Tax loss carryforwards and tax credits in USD millions, as of December 31 2019 2018
For which deferred tax assets have been recognized, expiring > 20 years or with no time limitation 448 747
The tax rates applicable to tax losses for which a deferred tax asset has not been recognized are 24.4 percent and 23.0 percent as of December 31, 2019 and 2018, respectively.
Senior debt Zurich Insurance Company Ltd 1.500% CHF 400 million notes, due June 2019 1,2 – 409 1.125% CHF 400 million notes, due September 2019 1,2 – 411 0.625% CHF 250 million notes, due July 2020 1 260 258 2.875% CHF 250 million notes, due July 2021 1 257 253 3.375% EUR 500 million notes, due June 2022 1,3 579 598 1.875% CHF 100 million notes, due September 2023 1 113 110 1.750% EUR 500 million notes, due September 2024 1,3 579 583 0.500% CHF 350 million notes, due December 2024 1 362 356 0.510% CHF 120 million loan, due December 2024 124 122 1.500% CHF 150 million notes, due July 2026 1 175 165 0.750% CHF 200 million notes, due October 2027 1 206 – 1.000% CHF 200 million notes, due October 2028 1 207 204 1.500% EUR 500 million notes, due December 2028 1,3 557 568
Zurich Finance (Ireland) DAC 1.625% EUR 500 million notes, due June 2039 1,3 559 – Other Various debt instruments 41 69 Senior debt 5,148 5,237 Subordinated debt Zurich Insurance Company Ltd 7.500% EUR 425 million notes, due July 2039, first callable 2.750% CHF 225 million perpetual capital notes, first callable June 2021 1 232 228 2.750% CHF 200 million perpetual capital notes, first callable September 2021 1 212 209 4.750% USD 1 billion perpetual capital notes, first callable January 2022 1,3 997 996 4.250% EUR 1 billion notes, due October 2043, first callable October 2023 1,3 1,117 1,138 4.250% USD 300 million notes, due October 2045, first callable October 2025 1,3 299 299 5.625% USD 1 billion notes, due June 2046, first callable June 2026 1,3 997 997 3.500% EUR 750 million notes, due October 2046, first callable October 2026 1,2,3 853 855 5.125% USD 500 million notes, due June 2048, first callable June 2028 1,3 498 498 4.875% USD 500 million notes, due October 2048, first callable October 2028 1,3 498 498 2.750% EUR 500 million notes, due February 2049, first callable February 2029 1,3 555 –
Subordinated debt 6,852 6,775 Total senior and subordinated debt 11,999 12,012 1 Issued under the Group’s Euro Medium Term Note Programme (EMTN Programme). 2 The Group applied the fair value hedge methodology either partially or in full to hedge the interest rate exposure. 3 These bonds are part of a qualifying net investment hedge to hedge the foreign currency exposure.
Debt issued is recognized initially at fair value of the consideration received, net of transaction costs incurred, and subsequently carried at amortized cost using the effective interest rate method, unless fair value hedge accounting is applied.
Debt maturities reflect original contractual dates, taking early redemption options into account. For call/redemption dates, see table 18.1. The total notional amount of debt due in each period is not materially different from the total carrying value disclosed in table 18.2. Undiscounted cash flows include interest and principal cash flows on debt outstanding as of December 31, 2019 and 2018. Floating interest rates are assumed to remain constant as of December 31, 2019 and 2018. The aggregated cash flows are translated into U.S. dollars at end-of-period rates.
As of January 1 12,012 10,784 Issuance of debt recognized in cash flows 1,398 3,079 Repayment of debt recognized in cash flows (1,367) (1,566) Acquisitions/(divestments) and transfers 1 – (1) Changes in fair value 60 (7) Other changes (13) (9) Foreign currency translation effects (90) (269) As of December 31 11,999 12,012 1 The 2018 movement of USD 1 million is related to the sale of Endsleigh Limited (see note 5).
New shares issued from contingent capital in 2018 818 8,176 0.10
New shares issued from contingent capital in 2019 – – 0.10 Capital reduction in 2019 (as per AGM resolutions 2019) 174,000 1,740,000 0.10
b) Contingent share capital Financial Instruments The share capital of Zurich Insurance Group Ltd may be increased by an amount not exceeding CHF 3,000,000 by issuing of up to 30,000,000 fully-paid registered shares with a nominal value of CHF 0.10 each by the voluntary or mandatory exercise of conversion and/or option rights which are granted in connection with the issuance of Financial Instruments by the Company or one of its Group companies or by mandatory conversion of Financial Instruments issued by the Company or one of its Group companies, that allow for contingent mandatory conversion into shares of the Company, or by exercising option rights which are granted to the shareholders. The subscription rights are excluded. The then-current owners of the Financial Instruments shall be entitled to subscribe for the new shares. The conversion and/or option conditions are to be determined by the Board.
The Board is authorized, when issuing Financial Instruments to restrict or exclude the advance subscription rights in cases where they are issued: 33 for the financing including re-financing of a take-over of an enterprise, of parts of an enterprise, or of participations or of investments by the Company or one of its Group companies; or 33 on national or international capital markets (including private placements to one or more selected investors); or 33 for the improvement of the regulatory capital position of the Company or one of its Group companies in a fast and expeditious manner.
If the advance subscription rights are restricted or excluded by a resolution of the Board, the following applies: the Financial Instruments are to be issued at prevailing market conditions (including standard dilution protection clauses in accordance with market practice) and the setting of the conversion or issue price of the new shares must take due account of the stock market price of the shares and/or comparable instruments priced by the market at the time of issue or time of conversion.
c) Additional paid-in capital This reserve is not ordinarily available for distribution. However, as of January 1, 2011, a Swiss tax regulation based on the Swiss Corporate Tax Reform II became effective, allowing for payments free of Swiss withholding tax to shareholders out of the capital contribution reserve, created out of additional paid-in capital. Therefore, amounts qualifying under this regulation can be paid out of additional paid-in capital. As of December 31, 2019, the general capital contribution reserve amounted to CHF 29 million.
Treasury shares (repurchased under the public share buy-back program for cancellation purposes, see f)) – 1,740,000 – Total Treasury shares 1,549,714 4,082,432 1,156,567
Treasury shares comprise shares acquired in the market as well as shares repurchased via the 2018 public share buy-back program and cancelled in June 2019 (see f) below).
In 2018, the dividend of CHF 18 per share was partially paid out of the capital contribution reserve and partially out of the available earnings on April 10, 2018, as approved at the Annual General Meeting on April 4, 2018. The difference between the respective amounts of the dividend at transaction day exchange rates amounting to USD 2.8 billion and at historical exchange rates are reflected in the cumulative foreign currency translation adjustment.
The Group had 54’030 and 52’267 employees (full-time equivalents) as of December 31, 2019 and 2018, respectively. Personnel and other related costs incurred were USD 6.2 billion and USD 6.1 billion for the years ended December 31, 2019 and 2018, respectively, including wages, salaries and social security contributions of USD 5.5 billion and USD 5.3 billion respectively.
Governance of the Group’s pension and post-employment benefit plans is the responsibility of the Group Pensions Committee. This committee is responsible for developing, reviewing and advising on the Group governance framework for matters related to pension and post-retirement benefit plans, including the relevant policies and processes. The committee provides oversight and guidance over the Group’s principal pension and post-retirement benefit plans for accounting, benefit design, funding and investment and plan governance purposes. This includes, but is not limited to: 33 oversight of the impact of the Group’s principal defined benefit pension and post-retirement benefit plans in terms of cash, expense, and balance sheet accounting impact and capital implications 33 development and maintenance of policies on funding, asset allocation, risk assessment and management, and assumption setting
The trustees review the Pension Plan’s funding status regularly as well as the technical interest rate and the conversion rates. The conversion rate at age 65 is currently being phased down to 5 percent until 2023 to align it more closely with the low interest rate environment and increased life expectancy. In 2018, both the employer and employee savings contributions were increased. The insured salary was increased by reducing the coordination deduction. The flexibility of both plans was improved by introducing three levels of savings. Top-up payments from the company were introduced to those members’ pension accounts which had been part of the plan in 2017 and were affected by the changes. For them, this ensures that expected benefits at normal retirement age will be at least equal to 98.5 percent of their pensions expectations under the previous conversion rates. The top up payments will be made until 2023.
Actuarial valuations are completed annually 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.
UK pension plan The major UK pension plan is a hybrid arrangement and defined benefits entitlements accrued to December 31, 2015 increase in line with salary increases. Normal retirement age for the plan is 60. The plan is split into distinct sections and the two defined benefit sections are closed to new entrants and, with effect from January 1, 2016, to future benefit accrual. All employees now participate in a defined contribution section within the same trust. The notes that follow consider only the defined benefit sections. The UK Pension Trustee Board is responsible for the governance of the plan. The employer contributions are determined based on regular triennial actuarial valuations which are conducted using assumptions agreed by the Trustee Board and the sponsoring company. A local statutory valuation was carried out at an effective date of June 30, 2016 and was finalized in June 2017. This valuation disclosed a funding surplus of USD 411 million (GBP 304 million) after taking into account the value of the asset-backed funding arrangement established in 2014. The statutory valuation as at June 30, 2019 is underway and expected to be finalized by September 2020.
The ZNA and FGI plans have been frozen with effect from December 31, 2018. ZNA and FGI employees with a cash balance account will continue to earn interest credits on their existing cash balance account balance after the freeze date and will continue to earn eligibility service used to determine vesting and early retirement eligibility. FGI employees participating in the final average pay formula will continue to earn eligibility service used to determine vesting and the percentage of pension benefit payable for early retirement before normal retirement age of 65. ZNA and FGI employees earn only defined contribution retirement benefits with effect from January 1, 2019. In conjunction with the change in the pension plan, ZNA and FGI employees receive an additional company contribution within their defined contribution plan.
Net post-employment benefit (expense)/income: Current service cost (138) – – (138) Interest (expense)/income (432) 373 – (59) Settlements gains/(losses) 29 (24) – 5 Past service (cost)/credit (7) – – (7)
Net post-employment benefit (expense)/income (547) 349 – (199) Remeasurement effects included in other comprehensive income: Return on plan assets excluding interest income – 2,350 – 2,350 Experience gains/(losses) (89) – – (89) Actuarial gains/(losses) arising from changes in demographic assumptions 404 – – 404 Actuarial gains/(losses) arising from changes in financial assumptions (2,308) – – (2,308) Change in asset ceiling – – (323) (323)
Net post-employment benefit (expense)/income (540) 201 – (339) Remeasurement effects included in other comprehensive income: Return on plan assets excluding interest income – (713) – (713) Experience gains/(losses) 199 – – 199 Actuarial gains/(losses) arising from changes in demographic assumptions 316 – – 316 Actuarial gains/(losses) arising from changes in financial assumptions 909 – – 909
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, 2019 and 2018, respectively.
Key information by main country – current period in USD millions, as of December 31, 2019
Fair value of plan assets 5,442 9,787 3,386 1,370 1,086 21,071 Impact of asset ceiling (407) (30) – – – (436) Net defined benefit asset/(liability) 192 (1,851) (321) (60) (164) (2,203) Net post-employment benefit (expense)/income 1 (67) (61) (34) (21) (21) (204)
1 Canada includes a past service credit of USD 5 million.
Table 20.4 shows the key financial assumptions used to calculate the Group’s post-employment defined benefit obligations and the Group’s post-employment benefit expenses.
Key financial assumptions used for major plans as of December 31 2019 2018
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, 2019 and 2018.
United Kingdom 113% of S3PMA Light (males) or 100% of S3PFA (females) with CMI_2018 projection using a long-term rate of 1.0% 21.83 22.83 23.73 24.93
RP 2014 with MP-2018 Generational projection and white collar adjustment 22.19 23.74 23.71 25.23 RP 2014 with plan specific adjustments 21.25 22.22 23.27 24.16
Table 20.6 shows the expected benefits to be paid under the Group’s major plans in the future. It should be noted that actual amounts may vary from expected amounts. Therefore future benefit payments may differ from the amounts shown.
Maturity profile of future benefit payments for major plans as of December 31 2019 2018
Duration of the defined benefit obligation (in years) 15.3 19.8 12.5 14.2 14.1 21.0 12.2 14.0
Discount rate +50 bps 1,824 1,647 Discount rate –50 bps (2,093) (1,886) Salary increase rate +50 bps (73) (71) Salary decrease rate –50 bps 70 65 Price inflation increase rate +50 bps (1,038) (865) Price inflation decrease rate –50 bps 903 763 Cash balance interest credit rate +50 bps (76) (116) Cash balance interest credit rate –50 bps 72 73 Mortality 10% increase in life expectancy (2,162) (1,841) Mortality 10% decrease in life expectancy 2,086 1,789 1 A negative number indicates an increase and a positive number indicates a decrease in the defined benefit obligation.
The cost of share-based payments depends on various factors, including achievement of targets, and are subject to the discretion of the Remuneration Committee and the Board. Costs may therefore vary significantly from year to year. The net amounts of USD 229 million and USD 215 million for the years ended December 31, 2019 and 2018, respectively, reflect all aspects of share-based compensation, including adjustments made during the year.
A revised Partnership Share Scheme was launched in March 2013. Participants benefit from purchasing shares by making deductions from gross salary up to a maximum of GBP 1,800 or 10 percent of their year-to-date earnings. There were 658 and 688 active participants in the plan as of December 31, 2019 and 2018, respectively.
The Group also operates a profit-sharing element of the Share Incentive Plan (Reward Shares) which was launched in 2004 with annual share allocations being made in May each year subject to business performance. The awards are based on business operating profit (BOP) after tax for the year achieved by the business unit of each participating employee. Individual awards are subject to a maximum of 5 percent of a participant’s base salary (before any flexible benefit adjustments) with an overall maximum of GBP 3,600. The total number of participating employees in Reward Shares as of December 31, 2019 and 2018 was 2,612 and 3,192, respectively.
The Group Long-Term Incentive Plan (LTIP) Participants in this plan are allocated a target number of performance shares as notional shares of Zurich Insurance Group Ltd in April each year (target shares). The number of target shares is calculated as a percentage of annual base salary of each participant.
Quantifiable commitments and contingencies in USD millions, as of December 31 2019 2018
Pledged assets The majority of assets pledged to secure the Group’s liabilities relate to debt securities pledged under short-term sale and repurchase agreements. The total amount of pledged financial assets including the securities under short-term sale and repurchase agreements amounted to USD 1.4 billion and USD 2 billion as of December 31, 2019 and 2018, respectively.
On April 25, 2019, the DOJ announced that Zurich Life Insurance Company Ltd (ZLIC) and Zurich International Life Limited (ZILL) entered into a non-prosecution agreement (NPA) with the DOJ, which memorializes the DOJ’s decision not to prosecute these entities for any U.S. tax-related offenses in connection with legacy cross-border sales to U.S. persons. Under the terms of the NPA, ZLIC and ZILL agreed to pay USD 5 million to the U.S. Treasury and to comply with certain specified conditions during the four-year term of the NPA.
To measure fair value, the Group gives the highest priority to quoted and unadjusted prices in active markets. In the absence of quoted prices, fair values are calculated through valuation techniques, making the maximum use of relevant observable market data inputs. Whenever observable parameters are not available, the inputs used to derive the fair value are based on common market assumptions that market participants would use when pricing assets and liabilities. Depending on the observability of prices and inputs to valuation techniques, the Group classifies instruments measured at fair value within the following three levels (the fair value hierarchy): Level 1 – includes assets and liabilities for which fair values are determined directly from unadjusted current quoted prices resulting from orderly transactions in active markets for identical assets/liabilities.
Level 2 – includes assets and liabilities for which fair values are determined using significant inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly or indirectly. These inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and other observable market inputs.
The governance framework and oversight of the Group’s standards and procedures regarding the valuation of financial instruments measured at fair value lies within the responsibility of Group Risk Management, Group Investment Management, Treasury Capital Management and Group Finance. Specialists from these departments ensure the adequacy of valuation models, approve methodologies and sources to derive model input parameters, provide oversight over the selection of third party pricing providers, and on a semi-annual basis review the classification within the fair value hierarchy of the financial instruments in scope.
Total available-for-sale securities 152,581 145,110 152,581 145,110 Fair value through profit or loss securities
Discounted cash flow models are used for mortgage loans and other loans. The discount yields in these models use interest rates that reflect the return a market participant would expect to receive on instruments with similar remaining maturities, cash flow patterns, currencies, credit risk and collateral. Such instruments are categorized within level 3.
Total fair value through profit or loss securities 1,611 7,234 2,260 11,105
Total fair value through profit or loss securities 1,409 5,176 2,276 8,862
Liabilities for insurance contracts fair value option 2 – – (2,203) (2,203)
Fair value hierarchy – unit-linked – current period in USD millions, as of December 31, 2019 Level 1 Level 2 Level 3 Total
Fair value hierarchy – unit-linked – prior period in USD millions, as of December 31, 2018 Level 1 Level 2 Level 3 Total
Total fair value through profit or loss securities 76,887 28,083 640 105,610
Within level 1, the Group has classified common stocks, exchange traded derivative financial instruments, investments in unit trusts that are exchange listed and daily published and other highly liquid financial instruments.
Within level 2, the Group has classified government and corporate bonds, investments in unit trusts, agency mortgage-backed securities (MBS) and ’AAA’ rated non-agency MBS and other asset-backed securities (ABS) where valuations are obtained from independent pricing providers. The fair value received from these pricing providers may be based on quoted prices in an active market for similar assets, alternative pricing methods such as matrix pricing or an income approach employing discounted cash flow models. If such quoted prices are not available, then fair values are estimated on the basis of information from external pricing providers or internal pricing models (for example, discounted cash flow models or other recognized valuation techniques).
Where there are active and transparent markets and no significant adjustments to the observable data required, the Group classified also a small portion of its investment property within level 2.
The fair value hierarchy is reviewed at the end of each reporting period to determine whether significant transfers between levels have occurred. Transfers between levels mainly arise as a result of changes in market activity and observability of the inputs to the valuation techniques used to determine the fair value of certain instruments.
No material transfers between level 1 and level 2 occurred for the year ended December 31, 2019.
Development of assets and liabilities classified within level 3 – non-unitlinked – current period in USD millions Available-for-sale securities
Realized gains/(losses) recognized in income 1 107 7 26 – (12) – 183 Unrealized gains/(losses) recognized in income 1,2 (8) (16) 198 2 (6) (17) 213 Unrealized gains/(losses) recognized in other comprehensive income 34 286 – – 61 18 –
Transfer from/to assets held for own use – – – – – – 18 Transfers into level 3 – 34 – – – – – Transfers out of level 3 (11) (619) – (7) – – –
1 Presented as net capital gains/(losses) and impairments on Group investments in the audited consolidated income statements. 2 Unrealized gains/(losses) recognized in income for available-for-sale securities relate to impairments.
Transfer to assets held for sale – – – – – – (15)
For the year ended December 31, 2018, the Group transferred USD 352 million of available-for-sale debt securities out of level 2 into level 3. The transfers were mainly due to a review of the classification of certain collateralized loan obligations due to the observability of the inputs used in the valuation techniques to determine its fair value. The Group also transferred USD 554 million of investment property out of level 2 into level 3. The transfer resulted from a review of the classification of the real estate property due to the observability of the inputs used in the valuation techniques to determine its fair value.
Development of liabilities for insurance contracts fair value option classified within level 3 – prior period in USD millions Gross Ceded Net
Transfers into level 3 1 – – Transfers out of level 3 – – – Acquisitions and divestments – – 7 Foreign currency translation effects (1) – 112 1 Presented as net investment result on unit-linked investments in the consolidated income statements.
Tables 24.1a and 24.1b provide an analysis, for non-unit-linked businesses, of the age of financial assets that are past due but not impaired, and of financial assets that are individually determined to be impaired.
Neither past due nor impaired financial assets 147,382 5,882 8,268 11,775 173,307 Past due but not impaired financial assets Past due by: Past due but not impaired financial assets – 48 6 2,157 2,211
Development of allowance for impairments – prior period in USD millions Mortgage loans
Increase/(decrease) in allowance for impairments (1) (12) (10) Amounts written-off – – – Acquisitions and divestments – – 15 Foreign currency translation effects – – (20)
Debt instruments with contractual terms that give rise to cash flows that are solely payment of principal and interest on the principal amount outstanding (SPPI) will be measured at either amortized cost or at fair value with changes recognized in OCI, unless they are managed on a fair value basis. The assessment of the features of the contractual terms is referred to as the SPPI test. Debt instruments that do not pass the SPPI test will always be measured at fair value through profit or loss.
Table 24.3a and Table 24.3b show the fair value and the carrying value at the end of current and previous reporting period for the following two groups of financial assets: 33 Financial assets with contractual terms that give rise to cash flows that are SPPI; 33 Other financial assets not passing the SPPI test, as well as financial assets managed on a fair value basis for which no SPPI assessment has been performed. Financial assets that have not passed the SPPI test include equities, callable bonds with significant prepayment features, hybrid bonds with certain cash flows at the discretion of the issuer and some ABS/MBS that do not fulfill the SPPI criteria for contractually linked instruments.
Net unrealized gains/(losses) on debt securities available for sale that are not SPPI amounted to USD 277 million and USD (143) million for the years ended December 31, 2019 and 2018, respectively. The carrying value on held-tomaturity debt securities, mortgage loans, other loans, and receivables include impairment allowances of USD 270 million and USD 249 million of the years ended December 31, 2019 and 2018, respectively.
At initial recognition of a debt instrument, a loss allowance is recognized for expected credit losses resulting from default events within the next 12 months after the reporting date (12-month ECL). Such instruments are classified as Stage 1. The Group does not originate or acquire financial assets that are credit-impaired at initial recognition.
The Group applies the ‘low credit risk practical expedient,’ by assuming that no increase in credit risk has occurred since initial recognition for financial assets that have an external or internal rating equivalent to ‘investment grade’ (i.e., ‘AAA’ to ‘BBB-‘) at the reporting date. For the remaining financial assets, the Group considers all relevant reasonable supporting information that is available without undue cost or effort when determining whether a SICR has occurred since initial recognition, or not. An increase in credit risk is assessed using a transition matrix approach that determines SICR thresholds depending on the credit rating at initial recognition and residual time to maturity of the instrument. Where necessary, the quantitative assessment is supplemented by a qualitative assessment of the issuer’s credit quality. For certain less material portfolios, including residential mortgage loans, the ‘30 days past due’ criterion is used as a primary indicator of a SICR. Where a SICR is no longer observed, the instrument transitions back to stage 1.
Financial assets (SPPI) by stages – prior period in USD millions, as of December 31, 2018
In the normal course of business, the Group enters into various transactions with related parties. Parties are considered to be related if one party has the ability to control or exercise significant influence over the other party in making financial or operational decisions, or one other party controls both. Related parties of the Group include, among others, subsidiaries, associates, joint ventures, key management personnel, and the post-employment benefit plans (see note 20). Transactions between the Group and its subsidiaries are eliminated on consolidation, and they are not disclosed in the consolidated financial statements. A list of the Group’s significant subsidiaries is shown in note 28. The transactions of the Group concluded with its associates and with its joint ventures are not considered material to the Group, either individually or in aggregate.
Table 25 summarizes related-party transactions with key management personnel reflected in the consolidated financial statements. Key management personnel includes members of the Board of Directors of Zurich Insurance Group Ltd and Zurich Insurance Company Ltd and members of the Executive Committee.
Related party transactions – key personnel in USD millions, for the years ended December 31 2019 2018
Remuneration of key personnel of the Group Cash compensation, current benefits and fees 32 30 Post-employment benefits 4 4 Share-based compensation 35 23 Other remuneration 5 3 Total remuneration of key personnel 76 60
As of December 31, 2019 and 2018, 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, 2019 and 2018. 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 and USD 4 million for the years ended December 31, 2019 and 2018 respectively.
a) Certificates of contribution/surplus notes issued by the Farmers Exchanges As of December 31, 2019 and 2018, FGI and its subsidiary held the following surplus note and certificates of contribution issued by the Farmers Exchanges. Originally these were purchased by FGI subsidiaries in order to supplement the policyholders’ surplus of the Farmers Exchanges.
In March 2019, the Farmers Exchanges repaid a USD 0.5 million certificate of contribution at an 8.50 percent rate to the Fire Underwriters Association. The USD 100 million of 10-year, no call five year notes at a 3.758 percent rate that the Farmers Exchanges issued to Farmers New World Life Insurance Company remain unchanged.
Conditions governing payment of interest and repayment of principal are outlined in the surplus note and certificates of contribution. Generally, repayment of principal and payment of interest may be made only when the issuer has an appropriate amount of surplus, and then only after approval is granted by the appropriate state insurance regulatory department in the U.S. Additionally, the approval by the issuer’s governing board is needed for repayment of principal.
Net earned premiums and policy fees 197 193 Insurance benefits and losses, net 3 (143) (129) Total net technical expenses 4 (63) (62) Net underwriting result (9) 2 1 From January 1, 2019, Farmers Re Co assumed a 1.0 percent quota share. Another 28.0 percent was assumed by third parties. Effective December 31, 2019, Farmers Re participation in the All Lines agreement was reduced by 0.75 percent to 0.25 percent. Another 25.75 percent was assumed by third parties.
2 From January 1, 2018, Farmers Re Co assumed a 1.0 percent quota share. Another 28.0 percent was assumed by third parties. 3 Under the All Lines agreement, the Farmers Exchanges catastrophe losses are subject to a provisional maximum of 6.75 percent of net earned premiums dependent on loss experience and recoveries at a specified rate for each year. Based on the results for 2019, the total catastrophe recoveries subject to the All Lines agreement was USD 1.3 billion.
4 Under the All Lines agreement, the Farmers Exchanges receive a ceding commission of 26.7 percent, 8.1 percent of premiums for unallocated loss adjustment expenses and 5.3 percent of premiums for other expenses.
Management fees and other related revenues 3,780 3,204 18% Management fees 2,804 2,796 Revenues for ancillary services 1 858 287 Membership fees 60 60 Other revenues 58 62 Management and other related expenses 2,356 1,792 31% Expenses for ancillary services 1 858 287 Management and other expenses 1,498 1,505 Gross management result 1,424 1,412 1% Managed gross earned premium margin 7.0% 7.0% 0.0 pts 1 2019 balance includes additional effect of adoption of IFRS 15 ’Revenue from Contracts with Customers.’
The Group’s reportable segments comprise the following: Property & Casualty and Life regions 33 Europe, Middle East & Africa 33 North America 33 Asia Pacific 33 Latin America 33 Group Reinsurance
Property & Casualty regions provide a variety of motor, home and commercial products and services for individuals, as well as small and large businesses on both a local and global basis. Products are sold through multiple distribution channels including agents, brokers and bank distribution.
Farmers, through Farmers Group, Inc. and its subsidiaries (FGI), provides certain non-claims services and ancillary services to the Farmers Exchanges, which are owned by their policyholders. This segment also includes all reinsurance assumed from the Farmers Exchanges by the Group. Farmers Exchanges are prominent writers of personal and small commercial lines of business in the U.S. In addition, this segment includes the activities of Farmers Life, a writer of individual life insurance business in the U.S.
Group Functions and Operations comprise the Group’s Holding and Financing, Headquarter and Zurich Insurance Mobile Solutions (ZIMS) activities. Certain alternative investment positions not allocated to business operating segments are included within Holding and Financing. In addition, this segment includes operational technical governance activities relating to technology, underwriting, claims, actuarial and pricing.
Aggregations and additional information Regional Property & Casualty and Life results are further aggregated to show a total Property & Casualty and total Life business view.
Business operating profit The segment information includes the Group’s internal performance measure, business operating profit (BOP). This measure is the basis on which the Group manages all of its business units. It indicates the underlying performance of the Group’s business units, after non-controlling interests, by eliminating the impact of financial market volatility and other non-operational variables. BOP reflects adjustments for shareholders’ taxes, net capital gains/(losses) and impairments on investments (except for certain non-insurance operations included in Non-Core Businesses, investments in hedge funds as at fair value through profit or loss, certain securities held for specific economic hedging purposes and policyholders’ share of investment results for the life businesses) and non-operational foreign exchange movements. Significant items arising from special circumstances, including restructuring charges, legal matters or large one-off regulatory projects outside the ordinary course of business, gains and losses on divestment of businesses, certain business combination integration costs and impairments of goodwill are also excluded from BOP.
Net investment result on Group investments 615 613 1,255 986 74 68 217 204 11 13 – – 2,171 1,884
Benefits, losses and expenses Insurance benefits and losses, net 7,438 7,884 6,555 7,109 1,358 1,304 840 960 285 35 – – 16,475 17,291 Policyholder dividends and participation in profits, net 7 8 8 10 – – – 1 (2) – – – 12 19 Underwriting and policy acquisition costs, net 2,168 2,315 2,295 2,318 579 580 910 916 (13) 7 – – 5,939 6,136 Administrative and other operating expense (excl. depreciation/amortization) 1,458 1,741 309 515 441 463 354 239 9 33 – – 2,571 2,992 Interest credited to policyholders and other interest 172 181 66 (23) 4 1 32 – (3) (4) – – 271 156 Restructuring costs and other items not included in BOP (100) (108) (23) (110) (7) (13) (50) 9 – – – – (180) (221) Total BOP benefits, losses and expenses (before interest, depreciation and amortization) 11,142 12,022 9,210 9,819 2,376 2,335 2,086 2,126 274 72 – – 25,088 26,373 Business operating profit (before interest, depreciation and amortization) 1,318 998 1,681 1,222 293 120 346 255 (279) (51) – – 3,359 2,543 Depreciation and impairments of property and equipment 92 36 66 37 37 18 18 6 1 3 – – 214 101 Amortization and impairments of intangible assets 83 76 37 84 19 16 13 10 – – – – 151 187
Business operating profit before non-controlling interests 1,125 869 1,578 1,099 237 86 315 238 (292) (92) – – 2,962 2,200
Life – 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
Benefits, losses and expenses Insurance benefits and losses, net 7,571 7,774 352 267 1,004 522 1,259 1,137 5 2 – – 10,190 9,702 Policyholder dividends and participation in profits, net 17,537 (3,596) 676 (29) 268 (21) 1,288 1,006 – – – – 19,769 (2,640) Income tax expense/(benefit) attributable to policyholders 333 (171) – – 32 (12) – – – – – – 365 (183) Underwriting and policy acquisition costs, net 917 925 123 68 279 220 1,092 1,037 8 2 (1) (1) 2,417 2,252 Administrative and other operating expense (excl. depreciation/amortization) 1,255 1,302 54 57 457 337 248 174 1 – – – 2,015 1,871 Interest credited to policyholders and other interest 212 218 39 8 26 35 26 20 – – – – 303 282 Restructuring costs and other items not included in BOP (99) (47) – – (63) (12) (66) 10 – – – – (228) (50) Total BOP benefits, losses and expenses (before interest, depreciation and amortization) 27,725 6,404 1,244 372 2,003 1,070 3,847 3,385 13 4 (1) (1) 34,831 11,234 Business operating profit (before interest, depreciation and amortization) 1,168 1,175 (29) 37 239 212 515 571 6 8 (2) (2) 1,897 2,000 Depreciation and impairments of property and equipment 23 12 – – 8 3 7 3 – – – – 39 17 Amortization and impairments of intangible assets 54 103 – 5 11 12 14 12 – – – – 80 133
Business operating profit before non-controlling interests 1,089 1,056 (30) 31 202 183 494 556 6 8 – – 1,761 1,834
Net investment income on Group investments 2,313 2,474 34 22 179 152 392 390 – – (2) (2) 2,915 3,035 Net capital gains/(losses) and impairments on Group investments 798 367 16 (11) 59 (35) 32 18 – – – – 906 338
Net written premiums and policy fees 26,362 26,465 13,958 13,717 882 916 – 5 50 129 – – 41,251 41,230 Net change in reserves for unearned premiums (754) (34) (275) (202) 59 (1) – – 21 12 – – (949) (224)
Net earned premiums and policy fees 25,608 26,431 13,683 13,514 941 915 – 5 71 141 – – 40,302 41,007 Farmers management fees and other related revenues – – – – 3,780 3,204 – – – – – – 3,780 3,204
Losses and loss adjustment expenses, net 16,477 17,293 – – 143 129 – 1 47 (27) – – 16,666 17,397 Life insurance death and other benefits, net (1) (2) 10,190 9,702 419 434 – – 295 116 – – 10,903 10,250
Business operating profit before non-controlling interests 2,962 2,200 1,761 1,834 1,707 1,643 (717) (754) (52) 37 – – 5,661 4,961
Gross written premiums and policy fees 34,184 33,505 15,151 14,754 1,056 1,095 – 5 150 140 (17) (14) 50,525 49,485 Less premiums ceded to reinsurers (7,822) (7,041) (1,193) (1,038) (175) (179) – – (100) (11) 17 14 (9,274) (8,255)
2 Other adjustments in 2019 include charges related to the implementation of IFRS 17, business combination integration costs and monetary losses related to hyperinflation accounting in relation to the Group’s operations in Argentina.
Reconciliation of BOP to net income after income taxes in USD millions, for the years ended December 31
Add back: Business operating profit attributable to non-controlling interests 84 115 275 281 – – (1) (1) – – 359 395 Net income before shareholders’ taxes 3,300 2,441 1,591 1,977 1,695 1,622 (866) (790) 14 44 5,735 5,293 Income tax expense/(benefit) attributable to policyholders – – 365 (183) – – – – – – 365 (183)
Net income before income taxes 3,300 2,441 1,956 1,794 1,695 1,622 (866) (790) 14 44 6,100 5,110 Income tax (expense)/benefit (1,716) (1,134)
Assets and liabilities by business in USD millions, as of December 31
Equity Shareholders’ equity 35,004 30,189 Non-controlling interests 1,545 1,613 Total equity 36,549 31,802 Total liabilities and equity 404,688 395,342 Supplementary information Additions and capital improvements to property, equipment and intangible assets 695 816 172 99 171 181 68 56 – – – – 1,105 1,152 1 In 2019, the Group reclassified USD 2 billion of assets to held for sale based on agreements signed to sell business in the UK (see note 5). In addition, assets held for sale include land and buildings formerly classified as investment property and held for own use amounting to USD 38 million. In 2018, the Group reclassified USD 24 billion of assets to held for sale based on agreements signed to sell business in the UK, Venezuela and Germany (see note 5). In addition, assets held for sale include land and buildings formerly classified as investment property and held for own use amounting to USD 29 million.
Property & Casualty – Revenues and non-current assets by region in USD millions Gross written premiums and policy fees from external customers
Rest of Europe, Middle East & Africa 206 167 505 179 4 5
Rest of Asia Pacific 3 114 191 – – – –
Significant subsidiaries are defined as those subsidiaries which either individually or in aggregate, contribute significantly to gross written premiums, shareholder’s equity, total assets or net income attributable to shareholders.
Spain Bansabadell Pensiones, E.G.F.P, S.A. Madrid 50 50 EUR 7.8 Bansabadell Seguros Generales, S.A. de Seguros y Reaseguros Madrid 50 50 EUR 10.0 Bansabadell Vida S.A. de Seguros y Reaseguros Madrid 50 50 EUR 43.9 Zurich Latin America Holding S.L. - Sociedad Unipersonal Barcelona 100 100 EUR 43.0 Zurich Santander Holding (Spain), S.L. 1 Boadilla del Monte 51 51 EUR 94.3 Zurich Santander Holding Dos (Spain), S.L. 1 Madrid 51 51 EUR 40.0 Zurich Santander Insurance America, S.L. 1 Madrid 51 51 EUR 177.0 Zurich Vida, Compañía de Seguros y Reaseguros, S.A. - Sociedad Unipersonal Madrid 100 100 EUR 56.4 Switzerland Zurich Finance Company AG Zurich 100 100 CHF 0.2 Zurich Insurance Company Ltd Zurich 100 100 CHF 825.0 Zurich Life Insurance Company Ltd Zurich 100 100 CHF 60.0 Zürich Rückversicherungs-Gesellschaft AG Zurich 100 100 CHF 11.7 United Kingdom Allied Zurich Holdings Limited St. Hélier, Jersey 100 100 GBP 477.6
Zurich Financial Services (UKISA) Limited Cheltenham, England 100 100 GBP 1,340.8
Zurich International Life Limited Douglas, Isle of Man 100 100 GBP 123.4
Zurich UK General Services Limited Fareham, England 100 100 GBP 343.2
United States of America Farmers Group, Inc. 2 Carson City, NV 100 100 USD 0.001
ZCM Matched Funding Corp. George Town, Cayman Islands 100 100 USD 0.00001
Opinion We have audited the consolidated financial statements of Zurich Insurance Group Ltd and its subsidiaries (the Group), which comprise the consolidated income statement and consolidated statement of comprehensive income for the year ended December 31, 2019, the consolidated balance sheet as of December 31, 2019, the consolidated statement of cash flows and consolidated statement of changes in equity for the year ended December 31, 2019, and notes to the consolidated financial statements, including a summary of significant accounting policies.
We concluded full scope audit work at 21 business units in 8 countries. The full scope audit work addressed 66% and 70% of the Group’s gross written premiums and policy fees (GWP) and total assets, respectively. In addition, specific procedures were performed on a further 12 business units in 8 countries representing a further 8% and 10% of the Group’s GWP and total assets, respectively.
We chose NIBIT as a benchmark because, in our view, it is the benchmark against which the Group’s performance is most commonly measured, and is a generally accepted benchmark. We also consider BOP as a benchmark because, in our view, BOP is a key indicator for analysts and other external parties.
The Group’s business units vary significantly in size and we identified 21 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 150 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 12 business units. Together the full scope audits and specific audit procedures accounted for 74% and 80% of Group GWP and total assets, respectively.
– Involving our life insurance actuarial experts to independently test and challenge management’s methodology and the assumptions used, with particular consideration of industry studies, the Group’s experience and management’s liability adequacy testing procedures. We focused on the changes to life actuarial methodology and assumptions during the year and assessed whether the methodologies are in compliance with recognized actuarial practices as well as regulatory and reporting requirements.
Specifically, long-tail lines of business, which often have low frequency, high severity claims settlements, are generally more difficult to project and subject to greater uncertainties than those with short-tail, high frequency claims. Further, not all natural catastrophes can be modeled using actuarial methodologies, which increases the degree of judgment needed in estimating property and casualty loss reserves.
– Utilizing information technology audit techniques to analyse claims through claims data plausibility checks and recalculation of claims development patterns.
– Performing 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 experts compared their re-projected reserves to those recorded by the Group, and assessed whether the recorded reserves were within a reasonable range.
– Performing sensitivity testing and evaluated the appropriateness of any significant adjustments made by management relating to property and casualty reserve estimates.
The Group’s goodwill is allocated to cash generating units (CGUs) that are identified generally at a segment level. Acquisitions which closed in 2019 have added substantial amounts of goodwill. The valuation and recoverability of significant goodwill and attorney-in-fact contracts involves complex judgments and estimates, including projections of future income, terminal growth rate assumptions, and discount rates. These assumptions and estimates can have a material impact on the valuations and impairment decisions reflected in the consolidated financial statements of the Group.
We assessed the design effectiveness of selected key controls over terminal growth rate assumptions, and discount rates related to the recoverability of goodwill and attorney-in-fact contracts. In relation to the particular matters set out opposite, our substantive testing procedures included the following: – Corroborating the justification of the CGUs defined by management for goodwill allocation.
– Testing the reasonableness of the assumptions used in the impairment assessment including projections of future income, terminal growth rate assumptions, discount rates and sensitivity analyses to determine the impact of those assumptions.
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 Zurich Insurance Group Ltd’s net income after taxes for the year was CHF 2,864 million compared with CHF 67 million in 2018. In 2019, the net income after taxes mainly reflects dividend income from its subsidiary Zurich Insurance Company Ltd (ZIC) in the amount of CHF 2,750 million. No dividend was paid by ZIC in 2018, but ZIC repaid CHF 2,700 million of the subordinated debt to its parent in 2018.
The Board of Directors proposes to the Annual General Meeting, which is to be held on April 1, 2020, to distribute a dividend from available earnings for 2019 of CHF 20.00 less 35 percent Swiss withholding tax per share.
Other operating income 44 29 Other operating expenses 4 (11,311) (15,312)
Short-term liabilities Other liabilities to subsidiaries 16,258 65,028 Other liabilities to third parties 920 962 Other liabilities to shareholders 1,480 1,425 Accrued expenses and deferred income to third parties 15 47 Total short-term liabilities 18,673 67,462 Total liabilities 18,673 67,462 Shareholders’ equity (before appropriation of available earnings)
Capital contribution reserve 11 287,506 287,506 General capital contribution reserve 29,495 27,751 Reserve for treasury shares (indirectly held via subsidiaries) 12 258,011 259,755
General legal reserve 515,190 732,478 General legal reserve 341,140 341,140 Reserve for treasury shares (indirectly held via subsidiaries) 12 174,050 391,338
Retained earnings: As of January 1 12,729,702 15,529,736 Dividends paid (2,816,854) (2,475,287) Cancellation of treasury shares (directly held by the Company) 10 (547,993) – Net income after taxes 2,863,506 66,591 Allocation from/to reserve for treasury shares (indirectly held via subsidiaries) 217,288 (391,338)
Retained earnings, as of December 31 12,445,649 12,729,702 Total shareholders’ equity (before appropriation of available earnings) 13,607,949 13,561,297 Total liabilities and shareholders’ equity 13,626,622 13,628,759
d) Reserves for treasury shares (indirectly held via subsidiaries) Reserves for treasury shares are accounted for at the acquisition costs of these shares held by the respective subsidiary.
In addition to the above mentioned directly held subsidiaries, the Company indirectly owns additional subsidiaries primarily through Zurich Insurance Company Ltd. Information regarding indirectly owned subsidiaries is included on pages 285 to 287 of this Annual Report.
9. Commitments and contingencies Zurich Insurance Group Ltd has provided unlimited guarantees in support of entities belonging to the Zurich Capital Markets group of companies. The Company has also entered into support agreements and guarantees for the benefit of certain of its subsidiaries. They amounted to CHF 1,068 million as of December 31, 2019, and CHF 1,054 million as of December 31, 2018. The increase is mainly due to a positive foreign exchange effect, partially offset by an expired letter of comfort in the amount of USD 10 million (CHF 10 million) provided to an indirectly fully owned subsidiary. 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.
10. Share capital a) Changes to the share capital During 2018, Zurich Insurance Group Ltd had repurchased shares via a public share buy-back program for cancellation purposes. At the Annual General Meeting of April 3, 2019, the shareholders approved the cancellation of the 1,740,000 own shares of Zurich Insurance Group Ltd repurchased under the public share buy-back program. The corresponding reduction of the share capital of Zurich Insurance Group Ltd from 151,348,027 to 149,608,027 fully paid registered shares with a nominal value of CHF 0.10 each through cancellation of the repurchased own shares was completed in June 2019.
The authorized share capital (Art. 5bis 1 of the Articles of Association) is comprised of 45,000,000 shares. The contingent share capital for Financial Instruments (Art. 5ter 1a of the Articles of Association; term as defined in section b) below) is comprised of 30,000,000 shares and the contingent share capital for Group employees (Art. 5ter 2a of the Articles of Association) is comprised of 4,947,232 shares. During the year 2019, no shares were issued to Group employees out of the contingent capital. During the year 2018, a total of 8,176 shares were issued to Group employees out of the contingent capital.
b) Authorized share capital (as specified in Article 5bis of the Articles of Association) Until April 4, 2020, the Board of Zurich Insurance Group Ltd is authorized to increase the share capital of Zurich Insurance Group Ltd 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, Zurich Insurance Group Ltd or one of its Group companies, up to a maximum of 15,000,000 shares, if the shares are to be used: 33 for the take-over of an enterprise, of parts of an enterprise or of participations or for investments by Zurich Insurance Group Ltd or one of its Group companies, or the financing including re-financing of such transactions; or 33 for the purpose of expanding the scope of shareholders in connection with the quotation of shares on foreign stock exchanges or issuance of shares on the national or international capital markets (including private placements to one or more selected investors); or 33 for the conversion of loans, bonds, similar debt instruments, equity-linked instruments or other financial market instruments (collectively, the ‘Financial Instruments’) issued by Zurich Insurance Group Ltd or one of its Group companies; or 33 for the improvement of the regulatory capital position of Zurich Insurance Group Ltd or one of its Group companies in a fast and expeditious manner.
Up to April 4, 2020, 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.
c) Contingent share capital (as specified in Article 5ter of the Articles of Association) Financial Instruments The share capital of Zurich Insurance Group Ltd may be increased by an amount not exceeding CHF 3,000,000 by issuing of up to 30,000,000 fully paid registered shares with a nominal value of CHF 0.10 each by the voluntary or mandatory exercise of conversion and/or option rights which are granted in connection with the issuance of Financial Instruments by Zurich Insurance Group Ltd or one of its Group companies or by mandatory conversion of Financial Instruments issued by the Zurich Insurance Group Ltd or one of its Group companies, that allow for contingent mandatory conversion into shares of Zurich Insurance Group Ltd, or by exercising option rights which are granted to the shareholders. The subscription rights are excluded. The then-current owners of the Financial Instruments shall be entitled to subscribe for the new shares. The conversion and/or option conditions are to be determined by the Board.
The Board is authorized, when issuing Financial Instruments to restrict or exclude the advance subscription rights in cases where they are issued: 33 for the financing including re-financing of a take-over of an enterprise, of parts of an enterprise, or of participations or of investments by Zurich Insurance Group Ltd or one of its Group companies; or 33 on national or international capital markets (including private placements to one or more selected investors); or 33 for the improvement of the regulatory capital position of Zurich Insurance Group Ltd or one of its Group companies in a fast and expeditious manner.
Employee participation On January 1, 2019, the contingent share capital, to be issued to employees of Zurich Insurance Group Ltd and its subsidiaries, amounted to CHF 494,723.20 or 4,947,232 fully paid registered shares with a nominal value of CHF 0.10 each. On January 1, 2018, the contingent share capital, to be issued to employees of Zurich Insurance Group Ltd and its subsidiaries, amounted to CHF 495,540.80 or 4,955,408 fully paid registered shares with a nominal value of CHF 0.10 each.
As of January 1 287,506 494,374 Transfer to free reserve (adjustment capital contribution reserve) – (19) Dividend payment out of capital contribution reserve – (208,759) Agio on share-based payment transactions – 1,910 As of December 31 287,506 287,506 12. Reserves for treasury shares (indirectly held via subsidiaries) These reserves correspond to the purchase value of all Zurich Insurance Group Ltd shares held by companies of the Zurich Insurance Group as shown in the table below.
Purchases during the year 272,874 106,310 1,634,015 502,359 Sales during the year (1,065,592) (325,342) (448,150) (133,354)
15. Remuneration of the Board of Directors and the Executive Committee The information required by articles 14 –16 of the Ordinance Against Excessive Compensation, which prevails over article 663bbis of the Swiss Code of Obligations, is disclosed and audited in the remuneration report on pages 92 to 101 of this Annual Report.
Eligible shares 149,608,027 151,348,027 1 These figures are based on the share capital issued on December 31, 2019, and may change depending on the number of shares issued on April 6, 2020. Treasury shares are not entitled to dividends and will not be taken into account.
Available earnings As of January 1, 2019 12,729,702 Dividends paid (2,816,854) Cancellation of treasury shares (directly held by the Company) (547,993) Net income after taxes 2,863,506 Allocation from reserve for treasury shares (indirectly held via subsidiaries) 217,288
Available earnings, as of December 31, 2019 12,445,649 in CHF thousands Available earnings
In our opinion, the accompanying financial statements (pages 297 to 303) as of December 31, 2019 comply with Swiss law and the Company’s articles of association.
As key audit matter the following area of focus has been identified: Recoverability of carrying value of investments in subsidiaries
Audit Materiality The scope of our audit was influenced by our application of materiality. Our audit opinion aims to provide reasonable assurance that the financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.
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 it is a generally accepted benchmark.
We obtained an understanding of management’s process and controls, and assessed and tested the design and operating effectiveness of a selected key control over the recoverability of the carrying value of investments in subsidiaries.
– Tested the reasonableness of the assumptions used in the impairment assessment including projections of future income, terminal growth rate assumptions and discount rates.
Based on the work performed we consider management’s impairment testing including the assumptions used to support the carrying value of investments in subsidiaries as reasonable.
Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Swiss law and Swiss Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
Mark Humphreys Ray Kunz Audit expert Audit expert Auditor in charge
Return on shareholders’ equity (ROE) is a measure that indicates the level of profit or loss relative to resources provided by shareholders. It is calculated as net income after taxes attributable to shareholders, annualized on a linear basis, divided by the average value of shareholders’ equity, adjusted for net unrealized gains/(losses) on available-for-sale investments and cash flow hedges, using the value at the beginning and end of each quarter within the period. The average shareholders’ equity for each quarter is then added together and divided by the number of quarters. If the dividend is approved at the Annual General Meeting within the first ten working days in April, then the dividend is deducted from the second quarter opening shareholders’ equity. Please refer to the ‘supplementary information (unaudited)/ROE, EPS and BVPS’ for further information.
Cash remittances is the net extraction of capital from each of the business units (P&C, Life, Farmers and Non-Core Business) to Group Functions & Operations (GF&O) and after all central costs in GF&O. Cash remittances are typically extracted from subsidiaries by way of dividends, capital reductions, repayment of intragroup debt and reinsurance profits.
Zurich Economic Capital Model (Z-ECM) is an internal economic capital model which defines the Z-ECM capital required to protect the Group’s policyholders in order to meet all of their claims with a confidence level of 99.95 percent over a one-year time horizon. The Z-ECM ratio is defined as the ratio of the Group’s available financial resources defined under the Z-ECM to the required capital under the Z-ECM model. Please refer to the ‘Annual Report/risk review’ for further information.
The following Property & Casualty (P&C) measures are net of reinsurance.
Net underwriting result is calculated as the difference between net earned premiums and policy fees and the sum of net insurance benefits and losses and net technical expenses. Please refer to the ‘supplementary information (unaudited)/P&C by segment & customer units’ for further information.
Total net technical expenses includes underwriting and policy acquisition costs, as well as the technical elements of administrative and other operating expenses, amortization of intangible assets, interest credited to policyholders and other interest, and other income. Please refer to the ‘supplementary information (unaudited)/P&C by segment & customer units’ for further information.
Loss ratio is a performance measure that indicates the level of claims during the period relative to net earned premiums and policy fees. It is calculated as insurance benefits and losses net, which include paid claims, claims incurred but not reported (IBNR) and claims handling costs, divided by net earned premiums and policy fees. Please refer to the ‘supplementary information (unaudited)/P&C by segment & customer units’ for further information.
Expense ratio is a performance measure that indicates the level of technical expenses during the period relative to net earned premiums and policy fees. It is calculated as the sum of net technical expenses and policyholder dividends and participation in profits, divided by net earned premiums and policy fees. Please refer to the ‘Supplementary information (unaudited)/P&C by segment & customer units’ for further information.
Net non-technical result includes expenses or income not directly linked to insurance operating performance, such as gains/losses on foreign currency translation and interest expense on debt. It includes the impact of financial market volatility and other non-operational variables that distort the ongoing business performance. Please refer to the ‘supplementary information (unaudited)/P&C by segment & customer units’ for further information.
Imprint The Annual Report is published in English and German, with the financial statements in English only. In the event of inconsistencies in the German translation, the English original version shall prevail.
All references to ‘Farmers Exchanges’ mean Farmers Insurance Exchange, Fire Insurance Exchange, Truck Insurance Exchange and their subsidiaries and affiliates. The three Exchanges are California domiciled interinsurance exchanges owned by their policyholders with governance oversight by their Boards of Governors. Farmers Group, Inc. and its subsidiaries are appointed as the attorneys-in-fact for the Farmers Exchanges and in that capacity provide certain non-claims services and ancillary services to the Farmers Exchanges. Neither Farmers Group, Inc., nor its parent companies, Zurich Insurance Company Ltd and Zurich Insurance Group Ltd, have any ownership interest in the Farmers Exchanges. Financial information about the Farmers Exchanges is proprietary to the Farmers Exchanges, but is provided to support an understanding of the performance of Farmers Group, Inc. and Farmers Reinsurance Company.
It should be noted that past performance is not a guide to future performance. Please also note that interim results are not necessarily indicative of full year results.