3,015) (2,891) Issuance of share capital 2 53 Net movement in treasury shares (957) 18 Issuance of debt 3,079 – Repayment of debt (1,566) (1,049) Net cash provided by/(used in) financing activities (2,457) (3,868) Foreign currency translation effects on cash and cash equivalents (319) 420 Change in cash and cash equivalents 260 902 Cash and cash equivalents as of January 1 8,850 7,948 Total cash and cash equivalents as of December 31 9,110 8,850 of which: Cash and cash equivalents 8,649 8,228 of which: Unit-linked 461 622
Other supplementary cash flow disclosures Other interest income received 4,851 4,783 Dividend income received 1,993 1,710 Other interest expense paid (883) (936) Income taxes paid (1,598) (1,589)
Cash and cash equivalents comprise the following: Cash at bank and in hand 8,535 7,993 Cash equivalents 575 857
For the periods ended December 31, 2018 and 2017, cash and cash equivalents held to meet local regulatory requirements were USD 825 million and USD 652 million, respectively.
of which: share buy-back program – – – – – – – – – – – Reclassification from revaluation reserves – – – – – – – 17 17 – 17 Total comprehensive income for the period, net of tax – – – 269 (9) 1,211 (7) 3,345 4,808 462 5,270
Net income – – – – – – – 3,004 3,004 Net unrealized gains/(losses) on available-for-sale investments – – – 269 – – – – 269 Cash flow hedges – – – – (9) – – – (9) Cumulative foreign currency translation adjustment – – – – – 1,211 – – 1,211 Revaluation reserve – – – – – – (7) – (7) Net actuarial gains/(losses) on pension plans – – – – – – – 341 341
Net changes in capitalization of non-controlling interests – – – – – – – – – (145) (145)
Share-based payment transactions – (7) – – – – – 5 (2) – (2)
Balance as of January 1, 2018 after the adoption of IFRS 15 11 1,162 – 3,078 410 (8,762) 228 36,866 32,993 1,831 34,824 Issuance of share capital – 2 – – – – – – 2 – 2
1 Effect of adoption of IFRS 15 ’Revenue from Contracts with Customers’ (see note 2). 2 Share buy-back program to reflect the purchase value of 1.74 million shares (see note 19).
On February 6, 2019, the Board of Directors of Zurich Insurance Group Ltd authorized these consolidated financial statements for issue. These financial statements will be submitted for approval to the Annual General Meeting of Shareholders to be held on April 3, 2019.
Disclosures under IFRS 4 ‘Insurance Contracts’ and IFRS 7 ‘Financial Instruments: Disclosures’ relating to the nature and extent of risks, and capital disclosures under IAS 1 ‘Presentation of Financial Statements’ have been included in the audited sections of the risk review on pages 5 to 34, and they form an integral part of the consolidated financial statements.
Table 1 summarizes the principal exchange rates used for translation purposes. Net gains/(losses) on foreign currency transactions included in the consolidated income statements were USD 63 million and USD 71 million for the years ended December 31, 2018 and 2017, respectively. Foreign currency exchange forward and swap gains/(losses) included in these amounts were USD 168 million and USD (12) million for the years ended December 31, 2018 and 2017, respectively. The functional currencies of the Group’s entities in Venezuela have been changed from Bolivar Fuerte (VEF) to U.S. dollars (USD) as of January 1, 2018, to reflect the currency in which the Venezuela business mainly operates. The cumulative foreign currency translation adjustment loss of USD 258 million is reflected in equity and will be recognized upon closure of the sale of the Group’s Venezuelan operations (see note 5).
Consolidated income statements and cash flows at average exchange rates 12/31/18 12/31/17 12/31/18 12/31/17
Standards, amendments and interpretations effective or early adopted as of January 1, 2018 and relevant for the Group’s operations Table 2.1 shows new accounting standards or amendments to and interpretations of standards relevant to the Group that have been implemented for the financial year beginning January 1, 2018, with no material impact on the Group’s financial position or performance. Amendments resulting from the IASB annual improvements project have no impact on the Group’s financials.
IFRS 15 ‘Revenue from Contracts with Customers’ IFRS 15 ‘Revenue from Contracts with Customers’ establishes the principles that are applied when reporting information about the nature, amount, timing and uncertainty of revenue and cash flows from a contract with a customer (see note 3, paragraphs d) and g)). IFRS 15 does not apply to revenues relating to insurance contracts, lease contracts and financial instruments. As permitted by the transitional provisions of IFRS 15, the Group elected not to restate comparative figures. The cumulative effect of the application of IFRS 15 of USD 70 million net of tax was recognized in opening retained earnings to reverse income recognized prior to January 1, 2018 in respect of Farmers membership fees. Membership fee revenue that was previously recognized at the time of the policy issuance is recognized over the expected life of the customer relationship, as customer setup activities covered by that fee do not represent a separate performance obligation under IFRS 15. Similarly, the costs directly related to fulfilling the contract that were previously recognized as incurred are recognized as an asset and subsequently amortized using the same pattern as the related revenue.
Additionally, beginning January 1, 2018, certain reimbursements received for ancillary services incurred primarily on behalf of the Farmers Exchanges and the related expenses are presented on a gross basis totaling USD 287 million. Overall, application of IFRS 15 did not result in a material impact on the Group’s financial position or performance.
Based on the volume of in-force non-cancellable operating leases as of December 31, 2018 (see note 22) recognition of the right-of-use asset and corresponding discounted lease liability will result in an increase of both assets and liabilities of less than USD 2 billion. Going forward, the Group will make use of the optional recognition exemption for short-term leases and leases of low-value assets. Operating leases expenses for leases not covered by the recognition exemption will be replaced by interest expense, which is typically higher in the earlier periods of the lease, and depreciation of the right-of-use asset recognized on a straight-line basis. The resulting difference in the pattern of expense recognition is not expected to materially affect Group’s operating performance.
In September 2016, the IASB issued an amendment to IFRS 4 introducing a temporary exemption from the adoption of IFRS 9 for reporting entities that have not previously applied any version of IFRS 9 and whose activities are predominantly related to insurance. Based on the analysis performed as of December 31, 2015, the Group was eligible to apply the temporary exemption as the predominance ratio reflecting the share of liabilities connected with insurance to total liabilities exceeded 90 percent. No reassessment of eligibility was required during subsequent annual periods up to and including 2018 as there was no significant change in the activities performed by the Group. We refer to the Annual Report 2016 for further details on the eligibility assessment. Due to the strong interaction between underlying assets held and the measurement of participating insurance contracts, the Group decided to use the option to defer the full implementation of IFRS 9 until IFRS 17 becomes effective.
Under IFRS 9, all equity securities and fund investments, and more debt instruments will be measured at fair value through profit or loss because the characteristics of the contractual cash flows from such instruments are not solely payments of principal and interest on the principal amount outstanding. Furthermore, credit allowances for financial assets carried at amortized cost and debt securities measured at fair value, with changes in fair value recognized in other comprehensive income (OCI), are expected to increase due to the introduction of the expected credit loss methodology. Though overall profit or loss volatility is expected to increase under IFRS 9, the measurement approach for direct participating contracts in IFRS 17 allows such volatility to be largely absorbed in the measurement of insurance liabilities with an option to reflect in shareholders’ equity (OCI) the effect of any asset-liability mismatch. For further information on effects from IFRS 9 see note 24.
In order to adopt IFRS 17 in the consolidated financial statements, a joint IFRS 17 and IFRS 9 Group Implementation Program (Program) sponsored by the Group Chief Financial Officer has been operating since 2017. A steering committee comprised of senior management from various functions (finance, risk, IT, operations and investment management) oversees the work performed by individual work streams.
At its November 2018 meeting the IASB tentatively decided to defer by one year, to January 1, 2022, the effective date of IFRS 17 given its plans to consider whether to explore amendments to IFRS 17, and given the criteria for assessing such potential amendments. The IASB also tentatively decided to defer the fixed expiry date for the temporary exemption in IFRS 4 from applying IFRS 9 to January 1, 2022, so that both standards can be applied simultaneously. The Group is monitoring IASB deliberations while continuing Program delivery according to the current implementation plan.
The Group is currently assessing the impact of the application of both IFRS 17 and IFRS 9. As of December 31, 2018, it was not practicable to quantify what the potential impact would be on the Group’s financial position or performance once these standards will be adopted.
Reserves for losses and loss adjustment expenses Losses and loss adjustment expenses are charged to income as incurred. Reserves for losses and loss adjustment expenses represent estimates of future payments of reported and unreported claims for losses and related expenses, with respect to insured events that have occurred. Any changes in estimates are reflected in the results of operations in the period in which estimates are changed. The Group does not discount its loss reserves, other than for claims with payment patterns which are fixed and reasonably determinable.
The reserves for life benefits for other traditional life insurance policies are calculated using a net level premium valuation method based on actuarial assumptions including mortality, persistency, expenses and investment return, plus a margin for adverse deviations. These assumptions are locked in at inception and are regularly assessed as part of the liability adequacy testing over the period of the contract.
g) Attorney-in-fact (AIF) contracts The AIF contracts reflect the ability of the Group to generate future revenues through Farmers Group Inc. (FGI) based on the FGI’s relationship with the Farmers Exchanges. The Farmers Exchanges are managed but not owned by FGI, a wholly owned subsidiary of the Group. In determining that these relationships have an indefinite useful life, the Group took into consideration the organizational structure of inter-insurance exchanges, under which subscribers exchange contracts with each other and appoint an attorney-in-fact to provide non-claims management services, and the historical AIF relationship between FGI and the Farmers Exchanges. The value of the AIF contracts is tested for impairment at least annually.
The Group establishes IBNR reserves, to recognize the estimated cost of losses for events which have already occurred but which have not yet been notified. These reserves are established to recognize the estimated costs required to bring such claims to final settlement. As these losses have not yet been reported, the Group relies upon historical information and statistical models, based on product line, type and extent of coverage, to estimate its IBNR liability. The Group also uses reported claim trends, claim severities, exposure growth, and other factors in estimating its IBNR reserves. These reserves are revised as additional information becomes available and as claims are actually reported.
b) Fair value measurement In determining the fair values of investments in debt and equity instruments traded on exchanges and in over-thecounter (OTC) markets, the Group makes extensive use of independent, reliable and reputable third party pricing providers and only in rare cases places reliance on valuations that are derived from internal models.
Valuations can be subject to significant judgment, especially when the fair value is determined based on at least one significant unobservable input parameter; such items are classified within level 3 of the fair value hierarchy. See notes 6, 7 and 23 for further information regarding the estimate of fair value.
The Group determines that there is objective evidence of impairment of an available-for-sale equity security, if at the reporting date: 33 its fair value is below the weighted-average cost by an amount significantly exceeding the volatility threshold determined quarterly for the respective equity market (such as North America, Asia Pacific, UK, Switzerland and other European countries); or 33 its fair value has been below the weighted-average cost for a prolonged period of 24 consecutive months or longer
Goodwill and attorney-in-fact (AIF) contracts Goodwill is allocated to a cash generating unit (CGU) as outlined in note 3. The Group has defined the CGUs according to regions, separating Property & Casualty (P&C), Life businesses and other (see note 27). The CGUs which carry the majority of goodwill and AIF contracts are presented in table 4.
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, among 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 sets out for the major CGUs the applied discount rates and the perpetual nominal growth rates beyond the projection period that depend on expectations about country-specific growth rates and inflation as of the date of valuation, as well as the value of goodwill and AIF contracts as of December 31, 2018. No impairment was identified.
d) Deferred taxes Deferred tax assets are recognized if sufficient future taxable income, including income from the reversal of existing taxable temporary differences and available tax planning strategies, is available for realization. The utilization of deferred tax assets arising from temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and their tax bases depends on the generation of sufficient taxable profits in the period in which the underlying asset or liability is recovered or settled. If applicable tax law acknowledges different types of expenses to be tax deductible, deferred tax assets are only recognized if they give rise to deductions against the same type of taxable income. The utilization of deferred tax assets arising from unused tax losses or tax credits depends on the generation of sufficient taxable profits before the unused tax losses or tax credits expire. As of each balance sheet date, management evaluates the recoverability of deferred tax assets and, if it is considered probable that all or a portion of the deferred tax asset will not be utilized, then a valuation allowance is recognized.
e) Employee benefits The Group provides defined benefit plans and other post-employment plans. In assessing the Group’s liability for these plans, critical judgments include estimates of mortality rates, rates of employment turnover, disability, early retirement, discount rates, future salary and pension increases and increases in long-term healthcare costs. Discount rates for significant plans are based on a yield curve approach. The Group sets the discount rate by creating a hypothetical portfolio of high-quality corporate bonds for which the timing and amount of cash flows approximate the estimated payouts of the defined benefit plan. These assumptions may differ from actual results due to changing economic conditions, higher or lower withdrawal rates, or longer or shorter life spans of participants. These differences may result in variability of pension income or expense recorded in future years.
Acquisitions Blue Insurance On October 3, 2018, Cover-More Australia Pty Ltd, a fully owned subsidiary of Zurich Insurance Company Ltd, completed the acquisition of Blue Insurance Ltd (Blue Insurance), an Irish domiciled insurance intermediary acquired for approximately USD 64 million, subject to performance adjustments. Based on the initial purchase price accounting, goodwill amounted to USD 35 million.
EuroAmerica portfolio in Chile On April 20, 2018, the Group announced it had entered into an agreement to acquire the individual and group life insurance portfolios as well as the long-term savings operations of EuroAmerica in Chile. The Group finalized the acquisition on November 5, 2018, for an estimated aggregate price of USD 144 million, subject to closing adjustments. Based on the initial purchase price accounting, goodwill amounted to USD 102 million.
Liabilities for insurance contracts 602 Other liabilities 118 Liabilities acquired 720
QBE Latin America’s net income after taxes for the months since the acquisition dates, as included in the Group consolidated income statements for the year ended December 31, 2018, amounts to USD 3 million including transaction-related costs. Pro-forma net income after taxes for the full 12 months ended December 31, 2018, amounts to approximately USD 21 million, adjusted for transaction-related costs incurred by QBE Latin America. In addition, the Group incurred transaction-related costs of approximately USD 9 million in non-technical expenses in BOP. The majority has been incurred in 2018.
Divestments Held for sale On December 21, 2018, the Group entered into an agreement to sell its 51 percent participation in ADAC Autoversicherung AG and the shares in Bonnfinanz AG. The sale of the shares in ADAC Autoversicherung AG became effective as of January 1, 2019, while the sale of Bonnfinanz AG is expected to close in the first half of 2019. As of December 31, 2018, assets and liabilities of USD 431 million and USD 294 million, respectively, were reclassified to held for sale.
On December 14, 2018, Zurich Insurance plc entered into an agreement with Catalina Holdings (Bermuda) Ltd and certain of its subsidiaries to transfer a portfolio of pre-2007 United Kingdom legacy employers’ liability policies to Catalina London Limited, subject to regulatory and court approvals. The sale is expected to close in the second half of 2019. As of December 31, 2018, assets and liabilities reclassified to held for sale were USD 260 million and USD 1.8 billion, respectively.
On November 7, 2018, the Group entered into an agreement to sell its Venezuelan operations, subject to regulatory approval. The Group currently has USD 258 million of negative cumulative translation adjustments which will be recognized in the statement of income upon completion of the sale.
UK workplace pensions and savings business On April 3, 2018, Sterling ISA Managers Limited completed the sale of its Corporate Savings Platform together with the associated infrastructure, assets and business to LBG subsidiary, Scottish Widows Administration Services Limited. The remaining business is to be transferred by Zurich Assurance Ltd to Scottish Widows Limited by a UK court process under Part VII of the Financial Services and Markets Act 2000. The target transfer date is July 1, 2019.
Endsleigh Limited On March 29, 2018, the Group completed the sale of the Endsleigh Limited group of companies to A-Plan Holdings. A pre-tax loss of USD 116 million has been recorded within net gains/losses on divestment of businesses, of which USD 97 million were recognized in December 2017 at the time the sale was announced.
The final purchase price for Cover-More and Halo amounted to USD 580 million gross of a pre-closing dividend of USD 14 million. Based on the initial purchase accounting, the fair value of net tangible assets acquired amounted to minus USD 99 million and identifiable intangible assets estimated at USD 163 million, gross of related deferred tax liabilities of USD 33 million. Residual goodwill amounted to USD 549 million, including a USD 16 million reduction of Goodwill and deferred tax liability in 2018, which represents the future growth potential of the travel insurance assistance business, the value of the workforce with their distribution capabilities and related know-how and synergies with the Group.
Table 5.2 shows the main balance sheet line items as of the acquisition date, representing the fair value of Cover-More and Halo net tangible assets acquired, intangible assets and goodwill.
Cover-More balance sheet as of the acquisition date in USD millions, as of April 13, 2017 Total
Divestments Middle East operations On June 19, 2017, the Group closed the sale of its Property & Casualty insurance operations in the Middle East to Cigna International Corporation for a sales price of approximately USD 48 million subject to a purchase price adjustment. A pre-tax gain of USD 10 million has been recorded within net gains/(losses) on divestment of businesses.
Taiwan operations On January 17, 2017, the Group closed the sale of its Property & Casualty insurance operations in Taiwan to Hotai Motor Co., Ltd for a sales price of approximately USD 213 million. A pre-tax loss of USD 9 million has been recorded within net gains/(losses) on divestment of businesses.
Investments in associates and joint ventures 1 3 – – 2 3 – –
Equity securities: Fair value through profit or loss 3,633 2.0 3,597 1.9
Debt securities: Fair value through profit or loss 5,229 2.9 5,699 2.9
As of January 1 12,238 10,562 Additions and improvements 757 1,124 Acquisitions/(divestments) 1 (2)
Market value revaluation 247 243 Transfer from/to assets held for own use – 51 Transfer to assets held for sale (15) (70) Foreign currency translation effects (315) 749 As of December 31 12,351 12,238
Gross unrealized gains/(losses) on Group investments 6,868 11,932 Less amount of unrealized gains/(losses) on investments attributable to: Life policyholder dividends and other policyholder liabilities (4,857) (6,779) Life deferred acquisition costs and present value of future profits (490) (702) Deferred income taxes (476) (928) Non-controlling interests (33) (36)
Securities lending, repurchase and reverse repurchase agreements in USD millions, as of December 31 2018 2017
2 The Group had the right to sell or repledge, in the absence of default by its counterparties, securities received as collateral with a fair value of USD 629 million and USD 818 million as of December 31, 2018 and 2017, respectively.
3 The Group’s counterparties had the right to sell or repledge, in the absence of default, assets pledged as collateral with a fair value of USD 609 million and USD 797 million as of December 31, 2018 and 2017, respectively. The majority of these assets were debt securities.
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 nil as of December 31, 2018 and 2017.
Under the terms of securities lending or repurchase agreements, the Group retains substantially all the risks and rewards of ownership of the transferred securities, and also retains contractual rights to the cash flows from these securities. These securities are therefore not derecognized from the Group’s consolidated balance sheet. Cash received as collateral is recorded as an asset, and a corresponding liability is established. Interest expense is charged to income using the effective interest rate method over the life of the agreement.
Under a reverse repurchase agreement, the securities received are not recognized on the Group’s consolidated balance sheet, as long as the risk and rewards of ownership have not been transferred to the Group. The cash delivered by the Group is derecognized and a corresponding receivable is recorded within receivables and other assets. Interest income is recognized in income using the effective interest rate method over the life of the agreement.
Credit default swaps – 4,000 – 4,000 – (31) – – – Total credit contracts – 4,000 – 4,000 – (31) – – – Other contracts: OTC
Other contracts Other contracts predominantly include stable value products (SVPs) issued to insurance company separate accounts in connection with certain life insurance policies (Bank Owned Life Insurance (BOLI) and Company Owned Life Insurance (COLI)) with an account value of USD 10.8 billion as of December 31, 2018 and 2017, and with a market value of the underlying investments of USD 10.4 billion and USD 10.7 billion as of December 31, 2018 and 2017, respectively (not included in the table above). The Group includes the likelihood of surrender as one of the input parameters to determine the fair value of the SVPs which was nil as of December 31, 2018 and 2017.
Maturity profile of notional amounts and fair values of Group derivative financial instruments in USD millions, as of December 31 2018 2017
Fair value hedges: Cash flow hedges: Net investment hedges: 1 Includes USD 636 million and USD 667 million notional related to derivatives centrally cleared as of December 31, 2018 and 2017, respectively.
Information on debt issuances designated as hedged items in fair value hedge relationships is set out in note 18.
Gains/(losses) arising from fair value hedges in USD millions, for the years ended December 31 2018 2017
As of December 31, 2018, there were no debt issuances designated as hedged items in a cash flow hedge relationship (see note 18).
The Group recognized gains of USD 34 million and USD 33 million in the consolidated income statement within net investment income on Group investments for the years ended December 31, 2018 and 2017, respectively. The Group also recognized net gains/(losses) of USD 5 million and USD (15) million within administrative and other operating expense for the years ended December 31, 2018 and 2017, respectively, as an offset to the foreign currency revaluation on the underlying hedged items.
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 7.5 billion and USD 4.7 billion for the years ended December 31, 2018 and 2017, respectively. The net gains/(losses) deferred in OCI were USD 148 million and USD (168) million before tax for the years ended December 31, 2018 and 2017, respectively.
Reserves for losses and loss adjustment expenses 60,913 65,368 (11,535) (11,070) 49,378 54,298
Policyholder contract deposits and other funds 2 24,266 24,944 (3,416) (3,533) 20,850 21,411 Reserves for unit-linked insurance contracts 68,766 75,413 – – 68,766 75,413
Undiscounted reserves for losses and loss adjustment expenses 62,187 66,715 (11,561) (11,092) 50,627 55,623 of which: Undiscounted amount of discounted reserves 4,117 4,235 (59) (47) 4,058 4,188
Losses and loss adjustment expenses incurred: Losses and loss adjustment expenses paid: Interest effects of discounted reserves 64 121 (6) (1) 59 120 1 In 2018 the Group reclassified USD 1.8 billion to assets and liabilities held for sale in UK and Germany (see note 5). Additional movements mainly related to QBE and Travel Ace and Universal Assistance acquisitions (see note 5) and portfolio transfers in Germany and Australia with retroactive reinsurance agreements signed in 2018. The 2017 net movement is related to the divestment of operations in Middle East and Taiwan and the acquisition of MAA Takaful Berhad.
Significant delays may occur in the notification and settlement of claims, and a substantial measure of experience and judgment is involved in assessing outstanding liabilities, the ultimate cost of which cannot be known with certainty as of the balance sheet date. The reserves for losses and loss adjustment expenses are determined on the basis of the information available. However, it is inherent in the nature of the business written that the ultimate liabilities may vary as a result of subsequent developments.
Net favorable reserve development emerged from reserves established in prior years amounting to USD 674 million mainly related to the following: 33 In EMEA, favorable prior year development of USD 357 million driven by motor and liability in retail; 33 In North America, favorable prior year development of USD 206 million driven by workers’ injury.
The increase in prior year incurred losses versus the previous year mainly relates to catastrophe events during 2017, most notably the hurricanes in North America during the third quarter of 2017.
Development of insurance losses, net in USD millions, as of December 31 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Gross reserves for losses and loss adjustment expenses (undiscounted) 68,126 68,274 67,762 69,986 68,312 64,472 62,971 62,254 66,715 62,187
Cumulative paid as of: Seven years later (37,324) (38,192) (37,625) Eight years later (38,695) (39,568) Nine years later (39,879)
Net undiscounted reserves re-estimated 1: Seven years later 53,315 54,073 54,229 Eight years later 53,341 53,992 Nine years later 53,325
Net reserves for losses and loss adjustment expenses for asbestos amounted to USD 384 million and USD 2 billion for the year ended December 31, 2018 and 2017, respectively. The decrease in year 2018 mainly related to the Group reclassification to assets and liabilities held for sale based on agreements signed to sell businesses in the UK (see note 5).
Fee income and other expenses (4,281) (3,947) 335 198 (3,945) (3,749) Interest and bonuses credited to policyholders 1,951 2,136 (89) (146) 1,862 1,990
Increase/(decrease) recorded in other comprehensive income (228) (65) – – (228) (65)
3 The Group’s life operations in the UK finalized the transfer of USD 1.6 billion of insurance assets and liabilities, associated with an annuities portfolio, as of June 30, 2017. 4 The 2018 net movement mainly relates to the EuroAmerica acquisition in Chile (see note 5) and sale of a portfolio in Singapore.
Future life policyholder benefits are generally calculated by a net premium valuation. In terms of U.S. dollars, the weighted average discount rate used in the calculation of future life policyholder benefits is 2.4 percent and 2.5 percent as of December 31, 2018 and 2017, respectively.
Policyholder contract deposits and other funds gross in USD millions, as of December 31 2018 2017
Universal life and other contracts 13,250 12,987 Policyholder dividends 11,016 11,957
Fee income and other expenses (402) (401) (6) (13) (407) (414) Interest and bonuses credited to policyholders 1,406 1,295 (123) (114) 1,284 1,181 Acquisitions/(divestments) and transfers 2 422 – – – 422 – Increase/(decrease) recorded in other comprehensive income (1,125) (456) – – (1,125) (456)
1 Farmers New World Life Insurance Company entered into a retrospective reinsurance agreement to transfer the risk of certain annuity portfolios with effect from April 1, 2017, which resulted in an initial increase of USD 1.6 billion in ceded policyholder contract deposits and other funds.
Tables 8.9a 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, 2018 and 2017. Reserves for unit-linked insurance contracts amounting to USD 69 billion and USD 75 billion as of December 31, 2018 and 2017, respectively, are not included, as policyholders can generally surrender their contracts at any time, at which point the underlying unit-linked assets would be liquidated. Risks from the liquidation of unit-linked assets are largely borne by the policyholders of unit-linked contracts.
Expected maturity profile for reserves for insurance contracts, net of reinsurance – current period in USD millions, as of December 31, 2018 Reserves for losses and loss adjustment expenses
Liabilities for investment contracts in USD millions, as of December 31 2018 2017
Development of liabilities for investment contracts in USD millions 2018 2017
Fee income and other expenses (464) (564) Interest and bonuses credited to policyholders (2,739) 6,591 Acquisitions/(divestments) and transfers 1 4,139 (29,073) Increase/(decrease) recorded in other comprehensive income (302) 5 Foreign currency translation effects (2,603) 7,823 As of December 31 51,439 55,627 1 As of December 31, 2018, the net carrying amount of the liabilities held for sale has decreased by USD 4 billion compared to the amount of USD 29 billion of unit-linked investment contracts that had been reclassified as of December 31, 2017, based on agreements to sell businesses in the UK (see note 5).
Policyholder dividends and participation in profits in USD millions, for the years ended December 31 2018 2017
Amortization of deferred acquisition costs 6,466 6,777 (810) (583) 5,655 6,193 Amortization of deferred origination costs 74 74 – – 74 74 Commissions and other underwriting and acquisition expenses 1 2,882 3,027 (47) (255) 2,835 2,772 Total underwriting and policy acquisition costs 9,422 9,877 (857) (838) 8,565 9,039 1 Net of additions related to deferred acquisition and origination costs.
Change in reserves for unearned premiums 339 295 (115) (217) 224 79
Development of deferred policy acquisition costs in USD millions Property & Casualty Life Other businesses 1 Total