Asia Pacific Zurich has operations in Australia, China, Hong Kong, Indonesia, Japan, Malaysia, New Zealand, Singapore and Taiwan.
Group overview Performance overview 2 Message from the Chairman and CEO 4 Business environment 6 How we create sustainable value 8
Group performance review Operating and financial review 98 Risk review 114
Financial information Consolidated financial statements 156 Embedded value report 258 Holding company 292 Shareholder information 308 Contact information 311 Glossary 312
Farmers 1 1 The Farmers Exchanges are owned by their policyholders. Farmers Group, Inc., a wholly-owned subsidiary of the Group, provides certain non-claims administrative and management services to the Farmers Exchanges as attorney-in-fact and receives fees for its services.
2 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.
USD 31,883 m Gross written premiums, policy fees and insurance deposits
Business operating profit (after tax) return on common shareholders’ equity (BOPAT ROE) 5 11.1% 11.6% (0.6 pts)
• Investing in distinctive positions We made progress with our customer strategies in Global Corporate/Corporate Life & Pensions, Zurich North America, Switzerland, the UK, Spain, Italy, Brazil and other markets.
• Growing our operating earnings We streamlined our operational structure above the business unit level, deployed an additional USD 2 billion of risk capital and invested more than USD 1 billion in additional less-liquid assets.
USD 3.9 bn Net income attributable to shareholders (NIAS) 2014 Cumulative 3-year target 3
USD 3.7 bn > USD 9 bn 2014 Key results Targets over strategic period
In 2014, Zurich delivered a business operating profit 1 (BOP) of USD 4.6 billion, one percent lower than in 2013. Our net income attributable to shareholders (NIAS) fell three percent to USD 3.9 billion in the same period, and our BOP after-tax return on equity in 2014 was 11.1 percent, down from 11.6 percent in 2013.
In General Insurance, we continue to make good progress in improving our accident year combined ratio, although the results show that we still have much to do in our turnaround businesses, and in driving further improvement.
In Global Life, we see good momentum in our priority life markets, and expect to start seeing the benefits of in-force management initiatives coming through in our earnings over the next two years.
Tom de Swaan and Martin Senn 1 Business operating profit indicates the underlying performance of the Group’s business units by eliminating the impact of financial market volatility and other non-operational variables.
3 The Farmers Exchanges are owned by their policyholders. Farmers Group, Inc., a wholly owned subsidiary of the Group, provides certain non-claims administrative and management services to the Farmers Exchanges as attorneyin -fact and receives fees for its services.
Progress across all business segments In 2014, General Insurance gross written premiums increased in local currency terms, led by the Group’s priority markets. General Insurance made good progress in the strategy to turn around or exit underperforming businesses – such as our decision to sell our general insurance retail business in Russia – and deliver an improved combined ratio, offset by lower releases on reserves established in prior years.
Corporate responsibility We believe that by acting responsibly, we can create sustainable value for all our stakeholders. In 2014 we doubled our commitment to invest in green bonds to up to USD 2 billion. The bonds will fund projects that help to reduce or mitigate the impact of climate change.
We are working to increase flood resilience in at-risk communities through our innovative flood resilience alliance. In 2014 the United Nations Framework Convention on Climate Change recognized Zurich’s flood resilience program as an exemplary ‘Lighthouse Activity.’ Zurich also significantly improved its performance in the Dow Jones Sustainability Index (DJSI). And at the end of 2014, Zurich was ‘carbon neutral.’ 4
Board and senior executive appointments At the Annual General Meeting the Board of Directors will propose to elect Joan Amble and Kishore Mahbubani to the Board of Directors for a term of office of one year each. Joan Amble brings extensive business experience in finance, accounting, operational and risk management, and strategic leadership to the Board. Kishore Mahbubani is widely recognized as an expert in geopolitical and economic issues and has a strong network in Asia and internationally.
On the Group Executive Committee, Cecilia Reyes, Chief Investment Officer, will take on the additional responsibility of Regional Chairman of Asia Pacific, succeeding Geoff Riddell, who is retiring from the Group. He will step down effective end of March 2015 and will continue to be involved for a transition period as Cecilia Reyes assumes this additional role effective April 1, 2015. We would like to thank Geoff for his outstanding contribution to the Group.
Looking ahead Although the economic environment is challenging, and interest rates are expected to remain low, we are convinced that the strategy we set out in 2013 is the right one, and are committed to delivering on our three strategic cornerstones. We thank you for your continued support.
As part of our strategy for 2014 – 2016, we target customers in the corporate market, commercial mid-market and selected retail markets.
Corporate market Zurich is a leader in the growing corporate market. Growth is driven by the geographic expansion of large corporations based in the OECD countries and emergence of large corporations in developing countries. We target those corporations that actively manage their risks and seek the services of global insurers such as Zurich that can offer international coverage and risk insights.
Commercial mid-market Zurich aims to build its position in the commercial mid-market globally, beginning with North America – by far the largest market – where we have a top-five position. Our research identified five behavioral segments, of which we are targeting ‘expertise seekers’, who tend to seek relationships with companies that have expertise, and a strong brand and reputation. We are making use of technology known as predictive analytics to develop competitive value propositions aimed at this group. We believe this approach can be replicated and we intend to extend it to other national markets.
Retail premiums are concentrated in Europe and North America. But retail insurance will continue to grow globally, driven by the growth of the middle classes and the shift from public to private provision in long-term protection and retirement savings. Emerging Asia and Latin America are the future centers of growth.
The ‘internet of things’ will see objects such as cars, household appliances and healthmonitoring devices connected to the internet, producing large volumes of data that will be available to support better tailoring of risk solutions (subject to appropriate privacy controls). Automation and advanced robotics are creating the ability to automate physical and knowledge-intensive work. These technologies will improve many insurance processes, from underwriting to customer service. Ubiquity of data will allow insurers, through advanced analytics, to develop risk management insights that will help them better serve their customers and become more efficient. On-board sensors (telematics) and self-driving vehicles have the potential to increase vehicle and driving safety and change the nature of motor liability.
The Financial Stability Board has asked the International Association of Insurance Supervisors to develop a global insurance capital standard (ICS) that addresses concerns about financial stability and the need for international supervision. Zurich supports well-designed global standards for capital. The ICS could help to provide regulatory certainty with respect to solvency, improve group supervision and provide a more level playing field for global insurers.
G-SII designations In November 2014, the Financial Stability Board updated its list of global systemically important insurers (G-SIIs), which are those it rates, in essence, as ‘too big to fail.’ As in 2013, Zurich was not placed on this list. We strongly believe that traditional insurers do not pose a systemic risk to the global financial system. This decision recognizes our focus on traditional insurance business.
Political engagement Stakeholders increasingly expect companies to be transparent about how they engage with politicians and governments, including any political contributions. Zurich supports such voluntary disclosure. You can read more about our involvement in the political process at www.zurich.com/cr/strategy-priorities 1 Audited by PricewaterhouseCoopers AG.
We have defined six people practices and a number of programs to support this cultural shift, aiming at further empowering people managers, fostering a more inclusive workplace, creating a diverse leadership pipeline and strengthening our employer brand.
Value creation begins with our service to customers: through our brand promise of intelligent protection, we help them understand and protect themselves from risk. We create value for our employees by investing in their capabilities and expertise so that each may fulfill his or her potential.
We create value for our shareholders by paying an attractive and sustainable dividend, and seeking to increase the value of the company by carrying out our strategy. And we create value for the communities in which we live and work, both through our core insurance business, which supports economic growth and social welfare, and by including corporate responsibility in everything we do.
Zurich takes on risk, provides claims and other payments, and returns on savings and investment plans
Who we are Founded in Switzerland in 1872, Zurich is one of the world’s most experienced insurers. Our customers choose Zurich to protect the people and things they love because they value our expertise, knowledge and stability. We care about our customers, employees, shareholders and the communities in which we live and work. Our brand promise of intelligent protection is Zurich’s unique approach to understanding and managing risk – not only on behalf of our customers, but also in the long-term interest of all stakeholders. We share our risk expertise and insights with customers, communities and other stakeholders to help them understand the risks they face.
What we do We are prioritizing investment in distinctive positions – our high-potential market positions – in the corporate market, commercial mid-market and select retail markets. We are managing other businesses for value. This means optimizing selected Global Life in-force books and maximizing returns in our smaller General Insurance markets, while turning around or exiting under-performing businesses.
For more information on our strategy and the Zurich Commitment, see: www.zurich.com/the-zurich-commitment
Investing in distinctive positions Implementing our customer strategies in the corporate market, commercial mid-market and select retail markets.
Growing our operating earnings Reducing complexity and overhead costs; increasing operational efficiency and improving processes; increasing excess investment returns.
We streamlined our operational structure above the business unit level: this speeds decision-making, optimizes governance and will result in annual cost savings estimated at USD 250 million by the end of 2015. Investment Management deployed an additional USD 2 billion of risk capital, mostly through the purchase of equities and corporate bonds, and invested more than USD 1 billion in additional less-liquid assets.
We added the role of Chief Human Resources Officer to the Group Executive Committee, and renewed our focus on managing talented people and developing leaders. We are developing advanced data analytics, improving processes that support business operations and customers, and continue to invest in an efficient and effective IT infrastructure. We extended our successful brand campaign ‘For those who truly love’ across Europe, the U.S. and Asia.
Progress in 2014Enablers of success 1 The Farmers Exchanges are owned by their policyholders. Farmers Group, Inc., a wholly-owned subsidiary of the Group, provides certain non-claims administrative and management services to the Farmers Exchanges as attorney-in-fact and receives fees for its services.
Zurich’s ability to offer efficient solutions to multinational customers, and help them to better understand their complex exposure to cross-border risks, is also welcomed by large global brokers and employee benefits consultants, who see our approach as beneficial to their own customer relationships.
North America Our priorities include Zurich’s North America Commercial business. As one of the largest providers of insurance to medium-sized companies and those with specialized risks, we are well positioned to offer solutions to these customers in the commercial insurance market. We are the fourth-largest commercial insurer in the U.S. based on premiums and are among the leaders in several industry segments, including construction and franchised U.S. auto dealers. Our size and strength allow us to draw on a large pool of data to gain statistically
We are executing on our three strategic cornerstones: prioritizing investment in distinctive positions; managing other businesses for value; and growing our operating earnings.
The combination of North America Commercial’s wealth of proprietary data and our investment in predictive analytics gives us a competitive advantage. The insights we are now obtaining from data allow us to provide more accurate and comprehensive customer solutions. Using predictive analytics, we can price risks much more selectively. We can also go one step further to provide our customers with real insights into risks to help them understand and protect themselves from risk.
Predictive analytics and our business The availability and accessibility of large amounts of risk data have transformed, and will continue to transform the insurance industry. That is why our businesses are actively building predictive analytics capabilities and using the insights from analytics to improve our business and to serve customers.
Switzerland With over 1.4 million customers, Zurich is one of Switzerland’s largest insurers. As a result of our aim to sharpen our focus on customers, we have begun to see clear signs of success in our personal lines (retail) business. In 2014 our personal lines customer base and gross written premiums increased. We are also investing in our digital capabilities to make sure we can quickly adapt to customer needs.
Italy We aim to increase our share of the growing telematics motor market in Italy through an innovative proposition, Zurich BluDrive, which offers protection to drivers, passengers and vehicles, and an anti-theft tracking ‘panic button’ along with pro-active roadside service. The device is fitted to a car and tracks the vehicle using GPS technology. It allows Zurich to measure how safely the car is driven and the mileage, factors which can be taken into account in renewal premiums. Its anti-theft tracking also means that if the car is stolen, the owner just needs to contact the operations center, which can locate the vehicle.
Farmers made significant progress in 2014 on its goal of improving customer experience, supported by key initiatives including major digital improvements, simplified customer communications, and improved agent interaction. The Net Promoter Score (NPS) for Farmers customers – a broad measure of customer satisfaction and loyalty – increased throughout the year, rising 25 percent from the final three months of 2013 to the final three months of 2014. As customer experience improved, customer retention also increased to 76.8 percent at the end of 2014 from 74.8 percent at the end of 2013.
In our U.S. business, Farmers New World Life, which accounts for more than USD 2 billion of the value of our in-force business (more than 18 percent), we are using Texas as our pilot state to implement targeted customer communications and active customer engagement at key points in the customer decision-making process. We have received positive customer and agent feedback and have improved customer retention.
Efficiency To help us grow our operating earnings, we announced in 2014 that we would streamline our organizational structure above the business unit level. This process, which was completed in December 2014, will speed up our decision-making and achieve optimum governance. It is expected to deliver annual cost savings of USD 250 million dollars by the end of 2015.
Risk capital To grow our operating earnings, we are deploying additional risk capital. Our investment strategy is designed to enable us to meet our insurance obligations even under extreme circumstances and is backed by substantial amounts of dedicated risk capital to allow absorption of unexpected losses.
In 2014, Investment Management deployed an additional USD 2 billion of risk capital, mostly through the purchase of equities and corporate bonds, and invested more than USD 1 billion in additional less-liquid assets. We are considering other types of investments in this area, including increased lending to corporations and infrastructure debt. In line with our proven investment approach, we ensure that these investments match our obligations, while also compensating us for holding less easily-tradable assets. Such investments are mostly carried out through external asset managers, to allow Zurich to benefit from their expert skills. Any investment has to meet our stringent requirements and fit our overall goal of achieving optimum returns relative to risk.
Group Operations & Technology is working in close collaboration with our businesses to better enable Zurich to use data insights and advanced analytics to make business decisions and serve our customers. We are also focusing on ensuring our technology is effective by improving the processes that support our business operations.
Our people Our people play a key role in helping us to be the best global insurer. In return, we must provide a working environment where they can be at their best so that we can deliver on our strategy and attract and retain the talented people we need.
The Zurich Commitment to stakeholders and Zurich Basics, our code of conduct, are part of the training of virtually every employee. They encapsulate our core values. We are now building on these values to evolve our culture toward one where our people can deliver even better results, inspire trust and confidence, show compassion and care and make a difference to those around them.
For more information on the progress we have made in developing and managing our people, please see: www.zurich.com/cr/our-people campaign, which was launched in September 2013 in Switzerland, and in our main corporate and commercial businesses in the U.S., UK and Germany, is built around the concept that when you truly love something, you want to protect it in the best way possible. The latest phase included brand campaigns in support of Italy’s Zurich BluDrive proposition, based on the use of an in-car telematics device. The campaign also supported MyZurich, an online portal serving Global Corporate customers.
We continued to engage customers and employees with campaigns that appeal to the emotions, including our winter snowman campaign promoted via digital media, cinema and TV. We brought our brand promise of intelligent protection to life through thought leadership and corporate responsibility communications, including publications produced by Zurich itself and together with academia, NGOs and commercial media organizations. Golf sponsorship is also helping to build the Zurich brand.
The Zurich Commitment is a guide to behavior for all Zurich employees (see www.zurich.com/ en/about-us). It is a reminder of what we must do every day to win and keep the trust of our stakeholders: our customers, our employees, our shareholders and the communities in which we live and work. We are working hard to embed it throughout our business. For us, corporate responsibility is a key part of living the Zurich Commitment.
Corporate responsibility Corporate responsibility is integrated within Zurich’s strategy. By acting responsibly in everything we do, we aim to create sustainable value for all our stakeholders.
Zurich’s flood resilience alliance brings together community, academic and private sector organizations. In 2014, the secretariat of the UN’s Framework Convention on Climate Change (UNFCCC) recognized the Zurich flood resilience program as a Momentum for Change Lighthouse Activity – an outstanding example of efforts to address climate change and its impacts. In 2014, we and other members of the alliance developed and tested an important flood resilience measurement tool which will assist us in our efforts to help communities protect themselves.
Zurich works with its customers, brokers and other distributors to ensure responsible and sustainable business practices and to protect reputations. Our approach systematically detects, assesses, and mitigates major environmental, social and ethical risks that are inherent in specific business transactions, and provides guidance on how to engage with our customers on those risks. In 2014, over 900 employees who work with corporate customers were trained to use this approach.
We began a process to better understand what the UN Guiding Principles on Business and Human Rights mean for Zurich, and led the development of Chief Risk Officer Forum’s 2014 discussion paper on human rights and corporate insurance, which seeks to raise awareness of this issue.
At the end of 2014, Zurich became carbon neutral 1 through its ambitious internal carbon emissions reduction efforts and by offsetting remaining emissions through a forestry project in Indonesia, complementing our flood resilience work.
For more information 2 on the progress we made in corporate responsibility in 2014 please see: www.zurich.com/corporate-responsibility 1 Carbon neutrality reached in 2014 by acquiring carbon credits (‘voluntary emissions reduction certificates’ supporting a forestry project in Indonesia), calculated on the basis of CO2 emissions reported in 2013, which were taken as the estimate for 2014.
We have given our business units more power to make decisions; we have simplified internal processes; and we are streamlining our reporting processes and policies. We have also introduced a new management committee structure, which we describe in this corporate governance report.
Board and GEC changes In the past year there have been changes on the Board and on the Group Executive Committee. At the Annual General Meeting in April 2014, you elected Christoph Franz as a new member of the Board of Directors, while Rolf Watter and Victor Chu stepped down.
Stakeholder dialogue I would like to thank you for your continued support and engagement. Dialogue is an essential part of our Zurich Commitment. We keep in touch with institutional investors through a year-round program of meetings. Many of you show your interest by attending our Annual General Meeting and I encourage you to do so once again on April 1, 2015.
We need high standards of corporate governance to help us succeed in the competitive environment in which we operate. The Board will safeguard and develop these standards to keep Zurich at the forefront of the global insurance industry.
Diversity and inclusion are important aspects of Zurich’s strategy for the entire business, including the Board.”
The shares of Zurich Insurance Group Ltd are listed on the SIX Swiss Exchange. Certain Group companies have listed debt issued under its Euro Medium Term Note Program and other financial instruments.
Zurich is subject to insurance group supervision by the Swiss Financial Market Supervisory Authority (FINMA). As set out in its decree of December 28, 2011, FINMA stated that Zurich is subject to insurance group supervision according to art. 64 et seq. of the Swiss Insurance Supervision Law (ISL) and no longer qualified as a conglomerate. The Joint Committee of the European Supervisory Authorities has also designated the Group as an insurance group and not as an insurance conglomerate because of the small size of its non-insurance activities. The ISL requires Swiss insurance companies and groups to establish and maintain strong governance and risk management systems as well as effective internal control systems that are appropriate to their business activities. It prescribes the calculation of a risk-based solvency margin on a Group wide basis and at legal entity level pursuant to the Swiss Solvency Test (SST) and also a Solvency I margin. All major intra-group transactions must be reported to FINMA. In addition to the group supervision exercised by FINMA and its supervision of the legal entities Zurich Insurance Company Ltd and Zurich Life Insurance Company Ltd, the insurance subsidiaries and remaining financial services entities of the Group are supervised by relevant regional and local supervisory authorities.
An effective structure is in place providing for cooperation between the Board of Directors of Zurich Insurance Group Ltd, management and internal control functions. This structure establishes checks and balances and is designed to provide for institutional independence of the Board from the Group Chief Executive Officer (CEO) and the Group Executive Committee (GEC) who together are responsible for managing the Group on a day-to-day basis. The Board is composed entirely of non-executive members independent from the management. The roles of Chairman of the Board and CEO are split, thus providing for separation of powers between these two roles and ensuring the independence of the Board.
Key governance developments in 2014 – at a glance as of December 31, 2014
New appointments: • Robert Dickie, Chief Operations and Technology Officer (as of March 17, 2014)
• Isabelle Welton, Chief Human Resources Officer (as of July 1, 2014)
Consisting of four regions: 1. North America 2. Europe 3. Latin America 4. Asia-Pacific, Middle East
A list of the Group’s significant subsidiaries, including information on significant subsidiaries that are listed, can be found on pages 250 to 253. For further information on the share listing of Zurich Insurance Group Ltd, see the shareholder information on page 308 to 314.
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 2014 the Group received several notifications by third parties that they had either exceeded or fallen below the threshold of three percent as a result of purchases or sales.
The announcements related to these notifications can be found via the search facility on the SIX Disclosure Office’s platform: Zurich Insurance Group Ltd is not aware of any person or institution which, as of December 31, 2014, directly or indirectly, alone or with others, exercised or was a party to any arrangements to exercise control over Zurich Insurance Group Ltd.
Number of shares held as of December 31, 2014 Number of registered shareholders registered share capital
Registered shareholders by type as of December 31, 2014 Registered shareholders in %
Registered shareholders by geography as of December 31, 2014 Registered shareholders in %
Capital structure Share capital As of December 31, 2014, the ordinary share capital of Zurich Insurance Group Ltd amounted to CHF 14,963,383.60 divided into 149,636,836 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 1, 2015 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.
Authorized and contingent share capital As of December 31, 2014, as specified in Article 5bis(1) of the Articles of Incorporation, the Board is authorized to increase the share capital of Zurich Insurance Group Ltd by up to CHF 1,000,000 representing 10,000,000 fully paid registered shares with a nominal value of CHF 0.10 each until April 2, 2016. The contingent share capital of Zurich Insurance Group Ltd, as specified in Article 5ter(1a) of the Articles of Incorporation, may be increased by an amount not exceeding CHF 1,000,000 by issuing up to 10,000,000 fully paid registered shares with a nominal value of CHF 0.10 each by exercising conversion and/or option rights which are granted in connection with the issuance of bonds or similar debt instruments by Zurich Insurance Group Ltd or one of its Group companies in national or international capital markets and/or option rights which are granted to the shareholders. Moreover, there is an additional contingent share capital of CHF 239,203.70 as specified in Article 5ter(2a) of the Articles of Incorporation, representing 2,392,037 fully paid registered shares with a nominal value of CHF 0.10 each, which may be issued to employees of the Group. For further information on the capital structure and the authorized and contingent share capital, see the audited consolidated financial statements, note 21 on pages 215 to 221.
Changes of share capital during 2014 During 2014, a total of 733,614 shares were issued to employees out of contingent capital. As a result, on December 31, 2014, the share capital amounted to CHF 14,963,683.60 (149,636,836 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 165,842.30 (1,658,423 shares).
Shares and participation certificates Zurich Insurance Group Ltd’s shares are registered shares with a nominal value of CHF 0.10 each. The shares are fully paid in. Pursuant to article 14 of the Articles of 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.
Some interests in shares are held by investors in the form of American Depositary Receipts (ADRs) 1. As of December 31, 2014, investors held 34,816,630 ADRs (representing 3,481,663 Zurich Insurance Group Ltd shares).
Limitations on transferability and nominee registrations The Articles of Incorporation do not provide for any limitations on transferability except for the following: Registration as a shareholder requires a declaration that the shareholder has acquired the shares in his or her own name and for his or her own account. Nominees holding Zurich Insurance Group Ltd shares may for the benefit of, or as nominee for another person be registered for up to 200,000 shares with voting rights notwithstanding that the nominee does not disclose the identity of the beneficial owner. A nominee, however, is entitled to be registered as a shareholder with voting rights of more than 200,000 shares if the nominee undertakes to disclose the identity of each beneficial owner and to inform the beneficial owners about corporate actions, to consult as to the exercise of voting rights and pre-emptive rights, to transfer dividends and to act in the interests of and in accordance with the instructions of the beneficial owner.
Board of Directors and its Committees as of December 31, 2014 * Chairman of Board or Chairperson of Board Committee, respectively
As of December 31, 2014, the Board included members of seven 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.
The current composition as of December 31, 2014 in terms of length of tenure and gender representation is as follows: Female
Skills and experience Tom de Swaan has served in the banking industry of the Netherlands for over 40 years. He joined De Nederlandsche Bank N.V. in 1972 and from 1986 until 1998, was a member of the governing board. In January 1999, he became a member of the managing board and chief financial officer of ABN AMRO Bank. He retired from ABN AMRO in May 2006, but continued as an advisor to the managing board until June 2007. Between 1987 and 1988, Mr. de Swaan was chairman of the Amsterdam Financial Center and from 1995 to 1997, chairman of the banking supervisory sub-committee of the European Monetary Institute. He was also a member of the Basel Committee on Banking Supervision from 1991 to 1996, its chairman from 1997 to 1998, and a non-executive director on the board of the UK’s Financial Services Authority from January 2001 until the end of 2006. He has been a member of the boards of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd since April 2006. In March 2012 he was elected vice-chairman, acting as chairman from August 2013 on. He was elected chairman of the Board in September 2013.
External appointments Ms. 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. Ms. Bies is also a member of the board of trustees of the Global Association of Risk Professionals (GARP).
Educational background Ms. Bies graduated with a B.S. degree from the State University College at Buffalo, New York and with an M.A. degree from Northwestern University, Evanston, where she later gained a Ph.D.
Rafael del Pino Member of the Board of Directors Nationality: Spanish Born: 1958
External appointments Mr. del Pino maintains contact with the academic world through his memberships on the MIT Corporation, the International Advisory Board of IESE and the European Advisory Board of Harvard Business School.
Thomas K. Escher Member of the Board of Directors Nationality: Swiss Born: 1949
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. Mr. Escher has also been the president of the Genossenschaft zum Rüden since 2010.
External appointments Mr. Franz was elected chairman of the board of Roche Holding Ltd in March 2014. He is also vice-chairman of Swiss International Air Lines Ltd and a member of the board of directors of Stadler Rail AG and Lufthansa Technik Ltd. Mr. Franz serves as a member of the board of trustees of Avenir Suisse and Ernst-Goehner-Stiftung.
Educational background Mr. Nicolaisen graduated from the University of Wisconsin-Whitewater with a B.B.A. degree.
External Mandates In line with the Ordinance AEC, art. 33 of Zurich’s Articles of Incorporation, contains rules regarding the number of mandates members of the Board and of the GEC are permitted to hold, as shown in the table below. Board members’ individual mandates are shown in their respective biographies.
For election and re-election at the 2015 AGM, which will take place on 1 April 2015, the Board proposes to the shareholders to re-elect all its members.
The Board proposes to the shareholders to elect or re-elect as follows: • As members: Mr. Tom de Swaan, Mr. Fred Kindle, Ms. Susan Bies, Dame Alison Carnwath, Mr. Rafael del Pino, Mr. Thomas Escher, Mr. Christoph Franz, Ms. Monica Mächler, and Mr. Don Nicolaisen.
Mr. Christoph Franz, and Mr. Tom de Swaan • As independent voting rights representative: Mr. lic. iur. Andreas G. Keller, Attorney at Law
In 2014, average attendance at Board meetings was 95.87 percent. In fulfillment of their duties, the members of the Board spent additional time participating in Board Committee meetings and preparing for meetings.
The Board is responsible for the ultimate management of Zurich Insurance Group Ltd and, to the extent legally permissible, of the Group as well as for the supervision of management. In particular, it is responsible for taking actions in the following topics: • Group strategy: The Board regularly reviews and discusses in particular the Group’s business portfolio including its target market, acquisition, customer and intermediaries strategy and its HR strategy; • Finance: The Board particularly approves the financial and operating plan annually, establishes guidelines for capital allocation and financial planning. Further, the Board reviews and approves the annual and interim (half year and quarterly) consolidated financial statements of the Group. Above certain thresholds, the Board approves major lending and borrowing transactions; Q4_2014_03_AR14_Corporate governance_part1_en.indd 37 23.02.2015 16:14:45
• Structure and organization of the Group: The Board determines and regularly reviews the basic principles of the Group’s structure and major changes in the Group’s management organization including major changes of management functions. In this respect, the Board particularly discusses the Group’s corporate governance framework and its remuneration system. The Board also adopts and regularly reviews the basic principles of conduct, compliance and risk management for the Group. Further, as part of its duty to convene the shareholders’ meeting and submit proposals to the shareholders’ meeting, it discusses the dividend policy and the Board’s proposal for the payment of dividends. Within its authorities the Board also makes resolutions on capital increases and the certification of capital increases and respective amendments to the articles of incorporation; • Business Development: Above certain thresholds, the Board regularly discusses and approves acquisitions and disposals of businesses and assets, investments, new businesses, mergers, joint ventures, co-operations and restructurings of business units or books of businesses.
In 2014, the Board specifically focused on the following topics: • Strategy implementation and execution including further development of Zurich’s Human Resources strategy; • Detailed reviews of various regional business operations; • Customer trends, structural industry changes and disruptive technologies.
The Board may establish committees for specific topics, terms of reference and rules with respect to delegated tasks, responsibilities and reporting to the Board. Except for the Remuneration Committee, the Board constitutes such committees from among its members at its own discretion. The members of the Remuneration Committee are elected by the shareholders’ meeting. The committees assist the Board in performing its duties. They discuss and propose matters to the Board in order that it may take appropriate actions and pass resolutions unless they are authorized to take resolutions in specific areas on their own. In 2014, committee meetings lasted two hours on average.
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. When identifying and proposing candidates as new Board members, the preservation and improvement of the Board’s diversity is a key factor. This includes diversity in many respects, such as gender, culture, technical and interpersonal skills, education and viewpoints, experience, geographical origins and a variety of complementary backgrounds, which should enable the Board to meet the current and future challenges of the Group. Notwithstanding the specific profile, every individual candidate should possess integrity and be of good standing of character, and be capable and available to fulfill his or her duty of care by serving, in close collaboration with the other Board members, in the best interest of the Group’s stakeholders; • reviews the system for management development and supervises progress made in respect of succession planning.
Activities 2014: During 2014, in particular the following topics were discussed: • developments with regard to corporate governance-related matters, including the implementation of legislative and regulatory changes; • Board and management succession planning; • the Group’s subsidiary corporate governance framework; and • Board self-assessment and resulting recommendations.
Remuneration Committee Composition and membership: Zurich Insurance Group Ltd’s Organizational Rules require the Remuneration Committee to consist of at least four independent non-executive Board members. Currently, Thomas Escher (Chairperson), Dame Alison Carnwath, Rafael del Pino and Tom de Swaan serve on this committee.
To facilitate an ongoing exchange of information between the Risk Committee and the Audit Committee, the Chairperson of the Audit Committee is a member of the Risk Committee and a member of the Risk Committee is a member of the Audit Committee.
Moreover, from a segment and regional risk perspective, the Risk Committee discussed: • Farmers risk and controls, including a a detailed review of selected risks of the segment risk profile; • General Insurance risks and controls, accumulation management, underwriting reviews and reinsurance; • Global Life risks and controls, including the proposition approval process; and • business specific risks and controls and topical detailed reviews of North America and Asia Pacific.
For further information on risk governance, see the risk review on pages 114 –153.
The Group has an information and financial reporting system. The annual plan for the Group, which includes a summary of financial and operational metrics, is reviewed by the GEC in detail and approved by the Board. Monthly updates are prepared to compare actual performance to the plan. Full-year forecasts are revised if necessary to reflect changes in sensitivities and risks that may affect the results of the Group. Action is taken, where appropriate, when variances arise. This information is reviewed regularly by the GEC and the Board.
Mike Foley CEO North America Commercial, Regional Chairman of North America
Changes to Management Committees In line with the simplification and structural alignment of our organization which was initiated in 2014, we have made the following changes to our management committee structure: On 1 January 2015, the Finance Committee (FC) and the Risk and Control Committee (RCC) have replaced the Group Balance Sheet Committee and the Group Finance and Risk Committee with clear mandates to avoid potential overlaps and duplication.
Technical Committees In addition to the Management Committees the Group governance structure provides for committees of a more technical nature to support other aspects of Zurich’s business activities.
The Group Reinsurance Committee, chaired by the Global Head of Group Reinsurance, leads the Group’s reinsurance business process of the Group and is responsible for defining and executing its reinsurance strategy in alignment with its risk framework. It also governs the segments’ reinsurance activities and ensures that they have access to re-insurance capacity on economic terms.
The General Insurance Global Underwriting Committee, chaired by the Chief Underwriting Officer, General Insurance, is the focal point for the underwriting function within General Insurance. In particular, it approves the underwriting and related risk control policy for all General Insurance business, develops and agrees the Group’s underwriting strategy, observes emerging issues and trends, monitors accumulation control and approves mitigation plans. The Committee is also responsible for approving new products and oversees and monitors technical underwriting.
The Group Pension Committee, chaired by the CEO Global Life, is responsible for developing, reviewing and advising on the Group governance framework for matters relating to retirement benefit arrangements and postemployment benefits, including the relevant policies and processes. It provides oversight and guidance over the Group’s retirement benefit arrangements and post-retirement benefits for benefit design, funding, investment and accounting purposes and provides recommendations to the GBSC in terms of material pension related matters.
For information on contractual termination benefits, see pages 55 and 56 of this report.
Skills and experience Martin Senn has more than 35 years of experience in the insurance and finance industry, having held various senior executive positions in Europe, the U.S. and the Asia-Pacific region.
Educational background Robert Dickie holds an MBA from the University of Strathclyde Graduate Business School.
Skills and experience Mike Foley joined the financial management training program of Armtek Corporation 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, where he later became a principal and led its North American property/casualty insurance practice.
External appointments Mr. Kerner is a Fellow of the Casualty Actuarial Society and a member of the American Academy of Actuaries.
Axel P. Lehmann Chief Risk Officer and Regional Chairman of Europe Nationality: Swiss Born: 1959
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 information technology (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.
Educational background Mr. Lehmann holds a Ph.D. and master’s in economics and business administration from the University of St. Gallen, 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 Ph.D. thesis in the area of management science and academic theory. He did his research study at Harvard Business School and Arizona State University.
Educational background Mr. Riddell received an M.A. degree in natural sciences (chemistry) from Oxford University (The Queen’s College) and later qualified as a chartered accountant.
Skills and experience Isabelle Welton started her career at Citibank in New York, and in Tokyo as product manager for custody and securities lending. She then moved to Simko Communication & Marketing in Geneva in 1992 where she was responsible for several financial services clients as advertising and communications consultant. In 1994, she moved to Interbrand, Zintzmeyer & Lux in Zurich, where she was responsible for the agency’s financial services clients. In 1996, she joined Zurich, leading external communications. In this position, she was responsible for branding, corporate identity, advertising, sponsoring and community marketing globally. She joined EFG Private Bank in 2001 as senior vice president and Head of Corporate Communications. In 2003 Ms. Welton joined IBM where she held several management positions in the marketing and communications function. From 2010 to 2012 she was Country General Manager for IBM Switzerland. In January 2013 she joined Zurich as Chief Marketing Officer and was appointed Chief of Staff in September 2013. In this position, she was responsible for overseeing the operational delivery of Group Communications, Group Human Resources, Group Marketing and Group Strategy. In July 2014 she was appointed Chief Human Resources Officer and became a member of the Group Executive Committee.
External appointments Ms. Welton is a member of the boards of Georg Fischer AG and AG für die Neue Zürcher Zeitung, a member of the Regional Economic Advisory Council of the Swiss National Bank and a member of the board of trustees of the Lucerne Festival.
Educational background Ms. Welton holds a law degree from the University of Zurich.
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 and reflected in article 13 of our Articles of Incorporation, 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 AGM. The independent voting rights representative may 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’s purpose or domicile, a dissolution of the company and certain matters relating to capital increases. In the event of the votes being equally divided, the Chairman of the Board has a casting vote.
Registrations in the share register With a view to ensuring 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 2014, an Investor Update was held in London on December 5, and focused on our North America Commercial business and Farmers. An Investor Day will take place on May 21, 2015 in Zurich. A wide range of Information on the Group and its businesses, including results reporting documents and the documentation from the Investor Update are available on the Investor Relations section of Zurich’s website www.zurich.com (www.zurich.com/investors).
For addresses and further upcoming important dates, see shareholder information starting on page 308 (Financial Calendar on page 310).
Employees The Group is committed to providing equal opportunities when recruiting and promoting people, whereby ability, experience, skills, knowledge, integrity and diversity are guiding principles. The Group actively encourages employee involvement in its activities through printed and online publications, team briefings and regular meetings with employees’ representatives. Further, the Group is party to an agreement with employee representatives of the Group’s companies in Europe. For further information on the Group’s people management activities, see page 14 of the Annual Report and a longer report on Zurich’s website www.zurich.com/cr/our-people.
Assurance at Zurich Insurance Group At Zurich, various governance and control functions help to 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.
Oversight: Group Risk Management is responsible for Zurich's Enterprise Risk Management framework. The Chief Risk Officer regularly reports risk matters to the CEO, senior management committees and the Risk Committee of the Board.
Independent Assurance: Group Audit is responsible for auditing risk management, control and governance processes. The Head of Group Audit regularly meets with the Chairman of the Board and the Chairperson of the Audit Committee and attends each meeting of the Audit Committee.
PwC assumes all auditing functions which are required by law and by the Articles of Incorporation of Zurich Insurance Group Ltd. The external auditors are appointed by the shareholders of Zurich Insurance Group Ltd annually. At the Annual General Meeting on April 2, 2014, PwC was re-elected by the shareholders of Zurich Insurance Group Ltd. The Board proposes that PwC be re-elected at the Annual General Meeting on April 1, 2015 as external auditors for the business year 2015. PwC fulfills all necessary requirements under the Swiss Federal Act on the Admission and Oversight of Auditors and has been admitted as a registered auditing company by the Federal Audit Oversight Authority.
Mark Humphreys of PwC is the lead auditor and auditor in charge for regulatory and statutory audit work since the business year 2014. Mr. Stephen O’Hearn, the Global Relationship Partner, co-signs the auditors’ report for 2014.
Total non-audit fees 9.6 14.9 – Tax advice 1.4 0.3 – Legal advice 0.0 0.1 – Transaction consulting incl. due diligence 0.0 0.1 – Audit-related advice 4.8 4.7
Supervision and control over the external audit process The Audit Committee regularly meets with the external auditors, at least four times a year. During 2014, the Audit Committee met with the external auditors seven times. The external auditors regularly have private sessions with the Audit Committee without management present. Based on written reports, the Audit Committee and the external auditors discuss the quality of the Group’s financial and accounting function and any recommendations that the external auditors may have. Topics considered during such discussions include strengthening of internal financial controls, applicable accounting principles and management reporting systems. In connection with the audit, the Audit Committee obtains from the external auditors a timely report relating to the audited financial statements of Zurich Insurance Group Ltd and the Group.
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 approves the Group Audit Plan annually, and 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 meets regularly 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.
Group Compliance The Group’s core values are founded on the principle that it acts lawfully and seeks to do what is right. Sound compliance in everything the Group does, helps to protect Zurich’s reputation and supports the achievement of the Group’s ambitious goals.
The Group’s compliance function provides policies and guidance, business advice, training and assurance of appropriate compliance controls within its mandate. The compliance function also supports Zurich’s management in maintaining and promoting a culture of compliance and ethics consistent with Zurich Basics, the Group’s code of conduct. This compliance framework relies on an ongoing global compliance risk assessment to support a risk-based monitoring regime. The results of this assessment underpin the compliance function’s strategic planning which is conducted in consultation with business partners. The compliance plan is presented annually to the Audit Committee. Through a comprehensive program, the compliance function implements, embeds and monitors internal compliance 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 compliance 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 all Zurich employees confirm their understanding of and compliance with Zurich Basics and internal policies. Zurich encourages its employees to speak up and report improper conduct that they believe is illegal, unethical, or violates Zurich Basics or our Group’s policies. Employees are free to report their concerns to management, Human Resources. the Group’s legal department, its compliance function, or through the Zurich Ethics Line (or similar service provided locally), a phone and web-based service run by an external specialized provider. Zurich does not tolerate retaliation against any employee who reports such concerns in good faith.
The Group’s compliance function, which consists of compliance professionals around the world is overseen by the Group Compliance Officer who reports to the Group General Counsel and regularly provides reports to the Group’s Audit Committee. The Group Compliance Officer has an additional reporting line to the Chairman of the Audit Committee and appropriate access to the Chairman of the Board.
Risk Management and Internal Control Statement For information regarding the Group’s risk management and internal control framework, see the risk review of this Annual Report 2014 on p. 148 to 149. The Group no longer separately describes risk management and internal control information in this governance report.
Going concern The Directors are satisfied that, having reviewed the performance of the Group and forecasts for the forthcoming year, the Group has adequate resources to enable it to continue in business for the foreseeable future. For this reason, the Directors have adopted the going concern basis for the preparation of the consolidated financial statements.
During 2014, the Remuneration Committee was active in continuing to review key aspects of the Zurich Insurance Group Ltd’s (Group or Zurich) remuneration system, the remuneration rules, and the remuneration structures of the Board of Directors (Board) and the Group Executive Committee (GEC). The Committee also dedicated significant time to legal and regulatory issues including the implementation of the Ordinance Against Excessive Compensation (Ordinance AEC), which became effective on January 1, 2014.
With regard to our variable pay plans, the overall assessment of business profitability in 2014 leads to an average payment under our Group short-term incentive plan (STIP) of 96 percent of target, relative to an average payment of 101 percent of target awarded for 2013. Under the Group long-term incentive plan (LTIP), the overall vesting level was set at 139 percent of target due to the achievements of the pre-defined performance criteria, which compares to a vesting level of 50 percent of target last year. Details on the payments under STIP and the LTIP vesting level can be found in the Remuneration report. As of January 1, 2014, the LTIP was modified to ensure alignment with the strategic goals for the 2014 to 2016 business cycle and the delivery of value to shareholders. The amendments included the transition to three year cliff vesting with continuation of the additional three year share holding period after vesting on one-half of the shares as well as a revised performance framework to ensure greater long-term alignment of the interests of management with shareholders (see page 74 for further information).
The aggregate amount of variable remuneration for 2014 for the entire Group (total variable remuneration pool, see page 64) is determined based on the Group’s long-term economic performance and resulted in USD 652 million, compared with USD 668 million in 2013.
We strongly value and appreciate the views of our stakeholders with regard to remuneration matters. Therefore we consult on remuneration related issues with large investors and proxy advisers during the year, and key topics were discussed during corporate governance roadshows, which primarily took place in December 2014. In previous AGMs, our shareholders have been provided with the opportunity to express their views through a consultative, non-binding vote on the remuneration system as set out in the Remuneration report. This resulted in 87.4 percent votes in favor in 2014, 85.5 percent in 2013 and 84.8 percent in favor in 2012. We also wish to continue to engage in a dialogue with our stakeholders and provide our shareholders with the opportunity to share their opinions via a further consultative, non-binding vote on the Remuneration report in 2014.
The Board and I are grateful for your continuous trust in Zurich and for your valuable feedback with regard to our remuneration approach. On the following pages you will find further insights into Zurich’s Remuneration framework including the remuneration philosophy, the governance, and also the remuneration details of the members of the Board, the GEC and all employees for 2014. I believe that the information disclosed in the Remuneration report and also the details included in the Report on the approval of remuneration provide you with a clear picture on Zurich’s remuneration. We therefore seek your support at the AGM 2015.
The Remuneration report describes the principles and governance framework relating to the remuneration of the members of the Board of Directors, Group Executive Committee and all employees. It also provides details of each remuneration element, and reports on the work of the Remuneration Committee.
In 2014, the Board of Directors continued to oversee and take decisions on the design and implementation of the remuneration principles, rules and architecture, which reflect international best practices in terms of governance, plan design and disclosure. The Group’s remuneration architecture is simple, transparent and market competitive, promotes a high performance culture, is aligned with our risk management principles and has an orientation toward the long-term for Key Risk Takers. With regard to the final rules in the Ordinance Against Excessive Compensation, a new set of Articles of Incorporation was approved by shareholders at the Annual General Meeting in 2014 and the first binding votes on the remuneration of the Board of Directors and the Group Executive Committee will take place at the Annual General Meeting in 2015. As set out in last year’s report, the Group long-term incentive plan with its new features became effective as of January 1, 2014 and strengthens the alignment between the strategy and the financial targets for the three year period 2014 to 2016.
This summary provides an overview of the 2014 remuneration of Zurich Insurance Group Ltd (Group or Zurich) and more details regarding the link between business performance and variable pay, and discloses the most important aspects of Zurich’s remuneration in 2014 including an outlook for 2015.
The members of the Board receive fixed remuneration as an annual fee which is paid partly in cash and partly in three year sales restricted shares, which are not subject to the achievement of any specific performance conditions. Total remuneration for employees including the GEC comprises, as applicable, base salaries, short- and long-term incentive awards, pensions and employee benefits. The Group short- and long-term incentive plans (STIP and LTIP) aim to align the remuneration architecture with the achievement of the Group’s key financial objectives and with the execution of the business strategy, the risk management framework and the operational plans.
As outlined in the graph below, Zurich’s remuneration structure strives for a balanced approach between fixed and variable remuneration, especially for those people in the most senior roles. For members of the GEC and for the most senior employees of the Group, including those incumbents who hold positions considered as key risk taker positions, there is a significant emphasis on variable pay compared to the fixed element (e.g. for the GEC, 63 percent of the total is variable). The variable remuneration is largely determined by the achievements against pre-defined financial measures, which are aligned with the Group’s strategy. Therefore by attributing a large portion of the total remuneration to variable pay this ensures that senior management is closely aligned with the achievement of business objectives. Further, variable remuneration is structured such that on average there is a higher weighting toward the long-term performance (e.g. for the GEC, 62 percent is long-term and 38 percent is short-term). This ensures that for key risk takers a significant portion of the variable pay is deferred over the long term. To ensure further alignment with the goals of Zurich and its shareholders, the performance based target shares (target shares) which form part of the LTIP only vest if certain performance criteria are met and then one-half of the vested shares are further sales restricted for an additional period of three years.
Remuneration report continued 2014 remuneration in light of the business results Expenditure on remuneration should be considered in the context of Zurich‘s overall revenues, capital base and profitability. As can be seen from the metrics in the table below, relative to Zurich’s overall revenues and shareholders’ equity, expenditure on variable remuneration is relatively small, also in relation to the dividends payable to shareholders. The key financial figures are set out in the table below and reflect data for 2014 and 2013: Key financial figures in USD million, for the year ended December 31 2014 2013
With regard to the STIP, the key factor driving individual awards is the Group’s net income attributable to shareholders and the business operating profit achieved by the segments. In 2014, both results were slightly lower than in 2013 and as a result the average award for the more than 39,000 plan participants across the Group is 96 percent of the target level for 2014, relative to an average award of 101 percent of target for 2013. This is the average award, actual individual awards vary around this level and take into account relevant performance factors for the person’s role which can include the performance of the Group, the segment, the country and person’s individual performance during the year.
With regard to the LTIP, the key factors driving the vesting level in 2015 were the Group’s relative total shareholder return (TSR) against an international peer group of insurance companies, the NIAS ROE and the BOPAT ROE. Based on the overall performance achievements the calculated vesting level in 2015 is 139 percent of the target reflecting the underlying profitability and the strong shareholder return in 2014. No discretionary adjustments were made to the calculated vesting level by the Remuneration Committee or the Board. The vesting level of 139 percent of target compares with a vesting level of 50 percent of target last year. For further information on the STIP and on the LTIP including the transition to the three year cliff vesting model see Remuneration elements.
• the total amount of sign-on payments 1 committed for people taking up their employment in 2014. • the total amount of severance payments 2 committed where the termination date was in 2014.
Commission payments made to employed sales agents are not included in the calculation of the total variable remuneration pool. The sales commission plans of employed agents are not considered part of the profitability based incentive plans. Sales commissions, like the commissions paid to a broker or other external distributors, represent a distribution cost. The employed sales agents do not generate financial risks as they are not involved in establishing the price levels for the products they sell. With regard to operational and reputation risks, in particular due to potential mis-selling, the control of these risks is addressed by the mandatory and Group wide adherence to the Zurich Risk Policy and Zurich Basics, the Group’s code of conduct. Further to enable a year on year comparison, the total variable remuneration pool does not include target share allocations from transition arrangements.
For 2014, the total variable remuneration pool resulted in an amount of USD 652 million. In determining the amount of the total variable remuneration pool for all employees, the Board considers the long-term economic performance of the Group as well as other relevant factors. The average economic profit is calculated by subtracting the required return on economic capital, based on the weighted average cost of capital, from the adjusted BOP after Tax. In this respect, the Group has continued to generate economic profit over the long-term which exceeds the actual expenditure on variable pay.
2 For all employees equals the cash incentives earned for the year. 3 It represents the value of the target share allocations made in 2014, which assume vesting levels in 2016 and 2017 at 100 percent of target. This excludes the value of target share allocations from transition arrangements which amount to USD 116m.
4 For all employees the Other remuneration includes Sign-on or Severance Payments committed in cash and/or in shares for comparison reasons. 5 Actual, gross and for cash amounts based on the accrual principle. The number of employees (full time equivalents) was broadly the same year on year.
Zurich’s approach of implementing the requirements of the Ordinance AEC The following paragraph provides information regarding Zurich’s approach to the remuneration related topics that are required by the Ordinance AEC. The Ordinance AEC is effective as of January 1, 2014 with a two year transition period. To implement the new requirements of the Ordinance AEC, the Board presented a new set of Articles of Incorporation which was approved by Zurich’s shareholders at the AGM on April 2, 2014. In addition, to comply with the Ordinance AEC and the Articles of Incorporation, Zurich’s Remuneration Rules (see Governance framework) were reviewed and amended and the existing employment agreements of members of the GEC are being reviewed and adjusted as necessary. At the AGM 2015, taking place on April 1, 2015, shareholders will be invited to a consultative, non-binding vote on the Remuneration report. Through this, Zurich provides its shareholders with the opportunity to continue to express their opinion on the 2014 remuneration approach and the respective amounts. Further, the Ordinance AEC requires an annual vote on the total amounts of remuneration of the Board and of the GEC as of the AGM 2015. According to Article 18 para 1 of the Articles of Incorporation, shareholders will vote on the maximum total amount of remuneration of the Board for the one year period from the AGM in 2015 to the AGM in 2016. For the GEC, shareholders will vote on the maximum total amount of remuneration for the financial year 2016. Detailed information is provided in the Board report on the approval of remuneration accompanying the invitation to the AGM in 2015. According to the Ordinance AEC and Article 18 para 4 Articles of Incorporation, the Group and/or its subsidiaries are authorized to make payments to any member who joins the GEC during a period for which the AGM has already approved the remuneration of the GEC, of a supplementary amount for the period(s) in question, where the total amount already approved for such remuneration is not sufficient. The sum of all supplementary amounts may not exceed, during any one remuneration period, 30 percent of the respective total amount of approved maximum remuneration of the GEC. Details on performance related remuneration for the GEC, allocation of shares as well as the approach regarding loans and credits can be found in Articles 18 para 3, 28 and 34 Articles of Incorporation.
• Loans and credits granted to current and former members of the GEC and the Board which are still outstanding. • Compensation paid to related persons of members of the Board and the GEC, which is not at arm’s length and loans and credits granted to related persons at non-market conditions.
Total remuneration for an individual employee is influenced by factors including the scope and complexity of the role, business performance and affordability, individual performance, internal relativities, external competitiveness, geographic location and legal requirements. Target opportunities are benchmarked to median levels in clearly defined markets and take into account the internal remuneration structures. Depending on the role, the relevant market can be global, regional or local and reflecting practices in either insurance, financial services or general industry. Remuneration is delivered through an overall framework overseen by the GEC, the Remuneration Committee and the Board itself.
In addition, Zurich has a clearly defined global performance management process which supports the achievement of the overall business strategy and operating plans, and links individual pay with business and personal performance. Actions of Zurich employees with regard to customers, people, shareholders and communities continue to be guided by the Zurich Basics and the Zurich Commitment. In order to support this undertaking, all Zurich employees have an objective regarding what they do to actively care for and add value to the stakeholder groups. Moreover, performance management objectives are also assessed on how they are achieved according to the values and behaviors underlying the Zurich Basics.
Guiding principles of the remuneration philosophy The guiding principles of remuneration philosophy as set out in Zurich’s Remuneration Rules are as follows: • The Group’s remuneration architecture is simple, transparent and easy to implement. For those individuals considered to be key risk takers for the Group, remuneration is focused on the long-term.
• The structure and level of total remuneration are aligned with the Group’s risk policies and risk taking capacity. • The Group promotes a high performance culture by differentiating total remuneration based on the relative performance of businesses and individuals.
• The structure of the LTIP links remuneration to the future development of performance and risk by including features for deferred remuneration.
Governance framework Remuneration governance framework The Board is responsible for the design and implementation of Zurich’s remuneration principles and remuneration rules (together Zurich’s Remuneration Rules). To support the Board in performing these duties, the Board has established a Remuneration Committee. Under the Ordinance AEC and as reflected in the Articles of Incorporation, the AGM elects the members of the Remuneration Committee individually. Their term of office ends with the conclusion of the next AGM with re-election being possible. The Remuneration Committee consists of at least three members of the Board, all of whom are experienced in the area of remuneration. In 2014 there were four members of the Committee. On an annual basis the Remuneration Committee evaluates the remuneration architecture and Zurich’s Remuneration Rules, and if appropriate, proposes amendments to the Board.
In the Remuneration Committee and the Board meetings where decisions are made on the individual remuneration of the Chairman, the Chairman is not present. In making decisions on the individual remuneration of the CEO, the CEO is not present. Where decisions are made on the individual remuneration of other members of the GEC, those members are also not present at the meetings. See page 39 in the Corporate governance report for further details of the Remuneration Committee’s responsibilities.
The STIP and the LTIP designs, which are explained in detail in the Remuneration report are regularly reviewed by the Remuneration Committee and the Board. Moreover, the Board reviews the implementation of the plans on a regular basis. The incentive plans are discretionary and can be terminated, modified, changed or revised at any time. The approval framework is set out below: Q4_2014_05_AR14_Remuneration_report_part1_en.indd 68 23.02.2015 16:21:05
Remuneration to the CEO Remuneration Committee Board and ultimately from shareholders via a vote as an aggregate maximum amount for the GEC
To help align remuneration with the Group’s risk-taking capacity, Group Risk Management consulted with other control, governance and assurance functions to provide the CEO with a review of risk factors to consider when assessing overall performance for the annual funding of incentives. The Chief Risk Officer (CRO) is available to discuss these findings with the Remuneration Committee and the Board. The CEO takes into account Group Risk Management’s assessment, among other factors, when proposing the funding of the STIP pools to the Remuneration Committee, which in turn makes its recommendation to the Board for final approval.
Annually, Group Risk Management reviews the processes and criteria for identifying the key risk taker positions. 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, and those who control, the specific risks at the level of the Group where the risks are most material. All key risk taker positions for the Group were reviewed and in 2014 the number of key risk taker positions remained stable. Group Risk Management, together with other control and assurance functions, provides risk and compliance information about each key risk taker as part of the annual individual performance assessment. The remuneration for key risk taker positions includes STIP and LTIP with a greater emphasis toward long-term, and therefore deferred, remuneration.
Group Audit regularly assesses the operational implementation of Zurich’s Remuneration Rules, to verify that the remuneration architecture is implemented across the Group. During 2014, management further documented key processes and controls in the remuneration area.
Share ownership guidelines 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 certain ownership requirements. Share ownership guidelines for members of the Board have been established at the level of one 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 five 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 being made in three year sales restricted shares and market purchases. Members of the GEC achieve this through their participation in the LTIP 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.
In 2014, the company issued 733,614 shares (0.49 percent of capital based on 148,903,222 registered shares eligible for dividends as of December 31, 2013) to meet the share obligations arising from the vesting of shares and the exercise of share options during the year (in 2013, 603,099 shares or 0.41 percent of capital based on 148,300,123 registered shares eligible for dividends as of December 31, 2012).
As of December 31, 2014, the total number of vested but unexercised share options was 780,763 (as of December 31, 2013, the number of vested but unexercised share options was 1,763,618). The exercise prices for these options range from CHF 198.10 to CHF 336.50. If all vested options were to be exercised in the future, the number of shares required represents 0.52 percent of the share capital which is based on 149,636,836 registered shares eligible for dividends as of December 31, 2014. If the options, which were in the money at December 31, 2014 (share price CHF 311.70) were exercised the number of shares required would be 478,593 or 0.32 percent of the share capital based on 149,636,836 registered shares eligible for dividends as of December 31, 2014.
Remuneration elements Total remuneration Total remuneration and how it is comprised for individual employees is influenced by a number of factors such as the scope and complexity of the role, level of responsibility, risk exposure, 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. The remuneration mix between base salary and variable pay is also aligned with local market practices and internal structures. Zurich is transparent in its communication of how the reward structure and the processes used for decision making are defined. Total remuneration includes the following elements: Remuneration elements
Factors which may determine the level of base pay include scope and complexity of the role, level of responsibility and geographic location.
Generally paid within an 80% to 120% range around the relevant market median.
Discretionary incentive awards are driven by the Group and/ or segment and/or country profitability achievements.
The allocation and payout to individuals is based on an assessment of overall individual performance through the performance management process.
One-half of all vested share awards are sales restricted for an additional three years.
1 The total variable remuneration pool includes short- and long-term incentives, and Sign-on and Severance Payments provided in cash and/or shares to employees who either joined or who left Zurich in 2014. However, it excludes the value of target share allocations from transition arrangements.
2 Includes also target share allocations from transition arrangements, however note with regard to the total variable remuneration pool such allocations are excluded. The new performance criteria and overall vesting grid are being phased in.
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.
Variable remuneration 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 remuneration 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 remuneration opportunities may include both short-term and long-term incentives.
A detailed description of the STIP design is laid out below: Vehicle and target award STIP awards are paid in cash.
Financial performance The STIP pool architecture which is reviewed and approved by the Board annually, is aligned with the organizational structure of Zurich. There are a number of STIP pools based on the NIAS result for members of the leadership team, the control functions, investment management, support functions and Group Operations and Technology. In addition, there are segment pools based on the overall BOP results of General Insurance and Global Life and based on specific growth and profitability measures of the Farmers Exchanges for employees in Farmers Group, Inc..
STIP award structure The financial performance defines the funding available for each STIP pool and the resulting range of potential STIP awards for various levels of individual performance. As an illustration, if the financial performance meets expectations then the award structure for an individual that also meets expectations with regard to his or her objectives is set at the target level. However, if the financial performance only partially meets expectations, then the STIP award for an individual who meets expectations under his or her individual objectives will be set at a level lower than target and can be zero. Within General Insurance and Global Life, there are a number of sub-pools, for example at the country level, where the award structure is specifically defined to reflect the overall results of the segment and also the sub-pool.
STIP award The financial performance, the resulting STIP award structure together with the individual performance are then utilized to determine the final individual STIP award for the year which can vary between 0 percent and 200 percent of the target award level. In this way, STIP awards are differentiated based on the financial performance and on the individual performance. The funding and potential award structure of the STIP pool is based fully on the financial performance and given the award structure the final STIP award is based on the individual performance.
Short-term incentives are delivered primarily through STIP although there are additionally some local country plans. The Group plan is utilized across the organization and, in many countries covers all employees in the respective country who are selected to participate. In other countries only the most senior individuals participate in the STIP. Local country plans, following broadly the same principles as STIP, may be utilized for other employees.
Long-term incentives Long-term (three to six years) incentives are performance-driven based on the following design: To support the achievement of the Group’s longer term financial goals, long-term incentives are utilized for a defined group of executives and senior managers, whose specific roles focus on the performance drivers of long-term shareholder value. This group contains the individuals with the highest levels of total remuneration, as well as those individuals whose activities have a significant influence on the risk profile of the Group.
In alignment with the Group’s risk profile and business strategy and taking into account best practice principles among insurance companies, and views from proxy advisors and shareholders, long-term incentives are provided with a deferral element taking into account material risks and the time horizon thereof. Such deferred remuneration is structured in a way as to promote the risk awareness of the participants and to encourage the participants to operate the business in a sustainable manner. As set out in last year’s Remuneration report, the LTIP was amended effective January 1, 2014 to align the performance measures with the financial objectives set out for the strategic period 2014 to 2016 and to move to a three year cliff vesting period. Certain transition arrangements were implemented. An illustration of the underlying plan is set out below.
Allocations are made in the form of target shares. In no circumstances can the LTIP award for an individual be more than 200% of the aggregate number of target shares and dividend equivalent shares.
Each participant has an annual target amount established for the year of allocation which is determined as a percentage of the base salary. An annual target amount has been set for the LTIP participants, including the members of the GEC. The number of target shares is calculated by dividing the annual target amount by the closing share price on the day prior to the allocation.
Financial performance The financial performance is determined by the assessment of the performance criteria as per the vesting grid which are set and reviewed by the Board annually in order to ensure alignment with the strategy.
Each performance measure is assessed independently over a three year period starting at the beginning of a calendar year when the target shares are allocated and each have a one third equal weighting. This then defines the vesting level according to the vesting grid.
Dividend equivalent shares To further align plan participants with the interests of the shareholders, effective from January 1, 2014 onwards, the target shares will be credited dividend equivalents target shares. The number of dividend equivalent target shares takes into account the actual dividends paid to shareholders during the vesting period. Each year during the vesting period, the cash dividend is calculated on the number of target shares provided at the date of allocation and the corresponding dividend is subsequently converted into dividend equivalent target shares based on the market share price prior to the dividend payment. At the vesting date, the number of target shares plus the dividend equivalent target shares will in aggregate be assessed for vesting against the performance criteria as per the above vesting grid. In this way only the number of shares vesting from the target shares will be eligible for accrual of dividend equivalent target shares. Further, no dividends will accrue on the dividend equivalent target shares. The vested dividend equivalent target shares are subject to the same sales restriction periods as the vested target shares.
Year of LTIP allocation 1 The average vesting levels for the 2013 and the 2014 LTIP allocations can only be calculated once the vesting level will be assessed for 2016 and 2017, respectively. 2 The calculated vesting level in 2015 of 139 percent also applies to the relevant parts of the transition allocations made in 2014, which are being assessed for vesting in 2015.
The following section sets out the remuneration including the shareholdings for Directors, for members of the GEC and also the remuneration for all employees.
The information provided according to Articles 14 – 16 of the Ordinance AEC contained in the Remuneration report needs to be externally audited following the audit requirements of the Ordinance AEC (Article 13 para 1 and Article 17 of the Ordinance AEC). In addition, the information according to Article 663c of the Swiss Code of Obligations is being audited and disclosed as such in the Remuneration report. All audited sections have been highlighted accordingly.
Directors Directors’ fees As a global insurance provider, Zurich’s Directors’ fees need to be established at a level which enables the Group to attract and retain high caliber individuals with diverse backgrounds. To assist the Board in determining Board remuneration, an independent adviser carries out benchmarking studies on a regular basis. Zurich aims to set the remuneration of its members of the Board at the relevant median levels using the Swiss Market Index (SMI) as a basis. Based on their role and the fee structure, fee levels are established for each member of the Board. Fees are paid in cash and in shares with approximately one-third of the basic fee provided in three year sales restricted shares of Zurich. The fees paid to Directors (including the portion provided in sales restricted shares) are not subject to the achievement of any specific performance conditions.
In 2014, no changes were made to the fee structure established in 2013.
All Directors of Zurich are also members of the Board of Directors of Zurich Insurance Company Ltd, and the fees cover the duties and responsibilities under both boards.
Basic fee for the Chairman of the Board 2 666 334 1,000 1,000 Basic fee for the Vice-Chairman of the Board 2 250 125 375 375 Basic fee for the Member of the Board 160 80 240 240
The committees on which the Directors serve are set out in the Corporate governance report on page 29. As of December 31, 2014, all of the Directors of Zurich are non-executive, independent of management.
Where a Director is also a member of one or more subsidiary boards of Zurich, the Director is entitled to an additional fee of CHF 50,000 in 2014 (CHF 50,000 in 2013) per annum plus CHF 10,000 in 2014 (CHF 10,000 in 2013) per annum if he or she also chairs an audit committee of such a board. The fee structure for subsidiary boards can be modified if certain circumstances, for example, the additional time commitment to discharge the duties of a board member, warrant it. Accordingly, with regard to his membership of the board of Zurich Insurance plc, from which he retired on September 30, 2014, Mr. de Swaan received a pro-rated basic fee of CHF 56,250 and a supplement of CHF 3,750 for being the chair of the audit committee to recognize his time commitments and responsibilities as a member of that board.
Total fees of which paid in cash of which allocated in shares 4, 5
Total fees of which paid in cash of which allocated in shares 4,11 1 The remuneration shown in the tables is gross, based on the accrual principle and does not include any business-related expenses incurred in the performance of the Directors’ services.
3 Committee chairs receive an annual fee of CHF 30,000 (CHF 30,000 in 2013) and the chair of the Audit Committee receives an additional CHF 10,000 (CHF 10,000 in 2013). Ms. Bies took on the role of the Risk Committee chair as of September 11, 2013. The committees on which the Directors serve and the chairs are set out in the Corporate governance report on page 29.
6 Neither the Chairman nor the Vice-Chairman receive any additional fees for their committee work on the Board of Zurich. 7 In addition to the fees received as Directors of Zurich Insurance Company Ltd, Ms. Bies, Mr. Nicolaisen and Mr. de Swaan earned fees for their board memberships of the following subsidiaries of Zurich: – In both 2014 and 2013, Ms. Bies and Mr. Nicolaisen earned CHF 50,000 for their membership of the board of Zurich Holding Company of America (ZHCA). – In 2014, Mr. de Swaan earned CHF 56,250 for his membership of the board of Zurich Insurance plc. He also earned an fee of CHF 3,750 for being chair of the Audit
8 In line with applicable laws, Zurich paid the company related portion of contributions to social security systems, which amounted to CHF 81,916 in 2014. The corresponding contributions amounted to CHF 136,246 in 2013. Any personal contributions of the Directors to social security systems are included in the amounts shown in the table above. Swiss-based Directors are eligible for selected employee benefits.
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.
Special payments and termination arrangements, additional honoraria and remuneration and personal loans for Directors Severance Payments and Payments in Advance are prohibited for members of the Board according to the Ordinance AEC. At the AGM on April 2, 2014, Mr. Franz was elected as a new member of the Board. No Replacement Payments or other benefits were provided. Further, Mr. Chu and Mr. Watter did not stand for re-election. No termination payments (i.e. golden parachutes) were made and no other benefits such as waiver of lock-up periods for equities or additional contributions to occupational pension schemes were provided.
None of the Directors received additional honoraria or any remuneration or benefits-in-kind from the Group or from any of the Group’s companies other than as set out above.
Related parties to the Directors or to former Directors No benefits (or waiver of claims) have been provided to related parties of the Directors or related parties of former members of the Board during the years 2014 and 2013, nor had any related party of the Directors or of former members of the Board any outstanding loans, advances or credits as of December 31, 2014 and 2013.
T. de Swaan, Chairman 3,853 2,597 F. Kindle, Vice-Chairman 17,717 17,247 S. Bies, Member 2,265 1,964 A. Carnwath, Member 925 624 V.L.L. Chu, Member n / a 1,964 R. del Pino, Member 925 624 Th. Escher, Member 10,103 9,802 C. Franz, Member 226 n / a M. Mächler, Member 548 247 D. Nicolaisen, Member 1,019 2,247 R. Watter, Member n / a 5,215 1 None of the Directors together with parties related to them held more than 0.5 percent of the voting rights of Zurich Insurance Group Ltd shares as of December 31, 2014 or 2013, respectively.
To assist decisions on the remuneration of the GEC, the Board conducts benchmarking studies on a regular basis. The remuneration structures and practices of a selected industry peer group of the largest insurance companies are analyzed, based on relevant companies in the Dow Jones Insurance Titans 30 Index. This Index comprises the largest insurance companies throughout the world, predominantly in Europe and in the United States. The Remuneration Committee reviews this peer group regularly. This analysis is supplemented by additional benchmarking studies as appropriate, e.g., by reviewing practices of large SMI companies in Switzerland or similar sized companies in other countries. The Remuneration Committee regularly reviews the benchmarking approach.
The total remuneration of the members of the GEC for 2014 comprised the value of base salaries, short-term cash incentives, the target share allocations made under the LTIP in 2014, pensions and other remuneration including employee benefits.
The distribution of the total remuneration in 2014 for the GEC between the individual remuneration elements is set out in the following chart and is based on the target values for the performance related remuneration 1.
The total amount of annual cash incentive awards to be paid in 2015 for the 2014 performance year for all members of the GEC was USD 11.9m compared to USD 12.1m for 2013. As set out on page 72 the annual cash incentive awards are determined individually and are performance based.
In 2014, each member of the GEC received an annual allocation of target shares under the LTIP.
The total number of target target shares allocated on April 3, 2014 to members of the GEC during 2014 was 64,460 which reflects a value of USD 18.7m at the date of allocation. This is based on the assumption of a 100 percent vesting in 2016 and 2017, a share price of CHF 274.30 on the day prior to the allocation and an exchange rate of 1 CHF = 0.88695 USD. This compares with 57,374 target shares allocated in 2013 and a respective value of USD 16.2m at the date of allocation on April 3, 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 2014, calculated on the basis of the service costs for the company as assessed under IAS 19 accounting principles, was USD 3.6m (compared to USD 3.2m in 2013). Service costs value the amount of the pension benefits accruing during the year and for defined contribution plans take the amount of the company contribution paid during the year.
Members of the GEC received other remuneration in 2014 in relation to employee benefits, expatriate allowances, perquisites, benefits-in-kind and any other payments due under each member’s employment contract.
The total value of other remuneration in 2014 was USD 1.9m (compared to USD 2.9m in 2013). Benefits-in-kind have been valued using market rates.
For the GEC, the key financial metric is the NIAS performance during the year. In evaluating the NIAS performance, an overall qualitative assessment of the results is carried out to determine the STIP award structure. NIAS for 2014 was slightly under USD 3.9 billion reflecting a 3% decrease compared to 2013. With regard to the individual performance, each member defines and agrees individual objectives relating to the execution of the strategy in the following key areas: positioning the business for long-term profitable growth, reducing complexity, improving profitability, investing in people, capabilities and brand, and implementing the Zurich Commitment. In a rigorous process the Remuneration Committee reviews the individual performance achievements of each of the GEC members considering a number of factors including the performance of the business segment or function being managed, and the achievement of the strategic objectives across the defined areas. The proposals for STIP awards are then reviewed and approved by the Board. The Remuneration Committee and the Board also reviews the performance of the CEO using a similar process at the year-end. As a result of this rigorous process individual STIP awards for each member of the GEC are determined and approved by the Board. Given the assessment of the overall financial and individual results for 2014, lower overall cash incentives have been allocated to the GEC for 2014 than in the previous year.
Replacement Payments were made to the two newly hired members of the GEC who took up their employment with the Group in 2014. The payments comprised a cash payment of CHF 0.8 million and restricted shares vesting over the four year period 2015 to 2018 with a value of CHF 7.0 million. The overall value of the Replacement Payments was therefore CHF 7.8 million, or USD 8.8 million when translated into U.S. dollars at the exchange rates at the time they were made.
Value of target share allocations from transition arrangements for the GEC As set out on page 76, transition arrangements were put in place for all plan participants in connection with the move from annual tranche vesting to three year cliff vesting under the LTIP. For members of the GEC, the value of the transition allocations made in 2014 was USD 7.2 million with vesting of the allocations in equal tranches in 2015, 2016 and 2017.
Summary of total remuneration (excluding Replacement Payments and allocations from transition arrangements) The table below shows that the total remuneration of the members of the GEC, comprising base salaries, cash incentive awards earned for the year, the value of target share allocations for 2014, pensions and the value of other remuneration including employee benefits amounted to USD 48.1 million. In 2013, the corresponding figure was USD 46.0 million. In order to make a suitable comparison to 2013, the amount excludes the value of target share allocations from transition arrangements and the Replacement Payments for members of the GEC hired in, and appointed in 2014.
The difference between the total amounts in 2014 and 2013 can predominantly be explained by the increased membership in the GEC in 2014 and also by changes in the relevant fx-rate over the two years.
4 The share allocations will vest in the future according to achievement of defined performance conditions. The value of the shares assumes that the allocation will vest in the future at 100 percent of the target level with the valuation of the target share allocations based on the share price on the day prior to the allocations (CHF 274.30 for 2014 and CHF 267.30 for 2013). The value of target share allocations does not include dividend equivalent target shares. As described in the section Remuneration elements the vesting level can range between 0% and 200% of the target.
5 The amounts reflect the total value of pension benefits accruing to members of the GEC during 2014 and 2013, respectively, calculated on the basis of the service costs for the company as assessed under IAS 19 accounting principles. Service costs value the amount of the pension benefits accruing during the year and for defined contribution plans takes the amount of the company contribution paid during the year. Service costs do not include the interest costs on accrued benefits, adjustments for actuarial gains and losses, nor the expected return on any assets held.
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 1.6m in 2014 and USD 1.6m in 2013. 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 This excludes the value of target share allocations from transition arrangements. 9 To maintain the target earning opportunities during the transition period an allocation of supplementary performance shares was made to all current LTIP participants.
To ensure that the members of the GEC further increase their long-term alignment with shareholders, the transition allocation is being provided in two installments for the members of the GEC and in the case of the CEO, in three installments.
10 Replacement Payments were made to compensate incentive plan forfeitures with previous employers.
CEO, Martin Senn in 2014 and 2013 in CHF millions, for the years ended December 31 2014 1 2013 1
Value of target share allocations from transition arrangements 2,7 1.2 n / a 1 The remuneration shown in the table is gross, based on the accrual principle and does not include any business related expenses incurred in the performance of the CEO’s services.
Member of the GEC with the highest remuneration The highest paid individual in 2014 was George Quinn, Chief Financial Officer. The remuneration comprised a total of CHF 3.7 million representing the base salary, cash incentive awards earned for the year, the value of the target shares allocated in 2014 under the LTIP, the value of pension benefits and other remuneration including employee benefits, and a Replacement Payment in restricted shares vesting in 2015, 2016 and 2017 with an aggregate value of CHF 5.0 million to compensate for the forfeiture of his incentive plan rights with his previous employer. This resulted in overall remuneration of CHF 8.7 million.
Special payments and termination arrangements, additional honoraria and remuneration, and personal loans for members of the GEC Severance Payments and Payments in Advance are prohibited for members of the GEC according to the Ordinance AEC.
None of the members of the GEC received any remuneration from the Group or from any of the Group’s companies in 2014 and 2013 other than as set out above.
As of December 31, 2014 and 2013, there were no loans, advances or credits outstanding for members of the GEC.
Related parties to members or former members of the GEC 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 2014 and 2013. No party related to GEC members or of former members of the GEC had outstanding loans, advances or credits as of December 31, 2014 and 2013.
Year of allocation 2015 2016 2017 2018 Total 1 With effect from January 1, 2014, the Board has decided to make the transition to three year cliff vesting. To transition to a three year cliff vesting, the 2014 LTIP allocation will vest one-third after two years (i.e. 2016), and two-thirds after three years (i.e. 2017). From the 2015 LTIP allocations onwards, three year cliff vesting for 100 percent of the allocation will apply.
3 To maintain the target earning opportunities during the transition period an allocation of supplementary target shares was made to all current LTIP participants. To ensure the GEC members further increase their long-term alignment with shareholders, the transition allocation is being provided in two installments for the members of the GEC and in the case of the CEO, in three installments.
Within the context of the regular LTIP allocations made in 2014, these performance share allocations are considered for vesting in 2016 and 2017 and one-half of the vested shares are further sales restricted for a three year period. With effect from the regular LTIP allocations in 2015, a three year cliff vesting period will apply. With regard to the transition allocation made in 2014 to the GEC including the CEO, the shares are assessed for vesting in 2015, 2016 and 2017.
In order to prevent executives from potentially losing the value of their options on the expiry date, the Board approved in 2011 an automatic exersale for all options being in the money at the end of the exercise period. A loss would otherwise occur if the executive was prohibited from dealing due to being in possession of price-sensitive information.
Under the share option program, the total number of shares under option for the members of the GEC as at December 31, 2014, and 2013, respectively, is set out in the tables below.
Share and share option holdings of members of the GEC The following table sets out the actual share and share option holdings of the members of the GEC as of December 31, 2014 and 2013. In addition to any shares acquired in the market, the numbers include vested shares, whether sales restricted or not, and vested share options received under the LTIP. However, the table does not include the share interests of the members of the GEC through their participation in the currently unvested target shares or unvested restricted shares.
All interests are beneficial and include shares or share options held by related parties to members of the GEC.
Share and vested share option holdings of the GEC members 1
M. Senn, Chief Executive Officer 48,756 88,012 41,392 107,212 J. Dailey, CEO of Farmers Group, Inc. 4,520 17,605 3,564 17,605 R. Dickie, Chief Operations and Technology Officer 3 – n / a n / a n / a M. Foley, Chief Executive Officer North America Commercial and Regional Chairman of the Americas 9,762 40,412 8,679 59,404 Y. Hausmann, Group General Counsel 6,900 10,193 5,644 10,193 M. Kerner, CEO General Insurance 9,759 13,067 9,090 21,588 A. Lehmann, Chief Risk Officer and Regional Chairman of Europe 30,861 62,531 27,955 79,559 M. Nordlin, ad interim Group Head of Operations 4 n / a n / a 5,288 11,322 G. Quinn, Chief Financial Officer 3 12 n / a n / a n / a C. Reyes, Chief Investment Officer 10,127 23,972 8,041 25,922 G. Riddell, Regional Chairman of Asia-Pacific & Middle East 19,845 48,548 27,840 67,171 V. Sharma, ad interim Chief Financial Officer 5 n / a n / a 3,988 8,741 K. Terryn, CEO Global Life 4,427 17,194 7,086 20,302 I. Welton, Chief Human Resources Officer 3 2,062 n / a n / a n / a 1 None of the members of the GEC together with parties related to them held more than 0.5 percent of the voting rights as at December 31, 2014 or 2013, either directly or through share options.
2 The distribution of the vested options according to the allocations identified in the tables Summary of unexercised options is shown in the table below. 3 Mr. Dickie has been appointed Chief Operations and Technology Officer effective March 17, 2014, Mr. Quinn has been appointed Chief Financial Officer effective May 1, 2014 and Ms. Welton has been appointed Chief Human Resources Officer, effective July 1, 2014.
4 Mr. Nordlin, who held the position of Chief Operations and Technology Officer on an ad interim basis, left the function on March 16, 2014. 5 Mr. Sharma, who held the position of Chief Financial officer on an ad interim basis, left the function on April 30, 2014.
The following tables show how the totals of the vested share options owned by members of the GEC are distributed according to the allocations identified in the tables Summary of unexercised options as of December 31, 2014 and 2013, respectively.
Number of vested share options as of December 31, 2014 Year of allocation Total
R. Dickie 1 n / a n / a n / a n / a
2 Mr. Sharma, currently Group Controller assumed responsibility for Group Finance on an ad interim basis succeeding Mr. Wauthier effective August 26, 2013. He is formally not a member of the GEC.
Remuneration of all employees Please refer to the Remuneration framework section for the key elements of remuneration and benchmarking approach for all employees. Also note that the benchmarking analysis is mainly carried out and approved at the local level. The Group had 54,551 and 55,102 full-time equivalent employees as of December 31, 2014 and 2013, respectively.
The following section includes information regarding the total remuneration earned by employees for the financial year 2014 across the Group, including remuneration for members of the GEC. The information provided is set out in accordance with the additional disclosure requirements defined in the FINMA Circular on Remuneration Schemes, applicable for the first time in 2010.
Fixed remuneration for all employees in USD million, for the years ended December 31 2014 2013
Base salaries 4,053 4,092 Value of other remuneration including employee benefits 1 663 643 Service costs for pension benefits 2 495 513 Total fixed remuneration 5,210 5,248 1 Includes employee benefits like health and dental insurance and other fringe benefits etc.
2 Includes Sign-on Payments in shares. 3 The share allocations will vest in the future according to achievement of defined performance criteria. The value of the shares assumes that the allocation will vest in the future at 100 percent of the target level with the valuation of the target share allocations based on the share price on the day prior to the allocations (CHF 274.30 in 2014 and CHF 267.30 for 2013). The charges in the financial statements may be calculated on different vesting basis.
Total remuneration Combining the fixed and variable remuneration, the total remuneration for all employees is as follows: Total remuneration for all employees in USD million, for the years ended December 31 2014 2013
4 Excludes any value of target share allocations from transition arrangements.
Value of outstanding deferred remuneration The Group’s remuneration system includes instruments for the deferral of remuneration, and the following table provides an overview of the overall value of the outstanding deferred remuneration at December 31, 2014 and 2013: Value of outstanding deferred remuneration for all employees in USD million, for the years ended December 31 2014 2013
Impact on net income in 2014 and 2013 from remuneration made in prior years Under the LTIP, a calculation is made at the date of vesting to determine the actual number of shares to be awarded to participants relative to the number that was originally expected to be awarded at the allocation date. Any difference in value is reflected in the consolidated income statement in the year of vesting. For shares vesting in 2014 and 2015 there was no material difference to the expense recognized in the 2014 income statement to reflect actual performance compared to original estimates. In 2013, a USD 108 million reduction in expense was recognized in the 2013 income statement.
Key Risk Takers With regard to the disclosure of Sign-on and Severance Payments for the individuals considered to be key risk takers for the Group, the following definition and principles for Sign-on and Severance Payments apply.
As mentioned above, the Group as a principle does not make any Sign-on or Severance Payments. However, if circumstances in the Group’s interest warrant such payments, these can be approved through a clear governance process. Any such payment with a value of CHF 1 million or more is approved by the Chair of the Remuneration Committee prior to the time the employment offer is made or prior to the time the Severance Payment is committed to.
In the course of the year, the Chairman of the Board and the Chairman of the Remuneration Committee will continue to engage with investors, proxy advisors and regulators regarding corporate governance and remuneration matters. These discussions are insightful and allow Zurich the opportunity to have a dialogue on key topics, explain the remuneration policy and receive feedback. Zurich will continue to assess market practices and developments to provide shareholders with a Remuneration report that is reader friendly, transparent and compliant with legal and regulatory requirements.
Finally, in a highly dynamic environment with the increasing complexity of legal and regulatory requirements and changes in the market, the Remuneration Committee will continue to stay abreast of any changes that develop. The Remuneration Committee will remain involved to ensure that Zurich’s remuneration philosophy and remuneration policies are aligned with the strategy, are embedded in the Group’s risk approach and also consider external views.
To the Annual General Meeting 2015 of Zurich Insurance Group Ltd
Report of the statutory auditor on the audit of the Remuneration report
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, 2014 and 2013. 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 2014 of the Group and, in particular, with its Consolidated financial statements for the year ended December 31, 2014.
In addition to the figures stated in accordance with International Financial Reporting Standards (IFRS), the Group uses business operating profit (BOP), new business measures and other performance indicators to enhance the understanding of its results. Details of these additional measures are set out in the separately published Glossary. These should be viewed as complementary to, and not as substitutes for the IFRS figures. For a reconciliation of BOP to net income attributable to shareholders, see table 27.2 in note 27 of the Consolidated financial statements.
The Group has reviewed the definition of net technical expenses within the General Insurance segment resulting in the reclassification of certain income and expenses between the net non-technical result and net technical expenses. As a result, comparative figures for total net technical expenses, net underwriting result, net non-technical result (excl. items not included in BOP), expense ratio and combined ratio have been restated to reflect this change.
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, 2014, compared with 2013.
Business operating profit 4,638 4,680 (1%) Net income attributable to shareholders 3,895 4,028 (3%)
General Insurance gross written premiums and policy fees 36,333 36,438 – Global Life gross written premiums, policy fees and insurance deposits 31,883 27,095 18% Farmers Management Services management fees and other related revenues 2,791 2,810 (1%) Farmers Re gross written premiums and policy fees 3,428 4,045 (15%)
General Insurance business operating profit 2,894 2,859 1% General Insurance combined ratio 97.3% 98.0% 0.7 pts
Farmers business operating profit 1,573 1,516 4% Farmers Management Services gross management result 1,335 1,353 (1%) Farmers Management Services managed gross earned premium margin 7.2% 7.2% –
1 Parentheses around numbers represent an adverse variance. 2 Details of the principles for calculating new business are included in the Embedded value report in the Annual Report 2014. New business value and new business margin are calculated after the effect of non-controlling interests, whereas APE is presented before non-controlling interests. 3 Calculated on average Group investments. 4 As of December 31, 2014 and December 31, 2013, respectively.
5 Ratios as of July 1, 2014 and January 1, 2014, respectively. The Swiss Solvency Test (SST) ratio is calculated based on the Group’s internal model, and both the ratio and the internal model are subject to the review and approval of the Group’s regulator, the Swiss Financial Market Supervisory Authority (FINMA). The ratio is filed with FINMA bi-annually.
6 Shareholders’ equity used to determine ROE and BOPAT ROE is adjusted for net unrealized gains/(losses) on available-for-sale investments and cash flow hedges. In 2013, no such adjustments were made and accordingly figures have been restated.
Business operating profit decreased by USD 42 million to USD 4.6 billion, or by 1 percent in U.S. dollar terms, but remained flat on a local currency basis.
• General Insurance business operating profit increased by USD 34 million to USD 2.9 billion, or by 1 percent in U.S. dollar terms and on a local currency basis, driven by an improved net underwriting result. This was partly offset by higher non-technical expenses as well as a lower investment result. The net underwriting result reflected an improvement in the underlying loss experience and the absence of major catastrophe and weather-related losses, partly offset by lower levels of favorable loss development on reserves established in prior years, as well as the cost of ongoing growth initiatives included in increased technical expenses.
• Non-Core Businesses reported a business operating loss of USD 142 million compared with a profit of USD 73 million in 2013, mainly as a result of increased loss reserves for future liabilities established in prior years.
• General Insurance gross written premiums and policy fees decreased by USD 106 million to USD 36.3 billion, but increased by 2 percent on a local currency basis led by underlying growth in the Group’s priority markets, partly offset by a non-renewal of a fronted portfolio in North America.
The net investment result on Group investments of USD 9.2 billion increased by USD 1.8 billion or by 24 percent and represents a net investment return on average Group investments of 4.5 percent compared with 3.5 percent in 2013. Net investment income, predominantly included in the core business results, was marginally lower in U.S. dollar terms, but marginally higher on a local currency basis. Net capital gains on investments and impairments included in the net investment result increased by USD 1.8 billion to USD 3.0 billion. The increase primarily resulted from re-balancing activities due to the deployment of additional risk capital, as well as an increase in the valuation of debt securities booked at fair value through profit or loss and a gain compared with a loss in 2013 from the valuation of derivative financial instruments used for hedging underlying business or investment risks. Total return on average Group investments improved to 8.6 percent from 1.3 percent in 2013, benefiting from the increase in the net investment result, as well as from an increase of USD 8.5 billion in gross unrealized gains not flowing through net income compared with losses of USD 4.7 billion in 2013.
Net income attributable to shareholders decreased by USD 133 million to USD 3.9 billion primarily due to several non-recurring costs relating to the restructuring or disposal of business operations as well as an increase in income tax expense attributable to shareholders, which more than offset the increase in net capital gains on investments. The shareholders’ effective tax rate increased to 27.3 percent for the year ended December 31, 2014 compared with 24.9 percent for 2013. The increase of 2.4 percentage points reflects changes in the relative levels of profit by country and several one-off costs, including the loss related to the sale of the Group’s retail business in Russia, which do not attract tax relief.
ROE decreased by 0.6 percentage points to 12.8 percent, mainly due to the reduction in net income attributable to shareholders. BOPAT ROE decreased by 0.6 percentage points to 11.1 percent, as a result of the decrease in business operating profit and the increase in the shareholders’ effective tax rate. Diluted earnings per share decreased by 6 percent to CHF 23.84 compared with CHF 25.23 in 2013.
Business operating profit increased by USD 34 million to USD 2.9 billion, or by 1 percent in U.S. dollar terms and on a local currency basis. This was driven by an improvement in the net underwriting result of USD 207 million to USD 812 million, partly offset by higher non-technical expenses, as well as a lower net investment result from lower hedge fund gains in North America and lower yields in EMEA. The net non-technical result in 2013 included the one-off benefit from the sale of own-use real estate in Taiwan.
Gross written premiums and policy fees 9,434 9,264 2% Net underwriting result 241 345 (30%) Business operating profit 767 879 (13%) Loss ratio 74.4% 73.6% (0.8 pts) Expense ratio 21.8% 20.8% (1.1 pts) Combined ratio 96.2% 94.3% (1.9 pts)
Business operating profit decreased by USD 48 million to USD 923 million, or by 5 percent. Improvements in the net underwriting result were more than offset by a reduction in the net investment result mainly due to lower hedge fund gains.
The net underwriting result increased by USD 39 million to USD 270 million, reflected in the improvement of 0.5 percentage points in the combined ratio to 96.5 percent. The underlying loss ratio improved compared with 2013 reflecting the favorable impact of sustained rate increases, as well as benefiting from claims and underwriting initiatives. The net underwriting result also benefited from a release of reserves established in prior years compared with unfavorable development in 2013, as well as lower catastrophe and weather-related losses. The expense ratio deteriorated by 1.2 percentage points, mainly as a result of investments in growth initiatives and higher management expenses, as well as an increase in commissions due to growth in lines of business with higher than average commissions.
Business operating profit increased by USD 198 million to USD 1.2 billion, or by 21 percent in U.S. dollar terms and 18 percent on a local currency basis, as a result of the improvement in the net underwriting result. This was partly offset by lower net investment income.
Gross written premiums and policy fees 1 4,460 4,973 (10%) Net underwriting result (175) (88) (98%) Business operating profit 40 169 (76%) Loss ratio 61.7% 59.9% (1.7 pts) Expense ratio 42.9% 42.4% (0.6 pts) Combined ratio 104.6% 102.3% (2.3 pts)
Business operating profit decreased by USD 128 million to USD 40 million, or by 76 percent in U.S. dollar terms and 55 percent on a local currency basis. The decrease resulted from a deterioration in the underwriting result and a less favorable non-technical result. The non-technical result in 2013 benefited from the sale of own-use real estate in Taiwan.
The net underwriting result deteriorated by USD 86 million, reflected in the 2.3 percentage points deterioration in the combined ratio to 104.6 percent. The loss ratio deteriorated by 1.7 percentage points mainly as a result of the adverse development of reserves established in prior years and higher catastrophe and weather-related losses mainly due to Hurricane Odile in Mexico. These negative effects were partly offset by an improvement in the underlying loss ratio. The expense ratio deteriorated by 0.6 percentage points due to an increase in commissions and higher expenses including costs as a result of the new distribution agreements in Brazil.
Gross written premiums and policy fees 14,594 13,916 5% Net investment income on Group investments 3,815 3,895 (2%) Insurance benefits and losses, net of reinsurance (10,685) (9,167) (17%) Business operating profit 1,273 1,272 –
3 Net policyholder flows are defined as the sum of gross written premiums and policy fees and deposits, less policyholder benefits. In 2013, net policyholder flows did not include inflows for certain short-duration contracts. Adjusting for this effect, net policyholder flows for 2013 would have been a net outflow of USD 688 million instead of USD 2.7 billion. See table 8.5 in the Consolidated financial statements.
New business – highlights 1 in USD millions, for the years ended December 31 2014 2013 Change
Source of earnings 1 in USD millions, for the years ended December 31 2014 2013 Change
Impact of deferrals 447 301 48% Business operating profit 1,273 1,272 –
1 Each line represents Zurich’s interest after deducting non-controlling interests, amounting in total to USD 239 million (in 2013 USD 233 million) in business operating profit.
Business operating profit was broadly flat in U.S. dollar terms increasing by USD 1 million to USD 1.3 billion, but increased 2 percent on a local currency basis reflecting the weakening of currencies in Latin America against the U.S. dollar. Improvements on a local currency basis in most regions were offset by the negative effects in North America of both the transfer of an annuity portfolio to Non-Core Businesses associated with Global Life’s in-force management strategy and impairments of software intangible assets.
Ongoing focus on fee-based and protection business has resulted in improvements in loadings and fees and in the underlying technical margin. Loadings and fees increased by USD 154 million. The majority of the increase was driven by higher volumes in North America and Zurich Santander and higher fees in Asia-Pacific and Middle East (APME), predominantly driven by an increase in unit-linked assets under management. The investment margin decreased by USD 16 million, but with the positive effect of increased investment yields in Latin America, albeit reduced by the effects of foreign currency translation, offset by the impact of persistently low yields in other regions. The underlying technical margin improved by USD 56 million largely driven by North America, Zurich Santander and Europe. This improvement was more than offset by one-off impacts of USD 56 million from the reassessment of reserves prior to the transfer of an annuity portfolio in North America and USD 40 million from a change in the law in Germany affecting policyholders’ participations in the technical margin.
Net reserves decreased by 2 percent in U.S. dollar terms, but increased 8 percent on a local currency basis compared with 2013, primarily reflecting favorable market movements on the underlying assets and positive net inflows, partly offset by the effect of the weakening of currencies against the U.S. dollar. Assets under management decreased by 1 percent in the U.S. dollar terms, but increased 10 percent on a local currency basis compared with 2013 driven by favorable market movements and positive net inflows, partly offset by the effect of the weakening of currencies against the U.S. dollar. Net policyholder flows were positive with a net inflow of USD 5.5 billion, with North America, Latin America and Europe all experiencing improved net inflows. This compared with a net outflow of USD 2.7 billion in 2013, which was mainly due to net outflows from private banking products in the UK.
of which: NBV and APE by pillar in USD millions, for the years ended December 31
(as % of APE) 1 1 New business value is calculated on embedded value principles after the effect of non-controlling interests while APE is shown gross of non-controlling interests. New business margin is calculated using net business value as a percentage of APE based on figures net of non-controlling interests for both metrics. See Embedded value report included in the 2014 Annual Report for details of these principles.
Global Life continued to benefit from its acquisitions and investment in organic growth in priority markets, leveraging global bank distribution and corporate life relationships as well as maintaining focus on protection and unit-linked products.
APE increased by USD 785 million to USD 5.2 billion, or by 18 percent in U.S. dollar terms and 19 percent on a local currency basis. North America, Europe and APME all increased, partly offset by decreases in Other, following withdrawal from certain private banking products in Luxembourg.
New business margin decreased by 4.9 percentage points to 22.1 percent compared with 2013, with decreases occurring in North America, Latin America and Europe. Assumption and methodology changes contributed half of the decrease in new business margin. In North America and Europe margins were also impacted by higher volumes of lower margin business. In addition, a reduction in swap rates negatively affected new business margin particularly in continental European countries.
In North America, IFA/Brokers continued to gain momentum leading to growth in APE of 48 percent and an increase in new business value of 79 percent. Overall, this resulted in a lower, but still very strong, new business margin of 57.8 percent.
In Latin America, APE decreased by 1 percent in U.S. dollar terms, largely driven by the weakening of currencies in Latin America against the U.S. dollar, which also affected new business value. In addition, new business value was impacted by assumption changes, particularly in Zurich Santander, and a change in the expense allocation methodology.
In Europe, the overall increase of USD 48 million in new business value was primarily driven by the UK, Spain and Switzerland. In the UK, new business value improved by USD 38 million, benefiting from continued strong growth of lower margin Corporate Life and Pensions business, driving the overall reduction in new business margin. In Spain, increases in new business value continued to be driven by protection business, while APE growth was largely due to an increase in sales of individual savings products, resulting overall in a lower new business margin. In Switzerland, the increase in new business value resulted from both volume and margin improvements.
In Bank Distribution, new business value decreased by USD 19 million to USD 282 million, or by 6 percent in U.S. dollar terms and 1 percent on a local currency basis. Strong volume growth in Zurich Santander and Spain was more than offset by the impact on new business value in Zurich Santander from changed assumptions and the weakening of currencies in Latin America against the U.S. dollar.
In Other Retail, new business value overall decreased by USD 54 million to USD 437 million, or by 11 percent in U.S. dollar terms and 10 percent on a local currency basis. The decrease arose mainly in Latin America, impacted by lower volumes, and Europe, which experienced lower margins, compared with 2013.
In Corporate Life and Pensions, new business value increased by USD 34 million to USD 303 million, or by 13 percent in U.S. dollar terms and 10 percent on a local currency basis, benefiting from higher volumes particularly in Europe, partly offset by a decrease in Other.
Farmers business operating profit increased by USD 58 million to USD 1.6 billion compared with 2013. This was due to an improved net underwriting result in Farmers Re partly offset by slightly reduced management fees and other related revenues in Farmers Management Services.
Farmers Management Services The Farmers Exchanges are owned by their policyholders. Farmers Group Inc., a wholly owned subsidiary of the Group, provides certain non-claims administrative and management services to the Farmers Exchanges as attorney-in-fact and receives fees for its services.
in USD millions, for the years ended December 31 2014 2013 Change
Management fees and other related revenues 2,791 2,810 (1%) Management and other related expenses (1,455) (1,457) – Gross management result 1,335 1,353 (1%)
Other net income 48 38 27% Business operating profit 1,383 1,390 (1%) Managed gross earned premium margin 7.2% 7.2% –
Management fees and other related revenues of USD 2.8 billion decreased by USD 19 million, or by 1 percent, reflecting lower premiums earned in the Farmers Exchanges. Management and other related expenses of USD 1.5 billion remained broadly flat. Other net income of USD 48 million increased by USD 10 million with lower investment income more than offset by the difference between positive miscellaneous income and expense items in 2014 compared with negative miscellaneous income and expense items in 2013.
Gross written premiums and policy fees decreased by USD 617 million, or by 15 percent, to USD 3.4 billion as a result of lower participation in reinsurance agreements with the Farmers Exchanges. The changes in the reinsurance agreements comprised a reduction in the All Lines quota share reinsurance agreement from 18.5 percent to 18.0 percent, effective December 31, 2013 and a further reduction from 18.0 percent to 10.0 percent effective December 31, 2014, subject to the approval of the California Department of Insurance. Participation in the Auto Physical Damage quota share reinsurance agreement was reduced from USD 925 million of ceded premium in 2013 to USD 900 million in 2014.
The net underwriting result improved by USD 75 million to USD 66 million as a result of lower catastrophe and underlying losses assumed from the Farmers Exchanges reflected in the 1.9 percentage points reduction in the loss ratio. The expense ratio, based on ceded reinsurance commission rates payable to Farmers Exchanges, was unchanged.
Farmers Exchanges Financial information about the Farmers Exchanges, which are owned by their policyholders, is proprietary to the Farmers Exchanges, but is provided to support an understanding of the performance of Farmers Group, Inc. and Farmers Re. Farmers Group, Inc., a wholly owned subsidiary of the Group, provides certain non-claims administrative and management services to the Farmers Exchanges as attorney-in-fact and receives fees for its services.
Gross written premiums in the Farmers Exchanges remained broadly flat in 2014 following the 2 percent decline in 2013. In 2014, increases in Business Insurance sold through exclusive agents, non-standard Auto, Homeowners, and Specialty were offset by decreases in Business Insurance sold through independent agents, Farmers Auto and Direct Auto.
Centrally managed businesses, which comprise run-off portfolios managed with the intention of proactively reducing risk and releasing capital, reported a business operating loss of USD 124 million. The deterioration of USD 151 million arose primarily from an increase of reserves relating to long-tail general insurance business in run-off.
Risk and capital management 116 Mission and objectives of risk management 116 Risk management framework 116 Risk governance and risk management organization 117 Objectives of capital management 117 Capital management framework 118 Capital management program 118
The Risk review is an integral part of the consolidated financial statements (only the information marked “audited”).
The risk review is structured differently this year in order to discuss a particular risk alongside important contextual information, such as Z-ECM capital required. As a consequence, audited and unaudited information is presented together. To address this, audited information is highlighted. The folded corner indicates that the information contained within the shaded panel is audited and forms an integral part of the consolidated financial statements.
AA–/positive Standard & Poor’s financial strength rating of Zurich Insurance Company Ltd (as of December 31, 2014)
Insurance-related and business risks are the main drivers of the Group’s required capital.
As of July 1, 2014, insurance-related and business risks contribute 44% of the Z-ECM capital required. 52% of the total capital allocated to the segments goes to General Insurance, 33% to Global Life and 7% to Farmers.
Zurich uses scenario analyses to assess the potential impact of conditions under stress.
The mission of risk management at Zurich Insurance Group (Zurich, or the Group) is to promptly identify, measure, manage, report and monitor risks that affect whether, and how, strategic, operational and financial objectives are achieved. This includes adjusting the risk profile in line with the Group’s stated risk tolerance to respond to new threats and opportunities, and to optimize returns.
The Group’s major risk management objectives are to: • Protect the capital base by monitoring that risks are not taken beyond the Group’s risk tolerance • Enhance value creation and contribute to an optimal risk-return profile by providing the basis for an efficient capital deployment • Support decision-making processes by providing consistent, reliable and timely risk information • Protect Zurich’s reputation and brand by promoting a sound culture of risk awareness and disciplined and informed risk taking
No action required as within stated objective and equivalent to “AA” rating 90-100% Position may be tolerated for a certain length of time depending on the risk environment
<90% Z-ECM ratio below Group risk tolerance level, requiring appropriate remedial actions and implementation of de-risking measures >140% Z-ECM ratio indicating over capitalization, requiring implementation of mitigation actions140%
AUDITED Based on the Group’s remuneration rules, the Board of Directors designs and structures remuneration arrangements to ensure 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 variable-compensation process. 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.’
The Group Risk Management organization consists of central functions at Group level and a decentralized risk management network at segment, regional, business unit and functional levels.
The Group manages its capital to maximize long term shareholder value while maintaining financial strength within its ‘AA’ target range and meeting regulatory, solvency and rating agency requirements. In particular, the Group endeavors to manage its capital so that the Group and all its regulated entities meet relevant regulatory capital adequacy requirements.
The Group’s capital management framework forms the basis for actively managing capital within Zurich. The Group uses a number of different capital models, taking into account economic, regulatory, and rating agency constraints. The Group’s capital and solvency position is monitored and regularly reported.
The Group’s executive management determines the capital management strategy and sets the principles, standards and policies to execute the strategy. Group Treasury and Capital Management executes the strategy.
The Group seeks to maintain a balance between higher returns for shareholders on equity held, and the security a sound capital position provides. Dividends, share buy-backs, and issuances and redemption of debt have a significant influence on capital levels. In 2014, the Group paid a dividend out of the capital contribution reserve, and replaced maturing senior debt and callable hybrid debt with new senior and hybrid debt.
The ability of the Group’s subsidiaries to pay dividends may be restricted or – while dividend payments as such may be legally permitted – may be indirectly influenced by minimum capital and solvency requirements imposed by insurance and other regulators in the countries in which the subsidiaries operate. Other limitations, such as foreign exchange control restrictions, exist in some countries.
The Group has active relationships with three global rating agencies: Standard & Poor’s, Moody’s and A.M. Best. The Insurance Financial Strength Rating (IFSR) of the Group’s main operating entity is an important element of Zurich’s competitive position. The Group’s credit ratings derived from the financial strength ratings also affect the cost of capital.
The Group maintained its strong rating level in 2014. As of December 31, 2014 the IFSR of Zurich Insurance Company Ltd (ZIC), the main operating entity of the Group, was ‘AA–’ by Standard and Poor’s, ‘Aa3’ by Moody’s and ‘A+ (superior)’ by A.M. Best. While Moody’s and AM Best have their rating outlooks as “stable,“ S&P revised its outlook for Zurich Insurance Group and all its core entities to “positive“ on October 1, 2014. The outlook revision reflects S&P’s growing confidence in the relative credit strength of ZIC compared with similarly rated peers. This follows S&P’s review of the Group’s non-life reserves and internal economic capital model.
Regulatory requirements in Switzerland Insurance entities operating in Switzerland are required to maintain minimum solvency margins according to the existing Solvency I legislation. Under the Swiss Solvency Test (SST), groups, conglomerates and reinsurers are required to use company-specific internal models to calculate risk-bearing and target capital. Internal models must be approved by the Swiss Financial Market Supervisory Authority (FINMA). The model approval process continues with FINMA, which approved the use of Zurich’s internal model for 2014 on a provisional basis, without prejudicing the final approval. Zurich has filed an SST ratio with FINMA in excess of the regulatory requirements, both as of January 1, 2014 and as of July 1, 2014 (subject to FINMA approval). For more details, see the ‘Swiss Solvency Test requirement (unaudited)’ section.
The Group’s Solvency I composition in USD millions, as of December 31 2014 2013
Eligible equity Total equity 36,830 34,734 Net of intangibles and other assets (7,722) (7,996) Free reserves for policyholder dividends 7,918 4,954
As of December 31, 2014 and 2013 respectively, the Group and its material, regulated subsidiaries complied with the applicable regulatory minimum capital requirements.
Development of the Group’s Swiss Solvency Test ratio (in %, as filed with FINMA)
Regulatory requirements in the European Economic Area In countries of the EEA, insurance entities are required to maintain minimum solvency margins according to the existing Solvency I legislation. Solvency I capital is calculated as a fixed percentage of premiums, claims, reserves and net amounts at risk. The same minimum capital requirements are applicable for insurance entities operating in Switzerland. In certain European countries, both EU and non-EU, further requirements have been imposed by regulators.
Zurich is fully engaged 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 Z-ECM, for Zurich Insurance plc (Ireland) while other subsidiaries will use the Solvency II standard formula. The Group is in the pre-application process to gain regulatory approval for the internal model from the Central Bank of Ireland.
Z-ECM capital required split by risk type (%, as of July 1 and January 1, 2014)
The following chart shows the Z-ECM capital required allocated to the segments as of July 1, 2014 and as of January 1, 2014. As of July 1, 2014, the largest proportion of Z-ECM capital required was allocated to General Insurance, which comprised 52 percent of the total, followed by Global Life with 33 percent of the total. Total allocated capital as of July 1, 2014 equaled USD 38 billion Z-ECM capital required plus USD 2 billion direct allocation to Farmers.
Total capital allocated, by segment (%, as of July 1 and January 1, 2014)
1 The credit spread sensitivity is applied to corporate debt, mortgages and Euro currency government debt (excluding Germany). The credit spread sensitivity does not take into account the buffering effect of policyholder participation.
In addition to the sensitivities shown in the preceeding section, the Group also evaluates certain stress scenarios on the Z-ECM ratio. Scenarios are defined as events that have a very small probability of occurring but that could, if realized, negatively affect the Group’s Z-ECM available financial resources. The chart below shows three groups of scenarios: market- and credit risk-specific, general insurance risk-specific and life insurance risk-specific. In the current market environment, two categories of threat scenarios have been identified: monetary policy errors of central banks (triggering market corrections) and a generic macro-economic crisis. The general insurance risk-specific scenarios present the three largest natural catastrophe events to which the Group is exposed. Lapse risk represents the Group’s largest life insurance risk-specific exposure.
The U.S. Federal Reserve (Fed) withdraws stimulus too early, which chokes off growth domestically and globally, and leads to a sharp correction in equity markets.
Impact of market, credit, and insurance scenarios on Z-ECM1 as of July 1, 2014 90% Risk Tolerance Level 126% Z-ECM ratio 120% AA Target Range
Life insurance risk 0.8 1.0 0.7 Premium and reserve risk 7.7 7.4 6.9 Natural catastrophe risk 5.1 4.8 5.4
• The Group diversifies its sources of revenues by geographies, lines of business, products, and customers. Therefore, Zurich is not exposed to concentrations of insurance risk beyond its risk appetite.
Total Z-ECM capital required: USD 36 billion (as per July 1, 2013)
The Group’s underwriting strategy aims 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 target. The Group’s major processes for underwriting governance – underwriting strategy, authorities, referrals and reviews – are implemented at Group and local levels.
Underwriting discipline is a fundamental part of managing insurance risk. The Group sets limits on underwriting capacity, and delegates authority to individuals based on their specific expertise. The Group sets appropriate pricing guidelines. These guidelines generally include a technical price set in line with common standards to allow a return on risk-based capital in line with the Group’s target. The ratio of actual premium to technical price is a key performance metric, which is monitored regularly. Technical reviews confirm whether underwriters perform within authorities and adhere to underwriting philosophies and policies. The Group has governance procedures to review and approve potential new products to evaluate whether the risks are well understood and justified by the potential rewards.
Actual losses on claims provisions may be higher or lower than anticipated. General insurance reserves are therefore regularly measured, reviewed and monitored. The total loss and loss adjustment expense reserves are based on work performed by qualified and experienced actuaries at local, regional and Group levels.
General Insurance – Direct written premiums and policy fees by line of business – current period in USD millions, for the year ended December 31, 2014 Motor Property Liability
General Insurance – Direct written premiums and policy fees by line of business – prior period in USD millions, for the year ended December 31, 2013 Motor Property Liability
Insurance risk sensitivity for the General Insurance business – current period in USD millions, for the year ended December 31, 2014
+1% in net loss ratio Net income before tax (63) (77) (122) (38)
+1% in net loss ratio Net income before tax (61) (76) (122) (38)
Modeling natural catastrophes While specific catastrophes are unpredictable, modeling helps to determine potential losses should catastrophes occur. The Group uses adjusted third-party models to manage its underwriting and accumulations to stay within intended exposure limits and to guide how much reinsurance Zurich buys.
To have a consistent approach and form a global perspective on accumulations, the Group models exposures in a center of excellence, which works with local businesses to help improve the overall quality of data. The Group models potential losses from property policies in hazard-prone areas with material exposure and from workers’ compensation policies covering earthquakes in California. Other non-property-related losses are estimated based on adjustments. Risk modeling mainly addresses climate-induced perils such as windstorms, river floods, tornadoes and hail, and geologically-induced perils such as earthquakes. The Group constantly seeks to improve its modeling, fill in gaps in models with additional assessments, and increase the granularity of data collection. It uses internal and external knowledge in modeling accumulations. One such source of external knowledge is the Natural Catastrophe Advisory Council, a group of scientists associated with research organizations such as the U.S. National Center for Atmospheric Research, the U. S. Geological Survey and the Intergovernmental Panel on Climate Change. Zurich further validates modeling results by comparing them with claims experience.
The Group reviews and aggregates worker injury and property exposures to identify areas of significant concentration and assesses other lines of business, such as liability and auto, although the potential exposure is not as significant. The data allows underwriters to evaluate how insuring a particular customer’s risk might affect Zurich’s overall exposure. In North America, Zurich uses a vendor-provided catastrophe model to evaluate potential exposures in every major U.S. city. The Group undertakes more detailed and frequent analyses for cities in which Zurich has greater exposure.
The Group’s analysis has shown that its exposures outside North America are lower, in large part due to governmentprovided pools; even so, the Group assesses the risk for countries with the next-greatest potential net exposure. The Group periodically monitors accumulation limits for these and other areas.
• Expense risk – expenses incurred in acquiring and administering policies are higher than expected. • Market risk – the risk associated with the Group’s balance sheet positions where the value or cash flow depends on financial markets, which is analyzed in the ‘market risk’ section.
The Group uses market-consistent embedded value reporting principles, which allow Zurich to increase understanding, and report on, the risk profile of its life products, and how these risks would change under different market conditions. Embedded value is the measure that markets use to value life businesses. For more information, see the ‘embedded value report.’
From a risk-management perspective, unit-linked products are designed to reduce much of the market and credit risk associated with the Group’s traditional business. Risks that are inherent in these products are largely passed on to the policyholder, although a portion of the Group’s management fees are linked to the value of funds under management, and hence are at risk if fund values decrease. To the extent that there are guarantees built into the product design, unit-linked products carry mortality/morbidity risk and market risk. Contracts may have minimum guaranteed death benefits where the sum at risk depends on the fair value of the underlying investments. For certain contracts these risks are mitigated by explicit mortality and morbidity charges.
Other life insurance liabilities include traditional life insurance products, such as protection and life annuity products. Protection products carry mortality, longevity and morbidity risk, as well as market and credit risk. Epidemics and lifestyle changes are among the most significant factors that could result in earlier or more claims than expected. Disability, defined in terms of the ability to perform an occupation, could be affected by economic conditions. To reduce pricing cross-subsidies, where permitted, premiums are adjusted for factors such as age, gender and smoker status. Policy terms and conditions and disclosure requirements in insurance applications are designed to mitigate the risk arising from non-standard and unpredictable risks that could result in severe financial loss.
Liabilities have been recorded for some life insurance contracts that contain guarantees for additional benefits and minimum guarantees; these are primarily in the subsidiary Zurich American Life Insurance Company (ZALICO), which in the past wrote variable annuity contracts that provide policyholders with certain guarantees related to minimum death and income benefits. After 2001, ZALICO stopped issuing new policies with such features. The Group has a dynamic hedging strategy to manage its economic exposure and reduce the volatility associated with its closed book of variable annuities products within its U.S. life business. New life products developed with financial guarantees are subject to review and approval by the Group-level product approval committee. The Group is also exposed to risks arising out of bank-owned life insurance contracts sold in the U.S. See heading ‘other contracts’ in note 7 of the consolidated financial statements for additional information.
Reserves, net of reinsurance, by region in USD millions, as of December 31 Unit-linked insurance contracts
Reinsurance for general insurance and life insurance The Group’s objective in purchasing reinsurance is to provide market-leading capacity for customers while protecting the balance sheet and achieving capital efficiency. The Group follows a centralized reinsurance treaty purchasing strategy for both General Insurance and Global Life, and bundles programs, where appropriate, to benefit from diversification and economies of scale. For General Insurance, these efforts have led to a decreasing expenditure for treaty reinsurance over the last few years. Reinsurance cessions to captives and co-reinsurer panels on individual Global Corporate accounts have grown in line with growth in the General Insurance captive and Global Corporate business.
The Group uses reinsurance to manage risk related to unusually severe or frequent events, through the main in-force reinsurance covers. The chart below shows cover for natural catastrophe events as of December 31, 2014.
All natural catastrophe losses exceeding USD 35 million are aggregated. Variable retention up to a maximum of USD 1,150 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.
Losses retained for individual events Reinsurance secured under regional catastrophe treaties Reinsurance secured under Global Catastrophe Treaty Reinsurance secured under Combined Global Catastrophe Occurrence / Aggregate Treaty* % of co-participation
All programs can be reinstated once, except the North America Earthquakes program and the Combined Global Catastrophe Occurence / Aggregate Treaty.
Market risk is the risk associated with the Group’s balance sheet positions where the value or cash flow depends on financial markets. Risk factors include: • Equity market prices • Property market prices • Interest rates and credit spreads • Currency exchange rates
• In 2014, the Group gradually increased investment risk, in particular with equities and corporate bonds.
AUDITED The Group uses derivative financial instruments to limit market risks arising from changes in currency exchange rates, interest rates and equity prices, from credit quality of assets and liabilities and commitments to third parties. The Group enters into derivative financial instruments mostly for economic hedging purposes and, in limited circumstances, the instruments may also meet the definition of an effective hedge for accounting purposes. The latter include cross- currency interest rate swaps in fair value hedges and cross-currency swaps in cash flow hedges of Zurich’s borrowings, in order to mitigate exposure to foreign currency and interest rate risk. In compliance with Swiss insurance regulation, the Group’s policy prohibits speculative trading in derivatives, meaning a pattern of “in and out” activity without reference to an underlying position. Derivatives are complex financial transactions; therefore, the Group addresses the risks arising from derivatives through a stringent policy that requires approval of a derivative program before transactions are initiated, and by subsequent regular monitoring by Group Risk Management of open positions and annual reviews of derivative programs.
For more information on the Group’s investment result, including impairments and the treatment of selected financial instruments, see note 6 of the consolidated financial statements. For more information on derivative financial instruments and hedge accounting, see note 7 of the consolidated financial statements.
The Group manages its risks from equity securities and property as part of the overall investment risk management process, and applies limits as expressed in policies and guidelines. Specifically, Zurich limits holdings in equities, real estate and alternative investments.
Zurich has limits on holdings in real assets and limits on deviations of asset interest rate sensitivities from liability interest rate sensitivities. The Group also manages credit spread risk, which describes the sensitivity of the values of assets and liabilities due to changes in the level or the volatility of credit spreads over the risk-free interest rate yield curves.
Returns on unit-linked contracts, whether classified as insurance or investment contracts, are at the risk of the policyholder; however, the Group is exposed to fluctuations in interest rates in so far as they affect the amount of fee income earned if the fee income level is dependent on the valuation of the asset base.
During 2014, the Group gradually increased investment risk, in particular with equities and corporate bonds.
Basis of presentation – General Insurance and rest of the business The basis of the presentation for tables 5, 6 and 7 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 worst-case scenario.
Basis of presentation – Global Life Tables 5, 6 and 7 show the estimated economic sensitivity of the embedded value of the Global Life business to financial market movements. Actions that would be taken by management or policyholders are considered. For contracts with financial options and guarantees, such as some participating business, movements in financial markets can change the nature and value of these benefits. The dynamics of these liabilities are captured so that this exposure is quantified, monitored, managed and where appropriate, mitigated.
In USD millions, as of December 31 2014 2013 100 basis points increase in the interest rate yield curves General Insurance business Net impact after tax (220) (509) Global Life business Total impact on Embedded Value (65) (425) Rest of the business Net impact after tax (47) (172) 100 basis points decrease in the interest rate yield curves General Insurance business Net impact after tax (17) 434 Global Life business Total impact on Embedded Value (222) 437 Rest of the business Net impact after tax 143 234
In USD millions, as of December 31 2014 2013 10% decline in stock markets General Insurance business Net impact after tax (541) (394) Global Life business Total impact on Embedded Value (301) (279) Rest of the business Net impact after tax (61) (85)
In USD millions, as of December 31 2014 2013 100 basis points increase in credit spreads General Insurance business Net impact after tax (1,383) (1,310) Global Life business Total impact on Embedded Value (884) (901) Rest of the business Net impact after tax (421) (285)
Limitations of the analysis for General Insurance and rest of the business: – 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 spread risk sensitivities.
– 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 ‘impact of market, credit, and insurance scenarios on Z-ECM (unaudited)’.
Currency risk Currency risk is the risk of loss resulting from changes in exchange rates. The Group operates internationally and therefore is exposed to the financial impact arising from changes in the exchange rates of various currencies. The Group’s presentation currency is the U.S. dollar, but its assets, liabilities, income and expenses are denominated in many currencies, with significant amounts in the euro, Swiss franc and British pound, as well as the U.S. dollar.
On local balance sheets a currency mismatch may cause a balance sheet’s net asset value to fluctuate, through either 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 to make use of the netting effect across the Group. Zurich hedges these residual local mismatches within an established limit through a central balance sheet. The monetary currency risk exposure on local balance sheets is considered immaterial.
Differences arise when functional currencies are translated into the Group’s presentation currency, the U.S. dollar. The Group applies net investment hedge accounting to protect against the impact that changes in certain exchange rates might have on selected net investments. The Group takes no speculative positions on foreign currency market movements. Using constant exchange rates from one year to the next, the Group’s 2014 net income attributable to shareholders would have been higher by USD 22 million (applying 2013 exchange rates to the 2014 result). In 2013, the result would have been lower by USD 6 million (applying 2012 exchange rates to the 2013 results).
Table 8 shows the total IFRS equity’s sensitivity to changes in exchange rates for the main functional currencies to which the Group is exposed. Positive values represent an increase in the value of the Group’s total equity.
Credit risk concentration The Group limits and regularly monitors credit exposures to individual and related counterparties. The Group’s exposure to counterparties’ parent companies and subsidiaries is aggregated to include reinsurance assets, investments, certain insurance products and derivatives. There is no unapproved material exposure in excess of the Group’s limits for counterparty aggregation as of December 31, 2014 or December 31, 2013.
Investment credit risk 3.6 3.4 3.7 Reinsurance credit risk 1.1 1.1 1.4
Credit risk related to cash and cash equivalents To reduce concentration, settlement and operational risks, the Group limits the amount of cash that can be deposited with a single counterparty. The Group also maintains an authorized list of acceptable cash counterparties.
Debt securities by rating of issuer as of December 31 2014 2013
Table 9 shows the credit risk exposure on debt securities, by issuer credit rating. As of December 31, 2014, 97.5 percent of the Group’s debt securities is investment grade and 19.7 percent is rated “AAA.” The downgrades of several Eurozone governments and related entities caused breaches of internal rating category limits, which were managed as circumstances allowed. As of December 31, 2013, 97.9 percent of debt securities was investment grade and 23.7 percent was rated “AAA.” The Group’s investment policy prohibits non-investment-grade investments, unless specifically authorized. Where the Group identifies investments expected to be downgraded, it implements appropriate actions.
Chemicals & Pharmaceuticals Government, Supranationals & similar Financial Institutions & similar
As of December 31, 2014, the largest concentration in the Group’s debt securities portfolio was in governments, supranationals and similar at 46.4 percent. In all other categories, a total of USD 35.9 billion or 44 percent is secured. As of December 31, 2013, 48.4 percent of the Group’s debt portfolio was invested in governments, supranationals and similar. In all other categories, a total of USD 37.9 billion or 47 percent was secured.
The Group’s debt exposure to Eurozone governments and supranationals & similar in USD millions, as of December 31 2014 2013
In addition to debt exposure, the Group had sovereign loan exposure of USD 3.6 billion and USD 4.2 billion to Germany as of December 31, 2014 and 2013, respectively.
The second-largest concentration in the Group’s debt securities portfolio is in financial institutions (including banks), at 21.0 percent, of which 40.8 percent is secured. In response to the European government-debt crisis, the Group identified and selectively reduced unsecured and subordinated credit exposure issued by banks with weak credit profiles, including banks supported by weaker governments.
Rating 1 The value of the collateral received amounts to USD 5.7 billion and USD 7.6 billion as of December 31, 2014 and 2013, respectively.
Credit risk related to other loans The credit risk arising from other loans is assessed and monitored together with the fixed income securities portfolio. 53.7 percent of the reported loans are to governments, supranationals and similar, of which 94.4 percent are to the German Central Government or the German Federal States. Table 12 shows the composition of the loan portfolio by rating class. As of December 31, 2014, a total of USD 6.0 billion or 55.5 percent of loans are secured. As of December 31, 2013, a total of USD 7.9 billion or 66.7 percent of loans were secured.
Other loans by rating of issuer as of December 31 2014 2013
Receivables from ceded reinsurance are part of reinsurance assets and are managed accordingly. See note 16 of the consolidated financial statements for additional information on receivables.
Analysis of financial assets Tables 13.a to 13.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.
Analysis of financial assets – current period in USD millions, as of December 31, 2014
Neither past due nor impaired financial assets 153,354 7,150 10,832 13,482 184,818 Past due but not impaired financial assets. Past due by: Past due but not impaired financial assets – 208 – 2,038 2,247
Analysis of financial assets – prior period in USD millions, as of December 31, 2013
Tables 14.a and 14.b show how the allowances for impairments of financial assets in tables 13.a and 13.b developed during the periods ended December 31, 2014 and 2013, respectively.
Increase/(Decrease) in allowance for impairments 22 – 23 Amounts written-off (109) – (26)
1 Due to the sale of the Group’s General Insurance retail business in Russia (see note 5 of the consolidated financial statements).
Zurich has a comprehensive framework with a common approach to identify, assess, quantify, mitigate, monitor and report operational risk within the Group.
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. This approach allows information to be compared 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.
• Documents and evaluates loss events exceeding a threshold determined by the Zurich Risk Policy. Remedial action is taken to avoid a recurrence of such operational loss events.
• The Group uses a scenario-based approach to quantify the capital required for operational risk.
• In 2014, the Group focused on significant financial reporting controls, and operational key controls for underwriting and claims.
Total Z-ECM capital required: USD 35 billion (as per July 1, 2014)
Zurich makes sure that cyber risks and threats to data security are mitigated and responded to. Data held by Zurich’s business partners is protected through controls that are built into “cloud governance” procedures designed to secure Zurich’s data in accordance with regulatory requirements and the Group’s information security policies.
M&A – Due Diligence and Integration: This risk cluster relates to poor execution of both 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.
The Group encourages risk awareness and understanding of controls with communication and training. Primary risk management and internal control systems are established at Group level and implemented Group-wide.
In 2014, the Group enhanced the internal control environment focusing on significant financial reporting controls as well as operational key controls in the areas of underwriting and claims. An internal control certification process is conducted regularly by local business units throughout the Group.
Significant financial reporting controls are independently assessed for their design and operating effectiveness. Significant control issues or issues affecting more than one business unit may be categorized as having Group-level significance. The Board’s Risk and Audit Committees monitor resolution of such issues.
In a disclosure meeting led by the Group Controller, the content, accuracy and integrity of the disclosures are considered and the effectiveness of the internal controls over financial reporting is assessed. The conclusions are reported to the Group Executive Committee and the Board Audit Committee, which may provide further challenge. The Board reviews and approves results announcements and the annual report. This ensures that both the Board and management have sufficient opportunity to review and challenge the Group’s financial statements and other significant disclosures before they are made public.
The Board Risk Committee has reviewed the effectiveness of the Group’s risk management system, including the Group’s risk tolerance and the enterprise-wide risk governance framework, and the Board Audit Committee has reviewed the effectiveness of the system of control over financial reporting for the calendar year 2014 and have reported to the Board accordingly. Issues identified have been communicated to the Board and either have been or are being addressed by the Group.
Similar guidelines apply at the Group level, and detailed liquidity forecasts are regularly conducted, based on local businesses’ input and the Group’s forecasts. As part of its liquidity management, the Group maintains sufficient cash and cash equivalents and high-quality, liquid investment portfolios to meet outflows under expected and stressed conditions. The Group also maintains internal liquidity sources that cover the Group’s potential liquidity needs, including those that might arise in times of stress. The Group takes into account the amount, availability and speed at which these sources can be accessed. The Group has access to diverse funding sources to cover contingencies, including asset sales, external debt issuance and making use of committed borrowing facilities or letters of credit. The Group maintains a range of maturities for external debt securities. A potential source of liquidity risk is actions that could occur as a result of a downgrade of the Group’s credit rating. This could affect the Group’s commitments and guarantees, potentially increasing liquidity needs. This risk, and mitigating actions that might be employed, are assessed on an ongoing basis within the Group’s liquidity framework.
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 2014, the Group was within its limits for asset liquidity. The fair value hierarchy tables in note 24 of the consolidated financial statements segregate financial assets into three levels, reflecting the basis for how fair value was determined. These tables indicate the high degree of liquidity of the Group’s investments.
Expected maturity profile for reserves for insurance contracts, net of reinsurance – current period in USD millions, as of December 31, 2014 Reserves for losses and loss adjustment expenses
Expected maturity profile for reserves for insurance contracts, net of reinsurance – prior period in USD millions, as of December 31, 2013 Reserves for losses and loss adjustment expenses
Tables 16.a and 16.b provide an analysis of investment contract liabilities according to maturity, based on expected cash flows as of December 31, 2014 and 2013. The undiscounted contractual cash flows for investment contract liabilities are USD 71.1 billion and USD 67.4 billion as of December 31, 2014 and December 31, 2013, respectively.
Expected maturity profile for liabilities for investment contracts – current period in USD millions, as of December 31, 2014
Expected maturity profile for liabilities for investment contracts – prior period in USD millions, as of December 31, 2013
See note 19 of the consolidated financial statements for information on the maturities of total debt issued. For more information on the Group’s other financial liabilities, see note 17 of the consolidated financial statements. See note 6 of the consolidated financial statements for information on the maturity of debt securities for total investments.
A strategy is a long term plan of action designed to allow the Group to achieve its goals and aspirations. Strategic risks can arise from: • Inadequate assessment of strategic plans • Ineffective implementation of strategic plans • Unexpected changes to assumptions underlying strategic plans
The Group works to reduce unintended risks of strategic business decisions through its risk assessment processes and tools, including the Total Risk Profiling™ process. The Group Executive Committee regularly assesses key strategic risk scenarios for the Group as a whole, including scenarios for emerging risks and their strategic implications.
Net investment income on Group investments 6,206 6,240 Net capital gains/(losses) and impairments on Group investments 3,002 1,157
attributable to policyholders 18 (106) (285) attributable to shareholders 18 (1,564) (1,415)
Comprehensive income for the period 4,028 (2,794) (133) (986) (3,912) 15 (367) (352) (4,265) (237) 122 (115) Details of movements during the period
Change (before reclassification, tax and foreign currency translation effects and after allocation to policyholders) (1,684) (87) (1,065) (2,836) 24 (205) (181) (3,017) Reclassification to income statement (before tax and foreign currency translation effects and after allocation to policyholders) (1,692) (86) 79 (1,699) – – – (1,699) Reclassification to retained earnings – – – – (6) – (6) (6) Deferred income tax (before foreign currency translation effects) 596 40 – 635 (4) (76) (80) 555 Foreign currency translation effects (13) 1 – (12) – (86) (86) (98)
Comprehensive income for the period 3,895 2,338 200 (2,251) 288 24 (407) (383) (95) 3,799 43 3,842 Details of movements during the period
Change (before reclassification, tax and foreign currency translation effects and after allocation to policyholders) 5,297 132 (2,507) 2,922 32 (855) (823) 2,099 Reclassification to income statement (before tax and foreign currency translation effects and after allocation to policyholders) (1,950) 163 256 (1,531) – – – (1,531) Deferred income tax (before foreign currency translation effects) (704) (65) – (769) (8) 190 183 (586) Foreign currency translation effects (305) (30) – (335) – 257 257 (78)
Assets in USD millions, as of December 31 Notes 2014 2013
Liabilities Reserve for premium refunds 606 571 Liabilities for investment contracts 9 70,813 67,113 Deposits received under ceded reinsurance contracts 1,022 1,245 Deferred front-end fees 5,539 5,791 Reserves for insurance contracts 8 253,719 265,440 Obligations to repurchase securities 1,451 1,685 Accrued liabilities 3,065 3,023
Deferred tax liabilities 18 5,020 5,110 Liabilities held for sale 1 – 49
Underwriting activities: 14,532 8,144 Reserves for insurance contracts, gross 4,759 (727) Reinsurers’ share of reserves for insurance contracts 691 1,787 Liabilities for investment contracts 9,746 7,984 Deferred policy acquisition costs (1,014) (578) Deferred origination costs 55 62 Deposits made under assumed reinsurance contracts 429 (58) Deposits received under ceded reinsurance contracts (134) (327)
Net changes in sale and repurchase agreements (139) 117 Movements in receivables and payables 913 (1,260) Net changes in other operational assets and liabilities 425 (252) Deferred income tax, net 178 228 Net cash provided by/(used in) operating activities 5,860 1,992
Other interest income received 6,261 6,437 Dividend income received 1,968 1,724 Other interest expense paid (1,124) (1,180) Income taxes paid (1,379) (1,186)
Cash and cash equivalents in USD millions, as of December 31 2014 2013
Change in ownership interests with no loss of control – – – – – – (1) (1) – (1) Reclassification from revaluation reserves – – – – – – 6 6 – 6 Total comprehensive income for the period, net of tax – – (2,794) (133) (986) 15 3,661 (237) 122 (115)
Change in ownership interests with no loss of control – – – – – – (38) (38) – (38) Total comprehensive income for the period, net of tax – – 2,338 200 (2,251) 24 3,488 3,799 43 3,842
4 The number of treasury shares deducted from equity as of December 31, 2014 amounted to 1,292,220 (December 31, 2013: 1,320,652, December 31, 2012: 1,348,395).
Issuance of share capital 1 – 152 – – – – – 152 – 152
Net changes in capitalization of non-controlling interests – – – – – – – – (59) (59)
On February 11, 2015 the Board of Directors of Zurich Insurance Group Ltd authorized these Consolidated financial statements for issue. These financial statements will be submitted for approval to the Annual General Meeting of Shareholders to be held on April 1, 2015.
Disclosures under IFRS 4 “Insurance Contracts” and IFRS 7 “Financial Instruments: Disclosures” relating to the nature and extent of risks, and capital disclosures under IAS 1 “Presentation of Financial Statements” have been included in the audited sections of the Risk review on pages 115 to 152, and they form an integral part of the Consolidated financial statements.
The Group transferred certain unit-linked liabilities from liabilities for investment contracts to reserves for unit-linked liabilities for an amount of USD 425 million and from deferred origination costs to deferred policy acquisition costs for an amount of USD 19 million. The reclassification was prospectively recognized in 2014 as the reclassification has no impact on the Group’s consolidated income statement. The reduction in liabilities for investment contracts is set out in note 9 and the transfer from deferred origination costs to deferred policy acquisition costs is set out in note 12.
Standards, amendments and interpretations effective or early adopted as of January 1, 2014 and relevant for the Group’s operations Table 2.1 shows new accounting standards or amendments to and interpretations of standards relevant to the Group that have been implemented for the financial year beginning January 1, 2014, with no material impact on the Group’s financial position or performance.
Amended Standards IAS 32 Offsetting Financial Assets and Financial Liabilities January 1, 2014
IAS 39 Novation of Derivatives and Continuation of Hedge Accounting January 1, 2014
New Standards IFRS 9 Financial Instruments 1 January 1, 2018 IFRS 15 Revenue from Contracts with Customers January 1, 2017
Acquisition transactions with non-controlling interests are recorded within equity if there is no change in control.
The Consolidated financial statements are prepared as of December 31 based on individual company financial statements at the same date. In some cases information is included with a time lag of up to three months. The consequent effect on the Group’s Consolidated financial statements is not material.
b) Foreign currency translation and transactions Foreign currency translation Due to the Group’s economic exposure to the U.S. dollar (USD), the presentation currency of the Group’s Consolidated financial statements is USD. Many Group companies use a different functional currency, being that of the respective primary economic environment in which these companies operate. Assets and liabilities are translated into the presentation currency at end-of-period exchange rates, while income statements and statements of cash flows are translated at average exchange rates for the period. The resulting foreign currency translation differences are recorded directly in other comprehensive income (OCI) as cumulative foreign currency translation adjustment.
Premiums General insurance Premiums from the sale of short-duration general insurance products are recorded when written and are normally recognized as revenue in relation to the insurance coverage provided. The unearned premium reserve represents the portion of the premiums written relating to the unexpired coverage period.
Unrealized gains or losses arising on the revaluation of available-for-sale assets are recorded directly in OCI in accordance with the Group’s accounting policy for such assets. Where these assets are related to life insurance, corresponding adjustments to the reserves for life benefits and related assets are also recognized directly in OCI.
Life insurance DAC for traditional participating life insurance contracts is amortized based on estimated gross margins expected to be realized over the life of the contract. Estimated gross margins are updated for actual and anticipated future experience and discounted using the latest revised interest rate for the remaining benefit period. Resultant deviations are reflected in income.
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.
e) Investments excluding derivative financial instruments Investments include financial assets (excluding derivative financial instruments), investments in associates and joint ventures and investment property.
Categories and measurement of investments (excluding derivative financial instruments) Financial assets are classified as available-for-sale, financial assets at fair value through profit or loss, held-to-maturity investments, or loans and receivables.
The Group recognizes regular purchases and sales of financial assets on the trade date, which is the date on which the Group commits to purchase or sell the asset. Financial assets are recognized initially at fair value plus, in the case of a financial asset not measured at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset. Subsequently, financial assets are measured in accordance with the classification category.
Held-to-maturity investments Held-to-maturity investments are financial assets with fixed or determinable payments and fixed maturities other than those that meet the definition of loans and receivables, and for which the Group has the positive intention and ability to hold to maturity. Held-to-maturity investments are carried at amortized cost using the effective interest rate method, less any charges for impairment.
Investments in associates where the Group has the ability to exercise significant influence but not control, as well as joint ventures where there is joint control, are accounted for using the equity method. Significant influence is presumed to exist when the Group owns, directly or indirectly, between 20 percent and 50 percent of the voting rights. Under the equity method of accounting, these investments are initially recognized at cost, including attributable goodwill, and adjusted thereafter for post-acquisition changes in the Group’s share of the net assets of the investment and impairment charges.
Held-to-maturity investments and loans and receivables Generally, significant financial assets are individually assessed to determine whether objective evidence of impairment exists. If no objective evidence of impairment exists, the asset is included in a group of financial assets with similar credit risk characteristics that are collectively assessed for impairment.
Cash flow hedges The effective portion of the gain or loss on the remeasurement of the cash flow hedging instrument is recognized in OCI. The ineffective portion is recognized immediately in income. The accumulated gains and losses on the hedged instrument in OCI are reclassified to income in the same period in which gains or losses on the hedged item are recognized in income.
Securities lending, repurchase and reverse repurchase transactions Certain entities within the Group participate in securities lending or repurchase arrangements whereby specific securities are transferred to other institutions, primarily banks and brokerage firms, for short periods of time. Under the terms of these agreements, the Group retains substantially all the risks and rewards of ownership of the transferred securities, and also retains contractual rights to the cash flows therefrom. These securities are therefore not derecognized from the Group’s balance sheet. Cash received as collateral is recorded as an asset, and a corresponding liability is established. Interest expense is charged to income using the effective interest rate method over the life of the agreement.
i) Property and equipment Buildings held for own use and equipment are carried at cost less accumulated depreciation and any accumulated impairment loss. These assets are depreciated usually on a straight-line basis to income over the following estimated useful lives: • Buildings 25 to 50 years; • Furniture and fixtures five to ten years; and • Computer equipment three to six years.
Goodwill on the acquisition of subsidiaries is capitalized as a separate line and tested for impairment annually, or more frequently if impairment indicators are observed. For the purpose of impairment testing, goodwill is allocated to cash generating units (CGUs) based on the level at which management monitors operations and makes decisions relating to the continuation or disposal of assets and operations. If goodwill has been allocated to a CGU and an operation within that unit is disposed of, the carrying amount of the operation includes attributable goodwill when determining the gain or loss on disposal.
k) Intangible assets Intangible assets with finite lives are carried at cost less accumulated amortization and impairments. Such assets are generally amortized using the straight-line method over their useful lives and reviewed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Restructuring provisions for employee termination costs are recognized when the Group has a present obligation as a result of a detailed formal plan, which has been announced to those affected, and the amount can be reasonably estimated.
Fin an cial info rm atio n m) Treasury shares Zurich Insurance Group Ltd shares held by the Group are classified as treasury shares and are deducted from shareholders’ equity, net of transaction costs and tax. The nominal value of treasury shares is deducted from share capital. The difference between the nominal value and the amount paid to acquire the treasury shares, is allocated between additional paid-in capital and retained earnings. No gain or loss is recognized in income on purchase, sale, issue or cancellation of treasury shares.
n) Other revenue recognition Farmers management fees FGI provides certain non-claims administrative and management services to the Farmers Exchanges, including 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 management services are primarily determined as a percentage of gross premiums earned by the Farmers Exchanges.
For Group investments, interest income is recognized using the effective interest method. Dividend income is recognized when the right to receive payment is established, which is usually the ex-dividend date. Rental income from investment property is recognized on a straight-line basis over the lease term.
Subsequently, depending on the underlying performance metrics, the Group revises its estimates of the number of shares that are expected to be issued and recognizes the impact of the revision, if any, in income with a corresponding adjustment to additional paid-in capital. However, no subsequent adjustment to additional paid-in capital is made after the vesting date.
Other post-employment benefits Other post-employment benefits, such as medical care and life insurance, are also provided for certain employees and are primarily funded internally. Similar to retirement benefits, the cost of such benefits is accrued over the service period of the employees based on the actuarially determined cost for the period.
Fin an cial info rm atio n 4. Critical accounting judgments and estimates
Since the Group does not establish reserves for catastrophes in advance of the occurrence of such events, these events may cause volatility in the levels of its incurred losses and reserves, subject to the effects of reinsurance recoveries. This volatility may also be contingent upon political and legal developments after the occurrence of the event.