Employee participation During 2017 and 2016, 732,445 shares and 202,442 shares, respectively, were issued to employees from contingent share capital. At the Annual General Meeting of March 29, 2017, the shareholders approved to increase the contingent share capital that can be issued to employees of the Company and group companies to CHF 500,000 by issuing up to 5,000,000 fully paid registered shares with a nominal value of CHF 0.10 each. The remaining contingent share capital, which can be issued to employees amounted to CHF 495,541 and CHF 68,785 or 4,955,408 and 687,853 fully paid registered shares as of December 31, 2017 and 2016, respectively, with a nominal value of CHF 0.10 each. Subscription rights of the shareholders, as well as advance subscription rights, are excluded. The issuance of new shares or respective option rights to employees is subject to one or more regulations to be issued by the Board and takes into account performance, functions, levels of responsibility and criteria of profitability. New shares or option rights may be issued to employees at a price lower than that quoted on the stock exchange.
Earnings per share for the years ended December 31 Net income attributable to common shareholders
Basic earnings per share 3,211 149,285,218 21.51 21.18 Effect of potentially dilutive shares related to share-based compensation plans 1,012,384 (0.14) (0.14) Diluted earnings per share 3,211 150,297,601 21.36 21.04 1 The translation from USD to CHF is shown for information purposes only and has been calculated at the Group’s average exchange rates for the years ended December 31, 2017 and 2016.
g) Equity component related to contracts with DPF Certain investment and insurance contracts sold by the Group contain benefit features for which the amount and timing of declaration and payment are at the discretion of the Group. Where that discretion has not been exercised, the total amount of undeclared funds surplus is included in equity. Mandated allocations related to unrealized results and earnings are included in policyholder liabilities and, upon declaration, discretionary bonuses are allocated to policyholders. The balances of unallocated gains and retained earnings after charging discretionary bonuses to policyholder liabilities amounted to USD 3.7 billion and USD 3.2 billion as of December 31, 2017 and 2016, respectively.
The overall investment policy and strategy for the Group’s defined benefit pension plans is to achieve an investment return which, together with contributions, targets having sufficient assets to pay pension benefits as they fall due while also mitigating the various risks in the plans. The actual asset allocation is determined by reference to current and expected economic and market conditions and in consideration of specific asset class risk in the risk profile. The Group has a governance framework to ensure the trust/foundation board or committee considers how the asset investment strategy correlates with the maturity profile of the plan liabilities and the potential impact on the funding status of the plans, including short-term liquidity requirements. The investment strategies for each pension plan are independently determined by the governance body in each country, with oversight by the Group Pensions Committee. The pension assets are invested in diversified portfolios across geographical regions and asset classes to ensure diversified returns, also taking into account local pension laws. The investment strategies aim to mitigate asset-liability mismatches in the long run.
Swiss pension plan The plan provides benefits that exceed the minimum benefit requirements under Swiss pension law. It provides a lifetime pension to members at the normal retirement age of 65 (age 62 for Executive Staff). Participants can draw retirement benefits early from age 60 (age 58 for Executive Staff). Alternatively, the benefit can be taken as a lump sum payment at retirement. Contributions to the plan are paid by the employees and the employer, both for retirement savings and to finance risk benefits paid out in the event of death and disability. The accumulated balance on the pension account is based on the employee and employer pension contributions and interest accrued. The interest rate credited is defined annually by the plan’s Board of Trustees which is responsible for the governance of the plans. The amount of pension payable on retirement is a result of the conversion rate applied on the accumulated balance of the individual participant’s pension account at the retirement date. As of December 31, 2017, the technical interest rate was reduced from 2.75 percent to 1.75 percent and the conversion rate is being phased down over a six-year period to align more closely with the revised technical interest rate and increased life expectancy. At the same time, it was agreed to reduce the impact on existing members’ retirement benefits by the employer making additional contributions to members’ pension accounts to ensure that benefits at normal retirement age will be at least equal to 98.5 percent of their previous pensions expectations under the previous conversion rates. The impact of both of these measures resulted in a past service credit of USD 35 million which has been reflected as a reduction in expenses in 2017. These changes, along with the adjustment of key financial assumptions and a positive asset return resulted in the plan to be in a net funded status as of December 31, 2017. Although the Swiss plan operates like a defined contribution plan under local regulations, it is accounted for as a defined benefit pension plan under IAS 19 ‘Employee Benefits’ because of the need to accrue interest on the pension accounts and the payment of a lifetime pension at a fixed conversion rate under the plan rules.
Actuarial valuations are completed regularly and if the plan becomes underfunded under local regulations, options for dealing with this include the Group paying additional contributions into the plan and/or reducing future benefits. At present, the plan is sufficiently funded, meaning that no additional contributions into the plans are expected to be required in the next year. The investment strategy of the Swiss plan is constrained by Swiss pension law including regulations related to diversification of plan assets. Under IAS 19, volatility arises in the Swiss pension plan net asset because the fair value of the plan assets is not directly correlated to movements in the value of the plan’s defined benefit obligation in the short-term.
The ongoing funding of the plan is closely monitored by the Trustee Board and a dedicated funding committee is made up of representatives from the Trustee Board and the Group. The plan rules and UK pension legislation set out maximum levels of inflationary increases applied to plan benefits. The plan assets are invested in diversified classes of assets. In 2017, the Trustees replaced the previous interest rate swap contract (which provided partial protection against volatility in interest rates) with a specialist liability-driven investment mandate which will eventually increase hedging ratios from 60 percent to 80 percent for interest rates and from 30 percent to 60 percent for inflation.
U.S. pension plans There are two major pension plans in the U.S., the Zurich North America (ZNA) plan and the Farmers Group, Inc. (FGI) pension plan. These are both cash balance pension plans funded entirely by the participating employers. The ZNA plan is entirely cash balance and the FGI pension plan provides benefits on a cash balance pension formula for benefits accruing after January 1, 2009, except with respect to certain grandfathered participants. A final average pay defined benefit formula applies for the grandfathered participants. For both cash balance plans, an amount is credited to the cash balance plan each quarter, determined by an employee’s age, service and their level of earnings up to and above the social security taxable wage base. The minimum annual interest earned on the account balance is 5 percent. The retirement account is available from age 65, or age 55 with five years of service. The benefit can be taken as a monthly annuity or as a lump sum. Both the ZNA plan and the FGI pension plan have fiduciaries as required under local pension laws. The fiduciaries are responsible for the governance of the plans. Actuarial valuations are completed regularly and the Group has historically elected to make contributions to the plans to maintain a funding ratio of at least 90 percent as valued under local pension regulations. The annual employer contributions are equal to the present value of benefits accrued each year, plus a rolling amortization of any prior underfunding. The FGI plan will be frozen with effect from December 31, 2018 following a decision in late 2016. The impact of this is reflected in 2017 and 2016. Farmers Group employees will earn only defined contribution retirement benefits starting January 1, 2019.
The ZNA cash balance pension plan has been amended effective December 31, 2018 following a decision and announcements in November 2017 so that employees will no longer earn pay credits. However, ZNA employees will continue to earn interest credits on their existing account balance. The impact resulted in a past service credit of USD 81 million in 2017. In conjunction with the change in the pension plan, ZNA employees will receive an additional company contribution within their defined contribution plan.
Net post-employment benefit (expense)/income (584) 349 – (235) Remeasurement effects included in other comprehensive income: Return on plan assets excluding interest income – 582 – 582 Experience gains/(losses) (65) – – (65) Actuarial gains/(losses) arising from changes in demographic assumptions 517 – – 517 Actuarial gains/(losses) arising from changes in financial assumptions (41) – – (41) Change in asset ceiling – – (86) (86)
Remeasurement effects included in other comprehensive income (3,332) 1,712 7 (1,613) Employer contributions – 404 – 404 Employer contributions paid to meet benefits directly 33 – – 33 Plan participants’ contributions (54) 54 – – Payments from the plan (incl. settlements) 769 (769) – – Foreign currency translation effects 2,060 (1,672) – 388
Tables 20.3a and 20.3b provide a breakdown of the key information included in tables 20.1a and 20.1b for the main countries for the years ended December 31, 2017 and 2016 respectively.
1 Following plan amendments in FGI a one-off curtailment gain of USD 96 million has been reflected as a reduction in expenses.
States Germany 1 In the UK part of the liability is linked to the inflation measure of the Retail Price Index (RPI), which is assumed to be 1.0 percent higher than the Consumer Price Index (CPI) as of both December 31, 2017 and 2016.
Tables 20.5a and 20.5b set out the life expectancies used in the valuation of the Group’s major plans. The mortality assumptions in each country have been based on mortality tables in accordance with typical practice in that country.
United Kingdom PNXA00 with CMI_2015 projection with plan specific adjustments 22.92 24.22 23.69 25.19
RP 2014 with MP-2017 Generational projection and white collar adjustment 22.22 23.76 23.71 25.24 RP 2014 with plan specific adjustments 21.20 22.17 23.22 24.12
Country Mortality table for major plans Switzerland BVG 2015 Generational 22.38 24.26 24.43 26.29 United Kingdom PNXA00 with CMI_2015 projection 22.82 24.12 24.82 26.32
Maturity profile of future benefit payments for major plans as of December 31 2017 2016
Defined benefit obligation 1 in USD millions, as of December 31 2017 2016
Discount rate +50 bps 1,927 1,897 Discount rate –50 bps (2,217) (2,190) Salary increase rate +50 bps (85) (117) Salary decrease rate –50 bps 89 109 Price inflation increase rate +50 bps (1,036) (1,167) Price inflation decrease rate –50 bps 920 1,034 Cash balance interest credit rate +50 bps (128) (131) Cash balance interest credit rate –50 bps 78 86 Mortality 10% increase in life expectancy (2,020) (1,881) Mortality 10% decrease in life expectancy 1,890 1,815 1 A negative number indicates an increase and a positive number indicates a decrease in the defined benefit obligation.
b) Defined contribution pension plans Certain of the Group’s companies sponsor defined contribution pension plans. Eligibility for participation in such plans is either immediate on commencement of employment or based on completion of a specified period of continuous service. The plans provide for voluntary contributions by employees and contributions by the employer which typically range from 2 percent to 12 percent of annual pensionable salary, depending on a number of factors. The Group’s contributions under these plans amounted to USD 139 million and USD 190 million for the years ended December 31, 2017 and 2016, respectively.
b) Share-based compensation plans for employees and executives The Group encourages employees to own shares in Zurich Insurance Group Ltd and has set up a framework based on the implementation of performance share programs. Actual plans are tailored to meet local market requirements.
The Group also operates a profit-sharing element of the Share Incentive Plan (Reward Shares) which was launched in 2004 with annual share allocations being made in May each year subject to business performance. The awards are based on business operating profit (BOP) after tax for the year achieved by the business unit of each participating employee. Individual awards are subject to a maximum of 5 percent of a participant’s base salary (before any flexible benefit adjustments) with an overall maximum of GBP 3,600. The total number of participating employees in Reward Shares as of December 31, 2017 and 2016 was 4,174 and 4,964, respectively.
A Dividend Shares scheme was launched in 2014 which allows employees to reinvest their dividends from Partnership Shares 3 and Reward Shares 3. As of December 31, 2017 and 2016, there were 313 and 346 participants in the scheme, respectively.
Share Incentive Plan for employees in Switzerland Under this plan, employees have the option to acquire sales-restricted shares at a 30 percent discount to the market value. The maximum permitted investment in shares is equivalent to CHF 3,500 per employee per annum. During 2017, 4,161 employees were eligible to participate in the share incentive plan, compared with 4,551 in 2016. For the years ended December 31, 2017 and 2016, 1,672 and 1,710 employees, respectively, purchased shares under the 2016 and 2015 share plans.
Target shares allocated in 2017 will vest after a period of three years following the year of allocation (three year cliff vesting), with the actual level of vesting between 0 percent and 200 percent of the target shares allocated, depending on the achievement of pre-defined performance criteria. The performance criteria used to determine the level of vesting are the Group’s return on shareholders’ equity (ROE), the position of its relative total shareholder return (TSR) measured against an international peer group of insurance companies, and the achievement of cash remittance targets. The three pre-defined performance criteria are each assessed over a period of three consecutive financial years starting in the year of allocation. One half of the shares that actually vest are sales-restricted for a further three years. To further align the participants with the interests of the shareholders, effective from January 1, 2014, the target shares are credited with dividend equivalent shares during the vesting period to compensate participants in LTIP for dividends paid to shareholders. As of December 31, 2017 and 2016 there were 1,129 and 1,203 participants in this plan, respectively.
The transition to a three-year cliff-vesting has been phased in with transitional arrangements for shares allocated in 2014 and prior. Target shares allocated in 2014 were to be assessed for vesting one-third after two years in 2016 and two-thirds after three years in 2017. Further, for LTIP participants who joined the plan prior to 2014, additional performance shares were allocated in 2014 to maintain the same cumulative target earning opportunity for these participants during the transition period.
Quantifiable commitments and contingencies in USD millions, as of December 31 2017 2016
Guarantees and letters of credit In 2017 and 2016, USD 642 million and USD 586 million, respectively, related to guarantees in the aggregate amount of GBP 475 million which were provided to the directors of a wholly owned subsidiary in connection with the repatriation of capital. These guarantees have no expiry date.
Commitments under lease agreements The Group has entered into various non-cancellable operating leases as lessee for office space and certain computer and other equipment. Lease expenses totaled USD 256 million and USD 262 million for the years ended December 31, 2017 and 2016, respectively.
Future payments under non-cancelable operating leases with terms in excess of one year in USD millions, as of December 31 2017 2016
While at this stage in the process it is unclear whether the Group will have any liability related to these matters, the Group does not currently believe this matter will have a material adverse effect on the Group’s business or the Group’s consolidated financial condition.
Fair value and carrying value of financial assets and financial liabilities in USD millions, as of December 31 Total fair value Total carrying value
Total fair value through profit or loss securities 9,295 9,032 9,295 9,032
Total financial liabilities held at amortized cost (12,196) (12,314) (11,295) (11,718)
Fair value hierarchy – non unit-linked – current period in USD millions, as of December 31, 2017 Level 1 Level 2 Level 3 Total
Total fair value through profit or loss securities 959 5,686 2,650 9,295
Reinsurers’ share of reserves for insurance contracts fair value option 1 – – 224 224
Fair value hierarchy – unit-linked – current period in USD millions, as of December 31, 2017 Level 1 Level 2 Level 3 Total
Investment property – – 3,138 3,138 Total investments for unit-linked contracts 1 92,236 29,331 3,614 125,182 Financial liabilities at FV through profit or loss
Within level 1, the Group has classified common stocks, exchange traded derivative financial instruments, investments in unit trusts that are actively traded in an exchange market and other highly liquid financial instruments.
Within level 3, the Group has classified: kk Unlisted stocks, private equity funds and hedge funds that are not actively traded. Such instruments are obtained from net asset value information and audited financial statements provided by the issuing company. Quantitative unobservable inputs are not developed by the Group when measuring fair value of these assets.
kk Options and long-dated derivative financial instruments with fair values determined using counterparty valuations or calculated using significant unobservable inputs such as historical volatilities, historical correlation, implied volatilities from the counterparty or derived using extrapolation techniques. Quantitative information on unobservable inputs are not available when counterparty pricing was used. For internally calculated fair values significant increases/ (decreases) in volatilities or correlation, would result in a significantly higher/(lower) fair value measurement.
kk Investment properties for which fair value is based on valuations performed annually by internal valuation specialists and generally on a rotation basis at least once every three years by an independent qualified appraiser. In general the portfolio is valued using an internal income capitalization approach. The model is asset specific and capitalizes the sustainable investment income of a property with its risk specific cap rate. This cap rate is an “all risk yield” with components such as asset class yield for core assets (lowest risk) plus additional premiums for additional risks, for example second tier location or deterioration risk. All cap rate components (risk premiums) are reviewed and, if necessary, adjusted annually before revaluations are performed. The model takes into consideration external factors such as interest rate, market rent and vacancy rate. The significant unobservable inputs which are outside this model, are estimated rental value, rental growth, long term vacancy rate and discount rate. Significant increases/ (decreases) in rental value and rental growth, in isolation, would result in a significantly higher/(lower) fair value measurement. Significant increases/(decreases) in the long term vacancy rate and discount rate, in isolation, would result in a significantly lower/(higher) fair value measurement.
kk The Group’s private debt holdings comprise certain private placements and other collateralized loan obligations (CLO) which are valued by dedicated external asset managers applying a combination of expert judgment and other specific adjustments for which interest rates as well as credit spreads serve as input parameters. Quantitative unobservable inputs are not developed by the Group when measuring fair value of these assets.
No material transfers between level 1 and level 2 occurred for the year ended December 31, 2017. The Group transferred 2.1 billion of unit-linked equity securities out of level 2 into level 1 as a result of a review of the classification of certain mutual fund investments for the year ended December 31, 2016.
For the year ended December 31, 2017, the Group transferred USD 115 million of available-for-sale debt securities out of level 3 into level 2. The transfers were mainly due to credit rating upgrades of certain asset-backed securities resulting in an increase in market activity of these instruments. The Group also transferred derivatives with a market value of USD 316 million out of level 3 into level 2. The transfers resulted from an increase in significance of certain observable input parameters used to derive the fair value.
Fee income and other expenses (10) 1 (9) Interest and bonuses credited to policyholders 43 (4) 38 Changes in assumptions 11 – 11 (Decreases)/increases recorded in other comprehensive income (32.6) – (33)
Fee income and other expenses (38) 10 (28) Interest and bonuses credited to policyholders 60 (8) 52 Changes in assumptions 56 (7) 49 (Decreases)/increases recorded in other comprehensive income – – –
Realized gains/(losses) recognized in income 1 – – (4) Unrealized gains/(losses) recognized in income 1 11 (1) (89)
Neither past due nor impaired financial assets 148,159 6,943 8,720 12,629 176,450 Past due but not impaired financial assets. Past due by: Past due but not impaired financial assets – 90 – 1,931 2,020
Analysis of financial assets – prior period in USD millions, as of December 31, 2016
Neither past due nor impaired financial assets 140,038 6,719 9,145 13,010 168,912 Past due but not impaired financial assets. Past due by: Past due but not impaired financial assets – 60 – 1,773 1,834
Development of allowance for impairments – current period in USD millions Mortgage loans Other loans Receivables
Development of allowance for impairments – prior period in USD millions Mortgage loans Other loans Receivables
Related party transactions – key personnel in USD millions, for the years ended December 31 2017 2016
As of December 31, 2017 and 2016, there were no loans, advances or credits outstanding from members of the Executive Committee. Outstanding loans and guarantees granted to members of the Board of Directors amounted to nil for the years ended December 31, 2017 and 2016. The terms ‘members of the Board of Directors’ and ‘members of the Executive Committee’ in this context include the individual as well as members of their respective households. The figures in table 25 include the fees paid to members of the Board of Directors of Zurich Insurance Group Ltd and Zurich Insurance Company Ltd, which were USD 5 million for both years ended December 31, 2017 and 2016.
Certificates of contribution/surplus notes in USD millions, as of December 31 2017 2016 6.15% certificate of contribution, due June 2021 200 707 3.758% surplus note, due December 2027 100 – Various other certificates of contribution 23 23
In 2017, Farmers Exchanges issued USD 400 million of 40 year, no call 20-year notes to private investors and repaid USD 507 million of the USD 707 million certificate of contribution at the 6.15 percent rate to Zurich America Insurance Company. Additionally, Farmers Exchanges issued USD 100 million of 10-year, no call five year notes at a 3.758 percent rate to Farmers New World Life Insurance Company.
b) Quota share reinsurance treaties with the Farmers Exchanges The Farmers Exchanges cede risk through quota share reinsurance treaties to Farmers Reinsurance Company (Farmers Re Co), a wholly owned subsidiary of FGI, and to Zurich Insurance Company Ltd (ZIC). These treaties can be terminated after 90 days’ notice by any of the parties.
c) Farmers management fees and other related revenues FGI as the appointed attorney-in-fact of the Farmers Exchanges, which are managed but not owned by FGI., a wholly owned subsidiary of the Group, is permitted by policyholders of the Farmers Exchanges to receive a management fee of up to 20 percent (up to 25 percent in the case of the Fire Insurance Exchange) of the gross premiums earned by the Farmers Exchanges.
FGI has historically charged a lower management fee than the amount allowed by policyholders. The range of fees has varied by line of business over time and from year to year. The gross earned premiums of the Farmers Exchanges were USD 19.8 billion and USD 19.5 billion for the years ended December 31, 2017 and 2016, respectively.
The Group pursues a customer-centric strategy, where the Property & Casualty (P&C) and Life businesses are managed on a regional basis. The Group’s reportable segments have been identified on the basis of the businesses operated by the Group and how these are strategically managed to offer different products and services to specific customer groups. The Group has identified 13 reportable segments in accordance with IFRS 8 and segment information is presented accordingly as follows: kk P&C regions kk Life regions kk Farmers kk Group Functions and Operations kk Non-Core Businesses
Property & Casualty – Overview by segment in USD millions, for the years ended December 31 Europe, Middle East & Africa North America Asia Pacific Latin America Group Reinsurance Eliminations Total
Insurance benefits and losses, net 8,478 8,601 7,917 6,947 1,055 964 805 739 (259) 94 – – 17,996 17,345 Policyholder dividends and participation in profits, net (1) 1 8 6 – – – – – – – – 7 7 Underwriting and policy acquisition costs, net 2,223 2,317 2,461 2,366 452 436 832 651 2 (6) – – 5,970 5,765 Administrative and other operating expense (excl. depreciation/amortization) 1,711 1,913 360 504 396 269 231 167 39 35 (9) (11) 2,727 2,878 Interest credited to policyholders and other interest 185 118 31 30 3 – 2 5 (3) – – – 218 153 Restructuring provisions and other items not included in BOP (115) (137) (50) (107) (16) (4) (6) (55) 2 – – – (185) (304) Total BOP benefits, losses and expenses (before interest, depreciation and amortization) 12,480 12,813 10,726 9,746 1,890 1,665 1,864 1,508 (218) 123 (9) (11) 26,733 25,844 Business operating profit (before interest, depreciation and amortization) 470 1,202 878 1,296 194 300 304 338 243 (211) – – 2,088 2,924 Depreciation and impairments of property and equipment 39 49 26 35 16 14 5 7 4 3 – – 89 109 Amortization and impairments of intangible assets 143 69 52 45 23 16 10 17 – – – – 228 148
Gross written premiums and policy fees 14,075 14,688 15,137 15,167 2,405 2,269 2,639 2,329 214 240 (1,447) (1,571) 33,024 33,122 Less premiums ceded to reinsurers (2,209) (2,088) (4,549) (5,159) (392) (385) (419) (462) (369) (491) 1,447 1,571 (6,492) (7,014)
Net investment result on unit-linked investments 9,279 11,822 75 36 202 78 1,336 1,323 – – – – 10,892 13,259
Benefits, losses and expenses Insurance benefits and losses, net 7,754 9,842 131 62 286 301 1,088 926 – – – – 9,259 11,130 Policyholder dividends and participation in profits, net 10,423 12,572 117 47 229 116 1,326 1,332 – – – – 12,095 14,067 Income tax expense/(benefit) attributable to policyholders 157 296 – – 15 8 – – – – – – 171 304 Underwriting and policy acquisition costs, net 1,173 1,011 81 93 163 140 1,072 912 – – – – 2,489 2,155 Administrative and other operating expense (excl. depreciation/amortization) 1,367 1,559 73 52 310 276 210 317 – – – (1) 1,959 2,203 Interest credited to policyholders and other interest 235 238 28 20 40 41 11 8 – – – – 315 307 Restructuring costs and other items not included in BOP (104) (101) (1) (1) 6 4 (4) (124) – – – – (104) (221) Total BOP benefits, losses and expenses 21,004 25,417 429 272 1,049 885 3,703 3,372 – – – (1) 26,185 29,945 Business operating profit (before interest, depreciation and amortization) 1,021 1,016 – (82) 147 83 566 501 1 – (2) (1) 1,733 1,516 Depreciation and impairments of property and equipment 10 14 – – 2 2 3 5 – – – – 15 21 Amortization and impairments of intangible assets 133 73 1 2 13 7 14 18 – – – – 161 100
Net investment income on Group investments 2,430 2,521 19 6 118 116 361 350 – – (2) (1) 2,925 2,993 Net capital gains/(losses) and impairments on Group investments 572 568 14 4 56 47 7 22 – – – – 649 640
Business operating profit by business in USD millions, for the years ended December 31
Gross written premiums and policy fees 33,024 33,122 14,070 14,657 1,871 2,459 48 48 202 429 (102) (101) 49,114 50,615 Less premiums ceded to reinsurers (6,492) (7,014) (1,128) (684) (195) (189) (42) (43) (222) (13) 102 101 (7,977) (7,843)
Net investment income on Group investments 1,847 1,891 2,925 2,993 215 262 170 228 233 281 (175) (180) 5,215 5,474 Net capital gains/(losses) and impairments on Group investments 191 67 649 640 1 – – – (8) (11) – – 833 697
Insurance benefits and losses, net 17,996 17,345 9,259 11,130 1,434 1,465 – – (45) 501 – – 28,643 30,441 Policyholder dividends and participation in profits, net 7 7 12,095 14,067 144 47 – – 737 398 – – 12,984 14,519 Income tax expense/(benefit) attributable to policyholders – – 171 304 – – – – – – – – 171 304 Underwriting and policy acquisition costs, net 5,970 5,765 2,489 2,155 582 614 1 – 4 11 (7) (7) 9,039 8,538 Administrative and other operating expense (excl. depreciation/amortization) 2,727 2,878 1,959 2,203 1,521 1,408 321 1,348 87 122 (126) (1,072) 6,490 6,888 Interest credited to policyholders and other interest 218 153 315 307 109 148 119 120 54 79 (269) (281) 546 525 Restructuring provisions and other items not included in BOP (185) (304) (104) (221) (22) (8) (66) (100) (1) (1) – – (377) (634) Total BOP benefits, losses and expenses (before interest, depreciation and amortization) 26,733 25,844 26,185 29,945 3,769 3,674 374 1,369 837 1,110 (402) (1,360) 57,496 60,581 Business operating profit (before interest, depreciation and amortization) 2,088 2,924 1,733 1,516 1,850 1,876 45 – 52 (4) (420) (421) 5,348 5,890 Depreciation and impairments of property and equipment 89 109 15 21 34 35 12 9 – – – – 152 174 Amortization and impairments of intangible assets 228 148 161 100 125 119 56 49 – – – – 570 416
Business operating profit before non-controlling interests 1,670 2,570 1,548 1,385 1,691 1,722 (733) (785) 39 (15) – – 4,215 4,877
Net earned premiums and policy fees 26,033 26,102 12,810 13,854 2,223 2,205 6 6 (14) 456 – – 41,057 42,622 Farmers management fees and other related revenues – – – – 2,892 2,867 – – – – – – 2,892 2,867
Losses and loss adjustment expenses, net 17,997 17,346 – – 1,044 1,085 – – 52 53 – – 19,094 18,484 Life insurance death and other benefits, net (1) (2) 9,258 11,130 389 380 – – (97) 448 – – 9,548 11,957
Net income before income taxes 2,361 2,631 1,861 1,670 1,705 1,734 (849) (864) 48 151 5,125 5,321 Income tax (expense)/benefit (1,816) (1,843)
Net income after taxes 3,309 3,478 attributable to non-controlling interests 305 268 attributable to shareholders 3,004 3,211 1 In 2017, Property & Casualty includes losses of USD 97 million for re-measurements of assets held for sale based on agreements to sell businesses in the UK (see note 5). In 2016, USD 134 million of losses in Property & Casualty include USD (137) million related to the sale of businesses in South Africa and Morocco and the re-measurements of assets held for sale and USD 47 million of gains in Life relate to a forward sale agreement of a UK based distributor (see note 5).
Total assets (after cons. of investments in subsidiaries) 121,160 115,333 278,675 236,759 15,554 16,187 23,406 22,437 17,984 24,980 (34,713) (33,347) 422,065 382,348 Liabilities
Gross written premiums and policy fees 15,852 15,873 18,441 18,606 Net earned premiums and policy fees 11,007 11,739 15,159 14,587 Insurance benefits and losses, net 9,213 8,427 9,041 8,823 Policyholder dividends and participation in profits, net 8 7 – – Total net technical expenses 3,038 3,215 5,270 5,025
Rest of Europe, Middle East & Africa 145 63 – – 4 –
Latin America 1 Includes business written under freedom of services and freedom of establishment in Europe, and the related assets. 2 Includes business written through licenses, mainly into Asia Pacific and Middle East, and the related assets.
Australia Cover-More Group Limited Sydney 100 100 AUD 939.2 Zurich Australia Limited Sydney 100 100 AUD 426.5 Zurich Australian Insurance Limited Sydney 100 100 AUD 6.6 Zurich Financial Services Australia Limited Sydney 100 100 AUD 1,348.8 Austria Zürich Versicherungs-Aktiengesellschaft Vienna 99.98 99.98 EUR 12.0 Brazil Zurich Santander Brasil Seguros e Previdência S.A. Sao Paulo 51 51 BRL 1,659.2 Zurich Minas Brasil Seguros S.A. Belo Horizonte 100 100 BRL 3,109.6 Zurich Resseguradora Brasil S.A. Sao Paulo 100 100 BRL 204.0 Chile Chilena Consolidada Seguros de Vida S.A. Santiago 98.99 98.99 CLP 44,718.8 Zurich Santander Seguros de Vida Chile S.A. Santiago 51 51 CLP 24,252.9 Germany Deutscher Herold Aktiengesellschaft Bonn 100 100 EUR 18.4 Zürich Beteiligungs-Aktiengesellschaft (Deutschland) Frankfurt 100 100 EUR 152.9 Zurich Deutscher Herold Lebensversicherung Aktiengesellschaft Bonn 100 100 EUR 68.5 Ireland Zurich Life Assurance plc Dublin 100 100 EUR 17.5 Zurich Holding Ireland Limited Dublin 100 100 EUR 0.1 Zurich Insurance plc Dublin 100 100 EUR 8.2 Italy Zurich Investments Life S.p.A. Milan 100 100 EUR 164.0 Luxembourg Zurich Eurolife S.A. Leudelange 100 100 EUR 39.0 REX-ZDHL S.C.S. SICAV-SIF Leudelange 100 100 EUR 849.5 Malaysia Zurich Insurance Malaysia Berhad Kuala Lumpur 100 100 MYR 579.0 Mexico Zurich Santander Seguros México, S.A. 1 Mexico City 99.99 99.99 MXN 190.0
United States of America Farmers Group, Inc. 3 Reno, NV 100 100 USD 0.001 Farmers Reinsurance Company 3 Woodland Hills 87.90 95.38 USD 58.8 Farmers New World Life Insurance Company 3 Mercer Island, WA 100 100 USD 6.6 Zurich American Corporation Wilmington, DE 100 100 USD 0.00001 Zurich American Insurance Company (and subsidiaries) New York, NY 100 100 USD 5.0 Rural Community Insurance Company Anoka, MN 100 100 USD 3.0 Zurich American Life Insurance Company Schaumburg, IL 100 100 USD 2.5 Zurich Holding Company of America, Inc. 4 Wilmington, DE 100 100 USD –
On January 18, 2018, the Group did an early redemption of USD 500 million perpetual capital notes, issued in 2012 by Zurich Insurance Company Ltd.
In our opinion the consolidated financial statements (pages 174 to 279 and the audited sections of the risk review on pages 122 to 155) give a true and fair view of the consolidated financial position of the Group as at December 31, 2017, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with the International Financial Reporting Standards (IFRS) and comply with Swiss law.
The following are the key audit matters we have identified: – Valuation of actuarially determined life insurance assets and liabilities
The Group’s business units vary significantly in size and we identified 19 which, in our view, required an audit of their complete financial information, due to their size or risk characteristics. Audits of these business units were performed using materiality levels lower than the materiality level for the Group as a whole, ranging from USD 20 million to USD 130 million, and established by reference to the size of, and risks associated with, the business concerned. Specific audit procedures on certain balances and transactions were performed at a further 17 business units. Together the full scope audits and specific audit procedures accounted for 76% and 80% of Group GWP and total assets, respectively.
We determined our materiality for the audit of the consolidated financial statements using quantitative and qualitative factors. Based on these factors we have selected a combined 3 year average of net income before income taxes (NIBIT) and business operating profit (BOP) as appropriate benchmarks for measuring audit materiality. We applied a 5% rule of thumb which resulted in an overall audit materiality of USD 200 million.
In relation to the particular matters set out opposite, our substantive testing procedures included the following: – Tested the completeness and accuracy of underlying data to source documentation.
– Challenged the Group’s methodology and assumptions, focusing on changes to life actuarial methodology and assumptions during the year, by applying our industry knowledge and experience to compare whether the methodologies are in compliance with recognized actuarial practices as well as regulatory and reporting requirements.
The valuation of property and casualty loss reserves involves a high degree of subjectivity and complexity. Reserves for losses and loss adjustment expenses represent estimates of future payments of reported and unreported claims for losses and related expenses at a given date. The Group uses a range of actuarial methodologies to estimate these provisions. Property and casualty loss reserves require significant judgment relating to factors and assumptions such as inflation, claims development patterns and regulatory changes.
– Performed independent re-projections on selected product lines, particularly focusing on the largest and most uncertain property and casualty reserves. For these product lines our actuarial specialists compared their reprojected reserves to those recorded by the Group, and assessed any significant differences.
– Performed sensitivity testing and evaluated the appropriateness of any significant adjustments made to management’s property and casualty reserve estimates.
In relation to the particular matters set out opposite, our substantive testing procedures included the following: – Corroborated the justification of the CGUs defined by management for goodwill allocation.
– Tested the principles and integrity of the Group’s discounted cash flow model that supports the value-in-use calculations in order to assess the appropriateness of the methodology applied in the Group’s annual impairment assessment.
– Tested the reasonableness of the assumptions used in the impairment assessment including projections on future income (comparing forecast to actual results), terminal growth rate assumptions, discount rates and sensitivity analyses to determine the impact of those assumptions.
– Engaged our internal valuation experts to assist in the testing of key assumptions and inputs.
Other information in the annual report The Board of Directors is responsible for the other information in the annual report. The other information comprises all information included in the annual report, but does not include the consolidated financial statements, the stand-alone financial statements of Zurich Insurance Group Ltd, the audited sections of the risk review on pages 122 to 155, the Remuneration report of Zurich Insurance Group Ltd and our auditor’s reports thereon. Our opinion on the consolidated financial statements does not cover the other information in the annual report and we do not express any form of assurance conclusion thereon.
Review of the year Net income after taxes for the year was CHF 2,370 million compared with CHF 1,791 million in 2016. The increase was mainly driven by a higher dividend income from its subsidiary Zurich Insurance Company Ltd (ZIC) of CHF 2,300 million in 2017 compared to CHF 1,400 million in 2016, partially offset by a decrease in interest income on subordinated loans to subsidiaries of CHF 415 million to CHF 97 million.
Income statements in CHF thousands, for the years ended December 31 Notes 2017 2016
Other operating income 184 208 Other operating expenses 4 (19,247) (14,108) Depreciation and valuation adjustments to non-current assets 5 – (62,000)
Current assets Cash and cash equivalents 534,714 337,786 Receivables from third parties 321 – Accrued income and prepaid expenses from subsidiaries 7 207,521 Derivatives with subsidiaries – 931 Total current assets 535,042 546,238 Non-current assets Subordinated loans to subsidiaries 9 4,832,405 4,832,405 Investments in subsidiaries 10 11,368,069 11,368,069 Total non-current assets 16,200,474 16,200,474 Total assets 16,735,516 16,746,712
Short-term liabilities Other liabilities to third parties 8,198 33,024 Other liabilities to shareholders 1,320 1,192 Accrued expenses and deferred income to subsidiaries 953 993 Accrued expenses and deferred income to third parties 24 971 Derivatives with subsidiaries 13 1,712 Total short-term liabilities 10,508 37,892 Total liabilities 10,508 37,892 Shareholders’ equity (before appropriation of available earnings)
General capital contribution reserve 212,286 860,481 Reserve for treasury shares 14 282,088 293,522
d) Derivatives Derivatives are carried at market value, with changes in the market value recorded in the income statement.
4. Other operating expenses Other operating expenses include directors’ fees of CHF 4.8 million and CHF 4.6 million for the years ended December 31, 2017, and December 31, 2016, respectively. Overhead expenses increased by CHF 4.3 million to CHF 8.5 million in 2017. In addition, fees paid to the Swiss Financial Market Supervisory Authority of CHF 3.2 million and CHF 3.7 million are included for the years ended December 31, 2017, and December 31, 2016.
6. Financial income Financial income for the year 2017 mainly consists of dividend income of CHF 2,300 million (2016: CHF 1,400 million) received from the Company’s subsidiary ZIC and interest income of CHF 97 million (2016: CHF 512 million) on the subordinated loan with ZIC. This interest income is recognized when Zurich Insurance Company Ltd declares its intention to pay a dividend to the Company. As of December 31, 2017, ZIC has not declared its intention to pay a dividend for 2017 and hence, no accrual is recognized in the Company’s financial statements.
7. Financial expenses Financial expenses for the year 2017 decreased by CHF 14.8 million to CHF 0.9 million mostly driven by realized and unrealized foreign exchange losses of CHF 0.9 million compared with CHF 9.9 million in the previous year and lower interest expense of CHF 5.8 million due to the repayment of the loan with Farmers Group, Inc., in December 2016.
9. Subordinated loans to subsidiaries Subordinated loans include a loan to Zurich Insurance Company Ltd of CHF 4,832 million as of December 31, 2017 and 2016, respectively.
11. Commitments and contingencies Zurich Insurance Group Ltd has provided unlimited guarantees in support of entities belonging to the Zurich Capital Markets group of companies. The Company has also entered into support agreements and guarantees for the benefit of certain of its subsidiaries. They amounted to CHF 1,319 million as of December 31, 2017, and CHF 2,281 million as of December 31, 2016. The decrease is mainly due to an expired guarantee in the amount of USD 1,000 million (CHF 975 million) provided to a fully owned subsidiary to secure the subordinated debt obligation of the issuer. Furthermore, the Company has issued an unlimited guarantee in favor of the Institute of London Underwriters in relation to business transferred to Zurich Insurance plc from a Group company which no longer has insurance licenses.
b) Authorized share capital (as specified in Article 5bis of the Articles of Association) Until March 29, 2019, the Board of Zurich Insurance Group Ltd is authorized to increase the share capital by an amount not exceeding CHF 4,500,000 by issuing up to 45,000,000 fully paid registered shares with a nominal value of CHF 0.10 each. An increase in partial amounts is permitted. The Board would determine the date of issue of any such new shares, the issue price, type of payment, conditions for exercising subscription rights, and the commencement of entitlement to dividends.
The Board is further authorized to restrict or exclude the subscription rights of shareholders and to allocate them to third parties, the Zurich Insurance Group Ltd or one of its group companies, up to a maximum of 15,000,000 fully paid registered shares, if the shares are to be used: kk for the take-over of an enterprise, of parts of an enterprise or of participations or for investments by the Zurich Insurance Group Ltd or one of its group companies, or the financing including re-financing of such transactions; or kk for the purpose of expanding the scope of shareholders in connection with the quotation of shares on foreign stock exchanges or issuance of shares on the national or international capital markets (including private placements to one or more selected investors); or kk for the conversion of loans, bonds, similar debt instruments, equity-linked instruments or other financial market instruments (collectively, the ‘Financial Instruments’) issued by the Zurich Insurance Group Ltd or one of its group companies; or kk for the improvement of the regulatory capital position of the Zurich Insurance Group Ltd or one of its group companies in a fast and expeditious manner.
Up to March 29, 2019, the total of new shares issued from (i) authorized share capital where the subscription rights were restricted or excluded, and (ii) contingent share capital in connection with Financial Instruments where the advance subscription rights were restricted or excluded, may not exceed 30,000,000 new shares.
Employee participation On January 1, 2017, the contingent share capital, to be issued to employees of Zurich Insurance Group Ltd and its subsidiaries, amounted to CHF 68,785.30 or 687,853 fully paid registered shares with a nominal value of CHF 0.10 each. On January 1, 2016, the contingent share capital, to be issued to employees of Zurich Insurance Group Ltd and its subsidiaries, amounted to CHF 89,029.50 or 890,295 fully paid registered shares with a nominal value of CHF 0.10 each.
As of January 1 342,664 342,206 Transfer from capital contribution reserve 1,960 458 As of December 31 344,624 342,664 16. Shareholders According to information available as of December 31, 2017, Zurich Insurance Group Ltd is not aware of any person or institution, other than BlackRock, Inc., New York, (>5 percent of the shares) and The Capital Group Companies, Inc., Los Angeles, (>3 percent of the shares) which, directly or indirectly, had an interest as a beneficial owner in shares, option rights and/or conversion rights relating to shares of Zurich Insurance Group Ltd exceeding the relevant thresholds prescribed by law.
17. Remuneration of the Board of Directors and the Executive Committee The information required by articles 14 –16 of the Ordinance Against Excessive Compensation, which prevails over article 663bbis of the Swiss Code of Obligations, is disclosed and audited in the remuneration report on pages 82 to 115 of this Annual Report.
Appropriation of available earnings As of January 1, 2018 15,529,736 Dividend payment out of available earnings 1 (2,512,242) Balance carried forward 1 13,017,494
Appropriation of capital contribution reserve As of January 1, 2018 (incl. reserve for treasury shares) 494,374 Dividend payment out of capital contribution reserve 1 (211,876) Balance carried forward 1 282,498 1 These figures are based on the issued share capital as of December 31, 2017. They may change following the issuance of shares out of contingent capital for employees after the balance sheet date (see note 12). Treasury shares are not entitled to dividends.
In our opinion, the accompanying financial statements as at December 31, 2017 comply with Swiss law and the Company’s articles of association.
We chose total assets as the benchmark because, in our view, it is the relevant benchmark for a holding company with no own business activities, and is a generally accepted benchmark.
Investments in subsidiaries are carried at cost less necessary impairments and valued on an individual basis.
– Tested the required disclosures in the notes to the financial statements.
We have audited the issue of new shares by Zurich Insurance Group Ltd in the period from January 1, 2017, to December 31, 2017, pursuant to the resolutions of the general meeting of March 30, 2010, and March 29, 2017, in accordance with article 653f para. 1 Code of Obligations (CO).
Auditor’s responsibility Our responsibility is to express an opinion based on our audit as to whether the issue of new shares complies with Swiss law and the Company’s articles of association. We conducted our audit in accordance with Swiss Auditing Standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the issue of new shares complies with the legal requirements and Company’s articles of association.
Opinion In our opinion, the issue of 732,445 registered shares with a nominal value of CHF 0.10 complies with Swiss law and the Company’s articles of association.
New business value, after tax is a measure that reflects the value added by new business written during the period, including allowances for frictional costs, time value of options and guarantees, and the cost of non-market risk, and is valued at the point of sale. It is calculated as the present value of the projected after-tax profit from life insurance contracts sold during the period using a valuation methodology consistent with the EV principles, after the effect of noncontrolling interests.
Gross management result is a performance measure of Farmers Management Services calculated as management fees and other related revenues minus management and other related expenses, including amortization and impairments of intangible assets.
Zurich Insurance Group Annual Report 2017303 Group overview Governance Risk review Financial review
Media Relations Zurich Insurance Group Ltd, Switzerland Telephone: +41 (0)44 625 21 00 Email: media@zurich.com
Share Register Services Zurich Insurance Group Ltd, Switzerland Telephone: +41 (0)44 625 22 55 Email: shareholder.services@zurich.com Website: www.zurich.com/shareholder-area
The Annual Report is published in English and German. In the event of inconsistencies in the German translation, the English original version shall prevail.
Printed climate neutrally with ClimatePartner using green electricity end of February 2018 by Neidhart + Schön Print AG, Schwerzenbach, www.nsprint.ch. ISO 14001 certified.