Life insurance The reserves for future life policyholders’ benefits and policyholders’ contract deposits and other funds contain a number of assumptions regarding mortality or longevity, lapses, surrenders, expenses, discount rates and investment returns. These assumptions can vary by country, year of policy issuance and product type and are determined with reference to past experience adjusted for new trends, current market conditions and future expectations. As such the liabilities for future life policyholders’ benefits and policyholders’ contract deposits may not represent the ultimate amounts paid out to policyholders. For example: • The estimated number of deaths determines the value of the benefit payments. The main source of uncertainty arises because of the potential for pandemics and wide-ranging lifestyle changes, such as changes in eating, smoking and exercise habits, which could result in earlier deaths for age groups in which the Group has significant exposure to mortality risk.
Deferred policy acquisition costs and PVFP are deferred only to the extent that they are recoverable from future policy income which also depends on the above assumptions. Recoverability is tested at contract inception and subsequently on a regular basis with reference to current expectations of future profits or margins.
b) Fair value measurement In determining the fair values of financial debt instruments and equity instruments traded in exchange and OTC markets, the Group makes extensive use of independent, reliable and reputable third party pricing providers and only in rare cases places reliance on prices that are derived from internal models.
Valuations can be subject to significant judgment especially when the fair value is determined based on at least one significant unobservable input parameter; such items are classified within Level 3 of the fair value hierarchy. See notes 6, 7 and 24 for further information regarding the estimate of fair value.
The Group determines that there is objective evidence of impairment of an available-for-sale equity security, if at the reporting date: • Its fair value is below the weighted-average cost by an amount significantly exceeding the volatility threshold determined quarterly for the respective equity market (such as North America, UK, Switzerland, other European countries and Asia-Pacific), or
The recoverable amount of the intangible assets with an indefinite life related to the Farmers segment (i.e., attorney- in-fact (AIF) relationships and goodwill) is determined on the basis of value-in-use calculations. These calculations use cash flow projections based on business plans which are approved by management and typically cover a threeyear period. The basis for determining the values assigned to the key assumptions are current market trends and earnings projections.
Table 4.2 sets out, as of the date of valuation, the applied discount rates and the perpetual growth rates beyond the projection period which are dependent on country specific growth rate and inflation expectations used for the major distribution agreements.
Banco Sabadell S.A. entities in Spain 1,880 9.3 11.0 2.0 2.0 Banco Santander S.A. entities in Latin America 1,588 12.2 – 35.7 12.6 – 42.0 n / a n / a
For impairment testing purposes, these distribution agreements are assessed as single assets by counterparty.
See notes 3, 6, 14, 15 and 16 for further information on impairment of assets.
Transactions in 2014 Acquisitions On October 31, 2014, the Group completed the acquisition of an effective 50.0 percent stake in Mediterráneo Seguros Diversos, S.A. (MSD), a general insurance company incorporated in Spain and thus extended the existing cooperation with Banco Sabadell S.A. (Banco Sabadell) entered into during 2008. The Group obtained control over MSD by virtue of the existing shareholders’ agreement between the Group and Banco Sabadell.
The initial consideration on a 50.0 percent basis amounted to approximately USD 50 million, subject to a purchase price adjustment. The Group is still in the process of finalizing the purchase price adjustment. In addition to the initial consideration, an uncapped contingent liability based on the future profitability over the term of the distribution agreement was agreed, for which the fair value was estimated to amount to USD 4 million on a 50.0 percent basis. Based on the preliminary purchase accounting, the fair value of net tangible assets acquired amounted to USD 33 million, identifiable intangible assets relating to the distribution agreement amounted to USD 76 million, net of deferred tax and the non-controlling interest amounted to USD 54 million.
Divestments On October 30, 2014, the Group closed the sale of its General Insurance retail business in Russia to OLMA Group. The contractually agreed sales price amounted to RUB 1 billion (approximately USD 23 million), subject to a purchase price adjustment. The Group is still in the process of finalizing any purchase price adjustment. A pre-tax loss of USD 247 million has been recorded within net gain/(loss) on divestments of businesses.
1 Net capital losses on derivative financial instruments attributable to cash flow hedge ineffectiveness amounted to USD 29 million and USD 9 million for the years ended December 31, 2014 and 2013, respectively.
2 Rental operating expenses for investment property included in investment expenses for Group investments amounted to USD 85 million and USD 119 million for the years ended December 31, 2014 and 2013, respectively.
Details of Group investments by category as of December 31 2014 2013
Cash and cash equivalents 7,600 3.7 7,181 3.5 Equity securities: Fair value through profit or loss 3,619 1.8 3,425 1.7
Debt securities: Fair value through profit or loss 7,121 3.5 7,121 3.4
Mortgage and asset-backed securities – – 18,868 19,253 706 679 Redeemable preferred stock – – 8 9 – –
Market value revaluation 189 72 Transfer from assets held for own use 70 81 Transfer to assets held for sale (28) (87) Foreign currency translation effects (1,032) 214 As of December 31 8,784 8,745
2 The Group had the right to sell or repledge, in the absence of default by its counterparties, securities received as collateral with a fair value of USD 7,344 million and USD 9,725 million as of December 31, 2014 and December 31, 2013, respectively.
3 The Group’s counterparties have the right to sell or repledge, in the absence of default, assets pledged as collateral with a fair value of USD 1,307 million and USD 1,508 million as of December 31, 2014 and December 31, 2013, respectively. The majority of these assets were debt securities.
4 The Group had the right to sell or repledge, in the absence of default by its counterparties, securities received as collateral with a fair value of nil and 187 million as of December 31, 2014 and December 31, 2013, respectively.
Consolidated financial statements continued 7. Group derivative financial instruments and hedge accounting
Maturity profile of notional amounts and fair values of Group derivative financial instruments in USD millions, as of December 31 2014 2013
Total Group derivative financial instruments 18,746 3,682 6,172 28,600 561 (307) 38,844 552 (682)
The Group also has fair value hedge relationships consisting of cross currency swaps to protect certain non eurodenominated fixed income securities from foreign currency fluctuation.
Table 7.3 sets out gains and losses arising from fair value hedges: Q4_2014_12_AR14_104_Consolidated_financial_statements_en.indd 189 23.02.2015 16:37:31
Gains/(losses) arising from fair value hedges in USD millions, for the years ended December 31 2014 2013
Gains/(losses) on hedging instruments 1 48 (57) on hedged items attributable to the hedged risk (35) 52 1 Excluding current interest income, which is recognized as an offset on the same line as the interest expense of the hedged debt.
The net gains/(losses) deferred in other comprehensive income on derivative financial instruments designated as cash flow hedges were USD 109 million and USD (94) million before tax for the years ended December 31, 2014 and 2013, respectively.
A hedge relationship through a foreign exchange forward with a notional amount of USD 168 million and USD 275 million was in place as of December 31, 2014 and 2013, respectively. Net gains/(losses) deferred in other comprehensive income were USD (13) million and USD 4 million before tax for the years ended December 31, 2014 and 2013, respectively.
Related amounts not offset (186) (216) 186 216 Cash collateral (received)/pledged (896) (845) 82 375 Non cash collateral (received)/pledged (27) (9) 8 7
Policyholders’ contract deposits and other funds 23,415 20,162 (1,994) (2,036) 21,421 18,126 Reserves for unit-linked contracts 71,400 74,873 – – 71,400 74,873 Total reserves for insurance contracts 1 253,719 265,440 (16,650) (18,107) 237,069 247,333 1 Total reserves for insurance contracts ceded are gross of allowances for uncollectible amounts of USD 100 million and USD 129 million as of December 31, 2014 and December 31, 2013, respectively.
Losses and loss adjustment expenses incurred: Losses and loss adjustment expenses paid: 1 The 2014 net movement includes USD 47 million reclassified from future life policyholders’ benefits (see note 1), USD 49 million due to the reclassification of a subsidiary of Centre Group Holdings Limited from held for sale (see note 5), USD 6 million due to the acquisition of MSD (see note 5) and USD (40) million due to the sale of the Group’s General Insurance retail business in Russia (see note 5). The 2013 net movement includes USD (49) million due to the reclassification of a subsidiary of Centre Group Holdings Limited to held for sale (see note 5).
• In Global Corporate, adverse prior year development of USD 56 million arising in North America, partially offset by favorable development in Europe; • Adverse prior year development of USD 198 million relating to asbestos and other run-off businesses.
For the year ended December 31, 2013, the decrease of USD 66 million (USD 324 million before the foreign currency translation impact) in net reserves for losses and loss adjustment expenses was mostly driven by payments on crop and storm Sandy losses in North America. Favorable reserve development arising from reserves established in prior years amounted to USD 757 million, and mainly related to the following movements by market-facing business, country and line of business: • The personal and commercial business in Europe reported favorable prior year development of USD 412 million, mostly driven by USD 326 million in motor liability in Switzerland and a reduction of large property claims of USD 46 million in the UK; • In Global Corporate, favorable development of USD 355 million was driven by lower estimates of large property claims in Switzerland, the UK and Global Energy and lower estimates for the Thai floods, which occurred in 2012.
Development of insurance losses, net in USD millions, as of December 31 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Gross reserves for losses and loss adjustment expenses 60,425 64,535 67,890 65,218 68,126 68,274 67,762 69,986 68,312 64,472
Initial net reserves for losses and loss adjustment expenses 46,194 50,814 54,712 52,986 55,944 56,180 55,341 57,385 57,319 54,703
Cumulative incurred as of December 31: Seven years later (841) (3,146) (3,215) Eight years later (681) (2,845) Nine years later (423)
Cumulative (deficiency)/ redundancy of net reserves 423 2,845 3,215 2,958 2,587 1,891 677 652 59 Cumulative (deficiency)/ redundancy as a percentage of initial net reserves 0.9% 5.6% 5.9% 5.6% 4.6% 3.4% 1.2% 1.1% 0.1%
Table 8.3 presents changes in the historical reserves for losses and loss adjustment expenses, net of reinsurance, that the Group established in 2005 and subsequent years. Reserves are presented by financial year, not by accident year. The reserves (and the development thereon) are for all accident years in that financial year. The top line of the table shows the estimated gross reserves for unpaid losses and loss adjustment expenses as of each balance sheet date, which represents the estimated amount of future payments for losses incurred in that year and in prior years. The cumulative paid portion of the table presents the cumulative amounts paid through each subsequent year in respect of the reserves established at each year end. Similarly, the cumulative incurred losses section details the sum of the cumulative paid amounts shown in the triangle above and the changes in loss reserves since the end of each financial year. The net reserves re-estimated portion of the table shows the re-estimation of the initially recorded reserve as of each succeeding year end. Reserve development is shown in each column. Changes to estimates are made as more information becomes known about the actual losses for which the initial reserves were established. The cumulative deficiency or redundancy is equal to the initial net reserves less the liability re-estimated as of December 31, 2014. It is the difference between the initial net reserve estimate and the last entry of the diagonal. Conditions and trends that have affected the development of reserves for losses and loss adjustment expenses in the past may or may not necessarily occur in the future, and accordingly, conclusions about future results cannot be derived from the information presented in table 8.3.
Development of future life policyholders’ benefits in USD millions Gross Ceded Net
Effect of changes in assumptions for future life policyholders’ benefits in USD millions, for the years ended December 31 2014 2013
1 2014 includes USD (105) million relating to changes in assumptions for terminal bonus reserves in Germany.
Fee income and other expenses (318) (285) (7) (12) (325) (297) Interest and bonuses credited to policyholders 1,593 1,217 (76) (80) 1,517 1,137 (Decrease)/increase recorded in other comprehensive income 3,925 (1,041) – – 3,925 (1,041) Foreign currency translation effects (1,907) 403 – – (1,907) 403
Liabilities for investment contracts in USD millions, as of December 31 2014 2013
Development of liabilities for investment contracts in USD millions 2014 2013
As of January 1 2,338 2,560 Net unrealized gains/(losses) on investments 675 (196) Current period profit/(loss) 71 (96) Foreign currency translation effects (243) 70 As of December 31 2,840 2,338
Losses and loss adjustment expenses 25,360 25,749 (2,488) (2,621) 22,871 23,128 Life insurance death and other benefits 12,093 9,507 (600) (437) 11,492 9,070 Total insurance benefits and losses 37,452 35,256 (3,088) (3,058) 34,364 32,198
As of January 1 724 770 Origination costs deferred 57 63
Expenses in USD millions, for the years ended December 31 2014 2013
Administrative and other operating expense 8,910 8,804 Other underwriting and policy acquisition expenses 1,2 2,439 2,197 Unallocated loss adjustment expenses 3 1,690 1,725 Other investment expenses for Group investments 4 160 125 of which: Personnel and other related costs 1 6,132 5,900 Amortization and impairments of intangible assets 840 1,011 Depreciation and impairments of property and equipment 173 186 Building and infrastructure 1 577 545 Brand and marketing expenses 1 523 498 Life recurring commission 415 380 Asset and other non-income taxes 95 150
Restructuring costs 97 40 External professional services 1 1,109 982 Foreign currency translation 1 (30) 41 1 The presentation of 2013 has been modified, showing a change in other underwriting and policy acquisition expenses, with corresponding changes by type of expense. This has no impact on the Group’s consolidated income statement.
Gross carrying value as of January 1, 2014 354 1,020 407 465 739 2,986
Gross carrying value as of December 31, 2013 354 1,020 407 465 739 2,986
Net carrying value as of January 1, 2014 1,852 729 3,553 1,025 1,640 81 8,880
Amortization charged to other comprehensive income – (50) – – – – (50)
Gross carrying value as of December 31, 2014 1,778 2,701 4,480 1,025 4,588 186 14,760 1 Distribution agreements relate to cancelations at an agreed price. Other relates to the sale of the Group’s General Insurance retail business in Russia (see note 5).
Intangible assets by segment – current period in USD millions, as of December 31, 2014
Other Operating Businesses – – – – 195 – 195 Net carrying value as of December 31, 2014 1,661 556 3,577 1,025 1,543 53 8,415
Net carrying value as of January 1, 2013 2,107 844 3,815 1,025 1,670 94 9,555 Additions and transfers – – 36 – 433 – 469 Divestments and transfers – – – – (2) – (3)
As of December 31, 2013, intangible assets relating to non-controlling interests were USD 163 million for the present value of future profits (PVFP) of acquired insurance contracts, USD 1,660 million for distribution agreements and USD 12 million for software.
In 2013, following a review of the Russian retail business, the Group decided to manage the retail business in Russia on a stand-alone basis and separately from the General Insurance CGU. On this basis, the Group reassessed the recoverability of the Russian goodwill of USD 209 million and concluded that it was fully impaired.
Additions of USD 36 million related to new distribution agreements entered into by Global Life in the Middle East, and by General Insurance and Global Life in Brazil.
Fin an cial info rm atio n 16. Receivables and other assets Table 16
USD 603 million, respectively, carried at fair value through profit or loss.
Table 17.2 shows the maturity schedule of other financial liabilities as of December 31, 2014 and 2013.
Undiscounted cash flows 3 1 Excluding liabilities for defined benefit plans. 2 Allocation to the time bands is based on the expected maturity date. 3 Allocation to the time bands is based on the earliest contractual maturity.
During the year ended December 31, 2014, restructuring programs with estimated costs of USD 104 million for the current year impacted mainly Other Operating Businesses, Global Life in the UK as well as General Insurance in Ireland and the UK. This included USD 63 million relating to the Group’s strategic initiative for organizational alignment to reduce complexity and cost while enhancing agility. USD (6) million related to net decreases of provisions for restructuring which were initiated in prior years.
During the year ended December 31, 2013, restructuring programs with estimated costs of USD 62 million were announced and primarily impacted General Insurance in Middle East and Africa, Global Life in the UK and Ireland as well as Farmers. USD (21) million related to net decreases of provisions for restructuring which were initiated in prior years. In addition, the Group recorded USD 37 million of software impairments (see note 15), and USD 30 million for impairments of deferred policy acquisition costs and deferred origination costs, net of deferred front-end fees (see note 12), resulting from restructuring decisions.
Expected and actual income tax expense in USD millions, for the years ended December 31 Rate 2014 Rate 2013
Net income before income taxes 5,844 5,960 less: income tax (expense)/benefit attributable to policyholders (106) (285) Net income before income taxes attributable to shareholders 5,738 5,674 Expected income tax expense attributable to shareholders computed at the Swiss statutory tax rate 22.0% 1,262 22.0% 1,248 Increase/(reduction) in taxes resulting from: Tax rate differential in foreign jurisdictions 240 158 Tax exempt and lower taxed income (109) (107) Non-deductible expenses 148 78 Tax losses previously unrecognized or no longer recognized 85 40 Prior year adjustments and other (63) (2)
Actual income tax expense attributable to shareholders 27.3% 1,564 24.9% 1,415 plus: income tax expense/(benefit) attributable to policyholders 106 285 Actual income tax expense 28.6% 1,670 28.5% 1,701
Tax loss carryforwards 615 – 572 – Gross deferred tax assets/(liabilities) before valuation allowance 3,282 (1,521) 3,791 (1,621) Valuation allowance (200) – (150) – Gross deferred tax assets/(liabilities) after valuation allowance 3,083 (1,521) 3,641 (1,621) Deferred tax assets 1,561 2,020 Gross deferred tax Deferred acquisition and origination costs 28 (2,447) 90 (2,560) Depreciable and amortizable assets 236 (2,215) 373 (2,566) Life policyholders’ benefits and deposits 1 1,392 (855) 1,229 (940) Unrealized (gains)/losses on available-for-sale investments and cash flow hedges 190 (1,367) 172 (888) Accruals and deferred income 118 (203) 112 (136) Reserves for losses and loss adjustment expenses 105 (95) 159 (111) Reserves for unearned premiums 40 (104) 46 (84) Deferred front-end fees 528 – 551 – Pensions and other employee benefits 498 (94) 369 (42)
The net deferred tax liabilities relating to non-controlling interests amounted to USD 431 million and USD 531 million as of December 31, 2014 and 2013, respectively.
Tax loss carryforwards and tax credits in USD millions, as of December 31 2014 2013
For which deferred tax assets have been recognized, expiring > 20 years or with no time limitation 1,230 1,395
For which deferred tax assets have not been recognized, expiring > 20 years or with no time limitation 976 658
Management assesses the recoverability of the deferred tax asset carrying values based on future years taxable income projections and considers that the carrying values of the deferred tax assets as of December 31, 2014, are recoverable.
2.25% CHF 500 million notes, due July 2017 4 501 559 2.375% CHF 525 million notes, due November 2018 4 525 585 1.50% CHF 400 million notes, due June 2019 3,4,5 414 443 1.125% CHF 400 million notes, due September 2019 3,4,5 419 450 0.625% CHF 250 million notes, due July 2020 3,4,5 256 – 2.875% CHF 250 million notes, due July 2021 4 249 277 3.375% EUR 500 million notes, due June 2022 3,4,5 656 687 1.875% CHF 100 million notes, due September 2023 3,4,5 110 112 1.750% EUR 500 million notes, due September 2024 4,5 609 – 1.500% CHF 150 million notes, due July 2026 3,4,5 161 –
Zurich Finance (USA), Inc. Euro Commercial Paper Notes, due in less than 1 year 400 400 4.50% EUR 1 billion notes, due September 2014 – 1,384 6.50% EUR 600 million notes, due October 2015 1,4,5 726 825
Zurich Santander Insurance America S.L. 7.5% EUR 93 million loan, due December 2035 113 210 Other Various debt instruments 40 113 Senior debt 5,379 6,044 Subordinated debt
Zurich Insurance Company Ltd 12.0% EUR 143 million perpetual capital notes, first callable July 2014 – 197 4.25% CHF 700 million perpetual notes, first callable May 2016 4 702 780 8.25% USD 500 million perpetual capital notes, first callable January 2018 4,6 497 496 4.625% CHF 500 million perpetual notes, first callable May 2018 4 499 555 7.5% EUR 425 million notes, due July 2039, first callable July 2019 4 512 582 2.75% CHF 200 million perpetual capital notes, first callable September 2021 3,4,5 206 – 4.25% EUR 1 billion notes, due October 2043, first callable October 2023 4,6 1,196 1,360
Zurich Finance (USA), Inc. 4.5% EUR 269 million notes, due June 2025, first callable June 2015 3,4,5 330 385
ZFS Finance (USA) Trust II Series II 6.45% USD 700 million Trust Preferred Securities (ECAPS), due December 2065, first callable June 2016 680 677
ZFS Finance (USA) Trust V Series V 6.5% USD 1 billion Trust Preferred Securities, due May 2067, first callable May 2017 501 498
Trust V, are called before 2047, the Group will issue a replacement debt instrument with terms and provisions that will be as or more equity-like than the replaced notes. 3 These bonds are part of qualifying fair value hedges (100 percent). 4 Issued under the Group’s Euro Medium Term Note Programme (EMTN Programme). 5 The Group applied the cash flow hedge methodology to hedge the foreign currency exposure and deferred the attributable basis spreads in shareholders’ equity, whereas the fair value hedge methodology was used to hedge the interest rate exposure with changes in the fair value being recorded through the income statement. 6 These bonds are part of a qualifying net investment hedge (100 percent).
None of the debt instruments listed in table 19.1 were in default as of December 31, 2014 or 2013.
Debt maturities reflect original contractual dates without taking early redemption options into account. For call/ redemption dates, see table 19.1. The total notional amount of debt due in each period is not materially different from the total carrying value disclosed in table 19.3. Undiscounted cash flows include interest and principal cash flows on debt outstanding as of December 31, 2014 and 2013. All debt is assumed to mature within 20 years of the balance sheet date without refinancing. Floating interest rates are assumed to remain constant as of December 31, 2014 and 2013. The aggregated cash flows are translated into U.S. dollars at end-of-period rates.
In addition, the Group has access to three other revolving credit facilities totaling USD 425 million, which will expire in 2019 at the latest. A fourth revolving credit facility of USD 16 million expired in July 2014.
Fin an cial info rm atio n 20. Shareholders’ equity Table 20.1
Employee participation During 2014 and 2013, 733,614 shares and 603,099 shares, respectively, were issued to employees from contingent share capital as outlined in note 20. As a result, on December 31, 2014 and 2013, respectively, the remaining contingent share capital, which can be issued to employees of Zurich Insurance Group Ltd and its subsidiaries, amounted to CHF 165,842.30 and CHF 239,203.70 or 1,658,423 and 2,392,037 fully paid registered shares, respectively, with a nominal value of CHF 0.10 each. Pre-emptive rights of the shareholders, as well as the right for advance subscription, are excluded. The issuance of 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. Shares or option rights may be issued to employees at a price lower than that quoted on the stock exchange.
Treasury shares number of shares, as of December 31 2014 2013
The Group had 54,551 and 55,102 employees (full-time equivalents) as of December 31, 2014 and 2013, respectively. Personnel and other related costs incurred for the years ended December 31, 2014 and 2013, were USD 6,241 million and USD 5,937 million, including wages and salaries of USD 5,096 million and USD 4,686 million, 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 relating to pension and 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 benefit design, funding, investment purposes and accounting. This includes, but is not limited to: • 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
• Development and maintenance of policies on funding, asset allocation and assumption setting.
The pension plans typically expose the company to risks such as interest rate, price inflation, longevity and salary risks. To the extent the pension plans are funded, the assets held mitigate some of the liability risk but introduce investment risk.
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 of 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.
For post-employment defined benefit plans, total contributions to funded plans and benefits paid directly by the Group were USD 572 million for 2014 compared with USD 491 million for 2013. The estimated total for 2015 is USD 540 million (actual amount may differ).
German pension plans There are a number of legacy defined benefit plans in Germany, most of which were set up under works council agreements. In 2007, a contractual trust arrangement was set up to support all pension commitments of the employing companies in Germany. From this time, new contributions to the contractual trust arrangement relate to the pension payment refund of the employer companies. A separate arrangement was also established in 2010 to provide for retirement obligations that were in payment at that time. Consideration is given from time to time based on the fiscal efficiency of adding recent retirees to this arrangement and to adding assets to the contractual trust. There is currently no formal plan to pay any further contributions to the contractual trust arrangement or to transfer recent retirees. These defined benefit plans provide benefits on either a final salary, career average salary or a cash balance basis. These plans are now closed to new entrants, who instead participate in a new cash balance arrangement, which has the characteristics of a defined contribution arrangement with a capital guarantee on members’ balances, which mirrors the capital guarantee given in a conventional life insurance arrangement in Germany.
Net post-employment benefit (expense)/income: Current service cost (353) – (353) Interest (expense)/income (777) 643 (134)
Net post-employment benefit (expense)/income (986) 643 (343) Remeasurement effects included in other comprehensive income: Return on plan assets excluding interest income – 2,260 2,260 Experience gains/(losses) (45) – (45) Actuarial gains/(losses) arising from changes in demographic assumptions (210) – (210) Actuarial gains/(losses) arising from changes in financial assumptions (2,875) – (2,875)
Remeasurement effects included in other comprehensive income (3,130) 2,260 (870) Employer contributions – 536 536 Employer contributions paid to meet benefits directly 37 – 37 Plan participants’ contributions (56) 56 – Payments from the plan 645 (645) – Foreign currency translation effects 1,669 (1,410) 260
Net post-employment benefit (expense)/income: Current service cost (370) – (370) Interest (expense)/income (701) 575 (126) Past service (cost)/credit 19 – 19
Net post-employment benefit (expense)/income (1,052) 575 (477) Remeasurement effects included in other comprehensive income: Return on plan assets excluding interest income – (31) (31) Experience gains/(losses) 101 – 101 Actuarial gains/(losses) arising from changes in demographic assumptions (70) – (70) Actuarial gains/(losses) arising from changes in financial assumptions (182) – (182)
Remeasurement effects included in other comprehensive income (151) (31) (182) Employer contributions – 458 458 Employer contributions paid to meet benefits directly 40 – 40 Plan participants’ contributions (53) 53 – Payments from the plan 648 (648) – Foreign currency translation effects (450) 344 (105)
Total 1 Level 1 assets (see note 24) 2 Level 2 and 3 assets (see note 24) 3 UK annuity policies
Key information by main country – current period in USD millions, as of December 31, 2014
Key information by main country – prior period in USD millions, as of December 31, 2013
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, 2014 and 2013.
Mortality tables and life expectancies for major plans – current period in years, as of December 31, 2014 Life expectancy at age 65 for a male currently
United States RP 2014 with MP-2014 Generational projection 22.24 22.86 24.79 25.43
Duration of the defined benefit obligation (in years) 15.7 21.3 14.1 15.3 15.6 20.7 14.1 14.2
Defined benefit obligation 1 in USD millions, as of December 31 2014 2013
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 10 percent of annual pensionable salary, depending on a number of factors. The Group’s contributions under these plans amounted to USD 141 million and USD 143 million for the years ended December 31, 2014 and 2013, respectively.
a) Cash incentive plans Various businesses throughout the Group operate short-term incentive programs for executives, management and, in some cases, for employees of that business. Awards are made in cash, based on the accomplishment of both organizational and individual performance objectives. The expense recognized for these cash incentive plans amounted to USD 525 million and USD 472 million for the years ended December 31, 2014 and 2013, respectively.
Employee share plans Share Incentive Plan for employees in the UK The Group established an Inland Revenue approved Share Incentive Plan and launched the Partnership Shares element of this plan in 2003, which enabled participating employees to make monthly purchases of Zurich Insurance Group Ltd shares at the prevailing market price out of their gross earnings. This plan was terminated in 2007. There were 112 and 138 participants in the plan as of December 31, 2014 and 2013, respectively.
The Group also operates the 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 the business operating profit (BOP) after tax for the year, for 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 3,000. The total number of participating employees in the Reward Share element of the plan as of December 31, 2014 and 2013 was 5,463 and 5,201, respectively.
The shares allocated during the year are the target allocations made under the Group’s LTIP. Whether these allocations vest or not will depend on whether the performance criteria are achieved. If the vesting level turns out to be different to the target, the actual expense is adjusted accordingly.
Quantifiable commitments and contingencies in USD millions, as of December 31 2014 2013
Remaining commitments under investment agreements 871 685 Guarantees and letters of credit 1 9,661 10,283 Future operating lease commitments 1,222 884 Undrawn loan commitments 3 8 Other commitments and contingent liabilities 2 538 72 1 Guarantee features embedded in life insurance products are not included. 2 Increase relates to a future lease commitment for a building which has not yet been occupied.
Future payments under non-cancelable operating leases with terms in excess of one year in USD millions, as of December 31 2014 2013
The Group has commitments to provide collateral on certain contracts in the event of a financial strength downgrading for Zurich Insurance Company Ltd from the current AA– by Standard & Poor’s. Should the rating by Standard & Poor’s fall to A+, then the additional collateral based on information available as of December 31, 2014 and 2013 is estimated to amount to approximately nil and USD 88 million, respectively.
On March 6, 2014, the court held a hearing to consider the effect of the initial decision on the plaintiffs’ remaining claims. On July 21, 2014, the court issued a Tentative Statement of Decision for Phase 1A. The court ruled that all of the plaintiffs’ fraudulent transfer causes of action were barred, and asked the plaintiffs to confirm on the record their concession that their unfair competition claims were also barred. The court allowed the plaintiffs’ remaining claims to proceed, but held that the plaintiffs are bound by the insurance regulators’ determinations that the 1995 recapitalization was fair and in the best interests of Home’s policyholders, including the plaintiffs. In early 2015, certain plaintiffs committed to voluntarily dismiss their claims with prejudice in exchange for an agreement that the defendants will not pursue them for litigation costs. The remaining parties have exchanged information concerning possible next steps in the litigation and will next appear before the court on February 26, 2015. The Group maintains that the Fuller-Austin Case is without merit and intends to continue to defend itself vigorously.
Fin an cial info rm atio n 24. Fair value measurement
The Group makes extensive use of third party pricing providers to determine the fair values of its available-for-sale and fair value through profit or loss financial instruments, and only in rare cases places reliance on prices that are derived from internal models. Investment accounting, operations and process functions, are independent from those responsible for buying and selling the assets, and are responsible for receiving, challenging and verifying values provided by third party pricing providers to ensure that fair values are reliable, as well as ensuring compliance with applicable accounting and valuation policies. The quality control procedures used depend on the nature and complexity of the invested assets. They include regular reviews of valuation techniques and inputs used by pricing providers (for example, default rates of collateral for asset-backed securities), variance and stale price analysis, and comparisons with fair values of similar instruments and with alternative values obtained from asset managers and brokers.
Table 24.1 compares the fair value of financial assets and financial liabilities with their carrying value. Certain financial instruments are not included within this table as their carrying value is a reasonable approximation of their fair value. Such instruments include cash and cash equivalents, obligations to repurchase securities, deposits made under assumed reinsurance contracts and deposits received under ceded reinsurance contracts and other financial assets and liabilities. This table excludes financial assets and financial liabilities relating to unit-linked contracts.
Total available-for-sale securities 155,037 154,481 155,037 154,481 Fair value through profit or loss securities
Total financial liabilities held at amortized cost (19,282) (20,565) (19,084) (20,030)
All of the Group’s financial assets and financial liabilities are initially recorded at fair value. Subsequently, available- for sale financial assets, fair value through profit or loss financial assets and financial liabilities, and derivative financial instruments are carried at fair value as of the balance sheet date. All other financial instruments are carried at amortized cost and the valuation techniques used to determine their fair value measurement are described below.
Total available-for-sale securities 8,542 142,164 3,774 154,481 Fair value through profit or loss securities
Total fair value through profit or loss securities 1,072 7,080 2,394 10,546
Reinsurers’ share of reserves for insurance contracts fair value option 1 – – 346 346
Fair value hierarchy – unit-linked – prior period in USD millions, as of December 31, 2013 Level 1 Level 2 Level 3 Total
Total fair value through profit or loss securities 85,411 44,066 148 129,624
Within level 3, the Group has classified: Q4_2014_12_AR14_104_Consolidated_financial_statements_en.indd 230 23.02.2015 16:37:47
• Non-agency MBS and ABS rated below ’AAA’ that are valued by independent pricing providers using a variety of valuation techniques which may require use of significant unobservable input parameters such as asset prepayment rate, default rates and credit curves.
• Certain options and long-dated derivative financial instruments with fair values determined using significant unobservable inputs such as historical volatilities, implied volatilities from the counterparty valuations or using extrapolation techniques.
Transfers out of level 3 – (20) – – – – –
No material transfers between level 2 and level 3 occurred for the year ended December 31, 2014.
Realized gains/(losses) recognized in income 1 35 (1) (4) Unrealized gains/(losses) recognized in income 1 (70) (4) 90
For the year ended December 31, 2013, the Group transferred USD 2,489 million of fair value through profit or loss equity securities out of level 3 into level 2. The transfers were the result of using observable inputs for the price valuation of the underlying assets of certain mutual funds.
The Group has valued USD 477 million and USD 691 million of mortgage loans at fair value on a non-recurring basis as of December 31, 2014 and 2013, respectively. These are classified within level 3 as the fair value measurement is based on internal pricing models, using significant unobservable inputs.
Sensitivity of fair values reported for level 3 instruments to changes to key assumptions Within level 3, the Group classified ABS amounting to USD 2,950 million and USD 2,993 million for Group investments and USD 67 million and USD 84 million for investments for unit-linked contracts as of December 31, 2014 and 2013, respectively.
Sensitivity analysis of level 3 investments to changes in key assumptions – current period as of December 31, 2014
Key assumptions Equity levels –20% (709) +20% 709 Discount rates +20% (71) –20% 75 Spread rates +20% (51) –20% 53 Prepayment rates –20% (1) +20% 3
Sensitivity analysis of level 3 investments to changes in key assumptions – prior period as of December 31, 2013
As of December 31, 2014 and 2013 there were no loans, advances or credits outstanding from members of the Group Executive Committee. Outstanding loans and guarantees granted to members of the Board of Directors amounted to nil and USD 3 million for the years ended December 31, 2014 and 2013, respectively. The terms “members of the Board of Directors” and “members of the Group 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 4 million and USD 5 million for the years ended December 31, 2014 and 2013, respectively.
Information required by art. 663bbis and art. 663c paragraph 3 of the Swiss Code of Obligations is disclosed in the Remuneration report.
Surplus Notes in USD millions, as of December 31 2014 2013 6.15% certificate of contribution, due June 2021 707 707 6.15% certificate of contribution, due June 2021 – 140 6.15% certificate of contribution, due June 2021 – 60 Various other certificates of contribution 23 23
Certain of the Farmers Exchanges participate in an All Lines Quota Share reinsurance agreement (All Lines agreement) with Farmers Re Co and ZIC. The All Lines agreement provides for a cession of a quota share of the premiums written and the ultimate net losses sustained in all lines of business written by the Farmers Exchanges after the APD agreement has been applied.
Net earned premiums and policy fees 900 925 3,056 3,174 3,956 4,099 Insurance benefits and losses, net 5 (646) (650) (2,004) (2,173) (2,650) (2,823)
4 From January 1, 2013, Farmers Re Co and ZIC assumed a 2.5 percent and 16.0 percent respective quota share. Another 1.5 percent was assumed by a third party on the same terms as Farmers Re Co and ZIC. Effective December 31 2013, Farmers Re Co and ZIC assumed a 2.0 percent and 16.0 percent respective quota share. Another 2.0 percent was assumed by a third party on the same terms as Farmers Re Co and ZIC.
c) Farmers management fees and other related revenues Farmers Group, Inc. and its subsidiaries (FGI) through its attorney-in-fact (AIF) relationship with the Farmers Exchanges, which are managed but not owned by Farmers Group, Inc., a wholly owned subsidiary of the Group, is permitted by policyholders to receive a management fee of 20 percent (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 18,545 million and USD 18,757 million for the years ended December 31, 2014 and 2013, respectively.
General Insurance is managed based on market-facing businesses, including: • Global Corporate • North America Commercial • Europe, Middle East & Africa (EMEA) • Latin America • Asia-Pacific
Net earned premiums and policy fees 30,023 29,769 13,866 12,852 3,956 4,099 (2) 54 478 504 – – 48,321 47,277 Farmers management fees and other related revenues – – – – 2,791 2,810 – – – – – – 2,791 2,810 Net investment result on Group investments 2,288 2,384 4,988 4,489 68 107 387 315 712 (439) (628) (602) 7,816 6,254
Policyholder dividends and participation in profits, net 6 6 12,097 13,820 – – – – 465 121 – – 12,568 13,946 Income tax expense/(benefit) attributable to policyholders – – 106 285 – – – – – – – – 106 285 Underwriting and policy acquisition costs, net 5,946 5,756 2,654 3,003 1,240 1,285 – – 6 6 (10) (10) 9,835 10,041 Administrative and other operating expense (excl. depreciation/amortization) 3,791 3,604 2,711 2,653 1,315 1,343 1,169 993 108 132 (1,198) (1,119) 7,897 7,607 Interest credited to policyholders and other interest 61 19 400 420 – – 3 4 126 91 (68) (23) 523 510 Restructuring provisions and other items not included in BOP (146) (276) (174) (88) 3 (12) (38) (63) – 2 – – (355) (437) Total BOP benefits, losses and expenses (before interest, depreciation and amortization) 29,706 29,429 28,478 29,261 5,208 5,440 1,128 984 1,693 189 (1,275) (1,151) 64,938 64,151 Business operating profit (before interest, depreciation and amortization) 3,404 3,554 2,042 1,968 1,706 1,655 105 115 (130) 93 (629) (634) 6,497 6,752 Depreciation and impairments of property and equipment 87 90 33 38 46 48 7 10 – 1 – – 173 186 Amortization and impairments of intangible assets 213 394 452 405 86 91 89 121 – – – – 840 1,011
Business operating profit before non-controlling interests 2,988 2,932 1,512 1,504 1,573 1,516 (973) (1,056) (141) 72 – – 4,959 4,968 1 Global Life included approximately USD 1,551 million and USD 521 million of gross written premiums and future life policyholders‘ benefits for certain universal life-type contracts in the Group’s Spanish operations for the years ended December 31, 2014 and 2013, respectively (see note 3).
Add back: Business operating profit attributable to non-controlling interests 95 72 239 233 – – (13) (16) 1 – 322 288 Net income before shareholders’ taxes 3,469 3,135 1,822 1,417 1,611 1,510 (1,015) (474) (150) 86 5,738 5,674 Income tax expense/(benefit) attributable to policyholders – – 106 285 – – – – – – 106 285
Revenues/(expenses) not included in BOP: Net capital gains/(losses) on investments and impairments, net of policyholder allocation 871 480 485 1 34 6 (1) 645 4 12 1,393 1,144 Net gain/(loss) on divestments of businesses 1 (245) – – – – – (2) (1) (13) – (259) (1)
Net income/(expense) on intercompany loans (16) (12) (6) (2) – – 22 14 – – – –
Reinsurers’ share of reserves for insurance contracts 11,664 13,008 1,979 2,068 – – – – 3,011 3,013 (103) (111) 16,550 17,978 Deposits made under assumed reinsurance contracts 38 56 73 49 1,952 2,376 – – 142 165 (2) (2) 2,203 2,645
Total assets (after cons. of investments in subsidiaries) 121,559 124,675 261,545 265,493 9,002 9,640 20,726 19,765 27,284 26,203 (33,586) (30,723) 406,529 415,053 Liabilities
General Insurance Global Life Farmers 1 Other Operating Businesses Non-Core Businesses Eliminations Total in USD millions, as of December 31 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013
General Insurance – Revenues and noncurrent assets by region in USD millions Gross written premiums and policy fees from external customers
Global Life – Revenues and noncurrent assets by region in USD millions Gross written premiums and policy fees from external customers Life insurance deposits
Zürich Versicherungs-Aktiengesellschaft Vienna General Insurance/ Global Life 99.98 99.98 EUR 12.0
Zurich Employment Services Limited Cheltenham, England Global Life 100 100 GBP 96.9
United States of America Farmers Group, Inc. 5 Reno, NV Farmers 100 100 USD 0.001 Farmers New World Life Insurance Company 5
Farmers Services LLC 6 Wilmington, DE Farmers 100 100 USD – Zurich American Corporation Wilmington, DE Non-Core Businesses 100 100 USD 0.00001
Zurich Holding Company of America, Inc. 7 Wilmington, DE Other Operating Businesses 100 100 USD –
1 The segments are defined in note 27. 2 Relates to Bansabadell insurance entities which are controlled by the Group. 3 The results of the operating activities are included in the General Insurance, Global Life and Farmers segments, whereas the headquarter’s activities are included in
6 These entities are LLCs and have no share capital. 7 Shares have no nominal value in accordance with the company’s articles of incorporation and local legislation.
Due to the nature of the insurance industry, the Group’s business is subject to extensive regulatory supervision, and companies in the Group are subject to numerous legal restrictions and regulations. These restrictions may refer to minimum capital requirements or the ability of the Group’s subsidiaries to pay dividends imposed by regulators in the countries in which the subsidiaries operate. These are considered industry norms, generally applicable to insurers who operate in the same markets.
Gross written premiums and policy fees 3,239 2,643 2,127 1,197 Net income after taxes 316 349 138 33
Dividends paid to non-controlling interests 94 181 23 44 1 Includes reserves for premium refunds, liabilities for investment contracts, deposits received under ceded reinsurance contracts, deferred front-end fees and reserves for insurance contracts.
On January 15, 2015, the Swiss National Bank ceased to enforce its temporary commitment to maintain the EUR/CHF exchange rate at or above CHF 1.20 to the EUR. As a result, the CHF appreciated against the EUR and other currencies. The Group presents its Consolidated financial statements and related footnotes in USD. The impacts of the currency movements on shareholders’ equity were not material.
As statutory auditor, we have audited the Consolidated financial statements of Zurich Insurance Group Ltd, which comprise the consolidated income statement, consolidated statement of comprehensive income, consolidated balance sheet, consolidated statement of cash flows, consolidated statement of changes in equity, and notes (pages 157 to 255 and the audited sections of the Risk review on pages 115 to 152), for the year ended December 31, 2014.
Opinion In our opinion, the Consolidated financial statements for the year ended December 31, 2014 give a true and fair view of the financial position, the results of operations and the cash flows in accordance with the International Financial Reporting Standards (IFRS) and comply with Swiss law.
Embedded value report – executive summary 259 1. Analysis of embedded value earnings 260 2. New business 262 3. Free surplus 266 4. Analysis of free surplus generation 267 5. Expected contribution and expected transfer to shareholders’ net assets 268 6. Operating, economic and other non-operating variances 269 7. Dividends, injections and other movements 273 8. Value of business in-force 274 9. Reconciliation of shareholders’ equity to embedded value 275 11. Group MCEV 277 12. Embedded value methodology 278 13. Embedded value assumptions 283 Appendix: Embedded value tables 286 Statement by Directors 290 Auditor’s report on embedded value 291
Embedded value operating earnings were USD 1,507 million. The earnings included USD 764 million of expected emergence of value from business in-force, USD 1,022 million of new business value, offset by USD 278 million of operating variances with the main contributor being the updated operating assumptions.
Analysis of embedded value earnings in USD millions, for the years ended December 31
Dividends in the first six months of the year – (574) (574) – (574) (465) Injections in the first six months of the year 1 – 203 203 – 203 Other movements in the first six months of the year 1 (41) (14) (55) 89 34 116
All metrics are reported net of non-controlling interests. 1 In 2013 other movements included injections.
In the Rest of Europe, embedded value decreased by USD 8 million, with new business value and positive economic variances more than offset by dividend payments and foreign currency translation effects.
Present value of new business premiums (PVNBP) 2 10,293 11,993 11,529 19,140 52,954 8,917 9,166 12,207 10,296 40,586
New business annual premium equivalent (APE) was USD 5,203 million, an increase of USD 785 million or 19 percent on a local currency basis. North America, Brazil Santander, Isle of Man and Europe were all up significantly with decreases in Latin America Zurich, IGRS and Luxembourg. The main contributors to the increase in Europe were Spain from higher volumes of individual protection and savings business and the UK from higher sales of individual savings and higher sales with low margin in corporate business, particularly in the fourth quarter.
PVNBP was USD 52,954 million, an increase of USD 12,369 million or 29 percent on a local currency basis compared with of 2013. The main increase came from corporate pensions business in the UK and individual savings in UK and Spain. The increase in the average annual premium multiplier is driven by regular premium corporate pension and protection business in the UK. The substantial increase in the fourth quarter reflects the high level of sales of corporate business in the UK in this quarter.
New business margin was 22.1 percent, a decrease of 5 percentage points compared with the same period of 2013 primarily driven by North America, Latin America and Europe. Just under half of this reduction came from the factors, noted above, which reduced new business value. The other driver was change in business mix with lower margin IFA/Broker sales in North America and lower margin corporate business in the UK. The high fourth quarter sales of this corporate business in the UK was the main driver of the margin reduction seen in that quarter.
North America increased APE by USD 47 million or 29 percent due to higher volumes in IFA/Brokers protection business. However the total margin decreased due to the lower margins in this business and the impact of the changed lapse assumption in FNWL. The net effect resulted in a lower, but still very strong, new business margin of 57.8 percent. New business value increased by USD 3 million or 3 percent.
APE in the other Zurich businesses in Latin America decreased by USD 42 million but increased 5 percent on a local currency basis. Corporate life and pension sales were up in Chile but down in Mexico. Margins in the region were lower as a result of the change in expense methodology and in Chile due to the change in the yield curve methodology. New business value decreased by USD 41 million or 29 percent on a local currency basis.
In Germany, APE increased by USD 65 million or 18 percent on a local currency basis, mainly as a result of a special sales campaign in the Bank Distribution channel of a traditional single premium product. The less favorable economic conditions decreased margins and as a result new business value remained stable at USD 42 million.
In Switzerland, APE increased by USD 29 million or 11 percent on a local currency basis, mainly from higher sales of corporate protection business which also increased the overall margins. As a result new business value increased by USD 12 million or 18 percent on a local currency basis.
In Spain, APE increased by USD 171 million or 110 percent on a local currency basis, mainly due to higher sales of individual saving products. This increased sales of products with lower margins resulted in a lower increase in new business value of USD 27 million or 43 percent on a local currency basis.
In Asia-Pacific and Middle East, APE increased by USD 36 million or 4 percent on a local currency basis. This arose mainly from the Isle of Man which experienced higher volume in corporate and unit linked business, although assumption changes resulted in lower margins. New business value also increased by USD 14 million, or 8 percent on a local currency basis, with the main contributions from Australia and Japan. Both countries experienced strong growth in new business value with both volume and margin improvements in protection business. The lower volumes in the Middle East and the decision to close the agency channel in Hong Kong partially offset the other positive impacts in the region.
1 APE is reported gross of non-controlling interests. 2 New business value and new business margin are reported net of non-controlling interests.
APE in the Bank Distribution pillar was USD 1,741 million, an increase of USD 157 million compared with 2013. This was mainly due to strong volume growth in individual protection products in Zurich Santander and individual savings in Spain and Germany, partially offset by a reduction in unit-linked business in the UK and Luxembourg. New business value was USD 282 million, a decrease of USD 19 million compared with 2013, mainly due to lower margins from business mix.
APE in the Other Retail pillar was USD 1,554 million, an increase of USD 114 million compared with 2013. This was mainly driven by individual savings products in UK, individual protection products in North America and growth across all product lines in the Isle of Man. However new business value was USD 437 million, a decrease of USD 54 million compared with 2013. The decrease related mainly to the UK due to high volumes of lower margin individual savings in 2014 compared with strong sales of high margin individual protection products in the first quarter of 2013. There was also a decrease in Chile Zurich in individual immediate annuities, driven by lower margins under the revised yield curve methodology.
In North America, free surplus increased by USD 85 million with a positive impact from market returns and capital injections partially offset by new business strain.
In Latin America, free surplus decreased by USD 97 million. New business strain was covered by in force cash emergence with the main drivers of the decrease being dividend payments, an increase in required capital in Chile and exchange rate movements, partially offset by market returns .
In Italy, free surplus decreased by USD 35 million with market returns offset by dividend payments.
In Rest of Europe, free surplus increased by USD 6 million. The main drivers were market returns partly offset by dividend payments.
Fin an cial info rm atio n 4. Analysis of free surplus generation
The graph below shows how the free surplus value has decreased from USD 2,790 million to USD 2,696 million during 2014.
Expected free surplus generation was USD 614. This included cash strain from new business net of non-controlling interests, expected transfer from in-force to free surplus and expected contribution to free surplus. The cash strain on new business of USD 1,431 million resulted from the combination of initial cash consumption of USD 775 million and an increase in required capital of USD 656 million. The expected transfer to shareholders’ net assets increased free surplus by USD 1,681 million and was driven by expected profits of USD 1,265 million and the release of required capital of USD 416 million. The expected contribution from in-force to free surplus was USD 363 million.
Dividends, injections and other movements decreased free surplus by USD 623 million as dividends of USD 996 million paid to the Group exceeded injections of USD 413 million. Other capital movements were USD 41 million and included a transfer of annuity business to Non-Core Businesses and a change in minority interest in Germany.
Free surplus development in USD millions, for the year ended December 31, 2014
Embedded value report continued 5. Expected contribution and expected transfer to shareholders’ net assets
Expected contribution in excess of reference rate The expected contribution in excess of reference rate is the additional embedded value expected to be created if “real world” expected investment returns applicable at the start of the year were to emerge. The expected contribution in excess of reference rate was USD 495 million.
Other non-operating variances of which: Asia-Pacific and Middle East (41) (251) 22 52 106
• Mortality and morbidity experience increased embedded value by USD 80 million. The main positive experience variance arose in UK, particularly on the unit-linked business and Spain where the variance included longevity experience.
• Persistency experience decreased embedded value by USD 24 million. The main negative experience was USD 23 million in the Isle of Man due to higher than expected lapses for Group business.
• Expenses assumption changes reduced embedded value by USD 65 million. The main contributors were Asia- Pacific and Middle East and Latin America contributing USD 52 million and USD 42 million respectively.
• Development expenses reduced embedded value by USD 260 million. The main contributors were UK with USD 74 million, Latin America with USD 54 million and Asia-Pacific and Middle East with USD 29 million. Other includes an impact from central costs of USD 78 million. Following changes to expense methodology introduced during 2013, any expense variance resulting from costs exceeding long-term expense assumptions for start-up businesses is now reported here.
Embedded value split of other operating variances in USD millions, for the year ended December 31, 2014
Economic variances Economic variances arise from the difference between actual economic experience during the year and the expected experience implied by the economic assumptions at the start of the year. Economic variances also include the impact of changes in assumptions in respect of future economic experience at the end of the year. In total, economic variances increased embedded value by USD 386 million in 2014.
In 2014, both the risk free rates and the liquidity premium spread reduced for the major currencies and in particular for the euro and the Swiss franc. Yields on sovereign debt were volatile across Europe, but spreads have reduced during the year. These movements are most significant for spread business and traditional participating business and as a result investment performance was positive in Italy, Ireland and Spain. In Germany the negative impact from the updated economic assumptions more than offset the positive investment variance.
Dividends, injections and other movements Dividends, injections and other movements reflect dividends paid by Global Life to the Group, shown as a negative number in the table below, net of capital and other movements received from the Group, shown as a positive number in the table. Other movements can also relate to the value of business in-force in respect of acquisitions and disposals, or corporate restructuring.
Other movements Total of which: Rest of Europe (30) – – (30)
In Latin America, the net dividends and capital movements reduced embedded value by USD 124 million.
In Europe, net dividends and capital movements were USD 500 million. Dividends were USD 630 million with the main contributions coming from UK, Switzerland and Germany. Capital injections were USD 124 million mainly in UK, Ireland and Asia-Pacific and Middle East. Other movements include USD 92 million from Germany due to a change in non-controlling interests and USD 86 million which represents the cost of acquiring distribution rights for the Caja de Ahorros del Mediterráneo (“CAM”) bank network in Spain.
Other adjustments Foreign currency translation effects represent the impact of adjusting opening embedded value, reported at the end-of-year exchange rates as of Decemeber 31, 2013 and movements during the year which are translated at average exchange rates during the year, to end-of-year exchange rates. The net effect of the change of the U.S. dollar against other currencies decreased the U.S. dollar embedded value by USD 1,695 million.
Components of value of business in-force in USD millions, as of December 31 2014 2013
Value of business in-force of which: Asia-Pacific and Middle East 1,704 (71) (11) (126) 1,497 1,536 1 CE is the certainty equivalent value of business in-force. 2 FC is the frictional costs. 3 TVFOG is the time value of financial options and guarantees including the application of a liquidity premium. 4 CRNHR is the cost of residual non-hedgeable risk (see section 12 d) for further details).
Maturity profile of value of business in-force The value in-force (VIF) maturity profile sets out when the VIF profits are expected to emerge as free surplus. It does not include the release of required capital to free surplus which usually accompanies the emergence of the VIF profit. The VIF emergence is determined after taking into account frictional costs, the cost of residual non-hedgeable risk and the time value of financial options and guarantees.
Maturity profile of value of business in-force in USD millions, as of December 31 2014 2013
The VIF maturity profile shows that 37 percent of the VIF should emerge as free surplus over the next five years and an additional 24 percent over the following five years. The main change in the first five years of the VIF emergence is driven by the assumptions update and the new business product mix.
Fin an cial info rm atio n 9. Reconciliation of shareholders’ equity to embedded value
Reconciliation of shareholders’ equity to embedded value in USD billions, as of December 31, 2014 Total
Reported embedded value and new business value 1 19,290 1,022 Base embedded value and base new business value 1 18,847 1,006 Operating sensitivities 10% increase in initial expenses n / a (4%) 10% decrease in maintenance expenses 3% 7% 10% increase in voluntary discontinuance rates (3%) (11%) 10% decrease in voluntary discontinuance rates 4% 15% 5% improvement in mortality and morbidity for assurances 3% 10% 5% improvement in mortality for annuities (2%) (1%) Required capital set equal to minimum solvency capital – 1%
In each sensitivity calculation, all other assumptions remain unchanged except where they are directly affected by the revised assumption. The results include the impact of assumption changes on the time value of financial options and guarantees. The 100 basis points decrease in risk free yield curve increases the value of some products, such as term assurance, with fixed future cash flows discounted at lower rates. This increase is offset by a reduction in the value of other products, such as those where lower assumed investment returns reduce profitability.
The Free surplus does not consider any allowance, for example, for capital required to fund future new business growth, group consolidation constraints or pension deficits.
Fin an cial info rm atio n d) Value of business in-force The value of business in-force is the present value of future projected profits, distributable after tax to shareholders from the covered business. It is defined as the certainty equivalent value of business in-force less frictional costs, the time value of financial options and guarantees, and the cost of residual non-hedgeable risk. These components are explained below.
Frictional costs (FC) reflect a deduction for the cost of holding the required capital. Under the market consistent framework, the FC represents tax in respect of the future investment return on required capital together with the cost of future investment management expenses on required capital. In Germany, the policyholders’ share of investment income on the required capital is also included.
For products with significant guarantees, the time value has been calculated on a market consistent basis by deducting the average present value of shareholder cash flows using 1,000 stochastic economic simulations from the CE value (both for the value of business in-force and separately for new business value).
CRNHR is calculated as a charge on the capital held for residual non-hedgeable risks. This is calculated according to Zurich’s internal risk based capital model by applying 2,000 shocks to the embedded value assumptions. To align with the MCEV Principles the risk based capital is scaled to a 99.5 percent confidence level by using empirical distributions where available, or by assuming probability distributions as appropriate.
The capital is projected over the lifetime of the business using appropriate risk drivers for each risk type. The present value of the risk capital is calculated by applying the swap curve as of the valuation date. The CRNHR allows for diversification across risk types and across geographical segments. This approach complies with MCEV Principles except Guidance 9.7 which does not allow for diversification benefits between covered and non-covered business. The Embedded value report does allow for diversification benefits between covered and non-covered business, which is consistent with the management view of the business and adds an estimated USD 501 million to embedded value and an estimated USD 57 million to new business value. Starting from January 1, 2015 these diversification benefits will be excluded in order to bring the presentation of MCEV results in line with the MCEV principles and guidance set by the CFO Forum.
New business is valued at the point of sale. Explicit allowance is made for FC, TVFOG, and CRNHR. New business value is valued using actual new business volumes.
New business is valued on a discrete quarter basis. Once calculated and reported, new business value for a quarter will not change in subsequent quarters in local currency terms. For details on the assumptions used for new business see section 13.
g) Market consistent discounting The Group has adopted a “bottom-up” market consistent approach for the projection and discounting of future cash flows in the calculation of embedded value. As a result, the risks inherent in the cash flows are allowed for in a way that is consistent with the way the market is expected to allow for such risks.
In principle, this method values each cash flow using a discount rate consistent with that applied to such a cash flow in the capital markets. For example, an equity cash flow is valued using an equity risk discount rate, and a debt security cash flow is valued using a debt security discount rate. If a higher return is assumed for equities, the equity cash flow is discounted at this higher rate.
The risk free yield curve assumptions are based on the swap curve in each major currency (U.S. dollars, euro, British pounds and Swiss francs). For liabilities where payouts are either independent or move linearly with markets, deterministic techniques (referred to as “certainty equivalent”) have been used. In such cases, the projection and discounting are based on the same risk free yield curve. Further details are set out under “Economic assumptions” in section 13.
The simulations used for calculation of TVFOG reflect the actual yield curves and implied volatilities observable as of the valuation date.
i) Holding companies Holding companies allocated to Global Life have been consolidated in embedded value at their shareholders’ equity. Related expenses have been included in the projection assumptions. Holding companies outside Global Life are not included in embedded value of the covered business.
j) Consolidation adjustments Where a reinsurance arrangement exists between two life companies within Global Life, the value of the reinsurance is shown in embedded value of the region to which the ceding company belongs.
l) “Look through” principle – service companies There are some companies within Global Life that provide administration and distribution services. These are valued on a “look through” basis. The results do not include any Group service companies outside Global Life.
m) Employee pension schemes In the Group’s Consolidated financial statements, actuarial gains and losses arising from defined benefit pension and other defined benefit post-retirement plans are recognized in full in the period in which they occur and are presented on a separate line in the statement of comprehensive income, with a liability recognized for employee benefit deficits under IAS 19. This adjustment has not been made in the detailed embedded value described in this Embedded value report. If the adjustment had been made embedded value as of the valuation date would have been lower by USD 1,192 million. The actuarial and economic assumptions used for this adjustment are consistent with those used for the equivalent allowance made in the Group’s Consolidated financial statements.
n) Change in legislation or solvency regime The impacts of changes in legislation or solvency regimes are included in economic variance for the analysis of movement when they occur.
The rates can be found in note 1 of the audited Consolidated financial statements as of December 31, 2014.
A 5 percent improvement in mortality and morbidity assumptions for assurances means that, for example, if the actuarial mortality assumption for assurances was 90 percent of a particular table, this would decrease to 85.5 percent.
Projections of future shareholder cash flows expected to emerge from covered business and for new business are determined using best estimate operating assumptions. These assumptions, including mortality, morbidity, persistency and expenses, reflect recent experience and are reviewed annually and updated as appropriate. Allowance is made for future improvements in annuitant mortality based on experience and externally published data. Favorable changes in future operating efficiency are not anticipated in the assumptions – in particular for expenses and persistency.
For the purposes of calculating the value of business in-force, future economic assumptions, for example, investment returns and inflation, are based on period end conditions and assumed risk discount rates are consistent with these conditions.
For equity assets for units where there is a substantial equity allocation, the investment return assumption is based on the long-term “real world” expected return. For equity assets for units without a material equity allocation the investment return assumption is based on the one year swap rate at the start of period plus a margin to reflect the additional risk associated with investment in this asset class.
Participating business Rates of future bonus or crediting rates have been set at levels consistent with the “risk neutral” investment return assumptions and current bonus plans. In the UK, bonus rates have been set so as to exhaust any remaining assets in the relevant long-term funds. In certain scenarios shareholder injections may be required to meet existing guaranteed benefits and this additional cost is included in the TVFOG.
b) Operating assumptions Demographic assumptions The assumed future mortality, morbidity and lapse rates have been derived from recent operating experience and relevant industry statistics. Where operating experience or industry statistics are limited, the assumptions are derived from a best estimate of future developments and are subject to regular review as more experience emerges. Where appropriate, surrender and option take-up rate assumptions that vary according to the investment simulation under consideration have been used, based on an assessment of likely policyholder behavior.
The maintenance expense assumptions allow for the expected cost of providing future service benefits in respect of the Group staff pension schemes. An adjustment to embedded value is noted in section 12 m) for pension scheme liabilities and no allowance is made in the expense assumptions for any contributions as a result of past service benefits.
The Group is liable for payments to be made to various distributors, each payment being dependent on preceding sales volumes or profits or other factors, in accordance with distribution agreements. As part of the economic valuation, for each such agreement, a liability is included in embedded value shareholders’ net assets for the best estimate of the next potential payment attributable to the business issued to date.
In countries where significant development work is performed these are shown under “development expenses”.
Any expense excluded from the unit cost base used for assumption setting requires approval from the Global Life Chief Financial Officer.
All expenses in embedded value are net of tax appropriate to the business unit to which the expense is charged.
In many life businesses, policyholders can exercise an option against the life company in certain circumstances, such as to surrender a policy. This leads to an increase in the assumed lapse rates when interest rates rise (or a corresponding reduction when interest rates fall). This dynamic effect in relation to lapse rates has been allowed for in the stochastic models.
Expected contribution from in-force 94 159 139 42 52 32 425 392 104 94 3 2 764 689
Dividends in the last six months of the year 1 (100) (68) (131) (182) (123) (146) (133) (77) (58) (15) – – (422) (342) Injections in the last six months of the year 1 61 29 7 93 24 3 210 Other movements in the last six months of the year 1 – 145 (2) 53 (2) – (18) (7) (5) 11 – 6 (25) 208
New business margin (% of APE) 57.8% 72.4% 23.0% 30.5% 26.1% 32.6% 15.8% 18.8% 33.8% 33.4% 83.0% 57.4% 22.1% 27.0% New business margin (% of PVNBP) 6.4% 8.3% 4.7% 5.9% 5.4% 6.1% 1.2% 1.6% 4.7% 5.2% 9.0% 5.2% 2.1% 2.8%
1 In 2013 other movements included injections. 2 Premiums, APE and PVNBP are reported gross of non-controlling interests.
Present value of new business premiums (PVNBP) 24,795 15,422 4,194 2,937 2,872 2,651 3,856 3,637 3,068 1,410 1,564 1,410 395 284
Embedded value information: Dividends in the first six months of the year 1 (231) – (31) (4) (151) (163) – – – (27) (54) (133) (30) (21) Injections in the first six months of the year 1 32 – – – – – Other movements in the first six months of the year 1 – 55 92 3 – 4 – 13 (68) (6) – – – (27)
This Embedded value report has been prepared in all material respects in accordance with the Market Consistent Embedded Value Principles and Guidance issued by the European Insurance CFO Forum in October 2009.
Board of Directors’ responsibility The Board of Directors is responsible for the preparation of the Embedded value report in accordance with the MCEV Principles and Guidance, including consistency of the applied methodology and the assumptions used and for an internal control system as determined necessary to enable the preparation of the Embedded value report that is free from material misstatement, whether due to fraud or error.
Auditor’s responsibility Our responsibility is to express an opinion on whether the Embedded value report has been properly prepared in accordance with the MCEV Principles and Guidance. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the Embedded value report is free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the Embedded value report. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the Embedded value report, whether due to fraud or error. In making those risk assessments, the auditor considers the internal control system relevant to the entity’s preparation of the Embedded value report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control system. An audit also includes evaluating the appropriateness of the principles used and the reasonableness of significant estimates made, as well as evaluating the adequacy of the overall presentation of the Embedded value report.
Opinion In our opinion, the Embedded value report of the Company for the year ended December 31, 2014 is prepared, in all material respects, in accordance with the MCEV Principles and Guidance.
The Annual General Meeting on April 2, 2014, approved a dividend of CHF 17.00 per share to be paid free of Swiss withholding tax to the shareholders out of the capital contribution reserve.
Shareholders’ equity increased by CHF 389 million to CHF 17,051 million as of December 31, 2014, from CHF 16,662 million as of December 31, 2013. The increase was mainly driven by the net income after taxes for the year as well as capital contributed through the issuance of new shares to employees out of contingent capital, partially offset by the dividend paid in 2014. The Board will propose a dividend from the capital contribution reserve of CHF 17.00 per share for the year 2014 for approval at the Annual General Meeting to be held on April 1, 2015.
Free reserve, as of December 31 340,242 338,443 Retained earnings: As of January 1 7,648,444 5,321,406 Net income after taxes 2,722,822 2,327,038
Retained earnings, as of December 31 10,371,266 7,648,444 Total shareholders’ equity (before appropriation of available earnings) 17,050,932 16,662,421 Total liabilities and shareholders’ equity 17,618,832 17,223,960 1 Dividends paid in the year, out of capital contribution reserve in respect of the 2013 result, amounting to CHF 2,516,073.
Notes to the financial statements 1. Basis of Presentation Zurich Insurance Group Ltd (the Company) presents its financial statements in accordance with Swiss law. The latest changes within the Swiss Code of Obligations effective January 1, 2013, were not yet adopted due to the two-year transitional period.
6. Administrative expense Administrative expense includes directors’ fees of CHF 3.5 million for the year ended December 31, 2014, and CHF 4.0 million for the previous year. In addition, it includes overhead expenses of CHF 10.0 million for both the years ended December 31, 2014 and 2013. Fees paid to the Swiss Financial Market Supervisory Authority increased by CHF 0.4 million to CHF 3.9 million in 2014.
7. Other financial expense Other financial expense includes impairments on investments in subsidiaries of CHF 100 million in 2014 and CHF 160 million in the previous year.
Zurich Insurance Company Ltd 11,088,466 100.00 11,088,466 100.00 Zurich Financial Services EUB Holdings Ltd 272,936 99.90 372,936 99.90 1 in CHF thousands
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 and their directors. They amounted to CHF 12,136 million as of December 31, 2014, and CHF 11,448 million as of December 31, 2013. The increase is solely driven by the change of foreign exchange rates. CHF 8,660 million out of the total of CHF 12,136 million relate to guarantees in the aggregate amount of GBP 5,595 million provided to a fully owned subsidiary and certain of its directors in connection with the restructuring of the Group’s top holding structure which resulted in the merger of Zurich Group Holding into Zurich Insurance Group Ltd (formerly known as Zurich Financial Services Ltd) in December 2009. These guarantees will expire in August 2015. Furthermore, the Zurich Insurance Group Ltd 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 Until April 2, 2016, the Board of Zurich Insurance Group Ltd is authorized to increase the share capital by an amount not exceeding CHF 1,000,000 by issuing up to 10,000,000 fully paid registered shares with a nominal value of CHF 0.10 each. An increase in partial amounts is permitted. The Board would determine the date of issue of such new shares, the issue price, type of payment, conditions for exercising pre-emptive rights, and the commencement of entitlement to dividends.
The Board is further authorized to restrict or withdraw the pre-emptive rights of shareholders and to allocate them to third parties if the shares are to be used for the take-over of an enterprise, or parts of an enterprise or of participations or if issuing shares for the financing including re-financing of such transactions, or for the purpose of expanding the scope of shareholders in connection with the quotation of shares on foreign stock exchanges.
The conversion rights may be exercisable during a maximum of ten years and option rights for a maximum of seven years from the time of the respective issue. The conversion or option price or its calculation methodology shall be determined in accordance with market conditions whereby, for shares of Zurich Insurance Group Ltd, the quoted share price is to be used as a basis.
As of January 1 8,319,504 10,688,412 Transfer to free reserve (adjustment capital contribution reserve) (1,799) (5,457) Dividend payment out of capital contribution reserve (2,516,073) (2,507,249) Agio on share-based payment transactions 181,688 143,798 As of December 31 5,983,320 8,319,504 14. Capital contribution reserve (reserve for treasury shares) This reserve corresponds to the purchase value of all Zurich Insurance Group Ltd shares held by companies in the Zurich Insurance Group as shown in the table below. The Company itself does not hold any treasury shares.
17. Remuneration of the Board of Directors and the Group Executive Committee The Ordinance Against Excessive Compensation in articles 14 –16 prevails over article 663bbis of the Swiss Code of Obligations. The information required by article 663bbis of the Swiss Code of Obligations is therefore now disclosed and audited in the Remuneration report on pages 62 to 93 of this Annual Report.
19. Supplementary information Cash and cash equivalents of CHF 0.5 million include restricted cash of CHF 0.4 million in 2014. There was no restricted cash in the previous year.
Appropriation of available earnings as proposed by the Board of Directors Net income after taxes 2,722,822 2,327,038 Balance brought forward 7,648,444 5,321,406 Retained earnings 10,371,266 7,648,444 Balance carried forward 10,371,266 7,648,444
The Board of Directors proposes to the shareholders at the Annual General Meeting on April 1, 2015, to carry forward retained earnings of CHF 10,371,266 as shown in the above table.
Appropriation of capital contribution reserve Balance at January 1, 2015 (incl. reserve for treasury shares) 5,983,320 Dividend payment out of capital contribution reserve 1 (2,543,826) Balance carried forward 1 3,439,494 1 These figures are based on the issued share capital as of December 31, 2014. 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.
On your instructions, we have audited in accordance with Art. 653f, paragraph 1 Swiss Code of Obligations the issuance of new shares, which took place during the period of January 1, 2014, to December 31, 2014, according to the resolution of the general meeting of March 30, 2010.
In this section Registered share data 308 Financial calendar 310 Contact information 311 Glossary 312
Basic earnings per share 24.05 25.33 Diluted earnings per share 23.84 25.23 Book value per share, as of December 31 232.65 196.14 Nominal value per share 0.10 0.10 Price at end of period 311.70 258.50 Price period high 314.70 270.30 Price period low 247.10 228.80 1 Proposed dividend, subject to approval by shareholders at the Annual General Meeting 2015; expected payment date as from April 9, 2015. As the dividend payment will be paid from the capital contribution reserve, it will be exempt from Swiss withholding tax.
The shares registered in the share ledger as of December 31, 2014 were owned by 119,407 shareholders of which 114,204 were private individuals holding 25.8% of the shares (or 15.0% of all outstanding shares), 1,908 were foundations and pension funds holding 6.5% of the shares (or 3.8% of all outstanding shares), and 3,295 were other legal entities holding 67.7% of the shares (or 39.5% of all outstanding shares).
Zurch Insurance Group Ltd is not aware of any person or institution which, as of December 31, 2014, directly or indirectly, alone or with others, exercised or was a party to any arrangements to exercise control over Zurich Insurance Group Ltd.
Annual Review 2014 The Annual Review provides an overview of Zurich’s business and strategy, and its financial and operating performance in 2014. It is available in English and German.
Annual Report 2014 The Annual Report contains detailed information about Zurich’s financial performance, structure, executive bodies, risk management, corporate governance and remuneration practices in 2014. It is available in English and German, with the financial statements in English only.
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Investments Total investments in the consolidated balance sheets includes Group investments and investments for unitlinked contracts. Group investments are those for which the Group bears part or all of the investment risk. They also include investments related to investment contracts with discretionary participation features. Average invested assets exclude cash collateral received for securities lending. The Group manages its diversified investment portfolio to optimize benefits for both shareholders and policyholders while ensuring compliance with local regulatory and business requirements under the guidance of the Group’s Asset/Liability Management and Investment Committee. Investments for unit-linked contracts include such investments where the policyholder bears the investment risk, and are held for liabilities related to unit-linked investment contracts and reserves for unit-linked contracts. They are managed in accordance with the investment objectives of each unit-linked fund. The investment result for unit-linked products is passed to policyholders through a charge to policyholder dividends and participation in profits.
Zurich Insurance Group Annual Report 2014 313Glossary Zurich Insurance GroupAnnual results 2014Glossary2
Net non-technical result includes expenses or income not directly linked to the 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.
Source of earnings (SOE) reporting presents the key drivers of Global Life BOP identifying specific profit sources. This information provides a shareholder’s view of earnings, thereby the components attributable to policyholders and noncontrolling interests are included in each line item and not separately identified.
Managed gross earned premium margin is a performance measure calculated as the gross operating profit of Farmers Management Services divided by the gross earned premiums of the Farmers Exchanges, which are owned by their policyholders. Farmers Group, Inc, a wholly owned subsidiary of the Group, provides certain non-claims administrative and management services as attorney-in-fact and receives fees for its services.
Latin America Zurich operates in Argentina, Brazil, Chile, Colombia, Mexico and Venezuela.
AA–/positive Standard & Poor’s financial strength rating on Zurich Insurance Company Ltd
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