Distribution channels Agents, banks, brokers and independent financial advisers, employee benefits consultants, direct
AA–/stable Standard & Poor’s financial strength rating on Zurich Insurance Company Ltd
1 This number also corresponds to the average number of employees in 2015. 2 The Farmers Exchanges are owned by their policyholders. Farmers Group, Inc., a wholly-owned subsidiary of the Group, provides certain non-claims administrative and management services to the Farmers Exchanges as attorney-in-fact and receives fees for its services. 3 All references to ‘Farmers Exchanges’ mean Farmers Insurance Exchange, Fire Insurance Exchange, Truck Insurance Exchange and their subsidiaries and affiliates. The three Exchanges are California-domiciled interinsurance exchanges owned by their policyholders with governance oversight by their Boards of Governors.
Photography by Ivan Stefania except for cover image by Zurich Insurance Company
Group performance review Operating and financial review 106 Risk review 122
Our cover We serve individuals, small businesses, and mid-sized and large companies. All of our customers, large and small, rely on us to help them understand and protect themselves from risk.
Performance overview in USD millions, for the years ended December 31, unless otherwise stated 2015 2014 Change in USD1
Return on common shareholders’ equity (ROE) 5 6.4% 13.0% (6.6 pts)
5 Shareholders’ equity used to determine ROE and BOPAT ROE is adjusted for net unrealized gains/(losses) on available-for-sale investments and cash flow hedges.
6 All amounts are shown in U.S. dollars and rounded to the nearest million unless otherwise stated, with the consequence that the rounded percentages may not add to 100 percent in all cases. All ratios and variances are calculated using the underlying amounts rather than the rounded amounts.
• Managing other businesses for value We retained more business from maturing life policies and reduced the number of policies that lapse. We exited some non-core businesses, including in the UK, Singapore, Australia and the Middle East.
• Growing our operating earnings We initiated programs to achieve savings and increase efficiency. We added more than USD 3 billion of less-liquid assets to the Group’s balance sheet in 2015, enhancing our investment return.
3 Cumulative net cash remittances to Zurich Insurance Company Ltd, after deducting central costs, in 2014 – 2016.
Farmers 2 BOP declined by 10 percent to USD 1.4 billion following underwriting losses in Farmers Re and lower participation in reinsurance agreements with the Farmers Exchanges. Farmers Exchanges, which are owned by their policyholders, have continued to make good progress in the execution of their strategy, with improved customer satisfaction and retention rates, as well as continued growth in their agents network.
Tom de Swaan Chairman of the Board of Directors and Chief Executive Officer a.i.
The global risk landscape is changing fast. At Zurich, we are developing our insurance products, services and solutions to keep ahead of customers’ changing needs, while paying close attention to the expectations of all our stakeholders.
On the life insurance side, key factors driving demand for corporate pension and employee benefit solutions are: the effects of demographic aging on the make-up of the workforce; weakening state support for health services, social security and pensions; international mobility; and the desire to de-risk balance sheets by phasing out defined benefit pension plans, replacing them with defined contribution plans.
Across all product lines, global corporations are looking for internationally compliant solutions and are growing more interested in what they can learn about insurance and risk from data collection, predictive analytics and risk insights.
Zurich’s research has shown that many commercial customers are not fully aware of these risks, creating an opportunity to provide risk analysis, insights and protection. Data collection and predictive analytics provide the tools to more precisely price commercial risks, by eliminating the inherent cross-subsidy of traditional insurance averaging. The larger the data pool, the more accurate the results, creating a competitive advantage for large insurers like Zurich and potentially improving loss ratios.
Retail markets Retail insurance is being transformed by evolving customer needs and the pervasiveness of digital technologies. As a result, customer behavior is undergoing a fundamental shift: people are better informed, more demanding, technology-savvy and more open to switching between insurers.
Our target market segment – customers we describe as ‘confident planners’ – have high expectations. They are prepared to pay a premium price for insurance services and solutions if they are available quickly and conveniently; accessible across multiple channels; customizable to their specific needs; backed by expert advice; and supported by a continuing dialogue on social media.
Zurich aims to build an omni-channel, customer-centric distribution approach that will allow our retail customers to navigate seamlessly across channels and facilitate collaboration with retail insurance intermediaries such as agents, brokers and independent financial advisers (IFAs).
Regulatory developments Globalization affects the insurance industry as well as its customers. Although many of today’s risks are globally interconnected and the largest insurers operate globally, insurance regulation is still mainly focused on national markets. From a global perspective, the regulatory framework is fragmented. This threatens the efficient use of capital and makes it harder for global insurers to fulfil their potential as bearers of risk. As a global insurer, Zurich advocates a consolidated group-wide approach to regulation, such as the International Association of Insurance Supervisors’ Common Framework for the Supervision of Internationally Active Insurance Groups initiative.
In these and other areas, Zurich will take a more active role in consultation with regulators and in the broader debate that is taking place on the opportunities and risks of new technologies.
Corporate responsibility At Zurich, we have made corporate responsibility (CR) part of our business strategy because sustainable and responsible business practices matter to stakeholders whose support we rely on: our customers, our people and potential recruits, our shareholders and investors, the communities in which we do business, and society more widely.
That is why we pro-actively address environmental, social and governance factors as part of our day-to-day business activity. CR helps us to differentiate Zurich with our customers; attract and retain talented people; improve long-term investment returns; build relationships of trust with policy-makers and regulators; and strengthen our brand and reputation.
Stakeholders expect us to be transparent about how we engage with politicians and governments, including political contributions. Zurich supports voluntary disclosure around these topics.
Our people Our people drive our success. With this in mind, we need to be able to recruit, develop and retain a diverse and talented workforce that can thrive in a culture of mutual trust, transparency and inclusion. We are making progress in creating a diverse environment that brings out the best in our people and attracts the brightest talent.
For further information: Corporate responsibility To learn more about the progress we have made in CR in 2015, see the Business Review section in this Annual Report and the online-only supplement ‘CR highlights 2015’ on: www.zurich.com/corporate-responsibility
Political engagement For more information on positions and engagement, see: www.zurich.com/cr/strategy-priorities
“As a global insurer, we advocate a consolidated group-wide approach to regulation.”
At Zurich, our ambition is to be the best global insurer, as measured by our customers, employees, investors and the communities in which we live and work. Our business model creates value for all our stakeholders.
Value creation begins with our service to customers: through our brand promise of intelligent protection, we help them understand and protect themselves from risk. We create value for our employees by investing in their skills and expertise so that each may fulfill his or her potential.
Our customers Zurich’s customers range from global corporations through mid-sized and large companies, small businesses and individuals in over 170 countries.
Zurich Insurance Group With about 55,000 employees worldwide, Zurich delivers insurance products and services through its General Insurance and Global Life segments, and through Farmers.1 1 The Farmers Exchanges are owned by their policyholders. Farmers Group, Inc., a wholly owned subsidiary of the Group, provides certain non-claims administrative and management services to the Farmers Exchanges as attorney-in-fact and receives fees for its services.
Zurich’s strategy is designed to deliver sustainable, profitable growth in a changing and more competitive business environment. We summarize our strategy under the headings ‘who we are, what we do and how we do it.’
We are also building the necessary supporting capabilities. This includes investing in our people; laying the foundations for industry top quartile operations and technology; investing in the Zurich brand with its promise of intelligent protection and building our reputation. In all that we do, we are living up to the Zurich Commitment to stakeholders, which includes acting responsibly throughout our business and following our core values.
Further detail For more information on our strategy and the Zurich Commitment, see: www.zurich.com/strategy
Building supporting capabilities Investing in our people and their capabilities; laying the foundations for industry top quartile operations and technology; building the Zurich brand and our reputation.
We continued to make progress in recruiting, developing and retaining a diverse, talented workforce. We became the first global insurer to be certified under a gender equality standard. We introduced a Swiss-style apprenticeship program in the U.S. Our marketing and communications strategy highlighted our ‘intelligent protection’ brand promise.
Reaching more customers through bank networks We are constantly looking to expand our network of bank alliances. Our bank distribution agreements contribute significantly to our results, providing us access to over 60 million customers in major markets in 15 countries.
These agreements include two joint ventures with major banks. The Zurich Santander joint venture agreed in 2011 provides long-term exclusive distribution agreements with Banco Santander S.A., giving access to about 40 million customers in Latin America. In Spain, our joint venture with Banco Sabadell S.A., signed in 2008 and expanded in 2014, provides a channel to sell insurance products across Sabadell’s network, offering access to about six million customers. In 2015, both Zurich Santander and our joint venture with Banco Sabadell continued to improve profitability and deliver strong sales of both life and general insurance products. Currency volatility, however, can affect the income from these agreements.
In 2015, business operating profit (BOP) from both joint ventures was USD 268 million. Additionally, a strategic relationship with Deutsche Bank in Germany, Italy and Spain gives us access to 10 million potential customers. Agreements recently signed include a 15-year exclusive bank distribution agreement with Citibank NA in the Middle East that began operation in 2015.
Appealing to SMEs in Hong Kong Small and mid-sized companies (SMEs) remain an important market for Zurich. In Hong Kong we found that medical insurance ranks only behind salary in importance to employees. Even so, and despite a tight job market, less than three percent of Hong Kong employers offer their employees a group medical plan; SMEs in particular lack the resources to provide such coverage, even though they face challenges recruiting top talent. To meet this need, in 2015 we launched a group medical plan specifically targeting SMEs. ‘FlexiCare’ offers options to match employers’ budgets. Via a smart phone application, employees can choose benefits and ‘wellness’ options. The app also reduces paperwork. Early market response has been positive: We received a gold award for this product in the category Best Employee Insurance Provider in HR Magazine’s Vendor of the Year Awards.
Corporate Life & Pensions gains market share in UK and Ireland and a major German customer Gaining scale in key markets contributes to the success of our Corporate Life & Pensions (CLP) business. In the UK, both our corporate protection and our corporate pensions businesses in our target market segments have grown market shares from a marginal position in 2009.
In Ireland, where our new business volumes have more than doubled since 2012, we have also grown our market share of the corporate risk market and corporate pension market.
This includes delivering a positive customer experience and developing products and services for Farmers Exchanges target customers, who seek the counsel and high level of service that Farmers Exchanges agents can provide. Farmers Group, Inc. is helping the Farmers Exchanges to support their agents’ success, introduce new products, and offer more options to better serve these customers.
The Farmers Exchanges continued to make progress in customer satisfaction results, with the Net Promoter Score, a broad measure of customer satisfaction and loyalty, increasing to 40.3 from 35.0, and retention increasing to 77.3 from 76.8 in 2015.
The performance of parts of our General Insurance Business was disappointing. We are implementing several measures to improve it.
General Insurance reported a business operating profit of USD 864 million, a decrease of 71 percent. The unsatisfactory result was due to a number of factors; these included USD 275 million in claims related to explosions in the port city of Tianjin, China, in August, a significant level of other large losses, and natural catastrophe claims especially following severe flooding in parts of the UK and Ireland in December. In the third quarter we also identified issues in certain areas such as U.S. auto liability, Global Corporate property and North America Commercial construction liability that are being addressed with highest priority through targeted measures.
We are re-evaluating the commercial priorities and earnings power of each business unit as we work to reduce earnings volatility. Our focus includes re-underwriting unprofitable portfolios and exiting those we see as unattractive. In addition, we are working to sustainably increase cost efficiency, while identifying opportunities to further simplify the organization.
50 U.S. states, providing risk management for more than 130 crops on over 90 million acres (36 million hectares). The acquisition, which still needs final regulatory approval, will increase General Insurance’s risk diversity in the U.S. and strengthen our top-five position in U.S. commercial insurance.
1 The Farmers Exchanges are owned by their policyholders. Farmers Group, Inc., a wholly-owned subsidiary of the Group, provides certain non-claims administrative and management services to the Farmers Exchanges as attorney-in-fact and receives fees for its services.
drawing on the knowledge and expertise of Zurich’s 900 risk engineering specialists. It also allows customers to see how specific actions to reduce risks could improve their risk grading score.
Focusing on opportunities with the greatest chance of success helps us to more effectively manage our pipeline of potential new business. Through our Smart Business Growth system, we can focus on broker ‘submissions’ (requests for bids) with large companies and concentrate on those bids that have the greatest chance
Zurich Risk Advisor gives customers insights on potential risks their businesses may face. The ‘app’ lets them analyze a risk by themselves and compare potential impact across locations, of succeeding, drawing on information we have collected on over 500,000 transactions. The system produces an expected probability of winning a bid, making us more efficient and giving us more time to manage existing customer relationships.
potential risks from landslides, mud and rock slides, and floods. Developed with engineers and geologists at Swiss natural hazards specialist GEOTEST AG, the tool also suggests ways to reduce risks.
Global Life in the UK is introducing services to help customers plan and manage their financial well-being, including through a new online platform. In an increasingly complex retirement savings market, and with fewer than one in five people in the UK seeking financial advice, such services are more important now than ever before. In 2015 we piloted three digital tools to help customers plan for retirement. These can make it easier for customers to achieve their long-term financial goals, while providing flexibility in how we support them through an ‘omni-channel’ approach.
Our strategy also calls for us to create the most value from existing businesses such as Global Life’s in-force books of business and smaller but profitable General Insurance businesses. We also seek to turn around or exit non-core or under-performing businesses, taking great care that our customers are properly served in any new arrangements that may be put in place.
Germany focuses on maturing policies Global Life in Germany is successfully targeting customers with maturing policies, working to help more of them to re-invest their savings from these policies with us. Our efforts were encouraged by the fact that many customers bought policies prior to changes in German regulations in 2004 and these policies are now maturing. Our in-force team gives us precise information about the number of policies maturing and the amount invested and helps us to identify the policyholders or their beneficiaries. This offers us a chance to tailor products that appeal to these customers, encouraging them to take the opportunity to re-invest.
We improved our processes to better serve these customers and focused our efforts on retaining their business within our distribution channels, especially in the bank distribution and tied agents channels. Our efforts are paying off. In 2015, our single premium products increased significantly, helped by business generated through ‘re-capturing’ more maturing policies.
We aim to grow our operating earnings by reducing complexity and overhead costs, making our operations and processes more efficient, and increasing excess investment returns.
As part of our efficiency improvements, GOT is leading efforts to standardize processes, work more efficiently and share more services throughout the organization. Zurich has operated shared service centers across the Group for a number of years and we plan to continue to expand this activity.
Setting standards for gender equality In November we became the first global company in the insurance industry to be certified by ‘EDGE’ (Economic Dividends for Gender Equality) in six key markets: Germany, Hong Kong, Italy, Spain, Switzerland and the UK. EDGE provides assessment methodology and a business certification standard for gender equality. The certification demonstrates Zurich’s commitment to be the employer of choice in the insurance industry.
Our inclusive culture and development opportunities support learning through all phases of a career. We are also helping to develop new talent.
Our people For more on the progress we are making in developing and managing our people, please see: www.zurich.com/cr/our-people
In 2015, we successfully targeted business customers and other stakeholders with original Zurich-produced reports on key topics such as cyber risk, flood resilience, supply chain risk and the ‘income protection gap’. A 2015 advertising campaign featured Zurich’s risk profiling – a structured approach that helps business customers to identify, prioritize and mitigate risk, thereby helping to manage risk, rather than just insuring against it.
We support the prestigious World Economic Forum (WEF), which rated us one of its most-engaged companies for the second year in a row. We sponsor golf tournaments including the Zurich Classic in New Orleans that raises funds for children’s charities. Four of our ‘golf ambassadors,’ who are committed to several humanitarian and social causes, were ranked among the top 10 players in 2015. We also provide sponsorship for events with broad public appeal such as ice hockey and ‘Opera for All’ in Switzerland, and the Barcelona marathon in Spain.
Building our brand and reputation Zurich’s brand promise of intelligent protection is our unique approach to understanding and managing risk – not only on behalf of our customers, but also in the long-term interest of all stakeholders. In 2015, we continued to build this message – that Zurich provides intelligent protection for the things and people our customers truly love – around the world, focusing our investments in priority markets, including Switzerland, our home market.
In all retail markets where we have invested in building our brand through advertising, there has been a significant increase in the number of people considering the brand. In commercial and corporate markets, Zurich’s global media partnerships with the Financial Times, Bloomberg, LinkedIn and Twitter helped us increase our visibility with senior business people by 10 percent. Our online industry ‘knowledge hub’ on www.zurich.com also helps us reach this audience and has seen a significant increase in the number of visits since launch.
Zurich reaches new high in sustainability index Zurich is a member of the Dow Jones Sustainability World and Europe indices. Companies in these indices are evaluated based on a range of financially relevant sustainability criteria covering economic, environmental and social dimensions. In 2015, Zurich achieved its highest score since joining the DJSI of 83 and outperformed 99 percent of other companies in the insurance industry group.
Investing responsibly Responsible investment means managing our portfolio of USD 191 billion in assets to create sustainable value. We believe environmental, social and governance (ESG) factors can affect risk and return; integrating these into our investment approach will help us to succeed on a long-term basis. With this in mind, in 2015 we trained over 200 people in our team worldwide, as well as external asset managers, in Zurich’s approach to ESG in investment decisions. To better incorporate ESG factors in our overall approach, we are also updating our proxy voting strategy to take a more active role as a shareholder in companies in which we invest.
Investing for positive impact Our impact investing portfolio topped USD 1 billion for the first time in 2015, an increase of 54 percent from 2014. This included USD 870 million invested in ‘green’ bonds that finance renewable energy or similar projects; we have committed to invest, in total, up to USD 2 billion in these instruments. We also have committed USD 105 million to impact private equity funds, as part of our plan to allocate up to 10 percent of our private equity investments to such funds. In addition, we have increased our investment in ‘sustainability bonds’ to USD 55 million. These bonds provide funding for projects that benefit social welfare.
Addressing the challenges of floods Floods affect more people globally than any other type of natural hazard. Although worldwide, the greatest portion of resources go to short-term disaster response, it is far more cost-effective to take a long-term approach. That is why we launched a global program to enhance flood resilience in 2013.
The Water Window In line with our approach, in August 2015 we also announced that we are investing USD 10 million in a grant-based competition called the Water Window, an initiative led by the international Global Resilience Partnership. The Water Window aims to identify, encourage and scale up local innovations to address challenges related to water, including floods. Zurich is the first private-sector member of the Partnership.
Governance In this section Chairman’s statement on corporate governance 22 Corporate governance report 24 Statement of the Chairman of the Remuneration Committee 66 Remuneration report 68
Over the last year we have been taking steps to strengthen Zurich and changes to our governance structure have been a part of these actions. As I wrote to you last year, we have given our business units more power to make decisions and enhanced internal processes and policies. We have seen important developments following these steps, while continuously building on them.
Board and GEC changes In the past year there have been several changes on the Board and on the Group Executive Committee. At the Annual General Meeting on April 1, 2015, you elected Joan Amble and Kishore Mahbubani as new members of the Board of Directors.
New technologies New technologies and the opportunity to gain ever more information (using so-called ‘big data’) provide new and transformational insights that will trigger changes in the insurance industry. It will likely bring new business opportunities, but also new regulations and will attract the attention of data and consumer protectors. While big data has the potential to unlock vast societal and economic benefits, it also has the potential to undermine the solidarity principle and the principle of equal access to information. Zurich’s goal is to actively engage in the emerging debate by stressing the importance of a responsible regulatory approach that takes into account the societal costs and benefits.
Corporate responsibility Over the last two decades, a consensus has grown that corporations should respect ethical standards, human rights, the environment and related areas. This approach to doing business is known as corporate responsibility (CR). For Zurich, CR is about sustainable value creation for our stakeholders, by proactively addressing relevant environmental, social and governance issues. CR has been part of our way of doing business for a long time; in fact the Swiss insurance industry has its origins in the concept of solidarity.
Zurich’s position with respect to transparency on CR-related matters is not limited to compliance with regulatory requirements. We seek to ensure concise and informative disclosure of Zurich’s financial position, strategy, governance and remuneration. Zurich has also included certain non-financial KPIs in the area of CR in its external reporting and is one of the first companies in Switzerland to include aspects of integrated reporting.
Good corporate governance enables Zurich to create sustainable value for the benefit of its shareholders, customers, employees and other stakeholders.
Introduction 25 Group structure and shareholders 26 Capital structure 29 Board of Directors 32 Group Executive Committee 50 Shareholders’ participation rights 59 Information Policy 60 Employees 60 Changes of control and defense measures 60 Assurance at Zurich Insurance Group 61 External Auditors 62 Group Audit 63 Group Compliance 64 Risk Management and Internal Control Statement 64 Going concern 64
Introduction The Zurich Insurance Group consisting of Zurich Insurance Group Ltd and its subsidiaries (the ‘Group’ or ‘Zurich’), is committed to effective corporate governance for the benefit of its shareholders, customers, employees and other stakeholders based on the principles of fairness, transparency and accountability. Structures, rules and processes are designed to provide for the proper organization and conduct of business within Zurich and to define the powers and responsibilities of its corporate bodies and employees.
• Swiss Code of Best Practice for Corporate Governance (Swiss Code of Best Practice), issued in 2002 by economiesuisse, as amended in October 2007 and in August 2014.
Zurich is subject to insurance group supervision by the Swiss Financial Market Supervisory Authority (FINMA). As set out in its decree of December 28, 2011, FINMA stated that Zurich is subject to insurance group supervision according to art. 64 et seq. of the Swiss Insurance Supervision Law (ISL) and no longer qualified as a conglomerate. The Joint Committee of the European Supervisory Authorities has also designated the Group as an insurance group and not as an insurance conglomerate because of the small size of its non-insurance activities. The ISL requires Swiss insurance companies and groups to establish and maintain strong governance and risk management systems as well as effective internal control systems that are appropriate to their business activities. It prescribes the calculation of a risk-based solvency margin on a Group wide basis and at legal entity level pursuant to the Swiss Solvency Test (SST) and also a Solvency I margin (only applicable to Zurich Insurance Company Ltd). All major intra-group transactions must be reported to FINMA. In addition to the group supervision exercised by FINMA and its supervision of the legal entities Zurich Insurance Company Ltd, Zurich Life Insurance Company Ltd and Orion Rechtsschutz-Versicherung AG, the insurance subsidiaries and remaining financial services entities of the Group are supervised by relevant regional and local supervisory authorities.
This report essentially follows the recommended structure outlined in the Directive on Information Relating to Corporate Governance of the SIX Exchange Regulation. The information on compensation, shareholdings and loans to Board members and members of the GEC is contained in a separate report, the Remuneration report (see pages 62 to 95) which supplements this Corporate governance report and also includes the information as required by the Circular 2010/1 on remuneration schemes (minimum standards for remuneration schemes of financial institutions) issued by FINMA on October 21, 2009 as amended on June 1, 2012 as well as the Ordinance against Excessive Compensation (Ordinance AEC) of November 20, 2013.
• Kishore Mahbubani, elected as a new member (as of April 1, 2015)
• Tom de Swaan, Chief Executive Officer (ad interim) (as of December 1, 2015)
Change of role: • Cecilia Reyes, Chief Risk Officer, former Chief Investment Officer (as of July 1, 2015)
Retirements and resignations: • Geoffrey Riddell, Regional Chairman of Asia-Pacific, Middle East and Africa (as of April 1, 2015)
• Michael Kerner, CEO General Insurance (as of October 1, 2015)
• Martin Senn, Chief Executive Officer (as of December 1, 2015)
Consisting of four regions: 1. North America 2. Europe, Middle East & Africa 3. Latin America 4. Asia-Pacific
• Farmers provides, through Farmers Group, Inc. (FGI) and its subsidiaries, non-claims related, administrative and management services to the Farmers Exchanges as attorney-in-fact. FGI receives fee income for the provision of services to the Farmers Exchanges, which are owned by their policyholders and managed by Farmers Group, Inc. a wholly owned subsidiary of the Group. This segment also includes all reinsurance assumed from the Farmers Exchanges by the Group. Farmers Exchanges are prominent writers of personal and small commercial lines of business in the U.S.
• Non-Core Businesses include insurance businesses that the Group does not consider core to its operations and that are therefore mostly managed to achieve a beneficial run-off. Non-Core Businesses also include the Group’s remaining banking activities. Non-core businesses are mainly situated in the U.S., Bermuda, the United Kingdom and Ireland.
A detailed review of the respective business segment results during 2015 can be found in the operating and financial review starting on page 106. Furthermore, an overview of the Group’s business strengths and activities is contained in the Annual Review, available on Zurich’s website www.zurich.com (www.zurich.com/en/ investor-relations/results-and-reports).
A list of the Group’s significant subsidiaries, including information on significant subsidiaries that are listed, can be found on pages 254 to 257. For further information on the share listing of Zurich Insurance Group Ltd, see the shareholder information on pages 276 to 278.
Zurich Insurance Group Ltd is obliged to announce shareholdings by third parties in its shares when notification is received from a third party that a threshold has been reached. During 2015 the Group received no notifications by third parties that they had either exceeded or fallen below the threshold of three percent as a result of purchases or sales.
As of December 31, 2015, Zurich Insurance Group Ltd is not aware of any person or institution, other than BlackRock, Inc., New York (> 5%), which, directly or indirectly, had an interest as a beneficial owner in shares, option rights and/or conversion rights relating to shares of Zurich Insurance Group Ltd representing three percent or more of its issued shares.
Number of shares held as of December 31, 2015 Number of registered shareholders registered share capital
Individual shareholders 95.8 29.2 Legal entities 4.1 26.7 Nominees, fiduciaries 0.1 44.1 1 of registered shareholders.
Registered shareholders by geography as of December 31, 2015 Registered shareholders in %
Latin America 0.1 – Rest of the World 4.3 16.1 1 of registered shareholders.
Capital structure Share capital As of December 31, 2015, the ordinary share capital of Zurich Insurance Group Ltd amounted to CHF 15,040,496.40 divided into 150,404,964 fully paid registered shares with a nominal value of CHF 0.10 each. The Board will propose to the shareholders at the Annual General Meeting on March 30, 2016 a dividend of CHF 17.00 per share. As it is planned that the dividend payment be made from the capital contribution reserve, it will be exempt from Swiss withholding tax.
Authorized and contingent share capital As of December 31, 2015, as specified in Article 5bis(1) of the Articles of Incorporation, the Board is authorized to increase the share capital of Zurich Insurance Group Ltd by up to CHF 1,000,000 representing 10,000,000 fully paid registered shares with a nominal value of CHF 0.10 each until April 2, 2016. The contingent share capital of Zurich Insurance Group Ltd, as specified in Article 5ter(1a) of the Articles of Incorporation, may be increased by an amount not exceeding CHF 1,000,000 by issuing up to 10,000,000 fully paid registered shares with a nominal value of CHF 0.10 each by exercising conversion and/or option rights which are granted in connection with the issuance of bonds or similar debt instruments by Zurich Insurance Group Ltd or one of its Group companies in national or international capital markets and/or option rights which are granted to the shareholders. Moreover, there is an additional contingent share capital of CHF 89,029.50 as specified in Article 5ter(2a) of the Articles of Incorporation, representing 890,295 fully paid registered shares with a nominal value of CHF 0.10 each, which may be issued to employees of the Group. For further information on the capital structure and the authorized and contingent share capital, see the audited consolidated financial statements, note 20 on pages 214 to 215.
Changes to share capital during 2015 During 2015, a total of 768,128 shares were issued to employees out of contingent capital. As a result, on December 31, 2015, the share capital amounted to CHF 15,040,496.40 (150,404,964 shares) and both the authorized capital and the contingent share capital (as specified in Article 5bis(1) and in Article 5ter(1a) of the Articles of Incorporation, respectively) amounted to CHF 1,000,000 (10,000,000 shares) and the other contingent share capital (as specified in Article 5ter(2a) of the Articles of Incorporation) amounted to CHF 89,029.50 (890,295 shares).
For information on changes of share capital during 2013, see the Annual Report 2014 of Zurich Insurance Group, page 26, pages 164 to 165 and pages 213 to 214.
The governance structure that controls relations between our Board and our Management is designed to help both bodies to fulfill their mandates. This structure provides checks and balances including the institutional independence of the Board of Directors from the Chief Executive Officer and the Group Executive Committee.
As of December 31, 2015, the Board included members of eight nationalities. The Board members gained their business experience in a broad range of jurisdictions resulting in a profound collective knowledge of international business practices. The Board also benefits from the broad cultural, educational and professional backgrounds of its members, which collectively include financial services, manufacturing, engineering, as well as legal and regulatory experience.
Educational background Ms. Amble received a Bachelor of Science in accounting from the Pennsylvania State University, and later became a certified public accountant (currently inactive).
Susan Bies Member of the Board of Directors Nationality: U.S. Born: 1947
External appointments Ms. Bies has served as a member of the board of directors of The Bank of America Corporation since June 2009, and joined the board of directors of Merrill Lynch International, London, a subsidiary of Bank of America Corporation, in 2013. She has also been a member of the senior advisory board of Oliver Wyman since 2009.
Educational background Dame Alison graduated in economics and German from the University of Reading. She was also awarded an honorary doctorate (LLB) from the University of Reading and the University of Exeter.
Skills and experience Rafael del Pino has more than 30 years of international management experience. From 1992 to 1999, he was CEO of Grupo Ferrovial and in 1999, he was appointed executive vice-chairman. In 2000, Mr. del Pino assumed the position of executive chairman and managing director of Ferrovial S.A. During his career at Ferrovial he has transformed the company from a mostly domestic construction company to a leading provider of infrastructure services around the world. In addition, Mr. del Pino was a member of the board of Banesto (Banco Español de Crédito S.A.) from 2003 to 2012 and of the International Advisory Board of Blackstone from 2007 to 2013. He has been a member of the boards of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd since March 2012.
External appointments Mr. Escher has been a member of the board of directors of Silent-Power AG of Cham, Switzerland, a company in the alternative energy field, since 2012, and its chairman since 2013.
Skills and experience Christoph Franz started his professional career in 1990 at Deutsche Lufthansa AG. From 1994 until 2003 he held different executive functions at Deutsche Bahn AG, including as member of the executive board and CEO of the passenger transport division. In 2004 he became CEO of Swiss International Air Lines Ltd, and in 2009 was promoted to the role of deputy chairman of the executive board of Deutsche Lufthansa AG and CEO Passenger Airlines. From 2011 to 2014, Mr. Franz was chairman of the executive board and CEO of Deutsche Lufthansa AG. He became a member of the boards of Zurich Insurance Group Ltd and Zurich Insurance Company Ltd in April 2014.
External appointments Mr. Franz was elected chairman of the board of Roche Holding Ltd in March 2014. He is also a member of the Board of Directors of Swiss International Air Lines Ltd and of Stadler Rail. Mr. Franz serves as a member of the board of trustees of Avenir Suisse and Ernst-Goehner-Stiftung.
Educational background Mr. Franz studied industrial engineering at the Technical University Darmstadt (Germany) and completed his studies with a Ph.D. in economic sciences (Dr. rer. pol.) at the same university. He also studied at the Ecole Centrale de Lyon (France) and conducted post-doctorate research at the University of California, Berkeley.
Monica Mächler Member of the Board of Directors Nationality: Swiss Born: 1956
External appointments Ms. Mächler has been a member of the supervisory board of directors of Deutsche Börse AG since May 2012 and since April 2015 a member of the board of directors of Cembra Money Bank AG. She also chairs the advisory board of the International Center for Insurance Regulation at the Goethe University Frankfurt am Main and serves on the board of the Stiftung für schweizerische Rechtspflege.
Kishore Mahbubani Member of the Board of Directors Nationality: Singapore Born: 1948
External appointments Mr. Mahbubani is dean and professor in the practice of public policy at the Lee Kuan Yew School of Public Policy of the National University of Singapore. He serves on boards and councils of several institutions in Singapore, Europe and North America, including Yale’s President’s Council on International Activities (PCIA), the University of Bocconi International Advisory Committee, the World Economic Forum’s Global Agenda Council on Geoeconomics, and as chairman of the Lee Kuan Yew World City Prize Nominating Committee.
Educational background Mr. Mahbubani graduated with a first-class honours degree in philosophy from the University of Singapore and an M.A. in philosophy from Dalhousie University, Canada, where he was also awarded an honorary doctorate.
Independence of the members of the Board of Directors Zurich considers the independence of its Board members to be an essential feature of good corporate governance. Zurich’s independence criteria comply with applicable laws and reflect best-practice standards such as the SIX Exchange Regulation Directive on Information relating to Corporate Governance and the Swiss Code of Best Practice. The Board consisted up to December 1, 2015 entirely of Directors who are non-executive, independent from the management and who – except for Ms. Mächler – have never held an executive position in the Group. Ms. Mächler held an executive position until 2006 and was elected in 2013 as a non-executive board member. According to the guidelines of the Swiss Code of Best Practice, she is considered independent.
The roles of Chairman and CEO were separated up to December 1, 2015 and will be separated again as of March 7, 2016, when Mario Greco will be taking over the role of Chief Executive Officer. For the interim period during which the Chairman of the Board, Tom de Swaan, is serving as Chief Executive Officer ad interim, Fred Kindle, Vice-Chairman of the Board, has taken on certain additional responsibilities to ensure continued good governance. The Board, with the exception of this period, consists entirely of non-executive members and there is no requirement for a lead director to be appointed under the Swiss Code of Best Practice.
Multiple mandates for different companies under unified control are counted as a single mandate. The maximum limits set forth in the Articles of Incorporation do not discharge the members of the Board or Group Executive Committee from their generally applicable duties to act with due care and to protect Group interests. As in the past, the assumption of additional mandates is possible only where, upon assumption of such mandates, sufficient time and resources remain available for performance of the office held in the Group.
Elections As required by Swiss law, directors are elected annually. Directors are elected by a majority of the votes cast.
At the AGM on April 1, 2015, all Board members were re-elected for another one-year term. Ms. Joan Amble and Mr. Kishore Mahbubani were newly elected. The shareholders elected Mr. Tom de Swaan as Chairman. As members of the Remuneration Committee, they elected Mr. Thomas Escher, Dame Alison Carnwath, Mr. Rafael del Pino, Mr. Tom de Swaan and Mr. Christoph Franz. As independent voting rights representative, the shareholders elected Mr. lic. iur. Andreas G. Keller, Attorney at Law.
The Board proposes to the shareholders that they elect or re-elect as follows: • As members: Mr. Tom de Swaan, Mr. Fred Kindle, Ms. Joan Amble, Ms. Susan Bies, Dame Alison Carnwath, Mr. Christoph Franz, Ms. Monica Mächler, and Mr. Kishore Mahbubani.
In 2015, average attendance at Board meetings was 93 percent. In fulfillment of their duties, the members of the Board spent additional time participating in Board Committee meetings and preparing for meetings.
The Board is responsible for the ultimate management of Zurich Insurance Group Ltd and of the Group as a whole as well as for the supervision of management. In particular, it is responsible for taking actions in the following areas: • Group strategy: The Board regularly reviews and discusses in particular the Group’s business portfolio including its target market, acquisitions, customer and intermediaries strategy and its human resources strategy; • Finance: The Board particularly approves the financial and operating plan annually, establishes guidelines for capital allocation and financial planning. Further, the Board reviews and approves the annual and interim (half year and quarterly) consolidated financial statements of the Group. Above certain thresholds, the Board approves major lending and borrowing transactions; • Structure and organization of the Group: The Board determines and regularly reviews the basic principles of the Group’s structure and major changes in the Group’s management organization including major changes of management functions. In this respect, the Board particularly discusses the Group’s corporate governance framework and its remuneration system. The Board also adopts and regularly reviews the Group’s basic principles of conduct, compliance and risk management. Further, as part of its duty to convene the shareholders’ meeting and submit proposals to the shareholders’ meeting, it discusses the dividend policy and the Board’s proposal for the payment of dividends. Within its authorities the Board also makes resolutions on capital increases and the certification of capital increases and respective amendments to the articles of incorporation; • Business Development: Above certain thresholds, the Board regularly discusses and approves acquisitions and disposals of businesses and assets, investments, new businesses, mergers, joint ventures, co-operations and restructurings of business units or books of businesses.
The Governance and Nominations Committee meets at least four times a year. In 2015 it met four times.
Remuneration Committee Composition and membership: Zurich Insurance Group Ltd’s Organizational Rules require the Remuneration Committee to consist of at least four independent non-executive Board members. Currently, Thomas Escher (Chairperson), Dame Alison Carnwath, Rafael del Pino, Tom de Swaan and Christoph Franz serve on this committee.
Key tasks and responsibilities: In general, the Remuneration Committee: • regularly evaluates the Group’s remuneration system and Zurich’s remuneration rules and proposes amendments to the Board, which is responsible for the design, implementation and monitoring of the Group’s remuneration framework
(Further details of the Group’s remuneration framework, including the remuneration philosophy and the remuneration governance are set out in the Remuneration report on pages 66 to 103); • reviews and proposes to the Board on an annual basis the terms of remuneration of the members of the Board; • based on Zurich’s Remuneration Rules, reviews and proposes to the Board the terms and conditions of employment of the CEO and reviews those of other members of the GEC, as proposed by the CEO, before submitting them to the Board for approval; • liaises with the CEO on other important employment, salary and benefit matters; • reviews and proposes to the Board the total variable remuneration pool and reviews the performance relating to short-term and long-term incentive plans, and also makes a qualitative assessment of the performance, reviews and makes proposals to the Board for submission to the General Meeting on the approval of the Board’s and GEC’s remuneration; • and prepares the remuneration report annually in accordance with applicable laws and regulations.
• the review of the employment agreements of the members of the GEC, and • remuneration-related matters arising from Solvency II; share ownership levels of the members of the Board and the GEC (for more details see the remuneration report on pages 66 to 103); • in the annual joint meeting with the Risk Committee, risk management aspects of the Group’s remuneration architecture, as well as key activities with respect to identified Key Risk Taker (KRT) positions, e.g. risk-based assessment of KRTs; • the remuneration report and the Board of Directors report on the approval of the remuneration of the Board of Directors and the Group Executive Committee; • Zurich’s Remuneration Rules and the Remuneration Committee Charter were revised and approved by the Board of Directors; • the Board’s and GEC’s compensation; • activities of the Group Pension Committee.
The Remuneration Committee meets at least four times a year. In 2015 it met five times.
To facilitate an ongoing exchange of information between the Risk Committee and the Audit Committee, the Chairperson of the Audit Committee is a member of the Risk Committee and at least one member of the Risk Committee is a member of the Audit Committee. The Chairman of the Board regularly participates in both the Audit and Risk Committee meetings as a guest.
The external auditors, the internal auditors, appropriate members of the GEC and other executives attend its meetings in order to, inter alia, discuss auditors’ reports, review and assess the auditing concept and the examination process and to assess the activities of both external and internal auditors. Private sessions with external and internal auditors are scheduled at the majority of Audit Committee meetings to enable discussion without the presence of management.
Activities 2015: During 2015, in particular the following topics were discussed: • quarterly reporting with a strong focus on accounting and reserving matters; • the effectiveness of the internal control framework, including SOX; • Group Audit work plans, Group Audit findings and management implementation of remediation actions; • the work of the external auditors, the terms of their engagement and the external auditor’s findings on key judgments and estimates in financial statements; and • the annual Group Compliance Plan, against which it monitored progress during the year, and compliance issues and trends, such as evolving regulatory expectations.
The Audit Committee meets at least four times a year. In 2015 it met seven times.
Activities 2015: From an enterprise risk management perspective, during 2015 the Risk Committee particularly discussed the following topics: • the results of the Group’s risk profile assessment, and the development and assessment of the Group’s economic and regulatory capital; • the results of the Group Total Risk Profiling™ (TRP) assessment including an update regarding risk ownership and mitigation actions; • Zurich Risk Policy (ZRP) including the annual review and approval of new and changed chapters; • investment and asset/liability management, market and credit risks and controls including reports on derivatives; • operational risks and controls, including enhancements to the integrated operational risk framework; • regular updates on the main developments in the Group’s risk profile; • regulatory risk updates; and • in the annual joint meeting with the Remuneration Committee, risk management aspects of the Group’s remuneration architecture.
Subject to the powers reserved to the Board as set out above, the Board has delegated the management of the Group to the CEO. The CEO and, under his leadership, the GEC are responsible for the development and execution of the strategic and financial plans approved by the Board. The CEO has specific powers and duties relating to strategic, financial and other matters as well as to the structure and organization of the Group and manages, supervises and coordinates the activities of members of the GEC. The CEO ensures that appropriate management tools for the Group are developed and implemented and represents the overall interests of the Group. The CEO holds delegated authority to approve certain acquisitions and divestments of businesses and assets, investments and the establishment of new businesses, mergers, joint ventures or cooperation with other organizations.
Information and control instruments vis-à-vis the Group Executive Committee The Board supervises management and monitors its performance through reporting and controlling processes. Regular reporting by the CEO and other executives to the Board provides for appropriate information and updates, including key data for the core businesses, financial information, existing and upcoming risks, and updates on developments in important markets and with regard to major competitors and other significant events. During 2015, before taking over as CEO ad interim, the Chairman of the Board regularly met with the former CEO. He meets from time to time with other GEC members and executives outside regular Board meetings. The other members of the Board do so as well, especially with the Chief Financial Officer and the Chief Risk Officer. While the Chairman of the Board is serving as CEO ad interim, the Vice-Chairman of the Board is taking on certain additional responsibilities to ensure continued good governance.
The Group has an information and financial reporting system. The annual plan for the Group, which includes a summary of financial and operational metrics, is reviewed by the GEC in detail and approved by the Board. Full-year forecasts are revised if necessary to reflect changes in sensitivities and risks that may affect the results of the Group. Action is taken, where appropriate, when variances arise. This information is reviewed regularly by the GEC and the Board.
Cecilia Reyes Chief Risk Officer and Regional Chairman of Asia Pacific
Isabelle Welton Chief Human Resources Officer and Regional Chairman of Latin America
Changes to the GEC As of April 1, 2015, Geoffrey Riddell resigned from the GEC. As of July 1, 2015, Urban Angehrn was appointed Chief Investment Officer and member of the GEC. Cecilia Reyes who was Chief Investment Officer up to that date, was appointed Chief Risk Officer. Axel Lehmann resigned as Chief Risk Officer as of July 1, 2015 and stepped down from the GEC as of October 1, 2015, serving as Regional Chairman Europe, Middle East and Africa up to that date. George Quinn was appointed Regional Chairman of Europe, Middle East and Africa effective October 1, 2015. Michael Kerner resigned as CEO General Insurance and member of the GEC as of October 1, 2015. Kristof Terryn was appointed CEO General Insurance as of October 1, 2015, while continuing to serve as CEO Global Life ad interim, a position he held until the end of 2015. As of 1 December 2015, Martin Senn, resigned and stepped down from the GEC, in mutual agreement with the Board, and Tom de Swaan was appointed Chief Executive Officer ad interim.
Management Committees In 2014, an initiative was carried out to streamline certain group processes in order to achieve more effective decision making, and to clearly allocate the duties and responsibilities of certain positions, corporate bodies and functions. In particular a new management committee structure and three distinct decision-making models for Group functions were established.
From January 1, 2015, the Finance Committee (FC) and the Risk and Control Committee (RCC) have replaced the Group Balance Sheet Committee and the Group Finance and Risk Committee with clear mandates to avoid potential overlaps and duplication.
Members: Chief Risk Officer (Chair),Chief Operations Officer GI, Chief Operations Officer GL, Head of Strategy, Enterprise Architecture, Governance and Consulting (SAGC), Global Head of Risk and Control, Head of IM Strategy and Development, Corporate Center General Counsel, Group Compliance Officer, Group Controller.
Technical Committees In addition to the management committees the Group governance structure provides for committees of a more technical nature to support further aspects of Zurich’s business activities.
The Disclosure Committee, chaired by the Group Controller, is responsible for reviewing all external communications and disclosures with information material to the financial position and/or performance of the Group. In particular it reviews quarterly, half-year and year-end IFRS financial results and related documents, e.g. related news releases and analysts’ information. It reviews other external communications with material information as to the financial position and performance of the Group, proposals from Group Compliance regarding projects that have an impact on the Group and respective dealing restrictions as well as controls and procedures regarding the effectiveness of the Group’s internal controls over financial reporting. It makes recommendations to the Chief Financial Officer.
For information on contractual termination benefits, see pages 60 and 61 of this report.
Educational background Mr. de Swaan graduated from the University of Amsterdam with a master’s degree in economics.
Skills and experience Jeff Dailey began his career in 1980 with Mutual Service Insurance Company. He also worked for Progressive Insurance Company. He went on to form Reliant Insurance Company, an auto insurance start-up owned by Reliance Group Holdings, which was sold to Bristol West Holdings Inc. in 2001. From 2001 until 2004, Mr. Dailey was Chief Operating Officer (COO) of Bristol West and, in 2004, he was named President of Bristol West, following the firm’s initial public offering (IPO) on the New York Stock Exchange. In 2006, he became CEO of Bristol West. Mr. Dailey joined Farmers in 2007 as President of Personal Lines for Farmers when Farmers acquired Bristol West. In January 2011, he was promoted to the position of President and COO of Farmers Group, Inc. He became a member of the Board of Farmers Group, Inc. in February 2011 and has been its Chairman since October 2015. Mr. Dailey was appointed to his current role of CEO of Farmers Group, Inc. and became a member of the Group Executive Committee in January 2012.
Educational background Mr. Dailey graduated from the University of WisconsinMadison with a bachelor’s degree in economics and has an MBA from the University of Wisconsin-Milwaukee.
Robert Dickie Chief Operations and Technology Officer Nationality: British Born: 1959
Skills and experience Robert Dickie held various senior positions with National Australia Bank Group in Australia and the UK from 1994 to 2000. From 2000 to 2002, he served as Managing Director, UK Enterprise, for Zurich in the UK. From 2003 to 2008 Mr. Dickie was Group Operations Director and a member of the executive committee of the UK-based bank Bradford & Bingley plc. In 2008 he joined American International Group, Inc. (AIG) where he served as Chief Operations and Systems Officer and was a member of the global leadership team. He joined Zurich in March 2014 as Chief Operations and Technology officer and member of the Group Executive Committee responsible for Zurich’s shared services, information technology (IT), procurement and sourcing and operational transformation initiatives. He is a member of the Board of Farmers Group, Inc. since October 2015.
Skills and experience Mike Foley joined the financial management training program of Armtek Corporation in 1984. After graduating from Kellogg in 1989, Mr. Foley joined the Deerpath Group in Lake Forest, Illinois, as an associate. He later became vice president responsible for managing a portfolio of equity investments in various acquired businesses. In 1993 he joined Electrocal, Inc. in Connecticut as president. In 1996, Mr. Foley joined McKinsey & Company, where he later became a principal and led its North American property/casualty insurance practice. He joined Zurich in 2006 as Chief Operating Officer of its North America Commercial business division and in January 2008 was appointed CEO of that division and a member of the GEC. Mr. Foley is also the Regional Chairman of North America and Chairman of the Board of Zurich Holding Company of America, Inc.
Skills and experience Yannick Hausmann started his career in 1995 at a law firm in Basel. From 1998 to 2000, he was associate in the tax and legal department of Arthur Andersen AG and Andersen Legal in Zurich. He was a member of the Legal and Compliance Group of the Swiss Insurance Association for several years. Mr. Hausmann joined the Zurich Corporate Center Litigation and Investigation Team in 2000. He has held his current position since December 2009 and was promoted to be a member of the Group Executive Committee in July 2012. He oversees the Legal, Compliance and Public Affairs functions worldwide across the Zurich Group, as well as the Board Secretariat. Mr. Hausmann has served on the Board of Directors of Farmers Group, Inc. since February 2011. In July 2013, he became Chairman of the Board of Directors of Zürich Beteiligungs-Aktiengesellschaft (Deutschland) as well as a member of the Board of Directors of Zurich Insurance plc (Ireland).
Educational background Mr. Hausmann received a doctorate in law from the University of Basel in 1995 and was admitted to the bar in Switzerland (Canton of Basel) in 1997. He earned a Master of Laws (LL.M.) from the New York University School of Law in 2003 and attended the Advanced Management Program at Harvard Business School in 2012.
Skills and experience George Quinn started his career at KPMG 1988 in London, where he held several positions working with the insurance and reinsurance industry. He joined Swiss Re in 1999 as Chief Accounting Officer based in Zurich and later served as Chief Financial Officer (CFO) for Swiss Re Group’s Financial Services. Mr. Quinn became the Regional CFO for Swiss Re Americas based in New York in 2003. In March 2007 he became Swiss Re Group’s CFO. Mr. Quinn joined Zurich in May 2014 as Group CFO and member of the Group Executive Committee. He was appointed Regional Chairman of Europe, Middle East and Africa effective October 2015. He also became Chairman of Zurich Insurance plc (Ireland) in October 2015.
Educational background Mr. Quinn holds a degree in engineering from the University of Strathclyde. Mr. Quinn is a member of the Institute of Chartered Accountants in England and Wales.
Cecilia Reyes Chief Risk Officer and Regional Chairman of Asia Pacific Nationality: Swiss and Philippine Born: 1959
Skills and experience Cecilia Reyes has over 20 years experience in the international financial markets. Ms. Reyes worked from 1990 until 1995 for Credit Suisse in Zurich in various roles in Credit Suisse Asset Management, global treasury and securities trading. In 1995, she started working with ING Barings in London and in 1997 she became a director and head of trading risk analytics. She moved to Amsterdam in 2000 as head of risk analytics for ING Asset Management to develop risk management methods for the asset management operation. Ms. Reyes joined Zurich in 2001 as regional manager for Group Investments with responsibility for North America, and became regional manager for Europe and International Businesses in 2004. From April 2006 until March 2010 she was Head of Investment Strategy Implementation. Ms. Reyes was appointed Chief Investment Officer and member of the GEC effective April 2010. In April 2015 she took on the additional responsibility of Regional Chairman of Asia Pacific and in July 2015 she assumed her current role as Chief Risk Officer.
Educational background Cecilia Reyes holds a Ph.D. in finance from London Business School and an MBA from the University of Hawaii.
Kristof Terryn CEO General Insurance and CEO Global Life (ad interim) Nationality: Belgian Born: 1967
Isabelle Welton Chief Human Resources Officer and Regional Chairman of Latin America Nationality: Swiss Born: 1963
External appointments Ms. Welton is a member of the board of AG für die Neue Zürcher Zeitung, a member of the Regional Economic Advisory Council of the Swiss National Bank and a member of the board of trustees of the Lucerne Festival.
Changes to the GEC since January 1, 2016 Mr. Gary Shaughnessy was appointed CEO Global Life and member of the Group Executive Committee as of 1 January 2016. He succeeds Mr. Kristof Terryn, CEO General Insurance, who held the position ad interim. In January 2016, Mario Greco was appointed Chief Executive Officer, effective March 7, 2016.
In accordance with Swiss law and practice, Zurich Insurance Group Ltd informs all shareholders at the beginning of the shareholders’ meeting of the aggregate number of shares represented by shareholders and the number of shares represented by the independent voting rights representative. Zurich Insurance Group Ltd provided electronic voting devices to its shareholders for all the resolutions taken at the AGM on April 1, 2015.
For addresses and further upcoming important dates, see shareholder information starting on page 277 (Financial Calendar on page 278).
Employees The Group is committed to providing equal opportunities when recruiting and promoting people, whereby ability, experience, skills, knowledge, integrity and diversity are guiding principles. The Group actively encourages employee involvement in its activities through printed and online publications, team briefings and regular meetings with employees’ representatives. Further, the Group is party to an agreement with employee representatives of the Group’s companies in Europe. For further information on the Group’s people management activities, see page 17 of the Annual Report and a longer report on Zurich’s website www.zurich.com/en/corporate-responsibility/doing-businessresponsibly /our-people.
Group Management: Group Management owns processes, controls and technical reviews related to assurance activities. This includes and is supported by assurance work provided by the management's review functions (e.g., underwriting, actuarial, claims) and the legal and finance functions.
Non-audit fees Total fees (including expenses and value added taxes) in the year 2015 for additional services, such as tax advice and services, internal control advice, transaction consulting services or special audits required by local law or regulatory bodies performed by PwC and parties associated with them for Zurich Insurance Group Ltd or a Group company amounted to USD 10.3 million (USD 9.6 million in 2014). Non-audit fees were as follows: Audit and non-audit fee amounts in USD millions, as of December 31 2015 2014
Group Audit The Group’s internal audit function (Group Audit) is tasked with providing independent and objective assurance to the Board, the Audit Committee, the CEO and management and to the boards and audit committees of subsidiary companies. This is accomplished by developing a risk-based plan, which is updated continuously as the risks faced by the business change. The plan is based on the full spectrum of business risks including concerns and issues raised by the Audit Committee, management and other stakeholders. Group Audit executes the plan in accordance with defined operating standards, which incorporate and comply with the International Standards for the Professional Practice of Internal Auditing, issued by the Institute of Internal Auditors (IIA). Key issues raised by Group Audit are communicated to the responsible management function, the CEO and the Audit Committee using a suite of reporting tools.
The Audit Committee, boards and audit committees of subsidiary companies and CEO are regularly informed of important audit findings, including ineffective opinions, mitigation actions and attention provided by management. Group Audit is responsible for ensuring that issues identified by Group Audit, that could have an impact on the Group’s operations are brought to the attention of the Audit Committee and appropriate levels of management and that timely follow-up action occurs. This is supported by the attendance of the Head of Group Audit at each meeting of the Audit Committee.
Group Audit is authorized to review all areas of the Group and has unrestricted access to all Group activities, accounts, records, property and personnel necessary to fulfill its duties. In the course of its work, Group Audit takes into consideration the work of other assurance functions. In particular, Group Audit co-ordinates its activities with the external auditors, sharing risk assessments, work plans, audit reports and updates on audit actions. Group Audit and the external auditors meet regularly at all levels of the organization to optimize assurance provision and efficiency.
Risk Management and Internal Control Statement For information regarding the Group’s risk management and internal control framework, see the Risk review of this Annual Report 2015 on pages 122 to 155. The Group no longer separately describes risk management and internal control information in this governance report.
Going concern The Directors are satisfied that, having reviewed the performance of the Group and forecasts for the forthcoming year, the Group has adequate resources to enable it to continue in business for the foreseeable future. For this reason, the Directors have adopted the going concern basis for the preparation of the Consolidated financial statements.
Remuneration system In addition to market competitive base salaries, pensions and benefits, Zurich’s remuneration system incorporates performance-related incentives with both short-term and long-term components.
These financial results are fully reflected in the awards under our Group’s performance related incentive plans. The overall assessment of business profitability in 2015 leads to an average payment under our Group short-term incentive plan (STIP) of 65 percent of target, relative to an average payment of 96 percent of target awarded for 2014, a reduction of approximately one-third. The funds under the STIP have been allocated to best recognize the performance achievements of the segments, countries and individuals. Under the Group LTIP, the vesting level is zero percent and no discretion has been applied. This reflects that we did not meet the minimum performance conditions on the three pre-defined criteria over the two-year period 2014 to 2015 and compares to a vesting level of 139 percent of target last year. Details on the awards under STIP and the LTIP vesting level can be found in the Remuneration Report.
The aggregate amount of variable remuneration for 2015 for the entire Group (total variable remuneration pool, see page 71) which is also assessed against the Group’s long-term economic performance, resulted in an amount of USD 505 million, compared with USD 652 million in 2014. This amount includes the value of the LTIP target allocations made in 2015 which will be assessed for vesting in 2018 based on the performance achievements over the three year period 2015 to 2017. If we consider the actual LTIP vesting level of zero percent however, no shares from previous allocations will vest in 2016 and therefore the actual earned total variable remuneration for the period ending December 31, 2015 was USD 365 million.
At previous AGMs, our shareholders have been provided with the opportunity to express their views through a consultative, non-binding vote on the Remuneration Report. This resulted in 86.9 percent of votes in favor in 2015 and 87.4 percent in 2014. For the first time at the AGM in 2015, and in accordance with the Ordinance AEC, we also submitted to our shareholders two binding votes on remuneration-related matters. Our shareholders voted in favor of both the approval of the maximum total amount of remuneration for the Board for the one-year period from the AGM in 2015 to the AGM in 2016 (95.6 percent) and the approval of the maximum total amount of remuneration for the GEC for the financial year 2016 (89.9 percent).
We will continue to engage in a dialogue with our stakeholders and provide our shareholders with the opportunity to express their opinions via a consultative, non-binding vote on the Remuneration Report for 2015, as well as two binding votes on the prospective maximum total amount of remuneration for the Board and for the GEC.
“The variable remuneration outcomes for 2015 show the strong link with our financial performance.”
The Remuneration Report describes the principles and governance framework relating to the remuneration of the members of the Board of Directors, the Group Executive Committee and all employees. It also provides details of each remuneration element, discloses important information regarding remuneration and reports on the work of the Remuneration Committee.
This summary provides an overview of the 2015 remuneration of Zurich Insurance Group Ltd (Group or Zurich), including details regarding the link between business performance and variable pay, developments in terms of Zurich’s remuneration in 2015, and an outlook for 2016.
Zurich’s remuneration Overall, Zurich operates a balanced and effectively managed remuneration system which ensures competitive total remuneration opportunities, for which the resulting awards are adjusted depending on the results achieved. It is an important element of the Group’s risk management framework and is designed to not encourage inappropriate risk-taking.
The following graph demonstrates how Zurich’s remuneration architecture is structured in a way that puts more emphasis on the variable remuneration elements, with a higher weighting on average towards the long-term for our most senior employees. The variable remuneration is largely determined by the achievements against pre-defined financial measures which are aligned with the Group’s strategy. For members of the GEC and for the most senior employees of the Group, including those incumbents who hold positions considered as key risk taker roles, a large proportion of their remuneration is deferred over the long term and dependent on the Group’s long-term performance. For example, for members of the GEC, on average: • 63 percent of the total remuneration is variable • 38 percent of the variable remuneration is short-term and 62 percent is long-term 1 At target, as a percentage of total remuneration.
The following tables provide details regarding the STIP award and LTIP vesting level in relation to the business performance achievements for each respective plan. For further information on the STIP and on the LTIP see the remuneration elements later in the report on page 78.
Context The key factors driving individual awards are: • The Group’s NIAS for members of the leadership team, the control functions, investment management, support functions and Group Operations and Technology. • The overall business operating profit results for General Insurance and Global Life respectively. • Specific growth and profitability measures for Farmers.
Based on the performance against the pre-defined criteria over the two-year period 2014 – 2015, the calculated vesting level in 2016 is zero, which is significantly lower compared to last year. None of the measures, TSR, NIAS ROE nor the BOPAT ROE met the threshold levels of performance required for vesting to occur. No discretionary adjustments were made to the calculated vesting.
The total variable remuneration pool includes the following elements: • The total expenditure on cash incentives to be paid for the performance year comprising the amount of the aggregated funding pools under the STIP, and the amounts to be paid under local short-term incentive plans.
• The total amount of severance payments 2 committed in 2015, regardless of when the payments are due. • It does not include commission payments made to employed sales agents.
2 Payments that are provided in connection with the termination of an employment relationship. Zurich does not include under the term Severance Payments, garden leave or similar payments for employees in jurisdictions where such payments are required by applicable law, or where they are based on contractual notice periods which conform with recognized market practice, or where they are non-contractual but in line with recognized market practice. However, Zurich does include garden leave or similar payments that go beyond recognized market practice, irrespective of whether these are provided pursuant to an agreement or are ex gratia. Severance Payments are prohibited to be paid to members of the Board and the GEC.
2 For all employees equals the cash incentives earned for the year. 3 It represents the value of the target share allocations made in 2015, which assume vesting levels in 2018 at 100 percent of target. This excludes the value of target share allocations from transition arrangements which amount to USD 6 million.
4 For all employees the Other remuneration includes Sign-on and Severance Payments committed in cash and/or in shares for comparison reasons. 5 Actual, gross and for cash amounts based on the accrual principle. The number of employees (full time equivalents) was broadly the same year on year.
Adjustments to the fee structure for Directors following the approval from shareholders at last year’s AGM in 2015 including increasing the level of fees paid in sales-restricted shares and increasing the sales restriction period to five years.
At the end of 2016, we will see the completion of a full three-year performance period since the introduction of the amended LTIP effective from January 1, 2014. This means that for the 2017 LTIP vesting level decision, all three performance criteria in the vesting grid (TSR, NIAS ROE and cash remittance), will be assessed over the full three-year performance period 2014 – 2016.
Legal and regulatory requirements This Remuneration Report provides all the information that is outlined in chapter 5 of the Directive on Information Relating to Corporate Governance of the SIX Exchange Regulation as amended with effect from September 1, 2014 (SIX Directive), the Swiss Code of Best Practice for Corporate Governance (Swiss Code of Best Practice), issued in 2002 by economiesuisse, as amended in October 2007 and in August 2014, and Articles 14 –16 of the Ordinance AEC (replacing the information in the notes to the consolidated financial statements according to Article 663bbis of the Swiss Code of Obligations). The information according to Articles 14 –16 of the Ordinance AEC subject to audit is marked in the respective sections of the Remuneration Report. The Remuneration Report also includes all the information as required by Article 663c para 3 of the Swiss Code of Obligations and the requirements of the Circular 2010/1 on minimum standards for remuneration schemes of financial institutions, issued by the Swiss Financial Market Supervisory Authority (FINMA) on October 21, 2009 and amended with effect as of December 3, 2015, as well as further guidance issued on January 19, 2011 (FINMA Circular on Remuneration Schemes).
According to the Ordinance AEC and Article 18 para 4 Articles of Incorporation, the Group and/or its subsidiaries are authorized to make payments to any member who joins the GEC during a period for which the AGM has already approved the remuneration of the GEC, of a supplementary amount for the period(s) in question, where the total amount already approved for such remuneration is not sufficient. The sum of all supplementary amounts may not exceed, during any one remuneration period, 30 percent of the respective total amount of approved maximum remuneration of the GEC. Details on the vote on pay, on performance related remuneration for the GEC, allocation of shares as well as the approach regarding loans and credits can be found in Articles 18, 28 and 34 of the Articles of Incorporation.
Further, the information provided according to Articles 14 –16 of the Ordinance AEC contained in the Remuneration Report has been externally audited following the audit requirements of the Ordinance AEC (Article 13 para 1 and Article 17 of the Ordinance AEC). The information disclosed according to Articles 14 –16 of the Ordinance AEC and audited in the Remuneration Report, consists of: • An indication of the total remuneration paid to current and former members of the GEC and the Board, specifying the highest amount paid to a member of the GEC mentioning the name and function and the potential supplementary amount paid to a new member of the GEC according to Article 18 para 4 Articles of Incorporation.
• The structure and level of total remuneration are aligned with the Group’s risk policies and risk-taking capacity. • The Group promotes a high performance culture by differentiating total remuneration based on the relative performance of businesses and individuals.
Remuneration to the CEO Remuneration Committee Board and ultimately from shareholders via a vote as an aggregate maximum amount
Total variable remuneration pool Remuneration Committee Board Short-Term Incentive Plan (STIP) funding pools
Remuneration Committee based on proposals by the CEO taking into account a risk assessment by Risk Management
The results of benchmarking studies are taken into account in setting the fee levels for Directors and the remuneration structure and levels for the CEO and the other members of the GEC. In analyzing the results of the benchmarking studies, market practices in the various countries and internal relativities between positions are taken into account. Overall positioning of target remuneration packages is toward the median levels. Management is supported in these activities by a variety of firms operating in the field of international executive compensation.
At Remuneration Committee and Board meetings where decisions are made on the individual remuneration of the Chairman, the Chairman is not present. In making decisions on the individual remuneration of the CEO, the CEO is not present. Where decisions are made on the individual remuneration of other members of the GEC, those members are also not present at the meetings. See page 45 in the Corporate Governance Report for further details on the Remuneration Committee’s responsibilities.
To help align remuneration with the Group’s risk-taking capacity, Risk Management consulted with other control, governance and assurance functions to provide the CEO with a review of risk factors to consider when assessing overall performance for the annual funding of incentives awards. The Chief Risk Officer (CRO) is available to discuss these findings with the Remuneration Committee and the Board. The CEO takes into account Risk Management’s assessment, among other factors, when proposing the STIP awards to the Remuneration Committee, which in turn makes its recommendation to the Board for final approval.
Annually, Risk Management reviews the processes and criteria for identifying the key risk taker roles. The criteria are based on factors that materially affect risk-taking within the Group, such as overall governance, capital consumption for each risk type as determined by the internal model, strategy and reputation. The criteria are then applied to those who take, and those who control, the specific risks at the level of the Group where the risks are most material. All key risk taker roles for the Group were reviewed and in 2015 the number of key risk taker roles remained stable. Risk Management, together with other control and assurance functions, provides risk and compliance information about each key risk taker as part of the annual individual performance assessment. The remuneration for key risk taker positions includes STIP and LTIP with a greater emphasis toward long-term, and therefore deferred, remuneration.
Group Audit regularly assesses the operational implementation of Zurich’s Remuneration Rules, to verify that the remuneration architecture is implemented across the Group. During 2015, management further documented key processes and controls in the remuneration area.
In 2015, the company issued 768,128 shares (0.51 percent of share capital based on 149,636,836 registered shares eligible for dividends as of December 31, 2014) to meet the share obligations arising from the vesting of shares, the exercise of share options and the funding of other local compensation plans during the year (in 2014, the corresponding number was 733,614 shares or 0.49 percent of share capital based on 148,903,222 registered shares eligible for dividends as of December 31, 2013).
As of December 31, 2015, the total number of unvested target shares under the LTIP was 1,267,179 (2014: 1,278,122) which includes 954,499 from allocations made in 2013, 2014 and 2015 (2014: 870,747 from allocations made in 2012, 2013 and 2014), 73,944 from accrued dividend equivalent target shares (2014: 30,966) and 238,736 target shares allocated under the transition allocations made in 2014 and 2015 (2014: 376,409 under the transition allocations made in 2014). Given the vesting level of zero percent for the tranches vesting in 2016 and assuming 100 percent vesting in 2017 and 2018, this would require 691,405 shares equivalent to 0.46 percent of the share capital based on 150,404,964 registered shares eligible for dividends as of December 31, 2015, in the coming years to cover our current potential LTIP obligations. As of December 31, 2015, the total number of vested but unexercised share options was 330,888 (780,763 as of December 31, 2014). The exercise prices for these options range from CHF 198.10 to CHF 259.90. If all vested options were to be exercised in the future, the number of shares required represents 0.22 percent of the share capital which is based on 150,404,964 registered shares eligible for dividends as of December 31, 2015.
Remuneration elements Total remuneration Target total remuneration is set around the relevant market median and includes the following elements: Q4_2015_05_AR15_Remuneration-Report_part1_en.indd 78 23.02.2016 09:22:21
Members of the GEC and a defined group of the most senior positions of the Group, including key risk takers.
Clawback, malus and hedging n / a Clawback framework established for members of the GEC to allow for recovery, forfeiture and/or clawback, subject to specific conditions. Malus conditions to reduce or eliminate awards applicable to all STIP participants.
Clawback framework established for members of the GEC to allow for recovery, forfeiture and/or clawback, subject to specific conditions. Malus conditions to reduce or eliminate awards applicable to all LTIP participants. Hedging of share-based remuneration prohibited.
n / a 1 The total variable remuneration pool includes short- and long-term incentives, and Sign-on and Severance Payments provided in cash and/or shares to employees who either joined or who left Zurich in 2015. However, it excludes the value of target share allocations from transition arrangements.
Variable remuneration Incentive plans are designed to provide a range of award opportunities linked to levels of performance. Business and individual performance may result in remuneration levels above target for superior performance, and reduced levels that are below target for performance below expectations. Variable remuneration opportunities are provided in markets where this is the norm, to motivate employees to achieve key short-term and long-term business goals to increase shareholder value. Variable remuneration opportunities may include both short-term and long-term incentives.
Short-term incentives Short-term (one-year) incentives are performance-driven based on the following design: Short-term incentives support employees to focus their performance during the year on the achievement of key financial and individual objectives set at the beginning of the year. The final individual STIP award is determined from the STIP target award, the financial performance, the resulting STIP award structure and the individual performance as set out in the following illustration.
Financial performance The STIP pool architecture is reviewed and approved by the Board annually and is aligned with the organizational structure of Zurich. There are a number of STIP pools based on the NIAS result for members of the leadership team, the control functions, investment management, support functions and Group Operations and Technology. In addition, there are segment pools based on the overall BOP results of General Insurance and Global Life and based on specific growth and profitability measures for Farmers.
STIP award The financial performance, the resulting STIP award structure together with the individual performance are then utilized to determine the final individual STIP award for the year which can vary between 0 percent and 200 percent of the target award level. In this way, STIP awards are differentiated based on the financial performance and individual performance. The funding and potential award structure of the STIP pool is based fully on financial performance. Given the resulting award structure, the final STIP award is based on individual performance.
Long-term incentives Long-term (three- to six-year) incentives are performance-driven based on the following design: To support the achievement of the Group’s longer term financial goals, long-term incentives are utilized for a defined group of executives and the most senior roles whose specific focus is on the performance drivers of long-term shareholder value. This group contains the individuals with the highest levels of total remuneration, as well as those individuals whose activities have a significant influence on the risk profile of the Group. In addition, the LTIP aligns the incentives and behaviors with the interests of the Group and its shareholders. To further support this purpose and in light of recent developments in the regulatory environment, the hedging of any shares of Zurich Insurance Company Ltd is prohibited.
In alignment with the Group’s risk profile and business strategy and taking into account best practice principles among insurance companies, views from proxy advisors and shareholders, long-term incentives are provided with a deferral element considering material risks and the time horizon thereof. Such deferred remuneration is structured in a way as to promote the risk awareness of participants and to encourage participants to operate the business in a sustainable manner. As set out in last year’s Remuneration Report, the LTIP was amended effective January 1, 2014 to align the performance measures with the financial objectives set out for the strategic period 2014 to 2016 and to move to a three-year cliff vesting period. Certain transition arrangements were implemented. An illustrative example of the underlying plan is set out below.
The vesting grid is based on pre-defined performance criteria and used to assess the overall vesting level.
<9.75% pa 13th – 18th 9.75% pa 10th – 12th 12% pa 7th – 9th 13.125% pa 4th – 6th
A detailed description of the LTIP is set out below: Vehicle and target amount Allocations are made in the form of target shares on the third working day in April.
From 2011 onwards, Zurich discontinued making any allocations in the form of share options and all outstanding options have vested.
Exceptional individual adjustments The right to modify individual LTIP awards to reflect specific circumstances is reserved for the CEO except for modifications regarding members of the GEC where such right is reserved for the Remuneration Committee and the Board. An individual adjustment of +/–25 percent to the final vesting level may be applied before vesting.
If performance under exceptional or unusual circumstances warrants it however, exceptions to the individual adjustment of +/–25 percent may be made. In this respect Zurich reserves the right to adjust and even set the vesting level to zero percent for an individual to reflect specific circumstances (e.g. in connection with a breach of internal or external rules) during the period prior to vesting. Any such adjustment is reserved exclusively for the Remuneration Committee and the Board.
Therefore, the cash remittance measure is being replaced by BOPAT ROE for the vesting decision in 2016. The BOPAT ROE measure increases the focus on profitability in line with the Group strategy and it will be assessed using the same vesting grid that applies to the NIAS ROE as set out in the table.
LTIP transition arrangements The transition to three-year cliff vesting as of January 1, 2014 resulted in a reduction in the total target earning opportunity during the transition period compared to the previous vesting system for all LTIP participants who were members of the plan prior to 2014. Various transition arrangements are being applied to allow the possibility for relevant participants to maintain their total target earning opportunity during the transition period, these are described below: i) Phasing in of three-year cliff vesting
The performance periods used to assess the vesting levels are also being phased in since the new LTIP came into effect from January 1, 2014 and to align with the 2014 – 2016 strategy. This means that for the 2016 vesting assessment, the performance in the period 2014 – 2015 applies. For the assessment of the vesting level in 2017, the three-year performance period 2014 – 2016 will be taken into account.
Through an allocation of supplementary target shares in 2014 (transition allocation) equal in value to the 2014 year’s regular LTIP allocation value and then assessed for vesting in equal amounts in 2015, 2016 and 2017 with the same performance criteria and conditions outlined above, the cumulative target earning opportunity is maintained for plan participants during the transition period. To enhance the long-term and retentive nature of the allocation, the transition allocation is being made in a number of installments and vests over the period as set out in the following table. The holding period for performance shares under the regular LTIP will also apply to the shares of the transition allocation and no dividend equivalent target shares will accrue on the transition allocation.
Pensions The Group provides a range of pension benefits to employees which are designed by reference to local market practices with the benefit levels positioned toward the relevant market median. The Group Pensions Committee oversees the management of the Group’s pension arrangements within the de-risking frameworks established for benefit design, investments, funding and accounting. On a regular basis, the Group Pensions Committee and the local countries assess the competitive environment with regard to pensions. In recent years, there has been a significant shift away from final salary defined benefit pension arrangements such that almost all new employees are enrolled in defined contribution and/or cash balance-type arrangements.
The folded corner indicates that all information contained within the shaded panel is audited and forms an integral part of the consolidated financial statements.
Fee structure for members of the Board 1 Fee elements in cash
Chair fee for the Audit Committee 80 – 80 40 Chair fee for the Remuneration Committee 60 – 60 30 Chair fee for the Risk Committee 60 – 60 30 Chair fee for the Governance and Nominations Committee 4 60 – 60 30 1 Table excludes other fees for board memberships of subsidiary Boards of Zurich (AGM to AGM). 2 Neither the Chairman nor the Vice-Chairman receive any additional fees for their committee work on the Board of Zurich. 3 Amount remains the same irrespective of the number of committees on which a member of the Board serves. 4 For 2015 and 2014 no such fees were paid as the Chairman of the Board has been chairing the Governance and Nominations Committee.
4 In addition to the fees received as Directors of Zurich Insurance Company Ltd, Susan Bies, Don Nicolaisen and Tom de Swaan earned fees for their board memberships of the following subsidiaries of Zurich: – In both 2015 and 2014, Susan Bies and Don Nicolaisen earned CHF 50,000 for their membership of the board of Zurich Holding Company of America (ZHCA). – In 2014, Tom de Swaan earned CHF 56,250 for his membership of the board of Zurich Insurance plc. He also earned a fee of CHF 3,750 for his role as chair of the
10 In line with applicable laws, Zurich paid the company related portion of contributions to social security systems, which amounted to CHF 92,129 in 2015. The corresponding contributions amounted to CHF 81,916 in 2014. Any personal contributions of the Directors to social security systems are included in the amounts shown in the table above. Swiss-based Directors are eligible for selected employee benefits.
11 As of June 16, 2014, Tom de Swaan was allocated 1,256 shares, Fred Kindle was allocated 470 shares, and the other Board members were allocated 301 shares. The share price (CHF 265.50) as of June 13, 2014 was adopted to calculate the number of shares based on the fixed portion of the fee allocated in shares for the respective members. Where the value of the allocated shares did not equal the value of the portion of the fee to be allocated in shares, the difference was paid in cash.
12 At the AGM on April 2, 2014, Victor L.L. Chu and Rolf Watter retired from the Board and Christoph Franz was elected to the Board.
Remuneration and personal loans for former Directors No benefits (or waiver of claims) have been provided to former Directors during the year 2015, nor were any provided during the year 2014. Rolf Watter continues to have a collateralized policy loan in the amount of CHF 2.5 million outstanding as of December 31, 2015. None of the other former Directors had outstanding loans, advances or credits as of December 31, 2014.
Related parties to the Directors or to former Directors No benefits (or waiver of claims) have been provided to related parties of the Directors or related parties of former members of the Board during the years 2015 and 2014, nor had any related party of the Directors or of former members of the Board any outstanding loans, advances or credits as of December 31, 2015 and 2014.
The total remuneration of the members of the GEC for 2015 comprised the value of base salaries, short-term cash incentives, the target share allocations made under the LTIP in 2015, pensions and other remuneration including employee benefits.
Base salaries Short-term incentives Long-term incentives Service cost for pension benefits Other remuneration
Group Executive Committee 1 This includes the Chief Executive Officer, however excludes the value of target share allocations from transition arrangements.
Elements and amounts of remuneration for the GEC The individual remuneration elements and the corresponding amounts are described in more detail below (the amounts for the highest paid executive and comparative figures for 2014 are also included).
The total amount of annual cash incentive awards to be paid in 2016 for the 2015 performance year for all members of the GEC was USD 5.9 million compared to USD 11.9 million for 2014. The annual cash incentive awards are determined individually and are performance-based.
The total number of target shares allocated on April 7, 2015 to members of the GEC for 2015 was 50,771 which reflects a value of USD 17.5 million at the date of allocation. This is based on the assumption of 100 percent vesting in 2018, a share price of CHF 330.50 (2014: CHF 274.30) on the day prior to the allocation and an exchange rate of 1 CHF = 1.04395 USD. This compares with 64,460 target shares allocated in 2014 and a respective value of USD 18.7 million at the date of allocation on April 3, 2014.
Summary of total remuneration (excluding Replacement Payments and allocations from transition arrangements) The following table shows that the total remuneration of the members of the GEC, comprising base salaries, cash incentive awards earned for the year, the value of target share allocations for 2015, pensions and the value of other remuneration including employee benefits amounted to USD 40.1 million. In 2014, the corresponding figure was USD 48.1 million. In order to make a suitable comparison to 2014, the amount excludes the value of target share allocations from transition arrangements and the Replacement Payments for members of the GEC hired and appointed in 2014, as these are one-off arrangements. The amounts for these items are outlined above and also shown separately in the following table.
2 On the basis of 13 members of the GEC, of whom 9 served during the full year 2015. 3 On the basis of 12 members of the GEC, of whom 9 served during the full year 2014. Included in the figures are the relevant compensation amounts for the 2 individuals who were acting ad interim in the positions Chief Financial Officer and Chief Operations and Technology Officer during the year. 4 In line with applicable laws where the executives are employed, Zurich paid the company-related portion of contributions to social security systems, which amounted to
8 Replacement Payments were made in 2014 to compensate incentive plan forfeitures with previous employers. 9 The amount relates to contractually agreed remuneration for work undertaken in 2015 after stepping down from the GEC and during the notice period. Such remuneration includes pro-rated base salaries, cash incentives and LTIP target allocations for the financial year 2015.
With regard to the LTIP, the amount included in the total of USD 40.1 million above is the value of target share allocations of USD 17.5 million allocated in 2015 and assumed to vest at 100 percent of target in 2018. As mentioned above, the vesting level for the allocations from previous years vesting in 2016 is zero percent (compared to 139 percent last year), reflecting that the minimum performance levels under the three performance metrics were not met over the two-year performance period. Given there are no shares vesting from prior allocations the actual earned total remuneration for the period ending December 31, 2015 was USD 22.6 million compared to the total remuneration of USD 40.1 million shown above. Further there is no vesting of prior allocations made under transition arrangements based on the two year results compared to USD 5.7 million shown above.
Member of the GEC with the highest remuneration Martin Senn’s remuneration in 2015 was CHF 6.1 million including his base salary, the cash incentive awards earned for the year, the value of the target shares allocated in 2015 under the LTIP, the value of pension benefits and other remuneration including employee benefits. In addition, Martin Senn received a target performance share allocation from transition arrangements with a value of CHF 1.2 million. The difference between the total amounts of remuneration in 2015 and 2014 can be explained by the lower cash incentive earned for 2015. All of Martin Senn’s remuneration is paid in Swiss francs.
In 2016, Martin Senn will receive contractually agreed remuneration during his notice period which is compliant with legal and regulatory requirements and does not include any termination payments (golden parachutes) nor other benefits, such as agreements concerning special notice periods or longer term employment contracts (exceeding 12 months in duration), waiver of lock-up periods for equities, shorter vesting periods or additional contributions to occupational pension schemes. The remuneration will be included in the Remuneration Report 2016.
Base salary 1.6 1.6 Cash incentive awards earned for the year 0.4 1.6 Value of target share allocations 3.6 3.6 Service costs for pension benefits 0.4 0.3 Value of other remuneration 0.1 0.1 Total in CHF 3 6.1 7.2 Total in USD 3,4 6.3 7.9 in CHF millions, for the years ended December 31 2015 2 2014 2
5 To maintain the target earning opportunities during the transition period an allocation of supplementary target shares was made.
Special payments and termination arrangements, additional honoraria and remuneration, and personal loans for members of the GEC During 2015, one new member was appointed to the GEC as an internal hire. Four members of the GEC relinquished their responsibilities as members of the GEC.
Payments in Advance and Severance Payments are prohibited for members of the GEC according to the Ordinance AEC. There were no termination payments (golden parachutes) made and no other benefits, such as agreements concerning special notice periods or longer term employment contracts (exceeding 12 months in duration), waiver of lock-up periods for equities, shorter vesting periods or additional contributions to occupational pension schemes, were provided.
As of December 31, 2015 and 2014, there were no loans, advances or credits outstanding for members of the GEC.
Remuneration and personal loans for former members of the GEC Former members of the GEC are eligible to continue their mortgage loans following retirement on similar terms to those when they were employed, in line with the terms available to employees in Switzerland. As of December 31, 2015 and 2014, no former member of the GEC had any outstanding loans, advances or credits.
No former member of the GEC received remuneration in 2015, other than disclosed in the Remuneration Report 2015.
Related parties to members or former members of the GEC No benefits (or waiver of claims) have been provided to related parties of members of the GEC or related parties of former members of the GEC during the years 2015 and 2014. No party related to members of the GEC or of former members of the GEC had outstanding loans, advances or credits as of December 31, 2015 and 2014.
Share and share option holdings of the members of the GEC This section provides a summary of total outstanding share commitments under the LTIP, transition arrangements and Replacement Payments and total outstanding share options for members of the GEC as at December 31, 2015.
Target share allocations under LTIP, transition arrangements and restricted share allocations for Replacement Payments As of December 31, 2015, the total number of unvested target share allocations under LTIP was 102,196 (109,445 as of December 31, 2014). Further, the total number of unvested target share allocations under the transition arrangement was 23,625 and 18,950 shares remained unvested under the Replacement Payments granted to the newly hired members of the GEC in 2014 (27,470 in 2014).
Within the context of the regular LTIP allocations made in 2015, these performance based share allocations are considered for vesting in 2018 and one-half of the resulting vested shares are sales-restricted for a further three year period. With regard to the transition allocation made in 2015 to the GEC including the CEO, the shares are assessed for vesting in 2016, 2017 and 2018.
All options mentioned above entitle the holder to purchase one share of Zurich at the exercise price stated with normal voting and dividend rights.
Share and share option holdings of members of the GEC The following table sets out the actual share and share option holdings of each member of the GEC as of December 31, 2015 and 2014. In addition to any shares acquired in the market, the numbers include vested shares, whether sales restricted or not, and vested share options received under the LTIP. However, the table does not include the share interests of the members of the GEC through their participation in the currently unvested target shares or unvested restricted shares.
All interests include shares or share options held by related parties to members of the GEC.
M. Senn, former Chief Executive Officer 64,407 70,918 48,756 88,012 U. Angehrn, Chief Investment Officer 4,211 6,272 n / a n / a J. Dailey, CEO of Farmers Group, Inc. 7,216 12,515 4,520 17,605 R. Dickie, Chief Operations and Technology Officer 3 1,909 n / a – n / a M. Foley, Chief Executive Officer North America Commercial 12,188 23,601 9,762 40,412 Y. Hausmann, Group General Counsel 10,712 10,193 6,900 10,193 M. Kerner, former CEO General Insurance 4 n / a n / a 9,759 13,067 A. Lehmann, former Chief Risk Officer 4 n / a n / a 30,861 62,531 G. Quinn, Chief Financial Officer 3 6,623 n / a 12 n / a
2 The distribution of vested options according to the allocations identified in the tables Summary of unexercised options. 3 Robert Dickie was appointed Chief Operations and Technology Officer effective March 17, 2014, George Quinn was appointed Chief Financial Officer effective May 1, 2014 and Isabelle Welton was appointed Chief Human Resources Officer effective July 1, 2014. 4 Geoff Riddell stepped down as member of the GEC effective March 31, 2015, Axel Lehmann stepped down as member of the GEC effective September 30, 2015, Urban
Angehrn was appointed Chief Investment Officer effective July 1, 2015, Cecilia Reyes was appointed Chief Risk Officer effective July 1, 2015, Mike Kerner stepped down as member of the GEC effective September 30, 2015 and Kristof Terryn was appointed Chief Executive Officer General Insurance effective October 1, 2015.
Trading plans To facilitate the sale of shares and the exercise of options for members of the GEC, the Board approved the implementation of trading plans under a pre-defined transaction program effective as of 2008. The terms and conditions of the transactions have to be defined and they cannot be changed. All trading plans require the approval of the Chairman of the Board. The establishment of a trading plan by a GEC member is reported to the SIX Swiss Exchange according to the rules on disclosure of management transactions. As of December 31, 2015, there were no trading plans in place. Further, no trading plans were entered into in 2015 or 2014.
Base salaries 3,922 4,053 Value of other remuneration including employee benefits 1 641 663 Service costs for pension benefits 2 556 495 Total fixed remuneration 5,119 5,210 1 Includes employee benefits like health and dental insurance and other fringe benefits.
The valuation of the target share allocations is based on the share price on the day prior to the allocations (CHF 330.50 in 2015 and CHF 274.30 for 2014). The charges in the financial statements may be calculated using a different vesting basis.
Total remuneration Combining the fixed and variable remuneration, the total remuneration for all employees is as follows: Total remuneration for all employees in USD million, for the years ended December 31 2015 2014
Value of outstanding deferred remuneration The Group’s remuneration system includes instruments for the deferral of remuneration, and the following table provides an overview of the overall value of the outstanding deferred remuneration as of December 31, 2015 and 2014: Remuneration report
Unvested target share allocations 1 307 254 Unvested restricted share allocations 14 17 Vested but sales-restricted allocations 167 125 Value of overall outstanding deferred remuneration 488 396 1 This excludes the value of target share allocations made in 2014 and 2015 from transition arrangements which amounts to USD 75 million.
• Sign-on Payments are payments that are agreed on the execution of an employment contract (whether paid immediately or over time). Sign-on Payments may include compensation made prior to a person joining the company and providing any services (Payments in Advance) or compensation for benefits foregone with a previous employer (Replacement Payments). According to the Ordinance AEC, Payments in Advance are prohibited to be paid to members of the Board and the GEC. Any Replacement Payments for members of the GEC including the CEO have to be approved by the Board based on a proposal by the Remuneration Committee.
The following table discloses Sign-on and Severance Payments committed to key risk takers. For the key risk taker roles where the incumbent is a member of the GEC, no Payments in Advance and/or Severance payments have been made. Replacement Payments for the GEC in 2014 are included; however there were no Replacement Payments for the GEC in 2015.
Sign-on Payments/number of beneficiaries 1 2.7 6 11.1 10 Severance Payments/number of beneficiaries 2 0.4 3 0.8 4 1 Payments (whether paid immediately or over time) that are agreed on the execution of an employment contract. Sign-on Payments may include compensation made prior to a person joining the company and providing any services (Payments in Advance) or compensation for benefits foregone with a previous employer (Replacement Payments). Payments in Advance are prohibited to be paid to members of the Board and the GEC.
2 Payments that are provided in connection with the termination of an employment relationship. Zurich does not include under the term Severance Payments garden leave or similar payments for employees in jurisdictions where such payments are required by applicable law, or where they are based on contractual notice periods which conform with recognized market practice, or where they are non-contractual but in line with recognized market practice. However, Zurich does include garden leave or similar payments that go beyond recognized market practice, irrespective of whether these are provided pursuant to an agreement or are ex gratia. Severance Payments are prohibited to be paid to members of the Board and the GEC.
We will also see the full implementation of the transition to three-year cliff vesting under the LTIP at the end of this year. All three performance criteria, TSR, NIAS ROE and cash remittance will be assessed over the full three-year performance period 2014 – 2016 to determine the vesting level for the LTIP allocations vesting in April 2017. As a result, a major part of the transition of the LTIP framework, which was amended effective from January 1, 2014, will be complete. The assessment of the vesting level for the first three-year cliff vesting performance period (2015 – 2017), will take place in April, 2018.
To the Annual General Meeting 2016 of Zurich Insurance Group Ltd
We have audited the sections on page 86, pages 88 to 89 and pages 93 to 98 of the accompanying Remuneration Report of Zurich Insurance Group Ltd for the year ended December 31, 2015.
Board of Directors’ responsibility The Board of Directors is responsible for the preparation and overall fair presentation of the Remuneration Report in accordance with Swiss law and the Ordinance against Excessive Compensation in Stock Exchange Listed Companies (Ordinance AEC). The Board of Directors is also responsible for designing the remuneration system and defining individual remuneration packages.
Opinion In our opinion, the Remuneration Report of Zurich Insurance Group Ltd for the year ended December 31, 2015 complies with Swiss law and articles 14 – 16 of the Ordinance AEC.
In addition to the figures stated in accordance with International Financial Reporting Standards (IFRS), the Group uses business operating profit (BOP), new business measures and other performance indicators to enhance the understanding of its results. Details of these additional measures are set out in the separately published Glossary. These should be viewed as complementary to, and not as substitutes for the IFRS figures. For a reconciliation of BOP to net income attributable to shareholders, see table 28.2 in note 28 of the Consolidated financial statements.
From January 1, 2015, the management of the UK asbestos business, which is in run-off, was transferred from General Insurance to Non-Core Businesses. This change had no impact on the Group. Comparative figures have been restated to reflect this change.
Financial highlights in USD millions, for the years ended December 31, unless otherwise stated 2015 2014 Change1
Business operating profit 2,916 4,638 (37%) Net income attributable to shareholders 1,842 3,949 (53%)
Global Life business operating profit 1,300 1,273 2% Global Life new business annual premium equivalent (APE) 2 4,772 5,203 (8%) Global Life new business margin, after tax (as % of APE) 2 21.6% 20.8% 0.8 pts Global Life new business value, after tax 2 912 965 (5%)
Average Group investments 198,049 206,070 (4%) Net investment result on Group investments 7,462 9,211 (19%) Net investment return on Group investments 3 3.8% 4.5% (0.7 pts) Total return on Group investments 3 1.7% 8.6% (6.9 pts)
5 Ratios as of July 1, 2015 and January 1, 2015, respectively. The Swiss Solvency Test (SST) ratio is calculated based on the Group’s internal model, which is subject to the approval of the Group’s regulator, the Swiss Financial Market Supervisory Authority (FINMA). The ratio is filed with FINMA annually. The July 1, 2015 ratio was calculated excluding a macro equity hedge, for more details please refer to the Risk review in the Annual results 2015.
6 Shareholders’ equity used to determine ROE and BOPAT ROE is adjusted for net unrealized gains/(losses) on available-for-sale investments and cash flow hedges.
The Group delivered overall business operating profit of USD 2.9 billion, a decrease of USD 1.7 billion or 37 percent in U.S. dollar terms and 34 percent on a local currency basis. The General Insurance result decreased by USD 2.1 billion to USD 864 million due to a substantial increase in the costs of large and catastrophe losses, particularly in the second half of the year. Global Life achieved a strong result whilst maintaining its focus on priority markets and on extracting value from in-force business. Farmers continued its positive momentum from premium growth, though Farmers Re incurred higher losses. The overall lower profit from the core businesses was partly offset by lower Group borrowing costs, currency exchange gains and a positive contribution from Non-Core Businesses.
The Group’s capital and solvency positions remain strong. Solvency measured on an economic basis as determined under the Swiss Solvency Test was 203 percent as of July 1, 2015, an increase of 7 percentage points since January 1, 2015, mainly as a result of changes in investment markets and business growth assumptions. Shareholders’ equity decreased by USD 3.6 billion during the year to December 31, 2015 to USD 31.2 billion. This decrease resulted from the cost of the dividend paid in April 2015, unrealized losses on investments and negative currency translation adjustments, partly offset by net income attributable to shareholders and positive actuarial effects on pension plans.
On the basis of the Group’s capital position and the expectation of strong sustainable earnings, the Board of Directors proposes a dividend of CHF 17 per share.
Business volumes for the core business segments, comprising gross written premiums, policy fees, insurance deposits and management fees, decreased by USD 6.4 billion to USD 68.0 billion, or by 9 percent in U.S. dollar terms, but increased 2 percent on a local currency basis.
• General Insurance gross written premiums and policy fees decreased by USD 2.3 billion to USD 34.0 billion, or 6 percent in U.S. dollar terms, but increased by 3 percent on a local currency basis with growth in the U.S. and Latin America.
• Global Life gross written premiums, policy fees and insurance deposits decreased by USD 2.8 billion to USD 29.0 billion, or 9 percent in U.S. dollar terms, but increased 6 percent on a local currency basis. The increase on a local currency basis occurred predominantly in EMEA, driven by growth in individual savings business in some continental European countries, partly offset by a reduction in corporate business in the UK, where a small number of large cases boosted volumes in 2014.
• Farmers Management Services management fees and other related revenues remained broadly flat at USD 2.8 billion. Farmers Re gross written premiums and policy fees decreased by USD 1.3 billion to USD 2.1 billion, or by 37 percent, due to reductions in reinsurance assumed from the Farmers Exchanges.
The net investment result on Group investments, before allocations to policyholders, of USD 7.5 billion decreased by USD 1.8 billion, or 19 percent in U.S. dollar terms and by 10 percent on a local currency basis, resulting in a net investment return on average Group investments of 3.8 percent compared with 4.5 percent in 2014. Net investment income, predominantly included in the core business results, of USD 5.6 billion decreased by USD 635 million, or by 10 percent in U.S. dollar terms, but remained flat on a local currency basis. Net capital gains on investments and impairments included in the net investment result decreased by USD 1.1 billion to USD 1.9 billion, mainly due to the decrease in value of the equities and debt securities booked at fair value through profit and loss reflecting the downturn in global equity markets and rising yields, respectively. Total return on average Group investments was 1.7 percent, compared with 8.6 percent in 2014. Total return includes the net investment return, as well as lower return from net unrealized investment gains before allocations to policyholders, of USD 4.1 billion compared with USD 8.5 billion in 2014, which do not flow through net income. The changes arose mainly as a result of rising bond yields, widening credit spreads, as well as the overall decline in equity markets during 2015, compared with falling yields and rising equity markets in 2014.
Gross written premiums and policy fees 34,020 36,333 (6%) Net earned premiums and policy fees 28,051 30,023 (7%) Insurance benefits and losses, net of reinsurance 20,152 19,920 (1%) Net underwriting result (1,002) 947 nm Net investment result 2,002 2,239 (11%) Net non-technical result (excl. items not included in BOP) (29) (112) 74% Non-controlling interests 108 95 (14%) Business operating profit 864 2,979 (71%) Loss ratio 71.8% 66.4% (5.5 pts) Expense ratio 31.7% 30.5% (1.2 pts) Combined ratio 103.6% 96.8% (6.7 pts)
in USD millions, for the years ended December 31 Business operating profit (BOP) Combined ratio
GI Global Functions including Group Reinsurance (45) 8 nm nm Total 864 2,979 103.6% 96.8%
Business operating profit deteriorated by USD 2.1 billion to USD 864 million, or 71 percent in U.S. dollar terms and 70 percent on a local currency basis. This resulted from a deterioration in the net underwriting result of USD 1.9 billion to a loss of USD 1.0 billion, principally in Global Corporate and EMEA, as well as a lower net investment result mainly due to lower yields in EMEA and lower hedge fund gains in North America.
Gross written premiums and policy fees 8,670 9,434 (8%) Net underwriting result (835) 273 nm Business operating profit (345) 783 nm Loss ratio 91.2% 73.9% (17.2 pts) Expense ratio 22.7% 21.8% (0.9 pts) Combined ratio 113.9% 95.7% (18.2 pts)
Gross written premiums and policy fees of USD 8.7 billion decreased by USD 764 million, or 8 percent in U.S. dollar terms, but remained flat on a local currency basis. The rate environment continues to be under pressure, particularly in the U.S. Overall, rates increased slightly in 2015.
Business operating profit decreased by USD 155 million to USD 768 million, with a deterioration in the net underwriting result, with a reduction in the net investment result driven by lower hedge fund gains, partly offset by an improvement in the non-technical result driven by foreign exchange gains.
The net underwriting result decreased by USD 124 million to USD 146 million, reflected in the 1.7 percentage points deterioration in the combined ratio to 98.2 percent. The loss ratio deteriorated by 0.6 percentage points resulting from an increase in the current accident year loss ratio and less favorable development of loss reserves established in prior years. This was partly offset by lower catastrophe and weather-related losses. The expense ratio increased by 1.0 percentage points, mainly as a result of an increase in commissions due to growth in products for which higher levels of commission apply. Premium taxes normalized in 2015 after a non-recurring benefit in 2014.
Europe, Middle East & Africa in USD millions, for the years ended December 31 2015 2014 Change
Gross written premiums and policy fees 10,955 12,626 (13%) Net underwriting result (138) 592 nm Business operating profit 403 1,223 (67%) Loss ratio 69.1% 64.1% (5.1 pts) Expense ratio 32.1% 31.1% (1.1 pts) Combined ratio 101.3% 95.1% (6.1 pts)
Business operating profit decreased by USD 820 million to USD 403 million, or 67 percent in U.S. dollar terms and 64 percent on a local currency basis, primarily as a result of a deterioration in the net underwriting result. The net investment result also reduced by USD 129 million in U.S. dollar terms, mainly as a result of foreign currency translation and lower yields, which was partly offset by a small improvement in the non-technical result.
Gross written premiums and policy fees decreased by USD 1.7 billion to USD 11.0 billion, or by 13 percent in U.S. dollar terms and 1 percent on a local currency basis. Adjusting for the sale of the retail market business in Russia in October 2014 and the exit from the personal lines business in the Netherlands owned by the Swiss business, premium volumes grew by 1 percent on a local currency basis. On a local currency basis, there was growth in Spain and in the commercial lines business in Switzerland. These positive impacts were partly offset by decreased premiums written in markets enduring competitive pressures especially in the UK in property and personal lines of business, and in Italy in the motor line of business. There were positive developments in retention levels, and overall rates have increased by 2 percent.
Gross written premiums and policy fees 3,894 4,460 (13%) Net underwriting result (112) (175) 36% Business operating profit 82 40 nm Loss ratio 56.5% 61.7% 5.2 pts Expense ratio 46.8% 42.9% (3.9 pts) Combined ratio 103.3% 104.6% 1.3 pts
Global Life in USD millions, for the years ended December 31 2015 2014 Change
Gross written premiums and policy fees 14,446 14,594 (1%) Net investment income on Group investments 3,320 3,815 (13%) Insurance benefits and losses, net of reinsurance (8,612) (10,685) 19% Business operating profit 1,300 1,273 2%
Total reserves for life insurance contracts, net of reinsurance, and liabilities for investment contracts (net reserves) 3 207,542 221,926 (6%)
1 Net policyholder flows are defined as the sum of gross written premiums and policy fees and deposits, less policyholder benefits. 2 Assets under management comprise Group and unit-linked investments that are included in the Global Life balance sheet plus assets that are managed by third parties, on which fees are earned. 3 As of December 31, 2015 and December 31, 2014, respectively.
New business – highlights in USD millions, for the years ended December 31 2015 2014 Change
1 APE is shown gross of non-controlling interests. 2 New business margin is calculated using new business value as a percentage of APE based on figures net of non-controlling interests for both metrics. 3 New business value is calculated on embedded value principles after the effect of non-controlling interests. 4 As of January 1, 2015 a change in new business value and new business margin methodology was implemented relating to the calculation of the cost of residual non-hedgeable risk, which no longer includes diversification benefits between covered and non-covered business in accordance with Market Consistent Embedded Value Principles. New business value and new business margin figures for 2014 have been restated to reflect this change.
Business operating profit increased by USD 27 million to USD 1.3 billion, or 2 percent in U.S. dollar terms and 16 percent on a local currency basis, with local currency improvements across all regions and all sources of earnings. The majority of these improvements arose in North America and EMEA with both benefitting from improvements in loadings and fees and in technical margin. 2014 was impacted by non-recurring adverse effects from a law change in Germany and from the transfer of an annuity portfolio from North America to Non-Core Businesses, as well as impairments of software intangible assets.
Loadings and fees decreased by USD 357 million, or by 8 percent in U.S dollar terms, but increased by 5 percent on a local currency basis. The increase in local currency was driven by higher volumes in Zurich Santander and higher fees in North America and EMEA, with the largest contribution from an increase in unit-linked fund based fees.
Insurance deposits decreased by USD 2.7 billion to USD 14.6 billion, or 16 percent in U.S. dollar terms and 2 percent on a local currency basis. EMEA experienced a decrease predominantly driven by lower sales of Corporate Life and Pensions products in the UK, where a small number of large cases had boosted volumes in 2014, with a partial offset from higher sales of individual savings business in Ireland and Italy.
Gross written premiums and policy fees decreased by USD 147 million to USD 14.4 billion, or 1 percent in U.S. dollar terms, but increased 15 percent on a local currency basis. The increase on a local currency basis predominantly arose from increased sales in EMEA, particularly in individual savings business in Spain, and in protection products in Zurich Santander, partly offset by a reduction related to the non-renewal of a large corporate contract in Chile.
Net policyholder flows were positive at USD 7.2 billion, with EMEA and Zurich Santander experiencing improved net inflows. The lower net inflow of USD 5.5 billion in 2014 was mainly due to higher surrenders linked to the discontinuation of certain private banking products in the UK. Assets under management decreased by 4 percent in U.S. dollar terms, but increased by 4 percent on a local currency basis compared with December 31, 2014 driven by favorable market movements and positive net policyholder flows. Net reserves decreased by 6 percent in U.S. dollar terms, but increased by 3 percent on a local currency basis compared with December 31, 2014, substantially reflecting similar movements as those in the related assets.
NBV, APE, NBM and BOP by region in USD millions, for the years ended December 31 New business value, after tax (NBV)1, 2
of which: Rest of Europe, Middle East & Africa 5 8 34 53 13.6% 15.1% 50 48
3 APE is shown gross of non-controlling interests. 4 New business margin is calculated using new business value as a percentage of APE based on figures net of non-controlling interests for both metrics.
The weakening of Latin American and European currencies against the U.S. dollar compared with 2014 had a significant impact on the reported results. Global Life continued to benefit on a local currency basis from its acquisitions and investments in organic growth in priority markets, leveraging global bank distribution and corporate life relationships, as well as maintaining focus on protection and unit-linked products.
APE decreased by USD 432 million to USD 4.8 billion, or 8 percent in U.S. dollar terms, but increased 7 percent on a local currency basis. The increase in local currency was driven by growth in Bank Distribution and Other Retail partly offset by Corporate Life and Pensions, for which there were significantly higher levels of business in 2014. On a geographical basis, the local currency growth mainly arose in EMEA, which experienced increased sales of individual savings business in some continental European countries, and protection business in Zurich Santander and Asia Pacific. These increases were partly offset by decreased volumes of corporate business in the UK and IFA business in North America.
On a geographical basis, the new business results were as follows: In North America, the rapid increase in sales seen in 2014, when IFA and Brokers achieved an exceptionally high volume of sales, was not repeated in 2015 and resulted in an overall decrease in APE of 14 percent and NBV of 10 percent. The less than proportional decrease in NBV was primarily due to changes in product mix, overall resulting in a strong NBM of 56 percent.
In Asia Pacific, APE increased by 23 percent in U.S. dollar terms and 44 percent on a local currency basis. The increase in local currency was primarily driven by increased volumes in Japan, resulting in an increase in NBV. This positive effect was partly offset as NBV reduced in Australia, as a result of both lower sales and assumption changes.
In Corporate Life and Pensions, NBV increased by USD 27 million to USD 318 million, or 9 percent in U.S. dollar terms, and 18 percent on a local currency basis, largely benefiting from higher margins in EMEA, partly offset by the effects of changes in product mix in Other.
Farmers business operating profit decreased by USD 152 million to USD 1.4 billion. This was due to a reduction in business operating profit of USD 129 million in Farmers Re and USD 23 million in Farmers Management Services.
Business operating profit decreased by USD 23 million to USD 1.4 billion with the gross management result at the same level as in 2014, but with a reduction in other net income.
Management fees and other related revenues of USD 2.8 billion remained broadly flat reflecting increased revenues due to the growth in gross earned premiums of the Farmers Exchanges offset by a reduction in average management fee rates. Management and other related expenses of USD 1.4 billion were slightly lower compared with 2014. Other net income of USD 22 million decreased by USD 26 million primarily due to unrealized losses recognized in 2015 compared with gains in 2014 from a mark-to-market valuation of securities supporting employee benefit liabilities, as well as a non-recurring gain in 2014 from the sale of a property.
in USD millions, for the years ended December 31 2015 2014 Change
Gross written premiums in the Farmers Exchanges increased by USD 442 million to USD 19.1 billion, or by 2 percent. Growth in most books of business was partly offset by decreases in premiums from the decision in September 2015 to discontinue 21 st Century operations in all U.S. states except California and Hawaii, and Business Insurance sold through independent agents.
Zurich Legacy Solutions, which comprise run-off portfolios managed with the intention of proactively reducing risk and releasing capital, reported a business operating loss of USD 50 million. The result was primarily driven by changes to reserves in the run-off portfolios. The improvement of USD 159 million arose primarily from the impact of both lower adverse development of loss reserves established in prior years and lower loan losses compared with 2014.
Risk and capital management 124 Mission and objectives of risk management 124 Risk management framework 124 Risk governance and risk management organization 125 Objectives of capital management 125 Capital management framework 126 Capital management program 126
The risk review is an integral part of the consolidated financial statements (only the information marked ‘audited’).
In 2015, the Group delivered its first own risk and solvency assessment report (ORSA) to FINMA, the Swiss supervisor. The ORSA reflects the Group’s robust enterprise risk management and capital management framework.
As of July 1, 2015, the Group had a Zurich Economic Capital Model (Z-ECM) ratio of 123%, and was well above the Swiss Solvency Test requirements with a ratio of 203%.
Market risk and insurance risk are the main drivers of the Group’s required capital
As of July 1, 2015, market risk, including investment credit risk, contributes 49% of the Z-ECM capital required, and insurance risk contributes 46%. Other credit risk and operational risk each contribute 3%.
The Group regularly reports on its risk profile at local and Group levels. The Group has procedures to refer risk issues to senior management and the Board of Directors in a timely way. To foster transparency about risk, the Board receives quarterly risk reports and additional updates. In 2015 reporting was enhanced with in-depth risk insights into the potential effects on Zurich of such topical issues as cyber resilience, the Swiss National Bank’s decision to abandon the minimum exchange rate for the Swiss franc against the euro, the Brazil Petrobras scandal, and the VW emissions scandal.
The Risk Management function consists of central teams at Group level and a decentralized risk management network at segment, regional, business unit and functional levels. Staff at Group level focus on model validation; quantitative assessments of insurance, market, credit and operational risks; operational risk management frameworks and tools; risk reporting; risk governance, and tools and methodologies. The risk management network consists of the Chief Risk Officers (CROs) of the Group’s regions and segments, and the Local Risk Officers (LROs) of the business units and functions and their staff. The risk officers are part of the management teams in their respective businesses and are thus embedded in the business. The LROs also report to the regional or segment CROs, who in turn report to the Group’s Chief Risk Officer.
The Group manages its capital to maximize long term shareholder value while maintaining financial strength within its ‘AA’ target range and meeting regulatory, solvency and rating agency requirements. In particular, the Group endeavors to manage its shareholders’ equity under IFRS to balance maximization of shareholder value and constraints from its economic framework, rating agencies and regulators. Shareholders’ equity of USD 31.2 billion and subordinated liabilities of USD 5.6 billion as of December 31, 2015 are part of the capital available in the Group’s economic framework. Further adjustments usually include such items as intangible assets, deferred tax assets and liabilities, or allowing for discounting of liabilities and the value of in-force business. For more information, see `analysis of the Group’s Z-ECM available financial resources (unaudited).’
Zurich strives to simplify the Group’s legal entity structure to reduce complexity and increase fungibility of capital. The Group pools risk, capital and liquidity centrally as much as possible.
Zurich’s policy is to allocate capital to businesses earning the highest risk-adjusted returns and pools risks and capital as much as possible to operationalize its risk diversification.
For details on issuances and redemptions of debt, see note 19 of the consolidated financial statements.
Internally, the Group uses its Zurich Economic Capital Model (Z-ECM), which also forms the basis of the Swiss Solvency Test model. The Z-ECM targets a total capital level that is calibrated to an ‘AA’ financial strength. Zurich defines the Z-ECM capital required as being the capital required to protect the Group’s policyholders in order to meet all of their claims with a confidence level of 99.95 percent over a one-year time horizon.
The chart below shows the development of the Group’s Z-ECM available financial resources, Z-ECM capital required and Z-ECM ratio over time. As of October 1, 2015, the Z-ECM ratio was 114 percent.
The chart below shows an analysis of the composition of the Group’s Z-ECM available financial resources as of July 1, 2015.
The chart below shows the Z-ECM capital required split by risk type as of July 1, 2015 and as of January 1, 2015 respectively. As of July 1, 2015, the largest proportion of Z-ECM capital required arose from market risk which comprised 49 percent of the total. Premium & reserve risk was the second-largest, comprising 23 percent.
The following chart shows the Z-ECM capital required allocated to the segments as of July 1, 2015 and as of January 1, 2015. As of July 1, 2015 the largest proportion of Z-ECM capital required was allocated to General Insurance, which comprised 49 percent of the total, followed by Global Life with 33 percent of the total. Total allocated capital as of July 1, 2015 equaled USD 33 billion Z-ECM capital required plus USD 2 billion direct allocation to Farmers.
Throughout the risk review, Z-ECM results, SST results and corresponding sensitivities and scenarios as of Q2 2015 are shown excluding macro equity hedge; for more information, see ‘market risk including investment credit risk.’
The sensitivities are considered as separate but instantaneous scenarios. They are shown excluding the macro equity hedge (for more information, see ‘market risk including investment credit risk’). They are best estimate and non-linear, i.e., will vary depending on prevailing market conditions at the time. The impact of the changes to the required capital is approximated and only taken into account for market risk.
In addition to the sensitivities shown in the preceding section, the Group also evaluates certain stress scenarios on the Z-ECM ratio. Scenarios are defined as events that have a very small probability of occurring but that could, if realized, negatively affect the Group’s Z-ECM available financial resources. The chart below shows three groups of scenarios: market and credit risk-specific, general insurance risk-specific and life insurance risk-specific. In the 2015 market environment, two categories of threat scenarios were identified: a euro crisis, and monetary policy errors by the U.S. Federal Reserve (triggering market corrections). The general insurance risk-specific scenarios present the three largest natural catastrophe events to which the Group is exposed. Lapse risk represents the Group’s largest life insurance risk-specific exposure.
Risk review continued 1 The impact of scenarios on changes to the Z-ECM capital required is not included in the sensitivities for the Z-ECM ratio as the impact is expected to be small and positive. Scenario 1 and Scenario 2 do not take into account the buffering effect of policyholder participation.
2 Scenarios 2 and 3 focus on potential monetary policy errors. For scenario 2, parameters include a 30 percent decrease in value of equities, a 10 percent decrease in value of real estate, interest rate shifts (CHF –70bps, EUR –70bps, USD –100bps, GBP –100bps), and a 200 – 220bps increase in corporate credit spreads. For scenario 3, parameters include a 10 percent increase in value of equities, a 3 percent increase in value of real estate, interest rate shifts (CHF +100bps, EUR +100bps, USD +160bps, GBP +140 bps), and a 10bps decrease in corporate credit spreads.
Scenario 1: Euro crisis • 25% decrease in value of equities • 13% decrease in value of real estate • Interest rate shifts: CHF -15bps, EUR +50bps, USD -25bps • Impairment of sovereign credit spread by 1 USD billion
The Fed fails to tighten policy as the money multiplier picks up, leading to inflation overshooting target for a period of time, and a sharp correction in bond markets.
Impact of market, credit, and insurance risk scenarios on Z-ECM1 as of July 1, 2015 90% Risk Tolerance Level 123% Z-ECM ratio 120% AA Target Range
The Group has interactive relationships with three global rating agencies: Standard & Poor’s, Moody’s and A.M. Best. The Insurance Financial Strength Rating (IFSR) of the Group’s main operating entity is an important element of Zurich’s competitive position. The Group’s credit ratings derived from the financial strength ratings also affect the cost of capital.
Zurich pools risk and capital as much as possible at a Group level, realizing diversification benefits for the Group. This also allows the Group to take into account the benefits that arise in regions where these benefits are recognized under the capital adequacy regime, e.g., in the U.S., Ireland and Switzerland.
Regulatory requirements in Switzerland Under the Swiss Solvency Test (SST), groups, conglomerates and reinsurers are required to use company-specific internal models to calculate risk-bearing and target capital. Internal models must be approved by the Swiss Financial Market Supervisory Authority (FINMA). FINMA approved the use of Zurich’s internal model for 2015 on a provisional basis, without prejudicing the final approval. Zurich has filed an SST ratio with FINMA as of January 1, 2015, which is subject to FINMA approval.
As of July 1, 2015, a revised version of the Swiss Insurance Supervision Ordinance entered into force. Related FINMA circulars were adapted and became effective January 1, 2016. The revision includes a new requirement for insurance companies to produce an own risk and solvency assessment report (ORSA report), with the first Group report to be filed at the latest by January 31, 2016. The revision also eliminated, for insurance groups, the Solvency I requirement under Swiss law, which until then had remained in force after the introduction of SST. In December 2015, Zurich filed its first Group ORSA report with FINMA.
Swiss Solvency Test requirements The Group uses an adaptation of its internal Zurich Economic Capital Model (Z-ECM) to comply with the Swiss Solvency Test (SST) requirements and runs a full SST calculation twice a year and files results with FINMA annually. The most recent results filed with FINMA are as of January 1, 2015.
Risk review continued 1 Excludes macro equity hedge (for more information, see ‘market risk including investment credit risk’)
The following chart shows the estimated impact on the Group’s SST ratio of a one percentage point increase/decrease in yield curves, a separate 20 percent rise/decline in all stock markets, after consideration of hedges in place and a separate one percentage point change in credit spreads, as of July 1, 2015. The sensitivities are considered separate but instantaneous scenarios. They are shown excluding the macro equity hedge (for more information, see ‘market risk including investment credit risk’). They are best estimate and non-linear, i.e., will vary depending on prevailing market conditions at the time. The impact of the changes to the required capital is approximated and only taken into account for market risk.
Sensitivity of the Group’s SST ratio to changes in: Interest rate +100bps
Regulatory requirements in Asia-Pacific, Latin America, and Middle East and Africa Every country has a capital standard for insurance companies. Some jurisdictions, including Japan, Mexico and South Africa, are reviewing their economic capital requirements, considering similar approaches to Solvency II.
• Property includes fire risks (for example fire, explosion and business interruption), natural perils (for example earthquake, windstorm and flood), engineering lines (for example boiler explosion, machinery breakdown and construction) and marine (cargo and hull).
Life insurance risk 1.0 0.7 1.6 Premium & reserve risk 7.4 6.9 7.6 Natural catastrophe risk 4.8 5.4 3.5
Actual losses on claims provisions may be higher or lower than anticipated. General insurance reserves are therefore regularly estimated, reviewed and monitored. The total loss and loss adjustment expense reserves are based on work performed by qualified and experienced actuaries at local, regional and Group levels.
To arrive at their reserve estimates, the actuaries take into consideration, among other things, the latest available facts, historical trends and patterns of loss payments, exposure growth, court decisions, economic conditions, inflation, and public attitudes that may affect the ultimate cost of claim settlement. Inflation is monitored on a country basis; the monitoring process relies on both Zurich’s economic view on inflation and specific claims activity, and feeds into actuarial models and Zurich’s underwriting processes such as technical price reviews.
The Group monitors potential new emerging risk exposures. Zurich has an Emerging Risk Group, with crossfunctional expertise from core insurance functions such as underwriting, claims and risk to identify, assess and recommend actions for such risks.
Tables 1.a and 1.b show the Group’s concentration of risk within the General Insurance business by region and line of business based on direct written premiums before reinsurance. General Insurance premiums ceded to reinsurers (including retrocessions) amounted to USD 5.6 billion and USD 5.5 billion for the years ended December 31, 2015 and 2014, respectively. Reinsurance programs are managed on a global basis, and therefore, net premium after reinsurance is monitored on an aggregated basis.
General Insurance – Direct written premiums and policy fees by line of business – current period in USD millions, for the year ended December 31, 2015 Motor Property Liability
Analysis of sensitivities for general insurance risk Tables 2.a and 2.b show the sensitivity of net income before tax and the sensitivity of net assets, using the Group effective income tax rate, as a result of adverse development in the net loss ratio by one percentage point. Such an increase could develop either due to the insured events happening more frequently or due to resulting claims becoming more severe, or from a combination of frequency and severity. The sensitivities do not indicate a probability of such an event and do not consider any non-linear effects of reinsurance. Based on the assumptions applied in the sensitivity analysis in tables 2.a and 2.b, each additional percentage point increase in the loss ratio would have a linear impact on net income before tax and net assets. The Group also monitors insurance risk by evaluating extreme scenarios, taking into account non-linear effects of reinsurance contracts.
Insurance risk sensitivity for the General Insurance business – current period in USD millions, for the year ended December 31, 2015
Insurance risk sensitivity for the General Insurance business – prior period in USD millions, for the year ended December 31, 2014
Life insurance risk The risks associated with life insurance include: • Mortality risk – when on average, the death incidence among the policyholders is higher than expected • Longevity risk – when on average, annuitants live longer than expected • Morbidity risk – when on average, the incidence of sickness or disability among the policyholders is higher or recovery rates from disability are lower than expected • Policyholder behavior risk – on average, the policyholders discontinue or reduce contributions or withdraw benefits prior to the maturity of contracts at a rate that is different from expected • Expense risk – expenses incurred in acquiring and administering policies are higher than expected • New business risk – volumes of new business are lower than sufficient to cover fixed acquisition expenses • Market risk – the risk associated with the Group’s balance sheet positions where the value or cash flow depends on financial markets, which is analyzed in the ‘market risk, including investment credit risk’ section • Credit risk – the risk associated with a loss or potential loss from counterparties failing to fulfill their financial obligations, which is analyzed in the ‘market risk, including investment credit risk’ and ‘other credit risk’ sections
A more diversified portfolio of risks is less likely than an undiversified portfolio to be affected across the board by a change in any subset of the risks. As a result, the offsetting effects between unit-linked and traditional business reduce some of the risk associated with the Global Life business.
The Group uses market-consistent embedded value reporting principles, which allow Zurich to increase its understanding, and report on, the risk profile of its life products, and how these risks would change under different market conditions. Embedded value is a measure that markets use to value life businesses. For more information, see the ‘embedded value report 2015’ at www.zurich.com/investor-relations/results-and-reports.
To have a consistent approach and form a global perspective on accumulations, the Group models general insurance exposures in a center of excellence, which works with local businesses to help improve the overall quality of data. The Group models potential losses from property policies in hazard-prone areas with material exposure and from workers’ compensation policies covering earthquakes in California, Pacific Northwest and New Madrid (U.S. states of Arkansas, Illinois, Indiana, Kentucky, Louisiana, Michigan, Mississippi, Missouri, Ohio, Tennessee, Wisconsin). Other non-property-related losses are estimated based on adjustments. Risk modeling mainly addresses climate-induced perils such as windstorms, river floods, tornadoes, hail storms, downburst and straight line winds, and geologically induced perils such as earthquakes. The Group constantly seeks to improve its modeling, fill in gaps in models with additional assessments, and increase the granularity of data collection. It uses internal and external knowledge in modeling accumulations. One such source of external knowledge is the Natural Catastrophe Advisory Council, a group of scientists associated with leading research organizations such as the U.S. National Center for Atmospheric Research, the U.S. Geological Survey and the Intergovernmental Panel on Climate Change. Zurich further validates modeling results by comparing them with claims experience. In 2015 Zurich joined the Risk Prediction Initiative (RPI), which is a membership organization funding academic research relevant to the reinsurance and insurance industry.
Zurich structures and aligns its reinsurance programs to achieve an optimum risk-return ratio. Zurich manages its central reinsurance purchasing according to these principles. The Group is thus able to manage its risks to retain a significant and stable portion of its risk exposure. The cession rate for General Insurance was 16.6 percent and 15.1 percent as of December 31, 2015 and December 31, 2014, respectively. The cession rate for Global Life was 17.2 percent and 4.6 percent as of December 31, 2015 and December 31, 2014, respectively. The increase in ceded premiums for Global Life is due to the temporary reinsurance of a run-off portfolio, pending regulatory approval of the portfolio transfer to a third party.
Reinsurance for natural catastrophes, aggregated – unusually frequent catastrophe events (in USD millions, as of December 31, 2015)
All natural catastrophe losses exceeding USD 25 million are aggregated. Reinsurance secured under Global Aggregate Catastrophe Treaty Reinsurance secured under Combined Global Catastrophe Occurrence / Aggregate Treaty* % of co-participation * This USD 150 million cover is the same Combined Global Catastrophe Occurrence / Aggregate Treaty presiding over the Global Catastrophe Treaty. This cover can be used only once, either for aggregated losses or for an individual event.
1 US Cat Treaty and Global Aggregate Cat Treaty renewed on January 1, 2015; Europe Cat Treaty and Global Cat Treaty renewed on April 1, 2015; and International Cat Treaty renewed on July 1, 2015. 2 Lakeside Re III - Cat Bond
Market risk is the risk associated with the Group’s balance sheet positions where the value or cash flow depends on financial markets. Risk factors include: • Equity market prices • Property market prices • Interest rate risk • Credit and swap spread changes • Defaults of issuers • Currency exchange rates
• In 2015 the Group protected its capital from the potential exit of Greece from the Eurozone with a hedge, unwound in August 2015.
Risk from equity securities and property The Group is exposed to risks from price fluctuations on equity securities and property which could affect the Group’s liquidity, reported income, surplus and regulatory capital position. Equity risk exposure includes common stocks, including equity unit trusts, private equity, common stock portfolios backing participating-with-profit policyholder contracts, and equities held for employee benefit plans. Exposure to property risk includes direct holdings in property, listed property company shares and funds, as well as property debt securities such as commercial and residential mortgages, commercial and residential mortgage-backed securities and mezzanine debt. Returns on unit-linked contracts, whether classified as insurance or investment contracts, may be exposed to risks from equity and property, but these risks are borne by policyholders. However, the Group is indirectly exposed to market movements from unit-linked contracts with respect to both earnings and economic capital. Market movements affect the amount of fee income earned when the fee income level is dependent on the valuation of the asset base. Therefore, the value of in-force business for unit-linked business can be negatively affected by adverse movements in equity and property markets.
Zurich has limits on holdings in real assets and limits on deviations of asset interest rate sensitivities from liability interest rate sensitivities. The Group also manages credit spread risk, which describes the sensitivity of the values of assets and liabilities due to changes in the level or the volatility of credit spreads over the risk-free interest rate yield curves. Movements of credit spreads are driven by expected probability of default, expected losses in cases of defaults of issuers, the uncertainty of default probabilities and losses, as well as actual defaults of issuers.
Analysis of market risk sensitivities for interest rate, equity and credit spread risks
Tables 4, 5 and 6 show the estimated economic market risk sensitivities of Group investments, including investment property, liabilities, including insurance and financial liabilities, and the net impact for General Insurance and the rest of the business. Positive values represent an increase in the balance, and values in parentheses represent a decrease. Mismatches in changes in value of assets relative to liabilities represent an economic risk to the Group. The net impact – the difference between the impact on Group investments and liabilities – represents the economic risk related to changes in market risk factors that the Group faces.
In determining the sensitivities, investments and liabilities are fully re-valued in the given scenarios. Each instrument is re-valued separately taking the relevant product features into account. Non-linear effects, where they exist, are reflected in the model. The sensitivities are shown after tax. They do not include the impact of transactions within the Group.
The impact of a 100 basis point decrease in interest rate yield curves in table 4 was restated for 2014 for General Insurance and rest of the business to allow for negative rates.
Basis of presentation – Global Life Tables 4, 5 and 6 show the estimated economic sensitivity of the embedded value of the Global Life business to financial market movements. Actions that would be taken by management or policyholders are considered. For contracts with financial options and guarantees, such as some participating business, movements in financial markets can change the nature and value of these benefits. The dynamics of these liabilities are captured so that this exposure is quantified, monitored, managed and where appropriate, mitigated.
For more information, see the ‘embedded value report 2015’ at www.zurich.com/investor-relations/results-and-reports.
Analysis of economic sensitivities for equity risk Table 5 shows the estimated impacts from a 10 percent decline in stock markets, after consideration of hedges in place, as of December 31, 2015 and 2014, respectively.
Limitations of the analysis for General Insurance and rest of the business: – The sensitivities show the effects of a change of certain risk factors, while other assumptions remain unchanged. – The interest rate scenarios assume a parallel shift of all interest rates in the respective currencies. They do not take into account the possibility that interest rate changes might differ by rating class; these are disclosed separately as credit spread risk sensitivities.
– The sensitivity analysis is based on economic net assets, and not on shareholders’ equity or net income as set out in the consolidated financial statements. – The sensitivity analysis is calculated after tax; the Group effective tax rate is 36.6 percent for 2015 and 27.0 percent for 2014. – The equity market scenarios assume a concurrent movement of all stock markets. – The sensitivity analysis does not take into account actions that might be taken to mitigate losses. Actions may involve changing the asset allocation, for example through selling and buying assets.
– The sensitivities do not indicate a probability of such events occurring in the future. They do not necessarily represent the Group’s view of expected future market changes.
Limitations of the analysis for Global Life: – The sensitivities show the effects of a change in certain risk factors, while other assumptions remain unchanged, except where they are directly affected by the revised conditions.
The third-largest concentration in the Group’s debt securities portfolio is in structured finance securities (mortgage- backed securities (MBS)/asset-backed securities (ABS) and similar). Although credit risks of the underlying securities are diverse in nature, the Group also considers macro impacts that may affect structured finance sub-categories (e.g., auto or credit card ABS) in its credit assessments. Structured finance exposures are assessed on a look-through basis prior to acquisition and not merely on the strength of prevailing credit ratings or credit profiles.
Derivatives The positive replacement value of outstanding derivatives represents a credit risk to the Group. These instruments include interest-rate, currency, total-return and equity swaps, forward contracts and purchased options. A potential exposure also arises from possible changes in replacement values. The Group regularly monitors credit risk exposures arising from derivative transactions. Outstanding positions with external counterparties are managed through an approval process embedded in derivative programs.
Sensitivity of the Group’s total IFRS equity to exchange rate fluctuations in USD millions, as of December 31 2015 2014 10% increase in EUR/USD rate 584 825 GBP/USD rate 220 302 CHF/USD rate 153 (176) BRL/USD rate 97 157 Other currencies/USD rates 525 573
Credit risk is the risk associated with a loss or potential loss from counterparties failing to fulfill their financial obligations. See section ‘risks from defaults of counterparties’ for market-risk-related asset categories. The Group’s exposure to other credit risk is derived from the following main categories of assets: • Reinsurance assets • Receivables
The Group regularly tests and analyzes credit risk scenarios and prepares possible contingency measures that may be implemented, if the credit risk environment worsens.
On-balance sheet exposures are the main source of credit risk. Off-balance sheet exposures are related primarily to collateral used to protect underlying credit exposures on the balance sheet. The Group also has off-balance sheet exposures related to undrawn loan commitments of USD 8 million and USD 3 million as of December 31, 2015 and 2014, respectively. See note 23 of the consolidated financial statements for undrawn loan commitments.
• The high and stable credit quality of the reinsurance assets portfolio and declining concentration risk allowed for a reduction in Z-ECM capital required.
Credit risk related to reinsurance assets The Group’s Corporate Reinsurance Security Committee manages the credit quality of cessions and reinsurance assets. The Group typically cedes new business to authorized reinsurers with a minimum rating of ‘A–’ 73 percent and 67 percent of the business ceded to reinsurers that fall below ‘A–’ or are not rated is collateralized, as of December 31, 2015 and 2014 respectively. Of the business ceded to reinsurers that fall below ‘A–’ or are not rated, 32 percent and 50 percent were ceded to captive insurance companies, in 2015 and 2014, respectively.
Reinsurance assets include reinsurance recoverables (the reinsurers’ share of reserves for insurance contracts) of USD 17.9 billion and USD 16.6 billion as of December 31, 2015 and 2014, respectively, and receivables arising from ceded reinsurance, gross of allowances for impairment, of USD 0.9 billion as of December 31, 2015 and 2014. Reserves for potentially uncollectible reinsurance assets amounted to USD 149 million as of December 31, 2015 and USD 135 million as of December 31, 2014. The Group’s policy on impairment charges takes into account both specific charges for known situations (e.g., financial distress or litigation) and a general, prudent provision for unanticipated impairments.
Rating 1 The value of the collateral received amounts to USD 9.0 billion and USD 7.6 billion as of December 31, 2015 and 2014, respectively. In 2014 collateral was under-reported by USD 1.9 billion.
Credit risk related to receivables The Group’s largest credit-risk exposure to receivables is related to third-party agents, brokers and other intermediaries, and arises where premiums are collected from customers to be paid to the Group, or to pay claims to customers on behalf of the Group. The Group has policies and standards to manage and monitor credit risk related to intermediaries. The Group requires intermediaries to maintain segregated cash accounts for policyholder money. The Group also requires that intermediaries satisfy minimum requirements of capitalization, reputation and experience, and provide short-dated business credit terms.
Zurich has a comprehensive framework with a common approach to identify, assess, quantify, mitigate, monitor and report operational risk within the Group. Within this framework, the Group: • Uses a scenario-based approach to assess, model and quantify the capital required for operational risk for business units under extreme circumstances. This approach allows information to be compared across the Group and highlights the main scenarios contributing to the Z-ECM capital required. See chart ‘Z-ECM capital required for operational risk split by risk scenarios (unaudited)’ for more information.
• Conducts risk assessments where operational risks are identified for key business areas. Risks identified and assessed above a certain threshold must be mitigated. Risk mitigation plans are documented and tracked on an ongoing basis. In the assessments, the Group uses such sources of information as the Total Risk Profiling™ process, internal control assessments, and audit findings, as well as scenario modeling and loss event data.
The Group has specific processes and systems in place to focus on high priority operational matters such as managing information security and third party suppliers, as well as combating fraud.
Preventing, detecting and responding to fraud is embedded in Zurich’s business. Both claims and non-claims fraud are included in the common framework for assessing and managing operational risks. For Z-ECM calculations, claims fraud is part of insurance risk and non-claims fraud is part of operational risk.
• Mitigating and responding to cyber risks and threats to data security strengthen Zurich’s ability to handle and protect data and information in anticipation of a rapidly evolving external environment.
Management is responsible for identifying, evaluating and addressing significant risks, and designing and maintaining internal controls. Key processes and controls in the organization are subject to reviews by management, Risk Management, Group Audit and Group Compliance. Significant risks and the mitigation actions are reported regularly to the Risk and Audit Committees of the Board.
In 2015 the Group further enhanced specific areas of the internal control framework, focusing on significant financial reporting controls as well as operational key controls in the areas of investment management, operations, underwriting and claims. An internal control certification process is conducted regularly by local business units throughout the Group.
Significant controls are assessed for their design and operating effectiveness. Significant control issues or issues affecting more than one business unit may be categorized as having Group-level significance. The Board’s Risk and Audit Committees monitor resolution of such issues.
The Board Risk Committee has reviewed the effectiveness of the Group’s risk management system, including the Group’s risk tolerance and the enterprise-wide risk governance framework, and the Board Audit Committee has reviewed the effectiveness of the system of control over financial reporting for the calendar year 2015 and have reported to the Board accordingly. Issues identified have been communicated to the Board and either have been or are being addressed by the Group.
The Group works to reduce unintended risks of strategic business decisions through its risk assessment processes and tools, including the Total Risk Profiling™ (TRP) process. As part of the regular TRP process, the Group Executive Committee assessed in 2015 the key strategic risk scenarios, looking at 2016 and beyond. The Group TRP identified and assessed risks in executing the Group’s transformation program, delivering on its customer strategy, information security and cyber risks. We have put mitigating actions in place to manage and carry out the Group’s transformation; to meet the challenge of evolving customer needs and changes in the distribution model affected by digitalization; and to strengthen Zurich’s ability to handle and protect data and information in anticipation of a rapidly evolving external environment.
Policy fees 2,508 2,712 Gross written premiums and policy fees 50,998 54,781
Less premiums ceded to reinsurers1 (8,078) (6,101) Net written premiums and policy fees 42,920 48,680
Net investment income on Group investments 5,572 6,206 Net capital gains/(losses) and impairments on Group investments 1,891 3,004
attributable to policyholders 18 (110) (106) attributable to shareholders 18 (1,183) (1,564)
Net income after taxes 2,047 4,228 attributable to non-controlling interests 205 280 attributable to shareholders 1,842 3,949 in USD
2 Accrued investment income on unit-linked investments amounted to USD 106 million and USD 133 million as of December 31, 2015 and 2014, respectively. 3 December 31, 2015 included land and buildings previously classified as investment property amounting to USD 10 million. December 31, 2014 included land and buildings formerly classified as investment property amounting to USD 48 million.
Underwriting activities: 6,868 14,532 Reserves for insurance contracts, gross 4,528 4,759 Reinsurers’ share of reserves for insurance contracts1 (1,981) 691 Liabilities for investment contracts 4,806 9,746 Deferred policy acquisition costs (981) (1,014) Deferred origination costs 47 55 Deposits made under assumed reinsurance contracts 526 429 Deposits received under ceded reinsurance contracts (77) (134)
Cash and cash equivalents in USD millions, as of December 31 2015 2014
Cash and cash equivalents comprise the following: Cash at bank and in hand 7,037 6,592 Cash equivalents 2,156 2,184 1 Includes cash and cash equivalents for unit-linked contracts of USD 1,034 million and USD 1,176 million as of December 31, 2015 and 2014, respectively.
As of December 31, 2015 and 2014, cash and cash equivalents held to meet local regulatory requirements were USD 710 million and USD 817 million, respectively.
3 As approved by the Annual General Meeting on April 1, 2015, the dividend of CHF 17 per share was paid out of the capital contribution reserve. The difference of USD 1,022 million between the dividend at transaction day exchange rates amounting to USD 2,705 million and the dividend at historical exchange rates amounting to USD 1,683 million is reflected in the cumulative foreign currency translation adjustment.
Change in ownership interests with no loss of control – – – – – – (38) (38) – (38) Total comprehensive income for the period, net of tax – – 2,338 200 (2,305) 24 3,542 3,799 43 3,842
Net income – – – – – – 3,949 3,949 Net unrealized gains/(losses) on available-for-sale investments – – 2,338 – – – – 2,338 Cash flow hedges – – – 200 – – – 200 Cumulative foreign currency translation adjustment – – – – (2,305) – – (2,305) Revaluation reserve – – – – – 24 – 24 Net actuarial gains/(losses) on pension plans – – – – – – (407) (407)
Maturity tables have been provided for the following balances: reserves for insurance contracts (tables 8.9a and 8.9b), liabilities for investment contracts (tables 9.3a and 9.3b), debt securities (table 6.4), derivative assets and derivative liabilities (tables 7.1 and 7.2), other financial liabilities (table 17.2) and outstanding debt (table 19.2).
Table 1 summarizes the principal exchange rates used for translation purposes. Net gains/(losses) on foreign currency transactions included in the consolidated income statements were USD 245 million and USD 82 million for the years ended December 31, 2015 and 2014, respectively. Foreign currency exchange forward and swap gains/(losses) included in these amounts were USD (126) million and USD 138 million for the years ended December 31, 2015 and 2014, respectively.
The Group transferred USD 381 million from future life policyholder benefits to policyholder contract deposits and other funds. The reclassification, set out in note 8, was prospectively recognized in 2015 as the reclassification has no impact on the Group’s consolidated balance sheet or income statement.
Other adjustments During the year ended December 31, 2015, the Group recorded out-of-period charges before tax of USD 68 million related to reinsurance recoverables, USD 47 million related to net assets in its Brazil operation and USD 24 million relating to annuities in its German General Insurance operation. These adjustments are not considered material to the Group’s results.
Standards, amendments and interpretations issued that are not yet effective or adopted by the Group Table 2 shows new accounting standards or amendments to and interpretations of standards relevant to the Group, which are not yet effective and are not expected to have a material impact on the Group’s financial position or performance, unless stated otherwise. In addition to the standards and amendments listed in table 2 the Group will also have to incorporate amendments resulting from the IASB annual improvements project, which relate primarily to disclosure enhancements.
New Standards IFRS 9 Financial Instruments1 January 1, 2018 IFRS 15 Revenue from Contracts with Customers January 1, 2018
IAS 16/IAS 38 Clarification of Acceptable Methods of Depreciation and Amortisation January 1, 2016 1 Expected to result in a significant portion of financial assets currently classified as available-for-sale being re-classified as at fair value through profit or loss. Credit allowances for financial assets carried at amortized cost and debt securities measured at fair value, with changes in fair value recognized in other comprehensive income (OCI), are expected to increase due to the introduction of the expected credit loss methodology. Upon implementation of the revised standard IFRS 4 ‘Insurance Contracts’, more assets may be classified as at fair value through profit or loss under the fair value option.
The Group has not early-adopted any of the standards shown in table 2.
b) Foreign currency translation and transactions Foreign currency translation Due to the Group’s economic exposure to the U.S. dollar (USD), the presentation currency of the Group’s Consolidated financial statements is USD. Many Group companies use a different functional currency, being that of the respective primary economic environment in which these companies operate. Assets and liabilities are translated into the presentation currency at end-of-period exchange rates, while income statements and statements of cash flows are translated at average exchange rates for the period. The resulting foreign currency translation differences are recorded directly in other comprehensive income (OCI) as CTA.
• Foreign currency translation differences arising on monetary items that form part of net investments in foreign operations as well as foreign currency translation differences arising from monetary items that are designated as hedging instruments in a qualifying net investment hedge relationship are included directly in OCI as CTA.
Reserves for unit-linked contracts are based on the fair value of the financial instruments backing those contracts less any fees and assessments charged to the policyholders. The related assets for unit-linked insurance contracts are designated at fair value through profit or loss in order to reduce measurement inconsistencies.
For products managed on a dynamic basis, an option in IFRS 4 is used to measure the insurance liabilities using current financial and non-financial assumptions, to better reflect the way that these products are managed. Financial assets relating to these liabilities are designated at fair value through profit or loss.
General insurance DAC for general insurance contracts is amortized over the period in which the related premiums are earned.
e) Group investments excluding derivative financial instruments Group investments are accounted for at either (a) fair value through OCI; (b) fair value through profit or loss; or (c) amortized cost.
Group investments at fair value through profit or loss include debt and equity securities backing certain life insurance contracts with participation features, and financial assets evaluated on fair value basis. The designation of these assets at fair value through profit or loss eliminates or significantly reduces a measurement inconsistency that would otherwise arise from measuring assets or recognizing the gains and losses on these assets on a different basis to the liabilities.
Group investments at amortized cost include debt securities for which the Group has the positive intention and ability to hold to maturity (held-to-maturity financial assets) as well as mortgage and other loans (loans and receivables). Such investments are carried at amortized cost using the effective interest rate method, less any charges for impairment. When impairment is determined to have occurred, the carrying amount of held-to-maturity investments and loans and receivables is reduced through the use of an allowance account, and the movement in the impairment allowance is recognized in income as an impairment loss.
Group investments include investment property accounted for at fair value through profit or loss. Rental income from investment property is recognized on a straight-line basis over the lease term and included in net investment income along with rental operating expenses for investment property recognized on an accrual basis.
• Net investment hedges, which are hedges of a net investment in a foreign operation.
h) Goodwill Goodwill on the acquisition of subsidiaries is capitalized and tested for impairment annually, or more frequently if impairment indicators are observed. For the purpose of impairment testing, goodwill is allocated to cash generating units (CGUs) based on the level at which management monitors operations and makes decisions relating to the continuation or disposal of assets and operations. If goodwill has been allocated to a CGU and an operation within that unit is disposed of, the carrying amount of the operation includes attributable goodwill when determining the gain or loss on disposal.
i) Intangible assets All intangible assets have finite lives and are carried at cost less accumulated amortization and impairments. Such assets are generally amortized using the straight-line method over their useful lives and reviewed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
• For contracts that insure the risk of longevity, such as annuity contracts, an appropriate allowance is made for people living longer. Continuing improvements in medical care and social conditions could result in further improvements in longevity in excess of those allowed for in the estimates used to determine the liability for contracts where the Group is exposed to longevity risk.
• Estimates are made as to future investment income arising from the assets backing long-term insurance contracts. These estimates are based on current market returns as well as expectations about future economic and financial developments.
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.
Consolidated financial statements continued c) Impairment of assets Financial assets A financial asset is considered impaired if there is objective evidence of impairment as a result of one or more occurred loss events that have an impact on the estimated future cash flows of the financial asset.
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, Asia Pacific, UK, Switzerland and other European countries), or
• Its fair value has been below the weighted-average cost for a prolonged period of 24 consecutive months or longer.
Goodwill and attorney-in-fact relationships (AIF) Goodwill is allocated to a cash generating unit (CGU) as outlined in note 3. For General Insurance and Farmers, CGUs are aggregated at the segment level. Within Global Life, CGUs are identified at either business unit level or individual reporting entity level.
The recoverable amounts of AIF relationships and goodwill are 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 three-year period. The basis for determining the values assigned to the key assumptions are current market trends and earnings projections.
Table 4.1 sets out, as of the date of valuation, the value of goodwill and AIF for the major CGUs, applied discount rates and the perpetual nominal growth rates beyond the projection period which are dependent on country specific growth rate and inflation expectations. As outlined in note 15, the goodwill of the Global Life Germany CGU was fully impaired in 2015.
Sensitivity tests have been performed on goodwill and AIF, and typically comprised of an analysis for either a decrease in cash flows of up to 30 percent, a decrease in the perpetual growth rate of up to 1.0 percentage point or an increase in the discount rate of up to 3.5 percentage points in order to capture potential future variations in market conditions No reasonably possible changes of key assumptions were identified which would result in the recoverable amount being close to the carrying amount for the remaining CGUs.
The discount rates used in the recoverable amount calculations for developed markets are based on a capital asset pricing model and consider government bond rates, which are further adjusted for equity risk premium, appropriate beta and leverage ratios. In emerging markets, discount rates are based on the U.S. dollar discount rate taking into account inflation differential expectations and country risks. All input factors to the discount rates are based on observable market data.
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. For the distribution agreement with Banco Santander S.A. entities in Latin America there was no indication that the asset may be impaired, therefore no impairment test was performed. Impairment indicators reviewed comprised of interest rates, inflation rates, actual and expected economic performance and other factors.
Discount and perpetual growth rates as of the date of valuation in USD
For impairment testing purposes, distribution agreements are assessed as single assets.
Sensitivity tests have been performed on distribution agreements and typically comprised of an analysis for either a decrease in cash flows, a decrease in the perpetual growth rate or an increase in the discount rate, applying reasonably possible changes. No reasonably possible changes of key assumptions were identified which would result in the recoverable amount being close to the carrying value.
Consolidated financial statements continued d) Deferred taxes Deferred tax assets are recognized if sufficient future taxable income, including income from the reversal of existing taxable temporary differences and available tax planning strategies, is available for realization. The utilization of deferred tax assets arising from temporary differences depends on the generation of sufficient taxable profits in the period in which the underlying asset or liability is recovered or settled. The utilization of deferred tax assets arising from unused tax losses or tax credits depends on the generation of sufficient taxable profits before the unused tax losses or tax credits expire. As of each balance sheet date, management evaluates the recoverability of deferred tax assets and, if it is considered probable that all or a portion of the deferred tax asset will not be utilized, then a valuation allowance is recognized.
e) Employee benefits The Group provides defined benefit plans and other post-employment plans. In assessing the Group’s liability for these plans, critical judgments include estimates of mortality rates, rates of employment turnover, disability, early retirement, discount rates, future salary and pension increases and increases in long-term healthcare costs. Discount rates for significant plans are based on a yield curve approach. The Group sets the discount rate by creating a hypothetical portfolio of high quality corporate bonds for which the timing and amount of cash outflows approximate the estimated payouts of the defined benefit plan. These assumptions may differ from actual results due to changing economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. These differences may result in variability of pension income or expense recorded in future years.
1 Net capital gains/(losses) on derivative financial instruments attributable to cash flow hedge ineffectiveness amounted to USD 10 million and USD (29) million for the years ended December 31, 2015 and 2014, respectively.
Details of Group investments by category as of December 31 2015 2014
Investments (including cash and cash equivalents) with a carrying value of USD 6,492 million and USD 6,214 million were held to meet local regulatory requirements as of December 31, 2015 and 2014, respectively.
Debt securities maturity schedule in USD millions, as of December 31
As of January 1 8,784 8,745 Additions and improvements 1,460 1,049
Investment property consists of investments in commercial, residential and mixed-use properties primarily located in Switzerland, Germany and the UK.
Net unrealized gains/(losses) on Group investments included in equity in USD millions, as of December 31 Total
1 Net unrealized gains/(losses) on Group investments include net gains arising on cash flow hedges of USD 294 million and USD 306 million as of December 31, 2015 and 2014, respectively.
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 USD 99 million and nil as of December 31, 2015 and December 31, 2014, repectively.
Under the terms of securities lending or repurchase agreements, the Group retains substantially all the risks and rewards of ownership of the transferred securities, and also retains contractual rights to the cash flows therefrom. These securities are therefore not derecognized from the Group’s balance sheet. Cash received as collateral is recorded as an asset, and a corresponding liability is established. Interest expense is charged to income using the effective interest rate method over the life of the agreement.
Table 7.1 shows the fair value and notional amounts for instruments which do not qualify for hedge accounting as of December 31, 2015 and 2014. Whilst these notional amounts express the extent of the Group’s involvement in derivative transactions, they do not, however, represent the amounts at risk.
Other contracts Other contracts predominantly include stable value products (SVPs) issued to insurance company separate accounts in connection with certain life insurance policies (Bank Owned Life Insurance (BOLI) and Company Owned Life Insurance (COLI)) with an account value of USD 9.2 billion and USD 9.0 billion as of December 31, 2015 and 2014, respectively and with a market value of the underlying investments of USD 9.2 billion as of both December 31, 2015 and 2014, respectively. The Group closely monitors the risk of surrender of these life insurance policies and includes the likelihood of surrender as one of the input parameters to determine the fair value of the SVPs which was nil as of December 31, 2015 and 2014.
In certain circumstances derivative financial instruments may meet the requirements of an effective hedge for accounting purposes. Where this is the case, hedge accounting may be applied. Financial information for these instruments is set out in table 7.2.
Forex swaps and forwards 393 – – 393 – (3) – – –
Gains/(losses) arising from fair value hedges in USD millions, for the years ended December 31 2015 2014
Gains/(losses) on hedging instruments1 (21) 48 on hedged items attributable to the hedged risk 21 (35)
1 Excluding current interest income, which is recognized as an offset on the same line as the interest expense of the hedged debt.
Cash flow hedges Designated cash flow hedges, such as interest rate swaptions and forwards are used to protect the Group against variability of future cash flows due to changes in interest rates associated with expected future purchases of debt securities (during the years 2016, 2021 and 2026) required for certain life insurance policies. The effective portion of the gains and losses on these swaptions are initially recognized in other comprehensive income. Subsequently the gains or losses will be recycled to income within net investment income on Group investments over the period to December 31, 2036. The gains and losses relating to the ineffective portion of these hedges are recognized immediately in income within net capital gains/(losses) on investments and impairments.
The Group also uses interest rate swaps and cross currency swaps for cash flow hedging to protect against the exposure to variability of cash flows attributable to interest rate and currency risk. The hedging instrument is measured at fair value, with the effective portion of changes in its fair value recognized in other comprehensive income. The effective portion, related to spot rate changes in the fair value of the hedging instrument, is reclassified to income within administrative and other operating expense as an offset to foreign currency revaluation on the underlying hedged debt. The ineffective portion of the change in fair value is recognized directly in income within administrative and other operating expense.
The net gains/(losses) deferred in other comprehensive income on derivative financial instruments designated as cash flow hedges were USD (22) million and USD 109 million before tax for the years ended December 31, 2015 and 2014, respectively.
The Group has also designated certain debt issuances as hedging instruments on a non-derivative net investment hedge relationship. The notional amount of these financial instruments was USD 3.3 billion and 1.5 billion for the years ended December 31, 2015 and 2014, respectively. The net gains/(losses) deferred in other comprehensive income were USD (68) and USD (35) million before tax for the years ended December 31, 2015 and 2014, respectively.
No ineffectiveness of net investment hedges was recognized in net capital gains/(losses) and impairments for the years ended December 31, 2015 and 2014.
Derivative financial instruments: offsetting of financial assets and liabilities Table 7.4 shows the net asset and liability position of Group derivative financial instruments subject to enforceable master netting arrangements and collateral agreements. Master netting arrangements are used by the Group to provide protection against loss in the event of bankruptcy or other circumstances that result in a counterparty being unable to meet its obligations. These arrangements commonly create a right of offset that becomes enforceable and affects the realization or settlement of individual financial assets and financial liabilities only following a specified event of default or other circumstances which would not be expected to arise in the normal course of business.
Losses and loss adjustment expenses incurred: Losses and loss adjustment expenses paid: 1 The net prior year incurred losses includes unwind of discount of USD 31 million and USD 32 million as of December 31, 2015 and December 31, 2014 respectively. 2 The 2015 net movement includes USD (44) million relating to a reinsurance agreement which transferred the benefits and risks of some of the Group’s general insurance portfolio to a third party and USD (61) million relating to the sale of the Group’s Dutch general insurance portfolio to a third party. The 2014 net movement relates to USD 47 million reclassified from future life policyholders’ benefits (see note 1 of the Consolidated financial statements 2014), 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 reclassification of the Group’s General Insurance retail business in Russia to held for sale (see note 2).
Gross reserves for losses and loss adjustment expenses 64,535 67,890 65,218 68,126 68,274 67,762 69,986 68,312 64,472 62,971
Initial net reserves for losses and loss adjustment expenses 50,814 54,712 52,986 55,944 56,180 55,341 57,385 57,319 54,703 53,739
Cumulative paid as of December 31: Seven years later (33,665) (35,188) (36,480) Eight years later (35,215) (36,717) Nine years later (36,511)
Net reserves re-estimated as of December 31: Seven years later 47,668 51,497 50,014 Eight years later 47,969 51,441 Nine years later 48,006
Gross reserves re-estimated as of December 31, 2015 60,888 63,240 60,809 63,575 64,767 65,650 67,620 67,229 64,275 Cumulative (deficiency)/ redundancy of gross reserves 3,647 4,650 4,409 4,552 3,506 2,112 2,366 1,083 198 Cumulative (deficiency)/ redundancy as a percentage of initial gross reserves 5.7% 6.8% 6.8% 6.7% 5.1% 3.1% 3.4% 1.6% 0.3%
Table 8.3 presents changes in the historical reserves for losses and loss adjustment expenses, net of reinsurance, that the Group established in 2006 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, 2015. 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 reserves for losses and loss adjustment expenses for asbestos in USD millions 2015 2014
Losses and loss adjustment expenses incurred 16 5 93 93 Losses and loss adjustment expenses paid (162) (143) (199) (175) Foreign currency translation effects (23) (7) (167) (146)
Increase/(decrease) recorded in other comprehensive income (335) 1,060 – – (335) 1,060 1 The Group’s life operations in the UK entered into a reinsurance agreement to transfer the risk associated with a significant annuities portfolio as of April 1, 2015 and an additional tranche as of October 1, 2015. The combined initial impact of these transactions was an increase of USD 1.8 billion in ceded premiums. In addition, USD 220 million changes in assumptions were recognized due to the recycling of balances previously recorded in other comprehensive income relating to the underlying asset portfolio.
Long-duration contract liabilities included in future life policyholder benefits result primarily from traditional participating and non-participating life insurance products. Short-duration contract liabilities are primarily accident and health insurance products.
Future life policyholder benefits are generally calculated by a net premium valuation. In terms of USD, the weighted average discount rate used in the calculation of future life policyholder benefits is 2.7 percent and 3.0 percent as of December 31, 2015 and 2014, respectively.
Interest rates 276 111 Investment return (96) 19 Changes in modeling (2) 6
Policyholder contract deposits and other funds gross in USD millions, as of December 31 2015 2014
Development of policyholder contract deposits and other funds in USD millions Gross Ceded Net
Fee income and other expenses (474) (318) (5) (7) (479) (325) Interest and bonuses credited to policyholders 1,561 1,593 (76) (76) 1,485 1,517 Acquisitions/(divestments) and transfers1 381 – – – 381 – Increase/(decrease) recorded in other comprehensive income (987) 3,925 – – (987) 3,925 Foreign currency translation effects (1,520) (1,907) – – (1,520) (1,907)