Amortization (charged)/ credited to other comprehensive income – – 136 46 29 13 166 59 1 Net of eliminations from inter-segment transactions. 2 In May 2018, the Group entered into a quota share reinsurance agreement with OnePath Life, a part of ANZ Banking Group Limited and made an upfront commission payment of USD 754 million. In July 2017, Bansabadell Vida signed a reinsurance agreement on its individual life risk portfolio which resulted in an initial increase of USD 755 million of reinsurance deferred acquisition costs.
4 The Property and Casualty movement mainly related to QBE acquisition and sale of Endsleigh Limited (see note 5). The 2018 other businesses movement mainly related to the sale of a portfolio in Singapore.
As of January 1 460 426 Origination costs deferred 55 59
Expenses in USD millions, for the years ended December 31 2018 2017
Administrative and other operating expenses 1 7,761 7,212 Other underwriting and policy acquisition costs 2 2,111 2,188 Claims handling expenses 3 1,126 1,261 Other investment expenses 4 219 218 of which: Personnel and other related costs 5,739 5,448 Amortization and impairments of intangible assets 501 570 Depreciation and impairments of property and equipment 173 152 Building and infrastructure costs 544 539 Brand and marketing expenses 332 344 Life recurring commission 445 431 Asset and other non-income taxes 54 38 IT expenses 1,611 1,394 Restructuring costs (excl. impairments) 297 292 Outsourcing and professional services 887 879 Foreign currency translation (63) (71)
Gross carrying value as of December 31, 2018 155 473 370 330 732 2,060 1 Includes USD 25 million related to the sale of business in the UK (Endsleigh) (see note 5).
Amortization charged to shareholders’ equity – – 14 – – – 14
For the year ended December 31, 2017, divestments and transfers include re-measurements of intangible assets related to assets held for sale of USD 124 million (see note 5).
Financial assets Group derivative assets 899 903 Unit-linked derivative assets 3 19 Receivables from policyholders 3,281 3,281 Receivables from insurance companies, agents and intermediaries 5,514 5,665 Receivables arising from ceded reinsurance 1,114 1,179 Reverse repurchase agreements 47 153 Amounts due from investment brokers 972 847 Other receivables 2,426 2,312 Allowance for impairments 1 (243) (258) Accrued premiums 849 845 Accrued investment income 2 1,601 1,695 Assets for defined benefit plans 3 232 201 Other financial assets 144 187 Non-financial assets Current income tax receivables 634 505 Prepaid expenses 391 350 Other non-financial assets 361 313 Total receivables and other assets 18,225 18,195 1 Includes receivables arising from ceded reinsurance of USD 38 million and USD 41 million as of December 31, 2018 and 2017, respectively. 2 Accrued investment income on the unit-linked investments amounts to USD 102 million and USD 107 million as of December 31, 2018 and 2017, respectively. 3 See note 20.
Other liabilities in USD millions, as of December 31 2018 2017
Table 16.2 shows the maturity schedule of other financial liabilities excluding liabilities for defined benefit plans as of December 31, 2018 and 2017. The allocation to the time bands is based on the expected maturity date for the carrying value and the earliest contractual maturity for the undiscounted cash flows.
Maturity schedule – other financial liabilities in USD millions, as of December 31 2018 2017
The Group is required to record taxes on policyholder earnings for life insurance policyholders in certain jurisdictions. Accordingly, the income tax expense or benefit attributable to these life insurance policyholder earnings is included in income tax expense. In certain jurisdictions an accrual for future policy fees that will cover the tax charge is included in insurance benefits and losses.
Taxes paid by certain of the Group’s life insurance businesses are based on the investment result less allowable expenses. To the extent these taxes exceed the amount that would have been payable in relation to the shareholders’ share of taxable profits, it is normal practice for certain of the Group’s businesses to recover this portion from policyholders. While the relevant company has the contractual right to charge policyholders for the taxes attributable to their share of the investment result less expenses, the obligation to pay the tax authority rests with the company and therefore, the full amount of tax including the portion attributable to policyholders is accounted for as income tax. Income tax expense therefore includes an element attributable to policyholders.
Tax loss carryforwards 131 – 99 – Gross deferred tax assets/(liabilities) before valuation allowance 4,149 (7,976) 4,056 (8,361) Valuation allowance (89) – (52) – Gross deferred tax assets/(liabilities) after valuation allowance 4,061 (7,976) 4,005 (8,361) Deferred tax liabilities (3,915) (4,357)
Development of net deferred tax liabilities in USD millions 2018 2017
As of January 1 (3,281) (3,114) Net change recognized in the income statement (15) 311 Net change recognized in equity 344 (245) Net changes due to acquisitions/(divestments) 75 (60) Foreign currency translation effects 86 (173) As of December 31 (2,790) (3,281)
For which deferred tax assets have not been recognized, expiring > 20 years or with no time limitation 2,010 1,731
Senior and subordinated debt in USD millions, as of December 31 2018 2017
Zurich Holding Comp. of America Inc Euro commercial paper notes, due in less than 12 months 399 399 Zurich Finance (Australia) Limited Floating rate AUD 241 million loan due July 2019 170 –
Other Various debt instruments 69 31 Senior debt 5,237 3,846 Subordinated debt Zurich Insurance Company Ltd 8.250% USD 500 million perpetual capital notes, first 4.625% CHF 500 million perpetual notes, first callable May 2018 1 – 513 7.500% EUR 425 million notes, due July 2039, first callable July 2019 1,3 486 509 2.750% CHF 225 million perpetual capital notes, first callable June 2021 1 228 230 2.750% CHF 200 million perpetual capital notes, first callable September 2021 1,2 209 212 4.750% USD 1 billion perpetual capital notes, first callable January 2022 1,3 996 994 4.250% EUR 1 billion notes, due October 2043, first callable October 2023 1,3 1,138 1,192 4.250% USD 300 million notes, due October 2045, first callable October 2025 1,3 299 299 5.625% USD 1 billion notes, due June 2046, first callable June 2026 1,3 997 996 3.500% EUR 750 million notes, due October 2046, first callable October 2026 1,2,3 855 890 5.125% USD 500 million notes, due June 2048, first callable June 2028 1,3 498 – 4.875% USD 500 million notes, due October 2048, first callable October 2028 1,3 498 –
Subordinated debt 6,775 6,938 Total senior and subordinated debt 12,012 10,784 1 Issued under the Group’s Euro Medium Term Note Programme (EMTN Programme). 2 The Group applied the fair value hedge methodology either partially or in full to hedge the interest rate exposure. 3 These bonds are part of a qualifying net investment hedge to hedge the foreign currency exposure.
None of the debt instruments listed in table 18.1 was in default as of December 31, 2018 and 2017.
a) Authorized share capital Until April 4, 2020, the Board of Zurich Insurance Group Ltd is authorized to increase the share capital by an amount not exceeding CHF 4,500,000 by issuing up to 45,000,000 fully-paid registered shares with a nominal value of CHF 0.10 each. An increase in partial amounts is permitted. The Board would determine the date of issue of any such new shares, the issue price, type of payment, conditions for exercising subscription rights, and the commencement of entitlement to dividends.
The Board may issue such new shares by means of a firm underwriting by a banking institution or syndicate with a subsequent offer of those shares to current shareholders. The Board may allow the expiry of subscription rights which have not been exercised, or it may place these rights as well as shares, the subscription rights of which have not been exercised, at market conditions.
The Board is further authorized to restrict or exclude the subscription rights of shareholders and to allocate them to third parties, the Company or one of its group companies, up to a maximum of 15,000,000 fully-paid registered shares, if the shares are to be used: 33 for the take-over of an enterprise, or parts of an enterprise or of participations or for investments by the Company or one of its group companies, or the financing including re-financing of such transactions; or 33 for the purpose of expanding the scope of shareholders in connection with the quotation of shares on foreign stock exchanges or issuance of shares on the national or international capital markets (including private placements to one or more selected investors); or 33 for the conversion of loans, bonds, similar debt instruments, equity-linked instruments or other financial market instruments (collectively, the ‘Financial Instruments’) issued by the Company or one of its group companies; or 33 for the improvement of the regulatory capital position of the Company or one of its group companies in a fast and expeditious manner.
b) Contingent share capital Financial Instruments The share capital of Zurich Insurance Group Ltd may be increased by an amount not exceeding CHF 3,000,000 by issuing of up to 30,000,000 fully-paid registered shares with a nominal value of CHF 0.10 each by the voluntary or mandatory exercise of conversion and/or option rights which are granted in connection with the issuance of loans, bonds, similar debt instruments, equity-linked instruments or other financial market instruments (collectively, the ‘Financial Instruments’) by the Company or one of its group companies or by mandatory conversion of Financial Instruments issued by the Company or one of its group companies, that allow for contingent mandatory conversion into shares of the Company, or by exercising option rights which are granted to the shareholders. The subscription rights are excluded. The then-current owners of the Financial Instruments shall be entitled to subscribe for the new shares. The conversion and/or option conditions are to be determined by the Board.
Employee participation During 2018 and 2017, 8,176 shares and 732,445 shares, respectively, were issued to employees from contingent share capital. The remaining contingent share capital, which can be issued to employees amounted to CHF 494,723 and CHF 495,541 or 4,947,232 and 4,955,408 fully paid registered shares as of December 31, 2018 and 2017, respectively, with a nominal value of CHF 0.10 each. Subscription rights of the shareholders, as well as advance subscription rights, are excluded. The issuance of new shares or respective option rights to employees is subject to one or more regulations to be issued by the Board and takes into account performance, functions, levels of responsibility and criteria of profitability. New shares or option rights may be issued to employees at a price lower than that quoted on the stock exchange.
c) Additional paid-in capital This reserve is not ordinarily available for distribution. However, as of January 1, 2011, a Swiss tax regulation based on the Swiss Corporate Tax Reform II became effective, allowing for payments free of Swiss withholding tax to shareholders out of the capital contribution reserve, created out of additional paid-in capital. Therefore, amounts qualifying under this regulation can be paid out of additional paid-in capital. As of December 31, 2018, the general capital contribution reserve amounted to CHF 28 million.
Treasury shares number of shares, as of December 31 2018 2017 2016
e) Dividends The dividend of CHF 18 per share was partially paid out of the capital contribution reserve and partially out of the available earnings on April 10, 2018, as approved at the Annual General Meeting on April 4, 2018. The difference between the respective amounts of the dividend at transaction day exchange rates amounting to USD 2.8 billion and at historical exchange rates are reflected in the cumulative foreign currency translation adjustment.
f) Share buy-back program On April 11, 2018, the Group launched a public share buy-back program for up to 1,740,000 shares of Zurich Insurance Group Ltd, which was completed on May 18, 2018. A total of 1,740,000 shares were repurchased on a second trading line on the SIX Swiss Exchange via Zürcher Kantonalbank as agent.
The Group had 52’267 and 51,633 employees (full-time equivalents) as of December 31, 2018 and 2017, respectively. Personnel and other related costs incurred were USD 5.8 billion and 5.6 billion for the years ended December 31, 2018 and 2017, respectively, including wages and salaries of USD 4.8 billion for both years.
a) Defined benefit pension plans Employees of the Group’s companies are or have been covered by various pension plans, the largest of which are in Switzerland, the UK, the U.S. and Germany, which together comprise over 90 percent of the Group’s total defined benefit obligation. The remaining plans in other countries are not individually significant, therefore no separate disclosure is provided.
Swiss pension plan The plan provides benefits that exceed the minimum benefit requirements under Swiss pension law. It provides a lifetime pension to members at the normal retirement age of 65 (age 62 for Executive Staff). Participants can draw retirement benefits early from age 60 (age 58 for Executive Staff). Alternatively, the benefit can be taken as a lump sum payment at retirement. Contributions to the plan are paid by the employees and the employer, both for retirement savings and to finance risk benefits paid out in the event of death and disability. The accumulated balance on the pension account is based on the employee and employer pension contributions and interest accrued. The interest rate credited is defined annually by the plan’s Board of Trustees which is responsible for the governance of the plans. The amount of pension payable on retirement is a result of the conversion rate applied on the accumulated balance of the individual participant’s pension account at the retirement date.
As of December 31, 2017, the technical interest rate was reduced from 2.75 percent to 1.75 percent and the conversion rate at age 65 is being phased down to 5 percent over a six-year period until 2023 to align more closely with the low interest rate environment and increased life expectancy. Both the employer and employee savings contributions were increased. The flexibility of both plans was improved by introducing three levels of savings. Together with other changes the insured salary was increased.
Top-up payments were introduced to those members’ pension accounts which had been part of the plan in 2017. This ensures that benefits at normal retirement age will be at least equal to 98.5 percent of their pensions expectations under the previous conversion rates.
Although the Swiss plan operates like a defined contribution plan under local regulations, it is accounted for as a defined benefit pension plan under IAS 19 ‘Employee Benefits’ because of the need to accrue interest on the pension accounts and the payment of a lifetime pension at a fixed conversion rate under the plan rules.
UK pension plan The major UK pension plan is a hybrid arrangement and defined benefits entitlements accrued to December 31, 2015 increase in line with salary increases. Normal retirement age for the plan is 60. The plan is split into distinct sections and the two defined benefit sections are closed to new entrants and, with effect from January 1, 2016, to future benefit accrual. All employees now participate in a defined contribution section within the same trust. The notes that follow consider only the defined benefit sections. The UK Pension Trustee Board is responsible for the governance of the plan. The employer contributions are determined based on regular triennial actuarial valuations which are conducted using assumptions agreed by the Trustee Board and the sponsoring company. A local statutory valuation was carried out at an effective date of June 30, 2016 and was finalized in June 2017. This valuation disclosed a funding surplus of USD 411 million (GBP 304 million) after taking into account the value of the asset-backed funding arrangement established in 2014.
The ongoing funding of the plan is closely monitored by the Trustee Board and a dedicated funding committee is made up of representatives from the Trustee Board and the Group. The plan rules and UK pension legislation set out maximum levels of inflationary increases applied to plan benefits. The plan assets are invested in diversified classes of assets.
The ZNA cash balance pension plan was amended effective December 31, 2018 following a decision in November 2017 so that employees will no longer earn pay credits. However, ZNA employees will continue to earn interest credits on their existing account balance. The impact resulted in a past service credit in 2017. In conjunction with the change in the pension plan, ZNA employees will receive an additional company contribution within their defined contribution plan.
Tables 20.1a and 20.1b set out the reconciliation of the defined benefit obligation and plan assets for the Group’s post-employment defined benefit plans.
Net post-employment benefit (expense)/income (540) 201 – (339) Remeasurement effects included in other comprehensive income: Return on plan assets excluding interest income – (713) – (713) Experience gains/(losses) 199 – – 199 Actuarial gains/(losses) arising from changes in demographic assumptions 316 – – 316 Actuarial gains/(losses) arising from changes in financial assumptions 909 – – 909 Change in asset ceiling – – (18) (18)
Remeasurement effects included in other comprehensive income 1,424 (713) (18) 693 Employer contributions – 611 – 611 Employer contributions paid to meet benefits directly 34 – – 34 Plan participants’ contributions (65) 65 – – Payments from the plan (incl. settlements) 965 (965) – – Foreign currency translation effects 816 (686) – 129 of which: Assets for defined pension plans 232 of which: Liabilities for defined pension plans (2,491)
Net post-employment benefit (expense)/income (584) 349 – (235) Remeasurement effects included in other comprehensive income: Return on plan assets excluding interest income – 582 – 582 Experience gains/(losses) (65) – – (65) Actuarial gains/(losses) arising from changes in demographic assumptions 517 – – 517 Actuarial gains/(losses) arising from changes in financial assumptions (41) – – (41)
of which: Assets for defined pension plans 201 of which: Liabilities for defined pension plans (3,590)
Fair value of assets held in funded defined benefit pension plans in USD millions, as of December 31 2018 2017
Tables 20.3a and 20.3b provide a breakdown of the key information included in tables 20.1a and 20.1b for the main countries for the years ended December 31, 2018 and 2017, respectively.
Key information by main country – current period in USD millions, as of December 31, 2018
Fair value of plan assets 4,881 8,410 3,008 1,181 967 18,447 Impact of asset ceiling (95) (18) – – – (113) Net defined benefit asset/(liability) 196 (1,748) (380) (135) (193) (2,260) Net post-employment benefit (expense)/income (98) (95) (106) (26) (13) (339)
Key information by main country – prior period in USD millions, as of December 31, 2017
Key financial assumptions used for major plans as of December 31 2018 2017
States Germany 1 In the UK part of the liability is linked to the inflation measure of the Retail Price Index (RPI), which is assumed to be 1.0 percent higher than the Consumer Price Index (CPI) as of both December 31, 2018 and 2017.
Maturity profile of future benefit payments for major plans as of December 31 2018 2017
Duration of the defined benefit obligation (in years) 14.1 21.0 12.2 14.0 14.5 21.2 12.8 14.7
Table 20.7 sets out the sensitivity of the defined benefit obligation to changes in key actuarial assumptions. The effect on the defined benefit obligation shown allows for an alternative value for each assumption while the other actuarial assumptions remain unchanged. While this table illustrates the overall impact on the defined benefit obligation of the changes shown, the significance of the impact and the range of reasonably possible alternative assumptions may differ between the different plans that comprise the overall defined benefit obligation. In particular, the plans differ in benefit design, currency and average term, meaning that different assumptions have different levels of significance for different plans. The sensitivity analysis is intended to illustrate the inherent uncertainty in the evaluation of the defined benefit obligation under market conditions at the measurement date. Its results cannot be extrapolated due to non-linear effects that changes in the key actuarial assumptions may have on the overall defined benefit obligation. Furthermore, the analysis does not indicate a probability of such changes occurring and it does not necessarily represent the Group’s view of expected future changes in the defined benefit obligation. Any management actions that may be taken to mitigate the inherent risks in the post-employment defined benefit plans are not reflected in this analysis.
b) Defined contribution pension plans Certain of the Group’s companies sponsor defined contribution pension plans. Eligibility for participation in such plans is either immediate on commencement of employment or based on completion of a specified period of continuous service. The plans provide for voluntary contributions by employees and contributions by the employer which typically range from 2 percent to 12 percent of annual pensionable salary, depending on a number of factors. The Group’s contributions under these plans amounted to USD 184 million and USD 139 million for the years ended December 31, 2018 and 2017, respectively.
The cost of share-based payments depend on various factors, including achievement of targets, and are subject to the discretion of the Remuneration Committee. Costs may therefore vary significantly from year to year. The net amounts of USD 215 million and USD 157 million for the years ended December 31, 2018 and 2017, respectively, reflect all aspects of share-based compensation, including adjustments made during the year.
A revised Partnership Share Scheme was launched in March 2013. Participants benefit from purchasing shares by making deductions from gross salary up to a maximum of GBP 1,800 or 10 percent of their year-to-date earnings. There were 688 and 754 active participants in the plan as of December 31, 2018 and 2017, respectively.
The Group also operates a profit-sharing element of the Share Incentive Plan (Reward Shares) which was launched in 2004 with annual share allocations being made in May each year subject to business performance. The awards are based on business operating profit (BOP) after tax for the year achieved by the business unit of each participating employee. Individual awards are subject to a maximum of 5 percent of a participant’s base salary (before any flexible benefit adjustments) with an overall maximum of GBP 3,600. The total number of participating employees in Reward Shares as of December 31, 2018 and 2017 was 3,192 and 4,174, respectively.
A Dividend Shares scheme was launched in 2014 which allows employees to reinvest their dividends from Partnership Shares 3 and Reward Shares 3. As of December 31, 2018 and 2017, there were 385 and 313 participants in the scheme, respectively.
Share Incentive Plan for employees in Switzerland Under this plan, employees have the option to acquire sales-restricted shares at a 30 percent discount to the market value. The maximum permitted investment in shares is equivalent to CHF 3,500 per employee per annum. During 2018, 4,097 employees were eligible to participate in the share incentive plan, compared with 4,161 in 2017. For the years ended December 31, 2018 and 2017, 1,648 and 1,672 employees, respectively, purchased shares under the 2017 and 2018 share plans.
Target shares allocated in 2018 will vest after a period of three years following the year of allocation (three year cliff vesting), with the actual level of vesting between 0 percent and 200 percent of the target shares allocated, depending on the achievement of pre-defined performance criteria. The performance criteria used to determine the level of vesting are the Group’s return on shareholders’ equity (ROE), the position of its relative total shareholder return (TSR) measured against an international peer group of insurance companies, and the achievement of cash remittance targets. The three pre-defined performance criteria are each assessed over a period of three consecutive financial years starting in the year of allocation and have an equal weighting. One half of the shares that actually vest are salesrestricted for a further three years. To further align the participants with the interests of the shareholders, effective from January 1, 2014, the target shares are credited with dividend equivalent shares during the vesting period to compensate participants in LTIP for dividends paid to shareholders. As of December 31, 2018 and 2017 there were 1,031 and 1,129 participants in this plan, respectively.
The shares allocated each year are based on target under the Group’s LTIP. The level of vesting will depend on the level of achievements in the performance criteria. If the vesting level is different to target, the actual cost of the share-based payments is adjusted accordingly in the year when the level of vesting is determined.
Commitments under lease agreements The Group has entered into various non-cancellable operating leases as lessee for office space and certain computer and other equipment. Lease expenses totaled USD 256 million for both years ended December 31, 2018 and 2017.
Other contingent liabilities The Group has received notices from various tax authorities asserting deficiencies in taxes for various years. The Group is of the view that the ultimate outcome of these reviews will not materially affect the Group’s consolidated financial position.
The Group has commitments to provide collateral on certain contracts in the event of a financial strength downgrading for Zurich Insurance Company Ltd from the current AA– by Standard & Poor’s. Should the rating by Standard & Poor’s fall to A+, then the additional collateral based on information available amounts to nil as of both December 31, 2018 and 2017.
In common with other insurance companies, the Group is mindful of the trend toward enhanced consumer protection. There is significant uncertainty about the ultimate cost this trend might have on our business. The main areas of uncertainty concern court decisions as well as the volume of potential customer complaints related to sales activities and withdrawal rights, and their respective individual assessments.
Pledged assets The majority of assets pledged to secure the Group’s liabilities relate to debt securities pledged under short-term sale and repurchase agreements. The total amount of pledged financial assets including the securities under short-term sale and repurchase agreements amounted to USD 2 billion and USD 2.4 billion as of December 31, 2018 and 2017, respectively.
The Group makes extensive use of third-party pricing providers to determine the fair values of its available-for-sale and fair value through profit or loss financial instruments, and only in rare cases places reliance on prices that are derived from internal models. Investment accounting, operations and process functions, are independent from those responsible for buying and selling the assets, and are responsible for receiving, challenging and verifying values provided by third party pricing providers to ensure that fair values are reliable, as well as ensuring compliance with applicable accounting and valuation policies. The quality control procedures used depend on the nature and complexity of the invested assets. They include variance and stale price analysis, and comparisons with fair values of similar instruments and with alternative values obtained from asset managers and brokers.
Total available-for-sale securities 145,110 154,430 145,110 154,430 Fair value through profit or loss securities
Fair value hierarchy – non unit-linked – current period in USD millions, as of December 31, 2018 Level 1 Level 2 Level 3 Total
Reinsurers’ share of liabilities for insurance contracts fair value option 1 – – 204 204
1 Included within reinsurers’ share of liabilities for insurance contracts. 2 Included within liabilities for insurance contracts.
33 Investment properties for which fair value is based on valuations performed annually by internal valuation specialists and generally on a rotation basis at least once every three years by an independent qualified appraiser. In general the portfolio is valued using an internal income capitalization approach. The model is asset specific and capitalizes the sustainable investment income of a property with its risk specific cap rate. This cap rate is an ‘all risk yield’ with components such as asset class yield for core assets (lowest risk) plus additional premiums for additional risks, for example second tier location or deterioration risk. All cap rate components (risk premiums) are reviewed and, if necessary, adjusted annually before revaluations are performed. The model takes into consideration external factors such as interest rate, market rent and vacancy rate. The significant unobservable inputs which are outside this model, are estimated rental value, rental growth, long term vacancy rate and discount rate. Significant increases/ (decreases) in rental value and rental growth, in isolation, would result in a significantly higher/(lower) fair value measurement. Significant increases/(decreases) in the long term vacancy rate and discount rate, in isolation, would result in a significantly lower/(higher) fair value measurement.
Fee income and other expenses (10) 1 (9) Interest and bonuses credited to policyholders 43 (4) 38 Changes in assumptions 11 – 11 (Decreases)/increases recorded in other comprehensive income (33) – (33)
Transfers into level 3 32 – – Transfers out of level 3 – (16) – Acquisitions and divestments – – (9) Foreign currency translation effects (1) (1) (195)
Realized gains/(losses) recognized in income 1 – (1) (20) Unrealized gains/(losses) recognized in income 1 38 (3) 128
Sales/redemptions (56) – (189) Transfers into level 3 – 8 – Transfers out of level 3 (16) (1) – Acquisitions and divestments – – (79) Foreign currency translation effects 1 2 300 1 Presented as net investment result on unit-linked investments in the consolidated income statements.
Analysis of financial assets – current period in USD millions, as of December 31, 2018
Neither past due nor impaired financial assets 148,159 6,943 8,720 12,629 176,450 Past due but not impaired financial assets Past due by: Past due but not impaired financial assets – 90 – 1,931 2,020
Under IFRS 9, the classification and measurement of all debt instruments will be driven by the business model in which these assets are held and by their contractual terms. The combined effect of the application of the business model and contractual cash flows characteristics determine whether the financial assets are measured at amortized cost, fair value with changes recognized in other comprehensive income (OCI) or fair value through profit or loss. The business model will be assessed at the date of the initial application of IFRS 9.
Total fair value through profit or loss securities – – 8,862 8,862 8,862 8,862 Held-to-maturity debt securities 2,655 2,118 – – 2,655 2,118 1 Other loans do not include policyholder loans, which will come under IFRS 17 and are therefore not applicable for IFRS 9, of USD 742 million and USD 636 million for fair value and carrying value, respectively.
Total fair value through profit or loss securities – – 9,295 9,295 9,295 9,295 Held-to-maturity debt securities 2,966 2,322 – – 2,966 2,322 1 Other loans do not include policyholder loans, which will come under IFRS 17 and are therefore not applicable for IFRS 9, of USD 782 million and USD 659 million for fair value and carrying value, respectively.
The tables 24.4a and 24.4b show the fair value and the carrying amount (before adjusting for any impairment in case of financial assets measured at amortized cost) of financial assets whose contractual terms give rise to cash flows that are SPPI, by impairment stages: Table 24.4a
Available-for-sale debt securities 124,194 124,194 502 502 132 132 124,829 124,829 Held-to-maturity debt securities 2,653 2,115 3 3 – – 2,655 2,118 1 Other loans do not include policyholder loans, which will come under IFRS 17 and are therefore not applicable for IFRS 9, of USD 742 million and USD 636 million for fair value and carrying value, respectively.
Financial assets (SPPI) by stages – prior period in USD millions, as of December 31, 2017
Farmers Group, Inc. and its subsidiaries (FGI) provide certain non-claims administrative, management, and ancillary services to the Farmers Exchanges, which are managed by Farmers Group Inc., a wholly owned subsidiary of the Group. Non-claims and management services primarily include risk selection, preparation and mailing of policy documents and invoices, premium collection, management of the investment portfolios and certain other administrative and managerial functions. Fees for these services are primarily determined as a percentage of gross premiums earned by the Farmers Exchanges. Ancillary services primarily include information technology services that are not covered under the attorney-in-fact contracts. The finances and operations of the Farmers Exchanges are governed by independent Boards of Governors. In addition, the Group has the following relationships with the Farmers Exchanges.
Certificates of contribution/surplus notes in USD millions, as of December 31 2018 2017 6.15% certificate of contribution, due June 2021 – 200 3.758% surplus note, due December 2027 100 100 Various other certificates of contribution 23 23
Net earned premiums and policy fees 193 1,541 Insurance benefits and losses, net 3 (129) (1,049) Total net technical expenses 4 (62) (493) Net underwriting result 2 (1)
3 Under the All Lines agreement the Farmers Exchanges catastrophe losses are subject to a provisional maximum of 6.5 percent of net earned premiums dependent on loss experience and recoveries at a specified rate for each year. Based on the results for 2018, the total catastrophe recoveries subject to the All Lines agreement was USD 1.3 billion.
The Group pursues a customer-centric strategy, where the Property & Casualty (P&C) and Life businesses are managed on a regional basis. The Group’s reportable segments have been identified on the basis of the businesses operated by the Group and how these are strategically managed to offer different products and services to specific customer groups. The Group has identified 13 reportable segments in accordance with IFRS 8 ‘Operating Segments’ and segment information is presented accordingly as follows: 33 Property & Casualty regions 33 Life regions 33 Farmers 33 Group Functions and Operations 33 Non-Core Businesses
Life regions provide a comprehensive range of life and health insurance products on both an individual and a group basis, including annuities, endowment and term insurance, unit-linked and investment-oriented products, as well as full private health, supplemental health and long-term care insurance. In addition to the agent distribution channel, certain of these products are offered via bank distribution channels.
Farmers, through Farmers Group, Inc. and its subsidiaries (FGI), provides certain non-claims administrative, management, and ancillary services to the Farmers Exchanges, which are owned by their policyholders. This segment also includes all reinsurance assumed from the Farmers Exchanges by the Group. Farmers Exchanges are prominent writers of personal and small commercial lines of business in the U.S. In addition, this segment includes the activities of Farmers Life, a writer of individual life insurance business in the U.S.
33 Property & Casualty Commercial Insurance 33 Property & Casualty Retail and Other Insurance
On 1 July, 2018 the Group amended its BOP policy to exclude certain costs relating to the integration of newly acquired businesses. The policy change was implemented with prospective effect, as the impact on comparable balances was not material to the Group’s financial results.
Net earned premiums and policy fees 12,086 11,865 10,005 10,456 2,250 1,912 2,145 1,933 (55) (133) – – 26,431 26,033 Net investment income on Group investments 621 647 1,026 964 68 60 204 161 13 15 – – 1,932 1,847 Net capital gains/(losses) and impairments on Group investments (8) 34 (40) 157 – – – – – – – – (48) 191
Property & Casualty – Overview by segment in USD millions, for the year ended December 31 Europe, Middle East & Africa North America Asia Pacific Latin America Group Reinsurance Eliminations Total
Business operating profit before non-controlling interests 869 273 1,099 800 86 155 238 288 (92) 155 – – 2,200 1,670
Life includes approximately USD 2.3 billion and USD 2.2 billion of gross written premiums and future life policyholder benefits for certain universal life-type contracts in the Group’s Spanish operations for the years ended December 31, 2018 and 2017, respectively.
Net investment income on Group investments 2,474 2,430 22 19 152 118 390 361 – – (2) (2) 3,035 2,925 Net capital gains/(losses) and impairments on Group investments 367 572 (11) 14 (35) 56 18 7 – – – – 338 649
Net investment result on unit-linked investments (5,159) 9,279 (29) 75 (60) 202 1,012 1,336 – – – – (4,236) 10,892
Business operating profit before non-controlling interests 1,056 870 31 (2) 183 129 556 549 8 1 – – 1,834 1,548
Business operating profit before non-controlling interests 2,200 1,670 1,834 1,548 1,643 1,691 (754) (733) 37 39 – – 4,961 4,215
Losses and loss adjustment expenses, net 17,293 17,997 – – 129 1,044 1 – (27) 52 – – 17,397 19,094 Life insurance death and other benefits, net (2) (1) 9,702 9,258 434 389 – – 116 (97) – – 10,250 9,548
Life includes approximately USD 2.3 billion and USD 2.2 billion of gross written premiums and future life policyholder benefits for certain universal life-type contracts in the Group’s Spanish operations for the years ended December 31, 2018 and 2017, respectively (see note 3).
Reconciliation of BOP to net income after income taxes in USD millions, for the year ended December 31
Net income after taxes 3,977 3,309 attributable to non-controlling interests 261 305 attributable to shareholders 3,716 3,004 1 In 2018, Property & Casualty included losses of USD 19 million related to the sale of Endsleigh Limited companies (see note 5), Group Functions and Operations included provision release gains of USD 16 million related to the sale of insurance operations in Morocco, Middle East and South Africa and Non-Core Businesses included losses of USD 15 million related to a portfolio transfer in Singapore. In 2017, Property & Casualty included losses of USD 97 million for re-measurements of assets held for sale based on agreements to sell businesses in the UK (see note 5).
Reinsurers’ share of liabilities for insurance contracts 14,454 13,414 1,803 1,858 2,242 2,319 – – 2,765 3,389 (67) (61) 21,197 20,918 Deposits made under assumed reinsurance contracts 172 158 57 70 400 771 – – 254 271 – – 883 1,269
Total assets (after cons. of investments in subsidiaries) 116,233 121,160 257,312 278,675 14,860 15,554 21,007 23,406 16,122 17,984 (30,190) (34,713) 395,342 422,065 Liabilities
Net capital gains/(losses) and impairments on investments (37) 149 (11) 42 Net non-technical result (excl. items not included in BOP) (92) (45) (51) (59) Business operating profit before non-controlling interests 614 (26) 1,677 1,541 1 Commercial and Retail Insurance overview exclude Group Reinsurance
Insurance as of December 31 for the years ended for the years ended for the years ended
1 Includes business written under freedom of services and freedom of establishment in Europe, and the related assets. 2 Includes business written through licenses, mainly into Asia Pacific and Middle East, and the related assets. 3 Primarily relates to the quota share agreement with OnePath Life, a part of ANZ Banking Group Limited.
Spain Bansabadell Pensiones, E.G.F.P, S.A. 2 Barcelona 50 50 EUR 7.8 Bansabadell Seguros Generales, S.A. de Seguros y Reaseguros 2 Barcelona 50 50 EUR 10.0 Bansabadell Vida S.A. de Seguros y Reaseguros 2 Barcelona 50 50 EUR 43.9 Zurich Latin America Holding S.L. - Sociedad Unipersonal Barcelona 100 100 EUR 43.0 Zurich Santander Holding (Spain), S.L. Boadilla del Monte 100 100 EUR 94.3 Zurich Santander Holding Dos (Spain), S.L. Madrid 100 100 EUR 40.0 Zurich Santander Insurance America, S.L. Madrid 51 51 EUR 177.0 Zurich Vida, Compañía de Seguros y Reaseguros, S.A. - Sociedad Unipersonal Madrid 100 100 EUR 56.4 Switzerland Genevoise Real Estate Company Ltd Geneva 100 100 CHF 20.4 Zurich Finance Company AG Zurich 100 100 CHF 0.2 Zurich Insurance Company Ltd Zurich 100 100 CHF 825.0 Zurich Investment Management AG Zurich 100 100 CHF 10.0 Zurich Life Insurance Company Ltd Zurich 100 100 CHF 60.0 Zürich Rückversicherungs-Gesellschaft AG Zurich 100 100 CHF 11.7 United Kingdom Allied Zurich Holdings Limited St. Hélier 100 100 GBP 90.7
United States of America Farmers Group, Inc. 3 Carson City, NV 100 100 USD 0.001
ZCM Matched Funding Corp. George Town, Cayman Islands 100 100 USD 0.00100
Centre Group Holdings (U.S.) Limited Wilmington, DE 100 100 USD 0.000010 ZCM (U.S.) Limited Wilmington, DE 100 100 USD 0.00001 Zurich Capital Markets Inc. Wilmington, DE 100 100 USD 0.00001 Zurich Structured Finance, Inc. Wilmington, DE 100 100 USD 0.012 1 The controlling shareholder of this subsidiary is Zurich Santander Holding Dos (Spain), S.L. 2 Relates to Bansabadell insurance entities which are controlled by the Group. 3 The ownership percentages in Farmers Group, Inc. and its fully owned subsidiaries have been calculated based on the participation rights of Zurich Insurance Group in a situation of liquidation, dissolution or winding up of Farmers Group, Inc.
4 Shares have no nominal value in accordance with the company’s articles of incorporation and local legislation.
We are independent of the Group in accordance with the provisions of Swiss law and the requirements of the Swiss audit profession, as well as the IESBA Code of Ethics for Professional Accountants, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Audit materiality The scope of our audit was influenced by our application of materiality. Our audit opinion aims to provide reasonable assurance that the consolidated financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the consolidated financial statements.
We determined our materiality for the audit of the consolidated financial statements using quantitative and qualitative factors. Based on these factors we have selected a combined 3 year average of net income before income taxes (NIBIT) and business operating profit (BOP) as appropriate benchmarks for measuring audit materiality. We applied a 5% rule of thumb which resulted in a selected overall audit materiality of USD 225 million.
– Involving our life insurance actuarial specialists to independently test and challenge management’s methodology and the assumptions used, with particular consideration of industry studies, the Group’s experience and management’s liability adequacy testing procedures. We focused on the changes to life actuarial methodology and assumptions during the year and assessed whether the methodologies are in compliance with recognized actuarial practices as well as regulatory and reporting requirements.
– Assessing the consistency of the life actuarial methods used across the Group’s business units.
Based on the work performed we determined that the methodologies, assumptions and underlying data used in the valuation of actuarially determined life insurance assets and liabilities are reasonable and in line with financial reporting requirements and industry accepted practice.
Specifically, long-tail lines of business, which often have low frequency, high severity claims settlements, are generally more difficult to project and subject to greater uncertainties than short-tail, high frequency claims. Further, not all natural catastrophes can be modeled using actuarial methodologies, which increases the degree of judgment needed in estimating property and casualty loss reserves.
– Involving our actuarial specialists to independently test management’s property and casualty loss reserve studies and evaluate the reasonableness of the methodology and assumptions used against recognized actuarial practices and industry standards.
The Group’s goodwill is allocated to cash generating units (CGUs) that are identified generally at a segment level. The valuation and recoverability of significant goodwill, distribution agreements and attorney-in-fact contracts involves complex judgments and estimates, including projections of future income, terminal growth rate assumptions, and discount rates. These assumptions and estimates can have a material impact on the valuations and impairment decisions reflected in the consolidated financial statements of the Group.
– Testing the reasonableness of the assumptions used in the impairment assessment including projections of future income (comparing forecast to actual results), terminal growth rate assumptions, discount rates and sensitivity analyses to determine the impact of those assumptions.
Based on the work performed we deem management’s assessment is reasonable that no impairment of goodwill, distribution agreements and attorney-in-fact contracts is needed.
Other operating income 29 184 Other operating expenses 4 (15,312) (19,247)
Current assets Cash and cash equivalents 2,557 534,714 Receivables from subsidiaries 77 – Receivables from third parties 34,222 321 Accrued income and prepaid expenses from subsidiaries 91,429 7 Total current assets 128,285 535,042 Non-current assets Subordinated loans to subsidiaries 7 2,132,405 4,832,405 Investments in subsidiaries 8 11,368,069 11,368,069 Total non-current assets 13,500,474 16,200,474 Total assets 13,628,759 16,735,516
Short-term liabilities Other liabilities to subsidiaries 65,028 – Other liabilities to third parties 962 8,198 Other liabilities to shareholders 1,425 1,320 Accrued expenses and deferred income to subsidiaries – 953 Accrued expenses and deferred income to third parties 47 24 Derivatives with subsidiaries – 13 Total short-term liabilities 67,462 10,508 Total liabilities 67,462 10,508 Shareholders’ equity (before appropriation of available earnings)
General capital contribution reserve 27,751 212,286 Reserve for treasury shares (indirectly held via subsidiaries) 12 259,755 282,088
General legal reserve 732,478 341,140 General legal reserve 341,140 341,140 Reserve for treasury shares (indirectly held via subsidiaries) 12 391,338 –
Retained earnings: As of January 1 15,529,736 14,855,952 Dividends paid (2,475,287) (1,696,301) Net income after taxes 66,591 2,370,085 Allocation to reserve for treasury shares (indirectly held via subsidiaries) (391,338) –
2. Basis of presentation Zurich Insurance Group Ltd presents its financial statements in accordance with Swiss law.
f) Treasury shares (directly held by the Company) Treasury shares are carried at acquisition cost and presented as a deduction in the shareholders’ equity.
4. Other operating expenses Other operating expenses include directors’ fees of CHF 4.3 million and CHF 4.8 million for the years ended December 31, 2018, and December 31, 2017, respectively. Overhead expenses decreased by CHF 1.7 million to CHF 6.8 million in 2018. In addition, fees paid to the Swiss Financial Market Supervisory Authority of CHF 3.4 million and CHF 3.2 million are included for the years ended December 31, 2018, and December 31, 2017.
9. Commitments and contingencies Zurich Insurance Group Ltd has provided unlimited guarantees in support of entities belonging to the Zurich Capital Markets group of companies. The Company has also entered into support agreements and guarantees for the benefit of certain of its subsidiaries. They amounted to CHF 1,054 million as of December 31, 2018, and CHF 1,319 million as of December 31, 2017. The decrease is mainly due to an expired senior guarantee in the amount of USD 217 million (CHF 214 million) provided to a fully owned subsidiary to secure its third party investment in surplus notes. Furthermore, the Company has issued an unlimited guarantee in favor of the Institute of London Underwriters in relation to business transferred to Zurich Insurance plc from a Group company which no longer has insurance licenses.
b) Authorized share capital (as specified in Article 5bis of the Articles of Association) Until April 4, 2020, the Board of Zurich Insurance Group Ltd is authorized to increase the share capital by an amount not exceeding CHF 4,500,000 by issuing up to 45,000,000 fully paid registered shares with a nominal value of CHF 0.10 each. An increase in partial amounts is permitted. The Board would determine the date of issue of any such new shares, the issue price, type of payment, conditions for exercising subscription rights, and the commencement of entitlement to dividends.
Employee participation On January 1, 2018, the contingent share capital, to be issued to employees of Zurich Insurance Group Ltd and its subsidiaries, amounted to CHF 495,540.80 or 4,955,408 fully paid registered shares with a nominal value of CHF 0.10 each. On January 1, 2017, the contingent share capital, to be issued to employees of Zurich Insurance Group Ltd and its subsidiaries, amounted to CHF 68,785.30 or 687,853 fully paid registered shares with a nominal value of CHF 0.10 each.
15. Remuneration of the Board of Directors and the Executive Committee The information required by articles 14 –16 of the Ordinance Against Excessive Compensation, which prevails over article 663bbis of the Swiss Code of Obligations, is disclosed and audited in the remuneration report on pages 80 to 113 of this Annual Report.
17. Supplementary information Cash and cash equivalents of CHF 2.6 million include restricted cash of CHF 0.3 million as of December 31, 2018, compared to cash and cash equivalents of CHF 534.7 million and thereof restricted cash of CHF 0.4 million in the previous year.
Appropriation of available earnings As of January 1, 2019 12,729,702 Dividend payment out of available earnings 1 (2,875,613) Balance carried forward 1 9,854,089 1 This figure is based on the share capital issued on December 31, 2018, and may change depending on the number of shares issued on April 8, 2019. Treasury shares are not entitled to dividends and will not be taken into account.
If this proposal is approved, a dividend of CHF 19.00 per share, less 35 percent for Swiss withholding tax, is expected to be paid starting from April 9, 2019.
In our opinion, the accompanying financial statements as at December 31, 2018 comply with Swiss law and the Company’s articles of association.
Basis for opinion We conducted our audit in accordance with Swiss law and Swiss Auditing Standards. Our responsibilities under those provisions and standards are further described in the “Auditor’s responsibilities for the audit of the financial statements” section of our report.
Audit scope We designed our audit by determining materiality and assessing the risks of material misstatement in the financial statements. In particular, we considered where subjective judgments were made; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including among other matters consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud.
Audit materiality The scope of our audit was influenced by our application of materiality. Our audit opinion aims to provide reasonable assurance that the financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material, if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.
Based on our professional judgment, we determined certain quantitative thresholds for materiality, including the overall materiality for the financial statements as a whole as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and in aggregate, on the financial statements as a whole.
In relation to the particular matters set out opposite, our testing procedures included the following: – Assessed the appropriateness of the Company’s impairment testing methodology.
We determined that the carrying value of investments in subsidiaries and the decisions made in connection with potential impairments thereof are reasonable and supportable. The methodology used by management serves as an adequate and sufficient basis for their decisions.
We have audited the issue of new shares by Zurich Insurance Group Ltd in the period from January 1, 2018, to December 31, 2018, pursuant to the resolutions of the general meeting of March 29, 2017, and April 4, 2018, in accordance with article 653f para. 1 Code of Obligations (CO).
Managed gross earned premium margin is a performance measure calculated as the gross operating profit of Farmers Management Services divided by the gross earned premiums of the Farmers Exchanges, which are owned by their policyholders. Farmers Group, Inc., a wholly owned subsidiary of the Group, provides certain non-claims administrative, management, and ancillary services to the Farmers Exchanges.
For more information see page 21 of this report or website: www.zurich.com/en/investor-relations/calendar
Both the Annual Review and Annual Report are available online and in print.
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All references to ‘Farmers Exchanges’ mean Farmers Insurance Exchange, Fire Insurance Exchange, Truck Insurance Exchange and their subsidiaries and affiliates. The three Exchanges are California domiciled interinsurance exchanges owned by their policyholders with governance oversight by their Boards of Governors. Farmers Group, Inc. and its subsidiaries are appointed as the attorneys-in-fact for the Farmers Exchanges and in that capacity provide certain non-claims administrative, management, and ancillary services to the Farmers Exchanges. Neither Farmers Group, Inc., nor its parent companies, Zurich Insurance Company Ltd and Zurich Insurance Group Ltd, have any ownership interest in the Farmers Exchanges. Financial information about the Farmers Exchanges is proprietary to the Farmers Exchanges, but is provided to support an understanding of the performance of Farmers Group, Inc. and Farmers Reinsurance Company.
Zurich Insurance Group Mythenquai 2 8002 Zurich, Switzerland Phone +41 (0) 44 625 25 25 www.zurich.com 48559–1902