Zurich is a leading multi-line insurer that serves its customers in global and local markets. With over 55,000 employees, we provide a wide range of general insurance and life insurance products and services. We serve individuals, small businesses, and mid-sized and large companies, including multinational corporations, in more than 170 countries.
Asia-Pacific Zurich has operations in Australia, China, Hong Kong, Indonesia, Japan, Malaysia, New Zealand, Singapore and Taiwan.
Printed climate neutrally with ClimatePartner using green electricity end of February 2014 by Neidhart + Schön AG, www.nsgroup.ch. ISO 14001 certified.
Group overview Financial highlights 2 Message from the Chairman and CEO 4 Market environment 6 Regulatory environment 8
Financial information Consolidated financial statements 180 Embedded value report 304 Holding company 340 Shareholder information 362 Contact information 365 Glossary 366
USD 27,095 m Gross written premiums, policy fees and insurance deposits
Market segments of the Farmers Exchanges 1 Individual and commercial customers
Average Group investments 208,431 204,066 2% Net investment result on Group investments 7,398 8,983 (18%) Net investment return on Group investments 4 3.5% 4.4% (0.9 pts) Total return on Group investments 4 1.3% 7.0% (5.7 pts)
Zurich Santander or new operations in Asia (including Zurich Insurance Malaysia Berhad – ZIMB). 4 Calculated on average Group investments. 5 Ratios as of July 1, 2013 and January 1, 2013, respectively, are calculated based on the Group’s internal model, which is subject to the review and approval of the Group’s regulator, the Swiss Financial Market Supervisory Authority (FINMA).
AA–/stable Standard & Poor’s financial strength rating on Zurich Insurance Company Ltd (December 31, 2013)
• Global Life business operating profit benefited from growth in protection business and continued to show increases in Latin America, although these were more than offset by reductions elsewhere.
Our results in 2013 benefited from a continued focus on profitability, underpinned by the sustained execution of our product, underwriting and pricing strategies. There were fewer severe catastrophe events compared with 2012. This helped to offset the impacts of an increase in both large and weather-related losses in 2013, as well as a decrease in investment income resulting from persistent low investment yields.
Our strategy for 2014–2016 has three cornerstones. First, we are prioritizing investment in markets and customer segments with strong potential for growth. Examples include the corporate market, in which we are building on the success of our combined General Insurance and Global Life offering to large corporate customers, and our North America Commercial business, where we are investing to better serve our commercial mid-market customers. And we have completed our field work on customer
Second, we are managing other businesses for value. This means optimizing Global Life in-force books and maximizing returns in our smaller General Insurance markets, while turning around or exiting underperforming businesses. Examples include Hong Kong, where we have withdrawn from an underperforming distribution channel, and the Middle East, where we combined the regional management structures of the Middle East, Africa and Europe, creating additional economies of scale.
Third, we aim to grow our operating profits. In 2013, we initiated a major project to reduce complexity and thereby overhead burden across the Group. We are focusing on improving the profitability of a number of our General Insurance portfolios. We are also seeking higher returns from our investment portfolio – without compromising investment discipline.
3 The Zurich Economic Capital Model (Z-ECM) is an internal measure of capital adequacy, which also forms the basis of Zurich’s Swiss Solvency Test model.
4 Cumulative net cash remittances to Zurich Insurance Company Ltd, after deducting central costs, in 2014–2016.
Changes in leadership In early 2014, we announced senior management changes that will further strengthen Zurich’s General Executive Committee. George Quinn, previously with Swiss Re, will become Chief Financial Officer (CFO) from May 2014. Robert Dickie joins Zurich from AIG as Chief Operations and Technology Officer in March 2014. His remit includes Zurich’s shared services, information technology, procurement and sourcing as well as operational transformation. We would like to thank Vibhu Sharma, Group Controller, who stepped in as ad interim CFO, and Markus Nordlin, Chief Information Technology Officer, who took on responsibility for Group Operations ad interim.
Zurich Insurance Group Annual Report 2013 5Message from the Chairman and CEO
At the same time, the progress of globalization is driving the growth of cross-border insurance. Global trade is increasing after an uneven period during the last three years. This growth is likely to continue in line with the global economic recovery, driving demand for cross-border insurance as complexity in supply chains continues to increase and risks become more interconnected. We also see a countertrend toward local protectionism (see the following section on regulatory matters). This will make it much harder to build cross-border business models in retail financial services – which could benefit established global insurers such as Zurich.
Technology and changing customer needs create opportunities Significant changes in technology and how individuals and companies use it are altering the way in which customers access insurance, creating new opportunities. These developments have lowered the cost of delivering insurance products and services, and increased price transparency in retail markets. At the same time, we are also re-evaluating how we use technology and rethinking our value proposition in some markets.
The evolution of ‘Big Data’ (the processing and analysis of large, complex data sets) enables insurers to develop a far more detailed understanding of the risk landscape, a trend which plays to our strengths in the commercial insurance sector. In parallel with these external drivers, we see a change in customers’ behavior and needs. Corporate, commercial mid-market and retail customers are affected differently.
Within the corporate insurance market, there is a trend toward centralization and coordination of insurance purchasing. Corporate customers and brokers are beginning to request combined life and general insurance solutions. The main benefits perceived by customers are operational simplification, with a single point of contact and one platform, as well as better risk insights and better-informed pricing. Distributors in the corporate insurance world are also adapting to this trend.
Commercial mid-market customers are shifting from predominantly relationship- driven to more data-driven decisions. Commercial insurers are now using the same analytical approach that has been in use in the retail markets for many years. Insurers – including Zurich – and brokers are now investing in predictive analytics, which allow the identification of trends, patterns, and relationships among data to improve customer risk selection.
The progress of globalization is driving the growth of cross-border insurance.”
Retail insurance markets are mainly locallyconcentrated and highly competitive. Technology is driving change: Customers expect to access services through many channels, including the telephone, websites and social media. To succeed, insurers must identify the most attractive customer segments that can be served profitably on a large scale, and keep up with technological change.
We can capitalize on the opportunities that will drive the industry and build on the strong platform that we have developed over the past decade, across the corporate, commercial mid-market and retail sectors. We are particularly strong in corporate risks, where we are one of a handful of insurers that can offer our customers a genuinely global service. Zurich also has a leading position in the commercial insurance market in North America. This is an area where our global business model will give us an advantage: We see many opportunities to mirror that success in other markets over time.
We can capitalize on these opportunities and build on the strong platform we have developed.”
Insurance groups are being affected by these tensions. Regulatory oversight of large international insurance groups continues to progress but there will be limited consistency in approach between regulators. Zurich therefore expects to work with regulators that have overlapping remits.
Protection of national interests and new insurance taxes Governmental challenges to the global management of insurance capital are growing, out of concern for the competitiveness of local insurers, the need to raise revenues or simple political expediency.
In recent years, governments have increasingly introduced or maintained nationalistic measures that affect the insurance industry. Examples include mandated reinsurance cessions in Brazil, and dividend and investment restrictions in Argentina. The U.S. is considering taxes on foreign affiliate reinsurance transactions. Canada imposes registration requirements for foreign-affiliated reinsurers. China has also introduced new restrictions.
It is likely that additional operational, compliance and reporting obligations will be imposed on the insurance industry, some of which will have cross-border implications. These schemes tend to generate high compliance costs and require considerable management attention. Global risk pooling, and global capital and liquidity management will come under pressure. Initiatives to raise revenue could affect insurers’ relationships with customers and intermediaries, while skewing the competitive playing field against global players as local players tend to secure more favorable terms.
Consumer regulation and its impact on products and services Since the onset of the financial crisis, there has been a trend toward greater consumer protection. Global standard-setters have adopted principles that center on the avoidance or disclosure of conflicts in the provision of advice; greater choice and ease of switching; the suitability and transparency of products; and recourse for customers if they are dissatisfied.
Data privacy and data management Advances in information technology have made it easier to share and analyze personal data. At the same time, the public and policymakers have become increasingly concerned about data privacy.
Insurers compete by developing deep insights into classifications of risks and by relating them to potential customers. As more data sources and computational capabilities grow, so does the insurer’s capability to select and price risk. However, this requires acceptance by the public and regulators as well as technological capabilities.
Reshaping of corporate governance and remuneration concerns The financial crisis has changed the way corporate governance is perceived. The role of boards, their composition and the qualification of their members are at the center of public concern. Regional initiatives such as Solvency II and national reforms accompany the global call for better corporate governance. Likewise, corporate governance expectations previously applicable to stock exchange-listed companies are increasingly applied to the boards of their subsidiaries. The management of organizational complexity (particularly in multinational groups) has become a concern of regulators.
In the aftermath of the financial crisis, global standard setters have released principles for sound compensation practices. Of most relevance to Zurich, FINMA has introduced strict remuneration requirements. And in March 2013, the people of Switzerland overwhelmingly approved the so-called Minder or ‘say on pay’ initiative to strengthen shareholders’ rights with respect to executive compensation. The new requirements are applicable to all publicly-listed companies.
The financial crisis has changed the way corporate governance is perceived.”
To take Zurich to the next level, we are focusing more closely on the markets and customer segments where we have a competitive edge: those where we can offer a superior value proposition to our customers. We are investing for growth in mature and emerging markets with the highest potential, managing other businesses for value, and growing operating earnings by further reducing complexity and operational costs while extracting additional profits from our business and investments.
The way to success will be the flawless and relentless execution of our strategic plan to build a more competitive, more successful Zurich – a business that will be recognized as the best in its chosen markets, worldwide.
We summarize our strategy under the headings ‘who we are, what we do and how we do it’. ‘Who we are’ is about our purpose and identity. ‘What we do’ describes the markets and customers we serve. ‘How we do it’ defines the enablers of success.
We are managing other businesses for value. This means optimizing Global Life in-force books and maximizing returns in our smaller General Insurance markets, while turning around or exiting underperforming businesses.
We take a focused approach to customers. That means understanding the needs of the customer segments we can serve profitably with superior propositions. We are investing in the capabilities needed to serve them and
We are focusing our investments on markets with the highest potential, including mature and emerging markets.”
G ro u p overview ensure we are visible through targeted advertising. We measure our success and use the knowledge we have gained right across our business.
Working together as One Zurich, we aim to offer our customers a superior service and products tailored to their requirements.
Corporate sector: Growth in trade, globalization and inter-connectivity play to our strengths. We are investing in our capabilities and stepping up our ‘One Zurich’ Global Corporate – Corporate Life & Pensions approach to cross-selling, aligning our approach to geographic territories and integrating our offerings.
Commercial mid-market sector: There has been a shift from relationship-driven toward data-driven decisions. Both competitors and brokers are now investing heavily in predictive analytics. At North America Commercial we have begun investing in customer insights, broker value propositions and predictive analytics, with a view to emulating this in other markets.
In Farmers and three other markets, a shift is underway from a product to a customer segment focus. More markets will follow later.
Managing for value: We will optimize our existing businesses and manage them more tightly for value so we can grow earnings and fund growth in other areas. This means extracting more value from the large Global Life in-force books, particularly those in the UK, Germany, Switzerland and the U.S., and continuing to capture value from profitable, smaller General Insurance markets by focusing on and turning around or exiting some of our non-performing operations. This will free up resources for investment in our priority markets.
How we do it Zurich’s strategy is clear about the ‘enablers of success’ – actions we need to take to achieve our objectives.
We are investing in our people and building a culture that is focused on the execution of our strategy – one in which our employees will feel motivated, challenged and proud to be part of Zurich.
Zurich’s targets for 2014 – 2016 Measured by: Improving return on equity BOPAT ROE target 12–14% 1
Delivering sustainable growth Bi-annual report cards providing proof points on the execution of our strategy 1 Excluding unrealized gains and losses. 2 The Zurich Economic Capital Model (Z-ECM) is an internal measure of capital adequacy, which also forms the basis of Zurich’s Swiss Solvency Test model. 3 Cumulative net cash remittances to Zurich Insurance Company Ltd, after deducting central costs, in 2014–2016.
Zurich Insurance Group Annual Report 2013 11Zurich’s strategy 2014 – 2016
The result also benefited from fewer major catastrophe events in 2013, though this benefit was partly offset by a higher level of large and weather-related losses. Overall the performance has more than absorbed the impact of the decrease in investment income resulting from persistent low investment yields.
Improvement in profitability continued, and the Group’s focus on growth was maintained in its priority markets in both General Insurance and Global Life.
Business operating profit (BOP) increased by USD 596 million to USD 4.7 billion, or 15 percent compared with 2012.
The Group delivered solid results in all core businesses. These results together with the Group’s continued strong capital position have enabled the Board of Directors to propose a dividend of CHF 17.00 per share.
Group investments decreased by USD 2.3 billion to USD 207.3 billion, or by 1 percent during the year. The decline in total Group investments was primarily driven by the impact of rising yields on the value of debt securities, partly offset by new cash flows invested in debt and equity securities. The Group maintains a disciplined strategy focused on asset and liability management, and continues to limit risks that it believes are not rewarded. The quality of the investment portfolio remains high, with investment-grade securities comprising 98 percent of the Group’s debt securities.
General Insurance General Insurance business operating profit increased by USD 747 million to USD 2.9 billion, or by 35 percent. The underlying loss experience and expenses improved in 2013, with savings initiatives to reduce expenses reflected in a lower expense ratio. The business also benefited from fewer major catastrophe events. These improvements were partly offset by an increase in large and weather-related losses. Investment income declined compared with 2012.
The net underwriting result increased by USD 868 million to USD 1.3 billion, reflected in the 2.9 percentage points improvement in the combined ratio to 95.5 percent. The improvement also reflected a higher level of favorable development of reserves established in prior years. Gross written premiums and policy fees increased by 828 million to USD 36.4 billion, or by 2 percent.
In this section of our Annual Report you can read about how we aim to create sustainable value by acting responsibly in all aspects of our business and by investing in our people.
Our flood resilience program taps into our insurance expertise in protecting against the risks posed by natural disasters, including floods. Our responsible investment program grew out of another of our core competencies: our role as one of the world’s largest institutional investors. And our work with corporate customers on corporate responsibility risks is a natural extension of our market position as one of the world’s most prominent corporate and commercial insurers.
CR management framework To ensure that we execute on our corporate responsibility strategy, the Group Executive Committee has formed a CR Working Group to advise it on strategy, priorities and objectives, and to drive our performance.
This Working Group ensures that the Group’s corporate responsibility strategy remains integrated in the Group strategy and enables us to live up to Zurich Basics, the Zurich Commitment and the UN Global Compact’s principles on human and labor rights, the environment and anti-corruption. It reports to the GEC twice a year on progress and developments.
The Working Group comprises senior representatives from General Insurance, Global Life, Group Operations, Investment Management, Group Finance and our Group Chief of Staff, who represents the Group’s functions. It is chaired by Mike Kerner, CEO General Insurance, a member of the Group Executive Committee. The composition of the Working Group is reviewed annually.
External commitments and indices Zurich became a signatory of the United Nations Global Compact in July 2011. As a signatory, we are committed to aligning our strategy, culture and day-to-day operations with the Global Compact’s 10 universallyaccepted principles in the areas of human rights, labor, environment and anti-corruption. The principles of the Global Compact complement Zurich Basics, our code of conduct. All Zurich employees are expected to live up to both. More about Corporate responsibility: www.zurich.com/aboutus/ corporateresponsibility/
Zurich became a signatory of the Principles for Responsible Investment (PRI) in July 2012. This global investor initiative, in partnership with the United Nations Environment Programme (UNEP) Finance Initiative and the UN Global Compact, is designed to provide a framework for better integration of environmental, social and governance factors into investment practice. Managing Zurich’s more than USD 200 billion portfolio of Group investments, our investment management function is fully committed to responsible investment.
Zurich works with its alliance partners to ensure that knowledge and ideas fit the needs of local communities and can be put into practice on the ground. As part of its involvement, Zurich not only provides funding, but also supplies resources including the contributions of time, knowledge and expertise of its employees around the world. What we learn through these activities will be made publicly available and shared across a wide group, including with customers, governments and communities.
Programs: Zurich launched a flood resilience program in 2013. The program comprises a five-year commitment, and includes an initial investment of USD 35.6 million by the Z Zurich Foundation. The IFRC was the first to join the new alliance. In March 2013, we announced that we will enhance an existing cooperation with this humanitarian organization that includes a commitment of up to USD 22.7 million over five years. Through the IFRC and the Red Cross national societies, we are putting in place community flood resilience programs in both urban and rural settings. Decisions on which communities to include were based on an approach supported by Zurich’s expertise in hazard assessments. The first priority country programs integrate our risk management knowledge and experience with that of the Red Cross and local communities.
Practical Action project1 1 Commitment over five years starting in 2013. 2 Commitment over four years starting in 2013.
Zurich employees with relevant skills have the opportunity to invest about 500 working days per year. To effectively deploy their skills and resources, and deliver on our commitment of employees’ time, we are developing an employee secondment program, allowing employees to contribute their time, skills and expertise to projects where they can make a difference. For an agreed period of time, employees can be seconded to a project. Selection will be based on their expertise and their manager’s support. Secondments can be with one of Zurich’s development partner organizations such as the IFRC or Practical Action, with a research partner such as Wharton, IIASA, or with a local Red Cross society on the ground.
Over the course of 2013 Zurich further expanded its activities through collaborations and efforts to develop new insights.
Investing in our local communities Purpose: Through local programs and the Z Zurich Foundation, Zurich shares its resources and expertise to help build more resilient communities. This type of investment has a positive impact on local communities, contributing to their well-being and encouraging sustainable development that goes beyond the social and economic value of our business.
Programs: Zurich enables and supports the development of local long-term community activities run by local offices, making it easier for them to share guidance and best practices across the Group, while providing access to funding by the Z Zurich Foundation. In 2013, the Foundation supported Zurich North America in its efforts to help rebuild neighborhoods on Staten Island damaged by Storm Sandy, and Zurich Nordic in building a mentoring program with young disadvantaged adults.
Zurich will invest up to USD 1 billion in green bonds.”
CO2 emissions (tons per sqm) Target: –20% by 2020 *Total change vs baseline 2010 Baseline 29–9%*
Environmental performance, health & safety in our office buildings Purpose: At Zurich, we are mindful of our impact on the environment. By improving our operational performance in terms of the environment, we aim to minimize our direct and indirect environmental impact, as defined in our Group Environmental Policy. For example, our vision is to create truly smart, innovative and sustainable office buildings. We manage our office buildings in line with best practice standards that take into account our environmental footprint and efficiency opportunities. In addition, we aim to minimize business travel through increased use of technology such as video-conferencing. Zurich is setting clear environmental targets and working to increase data transparency, quality and scope of reporting in areas relevant to the environment. Beyond setting concrete targets, we measure and report our environmental performance using relevant key performance indicators (KPIs).
Programs: In 2013, Zurich began implementing a Group- wide environmental management system that includes market-leading environmental reporting software, which will build on and integrate existing activities throughout the company. Further, it will allow us to accurately measure and continuously improve our environmental footprint across all countries in which we operate. Besides reducing our global carbon footprint, this system addresses other areas of environmental impact in our office buildings, such as paper use, water consumption and waste generation. A global network of environmental managers is managing initiatives across the world to actively reduce Zurich’s environmental footprint and aid progress toward the achievement of our environmental targets.
G ro u p overview to produce energy for the company’s own use. SkyKey in Zurich, our new headquarters for the Swiss market, will provide sustainable workplaces for around 2,500 employees and external staff and aim for the highest ‘platinum’ ranking under the Leadership in Energy & Environmental Design (LEED) certification system. The building will flush toilets with rainwater and recycled faucet water using a 100,000-liter water tank. It incorporates environmentally-friendly construction materials from the region.
From a health & safety perspective, projects that we initiated during 2013 included a phased roll-out of a global health & safety incident management system, which went live in the UK, South Africa, Australia and New Zealand. We also deployed a global health & safety induction training module in all the countries where English is spoken as the first language, as well as for Hong Kong. In some countries this module proved so popular that the local business required participation not only by new starters, but also all existing employees. It is currently being translated into nine other languages for global deployment during 2014.
Programs: In 2013, Zurich introduced the supplier contract assurance framework. Corporate responsibility clauses reflecting the UN Global Compact criteria are included in major contracts. Throughout the contract term the adherence of suppliers to these obligations is regularly assessed as part of the supplier relationship management process.
–9%*2.37 1.42 1 2013 data will be available in Q2 2014, calculation methodology currently under revision. 2 Includes emissions from own-use real estate (electricity and heat). 3 Includes emissions from air travel and cars (rental cars and car fleet).
Our people Effective people management plays a key role in Zurich’s strategy. We take a global approach to the development of our people and the retention and attraction of talent.
We want our people to make a positive difference in the world and our communities. We encourage employees to live by our core values, the Zurich Basics, and to take responsibility and care for customers, colleagues, shareholders and communities in line with our Zurich Commitment to stakeholders. We hold our employees accountable to do so.
Building talent Purpose: Attracting and retaining a talented and diverse workforce is one of our strategic goals. Our global approach, supported by regional structures, helps us to attract, retain and develop the right candidates to ensure that we remain competitive.
Programs: In 2013, Zurich’s Chief Executive Officer and the Group Executive Committee approved a Group-wide diversity and inclusion strategy, which helps ensure that the best and brightest want to work for Zurich. Our inclusive culture provides lifelong learning and development opportunities so that employees can reach their full potential. We are aligning our approach to attracting talent to ensure that our inclusive approach is fully integrated into our search and vetting practices. Our aim is to have a workforce reflecting the breadth and diversity of the customers we serve globally.
Programs: Examples of how we are addressing the people management needs of the modern world with the support of specific HR tools include the deployment of a global talent management system to help drive robust succession planning and talent pipelines, and our ongoing Zurich Workforce Analytics activities, which provide management information on key human capital indicators, enabling the entire business to prioritize people interventions based on consistent data and metrics. Technology also plays an important role in terms of people management administration, for example, in our HR Service Centers across several locations – some of which have been recognized externally for the quality of the service provided. This approach helps us to provide focused HR services to our employees and candidates, as well as to measure customer feedback as we strive for continuous improvement.
Developing our people Purpose: We support learning and development for all employees. Developing people is a core element of Zurich’s ambition to be the best global insurance company and of our strategy for 2014–2016. Our aim is to provide personal development and career opportunities in line with what we need to do to achieve our objectives. Employees are in charge of their own careers, and line managers are expected to provide support in terms of on-the-job development, career advice, coaching, feedback and encouragement. Employees are encouraged to have an Individual Development Plan (IDP), which is regarded as a key tool in understanding their personal learning and career development.
Programs: In 2013 we appointed a Chief Learning Officer. This is a new role with responsibility for defining and developing a global approach to learning. A global learning strategy was approved in spring 2013 by the Chief Executive Officer and the Group Executive Committee. This is designed to ensure that all employees are trained according to business needs, and that a strong leadership culture is embedded in all levels of the organization to support the retention and attraction of talent. We have implemented a new joiners training program as well as a senior leadership course. We continue to expand technical academies across the organization. Further programs for new leaders and leadership development programs are planned for 2014.
Our global people activities help employees to take responsibility for their own careers and be the best they can be. Zurich’s Individual Development Plans and Competency Assessments supports the development of their skills and capabilities to meet and support business needs.
In this section Chairman’s statement on corporate governance 26 Corporate governance report 28 Remuneration report 70
When I was appointed I promised you that my focus would be on ensuring the continued stability of the company and that a strong management team was our top priority.
With regard to the Board of Directors, in 2013, besides my appointment, Fred Kindle assumed the role of Vice Chairman last summer and in April, Monica Mächler was elected as a new member.
The Board carries out a self-assessment once a year and every third or fourth year, an external consultant conducts an independent review of the Board. In 2013, following this prescribed pattern, an independent review was carried out by a consultant. The review considered three key aspects of board effectiveness: the Board environment (culture and composition), the work of the Board (strategy, risk and control, and performance management), and the use of time and process (planning and allocation). A detailed report on the findings was produced and considered by the Board, and its recommendations are currently being implemented.
In the area of corporate governance, we have seen clear trends in the development of greater transparency and a strengthening of the position of shareholders. Switzerland has been at the forefront of these developments. On March 3, 2013, Swiss citizens voted in favor of the ‘Minder’ initiative. This resulted in an amendment of the Swiss Constitution that introduces stricter corporate governance requirements for Swiss listed companies. We have closely monitored the discussions and the process leading to the subsequent Ordinance Against Excessive Compensation at Public Corporations that was issued on November 20, 2013 and which came into effect on January 1, 2014. At the AGM on April 2, 2014, you, our shareholders, will decide on the revised Articles of Incorporation which we have drafted in line with this ordinance.
The Corporate governance report describes the structures, rules and processes that are in place to provide for effective governance by Zurich’s Board of Directors and Management. It also reports on the work of the Board of Directors and its committees.
Introduction The Zurich Insurance Group consisting of Zurich Insurance Group Ltd and its subsidiaries (the ‘Group’ or ‘Zurich’) is committed to effective corporate governance for the benefit of its shareholders, customers, employees and other stakeholders based on the principles of fairness, transparency and accountability. Structures, rules and processes are designed to provide for proper organization and conduct of business within Zurich and to define the powers and responsibilities of its corporate bodies and employees.
• Swiss Code of Best Practice for Corporate Governance (Swiss Code of Best Practice), issued in 2002 by economiesuisse, as amended in October 2007.
This report essentially follows the recommended structure outlined in the Directive on Information Relating to Corporate Governance of the SIX Swiss Exchange. The chapter on compensation, shareholdings and loans to Directors and the members of the GEC is dealt with in a separate report, the Remuneration report (see pages 70 to 99) 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 the Swiss Financial Market Supervisory Authority (FINMA) on October 21, 2009 as amended on June 1, 2012.
New appointments: • Markus Nordlin, Group Head of Operations (ad interim)3
The Group pursues a customer-centric strategy and is managed on a matrix basis, reflecting both lines of business and geography. The GEC is headed by the CEO. The CEOs of the business segments General Insurance, Global Life and Farmers as well as the Chief Financial Officer (CFO), the Chief Investment Officer (CIO), the Chief Risk Officer (CRO), the Group Head of Operations and the Group General Counsel are members of the GEC. The geographic regions of Europe, North America, Latin America, Asia-Pacific and Middle East and Africa are represented on the GEC by Regional Chairmen – of which those for Europe, North America and Asia-Pacific and Middle East and Africa are currently members of the GEC – who focus on stakeholder management and business development in respective regions. For further information on the GEC see pages 54 to 62.
• Global Life pursues a strategy with market-leading propositions in unit-linked and protection products as well as fee-based solutions managed through three global pillars (Bank Distribution, Corporate Life & Pensions and Inforce Management) to develop leadership positions in its target markets.
In September 2013, the Group decided that from January 1, 2014, the General Insurance business will manage Middle East and Africa together with Europe as a single market-facing business called Europe, Middle East & Africa (EMEA).
The Global Life segment is managed on a regionally based structure within a global framework, including: North America, Latin America, Europe and Asia-Pacific and Middle East.
A detailed review of the respective business segment results during 2013 can be found in the Operating and financial review starting on page 84. Furthermore, an overview of the Group’s business strengths and activities is contained in the Annual Review, available on Zurich’s website www.zurich.com ( sitecollectiondocuments/financial-reports/annual-review-2013-en.pdf).
allow for cash settlement only. Disclosure must be made separately for purchase positions (including shares, long call options and short put options) and sale positions (including long put options and short call options). The percentage thresholds are calculated on the basis of the total amount of voting rights according to the entry in the commercial register.
Zurich Insurance Group Ltd is obliged to announce shareholdings by third parties in its shares when notification is received from a third party that a threshold has been reached. During 2013 the Group received several notifications by third parties that they had either exceeded or subsequently fallen below the threshold of three percent as a result of purchases or sales.
As of December 31, 2013, Zurich Insurance Group Ltd is not aware of any person or institution, other than Black Rock, Inc., New York (4.97%) and Norges Bank, Oslo (3.07%), which, directly or indirectly, had an interest as a beneficial owner in shares, option rights and/or conversion rights relating to shares of Zurich Insurance Group Ltd representing three percent or more of its issued shares.
Capital structure Share capital As of December 31, 2013, the ordinary share capital of Zurich Insurance Group Ltd amounted to CHF 14,890,322.20 divided into 148,903,222 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 2, 2014 a dividend of CHF 17.00 per share. As the dividend payment is planned to be made from the capital contribution reserve, it will be exempt from Swiss withholding tax.
Changes of share capital during 2013 During 2013, a total of 603,099 shares were issued to employees out of contingent capital. As a result, on December 31, 2013, the share capital amounted to CHF 14,890,322.20 (148,903,222 shares) and both the authorized capital and the contingent share capital (as specified in Article 5bis(1) and in Article 5ter(1a) of the articles of incorporation, respectively) amounted to CHF 1,000,000 (10,000,000 shares) and the other contingent share capital (as specified in Article 5ter(2a) of the articles of incorporation) amounted to CHF 239,203.70 (2,392,037 shares).
Changes of share capital during 2012 During 2012, a total of 914,301 shares were issued to employees out of contingent capital. As a result, on December 31, 2012, the share capital amounted to CHF 14,830,012.30 (148,300,123 shares) and both the authorized capital and the contingent share capital (as specified in Article 5bis(1) and in Article 5ter(1a) of the articles of incorporation, respectively) amounted to CHF 1,000,000 (10,000,000 shares) and the other contingent share capital (as specified in Article 5ter(2a) of the articles of incorporation) amounted to CHF 299,513.60 (2,995,136 shares).
For information on changes of share capital during 2011, see the Annual Report 2012 of Zurich Insurance Group, page 22, pages 172 to 173 and pages 237 to 238.
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. Pursuant to Article 14 of the Articles of Incorporation, each share carries one vote at shareholders’ meetings and entitles 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, 2013. For information on employee share option plans, see the audited Consolidated financial statements, note 23 on pages 259 to 261.
1 Tom de Swaan Chairman of the Board, Chairperson of the Governance and Nominations Committee, Member of the Remuneration Committee 2 Fred Kindle Vice-Chairman of the Board, Member of the Audit Committee, Member of the Governance and Nominations Committee 3 Susan Bies Director, Chairperson of the Risk Committee, Member of the Audit Committee 4 Dame Alison Carnwath Director, Member of the Risk Committee, Member of the Remuneration Committee 5 Victor L.L. Chu Director, Member of the Governance and Nominations Committee 6 Rafael del Pino Director, Member of the Governance and Nominations Committee, Member of the Remuneration Committee 7 Thomas K. Escher Director, Chairperson of the Remuneration Committee, Member of the Governance and Nominations Committee 8 Monica Mächler Director, Member of the Governance and Nominations Committee, Member of the Risk Committee 9 Don Nicolaisen Director, Chairperson of the Audit Committee, Member of the Risk Committee 10 Rolf Watter Director, Member of the Audit Committee
The Board, under the leadership of the Chairman, is responsible for determining the overall strategy of the Group and the supervision of senior management. It holds the ultimate decision-making authority for Zurich Insurance Group Ltd, except for decisions on matters reserved for the shareholders.
Tom de Swaan* Victor L.L. Chu Rafael del Pino Thomas Escher
Board of Directors and its Committees as of December 31, 2013 * Chairman of Board or Chairperson of Board Committee, respectively
Vice-Chairman of the Board Member of the Audit Committee Member of the Governance and Nominations Committee 2006 2014
Director Chairperson of the Risk Committee Member of the Audit Committee 2008 2014
Director Member of the Risk Committee Member of the Remuneration Committee 2012 2014
Director Chairperson of the Remuneration Committee Member of the Governance and Nominations Committee 2004 2014
Director Member of the Governance and Nominations Committee Member of the Risk Committee 2013 2014
All Directors of Zurich Insurance Group Ltd are also members of the board of directors of Zurich Insurance Company Ltd. Mr. de Swaan also serves as chairman of that board. In addition, Mr. de Swaan is a member of the board of directors of Zurich Insurance plc. Mr. Nicolaisen and Ms. Bies are members of the board of directors of Zurich Holding Company of America, Inc. With the exception of Ms. Bies, Mr. Nicolaisen and Mr. de Swaan, the Directors have no further board memberships within the Group.
Fritz Gerber is the Honorary Chairman of Zurich Insurance Group Ltd. He was chairman of Zurich Insurance Company between 1977 and 1995 and its Chief Executive Officer between 1977 and 1991. In recognition of his leadership and services to that company, he was appointed Honorary Chairman. Such designation does not confer Board membership or any Director’s duties or rights, nor does it entitle him to any Directors’ fees.
As of December 31, 2013, the Board included members of six nationalities. The Board members gained their business experience in a broad range of jurisdictions resulting in a profound collective knowledge of international business practices. The Board also benefits from the broad cultural, educational and professional backgrounds of its members, which collectively include financial services, manufacturing, engineering, as well as legal and regulatory experience.
Susan Bies (1947), U.S. Citizen Member of the Board Skills and experience: Ms. Bies began her career in 1970 as regional and banking structure economist with the Federal Reserve Bank of St. Louis, Missouri and two years later became assistant professor of economics at Wayne State University, Detroit, Michigan. In 1977, she moved to Rhodes College, Memphis, Tennessee, in a similar role and in 1979 joined First Tennessee National Corporation in Memphis, where she remained until 2001. During the early years, her areas of responsibility included tactical planning and corporate development. In 1984, she became chief financial officer and chairman of the asset/ liability committee. In 1995, she became executive vice president of risk management and auditor and chairman of the risk management committee, as well as continuing her duties with the asset/liability committee. From 2001 until 2007, she was a member of the board of governors of the Federal Reserve System. Between 1996 and 2001, Ms. Bies was a member of the Emerging Issues Task Force of the Financial Accounting Standards Board. She has been a member of the Boards of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd since April 2008. Committee membership: Risk Committee (Chairperson), Audit Committee Other directorships within the Group: Zurich Insurance Company Ltd, Zurich Holding Company of America, Inc. External appointments: Susan Bies has served as a member of the board of directors of The Bank of America Corporation since June 2009, and joined the board of directors of Merrill Lynch International, London, a subsidiary of Bank of America Corporation, in 2013. She has also been a member of the Senior Advisory Board of Oliver Wyman since 2009. Susan Bies is a member of the board of trustees of the Global Association of Risk Professionals (GARP). Educational background: Ms. Bies graduated with a BS degree from the State University College at Buffalo, New York and with a MA degree from Northwestern University, Evanston, where she later gained a PhD.
Committee membership: Governance and Nominations Committee, Remuneration Committee Other directorships within the Group: Zurich Insurance Company Ltd External appointments: Mr. del Pino has been a member of the International Advisory Board of Blackstone since 2007. He also maintains contact with the academic world through membership on the MIT Corporation, the International Advisory Board of IESE and the European Advisory Board of Harvard Business School. Educational background: Mr. del Pino graduated in civil engineering from the Universidad Politécnica Madrid and obtained an MBA from MIT Sloan School of Management.
Other directorships within the Group: Zurich Insurance Company Ltd External appointments: Mr. Chu has been chairman of First Eastern Investment Group, a leading direct investment firm focusing on China and Asia-related opportunities, since 1988. He has also been chairman of First Eastern Investment Bank Limited since 2006 and of FE Securities Limited since 1994. He is currently a foundation board member of the World Economic Forum and co-chairs the Forum’s International Business Council. Mr. Chu is also chairman of the Hong KongEurope Business Council, vice-chairman of Asia House in London and a member of the Mayor of London’s International Business Advisory Council. Educational background: Mr. Chu graduated with a LL.B. from the University College London where he is now a Honorary Fellow. He was awarded the 2011 Global Economy Prize by the Kiel Institute for the World Economy.
Bank of UBS AG in 2005. He has been a member of the Boards of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd since April 2004. Committee membership: Remuneration Committee (Chairperson), Governance and Nominations Committee Other directorships within the Group: Zurich Insurance Company Ltd External appointments: Mr. Escher has been a member of the board of directors of Silent-Power AG of Cham, Switzerland, a company in the alternative energy field, since 2012, and its Chairman since 2013. Furthermore Mr. Escher has been the president of the Genossenschaft zum Rüden since 2010. Educational background: Mr. Escher graduated in electrical engineering and in Business Administration from the Swiss Federal Institute of Technology (ETH)
Monica Mächler (1956), Swiss Citizen Member of the Board Skills and experience: Monica Mächler has substantial legal, regulatory and governance expertise in a national and international context. Monica Mächler served as Vice-Chair of the Board of Directors to the integrated Swiss Financial Market Supervisory Authority (FINMA) from 2009 to 2012, after having been the Director of the Swiss Federal Office of Private Insurance from 2007 to 2008. From 2010 to 2012, Ms. Mächler chaired the Technical Committee of the International Association of Insurance Supervisors (IAIS). She assumed the roles of Group General Counsel and Head of the Board Secretariat of Zurich Insurance Group from 1999 to 2006 and was appointed a member of the Group Management Board in 2001 after joining in 1990. During the years 1985 to 1990 she was in private practice specializing in banking and business law. Monica Mächler has been a member of several Swiss federal expert commissions on regulatory projects and is regularly speaking, lecturing as well as publishing on international business law and regulation and their impact. She has been a member of the Boards of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd since April 2013.
Committee membership: Governance and Nominations Committee, Risk Committee Other directorships within the Group: Zurich Insurance Company Ltd External appointments: Ms. Mächler has been a member of the Supervisory Board of Directors of Deutsche Börse AG since May 2012. She also serves on the Advisory Board of the International Center for Insurance Regulation at the Goethe University Frankfurt am Main. Educational background: Monica Mächler earned her JD at the University of Zurich’s Law School and complemented her studies by attending programs on UK, U.S. and private international law. She is admitted to the bar of the Canton of Zurich.
Don Nicolaisen (1944), U.S. Citizen Member of the Board Skills and experience: Mr. Nicolaisen has substantial expertise in accounting, auditing and financial reporting. He joined Price Waterhouse in 1967 (which subsequently became PricewaterhouseCoopers or PwC) and was admitted to partnership in 1978. He served in various capacities, including as an auditor and as chairman of their financial services practice. Mr. Nicolaisen also led PwC’s national office for accounting and Securities and Exchange Commission services from 1988 to 1994 and served on both the U.S. and global boards of PwC from 1994 to 2001. From September 2003 to November 2005, he was Chief Accountant of the U.S. Securities and Exchange Commission and was principal adviser to the Commission on accounting and auditing matters. He has been a member of the Boards of Zurich Insurance
Elections and terms of office The articles of incorporation require that the Board shall consist of not fewer than seven and not more than thirteen members. On the expiration of their terms of office, Directors may be re-elected immediately. According to the Group’s internal guidelines, in general, the maximum tenure of Board members may not exceed twelve years and no individual of 70 years of age or older shall be nominated or stay in office as a Director, although exceptions may be made under special circumstances.
At the AGM on April 4, 2013, Ms. Monica Mächler and Ms. Susan Bies were elected or re-elected respectively to the Board for a term of three years. Messrs. Victor Chu and Rolf Watter were re-elected to the Board for a term of one year.
Mr. Josef Ackermann resigned from the Board and Mr. Tom de Swaan assumed the role as acting Chairman on August 28, 2013. Subsequently, the Board appointed Mr. Tom de Swaan as Chairman and Mr. Fred Kindle as ViceChairman on September 11, 2013.
On January 1, 2014, the Ordinance AEC came into force. In accordance with the Ordinance AEC, at the AGM to be held on April 2, 2014, each incumbent Board member will stand for re-election for a term of one year except for Mr. Rolf Watter, whose maximum tenure of office will be reached and Mr. Victor L.L. Chu, who will not stand for re-election.
• As members of the Remuneration Committee: Mr. Thomas Escher, Dame Alison Carnwath, Mr. Rafael del Pino and Mr. Tom de Swaan
Internal organizational structure and responsibilities The Board is chaired by the Chairman, or in his absence the Vice-Chairman, and has a program of topics that is presented at its meetings throughout the year. It is regularly informed of developments regarding the Group and is provided with timely information in a form and of a quality appropriate to the discharge of its duties in accordance with the standards of care set out in Article 717 of the Swiss Code of Obligations.
The Board consists entirely of Directors who are non-executive, independent from the Management and who – except for Ms. Mächler – have never held an executive position in the Group. Ms. Mächler joined Zurich Insurance Group in 1990, she assumed the roles of Group General Counsel and Head of the Board Secretariat from 1999 to 2006 and was appointed a member of the Group Management Board in 2001. She left the company in 2006. According to the guidelines of the Swiss Code of Best Practice Ms. Mächler meets the requirements with regard to independence. The Governance and Nominations Committee reviews the independence of the Board members 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 the use of inside information.
The CEO attends Board meetings ex officio. Members of the GEC 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.
In 2013, average attendance at Board meetings was 91 percent. In fulfillment of their duties, the members of the Board spent additional time participating in Board Committee meetings and preparing for meetings.
Committee 1 Until August 28, 2013, the Board had 11 and the GNC 4 members, respectively.
The Board has the following standing committees, which regularly report to the Board and submit proposals for resolution by the Board: Zurich Insurance GroupAnnual Report 2013Governance48
Key tasks and responsibilities: In general, the Governance and Nominations Committee: • oversees the Group’s governance and measures it against best practice with a view to ensuring that the rights of shareholders are fully protected; • develops and proposes guidelines to the Board for corporate governance and reviews them from time to time; • ensures compliance with corporate governance disclosure requirements as well as legal and regulatory requirements; • is entrusted with succession planning for the Board, the CEO and members of the GEC. In this regard, it proposes the principles for the nomination and ongoing qualification of members of the Board and makes proposals to the Board on the composition of the Board, the appointment of the Chairman, the Vice-Chairman, the CEO and members of the GEC. Final decisions for nominations and appointments are made by the Board, subject to shareholder approval, where required; and,
• management succession planning, talent management and group learning strategies; and,
Remuneration Committee Composition and membership: Zurich Insurance Group Ltd’s Organizational Rules require the Remuneration Committee to consist of at least four non-executive Board members. Currently, Thomas Escher (Chairperson), Dame Alison Carnwath, Rafael del Pino and Tom de Swaan serve on this committee.
Key tasks and responsibilities: In general, the Remuneration Committee: • evaluates regularly the Group’s remuneration system and the remuneration rules and, if appropriate, proposes amendments to the Board which is responsible for the design, implementation and monitoring of the Group’s remuneration architecture; Further details of the Group’s remuneration governance and the remuneration rules are set out in the Remuneration report on pages 70 to 99.
• proposes the Directors’ remuneration to the Board for approval; • based on the Remuneration Rules, negotiates the terms and conditions of employment of the CEO and reviews those of other members of the GEC, as negotiated by the CEO, before submitting them to the Board for approval; • liaises with the CEO on other important employment, salary and benefit matters; Zurich Insurance Group Annual Report 2013 49Corporate governance report
Activities 2013: During 2013, in particular the following topics were discussed: • the performance of the Group, the segments and the GEC as well as the approval of STIP and LTIP awards for 2012 including the approval of the total variable remuneration pool for 2012; • the regulatory environment such as implications from the FINMA Circular 2010/1 Remuneration Schemes and remuneration aspects raised by Ethos and ISS; • developments for remuneration-related matters and their potential effect on Zurich; • share ownership levels of the members of the Board and the GEC (for more details see the Remuneration report on page 85 and 91 to 92).
The external auditors, the internal auditors and appropriate members of the GEC and other executives attend its meetings in order to, inter alia, discuss auditors’ reports, review and assess the auditing concept and the examination process and to assess the activities of both external and internal auditors. Private sessions with external and internal auditors are scheduled at the majority of the Audit Committee meetings to enable discussions without the presence of management.
Key tasks and responsibilities: In general, the Audit Committee: • serves as a focal point for communication and oversight regarding financial accounting and reporting, internal control, actuarial practice and compliance; • reviews the Group’s auditing process (including establishing the basic principles relating to and making proposals for the audit of Zurich Insurance Group Ltd and the Group); • at least annually, reviews the standards of internal control, including the activities, plans, organization and the quality of internal audit and Group Compliance. Internal control and the procedures relating to their review were in accordance with Internal Control: Revised Guidance to Directors on the UK Corporate Governance Code (formerly known as UK Turnbull Guidance) as of October 2005 see pages 67 and 68; and
For further information on risk governance, see the Risk review on pages 127–177.
Information and control instruments vis-à-vis the Group Executive Committee The Board supervises Management and monitors its performance through reporting and controlling processes. Regular reporting by the CEO and other executives to the Board provides for appropriate information and updates, including key data for the core businesses, financial information, existing and upcoming risks, and updates on developments in important markets and with regard to major competitors and other significant events. The Chairman of the Board regularly meets with the CEO. He also meets from time to time with all other GEC members and executives outside regular Board meetings. The other members of the Board do so as well, especially with the Chief Financial Officer and the Chief Risk Officer.
The Group has adopted and implemented a coordinated, formalized and consistent approach to risk management and control. Information concerning the Group’s risk management processes is included in the Risk Review starting on page 127. The Risk Management & Internal Control Statement on pages 67 to 68 describes the Group’s approach with regard to risk management and internal control according to the Internal Control: Revised Guidance to Directors on the UK Corporate Governance Code (formerly known as UK Turnbull Guidance) as of October 2005.
3 Mike Foley Chief Executive Officer North America Commercial, Regional Chairman of North America 4 Yannick Hausmann Group General Counsel 5 Michael Kerner Chief Executive Officer General Insurance 6 Axel P. Lehmann Chief Risk Officer, Regional Chairman of Europe 7 Cecilia Reyes Chief Investment Officer 8 Geoff Riddell Regional Chairman of Asia-Pacific and Middle East 9 Kristof Terryn 1
Group Head of Operations ad interim, Chief Information Technology Officer 11 Vibhu Sharma 2
The Group Pension Committee, chaired by the Chief Executive Officer, Global Life, is responsible for developing and executing a governance framework including the relevant policies and processes for pension related matters. It provides oversight and guidance over the Group’s principal pension and post retirement benefit plans for accounting, benefit design, funding and investment purposes and provides recommendations to the GBSC in terms of material pension related matters.
Panels To enhance its understanding and assessment of the challenges and risks Zurich may face, the Group continues to seek external expertise and perspective. As of December 31, 2013, the Group had three panels of leading academics, business and industry experts to provide feedback and insight. They are not corporate bodies of the Group and have no decision-making powers. These panels provide expertise and advice to senior management or certain functions of the Group. In particular, the International Advisory Council is mandated to provide an external perspective and expertise to the CEO and to members of the GEC on the Group’s growth and public policy strategies. The Investment Management Advisory Council offers feedback on Zurich’s investment results and strategy and on achieving superior risk-adjusted returns relative to the liabilities for the Group’s invested assets. The Natural Catastrophe Advisory Council provides insight into the patterns of occurrence, predictability and destructiveness of catastrophes and feedback about Zurich’s approach to such catastrophes in order to help improve the effectiveness of its underwriting and reinsurance purchasing.
Martin Senn Swiss 1957 Chief Executive Officer Jeff Dailey American 1957 Chief Executive Officer Farmers Group, Inc. Mike Foley American 1962 Chief Executive Officer North America Commercial and
Markus Nordlin, currently Chief Information Officer assumed the responsibility for Group Operations on an ad interim basis succeeding Kristof Terryn effective August 14, 2013.
Both, Mr. Markus Nordlin and Mr. Vibhu Sharma are not members of the GEC.
For information on contractual termination benefits, see pages 63 and 64.
Martin Senn (1957), Swiss Citizen Chief Executive Officer Skills and experience: Mr. Senn is a trained banker and worked for the former Swiss Bank Corporation from 1976 to 1994 including as treasurer in Hong Kong and regional treasurer for Asia and the Pacific region in Singapore before eventually managing the company’s Tokyo office. In 1994, he joined Credit Suisse where his executive roles included those of treasurer for the Head Office and Europe and chairman of Credit Suisse Group, Japan with a mandate to restructure and reposition all legal entities of the Group in Japan. In 2001, he became a member of the Credit Suisse Banking executive board and was appointed head of its Trading and Investment Services Division. From 2003 until 2006, he served as a member of the corporate executive board and as chief investment officer of the Swiss Life Group. Mr. Senn joined Zurich Insurance Group in 2006 as Chief Investment Officer, serving on the Group Executive Committee and became Chief Executive Officer, effective January 1, 2010.
External appointments: Mr. Senn serves in a senior capacity with numerous business and industry organizations, including Avenir Suisse, the Zurich Association of Economics, the Swiss-American Chamber of Commerce, the Geneva Association and the Institute of International Finance (IIF). Besides that, he is a representative of the Property and Casualty CEO Roundtable, a member of the Pan European Insurance Forum (PEIF), the European Financial Services Roundtable (EFR), the advisory board of Tsinghua School of Economics and Management and of the international advisory board of the Atlantic Council. Mr. Senn is also a member of the board of trustees for the Lucerne Festival and serves as an Honorary Consul for the Republic of Korea in Zurich. Educational background: Mr. Senn received a Commercial and Banking diploma from the Business School in Basel, Switzerland and completed an International Executive Program at INSEAD in Fontainebleau as well as an Advanced Management Program at Harvard Business School.
Mike Foley (1962), U.S. Citizen CEO North America Commercial and Regional Chairman of North America Skills and experience: Mr. Foley joined the financial management training program of Armtek Corporation in New Haven, Connecticut, in 1984. After graduating from Kellogg in 1989, Mr. Foley joined the Deerpath Group in Lake Forest, Illinois, as an associate. He later became vice-president responsible for managing a portfolio of equity investments in various acquired businesses. In 1993 he joined Electrocal, Inc. in Connecticut as president. In 1996, Mr. Foley joined McKinsey & Company in Chicago, Illinois, where he later became a principal and led its North American property/casualty insurance practice.
Yannick Hausmann (1967), Swiss Citizen Group General Counsel Skills and experience: Mr. Hausmann started his career in 1995 at a law firm in Basel. From 1998 to 2000, he was Associate in the tax and legal department of Arthur Andersen AG and Andersen Legal in Zurich. He was a member of the Legal and Compliance Group of the Swiss Insurance Association for several years. Mr. Hausmann joined the Zurich Corporate Center Litigation and Investigation Team in 2000. He has held his current position since December 2009 and was promoted to be a member of the GEC in July 2012. He oversees the Legal, Compliance and GAIA (Government and Industry Affairs) functions worldwide across the Zurich Group as well as the Board Secretariat. Mr. Hausmann has served on the Board of Directors of Farmers Group, Inc. since February 2011. In July 2013, he became a member of the Board of Directors of Zurich Insurance plc (Ireland). External appointments: Since 2009, Mr. Hausmann has been a member of the Legal Committees of the SwissAmerican Chamber of Commerce and of economiesuisse. In 2011, he joined the Board of Trustees of the Museum Haus Konstruktiv in Zurich. In May 2013, Mr. Hausmann became a member of the Board of the Europa Institute at the University of Zurich. Educational background: Mr. Hausmann received a doctorate in Law from the University of Basel in 1995 and was admitted to the bar in Switzerland (Canton of Basel) in 1997. He earned a Master of Laws (LL.M.) from the New York University School of Law in 2003 and attended the Advanced Management Program at Harvard Business School in 2012.
Mr. Kerner was Global Chief Underwriting Officer for General Insurance and Head of Group Strategy in Zurich. Prior to his current role, he was Chief Executive Officer for Zurich Global Corporate in North America. External appointments: None Educational background: Mr. Kerner holds a Bachelor of Science in Mathematics and Economics from the State University of New York at Binghamton. Mr. Kerner is a Fellow of the Casualty Actuarial Society and a member of the American Academy of Actuaries.
Africa with the Continental Europe division. In September 2004, he became CEO of Zurich American Insurance Company and Zurich North America Commercial business division in Schaumburg, Illinois. In January 2008, he assumed his current role as Chief Risk Officer and assumed additional responsibility for Group IT until 2010. He became Chairman of the Board of Directors of Farmers Group, Inc. from July 2011 and Regional Chairman of Europe from October 2011. External appointments: Mr. Lehmann is a member of the board of directors of UBS AG and is a member and former Chairman of the CRO Forum. He is an Honorary Professor for Business Administration and Service Management and Chairman of the Board of the Institute of Insurance Economics (I.VW-HSG) at the University of St. Gallen in Switzerland. Mr. Lehmann is also a member of the board of directors of economiesuisse. Educational background: Mr. Lehmann holds a PhD and Masters in Economics and Business Administration from the University of St. Gallen, Switzerland where he also received his habilitation. He is a graduate of the Wharton School Advanced Management Program. His doctorate was awarded the Peter Werhahn Prize for the best PhD thesis in the area of management science and academic theory. He did his research study at Harvard Business School and Arizona State University.
Cecilia Reyes (1959), Swiss and Philippines Citizen Chief Investment Officer Skills and experience: Ms. Reyes has over 20 years’ experience in the international financial markets. She worked from 1990 until 1995 for Credit Suisse in Zurich in various roles in Credit Suisse Asset Management, Global Treasury and Securities Trading. In 1995, she joined ING Barings in London and in 1997, she became a Director and Head of Trading Risk Analytics. She moved to Amsterdam in 2000 as Head of Risk Analytics for ING Asset Management to develop risk management methods for the asset management operation. Ms. Reyes joined Zurich in 2001 as Regional Manager for Group
Council of the Association of British Insurers and for three years chaired its liability committee. From 1990 to 1995, he was a member of the Hong Kong Federation of Insurers Council. He was a director of Pool Re from February 2005 until August 2010 and of the Forum for Global Health Protection from 2007 until the end of 2010. He was a member of the Confederation of British Industry’s Chairmen’s Committee and chaired the CBI Financial Services Council until September 2010. Until late 2009, he was a member of the Foundation Board of IMD in Lausanne, the City of London EU Advisory Committee and the Lord Mayor of London’s Advisory Committee. External appointments: Mr. Riddell has been a director of the General Committee of the British Chamber of Commerce in Hong Kong since April 1, 2011. Educational background: Mr. Riddell holds a MA degree in natural sciences (chemistry) from Oxford University (The Queen’s College) and later qualified as a chartered accountant.
Kristof Terryn (1967), Belgian Citizen CEO Global Life Skills and experience: Mr. Terryn began his career in 1993 in the banking industry, where he worked in capital markets. In 1997, he joined McKinsey & Company where he held various positions within the financial services practice in Brussels and Chicago. He joined Zurich in 2004 as Head of Planning and Performance Management. In 2007, he became Chief Operating Officer for the Global Corporate business division and in 2009 was named
Chief Operating Officer for General Insurance. Mr. Terryn became a member of the Group Executive Committee in 2010 on his appointment as Group Head of Operations. He assumed his current role as CEO Global Life in August 2013. External appointments: None Educational background: Mr. Terryn holds a law degree and a degree in economics from the University of Leuven, Belgium, as well as an MBA from the University of Michigan.
Vibhu Sharma (1966), U.S. citizen Chief Financial Officer ad interim, Group Controller Skills and experience: Mr. Sharma began his career in 1987 at KPMG LLP, where he was named a partner in 1998. In 2004 he joined independent reinsurance broker John B. Collins Associates, Inc. in Minneapolis, serving initially as Chief Financial Officer and then Chief Operating Officer. He joined Zurich North America in 2008 as Chief Financial Officer with leadership responsibilities for the actuarial, controller’s, corporate tax, treasury and planning and performance areas. He was appointed as Group Controller in October 2012, moving to Switzerland to take up this role at Corporate Center. His responsibilities included Group Financial
A shareholder with voting rights can attend shareholders’ meetings of Zurich Insurance Group Ltd in person. He or she may also authorize, in writing, another shareholder with voting rights or any person permitted under the articles of incorporation and a more detailed directive of the Board to represent him or her at the shareholders’ meeting. Based on the articles of incorporation, minors or wards may be represented by their legal representatives, married persons by their spouses and a legal entity may be represented by a person authorized to bind it by his or her signature, even if such persons are not shareholders.
As of the enactment of the Ordinance AEC authority of representation may be given to an independent voting rights representative only. The AGM elects an independent voting rights representative. The term of office ends after completion of the next ordinary shareholders’ meeting. The independent voting rights representative can be re-elected. In addition the shareholders may give voting instructions to the independent voting rights representative for the AGM via the online platform Sherpany.
Statutory quora Pursuant to the articles of incorporation, the AGM constitutes a quorum irrespective of the number of shareholders present and shares represented. Resolutions and elections generally require the approval of a simple majority of the votes cast, excluding abstentions, blank and invalid votes, unless respective provisions in the articles of incorporation (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 purpose and domicile, a dissolution of the company and certain matters relating to capital increases. In the event of the votes being equally divided, the decision rests with the Chairman of the Board.
Registrations in the share register With a view to ensure an orderly process, shortly before the AGM 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 and in several newspapers.
Zurich Insurance Group Ltd maintains a regular dialogue with investors through its Investor Relations department and responds to questions and issues raised by institutional and private individual shareholders. In addition, Zurich Insurance Group Ltd organizes investor days for institutional investors and analysts to provide comprehensive information on its businesses and strategic direction. Such presentations can be followed via webcast or conference call. In 2013, the Investors Day was held in Zurich on December 5, focused on the strategy and targets for 2014 to 2016 and reported on the delivery of the 2010 to 2013 targets. Another investors Day is planned for 2014. A wide range of Information on the Group and its businesses, including results reporting documents and the full documentation for the Investors Day are available on the Investor Relations section of Zurich’s website www.zurich.com (
Zurich Insurance Group Ltd will hold its Annual General Meeting on April 2, 2014. The meeting will be conducted in the Hallenstadion in Zurich-Oerlikon. An invitation setting out the agenda for this meeting and an explanation of the proposed resolutions will be issued to shareholders at least 20 days before the meeting.
a change of control have the right to the vesting of share obligations. No other benefits are provided to members of the Group’s senior management in case of a change of control.
Assurance at Zurich Insurance Group At Zurich, various governance and control functions coordinate to help ensure that risks are identified and appropriately managed and internal controls are in place and operating effectively. This coordination is referred to as ‘integrated assessment and assurance’. The Board is ultimately responsible for the supervision of these assurance activities. Although each assurance provider maintains its distinct mandate and responsibilities, the assurance providers are closely aligned and co-operate with each other through a regular exchange of information, planning and other activities. This approach supports management in its responsibilities and provides confidence that risks are appropriately addressed and that adequate mitigation actions are implemented.
Board – Audit Committee and Risk Committee: The Board is ultimately responsible for the supervision of the assurance activities. Its Audit and Risk Committees receive regular updates from Group Risk Management, Group Audit, External Audit and Group Compliance throughout the year.
Audit fees Total audit fees (including expenses and value added taxes) charged by PwC in the year 2013 amounted to USD 46.6 million (USD 43.9 million in 2012).
Total non-audit fees 14.9 6.4 – Tax advice 0.3 0.8 – Legal advice 0.1 0.0 – Transaction consulting incl. due diligence 0.1 0.1 – Audit-related advice 4.7 4.0
employees that could be considered to bear on the external auditors’ independence. The Audit Committee evaluates the cooperation of the external auditors during their audit examination. It elicits the comments of management regarding the auditors’ performance (based on criteria such as their understanding of Zurich’s business, technical knowledge and expertise, etc.) and the quality of the working relationship (responsiveness of the external auditors to the needs of Zurich Insurance Group Ltd and the Group and the clarity of communication). The Audit Committee reviews, prior to the commencement of the annual audit, the scope and general extent of the external audit and suggests areas requiring special emphasis.
Group Audit The internal audit function of the Group (Group Audit) is tasked with providing independent and objective assurance to the Board, the Audit Committee, the CEO and management and to the boards and audit Committees of subsidiary companies. This is accomplished by developing a risk-based plan which is updated continuously as the risks faced by the business change. The plan is based on the full spectrum of business risks including concerns and issues raised by the Audit Committee, management and other stakeholders. Group Audit executes the plan in accordance with defined operating standards, which incorporate and comply with the International Standards for the Professional Practice of Internal Auditing, issued by the Institute of Internal Auditors (IIA). Key issues raised by Group Audit are communicated to the responsible management function, the CEO and the Audit Committee using a suite of reporting tools.
The Audit Committee, boards and audit committees of subsidiary companies and CEO are regularly informed of important audit findings, including ineffective opinions, mitigation actions and attention provided by management. Group Audit is responsible for ensuring that issues that could impact the Group’s operations are brought to the attention of the Audit Committee and appropriate levels of management and that timely follow up action occurs. This is supported by the attendance of the Head of Group Audit at each meeting of the Audit Committee.
The Audit Committee approves the Group Audit Plan annually, reviews reports from the function on its activities and significant risk, control and governance issues, at least every quarter. The Head of Group Audit reports functionally to the Audit Committee and administratively to the CEO and regularly meets with the Chairman of the Board and the Chairperson of the Audit Committee. Group Audit has no operational responsibilities over the areas it reviews and, to ensure independence, all Group Audit staff globally report (via audit managers) to the Head of Group Audit.
Through a comprehensive program, the compliance function implements, embeds and monitors internal policies and guidance. As part of that program, compliance officers introduce new employees to applicable rules and are involved in the integration of newly acquired companies. To help employees understand their responsibilities under Zurich Basics and internal policies, all employees receive regular ethical and compliance training. In addition, the Group’s Compliance function spearheads internal awareness campaigns on ethical and regulatory conduct. Each year Zurich managers confirm their understanding of and compliance with Zurich Basics and internal policies. Zurich encourages its employees to speak up and report improper conduct through for example the Zurich Ethics Line, a phone and web-based service. Zurich does not tolerate retaliation against any employee who reports such concerns in good faith.
Effectively managing risks is core to managing the business. Management is responsible for the identification, evaluation and management of significant risks. The Group manages risks throughout the organization, under direction of the senior management. Zurich has Group-wide risk management policies, as well as common methods and tools for assessing and modeling risks. The Group risk assessment processes are aligned with the Group planning process and are reviewed by the Group Executive Committee and the Risk Committee of the Board. Significant risks, the results of the assessment and modeling processes and the relevant actions arising are reported regularly to the Risk Committee of the Board. Periodic group and local risk assessments are conducted using among others Zurich’s Total Risk Profiling™ tool and business units are required, at least quarterly, to review key risks and implement action plans to mitigate them. Additional details are provided in the Risk Review in the Annual Report.
The operations relating to the long term alliance with Banco Santander, entered into in 2011, continue to adopt relevant aspects of the Zurich Risk Management framework. In addition, these operations continue to leverage their existing internal control system while putting into effect Zurich’s internal control system.
Contents 2013 Remuneration summary 71 2013 Remuneration report 74 Remuneration governance 74 Remuneration philosophy 78 Remuneration and shareholdings of the Board of Directors 83 Remuneration and shareholdings of the Group Executive Committee 86 Remuneration of employees 93 Amendments to Long Term Incentive Plan (LTIP) in 2014 97
Zurich operates a balanced and effectively managed remuneration system which is aligned with risk-considerations and provides for competitive total remuneration opportunities that attract, retain, motivate and reward employees to deliver outstanding performance. Total remuneration for an individual employee is influenced by factors including the scope and complexity of the role, business performance and affordability, individual performance, internal relativities, external competitiveness, geographic location and legal requirements. Target opportunities are benchmarked to median levels in clearly defined markets and take into account the internal structures. Depending on the role, the relevant market can be global, regional or local and will reflect practices in either the insurance, the financial services or the general industry.
Pension cost Other remuneration 1 At target, as a percentage of total remuneration. 2 Including the Chief Executive Officer.
2 For all employees equals the cash incentives earned for the year. 3 For members of the GEC and all other employees, it represents the value of LTIP target grants allocated in 2013, which assume vesting levels in 2014, 2015 and 2016 at 100 percent of target. As set out below, the actual LTIP vesting for the performance period 2011 – 2013 was set at 50 percent of target. 4 Includes other employee benefits, pension benefits and other remuneration costs. 5 Actual, gross and for cash amounts based on the accrual principle. 6 The number of employees (full time equivalents) was broadly the same year on year.
Remuneration expenditure should be considered in the context of Zurich‘s overall revenues, capital base and profitability. The key figures are set out in the table below and reflect data for 2013 and 2012: Gross written premiums and fees 2 57,659 56,822 Business operating profit 4,680 4,084 Net income attributable to shareholders 4,028 3,887 Shareholders’ equity 32,503 31,718 Return on common shareholders’ equity (ROE) 12.0% 11.8% Dividends paid to shareholders 3 2,651 2,763 Total variable remuneration pool for all employees gross before tax 668 608 – as a percentage of gross written premiums and fees 1% 1% – as a percentage of shareholders’ equity 2% 2%
As can be seen from these metrics, relative to Zurich’s overall revenues and shareholders’ equity, expenditure on variable remuneration is relatively small. Among other factors, in determining the amount of the total variable remuneration pool (please refer to pages 76 and 93) for all employees, the Board also considers the long-term economic performance of the Group. In this respect, the Group has generated economic profit over the long-term which significantly exceeds the actual expenditure on variable pay.
Remuneration amounts in USD million, for the years ended December 31Key financial figures
The total variable remuneration pool of USD 668 million for 2013 includes the value of the target performance share grants made under the Group Long-Term Incentive Plan (Group LTIP) of USD 134.2 million that were given out in 2013 assuming that vesting at 100 percent of target takes place in 2014, 2015 and 2016. As mentioned above, the vesting level for the three year performance period ending December 31, 2013 was 50 percent of target and this results in an actual realizable value of USD 62.1 million based on the number of shares vesting and the closing share price of CHF 258.50 as at December 31, 2013. As a result, the actual earned total variable remuneration for the period ending December 31, 2013 was USD 72.1 million lower than shown in the table above.
To further align their interests with those of shareholders, the Board and the GEC build their ownership position in the company. As of December 31, 2013, Directors held 42,531 shares and members of the GEC held 148,567 shares and 429,019 options. Share ownership guidelines are in place and these are discussed further on page 77. To meet the share obligations under the share-based compensation plans, Zurich issued 603,099 new shares in 2013, and 914,301 new shares in 2012, thereby creating minimal dilution for shareholders. Further details on the dilution impact of the share-based compensation plans are set out on page 75.
Summary of further key remuneration aspects in 2013 In addition to the remuneration context and outcomes described above, further key aspects for 2013 are outlined below: • The remuneration system as set out in the Remuneration report for 2012 was subject to a non-binding advisory shareholder vote at the Annual General Meeting on April 4, 2013 with 85.5 percent votes in favor.
• During the year, the Board reviewed the competitiveness of the overall fee structure for Board members and has decided that no changes will be made to the structure for 2014.
The first part of the report describes the general principles and the governance framework, and the second part provides details of each of the remuneration elements. The members of the Board of Zurich Insurance Group Ltd are all independent non-executives, therefore the information has been presented with the complete remuneration details of the Board contained in one section, those of the GEC shown in the next section, and then a further section including the information required by the FINMA Circular on Remuneration Schemes for all employees.
All information required by articles 663bbis and 663c paragraph 3 of the Swiss Code of Obligations is also included in the notes to the financial statements of Zurich Insurance Group Ltd holding company.
During 2013, a joint meeting between the Remuneration Committee and the Risk Committee took place to discuss a risk review of the remuneration architecture and the remuneration governance framework. For this joint meeting, the Group Risk Management function evaluated the remuneration architecture and reported its findings on whether and how 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. Based on the results of the risk review, the Board continues to be firmly of the opinion – taking into account the changes to the long-term incentive plan in 2014 as set out on pages 97 to 99 – that the remuneration architecture is aligned with the delivery of the Group’s strategy and reflects current international best practices in terms of governance, plan design and disclosure.
• The remuneration of the control functions continues to be structured so as to avoid conflicts of interest, by ensuring that the incentives for all employees in control functions are determined by reference to Group profitability rather than by the profitability of the business controlled by such functions.
• As part of a remuneration review in 2013, all KRT (Key Risk Taker) positions for the Group were reviewed. As a result, the Group has increased the number of KRT positions. These positions cover the three business segments of General Insurance, Global Life and Farmers as well as Group Operations and all other principle functions. In 2013, the processes and criteria for identifying KRT positions were further clarified and documented, in order to facilitate the annual reassessment. The criteria are based on factors that materially affect risk-taking within the Group, such as overall governance, capital consumption for each risk type as determined by the internal model, strategy and reputation. The criteria are then applied to those who take as well as to those who control the specific risks at the level of the Group where the risks are most material. In particular, Group Risk Management, together with other control and assurance functions, provides risk and compliance information about each KRT as part of the annual individual performance assessment. The remuneration arrangements for KRTs include both short-term and long-term incentive plans with a greater emphasis towards long-term and therefore deferred remuneration.
In 2013, the company issued 603,099 shares (0.41 percent of capital based on 148,300,123 registered shares eligible for dividends as of December 31, 2012) to meet the share obligations arising from the vesting of shares and the exercise of share options during the year (in 2012, 914,301 shares or 0.62 percent of capital based on 147,385,822 registered shares eligible for dividends as of December 31, 2011).
As of December 31, 2013, the total number of unvested target shares was 878,129 which are made up from the grants made in 2011, 2012 and 2013. Given the vesting level of 50 percent in 2014 and assuming 100 percent vesting in 2015 and 2016 this would require the issuance of 664,071 shares or 0.45 percent of the share capital based on 148,903,222 registered shares eligible for dividends as of December 31, 2013.
Remuneration of the CEO Remuneration Committee Board of Directors Remuneration of Members of the Group Executive Committee (excluding CEO)
In addition to the above, and in line with the requirements of the FINMA Circular on Remuneration Schemes, the Board also approves the aggregate amount of variable remuneration for the performance year for the entire Group (“Total Variable Remuneration Pool”) taking into account the long-term economic performance of the Group. For further details on the calculation of the Total Variable Remuneration Pool see pages 93 and 94.
Benchmark studies and external advisors to the Board To assist decision-making on both Board and GEC remuneration, benchmarking studies are carried out regularly. To assess market practices and market remuneration levels, the remuneration structures and practices of the largest insurance companies are analyzed, using the companies in the Dow Jones Insurance Titans 30 Index as a basis. This Index comprises the largest insurance companies throughout the world, predominantly in Europe and in the United States. This analysis is supplemented by additional benchmarking studies as appropriate, e.g. by reviewing practices within the large Swiss Market Index (SMI) companies in Switzerland or similar sized companies in other countries. The resulting industry peer group includes such companies as Ace, AIG, Allianz, AXA, Aviva, Chubb, Generali, Manulife Financial Corp., Met Life, Munich Re, Prudential Plc, Swiss Re and Travelers Cos. Inc. The Remuneration Committee reviews this peer group regularly.
Guidelines on share ownership requirements for Directors and members of the Group Executive Committee To align the interests of the Board and the GEC with those of shareholders, Directors and members of the GEC build their ownership position in the company and have to meet a certain ownership requirement. Share ownership guidelines for members of the Board have been established at the level of 1 times the basic annual fee. For members of the GEC, share ownership guidelines with regard to vested awards have been established at the level of 5 times base salary for the CEO and of 2.5 times base salary for other members of the GEC. Directors achieve this requirement through part of their fee payment being made in three-year sales-restricted shares and market purchases. Members of the GEC achieve this through their participation in long-term incentive plans and market purchases. Directors, the CEO and other members of the GEC have a period of five years to meet their ownership requirement and the Remuneration Committee monitors compliance with these guidelines on an annual basis.
Vesting is determined based on the Group’s relative total shareholder return (TSR 1) and return on common shareholders’ equity (ROE) achievements over the three calendar years prior to the vesting date
Benefits are positioned towards median 1 Total Shareholder Return (TSR) is the growth in value of a shareholding assuming that dividends and any capital distributions are reinvested to purchase additional shares at the closing price applicable on the ex-dividend / capital distribution date.
Base salary Base salary is the fixed pay for the role performed determined by the scope and complexity of the role and is reviewed annually. Overall base salary structures are positioned to manage salaries around the relevant market medians. At an individual level, base salary is generally paid within an 80 percent – 120 percent range of the appropriate market median. Key factors in setting the salary are the individual’s overall experience and performance.
Variable pay Incentive plans are designed to provide a range of award opportunities linked to levels of performance. Business and individual performance may result in superior remuneration levels above target for superior performance, and reduced levels below target for performance below expectations. Variable pay opportunities are provided, in markets where this is the norm, to motivate employees to achieve key short-term and long-term business goals to increase shareholder value. Variable pay opportunities may include both short-term and long-term incentives.
Short-term (one year) incentives are performance-driven based on the following design: • Short-term incentive awards are paid in cash.
In recent years, more than 10,000 employees have been transferred from local incentive plans to Group STIP. For 2014 and 2015, the Group will continue to analyze the possibility to transfer employees from local incentive plans to Group STIP taking into account the legal and market environment.
Long-term incentive plans applied by the Group may include i) performance shares, ii) performance based options, or iii) restricted shares, or a combination thereof. The key design features for the Group’s long-term incentive plans are as follows: • Each participant has a target award established for the year of grant.
• Vesting is based on an annual, ratable model where the target grants are divided into three equal tranches and each tranche is assessed for vesting in the three years following the date of grant. This is illustrated in the following table: Year of vesting and year when the sales restrictions on 50% of any vested share award lapses
The following table shows how the tranches under the various annual grants vest throughout consecutive calendar years. As a result, there are always three tranches of different years’ grants that are assessed for vesting in each calendar year.
Tranche 3 from 2013 grant 1 This chart reflects the vesting schedule in 2013 and prior years and will be impacted by the implementation of changes to the LTIP system as per 2014 as set out on pages 97–99.
Except for the Chairman and Vice-Chairman, Directors are remunerated with an annual basic fee of CHF 240,000 in 2013 (CHF 240,000 in 2012). One-third of this annual basic fee, i.e. CHF 80,000 in 2013 (CHF 80,000 in 2012), is allocated to sales-restricted Zurich Insurance Group Ltd shares. The fee is pro-rated for members leaving or joining during the year. Committee members receive an additional cash fee of CHF 50,000 in 2013 (CHF 50,000 in 2012) for all committees on which they serve, irrespective of the number of committees. In addition, the chair of each committee receives an annual fee of CHF 30,000 for 2013 (CHF 30,000 for 2012) and the chair of the Audit Committee receives an additional CHF 10,000 in 2013 (CHF 10,000 in 2012). The committees on which the Directors serve are set out in the Corporate governance report on page 38.
The annual basic fee for the Vice-Chairman during 2013 was CHF 375,000 (CHF 375,000 in 2012), of which an amount of CHF 125,000 in 2013 (CHF 125,000 in 2012) is allocated to sales-restricted Zurich Insurance Group Ltd shares. The annual basic fee for the Chairman of the Board of Zurich Insurance Group Ltd during 2013 was CHF 1,000,000 (CHF 1,000,000 in 2012) and one-third of the total amount, i.e. CHF 333,500 in 2013 (CHF 333,500 in 2012) is allocated to sales-restricted Zurich Insurance Group Ltd shares. Neither the Chairman nor the Vice- Chairman receives any additional fees for their committee work.
Based on this structure, the total aggregate fees allocated to the Directors of Zurich Insurance Group Ltd and Zurich Insurance Company Ltd for the year ended December 31, 2013, amounted to CHF 4,151,009. This included CHF 2,992,893 in cash and a value at the allocation date of CHF 1,158,116 in three-year sales-restricted shares. The share price at the allocation date was CHF 240.90. The corresponding amount for 2012 was CHF 4,244,246, which comprised CHF 3,166,298 in cash and a value at the allocation date of CHF 1,077,948 in three-year salesrestricted shares. The share price at the grant date in 2012 was CHF 207.10. The Directors’ fees are not pensionable.
The following tables set out the fees paid to the Directors for 2013 and 2012 in CHF.
4 The shares allocated to the Directors are sales-restricted for three years. 5 As of June 16, 2013, Mr. Ackermann was allocated 1,384 shares, Mr. de Swaan was allocated 518 shares, and the other Board members were allocated 332 shares. The share price (CHF 240.90) as of June 15, 2013 was adopted to calculate the number of shares based on the fixed portion of the fee allocated in shares for the respective members. Where the value of the allocated shares did not equal the value of the portion of the fee to be allocated in shares, the difference was paid in cash.
6 Neither the Chairman nor the Vice-Chairman receive any additional fees for their committee work. 7 In addition to the fees received as Directors of Zurich Insurance Group Ltd, Ms. Bies, Mr. Nicolaisen and Mr. de Swaan earned fees for their board memberships of the following of Zurich Insurance Group companies: – In both 2013 and 2012, Ms. Bies and Mr. Nicolaisen earned CHF 50,000 for their membership of the board of Zurich Holding Company of America (ZHCA). – In 2013, Mr. de Swaan earned CHF 75,000 for his membership of the board of Zurich Insurance plc. He also earned an annual fee of CHF 5,000 for being chair of the
G overn an ce 10 At the Annual General Meeting on April 4, 2013, Mr. Meyer retired from the Board and Ms. Mächler was elected to the Board. In August 2013, Mr. Ackermann resigned from the Board. Mr. de Swaan was appointed Chairman and Mr. Kindle Vice-Chairman of the Board of Directors as of September 11, 2013.
Share options held by Directors The members of the Boards of Zurich Insurance Group Ltd and Zurich Insurance Company Ltd do not participate in any share option plan for executive management. Hence, no share options have been allotted in the year under review or in earlier years. None of the Directors, nor any related parties to them, held any share options or conversion rights over Zurich Insurance Group Ltd shares as of December 31, 2013 or 2012.
The total value for 2013 comprises the following elements (the comparative figures for 2012 are shown in the table on total remuneration for all members of the GEC):
Base salaries and annual cash incentives paid for 2013 The total amount of base salaries and annual cash incentive awards earned under the Group STIP for 2013 was USD 23.7 million. This comprised USD 11.6 million in base salaries and USD 12.1 million in annual cash incentive awards to be paid in 2014 for 2013 performance. As set out on page 80 the annual cash incentive awards are determined individually and are performance-based.
Equity grants made to members of the Group Executive Committee under the Group LTIP in 2013 As described above, in 2013 members of the GEC received an annual grant of performance shares under the Group LTIP. In extraordinary circumstances, restricted share grants may also be made. For members of the GEC, including the CEO, the value of the target grants in 2013 was set between 100 percent and 225 percent of each member’s base salary.
For the three year performance period ended on December 31, 2013, the number of share awards that will vest in 2014 for the members of the GEC serving in 2013 from the performance share grants made in 2011, 2012 and 2013 was 25,234. As discussed in the summary on page 72, this represents a vesting level of 50 percent of target. One-half of the shares that vest under the plan are sales-restricted for three years from the date of vesting. The value of the share awards vesting based on the closing share price of CHF 258.50 was USD 7.2 million.
Value of pension benefits accruing during 2013 Members of the GEC participate in the pension plan arrangements of the entities where they are employed. The Group’s philosophy is to provide pension benefits through cash balance and/or defined contribution plans where funds are accumulated throughout a career to provide retirement benefits. The majority of GEC members participate in such plans and, over time, all future GEC members will participate in such plans. The remaining members of the GEC participate in defined benefit plans that provide retirement benefits based on final pensionable earnings and the number of years of service. Normal retirement ages vary from 60 to 65. The total value of pension benefits accruing to members of the GEC during 2013, calculated on the basis of the service costs for the company as assessed under IAS 19 accounting principles, was USD 3.2 million. 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.
7 In line with applicable laws where the executives are employed, Zurich paid the company-related portion of contributions to social security systems, which amounted to USD 1.6 million in 2013 and USD 1.7 million in 2012. Since the contributions are based on full earnings, whereas benefits are capped, there is not a direct correlation between the costs paid to the social security system and the benefits received by the executives.
8 The amounts have been translated to Swiss francs at the relevant exchange rates throughout the year and the cash incentive to be paid in 2014 has been translated at the year-end rate in 2013.
Termination arrangements for members of the Group Executive Committee who gave up their functions during the year During 2013, one member of the GEC left the Group and one other member died. In these circumstances, the remuneration provided was in line with terms of their employment contracts. No termination payments (i.e. “golden parachutes”) were made and no other benefits such as agreements concerning special notice periods or longer term contracts (exceeding 12 months in duration), waiver of lock-up periods for equities, shorter vesting periods or additional contributions to occupational pension schemes were provided.
in CHF millions, for the years ended December 31Highest paid executive, Chief Executive Officer, Martin Senn in 2013 and 2012
Within the context of the Group LTIP, these performance share grants are considered for vesting in one-third installments during the three years after the grant and one-half of the vested shares are further sales-restricted for a three year period. The actual level of vesting is determined in accordance with the remuneration principles and vesting criteria set out in this report.
Share option grants Under the share option program for senior management, the Group issued share options in the past to individuals within defined rules. From 2011, share option grants were no longer made.
Under the share option program, the total number of shares under option for the members of the GEC as of December 31, 2013, and 2012, respectively, is set out in the tables below.
Share and share option holdings of members of the Group Executive Committee The following table sets out the actual share and share option holdings of the members of the GEC as of December 31, 2013 and 2012. In addition to any shares acquired in the market, the numbers include vested shares, whether salesrestricted or not, and vested share options received under the Group’s LTIP. However, the table does not include the share interests of the members of the GEC through their participation in the currently unvested performance shares or unvested restricted shares.
Related parties to members or former members of the Group Executive Committee No benefits (or waiver of claims) have been provided to related parties of GEC members or related parties of former members of the GEC during the years 2013 and 2012. Neither had any related party of GEC members or of former members of the GEC outstanding loans, advances or credits as of December 31, 2013 and 2012.
• The total amount of sign-on incentive payments committed in 2013 for people taking up their employment in 2013.
• The total amount of severance payments committed in 2013 where the termination date was in 2013.
Cash incentive awards earned for the year 1 530 474 Value of target performance share grants made in the year 2,3 138 134 Total Variable Remuneration Pool 668 608 1 Includes sign-on and severance payments in cash.
Total remuneration Combining the fixed and variable remuneration, the total remuneration for all employees is as follows: Cash – fixed 4,092 4,036
Total remuneration 5,916 5,748 1 Includes cash incentive awards, sign-on and severance payments in cash. 2 Includes performance share grants and sign-on payment in shares. 3 Includes other remuneration and pension benefits.
The value of the deferred remuneration has been determined by multiplying the number of outstanding shares and options by the relevant share price and option price at the original date of grant and reflects the assumption of a 100 percent vesting level.
Impact on net income in 2013 and 2012 from remuneration granted in prior years Under the Group LTIP, a calculation is made at the date of vesting to determine the actual number of shares and options to be awarded to plan participants relative to the number that was originally expected to be awarded at the grant date. Any difference in value is reflected in the consolidated income statement in the year of vesting. For shares and options vesting in 2013 and 2014 a USD 108 million reduction in expense was recognized in the 2013 income statement to reflect actual performance compared to original estimates. In 2012, there was no material difference in the actual and estimated amounts.
Sign-on payments / number of beneficiaries 1 2 4 3 6 Severance payments / number of beneficiaries 2 0.6 1 2 5 1 “Sign-on payments” are payments (whether paid immediately or over time) that are agreed on the execution of an employment contract.
2 “Severance payments” are payments that are provided in connection with the termination of an employment relationship. Zurich does not include under the term “severance payments” garden leave or similar payments for employees in jurisdictions where such payments are required by applicable law, or where they are based on contractual notice periods which conform with recognized market practice, or where they are non-contractual but in line with recognized market practice. However, Zurich does include garden leave or similar payments that go beyond recognized market practice, irrespective of whether these are provided pursuant to an agreement or are ex gratia.
• takes into account the latest best practice principles among insurance companies in the United Kingdom, the United States, Europe and Switzerland, and views from proxy-advisors and shareholders; • is closely aligned to the achievement of the long-term strategic goals and the delivery of value for shareholders; and
• helps drive sustained performance, providing a key element in the motivation, retention and attraction of executive talent.
NIAS ROE 1 0% vesting 50% vesting 100% vesting 150% vesting 200% vesting <9.75% pa 9.75% pa 12% pa 13.125% pa ≥14.25% pa
Cash Remittance 0% vesting 50% vesting 100% vesting 150% vesting 200% vesting
<USD 8.0 billion USD 8.0 billion USD 9 billion USD 9.5 billion ≥USD 10.0 billion 1 In line with the methodology used to calculate the ROE with effect from January 1, 2014, the calculation of equity will exclude unrealized investment gains or losses.
The Remuneration Committee reviewed the peer companies to be included in the relative TSR assessment to ensure that the peer group exhibits a strong TSR correlation and reflects the Group’s business profile and geographic spread. As a result, the following 18 companies taken from the Dow Jones Insurance Titans 30 Index have been selected for assessing TSR performance effective from January 1, 2014: Ace, AIG, Allianz, Allstate, Aviva, AXA, Chubb, Generali, Legal & General, Manulife Financial Corp., Met Life, Munich Re, Progressive Ohio, Prudential Plc, QBE, Swiss Re, Travelers Cos. Inc. and Zurich. TSR is calculated for all companies in Swiss francs.
Vesting, performance and holding period The LTIP in 2013 and prior years included phased annual vesting of grants, in three equal tranches at the end of the 1st, 2nd and 3rd year after grant. Performance was measured over the three financial years ending in the relevant financial year immediately before each vesting date. Half of the vested shares were sales-restricted for three years from each of the respective vesting dates. The 2013 LTIP approach is described in more detail on pages 81 and 82.
With effect from January 1, 2014, the Board has decided to make the transition to “three-year cliff-vesting”. This approach is better aligned with market practice, with vesting of the whole LTIP grant being deferred until the third anniversary of the grant date. Performance will be measured over the three financial years starting with the year of grant. This will connect the LTIP more strongly to the new Group strategy and the long-term goals.
Due to the potential volatility in any one year, the assessment of cash remittance performance can only meaningfully be assessed over a three-year period. Therefore, the cash remittance measure will be replaced by the Business operating profit (after tax) return on common shareholders’ equity (BOPAT ROE) for the vesting decisions in 2015 and 2016. The BOPAT ROE measure increases the focus on profitability in line with the Group strategy and it will be assessed using the same vesting grid that applies to the NIAS ROE as set out in the table above on page 97.
The vesting level for the Transition Grants will be assessed based on the actual achievements against the Group performance measures set out above in the vesting grid. With this transition solution the Board ensured that all grants vesting in 2015, 2016 and 2017 will be based on the Group’s performance. The three-year sales-restrictions that apply to vested shares under the regular LTIP will also apply to the Transition Grants and no dividend equivalents will accrue on the Transition Grants. Overall, the changes to the LTIP including the transition arrangements are expected to be funded out of the regular LTIP expense.
The information contained within the Operating and financial review is unaudited and is based on the consolidated results of the Group for the years ended December 31, 2013 and 2012 and the financial position as of December 31, 2013 and December 31, 2012. 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 add up to the rounded total in all cases. 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 Report 2013 of the Group and, in particular, with its Consolidated financial statements as of December 31, 2013. Certain comparative figures have been restated, as set out in note 1 of the Consolidated financial statements.
In addition to the figures stated in accordance with the International Financial Reporting Standards (IFRS), the Group uses business operating profit (BOP), new business measures and other performance indicators to enhance the understanding of its results. Details of these additional measures are set out in the separately published Glossary and the Embedded value report. These should be viewed as complementary to, and not as substitutes for the IFRS figures. For a reconciliation of BOP to net income attributable to shareholders, see note 28 of the Consolidated financial statements.
The Operating and financial review is the management analysis of the business performance of Zurich Insurance Group Ltd and its subsidiaries, collectively the Group, for the year ended December 31, 2013, compared with 2012. It also explains key aspects of the Group’s financial position as of the end of 2013.
General Insurance gross written premiums and policy fees 36,438 35,610 2% Global Life gross written premiums, policy fees and insurance deposits 27,095 30,259 (10%) Farmers Management Services management fees and other related revenues 2,810 2,846 (1%) Farmers Re gross written premiums and policy fees 4,045 4,361 (7%)
New business amounts for the year ended December 31, 2012 do not include Zurich Santander or new operations in Asia (including Zurich Insurance Malaysia Berhad – ZIMB). 4 Calculated on average Group investments. 5 Ratios as of July 1, 2013 and January 1, 2013, respectively, are calculated based on the Group’s internal model, which is subject to the review and approval of the Group’s regulator, the Swiss Financial Market Supervisory Authority (FINMA).
The Group delivered solid results in all core businesses with overall business operating profit of USD 4.7 billion, an increase of USD 596 million or 15 percent compared with 2012. These results together with the Group’s continued strong capital position have again enabled the Board of Directors to propose an attractive dividend of CHF 17.00 per share.
Improvement in profitability continued while the Group’s focus on growth was maintained in its priority markets in both General Insurance and Global Life.
Business operating profit increased by USD 596 million to USD 4.7 billion, or by 15 percent in both U.S. dollar terms and on a local currency basis.
• General Insurance business operating profit increased by USD 747 million to USD 2.9 billion, or by 35 percent both in U.S. dollar terms and on a local currency basis. The underlying loss experience and expenses improved in 2013 compared with 2012, with savings initiatives to reduce expenses reflected in a lower expense ratio. The business also benefited from lower major catastrophe events. These improvements were partly offset by an increase in large and weather-related losses. Investment income declined compared with 2012.
• Farmers business operating profit increased by USD 114 million to USD 1.5 billion, or by 8 percent. This was due to an improved underwriting result in Farmers Re, benefiting from rate increases and the re-underwriting of business in the Farmers Exchanges, which are owned by their policyholders and managed by Farmers Group, Inc., a wholly owned subsidiary of the Group. Farmers Management Services business operating profit decreased by USD 38 million to USD 1.4 billion, mainly due to a decrease in management fees and other related revenues as well as lower investment income. This decrease was more than offset by the improved underwriting result in Farmers Re where business operating profit improved by USD 152 million to USD 125 million.
• Other Operating Businesses reported a business operating loss of USD 1.0 billion. This 14 percent deterioration compared with 2012 resulted mainly from decreased investment income in Holding and financing and several non-recurring items in the Headquarters result.
Business volumes for the core business segments, comprising gross written premiums, policy fees, insurance deposits and management fees, decreased by USD 2.7 billion to USD 70.4 billion, or by 4 percent in U.S. dollar terms and 3 percent on a local currency basis.
• General Insurance gross written premiums and policy fees increased by USD 828 million to USD 36.4 billion, or by 2 percent in U.S. dollar terms and 3 percent on a local currency basis, led by markets where the Group has targeted growth.
Net income attributable to shareholders increased to USD 4.0 billion, an increase of USD 141 million or 4 percent compared with 2012. The increase in business operating profit was partly offset by lower net capital gains on investments and by several non-recurring costs relating to the restructuring of business operations. The shareholders’ effective tax rate was 24.9 percent for the year ended December 31, 2013, compared with 24.7 percent for the year ended December 31, 2012.
Gross written premiums and policy fees increased by USD 655 million to USD 9.3 billion, or by 8 percent in both U.S. dollar terms and on a local currency basis. Internal business transfers from North America Commercial begun in 2012 accounted for approximately 1 percent of this growth. Strong renewals and new business production levels were achieved in both Europe and North America despite a continued focus on achieving rate increases and profitable underwriting. Rates increased by 4 percent in 2013, driven by motor, by workers’ compensation in both North America and Europe and by liability in North America.
The net underwriting result increased by USD 416 million to USD 466 million, reflected in the improvement of 6.8 percentage points in the combined ratio to 92.3 percent. This improvement arose principally from the loss ratio, which benefited from lower major catastrophe events, in contrast to 2012 which was impacted by storm Sandy. This was partly offset by adverse individual large losses and prior year premiums. The expense ratio also improved by 2.3 percentage points as a result of disciplined expense management and non-recurring one-off items.
The net underwriting result increased by USD 336 million to USD 362 million, which was reflected in the improvement of 4.4 percentage points in the combined ratio to 95.3 percent. The underlying loss ratio continued to show improvement compared with 2012 reflecting the favorable impact of sustained rate increases, as well as the impact of claims and underwriting initiatives. The underwriting result also benefited from lower major catastrophe events compared with 2012 which was impacted by storm Sandy. In 2013, changes in loss reserves established in prior years were negligible compared with favorable development in 2012. The expense ratio improved by 1.0 percentage points, reflecting the benefits of efficiency and savings initiatives which reduced other underwriting expenses. This was partly offset by an increase in the commission ratio following a shift toward business with higher commission rates.
Gross written premiums and policy fees 11,799 11,882 (1%) Net underwriting result 640 324 97% Business operating profit 1,009 702 44% Loss ratio 67.4% 69.9% 2.5 pts Expense ratio 27.1% 27.4% 0.3 pts Combined ratio 94.5% 97.2% 2.8 pts
Gross written premiums and policy fees decreased by USD 83 million to USD 11.8 billion, or by 1 percent in U.S. dollar terms and 2 percent on a local currency basis. The lower volume resulted from continued focus on profitability and the impact of the challenging economic environment. Average rate increases of 3 percent were achieved in 2013.
Gross written premiums and policy fees 5,700 5,603 2% Net underwriting result (29) 54 nm Business operating profit 115 165 (30%) Loss ratio 61.7% 60.3% (1.4 pts) Expense ratio 38.9% 38.4% (0.5 pts) Combined ratio 100.7% 98.7% (1.9 pts)
3 Net policyholder flows are defined as the sum of gross written premiums and policy fees and insurance deposits, less policyholder benefits.
BOP before special operating items (266) (266) 1,532 1,600 1,267 1,333 1 See Glossary for an explanation of profit by source.
2 Following a change in the relative weight of margins in Germany, policyholder impacts which relate to more than one margin have been reclassified from investment margin into other profit margins. Figures for 2012 have been restated.
Business operating profit decreased by USD 80 million to USD 1.3 billion, or by 6 percent in U.S. dollar terms and 4 percent on a local currency basis, with increases in Latin America more than offset by reductions in North America, Europe and APME.
Insurance deposits decreased by USD 3.5 billion to USD 13.2 billion, or by 21 percent both in U.S. dollar terms and on a local currency basis. This reduction was predominantly in the UK, driven by a reduction of single premium products in Private Banking Client Solutions following the implementation of new regulations on intermediary commission payments from the beginning of 2013.
1 New business amounts are calculated before the effect of non-controlling interests and, for 2012, did not include Zurich Santander and the new operations in Asia (including ZIMB).
Global Life continued to benefit from its acquisitions and investment in organic growth in priority markets, while maintaining focus on shifting its product mix from traditional savings business toward protection and unit-linked products and on leveraging its global bank distribution and corporate life relationships. Zurich Santander and ZIMB new business has been included in 2013, but was not reported in 2012.
In Europe, the overall increase of USD 36 million in new business value was primarily driven by Switzerland and Spain. Changes in product mix and management actions in Switzerland continued to reduce exposure to interest rate guarantees and this, together with strong volume growth in corporate business, led to higher margins and an increase in new business value. New business value grew in Spain following volume and margin increases from higher-margin protection products. These positive impacts were partly offset by a decrease in the UK following the implementation of the new regulations.
In APME, new business value grew in all countries, with the most significant increase coming from protection business in the Middle East. The first-time inclusion in 2013 of new operations in Asia also had a positive impact.
APE increased by USD 388 million to USD 4.4 billion, or by 10 percent in U.S. dollar terms and 11 percent on a local currency basis, benefiting from the first time inclusion of USD 821 million from Zurich Santander. This was partly offset by lower levels of single premium products in Private Banking Client Solutions, following the implementation of new regulations in the UK, and a reduction of APE in Chile, where 2012 included the impact from the successful participation in the biennial Social Security (SIS) bid process. No additional APE was recorded on this contract in 2013. On a comparable basis, excluding these large impacts as well as the contribution from Zurich Santander, APE increased by 6 percent in U.S. dollar terms with increases in protection and corporate savings business offset by reductions in unit-linked savings business in the UK and Germany.
New business margin increased by 6.2 percentage points to 28.3 percent, primarily due to the effects of changes in product mix, reflecting strong volume growth of higher-margin protection business in all regions, including Zurich Santander, the impact of the SIS contract which reduced margin in 2012 and lower volumes of lower-margin savings and unit-linked business in Europe. In Switzerland and Spain, new business margin increased significantly following changes in product mix and management actions.
In Corporate Life & Pensions, new business value increased by USD 8 million to USD 293 million benefiting particularly from higher-margin corporate protection business and volumes in Europe. This more than offset decreases in Latin America related to the SIS transaction in Chile and from the transitional impact arising from a change in methodology for corporate protection business.
Farmers business operating profit increased by USD 114 million to USD 1.5 billion, or by 8 percent. This was due to an improved underwriting result in Farmers Re, which benefited from the actions taken on rate increases and re-underwriting of business in the Farmers Exchanges, which are owned by their policyholders and managed by Farmers Group, Inc., a wholly owned subsidiary of the Group. This increase was partly offset by lower business operating profit in Farmers Management Services, also partly reflecting the actions taken in the Farmers Exchanges.
Business operating profit of USD 1.4 billion decreased by USD 38 million, or by 3 percent, primarily due to a decrease in management fees and other related revenues, as well as lower investment income.
Management fees and other related revenues of USD 2.8 billion decreased by USD 36 million, or by 1 percent, among other factors due to lower levels of fees on new business policies. Management and other related expenses of USD 1.5 billion decreased by USD 23 million, as a result of the impact of disciplined expense management, a one-off benefit to employee costs and reduced facilities expenses. Other net income and expenses of USD 38 million decreased by USD 24 million due to a reduction in investment income resulting from lower interest rates, as well as reduced real estate investment income compared with 2012. In addition, 2012 benefited from a one-time gain related to the settlement of a portion of the pension liability for vested plan participants who are no longer employed by the company.
Gross written premiums and policy fees 4,045 4,361 (7%) Net underwriting result (9) (163) 94% Business operating profit 125 (26) nm Loss ratio 68.9% 72.4% 3.5 pts Expense ratio 31.3% 31.3% – Combined ratio 100.2% 103.7% 3.5 pts
Gross earned premiums in the Farmers Exchanges were broadly flat. The effect of rate and underwriting actions begun in 2012 to improve profitability is flowing through to gross earned premiums. Decreases in non-standard auto and business insurance lines of business were offset by increases in the specialty, home, and standard auto lines of business.
in USD millions, for the years ended December 31 in USD millions, for the years ended December 31Farmers Exchanges
Headquarters business operating loss increased to USD 196 million, USD 22 million higher than in 2012. This deterioration was driven by several non-recurring items.
Business operating profit: Centrally managed businesses 27 29 (8%) Other run-off 46 100 (54%) Total business operating profit 73 129 (44%)
Other run-off, which largely comprises U.S. life insurance and annuity portfolios, reported a business operating profit of USD 46 million. The decline of USD 54 million resulted from a one-off gain in 2012 from the reassessment of liabilities on certain life run-off policies.
The Group maintains a disciplined strategy focused on asset and liability management. The Group continues to limit risks that it believes are not rewarded, such as foreign currency, interest rate and concentration risks. The quality of the Group’s investment portfolio remains high, with investment-grade securities comprising 98 percent of the Group’s debt securities.
of which: net capital gains/(losses) on investments and impairments attributable to shareholders 588 1,687 (65%)
Total net investment income decreased by 8 percent in both U.S. dollar terms and on a local currency basis to USD 6.2 billion, compared with USD 6.8 billion in 2012, reflecting persistent low investment yields on debt securities.
in USD millions, as ofDetails of total investments by category in USD millions, for the years ended December 31Performance of Group investments
Net capital gains from active management were USD 2.0 billion, a decrease of USD 128 million compared with 2012. The decrease was mainly due to lower gains from sales of debt securities, partly offset by gains of USD 692 million from the disposal of all of the Group’s remaining shares in New China Life Insurance Company Ltd.
Net unrealized gains on investments included in total equity decreased by USD 4.7 billion from December 31, 2012, mainly due to a reduction of USD 4.2 billion in net unrealized gains on debt securities. This was a result of a significant rise in yields on debt securities. Net unrealized gains on equity securities declined by USD 252 million compared with December 31, 2012, as the positive effects of rising equity markets were offset by the recognition of realized capital gains from active management, including the sale of all of the Group’s remaining shares in New China Life Insurance Company Ltd.
Net investment income 1,717 1,820 (6%) Net capital (losses)/gains on investments and impairments 11,088 8,373 32% Net investment result, net of investment expenses 1 12,805 10,193 26%
Total return on unit-linked investments delivered 9.9 percent, an increase of 1.3 percentage points compared with 2012. Capital gains, particularly from the rise in equity markets in Europe, were partly offset by a reduction of USD 102 million in net investment income, as yields have continued to decline.
Net losses and loss adjustment expenses incurred 23,128 23,769 20,323 20,547
One year later 64.2% 68.1% 66.2% 71.7% 74.1% 72.0% 73.2% 74.0% 70.0% Two years later 63.5% 66.6% 64.8% 70.6% 72.4% 70.7% 72.1% 73.7% Three years later 63.7% 65.0% 63.3% 69.4% 72.3% 70.6% 71.6% Four years later 62.9% 63.8% 62.6% 68.6% 72.1% 70.6% Five years later 62.2% 63.2% 61.6% 68.0% 71.6% Six years later 62.1% 62.6% 61.0% 67.9% Seven years later 61.9% 62.3% 60.9% Eight years later 61.9% 62.4% Nine years later 61.9%
The development of 2004 and each subsequent year demonstrates the Group’s philosophy of taking a prudent view on reserving.
Reserves for life insurance contracts and liabilities for investment contracts The majority of the Group’s reserves for life insurance contracts and liabilities for investment contracts are attributable to Global Life. Life insurance reserves in other segments relate predominantly to businesses that are in run-off or are centrally managed, and are included only in this first table.
Net reserves as of December 31 226,166 213,982 15,921 16,789 242,087 230,771 1 Restated as set out in note 1 of the Consolidated financial statements.
Fee income and other expenses (2,137) (1,898) (1,992) (1,780) (4,130) (3,678) Interest and bonuses credited to policyholders 12,829 10,318 3,542 3,496 16,371 13,814
Acquisitions/(divestments) and transfers – 4 – 998 – 1,002 Increases/(decreases) recorded in other comprehensive income 94 4 (1,113) 2,425 (1,019) 2,429
Other life insurance liabilities, net of reinsurance, increased by USD 1.7 billion, or by 2 percent in U.S. dollar terms and decreased by 1 percent on a local currency basis, compared with December 31, 2012.
As of December 31, 2012, as previously reported 34,494 2,368 36,862 Total adjustments due to restatement 1 11 1 12 As of December 31, 2012, as restated 34,505 2,369 36,874 Proceeds from issuance of share capital 152 – 152 Proceeds from treasury share transactions 15 – 15
Share-based payment transactions (4) – (4) Reclassification from revaluation reserves 6 – 6 Total comprehensive income (237) 122 (115)
Net income after taxes 4,028 231 4,259 Net other recognized income and expenses (4,265) (109) (4,374)
Total equity decreased by USD 2.1 billion to USD 34.7 billion, or by 6 percent compared with December 31, 2012. Non controlling interests overall decreased by USD 138 million with the remainder of the decrease ocurring in shareholders’ equity. Shareholders’ equity decreased as net income after taxes of USD 4.0 billion for the year ended December 31, 2013 was more than offset by net other recognized income and expenses in total comprehensive income and by the dividend paid to shareholders in April 2013.
Cash and cash equivalents as of January 1 10,208 9,705 Cash and cash equivalents as of December 31 8,162 10,208
Net cash and cash equivalents decreased by USD 2.0 billion for the year ended December 31, 2013, compared with an increase of USD 503 million in 2012.
Gross written premiums and policy fees (502) (1%) Insurance benefits and losses, gross of reinsurance 55 – Net income attributable to shareholders 6 – Business operating profit (22) –
The consolidated income statements are translated at average exchange rates. Throughout 2013, the U.S. dollar was on average weaker against the euro and Swiss franc, but stronger against the British pound compared with 2012. The net impact on the result from these major currencies was offset by the weakening of the Brazilian real and Japanese yen against the U.S. dollar. The overall net impact on the result was minimal.
The cumulative foreign currency translation adjustment (CTA) included an adjustment of USD 718 million relating to the payment of the dividend and the net effect of currency movements on capital held in foreign currencies.
Capital management and analysis of capital adequacy Capital management 164 Analysis of capital adequacy 165
To support the governance process, the Group relies on documented policies and guidelines. The Zurich Risk Policy is the Group’s main risk governance document; it specifies the Group’s risk tolerance, risk limits and authorities, reporting requirements, procedures to approve any exceptions and procedures for referring risk issues to senior management and the Board of Directors. Limits are specified per risk type, reflecting the Group’s willingness and ability to take risk, considering earnings stability, economic capital adequacy, financial flexibility and liquidity, franchise value and reputation, the Group’s strategic direction and operational plan, and a reasonable balance between risk and return, aligned with economic and financial objectives. The Group regularly enhances the Zurich Risk Policy to reflect new insights and changes in the Group’s environment and to reflect changes to the Group’s risk tolerance. In 2013, the Zurich Risk Policy was updated and strengthened for various areas, including market risk, project risk, as well as the management of asset/liability risk. Related procedures and risk controls were strengthened or clarified for these areas. As an ongoing process, adherence to requirements stated in the Zurich Risk Policy is assessed.
In addition to this qualitative approach, the Group regularly measures and quantifies material risks to which it is exposed. The Zurich Economic Capital Model (Z-ECM) provides a key input into the Group’s strategic planning process as it allows an assessment as to whether the Group’s risk profile is in line with the Group’s risk tolerance. Z-ECM forms the basis for optimizing the Group’s risk-return profile by providing consistent risk measurement across the Group. See “Internal model capital adequacy (unaudited)” for more information about the Group’s risk tolerance.
The operations relating to Zurich Santander (the long-term alliance with Banco Santander S.A., entered into in 2011) continue to be integrated into the Zurich risk management framework. In addition, these operations continue to leverage their existing internal control system while introducing Zurich’s internal control system. In 2013, Zurich Santander began to conduct Total Risk Profiling™ assessments as well as to monitor adherence to the Zurich Risk Policy.
An important element of the Group’s risk management framework is a well-balanced and effectively managed remuneration program. This includes a Group-wide remuneration philosophy, robust short- and long-term incentive plans, strong governance and links to the business planning, performance management and risk policies of the Group. Based on the Group’s Remuneration Rules, the Board of Directors establishes the structure and design of the remuneration arrangements so that they do not encourage inappropriate risk taking. The Group Chief Risk Officer (Group CRO) consults with the other assurance, control and governance functions to provide the CEO with a review of risk factors to consider in the annual process to determine variable compensation. Also in consultation with these functions, the Group CRO 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 (unaudited).”
Various external stakeholders, among them regulators, rating agencies, investors and accounting bodies, place emphasis on the importance of sound risk management in the insurance industry. Zurich monitors developments in the external environment and assesses the impact on the Group’s business, the insurance industry, and the communities in which the Group operates.
In 2013, the timeline for the roll-out of Solvency II in the European Union was further specified. The introduction of the complete framework is expected for January 1, 2016. In the context of systemic risk, the Financial Stability Board announced a list of Global Systemically Important Insurers, Zurich not being among them.
Rating-agency perspective Rating agencies’ assessment of an insurance company’s risk management is an integral part of their financial strength credit analysis. Standard & Poor’s (S&P) has a separate rating for Enterprise Risk Management. S&P’s rating for Zurich’s overall enterprise risk management is “strong.” This reflects its positive view of the Group’s risk management culture, risk controls, and strategic and emerging risk management. S&P regards these capabilities as enabling the Group to further optimize capital allocation and earnings.
In the second half of 2013, the global recovery appeared to have entered a more robust stage, both in advanced and emerging markets. The economic expansion was supported by continued loose monetary policy, while headwinds from elevated debt levels and fiscal austerity weakened. Geopolitically, the second half of 2013 was dominated by conflicts in the Middle East and North Africa and the situation in the region has remained very volatile.
During 2013, politics in the U.S. and in the Eurozone remained the key risk to the economic outlook. While the risk of a Eurozone breakdown receded, following decisive action from the European Central Bank and the marked improvements in peripheral funding conditions, longer-term uncertainty has remained. A further adjustment of debt and increased competitiveness is required in a number of countries. Also, U.S. fiscal policy remained a concern throughout the year.
The Group is also involved in a number of international industry organizations engaged in advancing the regulatory dialogue and sound risk management practices. Zurich is a standing member of and actively contributes to the Emerging Risk Initiative of the CRO Forum (an organization composed of the chief risk officers of major insurance companies and financial conglomerates that focuses on developing and promoting insurance industry best practices in risk management).
The Group seeks external expertise from its International Advisory Council and Natural Catastrophe Advisory Council to better understand and assess risks, particularly regarding areas of complex change. For more information on these councils, see the “Corporate governance report (unaudited).” In addition, the Investment Management Advisory Council provides feedback to Investment Management on achieving superior risk-adjusted returns versus liabilities for the Group’s invested assets.
To facilitate information exchange between the Audit Committee of the Board and the Risk Committee of the Board, at least one board member is a member of both committees. The Risk Committee met seven times in 2013 (once jointly with the Remuneration Committee).
To foster transparency about risk, the Board receives quarterly risk reports and additional updates. In 2013, reporting was further enhanced. Reports included in-depth risk insights into topics such as the development of new global capital standards and political risks in Latin America as well as emerging risks.
• General Insurance Global Underwriting Committee – acts as a focal point for underwriting policy and related risk controls for General Insurance and is chaired by the Global Chief Underwriting Officer for General Insurance.
• Group Reinsurance Committee – defines the Group’s reinsurance strategy in alignment with the Group’s risk framework and is chaired by the Global Head of Group Reinsurance.
At Group level there are two centers of expertise: risk analytics and risk and control. The risk analytics department quantitatively assesses insurance, financial market and asset/liability, credit and operational risks and is the Group’s center of excellence for risk quantification and modeling. The risk and control department includes operational risk management, risk reporting, risk governance, and risk operations. The risk management network consists of the Chief Risk Officers (CROs) of the Group’s segments and regions, and the Local Risk Officers (LROs) of the business units and functions and their staff. While their primary focus is on operational and business-related risks, they are responsible for providing a holistic view of risk for their area. The risk officers are part of the management teams in their respective businesses and therefore are embedded in the business. The LROs also report to the segment or regional CROs, who in turn report to the Group’s Chief Risk Officer. The CROs of the Group’s segments and regions are members of the leadership team of the Group’s Chief Risk Officer.
The Group’s underwriting strategy is to take advantage of the diversification of general insurance risks across lines of business and geographic regions. The Group seeks to optimize shareholder value by achieving its mid-term return on equity goals. Doing so necessitates a prudent, stable underwriting philosophy that aims to take advantage of its competitive strengths while avoiding risks with disruptive volatility. At the core of the Group’s underwriting is a robust governance process. The Group’s four major processes for underwriting governance – underwriting strategy, authorities, referrals and reviews – are implemented at Group and local levels.
Tables 1.a and 1.b show the Group’s concentration of risk within the General Insurance business by region and line of business based on direct written premiums before reinsurance. The Group’s exposure to general insurance risks varies significantly by geographic region and may change over time. General insurance premiums ceded to reinsurers (including retrocessions) amounted to USD 6.0 billion and USD 5.9 billion for the years ended December 31, 2013 and 2012, respectively. Reinsurance programs such as catastrophe covers are managed on a global basis, and therefore, net premium after reinsurance is monitored on an aggregated basis.
Table 1.b in USD millions, for the year ended December 31, 2012
Sensitivities analysis for general insurance risk 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. Such an increase could arise from either higher frequency of the occurrence of the insured events or from an increase in the severity of resulting claims or from a combination of frequency and severity. 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 presentation of the sensitivity analysis in tables 2.a and 2.b, each additional percentage point increase in the loss ratio would lead to a linear impact on net income before tax and net assets. In addition, the Group monitors insurance risk by evaluating extreme scenarios, taking into account non-linear effects of reinsurance contracts.
Life insurance risk The risks associated with life insurance include: • Mortality – risk that actual policyholder death experience on life insurance policies is higher than expected. • Longevity – risk that annuitants live longer than expected. • Morbidity – risk that policyholder health-related claims are higher than expected.
• Policyholder behavior – risk that policyholders’ behavior in discontinuing and reducing contributions or withdrawing benefits prior to the maturity of contracts is worse than expected. Poor persistency rates may lead to fewer policies remaining on the books to defray future fixed expenses and therefore reduce the future positive cash flows from the business written, potentially impacting its ability to recover deferred acquisition expenses.
The Group has local product development committees and a Group-level product approval committee, under the leadership of the Global Life Chief Risk Officer, for potential new life products that could significantly increase or change the nature of its risks. Such reviews allow Zurich to manage new risks inherent in its new business propositions. The Group regularly reviews the continued suitability and the potential risks of existing life products.
The Group’s use of market-consistent embedded value reporting principles allows Zurich to further understand and report on the risk profile of its life products and how risks would change in differing market conditions. Embedded value is the measure that markets use to value life businesses. For more information, see the “Embedded value report.”
In addition to the specific risks listed above, the Group is exposed to policyholder behavior and expense risks. Policyholder behavior risk is mitigated by product designs that match revenue and expenses associated with the contract as closely as possible. Expense risk is mitigated by careful control of expenses and by regular expense analyses and allocation exercises.
Zurich is exposed to two main types of concentration risk in its Global Life business: • From a market risk perspective, interest rate guarantees in Germany and Switzerland expose Zurich to financial losses that may arise as a result of adverse movements in interest rates. The Group also wrote a small book of variable annuity business in the U.S. with minimum guaranteed death benefits, but ceased writing new business in 2012. The management of these guarantees is a combination of asset-liability matching and hedging; see the “Market risk” section.
Due to its strong balance sheet, Zurich is able to structure and align its reinsurance programs to achieve an optimum risk/reward ratio. Zurich manages its central reinsurance purchasing according to these principles. The Group is therefore able to manage its risks to retain a significant and stable portion of its gross written premiums, as shown in the charts below.
The Group continues to use traditional reinsurance markets and other alternatives, such as catastrophe bonds, to protect against extreme single events and increased frequency of events. The Group is able to use its global reach in particular for catastrophe protection. It has in place a combination of per event and annual aggregate covers, which protects the Group’s business both per event and by region, and also for multiple events across regions. This helps to reduce the risks posed by the frequency of catastrophes, as well as their severity.
The Group uses reinsurance to manage risk to unusually severe or unusually frequent events, as illustrated on the following page, through the main in-force reinsurance covers as of December 31, 2013 for natural catastrophe events.
The Group participates in the underlying risks through its retention and through its co-participation in the excess layers. The contracts are on a loss-occurrence basis except the aggregate catastrophe cover Lakeside Re III Cat bond which operate on an annual aggregate basis. In addition to these covers, the Group has per risk programs, local catastrophe covers, a bilateral risk swap and a catastrophe bond in place. These covers are reviewed continuously and are subject to change going forward. The current covers are placed annually: January 1 for the U.S. Program and the Global Aggregate Catastrophe Cover; April 1 for the European Program and July 1 for the Rest of the World Program.
Single global USD 150 million treaty, which can be applied to any region*
Single global USD 500 million treaty, which can be applied to any region
All programs can be reinstated once, except the U.S. Earthquakes program and the Combined Global Catastrophe Occurrence / Aggregate Treaty.
All natural catastrophe losses exceeding USD 35 million are aggregated. Variable retention up to a maximum of USD 1,250 million, depending on the peril regions hit and the frequency Reinsurance secured under Global Aggregate Catastrophe Treaty Reinsurance secured under Combined Global Catastrophe Occurrence / Aggregate Treaty* % of co-participation * This USD 150 million cover is the same Combined Global Catastrophe Occurrence / Aggregate Treaty presiding over the Global Catastrophe Treaty. This cover can be used only once, either for aggregated losses or for an individual event.
Section highlights • The Group has slightly increased its investments in equity markets, in particular in the second part of the year, as the financial markets continued to recover. Risks from interest rates and credit spreads have remained stable.
The Group has policies and limits to manage market risk. It aligns its strategic asset allocation to its risk-taking capacity. Zurich centralizes management of certain asset classes to control aggregation of risk, and provides a consistent approach to constructing portfolios and selecting external asset managers. It also diversifies portfolios, investments and asset managers. Zurich regularly measures and manages market risk exposure. The Group has established limits on concentration in investments by single issuers and certain asset classes as well as deviations of asset interest rate sensitivities from liability interest rate sensitivities, and the Group limits investments that are illiquid.
The Group Balance Sheet Committee reviews and recommends the Group’s capital allocation to market risk, while the Asset/Liability Management Investment Committee reviews and monitors the Group’s strategic asset allocation and tactical boundaries and monitors the Group’s asset/liability exposure. The Group oversees the activities of local Asset/ Liability Management Investment Committees and regularly assesses market risks both at a Group and at a local business level. Risk assessment includes quantification of the contributions to financial market risk from major risk drivers. The economic effect of potential extreme market moves is regularly examined and considered when setting the asset allocation.
Risk from equity securities and real estate The Group is exposed to various risks resulting from price fluctuations on equity securities and real estate. Risks arising from equity securities and real estate could affect the Group’s liquidity, reported income, surplus and regulatory capital position. The exposure to equity risk includes common stocks, including equity unit trusts, common stock portfolios backing participating-with-profit policyholder contracts, and equities held for employee benefit plans. The exposure to real estate risk includes direct holdings in real estate, listed real estate company shares and funds, as well as real estate debt securities such as commercial and residential mortgages, commercial and residential mortgage-backed securities and mezzanine debt. 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 both with respect to earnings and with respect to economic capital. Market movements impact 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 impacted by adverse movements in equity and real estate markets.
Risk management initiatives during 2013 The Group unwound part of its euro receiver swaptions program in the first half of 2013 following the decrease in interest rate exposure in its German life business. The Group has slightly increased its investments in equity markets, in particular in the second part of the year, as the financial markets continued to recover. Risks from interest rates and credit spread have remained stable.
Analysis of market risk sensitivities Basis of presentation – General Insurance and rest of the businesses The basis of the presentation below is an economic valuation represented by the fair value for Group investments, IFRS insurance liabilities discounted at risk-free market rates (the Group describes risk-free market rates as swap rates) to reflect the present value of insurance liability cash flows and other liabilities, for example own debt. In the sensitivities, own debt does not include subordinated debt, which Zurich considers available to protect policyholders in a worstcase scenario.
Tables 6.a and 6.b show sensitivities for the rest of the businesses include Farmers, Other Operating Businesses and Non-Core Businesses. Where Non-Core Businesses includes business with life insurance characteristics, the analysis is based on market-consistent embedded value market risk sensitivities. See the “Embedded value report” for more details on the market risk sensitivities specifications.
Limitations of the analysis: • The sensitivity analysis does not take into account actions that might be taken to mitigate losses. This strategy may involve changing the asset allocation, for example through selling and buying assets.
• The 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 spreads risk sensitivities.
• The equity market scenarios assume a concurrent movement of all stock markets. • The sensitivities do not indicate a probability of such events occurring in the future. They do not necessarily represent the Group’s view of expected future market changes. In addition to the sensitivities, management uses stress scenarios to assess the impact of more severe market movements on the Group’s financial condition. For more information on stress scenarios, see table “Sensivities for the Z-ECM ratio (unaudited)”.
• The sensitivity analysis is based on economic net assets, and not on shareholders’ equity or net income as set out in the Consolidated financial statements.
• The sensitivity analysis is calculated after tax; the Group effective tax rate is 24.9 percent for 2013 and 24.7 percent for 2012.
• The market risk scenarios assume a concurrent movement of all stock markets and an unrelated parallel shift of all interest rates in different currencies.
100 basis points decrease in the interest rate yield curves Group investments 1,324 625 342 288 186 2,766
100 basis points decrease in the interest rate yield curves Total impact on Embedded Value 162 213 55 (37) 44 437
Table 4.a in USD millions, as of December 31, 2013Economic interest rate sensitivities for the General Insurance business – current period
Table 4.b in USD millions, as of December 31, 2012Economic interest rate sensitivities for the General Insurance business – prior period
Other currencies Total 100 basis points increase in the interest rate yield curves Group investments (798) (112) 1 (56) – (966)
100 basis points decrease in the interest rate yield curves Group investments 896 94 (3) 62 1 1,050
Table 6.a in USD millions, as of December 31, 2013Economic interest rate sensitivities for the rest of the businesses – current period
Analysis of economic sensitivities for equity risk Tables 7 to 9 show the estimated impacts from a 10 percent decline in stock markets, after consideration of hedges in place, as of December 31, 2013 and 2012, respectively.
Analysis of economic sensitivities for credit spread risk Tables 10.a to 12.b show the estimated impacts from a 100 basis points increase in corporate credit spreads, as of December 31, 2013 and 2012, respectively.
Table 10.b in USD millions, as of December 31, 2012Economic credit spread sensitivities for the General Insurance business – prior period
Other currencies Total 100 basis points increase in credit spreads Net impact before tax (320) (74) 2 (3) – (396)
On local balance sheets there is the risk that a currency mismatch may lead to fluctuations in a balance sheet’s net asset value, either through income or directly through equity. The Group manages this risk by matching foreign currency positions on local balance sheets within prescribed limits. Residual local mismatches are reported centrally in order to make use of the netting effect across the Group. Zurich then hedges residual mismatches from local balance sheets through a central balance sheet within an established limit. The monetary currency risk exposure on local balance sheets is considered immaterial.
Because the Group has chosen the U.S. dollar as its presentation currency, differences arise when functional currencies are translated into the presentation currency. The Group applies net investment hedge accounting in order to protect against the effects of changes in certain exchange rates on selected net investments. The Group does not take speculative positions on foreign currency market movements. Using constant exchange rates from one year to the next, the Group’s 2013 net income attributable to shareholders would have been lower by USD 6 million (applying 2012 exchange rates to the 2013 result). In 2012, the result would have been higher by USD 45 million (applying 2011 exchange rates to the 2012 results).
See notes 1, 3 and 7 of the Consolidated financial statements for additional information on foreign currency translation and transactions.
10% increase in EUR / USD rate 915 904 GPB / USD rate 311 362 CHF / USD rate (382) (253) Other currencies / USD rates 760 787
Section highlights • During 2013, the intensity of the euro crisis eased despite areas of negative growth and high unemployment.
The U.S. remains vulnerable to both domestic and global risks. • The risk-weighted average issuer credit rating of the Group’s debt securities portfolio is “BBB+“. The largest concentration in the Group’s debt securities portfolio is in government, supranationals and similar debt securities at 48.4 percent.
Credit risk concentration The Group limits and regularly monitors credit exposures by individual counterparty and related counterparties by the aggregated exposure across various types of credit risk for that counterparty. The Group’s exposure to counterparties’ parent companies and subsidiaries across sources of credit risk is aggregated to include reinsurance assets, investments, certain insurance products and derivatives. Best estimates, based on statistical data and own assessments, are used to assign loss-given-default percentages and loss dependency factors reflecting, for example, double default events. The aggregated exposure information is compared with the Group’s credit limits. The limits vary based on the underlying rating category of the counterparty. There was no material exposure in excess of the Group’s limits for counterparty aggregation as of December 31, 2013 or December 31, 2012. In line with the Group’s overall risk appetite, additional investments in Italy were exceptionally approved in order to benefit from slight credit improvements in the European “periphery.”
Cash and cash equivalents amounted to USD 7.2 billion as of December 31, 2013 and USD 9.1 billion as of December 31, 2012. The risk-weighted average rating of the overall cash portfolio has decreased from “A” to “BBB+” in 2013 due to a change in the rating methodology. Applying the changed methodology retrospectively, the risk-weighted average rating for 2012 would have been “BBB+“. 61 percent of the total was with the ten largest global banks, whose average rating was “A–” as of December 31, 2013, down from “A” as of December 31, 2012.
Credit risk related to debt securities The Group is exposed to credit risk from third party counterparties where the Group holds securities issued by those entities. Table 14 shows the credit risk exposure on debt securities, by issuer credit rating.
G ro u p p erfo rm an ce review portfolio was “BBB+” (2012: “A–/BBB+”). This is mainly due to both downgrades of governments and governmentrelated financial institutions in 2013 and higher exposures due to the tightening of credit spreads. Based on the linear scale, the average rating was“AA–“(2012: “AA–”) and therefore in line with the “AA–” target rating as set out in the Group’s risk policy.
As shown in table 15, the Group had debt exposure to Eurozone governments of USD 36.8 billion and USD 34.2 billion as of December 31, 2013 and 2012, respectively. Exposure to Greece, Ireland, Italy, Portugal and Spain amounted to USD 14.4 billion and USD 11.3 billion as of December 31, 2013 and 2012, respectively. This increase was primarily driven by switches in investments from Germany into Italy to benefit from improvements in credit quality and from the spread differential.
In addition to the debt exposure, the Group had sovereign loan exposure of USD 4.2 billion and USD 4.7 billion to Germany as of December 31, 2013 and 2012, respectively.
Table 15 in USD millions, as of December 31The Group’s debt exposure to Eurozone governments and supranationals & similar
Credit risk related to reinsurance assets As part of its overall risk management strategy, the Group cedes insurance risk through proportional, non-proportional and facultative reinsurance treaties. While these cessions mitigate insurance risk, the recoverables from reinsurers and receivables arising from ceded reinsurance expose the Group to credit risk.
Reinsurance assets include reinsurance recoverables of USD 18.1 billion and USD 19.9 billion as of December 31, 2013 and 2012, respectively, which are the reinsurers’ share of reserves for insurance contracts, and receivables arising from ceded reinsurance, gross of allowances for impairment, of USD 1.1 billion and USD 1.1 billion as of December 31, 2013 and 2012, respectively. Reserves for potentially uncollectible amounts of reinsurance assets amount to USD 174 million as of December 31, 2013 and USD 206 million as of December 31, 2012. The Group’s policy on impairment charges takes into account both specific charges for known situations (e.g. financial distress or litigation) and a general, prudent provision for unanticipated impairments.
Reinsurance assets in table 16 are shown before taking into account collateral such as cash or letters of credit from banks rated at least “A,” which can be converted into cash, and deposits received under ceded reinsurance contracts.
The risk-weighted average credit quality of reinsurance assets (including receivables, but after deduction of collateral) was “A” as of December 31, 2013 and 2012. Credit factors to determine the risk-weighted average credit quality of reinsurance assets are based on historical insurance impairment statistics, consistent with the prior year. For credit risk assessment purposes, collateral has been taken into account at nominal value as an approximation for fair value. For collateral, the Group applies minimum requirements, such as a minimum rating for the issuers of letters of credit and guarantees, and for pledged assets a minimum coverage ratio of 100 percent.
Credit risk related to mortgage loans Mortgage loans expose the Group to credit risk. The mortgage business is dependent on local property market conditions and local legislation. Investment portfolio allocations made to mortgages consider these factors and are within the framework of the strategic asset allocation defined by the Group and adapted and approved by local investment committees. Conservative lending criteria (i.e. maximum mortgage loan to property value ratios) and the diversification of loans across many single borrowers, particularly in Germany and in Switzerland, help reduce potential loss. Dunbar Assets Ireland (formerly Zurich Bank) has, however, suffered from concentrations to a smaller number and type of borrowers, such as property developers and investors. Furthermore, business units are required to clearly state criteria for determining borrower and collateral quality in their local mortgage policies. The Group specifies requirements for the local policies and sets monitoring and reporting standards. The Group closely monitors the performance of the portfolios in terms of impairments and losses.
The Group’s largest mortgage loan portfolios are in Germany (USD 4.5 billion) and in Switzerland (USD 3.9 billion); these are predominantly secured against residential property. In Switzerland, the underlying properties backing individual loans are revalued every 10 years. In Germany, the property valuation is not generally reassessed after the granting of the mortgage loan. A less frequent or no revaluation of the underlying property means that reported loan-to-value (LTV) ratios will be higher (lower) than they would be if property prices have risen (fallen) since their valuation.
Table 16 as of December 31Reinsurance premiums ceded and reinsurance assets by rating of reinsurer and captive
Credit risk related to other loans The credit risk arising from other loans is assessed and monitored together with the fixed income securities portfolio. 63.1 percent of the reported loans are to Government, Supranationals and similar or government or supranational institutions, of which 99.4 percent are to the German Central Government or the German Federal States. Table 17 shows the composition of the loan portfolio by rating class. As of December 31, 2013, a total of USD 7.9 billion or 66.7 percent of loans are secured. As of December 31, 2012, a total of USD 8.0 billion or 68.3 percent of loans were secured.
Past due but not impaired receivables should be regarded as unsecured, but some of these receivable positions may be offset by collateral. The Group reports internally on Group past due receivable balances and strives to keep the balance of past due positions as low as possible, while taking into account customer satisfaction. In 2013, the Group continued efforts to reduce past due receivables through both short- and long-term initiatives to improve processes and systems.
See note 17 of the Consolidated financial statements for additional information on receivables.
Analysis of financial assets Tables 18.a to 19.b provide an analysis, for non unit-linked businesses, of the age of financial assets that are past due but not impaired and of financial assets that are individually determined to be impaired.
Neither past due nor impaired financial assets 156,181 8,825 11,787 15,016 191,809 Past due but not impaired financial assets. Past due by: 1 to 90 days – 131 – 1,477 1,608
Past due but not impaired financial assets – 304 1 2,248 2,553
Neither past due nor impaired financial assets 155,182 9,318 13,385 14,492 192,376 Past due but not impaired financial assets. Past due by: 1 to 90 days – 185 – 1,207 1,392
Less: impairment allowance Impairment allowances on individually assessed financial assets – 696 – 117 814 Impairment allowances on collectively assessed financial assets – 37 – 210 247 1 Available-for-sale debt securities are included net of USD 12 million of impairment charges recognized during the year. 2 USD 385 million past due but not impaired and USD 1.4 billion impaired mortage loans relate to the run-off property loans at Dunbar Assets Ireland.
Tables 19.a and 19.b show how the allowances for impairments of financial assets in tables 18.a and 18.b have developed during the periods ended December 31, 2013 and 2012, respectively.
Increase/(Decrease) in allowance for impairments 69 13 39 Amounts written-off (4) (13) (37) Foreign currency translation effects 23 – 5
Table 18.b in USD millions, as of December 31, 2012Analysis of financial assets – prior period
The Group limits the percentage of the investment portfolio that is not readily realizable, and regularly monitors exposures to take action if necessary to maintain an appropriate level of asset liquidity. During 2013, the Group was within its limits for asset liquidity. The fair value hierarchy tables in note 25 of the Consolidated financial statements segregate financial assets into three levels to reflect the basis of the determination of fair value. These tables indicate the high liquidity of the Group’s investments.
See note 20 of the Consolidated financial statements for additional information on debt obligation maturities and on credit facilities and note 24 of the Consolidated financial statements for information on commitments and guarantees. The Group’s regular liquidity monitoring includes monthly reporting to the executive management and quarterly reporting to the Risk Committee of the Board, covering aspects such as the Group’s actual and forecasted liquidity, possible adverse scenarios that could affect the Group’s liquidity and possible liquidity needs from the Group’s main subsidiaries, including under stressed conditions.
Tables 20.a and 20.b 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, 2013 and 2012. Reserves for unit-linked insurance contracts amounting to USD 74.9 billion and USD 74.1 billion as of December 31, 2013 and 2012, 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.
For additional information on reserves for insurance contracts, see note 8 of the Consolidated financial statements.
Tables 21.a and 21.b provide an analysis of the maturity of liabilities for investment contracts based on expected cash flows as of December 31, 2013 and 2012. The undiscounted contractual cash flows for liabilities for investment contracts are USD 67.4 billion and USD 57.6 billion as of December 31, 2013 and December 31, 2012, respectively. Liabilities for unit-linked investment contracts amount to USD 59.5 billion and USD 50.2 billion as at December 31, 2013 and 2012, respectively. The policyholders of unit-linked investment contracts 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 borne by the policyholders of unit-linked investment contracts. Certain non-unit-linked contracts also allow for surrender of the contract by the policyholder at any time. Liabilities for such contracts amounted to USD 922 million and USD 958 million as of December 31, 2013 and 2012 respectively. The Group actively manages the Global Life in-force business to improve persistency and retention.
Table 20.a in USD millions, as of December 31, 2013Expected maturity profile for reserves for insurance contracts, net of reinsurance – current period
Table 20.b in USD millions, as of December 31, 2012Expected maturity profile for reserves for insurance contracts, net of reinsurance – prior period
Table 21.a in USD millions, as of December 31, 2013Expected maturity profile for liabilities for investment contracts – current period
The Group has committed to contribute capital to subsidiaries and third parties that engage in making investments in direct private equity and private equity funds. Commitments may be called by the counterparty over the term of the investment (generally three to five years) and must be funded by the Group on a timely basis. See note 24 of the Consolidated financial statements.
• In 2013, this area was strengthened by adding to the Zurich Risk Policy specific requirements to manage project risks.
Within this framework, the Group: • Uses a scenario-based approach to assess, model and quantify the capital required for operational risk for business units under extreme circumstances (internal model calibrated to a confidence level of 99.95 percent over a one-year time horizon). This approach allows comparison of information across the Group and highlights the main scenarios contributing to the Z-ECM capital required. See chart “Z-ECM capital required for operational risk split by risk scenarios (unaudited)” for more information.
• Conducts operational risk assessments through which operational risks are identified for key business areas and are qualitatively assessed. Risks identified and assessed above a certain threshold must be mitigated, and escalated in specific reports at the Group level. Plans for improvement actions are documented and tracked on an ongoing basis. The Group uses a scoping exercise to determine which business units and Group-wide functional areas conduct operational risk assessments. In the assessments, the Group uses such sources of information as Total Risk Profiling™, internal control assessments, and audit findings, as well as scenario modeling and loss event data.
The Group has specific processes and systems in place to focus on high priority operational matters such as managing information security, business continuity and project risks as well as combating fraud.
Capital management program The Group’s capital management program comprises various actions to optimize shareholders’ total return and to meet capital needs, while enabling Zurich to take advantage of growth opportunities as they arise. Such actions are performed as and when required and include dividends, capital repayments, share buy-backs, issuances of shares, issuance of senior and hybrid debt, securitization and purchase of reinsurance.
In the U.S., restrictions on the payment of dividends that apply to insurance companies may be imposed by the insurance laws or regulations of an insurer’s state of domicile. For general insurance subsidiaries, dividends are generally limited over a 12 month period to the lesser of 10 percent of the policyholders’ surplus or adjusted net investment income. For life, accident and health insurance subsidiaries, dividends are generally limited over a 12 month period to 10 percent of the previous year’s policyholders’ surplus or the previous year’s net gain from operations. Dividends paid in excess of statutory limitations require prior approval from the Insurance Commissioner in the insurer’s state of domicile.
For details on dividend payments, and issuances and redemptions of debt, see notes 20 and 21 of the Consolidated financial statements.
The Group maintained its strong rating level and its stable outlook in 2013. As of December 31, 2013 the IFSR of Zurich Insurance Company Ltd, the main operating entity of the Group, was “AA–/stable” by Standard and Poor’s, “Aa3/stable” by Moody’s and “A+ (superior)/stable” by A.M. Best.
In each country in which the Group operates, the local regulator specifies the minimum amount and type of capital that each of the regulated entities must hold in addition to their liabilities. The Group targets to hold, in addition to the minimum capital required to comply with the solvency requirements, an adequate buffer to ensure that each of its regulated subsidiaries meets the local capital requirements. The Group is subject to different capital requirements depending on the country in which it operates.
At a Group level, Zurich endeavors to pool risk and capital as much as possible and thereby create diversification benefits for the Group. This also allows the Group to take into account the benefits that arise from this pooling in those regions where these benefits are recognized under the capital adequacy regime, e.g., in the U.S., Ireland, and Switzerland.
Regulatory requirements in Switzerland In Switzerland, under the Swiss Solvency Test (SST), groups, conglomerates and reinsurers are required to use companyspecific internal models to calculate risk-bearing and target capital. Internal models must be approved by the Swiss Financial Market Supervisory Authority (FINMA). In 2013, Zurich continued to further enhance and refine its internal model to meet evolving regulatory requirements. The model approval process continues with FINMA, which has approved on a provisional basis the use of Zurich’s internal model for 2013, without prejudicing the final approval of the internal model. Zurich has filed an SST ratio with FINMA in excess of the regulatory requirements, both as of January 1, 2013 and as of July 1, 2013 (subject to FINMA approval). For more details, see the “Swiss Solvency Test requirement (unaudited)” section.
On November 25, 2009 the directive on Solvency II was adopted. Solvency II aims to reflect the latest developments in prudential supervision, actuarial methods and risk management. It includes economic risk-based solvency requirements, which are more risk sensitive and more sophisticated than Solvency I. Solvency II capital requirements also consider all material risks and their interactions. As part of the risk management system, every insurance and reinsurance entities will be required to conduct their own risk and solvency assessment, including the assessment of the overall solvency needs reflecting their specific risk profiles. As part of the disclosure provisions, companies will have to publicly report their solvency and financial condition.
In 2013, the timeline for the roll-out of Solvency II was further specified. The introduction of the complete framework is expected for January 1, 2016. Zurich is fully engaged in an extensive program of work in order to meet Solvency II requirements when they enter into force. The Group intends to use its internal model, which aligns the Solvency II approach with that used for the Z-ECM, for Zurich Insurance plc (Ireland). The Group is in the pre-application process in order to gain regulatory approval for the internal model from the Central Bank of Ireland, the Group’s EU lead regulator.
1 December 31, 2012 has been restated as set out in note 1 of the Consolidated financial statements. 2 Dated subordinated debt issuances are admissible up to 25 percent of the capital requirement, undated issuances up to 50 percent of the capital requirement. 3 Amount for dividend reflects the proposed dividend for the financial year 2013, not yet approved by the Annual General Meeting.
• The Group effective tax rate is assumed to be 24.9 percent in 2013. For the Non-Core Businesses with life insurance characteristics, specific tax rates have been applied.
Monetary impact on total IFRS equity 2013 totaI IFRS equity: USD 34.7bn
Swiss Solvency Test requirement Since January 1, 2011, the Swiss Solvency Test (SST) capital requirements are binding in Switzerland. The Group uses an adaptation of its internal Zurich Economic Capital Model (Z-ECM) to comply with the SST requirements and runs a full SST calculation twice a year. The model is still subject to FINMA approval. For more details about Z-ECM, see the “Internal model capital adequacy (unaudited)” section. For more details about the SST model approval process see the “Regulatory requirements in Switzerland (audited)”.
Sensitivities for the Group’s Swiss Solvency Test ratio (as of July 1, 2013)
Internally, the Group uses its Zurich Economic Capital Model (Z-ECM), which also forms the basis of the SST model. The Z-ECM targets a total capital level that is calibrated to an “AA” financial strength. Zurich defines the Z-ECM capital required as being the capital required to protect the Group’s policyholders in order to meet all of their claims with a confidence level of 99.95 percent over a one-year time horizon.
The Group uses Z-ECM to assess the economic capital consumption of its business on a one-balance-sheet approach. The Z-ECM framework is an integral part of how the Group is managed. The Z-ECM framework is embedded in the Group’s organization and decision making, and is used in capital allocation, business performance management, pricing, reinsurance purchasing, transaction evaluation, risk optimization, and regulatory, investor, and rating agency communication. Z-ECM quantifies the capital required for insurance-related risk (including premium and reserve, natural catastrophe, business and life insurance), market risk (market/ALM), credit risk (including reinsurance credit and investment credit) and operational risks.
Analysis of the Group’s Z-ECM available financial resources and Z-ECM capital required (in USD billions)
Analysis of the Group’s Z-ECM available financial resources (in USD billions as of July 1, 2013)
As part of Z-ECM, the Group uses a scenario-based approach to assess, model and quantify the capital required for operational risk for business units under extreme circumstances and a very slight probability of occurrence (internal model calibrated to a confidence level of 99.95 percent over a one-year time horizon). The chart below shows the operational risk scenarios that have the highest impact on Z-ECM capital required. See “Operational risk (audited)” for more information.
M&A - Due Diligence and Integration: This risk cluster relates to poor execution ofboth the due diligence and the post-M&A integration processes. It includes the understatement of liabilities and required investments, operational or legal risks in the acquired business, inadequate transaction decisions, loss of key staff, inability to realize synergies or deliver benefits.
G ro u p p erfo rm an ce review 1 The impact of scenarios on changes to the Z-ECM capital required is not included in the sensitivities for the Z-ECM ratio as the impact is expected to be small and positive. Scenario 1 and Scenario 2 do not take into account the buffering effect of policyholder participation.
• Parallel upward shift of 100 basis points to the risk-free yield curves • Increase in base lapse rates of 50% for all future years • Increase in policyholder option take-up rates of 25% for all future years
Impact of market, credit, and insurance scenarios on Z-ECM1 as of July 1, 2013 90% Risk Tolerance Level 121% Z-ECM ratio 120% AA Target Range
Impact on the Z-ECM ratio due to market and credit risk-specific scenarios: Impact on the Z-ECM ratio due to general insurance risk-specific scenarios3: Impact on the Z-ECM ratio due to a life insurance risk-specific scenario:
Conclusion Zurich’s risk management framework is well embedded in the business. It sets clear responsibilities for taking, managing, monitoring and reporting risks, and is based on a transparent risk tolerance and risk limit system approved by the Board.
In 2013 Zurich conducted more than 150 Total Risk ProfilingTM exercises, allowing for a systematic assessment of risk from a strategic perspective. The Zurich Risk Policy was strengthened for various areas, including outsourcing.
Several countries, among them Japan, Mexico and South Africa, started the legislative process to implement regulatory frameworks similar to Solvency II.
Embedding standards and principles Groupwide to promote risk awareness and informed risk-taking
Zurich Remuneration Rules help to root disciplined risk-taking across all levels in the Group
As of July 1, 2013, the Group had a Zurich Economic Capital Model (Z-ECM) ratio of 121%, and was well above the Swiss Solvency Test requirements with a ratio of 206%. As of December 31, 2013, the Group’s Solvency I ratio was 258%.
AA–/stable Standard & Poor’s financial strength rating of Zurich Insurance Company Ltd (as of December 31, 2013)
In 2013, the sensitivities for the Z-ECM ratio were analyzed with regard to changes in market and credit conditions. Under all scenarios, the Z-ECM ratio stayed well within the “AA” target range.
In this section Consolidated financial statements 180 Embedded value report 304 Holding company 340 Shareholder information 362 Contact information 365 Glossary 366
Consolidated income statements 181 Consolidated statements of comprehensive income 182 Consolidated balance sheets 184 Consolidated statements of cash flows 186 Consolidated statements of changes in equity 188 1. Basis of presentation 190 2. New accounting standards and amendments to published accounting standards 194 3. Summary of significant accounting policies 195 4. Critical accounting judgments and estimates 206 5. Acquisitions and divestments 211 7. Derivative financial instruments and hedge accounting 219 8. Reserves for insurance contracts and reinsurers’ share of reserves for insurance contracts 224 9. Liabilities for investment contracts 231 10. Equity component relating to contracts with DPF 231 11. Gross and ceded insurance revenues and expenses 232 12. Deferred policy acquisition costs and deferred origination costs 233 14. Farmers management fees and other related revenues 235 15. Property and equipment 236 16. Goodwill and other intangible assets 237 17. Receivables and other assets 239 18. Other liabilities 239 19. Income taxes 241 20. Senior and subordinated debt 245 21. Shareholders’ equity 249 22. Employee benefits 251 23. Share-based compensation and cash incentive plans 259 24. Contingent liabilities, contractual commitments and financial guarantees 262 25. Fair value measurement 265 26. Related party transactions 273 27. Farmers Exchanges 274 28. Segment information 276 29. Interests in subsidiaries 297 Report of the statutory auditor 302
Net investment income on Group investments 6,240 6,782 Net capital gains/(losses) and impairments on Group investments 1,157 2,201
Basic earnings per share 21 27.33 26.50 Diluted earnings per share 21 27.22 26.37 in CHF
Accrued investment income 2,321 2,414 2,589 Receivables and other assets 17 18,499 18,425 17,831 Mortgage loans given as collateral – – 223
Additional paid-in capital 21 6,395 8,172 9,907 Net unrealized gains/(losses) on available-for-sale investments 1,730 4,523 2,800 Cash flow hedges 106 238 232 Cumulative foreign currency translation adjustment (4,008) (3,022) (2,581)
Cash flows from operating activities Net income attributable to shareholders 4,028 3,887 Adjustments for: Net (gain)/loss on divestments of businesses 1 34 (Income)/expense from equity method accounted investments (11) (12) Depreciation, amortization and impairments of fixed and intangible assets 1,198 1,085 Other non-cash items 255 134
Other interest income received 6,437 6,929 Dividend income received 1,724 1,826 Other interest expense paid (1,180) (1,216) Income taxes paid (1,186) (1,231)
Cash and cash equivalents comprise the following: Cash at bank and in hand 5,746 6,954 Cash equivalents 2,416 3,254
As of December 31, 2013 and 2012, cash and cash equivalents held to meet local regulatory requirements were USD 1,284 million and USD 1,345 million, respectively.
Share-based payment transactions – (34) – – – – – (34) – (34)
Share-based payment transactions – (4) – – – – – (4) – (4)
USD 840 million between the dividend at transaction day exchange rates amounting to USD 2,763 million and the dividend at historical exchange rates amounting to USD 1,923 million is reflected in the cumulative foreign currency translation adjustment.
All amounts in the Consolidated financial statements, unless otherwise stated, are shown in USD, rounded to the nearest million with the consequence that the rounded amounts may not add to the rounded total in all cases. All ratios and variances are calculated using the underlying amounts rather than the rounded amounts.
The presentation of deferred bonuses allocated to policyholders had been aligned across the Group. There was no impact to the Group’s consolidated income statement. As a result of this alignment there was a corresponding reduction in both deferred front-end fees and deferred policy acquisition costs. The impact of the reduction in deferred policy acquisition costs is set out in note 12.
The presentation of indemnity commission has been aligned across the Group with no impact on the Group’s consolidated income statement. As a result of this alignment there is a transfer from receivables and other assets to deferred policy acquisition costs. The impact of the increase in deferred policy acquisition costs is set out in note 12.
Revenues Gross written premiums 51,285 – – 51,285 Policy fees 2,692 – – 2,692 Gross written premiums and policy fees 53,977 – – 53,977 Less premiums ceded to reinsurers (6,481) – – (6,481) Net written premiums and policy fees 47,496 – – 47,496 Net change in reserves for unearned premiums (741) – – (741) Net earned premiums and policy fees 46,755 – – 46,755 Farmers management fees and other related revenues 2,846 – – 2,846 Net investment result on Group investments 8,911 – 72 8,983
Net investment income on Group investments 6,711 – 72 6,782 Net capital gains/(losses) and impairments on Group investments 2,201 – – 2,201
Basic earnings per share 26.44 0.06 – 26.50 Diluted earnings per share 26.31 0.06 – 26.37 in CHF
Table 1.2 in USD millions, for the year ended December 31, 2012Restatement of the consolidated income statement
Reinsurers’ share of reserves for insurance contracts 19,753 – – 19,753 Deposits made under assumed reinsurance contracts 2,588 – – 2,588 Deferred policy acquisition costs 18,346 – – 18,346 Deferred origination costs 770 – – 770 Accrued investment income 2,414 – – 2,414 Receivables and other assets 18,423 – 3 18,425 Deferred tax assets 1,854 – – 1,853 Assets held for sale 102 – – 102 Property and equipment 1,530 – – 1,530
Liabilities Reserve for premium refunds 706 – – 706 Liabilities for investment contracts 58,131 – (693) 57,437 Deposits received under ceded reinsurance contracts 1,558 – – 1,558 Deferred front-end fees 6,073 – – 6,073 Reserves for insurance contracts 265,233 – – 265,233 Obligations to repurchase securities 1,539 – – 1,539
Table 1.3 in USD millions, as of December 31, 2012Restatement of the consolidated balance sheet
Zurich Insurance GroupAnnual Report 2013Financial information194 2. New accounting standards and amendments to published accounting standards
IAS 1 Presentation of items of Other Comprehensive Income (OCI) 1 July 1, 2012
3 Resulted in a change in the fair value hierarchy disclosures. 4 Applying a high quality corporate bond rate rather than an expected return on assets rate resulted in approximately USD 9 million lower expenses. Additionally, impact from past service cost is immaterial.
IAS 39 Novation of Derivatives and Continuation of Hedge Accounting 1 January 1, 2014 1 Not expected to have a significant impact on the Consolidated financial statements. 2 The impact on the Consolidated financial statements will be assessed in conjunction with the revised standard IFRS 4 “Insurance Contracts”. Changes to the IFRS timetable may impact this approach.
Acquisition transactions with non-controlling interests are accounted for as transactions with parties external to the Group. The effect of transactions with non-controlling interests is recorded in equity if there is no change in control.
Foreign currency transactions and balances Foreign currency transactions are translated into the functional currency using the spot exchange rate at the date of the transaction or, for practical reasons, a weighted average rate, if exchange rates do not fluctuate significantly. Foreign currency monetary items and foreign currency non-monetary items that are carried at fair value, are translated at end-of-period exchange rates. Foreign currency non-monetary items that are carried at historical cost are translated at historical exchange rates. The resulting foreign currency differences are recorded in income, except for the following: • when gains or losses on non-monetary items measured at fair value, such as available-for-sale equity securities, are recognized directly in OCI, any foreign currency component included in the gains or losses is also recognized directly in OCI; • when changes in the fair value of monetary items denominated in foreign currency, such as debt securities, that are classified as available-for-sale, are analyzed between foreign currency translation differences resulting from changes in the amortized cost of the security and other fair value changes in the security. Foreign currency translation differences related to changes in amortized cost are recognized in income, and those related to other changes in fair value are recognized in OCI; and
Once a contract has been classified as an insurance contract, no reclassification can subsequently be made.
Amounts collected as premiums from investment type insurance contracts such as universal life, unit-linked and unitized with-profits contracts are reported as deposits. Revenue from these contracts consists of policy fees for the cost of insurance, administration and surrenders during the period. Front-end fees are deferred and recognized over the estimated life of the contracts.
DAC for investment type insurance contracts such as universal life, unit-linked and unitized with-profits contracts is amortized over the life of the contracts based on estimated gross profits expected to be realized over the life of the contract. Estimated gross profits are updated for actual and anticipated future experience and discounted using either the interest rate in effect at the inception of the contracts or the latest revised interest rate for the remaining benefit period, depending on whether crediting is based on the policyholder’s or on the reporting entity’s investment performance. Resultant deviations are reflected in income.
Reinsurance contracts that do not transfer significant insurance risk are accounted for using the deposit method. A deposit asset or liability is recognized based on the premium paid or received less any explicitly identified premiums or fees to be retained by the ceding company. Interest on deposits is accounted for using the effective interest rate method. Future cash flows are estimated to calculate the effective yield and revenue and expense are recorded as interest income or expense. Reinsurance deposit assets or liabilities also include funds deposited or held by the Group, under assumed or ceded reinsurance contracts, respectively, when funds are retained by the reinsured under the terms of the contract.
d) Liabilities for investment contracts (without DPF) Investment contracts are those contracts that transfer no significant insurance risk. The Group issues investment contracts without fixed terms (unit-linked) and investment contracts with fixed and guaranteed terms (fixed interest rate).
Unit-linked investment contracts These represent portfolios maintained to meet the specific investment objectives of policyholders who bear the credit, market and liquidity risks related to the investments. The liabilities are carried at fair value, with fair value being determined by reference to the underlying financial assets and changes in fair value are recorded in income. The related assets for unit-linked investment contracts are designated at fair value through profit or loss in order to reduce measurement inconsistencies.
Deferred origination costs (DOC) The costs of acquiring new investment contracts with investment management services, such as commissions and other incremental expenses directly related to the issuance of each new contract, are capitalized and amortized in line with the revenue generated by providing investment management services. DOC is tested for recoverability annually.
Financial assets irrevocably designated at fair value through profit or loss are mainly financial assets backing unit-linked insurance contracts, unit-linked investment contracts and certain life insurance contracts with participation features. The designation of these assets at fair value through profit or loss eliminates or significantly reduces a measurement inconsistency that would otherwise arise from measuring assets or recognizing the gains and losses on them on a different basis compared to the liabilities.
Real estate held for investment is initially recorded at cost (including transaction costs) and subsequently measured at fair value with changes in fair value, as well as any realized gain or loss upon disposal, recognized in income.