Z-ECM 132% Zurich Economic Capital Model (Z-ECM) ratio estimated as of December 31, 2017 4 1 Business operating profit (BOP) indicates the underlying performance of the Group’s business units by eliminating the impact of financial market volatility and other non-operational variables.
2 Adjusted for the impact of the hurricanes Harvey, Irma and Maria, measures related to the Group’s restructuring, and the impact of changes to UK capital gains tax indexation relief.
USD 3.7 bn Cash remittances over 550,000 Number of customers interviewed through Zurich’s NPS program 6
USD 207 bn Investment portfolio 2.1 tons CO2e emissions per employee (tons per FTE) 7
Female participation in Leadership Team 3 Shareholders’ equity used to determine ROE and BOPAT ROE is adjusted for net unrealized gains or losses on available-for-sale investments and cash flow hedges.
Moving toward integrated reporting This report represents a further step in Zurich’s journey toward integrated reporting. It aims to show how we create value for our stakeholders and brings together information about our operations, strategy, governance, performance, prospects and external environment. It is intended to reflect the varied interests and perspectives of all Zurich’s stakeholders, offering a holistic view of our performance.
6 In 2017, Zurich interviewed over 550,000 customers (including Zurich Santander) in over 20 countries through its NPS (Net Promoter Score) program.
7 Number shown as of 2016; 2017 data will be available in Q2 2018.
Zurich Insurance Group Annual Report 2017 Group overview Governance Risk review Financial review1
“We remain on course to meet our strategic targets and deliver sustainably. I am fully confident that Zurich will continue to succeed and thrive in the future.” Tom de Swaan Chairman of the Board of Directors
From planning to execution The strength of our determination to focus on customers is now different from anything I have seen previously at Zurich. One example is the work of our outstanding Group Strategy Task Force. Building on its contribution to Zurich’s Strategy, in 2017 the Task Force worked with our Executive Committee to develop Zurich’s purpose and values. These let customers know, in a clear and simple way, why we are relevant to their lives and how we deliver on that relevance.
Our actions come alongside strong financial performance and we remain on course to meet strategic targets. There has been progress in the Property & Casualty, Life and Farmers businesses coming alongside resilience to the natural catastrophes witnessed in the third quarter. Reflecting the Group’s strong performance in 2017, and with expectations of further improvement in 2018, the Board is proposing to increase the dividend to 18 CHF per share. In addition, in line with our policy on anti-dilution, we intend buy back shares in the amount of about USD 1 billion.
Farewell and the future My 12 years at this fantastic organization – of which five years were as Chairman – draw to a close. I am fully confident that Zurich will succeed and thrive in the future. The everstronger emphasis on the customer combined with an entrepreneurial culture will be the main ingredients for this success. The company is showing the necessary adaptive attitude to evolve in the fast changing environment in which it operates.
I would like to thank all stakeholders for the support they have extended to me over the last 12 years. A special word of thanks to all of our approximately 53,000 employees worldwide for their relentless commitment to Zurich.
USD 33.2 bn Gross written premiums, policy fees and insurance deposits
Our industry is facing unprecedented changes. How we operate, the value we provide – and above all – our customers’ expectations are undergoing a profound transformation. To succeed, we must ensure we can continue to meet the challenges of the future.
Positioned for the future We are fortunate to be in a strong, competitive position, as our performance in 2017 demonstrated. Despite historic weather-related events our focus and discipline delivered improved underwriting, reduced costs and an expanded premium base, creating immense opportunities for 2018 and beyond.
We also named Alison Martin to the post of Group Chief Risk Officer. With her background in life and health insurance, she has good knowledge of what customers need and how to bring our business priorities into line with the changes we face.
Clearly we still have work to do. We will continue to reduce our cost base and improve our technical underwriting performance, and will implement changes that allow us to devote more time and resources to interacting with customers.
Learning from our customers No business today can afford to take customer relationships for granted. To anticipate and respond to customers’ needs, we start by listening to them. One way we are doing this is by using the Net Promoter Score (NPS), which allows us to measure customer satisfaction. The NPS approach has already been effective in helping the Farmers Exchanges 1 to share customer feedback and make improvements. We will now use NPS metrics across Zurich to become more consistent about monitoring, targeting and managing customer satisfaction.
Alison Martin to be new Group Chief Risk Officer, Kathleen Savio new CEO Zurich North America. Both appointments effective January 1, 2018.
Zurich sets new targets to reduce emissions and energy use after meeting and exceeding previous targets.
Zurich raises commitment to impact investment portfolio to USD 5 billion and sets clear impact targets.
1 The Farmers Exchanges are owned by their policyholders. Farmers Group, Inc., a wholly owned subsidiary of Zurich Insurance Group, provides certain non-claims administrative and management services to the Farmers Exchanges as attorney-in-fact and receives fees for its services.
In addition, in 2017 we agreed with Porsche to insure amateur racetrack drivers who want to test their skills on Germany’s Nürburgring for a day. And we have put agreements in place with Europe’s largest frequent flyer program, Miles & More, and with Payback in Italy, a customer loyalty program with 110 million customers worldwide.
Our strategy, culture, and the strengths of our business put us in an enviable position, helping us to generate cash for shareholders, while making us better at serving those who depend on us, year for year, to secure their lives, livelihoods and futures.
An example of the many ways we contribute to communities is through Zurich’s award-winning flood resilience program, which works to mitigate flood risks at the community level by applying an innovative approach to risk that improves decision-making.
Another is through the many skills and training initiatives we sponsor across our markets, including our innovative apprenticeship program which has been long-running in Switzerland that we are now piloting in the U.S. And yet another is the leading role we play in developing a market for green bonds and other eco-sensitive financial instruments.
At our core, we live our values to the benefit of all our stakeholders, helping society achieve its full potential. Learn more about the ‘Why, How, What’ that will allow us to harness our capabilities to serve all our stakeholders on page 12.
The role of insurance Zurich provides property and casualty insurance, life insurance products and savings and investment solutions in more than 210 countries and territories.
We invest their payments in high-quality assets so that we can pay claims and financial returns on savings and investment plans. We also provide risk advice, particularly to our commercial customers, to help them anticipate risks and take action to protect themselves.
We create value for our customers by helping them understand and protect themselves from risk.
We create value for our people by investing in their skills and expertise so that each may fulfill his or her potential.
We create value for communities and society both through our core insurance business, which supports economic growth and has a positive social impact, and by acting responsibly in everything we do.
Throughout our business review we have highlighted how we are creating value for our stakeholders.
Reserves Zurich bases the calculation of its insurance liabilities on the ‘Zurich Way of Reserving,’ a group-wide policy with well-defined and prudent standards applied by the Group’s actuaries in all regions. The reserving process is supported by strong governance including extensive peer reviews and regular external reviews.
Zurich Insurance Group Annual Report 2017 Group overview Governance Risk review Financial review9
Geopolitics and macroeconomics An increasing number of geopolitical ‘hot spots’ poses significant challenges with respect to business decisions.
At the same time, interest rates, a key component of our investment income, remain at or near historic lows in major markets. See box at right for further commentary on the macroeconomic outlook.
Environment and emerging risks Cyber crime has been described as the new fire insurance; despite its huge potential, this is still a nascent business. Cyber breaches and financial loss are bad in and of themselves. Even more insidious is the embedded, often systemic nature of such risks.
Interconnectivity increases customers’ vulnerability. A fire could shut down a single power station. A cyber attack on a power grid could paralyze businesses and entire communities.
Demographics and customer behaviors Insurers and their customers must take into account the fact that people are living longer, and working longer, and their need for protection is changing accordingly.
Insurance market dynamics A growing number of new entrants into insurance and innovative business models are having a profound impact on the insurance industry.
The increasingly robust economic recovery pushed many global equity indices to record levels in 2017, with extremely low levels of volatility. Even though credit markets began to lag equities in the final six months of the year, spreads fell to cycle lows.
The U.S. Treasury yield curve has flattened appreciably as yields of shorter maturities moved higher relative to longer-dated yields. The global macroeconomic backdrop is expected to remain supportive, but is likely to increasingly favor equity returns over those of credit and government bonds as the cycle advances.
“We have introduced a new, simplified approach to articulating why we are relevant and how we deliver on that, no matter where the transformational forces shaping our industry will take us.” Mario Greco Group Chief Executive Officer
Net savings USD 1.5bn by 2019 compared with 2015 baseline 1 The Farmers Exchanges are owned by their policyholders. Farmers Group, Inc., a wholly owned subsidiary of Zurich Insurance Group, provides certain non-claims administrative and management services to the Farmers Exchanges as attorney-in-fact and receives fees for its services.
4 Cumulative net cash remittances to Zurich Insurance Company Ltd, after deducting central costs, over the 2017 to 2019 period.
Our unique footprint is balanced between Europe and North America, between commercial and retail, and between property and casualty and life insurance. The Latin American contribution is strong and growing, and the business in Asia Pacific is expanding in size and importance. This diversification positions us well to weather economic and market volatility, and gives us a strong presence across customer segments and product lines.
We have a solid financial position. That can reassure our customers that we will be there when they need us to handle their claims, our shareholders that we are financially stable, and our colleagues that we have a well-earned positive reputation as a business and an employer.
Our portfolio is healthy and balanced between Property & Casualty, and Life. Both are sustainable and profitable businesses. Farmers is performing well, providing stable income in line with expectations.
We have, and continue to attract, the most talented people in the industry.
A revolution is affecting our business. Customers expect more, and their needs are changing. In this section we provide a few of the many examples that set us apart in our industry and show how we are adapting to thrive in this challenging new environment.
Covering a customer’s ‘e-motional’ needs E-vehicles are changing the way we think about cars. High performance and low emissions need no longer be mutually exclusive. Stephan Schwarz, (pictured right), president of the Swiss Tesla Owners Club trusts Zurich to insure his Tesla Roadster and his Tesla Model S. As an insurer, we want to make sure that electric vehicle owners like Stephan are able to stay on the move, no matter where they drive.
Watch video about how we are supporting drivers of e-vehicles: www.zurich.com/e-motional-driving
A global presence Zurich takes a lead role in insuring and protecting major building and infrastructure projects for some of the biggest construction companies and project owners around the world. We helped to insure over 600 such projects in 2017, supported by our underwriters in major cities. Our unified approach allows us to provide coverage for construction projects, and helps companies to have financial protection in place to ensure projects are completed and potential damages are covered.
High-level insights for Zurich customers Walking a 64-meter long jib 75 meters off the ground is all in a day’s work for a Zurich engineer surveyor. Just ask Trevor Shaw, shown here examining a crane erected to assist in construction of a building by customer Balfour Beatty. His job includes doing a thorough close-up examination, and then making sure the customer gets the report on time.
“ Working at height doesn’t bother me as long as the risks are controlled. I love doing what I do, and helping our customers.”
Innovating with customers in mind A revolution led by technology is affecting everything we do, and changing what our customers expect from us. Mindful of that, we are looking beyond risk transfer to satisfying customers’ expectations and needs in many ways. Digital technology is helping to make the difference.
From coding to saving lives We are committed to addressing the skills gap in our industry, while focusing on new ways to access digital talent. One way we are doing this is through our cooperation with CoderDojo to help youngsters learn computer programming languages, which it believes is an essential tool that should be accessible to anyone, anywhere in the modern world. We are also active at ‘hackathons.’ At these weekend events, the world’s best coders compete to develop technology to address specific problems. HackZurich held in September 2017 brought together 550 talented coders and software developers from 55 countries. Grand-prize winner ‘HoloBrigade’ (below) developed a solution for rescuers to ‘see’ hazards and people in dangerous situations, based on a challenge provided by Zurich. In Germany, Zurich sponsored a similar event, InsurHack.
Meeting changing customer needs: Wherever we can help, we’re there Business review 2017 (continued)
Closer to travelers Zurich is one of the world’s three top travel insurance providers. We acquired Cover-More Group in 2017, underscoring our determination to focus on customer service. Based in Australia, Cover-More provides specialist travel insurance services and medical assistance and has operations in 14 countries, including market-leading positions in Australia, India, and in the U.S. In 2017 it assisted in providing cover for more than seven million travelers and ensured many thousands got help and support when needed. Cover-More does more than collect premiums and pay claims. It finds solutions.
Around the world, around the clock With over 1,500 employees worldwide, Cover-More can contact and assist people almost anywhere. Its geo-location technology allows it to contact customers within minutes, including those who might be in danger. When customers are directly involved, Cover-More can mobilize care, including by arranging hospitalization for injured and flying in family members and relatives. Cover-More’s Chief Medical Officer, Dr. Stephen Rashford (shown below), a specialist emergency physician with over 25 years’ experience in trauma treatment, oversees all critical care cases.
Zurich Insurance Group Annual Report 2017 Group overview Governance Risk review Financial review19 www.youtube.com/watch?v=gGN5xhQABPo
The risk spotters As a global insurer with a strong presence on the ground, Zurich wants to ensure customers reduce risk before an event, including by working with our risk engineers, claims specialists and others who help customers identify vulnerabilities and develop emergency plans.
“ We are constantly evaluating and putting into practice what we have learned from previous events to improve our processes and ultimately enhance the customer experience.”
Business review 2017 (continued) Meeting changing customer needs: Experience, trust, know-how
“ I am very proud to be part of Zurich. How we support customers reflects on Zurich’s reputation, and the personal reputations of me and my fellow adjusters.”
Zurich Insurance Group Annual Report 2017 Group overview Governance Risk review Financial review21 www.zurichna.com
To learn more about how Zurich is helping L’Oréal visit: www.zurich.com/ipg-prevention
Individuals are protected from a gap in income, allowing them to maintain their quality of life
Did you know that 1 out of 10 employees become disabled for part of their working lifetimes?
Zurich works with employers and others to increase awareness about income protection gaps
Retaining talent is especially important in what we call ‘technical functions’ – underwriting, claims and risk engineering. We are very proud that employee retention improved in 2017 as the table on this page shows, including in these key roles.
Technical function voluntary turnover rate (%) 2 7.1% 8.7% (1.5 pts)
We have also expanded our development efforts through focused planning, such as the ‘country CEO accleration centers’ that actively provide assessment and development to this critical pipeline of talent. Designed as a global program, it was piloted in Latin America and North America in 2017. Another example is the ‘leadership discovery program’ that equips senior leaders with the skills and experience to implement our strategy, offered in all regions in 2017.
A job for a detective: the motivated insurance sleuth Insurance fraud is a serious crime costing businesses, customers, society millions, and even endangering lives. Michael Richards (shown below) is one of Zurich’s counter-fraud experts. He credits his education including a law degree from the University of Birmingham, and training and mentoring he received at Zurich, for his success. In 2017 he won the UK Insurance Post’s prestigious ‘Young Investigator of the Year’ award. Congratulations, Michael!
Tackling mental health issues in Ireland Everyone has feelings, even tough rugby players. Yet there is a stigma around talking about mental health. Through the ‘Tackle your Feelings’ campaign in Ireland, a country with one of the highest youth suicide rates in Europe, Zurich is helping people to open up about mental health issues. Zurich Ireland has paired up with the Rugby Players Ireland in a three-year, one million euro campaign aimed at changing attitudes and breaking down the stigma attached to mental health issues. The Z Zurich Foundation provides support and funds, helping Zurich offices work with local community organizations to promote this project.
Zurich will engage in dialogue (not to exceed 24 months) with existing customers that derive more than half their revenues from mining thermal coal, or, in the case of utility companies, generate more than half of their energy from this type of coal, with the aim to facilitate a transition to another insurer or explore if an underwriting exception should be granted, based on the customer’s strategy and position on climate risk. We will also divest from equity holdings in companies that get more than half of their revenues from mining thermal coal, or utility companies that generate more than half of their energy from it.
Learn more about our corporate responsibility initiatives in the Corporate responsibility highlights 2017 report: www.zurich.com/corporateresponsibility
As leaders in sustainability, we aim to double our impact investments to
Total amount of impact investments (USD millions) 3 2,830 1,704 66%
Dream savers As an insurer, our commitment includes helping communities reduce flood risks. Working with our flood resilience alliance, we can secure lives and livelihoods so people’s hopes, ambitions and futures remain intact, despite floods.
Zurich Insurance Group Annual Report 2017 Group overview Governance Risk review Financial review27
A balanced and diverse global business Zurich is a large and diversified global insurer. It is a leading cross-border insurer to multinational corporations, and has significant market share in North America and Europe and a growing presence in emerging markets. Zurich also benefits from the predictable fee income generated by Farmers Management Services for services provided to the Farmers Exchanges. 1
The balanced business profile of Zurich is also supported by best practice corporate governance. Its Board is independent and remarkably diverse in terms of gender and skills. Its remuneration principles align pay to performance and are an important element of the Group’s risk management framework.
Zurich pro-actively addresses environmental, social and governance (ESG) factors as part of day-to-day business activity. This includes responsible investment, corporate responsibility in business transactions, minimizing its carbon footprint and helping the communities in which it operates. Zurich’s excellent ESG track record is illustrated by a ‘AA’ rating from MSCI and 1 The Farmers Exchanges are owned by their policyholders. Farmers Group, Inc., a wholly owned subsidiary of Zurich Insurance Group, provides certain non-claims administrative and management services to the Farmers Exchanges as attorney-in-fact and receives fees for its services.
2 Reflects midpoint estimates as of December 31, 2017 with an error margin of +/– 5 pts.
our Silver Class distinction in the Dow Jones Sustainability Indices (DJSI). Zurich also improved its score in the annual CDP Climate Change rankings to ‘Leadership’ level.
Zurich has a highly cash-generative business model and is focused on paying an attractive and growing dividend while managing capital in a disciplined way.
Market capitalization (CHF millions) 44,670 42,000 1 Proposed gross dividend, subject to approval by shareholders at the Annual General Meeting; expected payment date as from April 10, 2018.
Zurich’s shares The shares are listed on the SIX Swiss Exchange and traded on the SIX Swiss Exchange Blue Chip Segment; ticker symbol: ZURN; the Swiss security number (Valorennummer) is 1107539. Trading in Zurich Insurance Group Ltd shares on the blue chip segment is conducted in Swiss francs. Zurich has a level 1 American Depositary Receipt (ZURVY) program, which is traded over-the-counter on OTCQX. For further information on shareholders or capital structure, see corporate governance report or www.zurich.com/en/investor-relations/our-shares/registered-share-data
“A diverse Board and management team is key to understanding and serving our current and future customers in the best possible way.” Tom de Swaan Chairman of the Board of Directors
Good corporate governance enables Zurich to create sustainable value for its shareholders, customers, employees and other stakeholders The corporate governance report describes the work of Zurich’s Board of Directors (the Board) and management and its committees.
Dear Shareholder Good corporate decision-making is key to our organization. We continued to strengthen Zurich and our governance structure in 2017 by enhancing internal processes and policies and adapting them to the new operational Group structure.
Corporate responsibility At Zurich, doing business responsibly is at the core of our culture and an integral part of our Group strategy. Corporate responsibility creates sustainable value for all our stakeholders. We seek ways to address environmental, social and governance issues in our day-to-day activities. Zurich also promotes and ensures implementation of diversity and inclusion in the workplace, aiming to attract, develop and retain talented people whose diversity reflects our global customers. The Executive Committee (ExCo) and the Board take an active role in the oversight and implementation of our approach to corporate responsibility. For a comprehensive view on Zurich’s engagement in the area of Corporate responsibility see under www.zurich.com/en/ corporate-responsibility.
Executive Committee by geographic origin %, as of December 31, 2017
To actively support the transition to a lowcarbon economy, Zurich has decided to apply enhanced ESG risk screening criteria for investments and apply its existing ESG risks in business transactions process to the thermal coal sector. We will divest from equity holdings in companies that derive more than half their revenues from mining thermal coal, and utility companies that generate more than half their energy from coal.
The Board proposes to the shareholders that they re-elect all other current members of the Board at the AGM.
Diversity in all its aspects is a key success factor in today’s fast-changing global environment. Zurich’s Board and ExCo consist of individuals with wide-ranging backgrounds, experience, skills and knowledge. This favorable balance enables them to conduct their tasks and responsibilities while taking into account business needs. Our Board and ExCo are truly diverse with regard to tenure, gender, professional background, experience and geographic origin, reflecting our customer base.
This report describes the Group’s approach to corporate governance and illustrates the key elements of corporate governance within the Group. It includes the information required under the following rules, with which Zurich complies: kk Directive on Information Relating to Corporate Governance of SIX Exchange Regulation (as of December 13, 2016).
kk 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 (’FINMA’). 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 Swiss Insurance Supervision Act (ISA) 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, to the extent this is required by state treaties between Switzerland and other countries, also a Solvency I margin. All material intra-group transactions must be reported to FINMA. In addition to the group supervision exercised by FINMA and its insurance supervision of the legal entities Zurich Insurance Company Ltd, Zurich Life Insurance Company Ltd, Zurich Reinsurance Company Ltd and Orion Rechtsschutz-Versicherung AG, the insurance subsidiaries and remaining financial services entities of the Group are supervised by the respective local supervisory authorities.
The principles of corporate governance and the standards described above are incorporated and reflected in a number of corporate documents, in particular the Articles of Association, the Organizational Rules and the Charter of the Committees of the Board of Directors of Zurich Insurance Group Ltd. The Governance, Nominations and Corporate Responsibility Committee of the Board of Directors of Zurich Insurance Group Ltd regularly reviews the Group’s corporate governance against best practice standards and ensures compliance with corporate governance requirements.
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 ExCo is contained in a separate report, the remuneration report (see pages 80 to 116), 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, December 3, 2015 and September 22, 2016, as well as the Ordinance against Excessive Compensation (Ordinance AEC) as of November 20, 2013.
Alison Martin, Group Chief Risk Officer-Designate (as of October 1, 2017)
Key governance developments in 2017 – at a glance as of December 31, 2017
The following chart shows the operational group structure in effect as of December 31, 2017.
The Group pursues a customer-centric strategy and is managed by regions with the addition of the Farmers and Commercial Insurance businesses. The ExCo is headed by the Group CEO. Six members of the ExCo represent the Group’s businesses: the CEOs of the regions (CEO North America, CEO Europe, Middle East & Africa (EMEA), CEO Latin America, CEO Asia Pacific), the CEO of Farmers and the CEO of Commercial Insurance. Four members of the ExCo represent Group functions: the Group Chief Financial Officer (Group CFO), the Group Chief Investment Officer (Group CIO), the Group Chief Risk Officer (Group CRO) and the Group Chief Operating Officer (Group COO). The Group COO has responsibility for operations and technology as well as underwriting, claims, and pricing, creating a unified sense of purpose and responsibility for technical excellence, efficiency and business transformation across all parts of the business. The Group CFO is responsible for Group Reinsurance. For further information on the ExCo see pages 62 to 72.
kk 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.
kk Group Functions and Operations comprise the Group’s Holding and Financing and Headquarters activities. Certain alternative investment positions not allocated to business operating segments are included within Holding and Financing. In addition, this segment includes operational technical governance activities relating to technology, underwriting, claims, actuarial and pricing.
kk Non-Core Businesses include insurance and reinsurance 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 are mainly situated in the U.S., Bermuda and the UK.
A list of the Group’s significant subsidiaries can be found on pages 275 to 278. For further information on the share listing of Zurich Insurance Group Ltd, see the investor section on pages 28 to 29.
Cross-shareholdings Zurich Insurance Group Ltd has no interest in any other company exceeding 5 percent of the voting rights of that other company, where such other company has an interest in Zurich Insurance Group Ltd exceeding five percent of the voting rights in Zurich Insurance Group Ltd.
Authorized and contingent share capital as of December 31, 2017 At the Annual General Meeting of March 29, 2017, shareholders approved to increase the authorized and contingent share capital as specified in Article 5bis and 5ter of the Articles of Association.
The contingent share capital of Zurich Insurance Group Ltd (Art. 5ter 1a) may be increased by an amount not exceeding CHF 3,000,000 by issuing of up to 30,000,000 fully paid registered shares with a nominal value of CHF 0.10 each by the voluntary or mandatory exercise of conversion and/or option rights, which are granted in connection with the issuance of loans, bonds, similar debt instruments, equity-linked instruments or other financial market instruments (collectively, the ‘financial instruments’) by Zurich Insurance Group Ltd or one of its Group companies, or by mandatory conversion of financial instruments issued by Zurich Insurance Group Ltd or one of its Group companies, that allow for contingent mandatory conversion into shares of Zurich Insurance Group Ltd, or by exercising option rights which are granted to the shareholders. This contingent share capital equates to about 20 percent of the current total registered shares issued.
Moreover, there is an additional contingent share capital (Art. 5ter 2a) of CHF 495,540.80, representing 4,955,408 fully paid registered shares with a nominal value of CHF 0.10 each, which may be issued to employees of Zurich Insurance Group Ltd or one of its Group companies. For further information on the capital structure and the authorized and contingent share capital, see the audited consolidated financial statements, note 19 on pages 232 to 234. This contingent share capital equates to about 3.3 percent of the current total registered shares issued.
For further information please see Article 5bis and 5ter of the Articles of Association, as published under the following link: www.zurich.com/IR-articles-of-association.
For information on changes of share capital during 2015, see the Annual Report 2016 of Zurich Insurance Group, page 35, pages 174 to 175 and pages 224 to 225 (www.zurich.com/en/investor-relations/results-and-reports).
Some interests in shares are held by investors in the form of American Depositary Receipts (ADRs) 1. As of December 31, 2017, investors held 24,351,380 ADRs (representing 2,435,138 Zurich Insurance Group Ltd shares).
Born: Committee membership: Audit Committee (chairman), Governance, Nominations and Corporate Responsibility Committee, Risk and Investment Committee
Born: Committee membership: Governance, Nominations and Corporate Responsibility Committee, Risk and Investment Committee
Board of Directors and its Committees as of December 31, 2017
Board Composition Diversity is a key factor for success in today’s fast-changing global environment. Zurich’s Board consists of a variety of individuals with different backgrounds, experience, knowledge and skills. The Board can draw on this diverse, balanced group of individuals to carry out its responsibilities and tasks, while taking into account the full range of contemporary business needs.
The composition as of December 31, 2017 in terms of length of tenure, gender, background, experience, knowledge and skills, as well as geographic origin was as follows: Board by length of tenure %, as of December 31, 2017
Board by background, experience, skills and knowledge %, as of December 31, 2017
External appointments Mr. de Swaan is vice-chairman of the supervisory board of Royal DSM, a Netherlands-based global life sciences and material sciences group. In addition, Mr. de Swaan is chairman of the board of the Netherlands Cancer Institute, chairman of the board of trustees of the Van Leer Jerusalem Institute and acts as director of certain other non-profit organizations. He is also a member of the IIF Board of Directors and the European Financial Services Round Table (EFR).
Skills and experience Fred Kindle worked at Hilti AG in Liechtenstein from 1984 until 1986. From 1988 until 1992 he was a consultant with McKinsey & Company in New York and Zurich. He then joined Sulzer AG in Switzerland, where he held several management positions. In 1999 he was appointed CEO of Sulzer Industries and in 2001 he became CEO of Sulzer AG. After joining ABB Ltd in 2004, Mr. Kindle was appointed CEO of ABB Group, a position he held until 2008. From 2008 to 2015 he was a partner of Clayton, Dubilier & Rice LLP, a private equity firm based in New York and London. In 2016 he took on the role of operating adviser to that company. He has been a member of the boards of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd since April 2006. He was elected vicechairman in September 2013.
Other directorships within the Group Zurich Insurance Company Ltd, Zurich American Insurance Company
Skills and experience Dame Alison Carnwath has substantial financial industry experience. She began her career with Peat Marwick Mitchell, now KPMG, where she practiced as a chartered accountant from 1975 to 1980. From 1980 to 1982, she worked as a corporate financier for Lloyds Bank International. From 1982 to 1993, she was assistant director, then director, at J. Henry Schroder Wagg & Co in London and New York. From 1993 to 1997, Ms. Carnwath was a senior partner at the financial advisory firm Phoenix Partnership. The firm was taken over by Donaldson, Lufkin & Jenrette (DLJ) in late 1997; she continued working for DLJ until 2000. Ms. Carnwath has held several board offices. From 2000 to 2005, she was the chairman of the board of Vitec Group plc, from 2001 to 2006 a director of Welsh Water, from 2004 to 2007 of Friends Provident plc, from 2004 to 2007 of Gallaher Group and from 2007 to 2010, she was the independent chairman of MF Global Inc. She also served on the boards of directors of Barclays from 2010 to 2012, and of Man Group plc from 2001 to 2013. She has been a member of the boards of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd since March 2012.
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 boards of the Stiftung für schweizerische Rechtspflege and of the Europa Institut at the University of Zurich.
Skills and experience Mr. Nish started his professional career in 1981 at Price Waterhouse (now PWC) in the UK, where he served as an audit and transaction partner from 1993 to 1997. In 1997, he joined ScottishPower plc as deputy finance director, and in 1999 he was promoted to group finance director, a role he held until 2005 when he became executive director responsible for the division operating ScottishPower’s regulated transmission and distribution business. In 2006, Mr. Nish became group finance director at global investment management and life insurance group Standard Life plc, and was promoted to group CEO of Standard Life plc in 2010, a position he held until 2015. He has also served as deputy chairman of the Association of British Insurers, and as a member of TheCityUK board advisory committee, and as a member of the financial services advisory board of the Scottish government. He has been a member of the boards of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd since March 2016.
Skills and experience Kishore Mahbubani began his career in 1971 as a diplomat with the Singapore Foreign Service, in which he served until 2004, with postings in Cambodia, Malaysia, Washington D.C. and New York. He served two postings as Singapore’s ambassador to the UN and as President of the UN Security Council in January 2001 and May 2002. Mr. Mahbubani was permanent secretary of the Singapore Foreign Ministry from 1993 to 1998. He served as dean at the Lee Kuan Yew School of Public Policy of the National University of Singapore (NUS) from its founding in 2004 until end of 2017. He continues to be a professor in the practice of public policy at the NUS. He has spoken and has published extensively on geopolitical and economic issues. In 2013 the Financial Times chose one of his books, ‘The Great Convergence: Asia, the West and the Logic of One World,’ as one of the best books about economics in that year. His latest book, ‘The ASEAN Miracle,’ was published in March 2017. He has been a member of the Boards of Zurich Insurance Group Ltd and of Zurich Insurance Company Ltd since April 2015.
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. Prior to December 1, 2015 the Board consisted entirely of Directors who were non-executive, independent from the management and who – except for Ms. Mächler – had 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.
Multiple mandates for different companies under unified control are counted as a single mandate. The maximum limits set forth in the Articles of Association do not discharge the members of the Board or ExCo from their generally applicable duties to act with due care and to protect Group interests. As in the past, additional mandates may be assumed only where, upon assumption of such mandates, sufficient time and resources remain available for performance of the office held in the Group.
At the AGM on March 29, 2017, all Board members were re-elected for another one-year term. Ms. Catherine Bessant was newly elected. The shareholders re-elected Mr. Tom de Swaan as Chairman. As members of the Remuneration Committee, they elected Mr. Christoph Franz, Mr. Tom de Swaan, Mr. Fred Kindle and Mr. Kishore Mahbubani. As independent voting rights representative, the shareholders elected Mr. lic. iur. Andreas G. Keller, attorney at law.
The Board proposes to shareholders that they re-elect all other current members of the Board at the AGM, which will take place on April 4, 2018, and that they elect Michel M. Liès as new member and as Chairman of the Board.
Internal organizational structure and responsibilities The Board is chaired by the Chairman, or in his absence by the Vice-Chairman. The Vice-Chairman is appointed by the Board. The Board also appoints its Secretary. The Board has a program of topics that is presented at its meetings throughout the year. It is regularly informed of developments relevant to the Group and is provided with timely information in a form and of a quality appropriate to the discharge of its duties in accordance with the standards of care set out in Article 717 of the Swiss Code of Obligations.
The Board is required to meet at least six times each year. During 2017 it held 12 meetings (of which six were partly attended by tele-/videoconference and six were held over two days). One meeting was fully dedicated to the discussion of strategy. Six meetings lasted four or more hours during the course of a day, two meetings took about three hours on average and four meetings lasted less than three hours. In addition, the Board approved six circular resolutions.
In 2017, average attendance at Board meetings was 95 percent. In fulfillment of their duties, the members of the Board spent additional time participating in Board Committee meetings and preparing for meetings.
Activities 2017: In 2017, the Board specifically focused on the following: kk succession of the Chairman of the Board kk ExCo succession kk strategy implementation kk customer trends, structural industry changes and disruptive technologies kk merger and acquisition transactions kk Board self-assessment and resulting recommendations kk exercise of certain scenarios of the recovery plan kk review of the annual update on sustainability risk as part of the Own Risk and Solvency Assessment (ORSA) process
The Board may establish committees for specific topics, terms of reference and rules with respect to delegated tasks, responsibilities and reporting to the Board. Except for the Remuneration Committee, the Board constitutes such committees from among its members at its own discretion. The members of the Remuneration Committee are elected by the shareholders’ meeting. The committees assist the Board in performing its duties. They discuss and propose matters to the Board in order that it may take appropriate actions and pass resolutions unless they are authorized to take resolutions in specific areas on their own. In 2017, committee meetings lasted over an hour and a half on average.
Self assessment The full Board and its committees conduct a self assessment once a year. In 2017 it considered the following key aspects of the effectiveness of the Board and its committees: a) the Board and committee environment (size, culture and composition, skill set and qualification); b) the work of the Board and its committees (strategy, governance, competition and peer comparison and performance management); and c) the use of time and process (planning quality and allocation). A report identifying key strengths and challenges was produced for, and considered by the Board. An action plan is currently being implemented by the Board that takes these aspects into account.
Key tasks and responsibilities: In general, the Remuneration Committee: kk regularly evaluates the Group’s remuneration architecture 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 82 to 116)
kk reviews and proposes to the Board annually the terms of remuneration of the members of the Board kk based on Zurich’s remuneration rules, reviews and proposes to the Board the terms and conditions of employment of the Group CEO and reviews those of other members of the ExCo, as proposed by the Group CEO, before submitting them to the Board for approval kk liaises with the Group CEO on other important matters related to employment, salary and benefit kk reviews and proposes to the Board the total variable remuneration pool, reviews the performance related to short-term and long-term incentive plans (STIP and LTIP), and also makes a qualitative assessment of the performance; reviews and makes proposals to the Board for submission to the AGM on the approval of the Board’s and ExCo’s remuneration kk and prepares the remuneration report annually in accordance with applicable laws and regulations
Audit Committee Composition and membership: Zurich Insurance Group Ltd’s Organizational Rules require the Audit Committee to consist of at least four non-executive Board members, independent from management. Currently, the committee comprises Alison Carnwath (Chairman), Joan Amble, Catherine Bessant, Susan Bies, Monica Mächler and David Nish, all of whom meet the relevant requirements for independence and qualification.
The external auditors, the internal auditors, appropriate members of the ExCo and other executives attend Audit Committee 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.
kk at least annually, reviews the standards of internal control, including activities, plans, organization and quality of Group Audit and Group Compliance kk reviews annual and half year consolidated financial statements of the Group as well as the three months and nine months interim management statements
kk Group Audit work plans, Group Audit findings and management implementation of remedial actions kk 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 kk 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 per year. In 2017 it met eight times.
Key tasks and responsibilities: In general, the Risk and Investment Committee: kk oversees the Group’s risk management, in particular the Group’s risk tolerance, including agreed limits that the Board regards as acceptable for Zurich to bear, the aggregation of agreed limits across the Group, the measurement of adherence to agreed risk limits and the Group’s risk tolerance in relation to anticipated capital levels kk further oversees the Group’s enterprise-wide risk governance framework, including risk management and control, risk policies and their implementation and the risk strategy and the monitoring of operational risks kk reviews the methodologies for risk identification kk oversees the impact of various risk types on economic and regulatory capital kk reviews, with business management and the Group risk management function, the Group’s general policies and procedures and satisfies itself that effective systems of risk management are established and maintained kk receives periodic reports from the Group risk management function and assesses whether significant issues of a risk management and control nature are being appropriately addressed by management in a timely manner kk oversees the investment process kk reviews transactions above the pre-defined threshold kk receives updates on the Group’s annual strategic asset allocation, market risk consumption relative to allocated market risk capital and limit and major market risk drivers, accounting investment result, economic investment return relative to liabilities, as well as updates on the performance of asset managers kk assesses the independence and objectivity of the risk management function and reviews the activities, plans, organization and the quality of the risk management and investment management functions kk oversees Zurich’s overall risk management framework and investment process
kk Swiss Solvency Test (SST) internal model approval program kk Operational Risk Framework kk regulatory risk kk risk management aspects of the Group’s remuneration architecture, discussed during the annual joint meeting with the Remuneration Committee kk macroeconomic developments; investment and asset/liability management, market and credit risks and controls including reports on derivatives; and performance of asset managers kk Zurich’s approach on model risk management kk climate change-related risks kk For further information on risk governance, see the risk review on pages 120 to 155
The Risk and Investment Committee meets at least four times per year. In 2017 it met nine times.
Subject to the powers reserved to the Board, the Board has delegated management of the Group to the Group CEO and, under his supervision, to the ExCo and its members. The Group CEO is the highest executive officer in the Group and has responsibility and accountability for the Group’s management and performance. He represents the overall interests of the Group toward third parties to the extent such interests are not represented by the Board. The Group CEO is responsible for developing and implementing the strategic and financial plans approved by the Board. He has specific powers and duties pertaining to strategic, financial and organizational matters and manages, supervises and coordinates the activities of the members of the ExCo and of his other direct reports.
Information and control instruments vis-à-vis the Executive Committee The Board supervises management and monitors its performance through reporting and controlling processes. The Group CEO and other executives provide information and updates through regular reports to the Board. These include reports on key performance indicators and other Group-relevant financial data, existing and emerging risks, and updates on developments in important markets and on industry peers and other significant events. During 2017, the Chairman of the Board regularly met with the Group CEO. He meets from time to time with other ExCo members and management outside regular Board meetings. The other members of the Board do so as well, meeting with the Group CFO and the Group CRO in particular.
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 ExCo 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 ExCo and the Board.
We have restored our position as a leading global underwriter for property and casualty and life business and will continue to focus on profitability, while enhancing capabilities.
Born: Page 68 1 Mike Foley assumed the role of Senior Adviser as of January 1, 2018, and will continue in that position until February 28, 2018. 2 Alison Martin assumed the role as Group Chief Risk Officer as of January 1, 2018. 3 Cecilia Reyes assumed the role of Senior Adviser as of January 1, 2018, and will continue in that position until February 28, 2018. 4 Kathleen Savio assumed the role of CEO North America as of January 1, 2018.
Key tasks and responsibilities: The GBSC acts as a cross-functional advisory body for matters that could materially affect the balance sheets of Zurich and/or the Group as a whole. The committee issues recommendations to the Group CEO. Core topics are: kk capital management on capital allocations and lending and borrowing decisions kk balance sheet planning on liquidity, solvency, investment and asset/liability management strategies and associated capital allocation, including changes to investment strategy kk business development matters on corporate transactions with third parties, internal restructuring, investments, including real estate, and entry into new types of business and markets kk material Group reinsurance strategy and reinsurance programs kk other topics and matters that may have a material impact on the balance sheet of the Group as determined by the chairman
The GRC reviews and recommends topics such as: kk the overall Group risk appetite, risk tolerance and risk limits, including exceptions to limits over specified thresholds kk requests to enter new lines of insurance business or types of insurance coverage that would have a significant impact on the risk profile of the Group kk changes to the Group Policy Framework and the Zurich Risk Policy (ZRP)
The Group Pensions Committee, chaired by the CEO EMEA, is responsible for developing, reviewing and advising on the Group governance framework in matters related to retirement benefit arrangements and post-employment benefits, including the relevant policies and processes. It provides oversight and guidance on the Group’s retirement benefit arrangements and post-retirement benefits in matters of benefit design, funding, investment and accounting and provides recommendations to the GBSC on material pension-related matters.
Panels To enhance its understanding and assessment of the challenges and risks Zurich may face, the Group continues to seek external expertise and perspectives. As of December 31, 2017, the Group had access to one panel of leading academics and experts from business and industry which provided feedback and insights. Panels are not corporate bodies of the Group and have no decision-making powers. They provide expertise and advice to senior management or certain functions of the Group. The Advisory Council for Catastrophes (formerly Natural Catastrophe Advisory Council) provides insights into the patterns of occurrence, predictability and destructiveness of catastrophes and gives feedback about Zurich’s approach to such catastrophes to help improve the effectiveness of its underwriting and reinsurance purchasing.
Skills and experience Mario Greco has broad experience in the insurance industry, having served in senior executive positions for more than 20 years. He joined Zurich in March 2016 as Group Chief Executive Officer and member of the Executive Committee.
External appointments Mr. Greco is a board member of The Geneva Association and a member of the board of trustees of the Lucerne Festival.
External appointments Mr. Dailey is a member of The Institutes Board of Trustees and serves on the advisory board of Team Rubicon, a disaster relief organization that brings together military veterans, first responders, medical professionals and technology experts.
Skills and experience Mike Foley joined the financial management training program of Armtek Corporation in 1984. After graduating from J.L. Kellogg Graduate School of Management in 1989, Mr. Foley joined the Deerpath Group in Lake Forest, Illinois. 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 and casualty insurance practice. He joined Zurich in 2006 as Chief Operating Officer of its North America Commercial business division. In January 2008 he became CEO of that division, a role he held until the end of 2017, and a member of the Executive Committee. In January 2018 he assumed the role of Senior Adviser, and will continue in that position until February 28, 2018. Mr. Foley was Chairman of the Board of Zurich Holding Company of America, Inc. until end of 2017.
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 Group 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 2005. In March 2007 he became Swiss Re Group’s CFO. Mr. Quinn joined Zurich in May 2014 as Group CFO and is a member of the Executive Committee.
External appointments Ms. Reyes has been a member of the advisory board of the Department of Banking and Finance at the University of Zurich since 2011. In 2014 she became a member of the Board of Governors of the Asian Institute of Management. In March 2017 she was accepted as a member of the Board of Trustees of the Global Association of Risk Professionals.
Skills and experience Kathleen Savio has more than 25 years of experience working across several disciplines at Zurich. She became a member of the Executive Committee in October 2017 upon her appointment to the position of Chief Executive Officer-Designate for Zurich North America. Ms. Savio assumed the role of Chief Executive Officer for that business in January 2018. From 2012 through 2017, she served as the Head of Alternative Markets for Zurich North America, which delivers products and services to customers through multiple distribution channels, including direct, program administrators, crop agents, captive consultants and brokers. Prior to that appointment she held the position of Chief Administrative Officer for North America Commercial. Before assuming that role, she led Corporate and Marketing Communications for North America Commercial, as well as Strategic Initiatives for Marketing and Distribution. She also has held roles in product underwriting and corporate marketing and within key business units. She joined Zurich in 1991.
Skills and experience James Shea began his insurance career at AIG in 1994 as a financial lines underwriter in New York. He joined the American International Underwriters (AIU) division in 1996, where he held several senior underwriting and general management positions. These included senior vice president of International Financial Lines, regional president for Central Europe and the Commonwealth of Independent States and managing director of AIG UK. In 2011 he was appointed president of Global Specialty Lines and in 2012 his role was expanded to CEO of Commercial Insurance for AIG in Asia Pacific. Most recently he was President of Global Financial Lines based in New York. During his career, he has worked in Canada, the U.S., UK, France, Japan and Singapore. Mr. Shea joined Zurich in September 2016 as CEO Commercial Insurance and as a member of the Executive Committee effective October 2016.
Educational background Mr. Shea holds a bachelor’s degree in political science from McGill University, Canada.
Voting rights restrictions and representation Each share entered into the share register entitles the holder to one vote. There are no voting rights restrictions.
In accordance with the Ordinance AEC and reflected in article 13 of our Articles of Association, authority of representation may also be given to the independent voting rights representative. The AGM elects the independent voting rights representative. The term of office ends with the conclusion of the next AGM. The independent voting rights representative may be re-elected. The shareholders may give voting instructions to the independent voting rights representative either in writing or via the online platform of Computershare Switzerland Ltd.
Zurich Insurance Group Ltd may under certain circumstances authorize the beneficial owners of shares that are held by professional persons as nominees (such as a trust company, bank, professional asset manager, clearing organization, investment fund or another entity recognized by Zurich Insurance Group Ltd) to attend shareholders’ meetings and exercise votes as proxy of the relevant nominee. For further details, see page 42 of this report.
For addresses see information on page 304 and further upcoming important dates, see investor section starting on page 28 (financial calendar on page 29).
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 24 of the Annual Report.
In some countries, the Group has established broad-based employee share compensation and incentive plans to encourage employees to become shareholders of the Group.
1st line: Business Management The first line of defense consists of business management and all functions except Group Risk Management, Group Compliance and Group Audit. The first line takes risks and is responsible for day-to-day risk management (i.e. risks are identified and monitored, mitigation actions are implemented and internal controls are in place and operating effectively).
Group Risk Management is responsible for Zurich’s enterprise risk management framework. The Group Chief Risk Officer regularly reports risk matters to the Group CEO, senior management committees and the Risk and Investment Committee of the Board.
PwC assumes all auditing functions which are required by law and by the Articles of Association of Zurich Insurance Group Ltd. The external auditors are appointed by the shareholders of Zurich Insurance Group Ltd annually. At the Annual General Meeting on March 29, 2017, PwC was re-elected by the shareholders of Zurich Insurance Group Ltd. The Board proposes that PwC be re-elected at the Annual General Meeting on April 4, 2018 as external auditors for the business year 2018. PwC fulfills all necessary requirements under the Swiss Federal Act on the Admission and Oversight of Auditors and has been admitted as a registered auditing company by the Federal Audit Oversight Authority.
The Group will rotate its external auditor in 2021. The tender process for the rotation will occur in 2018 to allow the greatest amount of flexibility and time for a smooth transition to the selected audit firm. The Group will run a competitive, transparent and fair tender process and will actively engage with the Audit Committee throughout.
Non-audit fees Total fees (including expenses and value added taxes) in the year 2017 for additional services, such as tax advice and internal control 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 8.9 million (USD 9.3 million in 2016).
The Group has a comprehensive policy covering non audit services. The Group’s policy specifies definitions of allowable and non-allowable non audit services as well as approval limits for non-audit service mandates at the local and Group level. The Group’s external auditor tracks non audit services and reports semi-annually to the Head of Group FAR and the Audit Committee the extent of non-audit services provided world-wide. The amount of non-audit services is also disclosed in the annual report.
The Audit Committee assesses the independence of Group Audit and reviews its activities, plans and organization, the quality of its work and its cooperation with the external auditors. As required by the Institute of Internal Auditors (IIA) International Standards, the Internal Audit function is quality-reviewed at least every five years by an independent qualified assessor. This review was conducted most recently in 2016. The results confirmed that Group Audit’s practices conform to all IIA Standards.
The Group is committed to complying with applicable legal, regulatory and internal requirements, professional and industry standards. Accordingly, the Group’s core values are founded on the principle that it acts lawfully and seeks to do what is right. The Compliance function is a control function responsible for: kk delivering compliance solutions by providing expertise regarding the management and maintenance of policies, practical guidance, training, and controls and processes relating to compliance risks kk providing assurance, as part of the second line of defense, to management that compliance risks within the scope of the function are appropriately identified and managed kk assisting management to promote the ethics-based foundation of Zurich’s corporate culture
This operationalization of the compliance framework relies on regular global compliance risk and assurance assessments which support the compliance function’s risk-based strategic and annual planning conducted in consultation with business partners as well as its monitoring activities. The risk and assurance assessment is presented annually to the Audit Committee. Through a comprehensive program, the compliance function implements, embeds and monitors internal compliance policies and guidelines. As part of that program, compliance officers introduce new employees to applicable rules and are involved in the integration of newly-acquired companies. To help employees understand their responsibilities under Zurich’s code of conduct and internal compliance policies, all employees receive yearly ethical and compliance training. In addition, each year all Zurich employees confirm their understanding of, and compliance with Zurich’s code of conduct and internal policies.
For information regarding the Group’s risk management and internal control framework, see the Risk review of this Annual Report 2017 on pages 120 to 155. The Group no longer separately describes risk management and internal control information in this governance report.
“We continue to evolve our remuneration architecture to support the execution of our strategy, with a focus on financial targets, customers and people.” Christoph Franz Chairman of the Remuneration Committee
Dear Shareholder Thank you for your support at the Annual General Meeting (AGM) held in 2017 where we outlined proposed changes, predominantly focusing on our short-term incentive plan (STIP) architecture, to align to the strategic direction communicated in 2016. During the past year we implemented these changes, resulting in a simpler STIP architecture, with funding predominantly based on the business operating profit (BOP) across the Group. We continue to review Zurich’s remuneration approach and appreciate your input and support.
Details on the payments under STIP and the LTIP vesting level are set out in this remuneration report.
The aggregate amount of variable remuneration for 2017 for the entire Group is determined based on the Group’s longterm economic performance and resulted in USD 669 million (compared to USD 691 million in 2016).
Achievements in 2017 During 2017 we implemented the changes to align the STIP architecture with the organizational structure and ensure consistency in the funding metrics of the STIP pools. In addition, the cash remittance performance metric for LTIP vesting was recalibrated to align with the Group’s financial targets. We continued to refine our approach in terms of supporting Zurich’s strategic goals and are proposing additional enhancements to STIP. These are covered in more detail in the outlook section of the remuneration report.
AGM 2018 Finally, I would like to thank shareholders and other stakeholders for their input and engagement, especially at the Corporate Governance Roadshows held during 2017. I welcome all shareholders’ feedback on this report.
Details on the binding remuneration votes of the Board of Directors (Board) and of the Executive Committee (ExCo) are included in the 2018 Board of Directors Report of Zurich Insurance Group Ltd (Board of Directors Report), which accompanies the invitation to the AGM 2018 (www.zurich.com/en/ investor-relations/shareholder-area/annualgeneral -meeting).
This summary provides an overview of the 2017 remuneration of Zurich Insurance Group Ltd and its affiliates (Group or Zurich), including details regarding the link between business performance and variable pay decisions for 2017.
2017 remuneration in light of business results Expenditure on remuneration is considered in the context of Zurich‘s overall revenues, capital base and profitability. As can be seen from the metrics in the following table, relative to Zurich’s overall revenues and shareholders’ equity, expenditure on variable remuneration remains relatively small, also in relation to the amount of dividends payable to shareholders. The key financial figures reflect data for 2017 and 2016, and show that the total variable remuneration pool in 2017 is slightly lower compared to 2016.
Key financial figures in USD millions, for the years ended December 31 2017 2016
Gross written premiums and fees 1 52,005 53,482 Underlying business operating profit 2 4,762 4,530 Business operating profit (BOP) 3,803 4,530 Net income attributable to shareholders (NIAS) 3,004 3,211 Shareholders’ equity 33,062 30,660 Return on common shareholders’ equity (ROE) 10.9% 11.8% Dividends paid to shareholders 3 2,639 2,643 Total variable remuneration pool for all employees gross before tax 669 691 – as a percentage of gross written premiums and fees 1% 1% – as a percentage of shareholders’ equity 2% 2% – as a percentage of dividends paid to shareholders 25% 26%
Context The key factors driving individual awards for 2017 are primarily: 106% 109% kk Group BOP for members of the Leadership Team, control functions and Group and regional employees. kk The relevant BOP metrics for countries, business units and Commercial Insurance. kk Investment results for Investment Management.
Context The key factors driving the vesting level in 2018 are: 83% 121% kk The Group’s relative TSR against an international peer group of insurance companies kk NIAS ROE kk Cash remittance
Context In determining the amount of the total variable remuneration pool for all employees, the Board considers the long-term economic performance of the Group as well as other relevant factors. The average economic profit is calculated by subtracting the required return on economic capital, based on the weighted average cost of capital, from the adjusted BOP 2 after tax. In this respect, the Group has continued to generate economic profit over the long-term which exceeds the actual expenditure on variable pay.
kk The total amount of severance payments 2 committed in 2017, regardless of when the payments are due.
For 2017, the remuneration amounts were as follows: Remuneration amounts in USD millions, for the years ended December 31 Base salary/
5 Actual, gross and for cash amounts based on the accrual principle. 6 Includes the remuneration for members of the ExCo. The ’other remuneration’ of all employees also includes Sign-on and Severance Payments committed in cash and/or in shares for comparison reasons.
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 not paid to members of the Board or the ExCo.
kk Key risk takers: Continued review of the process and criteria for identifying key risk takers. The number of key risk taker roles remained fairly stable in 2017. The process and criteria for identifying key risk taker roles will continue to be reviewed. A risk-based assessment of performance for this population will be carried out again for 2018 and remuneration of the key risk takers continues to be monitored with a greater emphasis toward long-term, therefore deferred, remuneration.
kk Articles 14 – 16 of the Ordinance Against Excessive Compensation (AEC) (replacing the information in the notes to the consolidated financial statements according to Article 663bbis of the Swiss Code of Obligations).
kk 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 as amended on June 1, 2012, December 3, 2015 and September 22, 2016, as well as further guidance issued on January 19, 2011 (FINMA Circular on Remuneration Schemes).
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) and the information subject to audit is marked in the respective sections of the remuneration report.
Zurich Insurance Group Annual Report 2017 Group overview Governance Risk review Financial review www.zurich.com/en/investor-relations/our-shares/articles-of-association
Guiding principles of the remuneration philosophy The guiding principles of the remuneration philosophy as set out in Zurich’s Remuneration Rules are as follows: kk The remuneration architecture is simple, transparent and can be put into practice.
kk The structure and level of total remuneration are aligned with the Group’s risk policies and risk-taking capacity.
kk Expected performance is clearly defined through a structured system of performance management and this is used as the basis for remuneration decisions.
kk Variable remuneration awards are linked to key performance factors which include the performance of the Group, countries, business units, functions, as well as individual achievements.
kk Employees are provided with a range of benefits based on local market practices, taking into account the Group’s risk capacity on pension funding and investments.
Remuneration governance framework The Board is responsible for the design and implementation of Zurich’s remuneration principles and remuneration rules (together Zurich’s Remuneration Rules). To support the Board in performing these duties, the Board has established a Remuneration Committee. Under the Ordinance AEC and as reflected in the Articles of Association, the members of the Remuneration Committee are elected individually at the AGM. Their term of office ends with the conclusion of the next AGM with re-election being possible. The Remuneration Committee consists of at least three members of the Board, all of whom are experienced in the area of remuneration. As of the AGM in 2017 there continued to be four members in the Committee. The Remuneration Committee evaluates the remuneration architecture and Zurich’s Remuneration Rules on an annual basis, and if appropriate, proposes amendments to the Board.
The remuneration approval framework is set out as follows: Approval framework
Zurich’s Remuneration Rules Remuneration Committee Board Remuneration report Remuneration Committee Board and consultative, non-binding vote by the shareholders. Remuneration payable to Directors (including Chairman and Vice-Chairman)
Vesting levels under the LTIP Remuneration Committee based on proposals by the Group CEO taking into account a risk assessment by Group Risk Management.
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 Group CEO, the Group CEO is not present. Where decisions are made on the individual remuneration of other members of the ExCo, those members are also not present at the meetings. See page 57 in the corporate governance report for further details on the Remuneration Committee’s responsibilities.
Group Risk Management, together with other control and assurance functions, provide 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.
kk Group CEO: vested awards at the level of five times the base salary.
kk Other members of the ExCo: vested awards at the level of two-and-a-half times the base salary.
As of December 31, 2017, Directors held 47,012 shares and members of the ExCo held 114,495 vested shares. At the end of 2017, all Directors and all members of the ExCo, who have served at least five years on the Board or the ExCo respectively, met the required share ownership level.
LTIP Total number of unvested target shares 1 1,506,385 1,614,185 – as percentage of share capital based on the registered shares 0.99% 1.07% Total number of vested but unexercised options 2 n.a. 172,978 – as percentage of share capital based on the registered shares n.a. 0.11%
1 Given the vesting level of 83 percent for the share allocations vesting in 2018 and assuming 100 percent vesting in 2019 and 2020. For 2016 the figure represents vesting of 121 percent in 2017 and assumed 100 percent vesting in 2018 and 2019.
Discretionary incentive awards to reward achievement of key financial and individual objectives during the year.
Duration n.a. 1 year. 3 – 6 years (target shares subject to three-year cliff vesting and one-half of the vested shares are sales-restricted for an additional three years).
kk Financial criteria for determining the funding of each pool is now focused primarily on the achievement of BOP goals.
Further information on the STIP and LTIP are set out below.
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 on the achievement of key short-term financial and individual objectives set at the beginning of the year. The final individual STIP award is determined by the target STIP award (STIP target), financial performance, the resulting STIP award levels and individual performance as set out in the following illustration.
The STIP pool architecture is reviewed and approved by the Board annually and is aligned with the organizational structure of Zurich.
Financial performance The financial measures to fund the pools typically include: kk Group BOP for members of the Leadership Team, control functions and Group and regional employees.
kk The relevant BOP metrics for countries, business units and Commercial Insurance.
STIP award levels The financial performance defines the funding available for each STIP pool and also the resulting range of potential STIP awards for varying levels of individual performance. For example, if the financial performance meets expectations then the award for an individual that successfully achieves his or her individual objectives, will be in line with their STIP target . If the financial performance only partially meets expectations however, then the STIP award for an individual who successfully achieves his or her individual objectives will be lower than target and can potentially be 0 percent of their STIP target. Similarly, if financial performance is above expectations, than an award for an individual can also be above target, but is capped at 200 percent of an individual’s STIP target.
Individual performance At the beginning of the year each individual, jointly with his or her line manager, defines and agrees annual objectives. The individual performance achievements are then assessed during and at the end of the year through the Group’s performance management process. This process utilizes a rating scale between 1 and 5, with 5 being the highest rating. There is a distribution and payout guideline for each of the ratings. Any violations of internal or external rules or requirements by an individual are taken into account in the individual performance assessment and subsequent rating.
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 of participants with the interests of the Group and its shareholders. To further support this purpose, the individual hedging of any shares of Zurich Insurance Group Ltd is prohibited.
The vesting level is calculated according to an assessment of the performance criteria in the vesting grid during the three-year performance period. For the NIAS ROE and cash remittance metrics, linear interpolation is used. Each performance criteria has an equal weighting. The vesting level is applied to all LTIP participants and defines the percentage of target shares that will vest.
Allocations are made in the form of target shares. Target shares vest according to the calculated vesting level three years after they were allocated.
Relative TSR position 13th – 18th 10th – 12th 7th – 9th 4th – 6th 1st – 3rd
Cash remittance < USD 8.5 bn USD 8.5 bn USD 9.5 bn USD 10.0 bn ≥ USD 10.5 bn
The performance criteria for the period 2017 to 2019 comprise: (i) The position of the TSR compared with an international peer group of insurance companies derived from the Dow Jones Insurance Titans 30 Index. The Remuneration Committee reviews the peer companies to be included in the relative TSR assessment regularly to ensure that the peer group exhibits a strong TSR correlation and reflects the Group’s business profile and geographic spread. The resulting industry peer group includes the following companies: AIG, Allianz, Allstate, Aviva, AXA, Chubb, Generali, Legal & General, Manulife Financial Corp., MetLife, Munich Re, Progressive Ohio, Prudential Plc, QBE, Swiss Re, The Hartford and Travelers Cos. Inc.
The cash remittance goals were recalibrated with an increase of USD 0.5 billion as shown in the vesting grid on the previous page. This is relevant for the performance period 2017 to 2019, vesting in 2020. For the vesting decisions in 2018 and 2019 from previous plan allocations, the vesting grid outlined in the remuneration report for 2015 and 2016 is relevant.
Vesting level The vesting level defines the percentage of target shares that will vest. The target shares will not vest if all three performance criteria do not meet their respective minimum thresholds.
Exceptional individual adjustments The right to modify awards to reflect individual circumstances is reserved for the Group CEO except for modifications regarding members of the ExCo where this right is reserved for the Remuneration Committee and the Board. An adjustment of +/–25 percent to the calculated final vesting level may be applied on an individual level prior to vesting. However, if performance under exceptional or unusual circumstances warrants it, exceptions to the +/–25 percent adjustment 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.
The final vesting level, which may include exceptional individual adjustments, is then used to assess the number of shares for vesting.
Half of any vested shares are sales-restricted for a further three-year period following the date of vesting. This takes the overall vesting and sales-restriction period to a six-year holding period for this part of the award.
Vesting level as percentage of target in 1 Prior to 2014, the LTIP allocation vested in three equal tranches across three years following the year of allocation. 2 With effect from January 1, 2014, the Board approved the transition to three-year cliff vesting. To transition to three-year cliff vesting, the 2014 LTIP allocation vested one-third after two years (2016), and two-thirds after three years (2017). Accordingly, the calculated average for the allocation made in 2014 is based on a weighted average of the vesting levels in 2016 and 2017, at one-third and two-thirds respectively.
3 For the 2016 and 2017 allocations, the vesting level will be known in 2019 and 2020 respectively.
The total aggregate fees allocated to the Directors of Zurich and Zurich Insurance Company Ltd for the calendar year ended December 31, 2017, amounted to CHF 4,832,000. This included CHF 2,802,000 in cash and a value at the allocation date of CHF 2,030,000 in five-year sales-restricted shares. The share price at the allocation date was CHF 285.90. The corresponding amount for 2016 was CHF 4,607,500, which comprised CHF 2,697,500 in cash and a value at the allocation date of CHF 1,910,000 in five-year sales-restricted shares. The share price at the allocation date in 2016 was CHF 222.90. The Directors’ fees are not pensionable.
The following tables set out the actual fees paid to the Directors for 2017 and 2016 in Swiss francs. In 2017, ten members served for the full year and one member served for part of the year. In 2016, eight members served for the full year and five members served for part of the year.
As disclosed in the Directors’ fees 2017 table, Tom de Swaan received a farewell present to the value of CHF 27,000 recognizing the Chairman’s service and outstanding contribution to Zurich. None of the Directors received any additional honoraria or any remuneration or benefits-in-kind from the Group or from any of the Group’s companies other than what is set out above.
Remuneration and personal loans for former Directors No benefits (or waiver of claims) or loans have been provided to former Directors during the year 2017 at conditions which are not at arm’s length, nor were any provided during the year 2016.
Number of Zurich Insurance Group Ltd shares 1 as of December 31 Ownership of shares
To assist with decisions regarding the remuneration of the ExCo, the Board conducts benchmarking studies on a regular basis. The remuneration structures and practices of a selected industry peer group of relevant companies in the Dow Jones Insurance Titans 30 Index, are analyzed. This index is comprised of the largest insurance companies throughout the world, predominantly in Europe and in the U.S.
The total remuneration of the members of the ExCo for 2017 comprised the value of base salaries, short-term cash incentives, the target share allocations made under the LTIP in 2017, pensions and other remuneration including employee benefits.
The distribution of the individual elements making up the total remuneration of the ExCo in 2017, is set out in the following chart and is based on the target values for the performance-related remuneration.
ExCo2 1 At target, as a percentage of total remuneration. 2 Including the Group CEO.
For members of the ExCo the STIP target percentages for 2017 vary between 90 and 100 percent of the base salary. The maximum STIP award for all members of the ExCo is 200 percent of the individual target amount. Further information regarding STIP is set out on the next page.
Value of target share allocations made during the year (under LTIP)
In 2017, each member of the ExCo received an annual allocation of target shares under the LTIP for the three-year performance cycle 2017 – 2019. For members of the ExCo the LTIP target percentages in 2017 varied between 90 percent and 225 percent of base salary. As in previous years, the allocations of target shares for 2017 were based on the closing share price from the second working day in April, i.e. on April 4, 2017. The value of target share allocations does not include dividend equivalent target shares. The maximum vesting level, to be assessed in 2020, is 200 percent of the target number of shares allocated.
The total number of target shares allocated in 2017 to members of the ExCo was 63,341 which reflects a value of USD 16.7 million on the second working day in April. This is based on the assumption of 100 percent vesting in 2020, a share price of CHF 263.80 (2016: CHF 203.20) and an exchange rate of CHF 1 = USD 0.99815. This compares with 81,146 target shares allocated in 2016 and a respective value of USD 17.2 million for the allocations made in 2016.
The total value of pension benefits accruing to members of the ExCo during 2017, calculated on the basis of the service costs for the company as assessed under IAS 19 accounting principles, was USD 3.2 million (compared to USD 3.5 million in 2016). Service costs value the amount of the pension benefits accruing during the year and for defined contribution plans take the amount of the company contribution paid during the year.
With regard to assessing performance, reviews are conducted during and at the end of the year. At year-end, each member of the ExCo conducts a self-assessment of their performance achievements in relation to the targets set for the year. Group Risk Management, together with other control and assurance functions, provide risk and compliance information to be considered as part of the ExCo members’ individual performance assessment. A year-end discussion is subsequently conducted between each member of the ExCo and the Group CEO. In a rigorous process, the Group CEO and the Remuneration Committee review the individual performance achievements of each member of the ExCo in relation to the targets set for the year, taking into account behavior and risk aspects.
For the ExCo, including the Group CEO, the key financial metric for determining the award structure in 2017 is the Group’s BOP performance during the year. In evaluating the Group BOP performance, a qualitative assessment of the overall achievement is carried out. The underlying BOP was USD 4.8 billion reflecting a 6 percent increase compared with 2016. There was an improvement in underwriting, cost savings of USD 700 million were achieved and service offerings expanded, while growing premiums and improving customer retention levels. For 2016, the Group’s NIAS result was used as the key financial metric to determine the funding level for the members of the ExCo.
As a result of the funding, and of the assessment of the performance achievements by the Remuneration Committee and the Group CEO, individual STIP awards for each member of the ExCo are determined and approved by the Board.
Replacement Payments for members of the ExCo appointed in 2017 In extraordinary circumstances payments may be made to new hires to replace forfeitures under the incentive plans of the previous employer. In these circumstances, the payments mirror the type and timing of the forfeited payments and can include cash payments and/or awards of restricted or performance shares. Where payments are made in cash, there is typically a clawback period if the employee leaves the company voluntarily during the first two years of employment. Restricted share allocations typically vest over three to five years following the date of allocation and are forfeited if the holder of such share allocations leaves the company voluntarily before the vesting date and the employment relationship terminates.
Replacement Payments were made to the new members of the ExCo who took up their employment with the Group during 2017. The overall value of Replacement Payments for 2017 is USD 3.8 million at the relevant exchange rates throughout the year and at the year-end rate for payments in 2018 and later. They comprise payments in cash over a four-year period from 2018 to 2021 and restricted share allocations that vest over a three-year period from 2018 to 2020. In 2016 the overall value of Replacement Payments made was USD 8.1 million.
Summary of total remuneration (excluding Replacement Payments) in 2017 The following table shows that the total remuneration of the members of the ExCo, comprising base salaries, cash incentive awards earned for the year, the value of target share allocations in 2017 (to be assessed for vesting in 2020), pensions, and the value of other remuneration including employee benefits, amounted to USD 47.1 million. The amount of total remuneration increased compared to USD 44.9 million in 2016, due largely to the higher number of ExCo members in 2017. Below the total amounts, the values of any one-time remuneration awards and the amounts of contractually agreed remuneration after stepping down from the ExCo and during the notice period are disclosed.
in USD millions, for the years ended December 31 2017 1, 2 2016 1, 3
Other payments and share allocations 7 3.8 10.1 Contractually agreed remuneration after stepping down and during notice period in the respective year 8 1.1 3.7 1 The remuneration shown in the table is gross, based on the accrual principle, for the time employees are members of the ExCo during the year and does not include any business-related expenses incurred in the performance of the members’ services.
USD 2.1 million in 2017 and USD 1.2 million in 2016. Since the contributions are based on full earnings, whereas benefits are capped, there is no direct correlation between the costs paid to the social security system and the benefits received by the executives.
6 The amounts have been translated from USD to CHF at the relevant exchange rates throughout the year and the cash incentive to be paid in 2018 has been translated at the year-end rate in 2017.
Based on these figures, the value of the total remuneration for all members of the ExCo comprises 34 percent (33 percent in 2016) in fixed remuneration (comprising base salaries, service costs for pension benefits and other remuneration including employee benefits) and 66 percent (67 percent in 2016) in performance-related elements (comprising the cash incentive awards under the STIP and the value of the target share allocations under the LTIP). The emphasis within variable remuneration lies on the deferred part, with 54 percent represented by target performance shares under the LTIP and 46 percent as cash incentive awards under the STIP.
Highest paid executive, Mario Greco for full-year in 2017 and pro rata in 2016 (started on March 7, 2016)
in CHF millions, for the years ended December 31 2017 1 2016 1
Other payments and share allocations 3 0.0 4.2 1 The remuneration shown in the table is gross, based on the accrual principle and does not include any business-related expenses incurred in the performance of the Group CEO’s services.
3 Other payments and share allocations are extraordinary and were made in 2016 to compensate incentive plan forfeitures with previous employer. Included in the amount of CHF 4.2 million is a value of CHF 4.0 million which was allocated as additional target performance shares in the 2016 – 2018 LTIP, to be assessed for vesting in 2019.
As of December 31, 2017 and 2016, there were no loans, advances or credits outstanding for members of the ExCo.
Related parties to members or former members of the ExCo No benefits (or waiver of claims) have been provided to related parties of members of the ExCo or related parties of former members of the ExCo during the years 2017 and 2016. No party related to members of the ExCo or former members of the ExCo had outstanding loans, advances or credits as of December 31, 2017 and 2016.
Target share allocations under LTIP including transition arrangements and restricted share allocations As of December 31, 2017, the total number of unvested target share allocations under LTIP was 202,749 (148,322 as of December 31, 2016). Further, the total number of unvested target share allocations under the LTIP transition arrangement was 2,547 (9,627 in 2016) and the number of unvested restricted shares was 15,719 in 2017 (20,103 in 2016).
The actual level of vesting is determined in accordance with the remuneration principles and vesting criteria set out in this report.
Audited Share and share option holdings of members of the ExCo The following table sets out the actual share and share option holdings of each member of the ExCo as of December 31, 2017 and 2016. 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. The table does not however, include the share interests of the members of the ExCo that are currently unvested target shares or unvested restricted shares.
Number of shares and vested share options, as of December 31 2017 2016
M. Greco, Group CEO 4 2,000 n.a. – – U. Angehrn, Group Chief Investment Officer 6,117 n.a. 3,811 6,272 J. Dailey, CEO of Farmers Group, Inc. 10,211 n.a. 7,216 9,231 C. Dill, CEO Latin America 4 12,509 n.a. 10,258 – M. Foley, CEO North America 14,824 n.a. 12,188 23,601 J. Howell, CEO Asia Pacific 4 2,316 n.a. – – A. Martin, Group Chief Risk Officer-Designate 3 – n.a. n.a. n.a. G. Quinn, Group Chief Financial Officer 24,598 n.a. 12,855 – C. Reyes, Group Chief Risk Officer 11,182 n.a. 15,421 – K. Savio, CEO North America-Designate 3 4,028 n.a. n.a. n.a. G. Shaughnessy, CEO EMEA 4 9,540 n.a. 8,259 – J. Shea, CEO Commercial Insurance 4 – n.a. – – K. Terryn, Group Chief Operating Officer 4 17,170 n.a. 8,778 8,781 1 None of the members of the ExCo, together with parties related to them, held more than 0.5 percent of the voting rights as at December 31, 2017 or 2016, either directly or through share options.
2 The distribution of vested options according to the allocations identified in the table Summary of unexercised options. There are no further outstanding shares under option as of December 31, 2017.
Trading plans To facilitate the sale of shares and the exercise of options for members of the ExCo, the Board approved the implementation of trading plans under a predefined 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 an ExCo member is reported to the SIX Swiss Exchange according to the rules on disclosure of management transactions. As of December 31, 2017, there were no trading plans in place. Further, no trading plans were entered into in 2017 or 2016.
Remuneration of all employees Please refer to the remuneration framework section on page 87 for the key elements of remuneration and the benchmarking approach for all employees. Note that the benchmarking analysis is mainly carried out and approved at the local level. The Group had 51,633 full-time equivalent employees as of December 31, 2017 (52,473 in 2016).
Total remuneration for all employees in USD millions, for the years ended December 31 2017 2016
Variable remuneration Cash incentive awards earned for the year 3 533 542 Value of target share allocations made in the year 4 136 148
Total remuneration 5,286 5,490 1 Includes employee benefits like health and dental insurance and other fringe benefits. 2 This represents the present value of the defined benefits from pension and post-retirement benefits plans, plus employers’ contributions to defined contribution plans, arising from employee service over the accounting period. The amount included in this figure for defined benefit plans is calculated using actuarial factors and can vary year on year as economic conditions change. These numbers are explained in greater detail in note 20 of the consolidated financial statements.
The value of the deferred remuneration has been determined by multiplying the number of outstanding shares by the relevant share price at the original date of allocation and reflects the assumption of a future vesting level of 100 percent.
Impact on net income in 2017 and 2016 from remuneration made in prior years Under the LTIP, the vesting level is used to determine the actual number of shares to be awarded to participants relative to the target shares initially allocated. Differences in value between the target shares allocated and the actual shares vesting is reflected in the consolidated income statement in the year of vesting in line with the accounting principles. For the 2015 and 2016 plans with shares vesting in 2018 and 2019 respectively, there was a reduction of USD 20 million in the expense recognized in the 2017 income statement to reflect actual performance compared to original estimates. In 2016, there was no adjustment to the expense recognized in the income statement to reflect the actual amounts.
kk Severance Payments 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. Zurich does include garden leave or similar payments however, that go beyond recognized market practice, irrespective of whether these are provided pursuant to an agreement or are ex gratia. Severance Payments are not paid to members of the Board or the ExCo.
Sign-on and Severance Payments for key risk takers in USD millions, for the years ended December 31 2017 2016
Sign-on Payments/number of beneficiaries 7.0 6 11.2 6 Severance Payments/number of beneficiaries – – 0.4 1
Zurich’s remuneration architecture is reviewed regularly to ensure compliance with legal and regulatory requirements, to support the achievement of strategic objectives and to align with risk considerations. To further support the customer-led transformation, specifically the approach of listening to and learning from customers by using the Net Promoter Score (NPS), refinements are proposed to the remuneration architecture for 2018. The key aspects are set out below: kk STIP pool funding metrics: Inclusion of quantitative customer metrics in selected major markets to assess the overall business performance and to determine the resulting STIP pool funding and award levels in those markets. Customer metrics using the Transactional Net Promoter Score (TNPS), will be assessed in addition to the existing financial measures and the overall qualitative assessment of the results, to determine the STIP pool funding in these selected markets and also at the Group level.
kk Performance management: The way performance is managed at Zurich has been refreshed for 2018 taking employee feedback into account. Employee performance and development have been brought together into one integrated process with more regular feedback conversations and objective categories in line with Zurich’s purpose, values and strategic direction.
Opinion In our opinion, the remuneration report of Zurich Insurance Group Ltd for the year ended December 31, 2017 complies with Swiss law and articles 14 –16 of the Ordinance.
Mark Humphreys Nicolas Juillerat Audit expert Audit expert Auditor in charge
I have inherited strong risk management practices, as evidenced by our strong capitalization and Standard and Poor’s very strong rating for Enterprise Risk Management. We have a solid and proven foundation of quantitative and qualitative risk assessments, policies, and risk governance.
Economic risk profile The Group’s Z-ECM ratio has increased from 125 percent as of January 1, 2017 to 134 percent as of July 1, 2017. Year-end 2017 estimate is 132 percent (with an error margin of +/– 5 percentage points). The increase was driven mainly by positive financial market performance and economic profit generation.
External and internal challenges Our risk landscape is as complex and varied as ever, and we know that risks emerge and develop over time. The Group uses our Total Risk Profiling ™ process to evaluate internal and external risks, both those that are market-wide and those idiosyncratic to Zurich. In deciding how to respond, we take into account the time horizon for risks to potentially materialize, as well as what we can control and what we cannot.
Of the near-to mid-term risks we have identified, I highlight two risks that have strong technology elements and that reflect the rapidly changing environment in which we operate in. The first is the external risk posed by changes in customer expectations, and the corollary internal risk to our ability to engage and provide service to our customers at the desired level. The second is information security and cyber risk.
Financial condition tested under stressed perspective We use sensitivity and scenario analyses to assess the potential impact of conditions under stress.
In this report, we present Zurich Economic Capital Model (Z-ECM) ratio sensitivity analysis to seven market- and credit-risk scenarios, and three natural catastrophe scenarios. The Z-ECM ratio remains within the ‘AA’ range for one scenario, and above for the rest. These stress scenarios demonstrate the Group’s capital strength and resilience.
Insurance risk The Group diversifies its sources of revenue by geography, line of business, product and customer, and therefore is not exposed to concentrations of insurance risk beyond our risk appetite.
Operational risk The Group uses a scenario-based approach to quantify the capital required for operational risk. The top three risk-scenario clusters relate to regulatory compliance, business conduct and M&A transactions.
January 1, 2015 July 1, 2015 January 1, 2016 July 1, 2016 January 1, 2017 July 1, 2017
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 risk updates. In 2017, reporting was enhanced with in-depth risk insights into ongoing topics such as information security and cyber risk; insurance market trends; the potential adverse impact that accelerating inflation and expectations about inflation could have on reserves; and the potential effects on Zurich of such topical issues as the Brexit negotiations and geopolitical developments in Asia and Latin America.
This ‘audited’ symbol indicates that the information contained within the shaded panel is audited and forms an integral part of the consolidated financial statements.
The Group’s risk appetite statement includes capital, liquidity, earnings volatility and non-financial metrics. The Group regularly measures and quantifies material risks to which it is exposed. Zurich’s policy is to maintain capital consistent with an ‘AA’ financial strength rating for the Group. The Group translates that goal into a quantified risk tolerance. The primary metric used to steer business is the Zurich Economic Capital Model (Z-ECM). The Z-ECM provides a key input into the Group’s strategic planning process as an assessment between the Group’s risk profile and the Group’s risk tolerance. The Z-ECM forms the basis for optimizing the Group’s risk-return profile by providing consistent risk measurement across the Group.
No action required as within stated objective and equivalent to ‘AA’ rating 90–100% Position may be tolerated for a certain length of time depending on the risk environment 120–140% Consider increased risk taking or remedial actions >140% Z-ECM ratio indicating over capitalization, requiring implementation of mitigating actions
Leads the Group Risk Management function, which develops frameworks and processes for identifying, measuring, managing and reporting risks throughout the Group. The Group CRO has direct access to the Board of Directors.
The Group has committees covering oversight activities that encompass major business areas. The committees review certain risk management matters for their respective areas. At the local level, these oversight activities are conducted through risk and control committees.
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 imposed by its economic framework, rating agencies and regulators. As of December 31, 2017, shareholder’s equity of USD 33.1 billion, subordinated debts of USD 6.9 billion and senior financial debts not maturing within the next year of USD 2.9 billion were 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).
The Swiss Code of Obligations stipulates that dividends may only be paid out of freely distributable reserves or retained earnings. Apart from what is specified by the Swiss Code of Obligations, Zurich Insurance Group Ltd faces no legal restrictions on dividends it may pay to its shareholders. As of December 31, 2017, the amount of the general legal reserve exceeded 20 times the paid-in share capital. The ability of the Group’s subsidiaries to pay dividends may be restricted or indirectly influenced by minimum capital and solvency requirements imposed by insurance and other regulators in the countries in which the subsidiaries operate. Other limitations or considerations include foreign exchange control restrictions in some countries, and rating agencies’ methodologies.
At the Group level, Zurich compares Z-ECM capital required to the Z-ECM available financial resources (Z-ECM AFR) to derive an Economic Solvency Ratio (Z-ECM ratio). Z-ECM AFR reflects financial resources available to cover policyholder liabilities in excess of their expected value. It is derived by adjusting the IFRS shareholders’ equity to reflect the full economic capital base available to policyholders to absorb any unexpected volatility in the Group’s business activities.
The chart below shows the development of the Group’s Z-ECM AFR, Z-ECM capital required and Z-ECM ratio over time. As of December 31, 2017, the Z-ECM ratio was estimated at 132%, with an error margin of +/– 5 percentage points.
The chart below shows the Z-ECM capital required, split by risk type as of July 1, 2017 and as of January 1, 2017. As of July 1, 2017, the largest proportion of Z-ECM capital required arose from market risk which comprised 50 percent of the total. Capital required for premium and reserve risk was the second-largest, comprising 23 percent.
129 Zurich Insurance Group Annual Report 2017 Group overview Governance Risk review Financial review
The Group has interactive relationships with three global rating agencies: Standard & Poor’s, Moody’s, and AM 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.
As of December 31, 2017, the IFSR of Zurich Insurance Company Ltd (ZIC), the main operating entity of the Group, was ‘AA–/Stable’ by Standard and Poor’s, ‘Aa3/Stable’ by Moody’s, and ‘A+ (Superior)/Stable’ by A.M. Best.
Regulatory requirements in Switzerland Under the Swiss Solvency Test (SST), insurance companies and insurance groups can apply to use company-specific internal models to calculate risk-bearing and target capital, as well as the SST ratio. The SST ratio has to be calculated as per January 1 and must be submitted to the Swiss Financial Market Supervisory Authority (FINMA). Zurich filed with FINMA an SST ratio of 227% (unaudited) as of January 1, 2017.
Property and casualty insurance risk Property and casualty risk comprises premium and reserve risk, catastrophe risk, and business risk. Premium and reserve risk covers uncertainties in the frequency of the occurrence of the insured events as well as in the severity of the resulting claims. Business risk for property and casualty predominantly relates to unexpected increases in the expenses relating to claims handling, underwriting, and administration. The following provides an overview of the Group’s main lines of business: kk Motor includes automobile physical damage, loss of the insured vehicle and automobile third-party liability insurance.
kk Liability includes general/public and product liability, excess and umbrella liability, professional liability including medical malpractice, and errors and omissions liability.
Zurich Insurance Group Annual Report 2017 Group overview Governance Risk review Financial review133
The Group’s underwriting strategy takes advantage of the diversification of property and casualty risks across lines of business and geographic regions. Zurich’s underwriting governance is applicable throughout the Group.
Underwriting discipline is a fundamental part of managing insurance risk. The Group sets limits on underwriting capacity, and delegates authority to individuals based on their specific expertise. The Group sets appropriate underwriting and pricing guidelines, which are monitored regularly. Technical reviews confirm whether underwriters perform within authorities and adhere to underwriting philosophies and policies. The Group has governance procedures to review and approve potential new products, in order to evaluate whether the risks are well understood and justified by the potential rewards.
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 management to identify, assess and recommend actions for such risks.
Property & Casualty – Direct written premiums and policy fees by line of business – current period in USD millions, for the year ended December 31, 2017 Motor Property Liability
Property & Casualty – Direct written premiums and policy fees by line of business – prior period in USD millions, for the year ended December 31, 2016 Motor Property Liability
Analysis of sensitivities for Property & Casualty risks 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 the non-linear effects of reinsurance contracts.
Insurance risk sensitivity for the Property & Casualty business – current period in USD millions, for the year ended December 31, 2017
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Life insurance risk The risks associated with life insurance include: Life liability risk kk Mortality risk – when on average, the death incidence among the policyholders is higher than expected kk Longevity risk – when on average, annuitants live longer than expected kk 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
Business risk kk 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 kk Expense risk – expenses incurred in acquiring and administering policies are higher than expected kk New business risk – volumes of new business are insufficient to cover fixed acquisition expenses kk 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 kk 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 life business.
Other life insurance liabilities include traditional life insurance products, such as protection and life annuity products. Protection products carry mortality, longevity and morbidity risk, as well as market and credit risk. Epidemics and lifestyle changes are among the most significant factors that could result in earlier or more claims than expected. Disability, defined in terms of the ability to perform an occupation, could be affected by adverse economic conditions. To reduce pricing cross-subsidies, where permitted, premiums are adjusted for factors such as age, gender and smoker status. Policy terms and conditions and disclosure requirements in insurance applications are designed to mitigate the risk arising from non-standard and unpredictable risks that could result in severe financial loss.
The Group defines concentration risk in the life business as the risk of exposure to increased losses associated with inadequately diversified portfolios of assets or obligations. Concentration risk for a life insurer may arise with respect to investments in a geographical area, economic sector, or individual issuers, or due to a concentration of business written within a geographical area, of a policy type, or of underlying risks covered.
2 The Other businesses are defined in note 27 of the consolidated financial statements.
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To have a consistent approach and form a global perspective on accumulations, the Group models property and casualty 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 the U.S. in California, the Pacific Northwest and New Madrid Seismic Zone. 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, 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 Advisory Council for Catastrophes, 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. Furthermore, Zurich is a Governor Sponsor of the Global Earthquake Model (GEM) Foundation, a shareholder of PERILS AG, and a member of the Risk Prediction Initiative (RPI) and the Oasis Loss Modeling Framework. Zurich validates modeling results by comparing them with claims experience.
The Group models the impact from cyber scenarios. In 2017, a cyber risk expert was newly appointed as a member of the Advisory Council for Catastrophes.
The Group structures and aligns its external reinsurance protection to its capital position to achieve an optimum risk-return ratio. This includes a participation in the underlying risks through self-retentions. The Group manages its central reinsurance purchasing according to these principles. The cession rate for Property & Casualty was 19.7 percent and 21.2 percent as of December 31, 2017 and December 31, 2016, respectively. The cession rate for Life was 8.0 percent and 4.7 percent as of December 31, 2017 and December 31, 2016, respectively. The increased Life reinsurance cession is predominantly due to transferring the Bansabadell Vida Life portfolio reinsurance to an external reinsurer.
The Group participates in the underlying risks through its retention and through its co-participation in excess layers. The contracts are on a loss-occurrence basis except the Global Aggregate Catastrophe cover, which operates on an annual aggregate basis. The current catastrophe covers are placed annually with the exception of the USD 750 million Global Catastrophe treaty, which is a three-year treaty expiring in 2019. In addition to these covers, the Group has some local catastrophe covers, a bilateral risk swap, and various lines of business-specific risk treaties in place. These covers are reviewed continuously and are subject to change going forward.
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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: kk Equity market prices kk Real estate market prices kk Interest-rate risk kk Credit and swap spread changes kk Defaults of issuers kk Currency exchange rates
Risk assessment reviews include the analysis of the management of interest-rate risk for each major maturity bucket and adherence to the aggregate positions with risk limits. The Group applies processes to manage market risks and to analyze market risk hotspots. Actions to mitigate risk are taken if necessary to manage fluctuations affecting asset/liability mismatch and risk-based capital.
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Returns on unit-linked contracts, whether classified as insurance or investment contracts, are at the risk of the policyholder; however, the Group is exposed to fluctuations in interest rates and credit spreads in so far as they affect the amount of fee income earned if the fee income level is dependent on the valuation of the asset base.
In addition to the sensitivities, management uses stress scenarios to assess the impact of more severe market movements on the Group’s financial condition. For more information on stress scenarios, see ‘Group economic net asset sensitivities ‘(unaudited), below.
The basis of presentation for the Life business to financial market movements uses replicating portfolios. The replicating portfolios are portfolios of assets that replicate the cash flows or present values of the life insurance liabilities under stochastic scenarios from the embedded value models. They are calibrated to match dependencies of life insurance liabilities on developments in the financial markets, in respect of interest rates, equity and property. The options and guarantees of the underlying life insurance liabilities are captured through the inclusion of options in the replicating portfolios The methodology for embedded value models was enhanced during 2017 to allow for negative interest rates. This caused a change in interest rate sensitivities for the Life business; see table 4.
The sensitivities for 2016 reflect the new basis of presentation (net impact before tax) and include the latest liability information available for that time.
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Analysis of economic sensitivities for interest-rate risk Table 4 shows the estimated impacts of a 100 basis point increase/decrease in yield curves after consideration of hedges in place, as of December 31, 2017 and 2016.
Analysis of economic sensitivities for credit spread risk Table 6 shows the estimated impacts from a 100 basis points increase in corporate credit spreads, as of December 31, 2017 and 2016. The sensitivities apply to all fixed income instruments, excluding government, supranational and similar debt securities. For Life business the loss absorbing capacity of liabilities for losses on credit spreads are not included as they are not modelled in the replicating portfolios.
Table 7 shows the credit risk exposure of debt securities, by issuer credit rating. As of December 31, 2017, 95.4 percent of the Group’s debt securities was investment grade and 25.2 percent was rated ‘AAA’. As of December 31, 2016, 95.5 percent of debt securities was investment grade and 20.3 percent was rated ‘AAA’. The shift in portfolio exposure from AA to AAA largely reflects the outcome of a review of the ratings assigned to U.S. agency mortgagebacked -securities, which moved assets from AA+ to AAA.
The risk-weighted average issuer credit rating of the Group’s debt securities portfolio is ‘A–’ in 2017, compared with ‘BBB+’ in 2016.
As of December 31, 2017, the largest concentration in the Group’s debt securities portfolio was in governments, supranationals and similar at 47.6 percent. In all other categories, a total of USD 31.7 billion (40.8 percent) was secured. As of December 31, 2016, 47.5 percent of the Group’s debt portfolio was invested in governments, supranationals and similar. In all other categories, a total of USD 31.3 billion (42.5 percent) was secured.
The Group’s debt exposure to eurozone governments and supranationals and similar in USD millions, as of December 31 2017 2016
Rest of eurozone 680 742 Eurozone supranationals and similar 1,639 1,388
In addition to debt exposure, the Group had loan exposure of USD 4.9 billion and USD 4.3 billion to the German Central Government or the German Federal States as of December 31, 2017 and 2016, respectively. For more information, see the ‘mortgage loans and other loans section.
Cash and cash equivalents amounted to USD 8.2 billion as of December 31, 2017 and USD 7.2 billion as of December 31, 2016. The risk-weighted average rating of the overall cash portfolio is ‘A–’ as of December 31, 2017 and December 31, 2016. 74 percent of the total was with the 10 largest global banks, whose risk-weighted average rating is ‘A’ as of December 31, 2017 and December 31, 2016.
Mortgage loans and other loans The Group’s largest mortgage loan portfolios are held in Germany (USD 2.6 billion) and in Switzerland (USD 3.6 billion); these are predominantly secured against residential property but also include mortgages secured by commercial property. The Group invests in mortgages in the U.S. (USD 0.6 billion); these are mainly participations in large mortgage loans secured against commercial property.
To limit credit risk, derivative financial instruments are typically executed with counterparties rated ‘A–‘ or better by an external rating agency, unless collateral is provided as per Zurich’s risk policy manuals. The Group’s standard practice is to only transact derivatives with those counterparties for which the Group has in place an ISDA Master Agreement, with a Credit Support Annex. This mitigates credit exposures from over-the-counter transactions due to close-out netting and requires the counterparty to post collateral when the derivative position exceeds an agreed threshold. The Group further mitigates credit exposures from derivative transactions by using exchange-traded instruments whenever possible.
Risk from currency exchange rates Currency risk is the risk of loss resulting from changes in exchange rates. The Group operates internationally and therefore is exposed to the financial impact of changes in the exchange rates of various currencies. The Group’s presentation currency is the U.S. dollar, but its assets, liabilities, income and expenses are denominated in many currencies, with significant amounts in the euro, Swiss franc and British pound, as well as the U.S. dollar. On local balance sheets a currency mismatch may cause a balance sheet’s net asset value to fluctuate, either through income or directly through equity. The Group manages this risk by matching foreign currency positions on local balance sheets within prescribed limits. Residual local mismatches are reported centrally to make use of the netting effect across the Group. Zurich hedges these residual local mismatches within an established limit through a central balance sheet. For information on net gains/losses on foreign currency transactions included in the consolidated income statements, see note 1 of the consolidated financial statements. The monetary currency risk exposure on local balance sheets is considered immaterial.
Table 9 shows the total IFRS equity’s sensitivity to changes in exchange rates for the main functional currencies to which the Group is exposed. Positive values represent an increase in the value of the Group’s total equity. See notes 1, 3 and 7 of the consolidated financial statements for additional information on foreign currency translation and transactions.
Sensitivity of the Group’s total IFRS equity to exchange rate fluctuations in USD millions, as of December 31 2017 2016 10% increase in EUR/USD rate 467 515 GBP/USD rate 245 208 CHF/USD rate 447 457 BRL/USD rate 147 139 Other currencies/USD rates 645 546
The Group regularly tests and analyzes credit risk scenarios and prepares possible contingency measures that may be implemented if the credit risk environment worsens.
Credit risk concentration The Group has counterparty limits, which are regularly monitored. Exposure to counterparties’ parent companies and subsidiaries is aggregated to include reinsurance assets, investments, derivatives, and for the largest counterparties, certain insurance products. There was no unapproved material exposure in excess of the Group’s limits for counterparty aggregation as of December 31, 2017 or December 31, 2016.
On-balance sheet exposures are the main source of credit risk. Off-balance sheet credit exposures are related primarily to certain insurance products, reinsurance and 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 16 million and USD 7 million as of December 31, 2017 and 2016, respectively. See note 22 of the consolidated financial statements for undrawn loan commitments.
Reinsurance assets in table 10 are shown before taking into account collateral such as cash or bank letters of credit and deposits received under ceded reinsurance contracts. Unsecured reinsurance assets shown are after deducting collateral. Except for an immaterial amount, letters of credit are from banks rated ‘A–’ or better. Compared with December 31, 2016, collateral increased by USD 1.0 billion to USD 9.4 billion.
Reinsurance assets and unsecured reinsurance assets by rating of reinsurer and captive as of December 31 2017 2016
Rating 1 The value of the collateral received amounts to USD 9.4 billion and USD 8.4 billion as of December 31, 2017 and 2016, respectively.
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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: kk 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.
Zurich mitigates and responds to cyber risks and threats to data security. Data held by Zurich’s business partners are protected through contractual arrangements and controls that are built into ‘cloud governance’ procedures designed to secure Zurich’s data in accordance with regulatory requirements and the Group’s information security policies.
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Risk management and internal controls The Group considers controls to be key instruments for managing operational risk. The Board has overall responsibility for the Group’s risk management and internal control frameworks, in particular for their adequacy and integrity. The Group’s internal control system increases the reliability of Zurich’s financial reporting, makes operations more effective, and aims to ensure legal and regulatory compliance. The internal controls system is designed to mitigate rather than eliminate the material risk that business objectives might not be met. It provides reasonable assurance against material financial misstatements or operational losses.
The Group’s Disclosure Committee, chaired by the Head of Group Financial Accounting and Reporting, assesses the content, accuracy and integrity of the disclosures and the effectiveness of the internal controls over financial reporting. The conclusions result in a recommendation to the Group Chief Financial Officer to release the financial disclosures to the Audit Committee of the Board, which may challenge further. The Board reviews and approves results announcements and the annual report. This ensures that both the Board and management have sufficient opportunity to review and challenge the Group’s financial statements and other significant disclosures before they are made public.
Liquidity risk is the risk that the Group may not have sufficient liquid financial resources to meet its obligations when they fall due, or would have to incur excessive costs to do so. Zurich’s policy is to maintain adequate liquidity and contingent liquidity to meet its liquidity needs under normal conditions and in times of stress. To achieve this, the Group assesses, monitors and manages its liquidity needs on an ongoing basis.
Group-wide liquidity management policies and specific guidelines govern how local businesses plan, manage and report their local liquidity and include regular stress tests for all major carriers within the Group. The stress tests use a standardized set of internally defined stress events, and are designed to provide an overview of the potential drain on liquidity if the Group had to recapitalize local balance sheets. Similar guidelines apply at the Group level, and detailed liquidity forecasts are regularly conducted, based on local businesses’ input and the Group’s forecasts. As part of its liquidity management, the Group maintains sufficient cash and cash equivalents and high-quality, liquid investment portfolios to meet outflows under expected and stressed conditions. The Group also maintains internal liquidity sources that cover the Group’s potential liquidity needs, including those that might arise in times of stress. The Group takes into account the amount, availability and speed at which these sources can be accessed. The Group has access to diverse funding sources to cover contingencies, including asset sales, external debt issuance and making use of committed borrowing facilities or letters of credit. The Group maintains a range of maturities for external debt securities. A potential source of liquidity risk is the effect of a downgrade of the Group’s credit rating. This could affect the Group’s commitments and guarantees, potentially increasing liquidity needs. This risk, and mitigating actions that might be employed, are assessed on an ongoing basis within the Group’s liquidity framework.
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Zurich based its analysis on two scenarios to represent an archetypical transition pathway and a physical risk pathway, and applied a scorecard approach to assess the relative likelihood of the two scenarios, and their progression along pathways over time. The two scenarios are not mutually exclusive as transition risks and physical risks coexist, but Zurich’s initial assessment shows that a physical risk pathway currently is significantly more likely than a transition pathway.
The Group analyzed the effect of climate-change risk on its major risk types: kk Underwriting risks: • Physical risks: Generally, annual policy renewals provide a degree of insulation against increasing physical risks for short-tail business. Initial analysis suggests that property, motor and crop lines of business are potentially most at risk from climate change, with rainfall, cyclone and hail as the driving perils. While standard industry natural catastrophe models are regularly updated and designed to reflect today’s risk, including climate change, potential gaps are addressed as part of Zurich’s model validation process and the ‘Zurich View’ approach, leveraging both internal and external expertise. For long-tail business, legal liability represents the most significant potential risk from climate change. However, based on Zurich’s current assessment, this and related risks are not material at this time, although climate change-related legal action could become more frequent going forward.
kk Operational risks: Given the low-carbon nature of Zurich’s business, continuous progress on energy and carbon reduction targets, Zurich’s voluntary carbon offsetting scheme, and strong local disaster and recovery planning in place for all facilities, Zurich does not consider operational risks related to climate change to be material.
In addition, the Group is integrating climate and sustainability risk assessments into its standard enterprise risk management framework and tools to consistently identify risks and create mitigating actions over time. For more information about Zurich’s assessment of climate risk, see www.zurich.com/en/knowledge/articles/2017/11/ me-topic-navigating-climate-change. For more information about TCFD disclosures, including Zurich’s governance, strategy, and metrics, see www.zurich.com/en/corporate-responsibility/climate-change/tcfd.
“Overall, the results show strong progress across all areas of the business and, together with improved efficiency, position the Group well to deliver further earnings growth and to take advantage of an improved market environment.” George Quinn Group Chief Financial Officer
For Zurich, 2017 was another year of progress, with the Group growing operating earnings 1 while continuing to improve its focus. Reflecting this performance, and management’s expectations of further improvement in 2018, the Board will propose a CHF 18 per share dividend for 2017.
Executing on key strategic priorities 2017 showed a strong underlying performance, with BOP up 6 percent versus the prior year after adjusting for the impact of the hurricanes Harvey, Irma and Maria, the impact of charges related to the Group’s restructuring taken through business operating profits and the impact of the change to the UK capital gains tax indexation relief announced in the 2017 budget.
The company underpinned its position as one of the top three global providers of travel services with the acquisitions of Cover-More Group Limited and Halo Insurance Limited.
The Group continued to execute against its expense targets, with cumulative net savings of USD 700 million achieved to date, on track to deliver USD 1.5 billion of savings by 2019.
Progress made across all businesses P&C results show management actions taking hold. Top-line growth has stabilized over the year, with a return to growth in the second half, while the accident year combined ratio excluding catastrophes reduced by around one percentage point, driven by an improved underwriting performance and reduced expenses. The Group expects to deliver further improvement in the underwriting results, as the focus on technical performance and the reshaping of the portfolio continues to have a positive effect, in particular in the commercial insurance business.
The Farmers Exchanges 3 have continued to show steady growth, while also improving their underwriting performance and key customer metrics. Growth in the Farmers Exchanges has also continued to drive top-line growth in Farmers Management Services, while Farmers Life has reflected the broader positive trends within the Group’s life businesses with solid earnings growth combined with expanding margins for new business.
George Quinn Group Chief Financial Officer 1 Full-year 2017 adjusted for the impact of the U.S. hurricanes, the change to capital gains tax indexation relief in the UK and the measures related to the Group’s restructuring.
2 Excluding unrealized gains and losses. 3 Zurich Insurance Group has no ownership interest in the Farmers Exchanges. Farmers Group, Inc., a wholly owned subsidiary of the Group, provides certain non-claims administrative and management services to the Farmers Exchanges as its attorney-in-fact and receives fees for its services.
The information contained within the operating and financial review is unaudited and is based on the consolidated results of the Group for the years ended December 31, 2017 and 2016. All amounts are shown in U.S. dollars and rounded to the nearest million unless otherwise stated, with the consequence that the rounded amounts may not always add up to the rounded total. All ratios and variances are calculated using the underlying amounts rather than the rounded amounts. This document should be read in conjunction with the annual results 2017 of the Group and, in particular, with its consolidated financial statements and embedded value report for the year ended December 31, 2017.
Financial highlights in USD millions, for the years ended December 31, unless otherwise stated 2017 2016 Change 1
P&C business operating profit 1,546 2,437 (37%) P&C gross written premiums and policy fees 33,024 33,122 – P&C combined ratio 100.9% 98.1% (2.7 pts)
Farmers business operating profit 1,691 1,722 (2%) Farmers Management Services management fees and other related revenues 2,892 2,867 1% Farmers Management Services managed gross earned premium margin 7.0% 7.0% – Farmers Re gross written premiums and policy fees 995 1,587 (37%) Farmers Life new business annual premium equivalent (APE) 2 91 94 (3%)
Return on common shareholders’ equity (ROE) 7 10.9% 11.8% (0.9 pts) Business operating profit (after tax) return on common shareholders’ equity (BOPAT ROE) 7 9.2% 11.5% (2.2 pts)
Consolidated balance sheets – Assets as of December 31, 2017 (in USD millions)
Consolidated balance sheets – Liabilities and equity as of December 31, 2017 (in USD millions)
Balance sheet review The total assets for the Group increased to USD 422 billion from USD 382 billion in 2016. The increase was mainly driven by foreign exchange movements, whereby net assets predominantly denominated in the British pound and euro strengthened against the U.S. dollar, and market valuation gains on the Groups investment portfolio. The Group entered into agreements to sell certain UK businesses, as a result USD 29 billion of assets (comprising investments for unit-linked contracts) were reclassified as held for sale. The Group’s acquisition of Cover-More added USD 728 million of goodwill and other intangible assets.
The Group’s shareholder equity increased to USD 33 billion from USD 31 billion in 2016. The increase primarily resulted from the Group’s 2017 net income attributable to shareholders of USD 3 billion, and a USD 1.2 billion positive development in cumulative foreign currency translation reserve due to a general weakening of the U.S. dollar against other key currencies where the Group owns subsidiaries. This increase was partially offset by a dividend payment of USD 2.6 billion.
During the year the Group saw net remittances of USD 3.7 bn, a level consistent with the Group’s target for remittances to exceed USD 9.5bn over the 2017 – 2019 period. The level of remittances has been driven both by operational earnings and capital released as a result of the Group’s efforts to extract capital from non-core businesses.
Significant transactions in 2017 The Group continued to drive its strategic objectives of investing to improve the quality of service and experience of our customers and becoming a more agile organization.
Refocusing on its core business, the Group entered into agreements to sell the Endsleigh group of companies and the UK workplace pensions and savings business. The transactions are expected to close in 2018 subject to regulatory approval. As at December 31, 2017 the respective assets and liabilities of these businesses have been classified as held for sale.
The Group also finalized the sale of its property and casualty (P&C) insurance operations in the Middle East and Taiwan.
“Despite the low-yield environment, we have delivered attractive returns to our shareholders and customers, while also increasing our commitment to impact investments.” Urban Angehrn Group Chief Investment Officer
Group Investment Management applies a systematic and structured investment process focused on deploying allocated risk capital and acting as the investor for Zurich. Our disciplined approach has been effective across market cycles.
Overview of investment results The total return on average Group investments of 4.1 percent was relatively stable compared with 2016, despite lower fixed-income returns year-on-year. Net investment income of USD 5.2 billion, included primarily in the core business results, decreased by 5 percent in both U.S. dollar terms and on a local currency basis, mainly as a result of low European bond yields. Net capital gains on investments and impairments included in the net investment result were USD 2 billion, mainly due to sales of equity securities amid strength in equity markets.
Investment income continued to be challenged by re-investment yields remaining at compressed levels. However, rising yields in some bond markets, alongside further net new investments into private debt and real estate, helped preserving investment income and stabilizing it in the second half of 2017.
Our disciplined investment process ensures appropriate risk taking As a long-term investor for Zurich we aim to achieve superior returns relative to Zurich’s insurance obligations through an optimal strategic asset allocation. During 2017 we employed a stable risk allocation, well within the risk limits allocated to investment risk, while directing new investments into less-liquid assets. Total investment risk versus liabilities continued to be well balanced, with equity and credit risk dominating, while unrewarded exposures were minimized.
Investment expertise generates a competitive advantage for Zurich As the investor for Zurich, we provide investment expertise across Zurich’s unit-linked investments and savings products, as well as for our employee pension funds.
Our skilled and diverse investment teams work closely with local businesses, providing investment solutions for retail and group savings products, as well as selected asset management services
Urban Angehrn Group Chief Investment Officer 1 Market value of the investment portfolio (economic view).
Gross written premiums and policy fees 33,024 33,122 – 15,852 15,873 – Net earned premiums and policy fees 26,033 26,102 – 11,007 11,739 (6%) Insurance benefits and losses, net of reinsurance 17,996 17,345 (4%) 9,213 8,427 (9%) Net underwriting result (231) 485 n.m. (1,252) 90 n.m. Net investment result 2,038 1,958 4% 1,271 1,186 7%
Commercial Insurance business operating loss stemmed from catastrophe losses, including the impact of hurricanes in the U.S. during the third quarter of 2017. The result also reflected a lower level of favorable development of loss reserves established in prior years, partly related to higher loss reserve releases in 2016 in Asia Pacific. An increase in non-technical expenses in UK and Venezuela, the latter due to lower foreign exchange gains, was partly offset by hedge fund gains in North America.
The net underwriting result in EMEA decreased by USD 523 million due to higher catastrophe and weather related losses, unfavorable development in loss reserves established in prior years compared to favorable development in prior year, and lower net premium volumes, partly due to higher internal reinsurance cessions. The expense ratio remained broadly flat, with an increase in commissions offset by lower other underwriting expenses. North America decreased by USD 539 million, heavily affected by catastrophe losses in the third quarter of 2017. This was partly offset by an improvement in underlying loss experience, mainly on workers compensation and property lines of business, as well as higher gains on crop business, mostly due to higher retention. Other underwriting expenses also improved, benefiting from initiatives to reduce costs and lower corporate center charges, only partially offset by an increase in commissions due to changes in business mix. Asia Pacific was USD 121 million lower than in 2016, which benefited from higher favorable development of loss reserves established in prior years. The result was also affected by an increase in large losses, partly offset by improved underlying loss experience, mostly in Australia’s property and motor lines of business and Japan. The net underwriting result in Latin America improved by USD 19 million, reflecting higher volumes and improvements in the underlying loss experience, only partly offset by a lower level of favorable development of reserves established in prior years, higher catastrophe losses, and higher commissions and other underwriting expenses.
Total reserves for life insurance contracts, net of reinsurance, and liabilities for investment contracts (net reserves) 3 214,626 203,039 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 on balance sheet Group investments and unit-linked investments plus assets that are managed by third parties, on which fees are earned. 3 As of December 31, 2017 and December 31, 2016, respectively.
Gross written premiums, policy fees and insurance deposits increased by USD 3.9 billion to USD 33.2 billion, or by 13 percent both in U.S. dollar terms and on a local currency basis. Improvements occurred in North America, driven by a large contribution to an existing corporate protection scheme, subsequent to a transfer of that business from the Non-Core segment, and improved corporate savings sales across EMEA. The latter was partly offset by an expected reduction of sales of individual savings products in Spain and Italy. Net policyholder flows of USD 7.7 billion remained flat compared with 2016, substantially reflecting the same factors.
Assets under management increased by 8 percent in U.S. dollar terms, but decreased 1 percent on a local currency basis compared with December 31, 2016. On a local currency basis, favorable market movements and positive net policyholder flows were offset by a reclassification of approximately USD 29 billion to held for sale of assets related to the disposal of the UK workplace pensions and savings business to Lloyds Banking Group (LBG). In U.S. dollar terms, a further improvement stemmed from the impact of the weaker U.S. dollar against the euro and the British pound on investments denominated in those currencies compared with December 31, 2016.
Source of earnings 1 in USD millions, for the years ended December 31 2017 2016 Change
Impact of deferrals 164 240 (31%) Business operating profit 1,258 1,130 11%
Loadings and fees improved by 6 percent both in U.S dollar terms and on a local currency basis. Growth in Asia Pacific, which benefited from the 2016 acquisitions of MAA Takaful Berhad in Malaysia and the retail life insurance protection business of Macquarie Group in Australia, higher volumes in Latin America and a large contribution to an existing corporate protection scheme in North America were the main drivers. These positive factors were partially offset by lower fee revenue in Germany due to a decrease in single premium business volume. Investment margin improved by 18 percent in U.S. dollar terms, and 16 percent on a local currency basis. All segments improved, with the highest contribution from EMEA, where lower policyholder crediting rates in Germany were the main contributor. Technical margin improved by 12 percent in U.S dollar terms and 11 percent on a local currency basis, driven by the growing life insurance protection business in Asia Pacific, predominantly in Australia and Japan, and improved claims experience in North America and Latin America.
Operating and funding costs deteriorated by 5 percent in U.S dollar terms and on a local currency basis. In EMEA savings were achieved despite the negative impact which resulted from the change to UK capital gains tax indexation relief. Higher operating and funding costs in Asia Pacific, largely resulted from growth initiatives and the costs related to integrating the recently acquired businesses. In North America the increase was driven by premium taxes resulting from a large contribution to an existing corporate protection scheme. Acquisition costs increased by 5 percent both in U.S dollar terms and on a local currency basis. The increase on a local currency basis reflected higher volumes of business in Asia Pacific and Latin America. EMEA was broadly flat. The positive contribution from the impact of deferrals decreased by 31 percent in U.S. dollar terms and 30 percent on a local currency basis, mainly in EMEA, driven by an update of expected reinvestment rates, partially offset by the positive effect in North America, where prior year was impacted by the review of expected persistency in certain universal life books of business.
Europe, Middle East & Africa (EMEA) 605 541 3,333 3,238 19.1% 18.3%
APE improved by USD 183 million to USD 4.9 billion, or 4 percent both in U.S. dollar terms and on a local currency basis. On a local currency basis, the largest improvements occurred in North America, driven by a large contribution to an existing corporate protection scheme, subsequent to a transfer of that business from the Non-Core segment, and in EMEA, where higher corporate and unit-linked retail sales were only partly offset by reductions in sales of individual savings products in Spain and Italy. Asia Pacific also improved, reflecting both the impact of the MAA Takaful Berhad acquisition in Malaysia and organic growth. These positive impacts were partly offset by lower new business sales in Latin America, where growth in sales of individual protection products in Zurich Santander Brazil was more than offset by a reduction in the Zurich operations in Chile, where 2016 included the effect of a large corporate contract.
New business value increased by USD 218 million to USD 1 billion, or 28 percent both in U.S. dollar terms and on a local currency basis. On a local currency basis, new business value benefited from higher volumes of new business in EMEA and North America, and an improved product mix in EMEA. In addition, Asia Pacific benefited from a positive change in operating assumption in Japan.
Management fees and other related revenues 2,892 2,867 1% Management and other related expenses 1,503 1,500 – Gross management result 1,389 1,367 2% Managed gross earned premium margin 7.0% 7.0% –
Management fees and other related revenues of USD 2.9 billion increased USD 25 million, or 1 percent, due to growth in gross earned premiums of the Farmers Exchanges. Management and other related expenses of USD 1.5 billion remained flat.
Farmers Re in USD millions, for the years ended December 31 2017 2016 Change
The net underwriting result improved by USD 49 million to a loss of USD 1 million reflected in a 3.2 percentage point improvement in the combined ratio. The loss ratio decreased 3.2 percentage points as a result of an improved underlying loss ratio, favorable development of loss reserves established in prior years and slightly lower impact from catastrophe events. The expense ratio remained flat at 32 percent.
Total reserves for life insurance contracts, net of reinsurance, and liabilities for investment contracts (net reserves) 2 4,679 6,085 (23%)
1 Assets under management comprise on balance sheet Group investments and unit-linked investments plus assets that are managed by third parties, on which fees are earned.
Insurance deposits decreased by USD 2 million to USD 149 million. Gross written premiums and policy fees increased by USD 4 million to USD 877 million.
APE was lower mainly due to lower cross-sell opportunities. NBV increased largely due to improved persistency and mortality, favorable sales mix and lower acquisition expenses, partially offset by lower sales volumes and the negative impact of higher interest rates on certain individual protection business.
in USD millions, for the years ended December 31 2017 2016 Change
Gross written premiums in the Farmers Exchanges increased by USD 194 million to USD 19.9 billion, or by 1 percent. Continuing operations 2 were up 3 percent, with growth across most books of business, driven primarily by rate increases in the auto lines of business.
Gross earned premiums in the Farmers Exchanges increased by USD 312 million to USD 19.8 billion, or by 2 percent.
2 Continuing operations exclude 21st Century outside of California and Hawaii and other discontinued operations.
Holding and Financing business operating loss of USD 450 million improved by USD 100 million or 18 percent in U.S. dollar terms and 18 percent on a local currency basis. The main factors driving the improvement were savings in administration costs and lower financing costs, partly offset by lower foreign exchange gains than in the previous year.
Headquarters recorded a business operating loss of USD 281 million, USD 51 million higher compared to 2016, or 22 percent both in U.S. dollar terms and in local currency. Underlying expense savings were more than offset by lower recharges to business units and a software impairment.
Non-Core Businesses in USD millions, for the years ended December 31 2017 2016 Change
Zurich Legacy Solutions (8) (24) 67% Other run-off 47 9 n.m. Total business operating profit 39 (15) n.m.
Zurich Legacy Solutions, which predominantly comprises P&C run-off portfolios, reported a business operating loss of USD 8 million, an improvement of USD 16 million driven by net reserve releases in run-off portfolios.
Other run-off, which largely comprises U.S. life insurance and annuity portfolios, reported a USD 38 million increase in business operating profit. This arose primarily from the release of long-term reserves as a consequence of in-force management activities in a closed Life book, market value volatility, partly offset by lower releases of long-term reserves compared to prior year.
Consolidated income statements in USD millions, for the years ended December 31 Notes 2017 2016
Policy fees 2,429 2,407 Gross written premiums and policy fees 49,114 50,615
Net investment result on Group investments 6 7,249 7,034 Net investment result on unit-linked investments 11,664 13,613 Net gains/(losses) on divestment of businesses (84) (89) Other income 1,183 1,199 Total revenues 63,961 67,245 Benefits, losses and expenses Insurance benefits and losses, gross of reinsurance 10 34,894 35,123 Less ceded insurance benefits and losses 10 (6,252) (4,682) Insurance benefits and losses, net of reinsurance 10 28,643 30,441 Policyholder dividends and participation in profits, net of reinsurance 10 12,984 14,519 Underwriting and policy acquisition costs, net of reinsurance 10 9,039 8,538 Administrative and other operating expense 12 7,212 7,478 Interest expense on debt 411 423 Interest credited to policyholders and other interest 546 525 Total benefits, losses and expenses 58,835 61,924 Net income before income taxes 5,125 5,321 of which: Attributable to non-controlling interests 459 408 Income tax (expense)/benefit 17 (1,816) (1,843)
attributable to policyholders 17 (171) (304) attributable to shareholders 17 (1,645) (1,539) of which: Attributable to non-controlling interests (154) (140)
Basic earnings per share 19 19.71 21.18 Diluted earnings per share 19 19.58 21.04
Comprehensive income for the period 3,211 254 125 (626) (247) 7 (995) (988) (1,236) 1,975 267 2,242 Details of movements during the period
Assets in USD millions, as of December 31 Notes 2017 2016
Liabilities and equity in USD millions, as of December 31 Notes 2017 2016
Cash flows from operating activities Net income attributable to shareholders 3,004 3,211 Adjustments for: Net (gains)/losses on divestment of businesses 84 89 (Income)/expense from equity method accounted investments (3) (3) Depreciation, amortization and impairments of fixed and intangible assets 936 781 Other non-cash items 519 431
Underwriting activities: 14,760 14,783 Liabilities for insurance contracts, gross 7,599 7,651 Reinsurers’ share of liabilities for insurance contracts (1,543) (977) Liabilities for investment contracts 7,760 9,506 Deferred policy acquisition costs 308 (1,056) Deferred origination costs 15 31 Deposits made under assumed reinsurance contracts 705 (46) Deposits received under ceded reinsurance contracts (83) (326)
Net changes in sale and repurchase agreements 24 (137) Movements in receivables and payables 100 (1,238) Net changes in other operational assets and liabilities (101) (13) Deferred income tax, net (311) 355 Net cash provided by/(used in) operating activities 5,207 1,473
in USD millions, for the years ended December 31 2017 2016
Cash flows from investing activities Additions to tangible and intangible assets (530) (715) Disposals of tangible and intangible assets 29 59 (Acquisitions)/disposals of equity method accounted investments, net 3 (2) Acquisitions of companies, net of cash acquired (578) (826) Divestments of companies, net of cash divested 220 341 Dividends from equity method accounted investments 1 1 Net cash provided by/(used in) investing activities (856) (1,142) Cash flows from financing activities Dividends paid (2,891) (2,768) Issuance of share capital 53 40 Net movement in treasury shares 18 17 Issuance of debt – 3,066 Repayment of debt (1,049) (1,652) Net cash provided by/(used in) financing activities (3,868) (1,296) Foreign currency translation effects on cash and cash equivalents 420 (280) Change in cash and cash equivalents 1 902 (1,245) Cash and cash equivalents as of January 1 7,948 9,193 Cash and cash equivalents as of December 31 8,850 7,948 of which: Group investments 8,228 7,197 of which: Unit-linked 622 751
1 The movement for the year ended December 31, 2017 and 2016, includes USD 102 million and USD 42 million, respectively, of cash and cash equivalents reclassified to assets held for sale, which has been recognized in net changes in other operational assets and liabilities (see note 5).
Cash and cash equivalents in USD millions, as of December 31 2017 2016
Cash and cash equivalents comprise the following: Cash at bank and in hand 7,993 5,511 Cash equivalents 857 2,437 1 Includes cash and cash equivalents for unit-linked contracts of USD 622 million and USD 751 million as of December 31, 2017 and 2016, respectively.
Issuance of share capital – 47 – – – – – 47 – 47
Share-based payment transactions – (15) – – – – 40 25 – 25
Change in ownership interests with no loss of control – – – – – – 3 3 – 3 Total comprehensive income for the period, net of tax – – 254 125 (626) 7 2,216 1,975 267 2,242
Share-based payment transactions – (7) – – – – 5 (2) – (2)
Net income – – – – – – 3,004 3,004 Net unrealized gains/(losses) on available-for-sale investments – – 269 – – – – 269 Cash flow hedges – – – (9) – – – (9) Cumulative foreign currency translation adjustment – – – – 1,211 – – 1,211 Revaluation reserve – – – – – (7) – (7) Net actuarial gains/(losses) on pension plans – – – – – – 341 341
On February 7, 2018, the Board of Directors of Zurich Insurance Group Ltd authorized these consolidated financial statements for issue. These financial statements will be submitted for approval to the Annual General Meeting of Shareholders to be held on April 4, 2018.
Disclosures under IFRS 4 ‘Insurance Contracts’ and IFRS 7 ‘Financial Instruments: Disclosures’ relating to the nature and extent of risks, and capital disclosures under IAS 1 ‘Presentation of Financial Statements’ have been included in the audited sections of the Risk review on pages 123 to 155, and they form an integral part of the consolidated financial statements.
Maturity tables have been provided for the following balances: debt securities (table 6.4), derivative assets and derivative liabilities (tables 7.1 and 7.2), reserves for insurance contracts (tables 8.10a and 8.10b), liabilities for investment contracts (tables 9.3a and 9.3b), other financial liabilities (table 16.2) and outstanding debt (table 18.2).
Table 1.1 summarizes the principal exchange rates used for translation purposes. Net gains/(losses) on foreign currency transactions included in the consolidated income statements were USD 71 million and USD 118 million for the years ended December 31, 2017 and 2016, respectively. Foreign currency exchange forward and swap gains/(losses) included in these amounts were USD (12) million and USD (131) million for the years ended December 31, 2017 and 2016, respectively. For its Venezuela business, the Group had net gains/(losses) on foreign currency transactions of USD 70 million and USD 119 million for the years ended December 31, 2017 and 2016, respectively, and a cumulative foreign currency translation adjustment loss of USD 258 million in equity as of December 31, 2017 (both before non-controlling interest).
Consolidated income statements and cash flows at average exchange rates 12/31/17 12/31/16 12/31/17 12/31/16
Reclassifications Changes in presentation Cash and cash equivalents are shown outside of total investments and income from operating cash and cash equivalents is included in other income (non-technical) and not in investment income any longer. Insurance liability related balances in the total amount of USD 1 billion per December 31, 2016, have been reclassified from receivables and other assets, reserve for premium refunds and other liabilities to liabilities for insurance contracts. In addition, accrued investment income and accrued liabilities were merged with receivables and other assets and other liabilities, respectively. Accrued liabilities have been split into accrued liabilities and other financial liabilities within note 16 according their nature. Prior year comparative figures have been revised accordingly (see note 15 and 16).
Change in the structure of the Group Following the changes to the Group’s management effective July 1, 2016, reportable segments and their composition have been changed in accordance with IFRS 8. Prior year comparative figures have been revised accordingly (see note 27).
Standards, amendments and interpretations effective or early adopted as of January 1, 2017 and relevant for the Group’s operations Table 2.1 shows new accounting standards or amendments to and interpretations of standards relevant to the Group that have been implemented for the financial year beginning January 1, 2017, with no material impact on the Group’s financial position or performance. Amendments resulting from the IASB annual improvements project have no impact on the Group’s financials.
Standards, amendments and interpretations issued that are not yet effective or adopted by the Group Table 2.2 shows new accounting standards or amendments to and interpretations of standards relevant to the Group, which are not yet effective or adopted by the Group.
IFRS 17 ‘Insurance contracts’ and IFRS 9 ‘Financial Instruments’ IFRS 17 ‘Insurance contracts’ was published on May 18, 2017 with the effective date of January 1, 2021 (retrospective application). IFRS 17 provides comprehensive guidance on accounting for insurance contracts and investment contracts with discretionary participation features. For non-life and short-term life insurance contracts IFRS 17 introduces mandatory discounting of loss reserves as well as a risk adjustment for non-financial risk, for which confidence level equivalent disclosure will be required. Further, IFRS 17 will change the presentation of insurance contract revenue, as gross written premium will no longer be presented in profit or loss.
Under IFRS 9, all equity securities and fund investments, and more debt instruments will be measured at fair value through profit or loss because the characteristics of the contractual cash flows from such instruments are not solely payments of principal and interest on the principal amount outstanding. Furthermore, 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. Though overall profit or loss volatility is expected to increase under IFRS 9, the measurement approach for direct participating contracts in IFRS 17 allows such volatility to be largely absorbed in the measurement of insurance liabilities with an option to reflect in shareholders’ equity (OCI) the effect of any asset-liability mismatch.
Significant accounting policies applied in these consolidated financial statements are set out below. These policies have been consistently applied to all years presented unless otherwise stated. Other accounting policies are presented as part of the respective note disclosures.
Premiums Property & Casualty Premiums from the sale of short-duration property & casualty products are generally recorded when written and are normally recognized as revenue in relation to the insurance coverage provided. The unearned premium reserve represents the portion of the premiums written related to the unexpired coverage period.
Property & Casualty DAC for property & casualty contracts is amortized over the period in which the related premiums are earned.
Reinsurance The Group’s insurance subsidiaries cede risk in the normal course of business to limit the potential for losses arising from certain exposures. Reinsurance does not relieve the originating insurer of its liability. Certain Group insurance companies assume reinsurance business as part of their normal business.
Investment contracts at amortized cost Liabilities for investment contracts with fixed and guaranteed terms are measured at amortized cost using the effective interest rate method. Transaction costs are included in the calculation of the effective yield. As of each reporting date, the Group re-estimates the expected future cash flows and re-calculates the carrying amount of the financial liability by computing the present value of estimated future cash flows using the original effective interest rate for the financial liability. Any adjustment is immediately recognized in income.
f) Derivative financial instruments and hedge accounting Derivative financial instruments, except those designated under a qualifying hedge relationship, are classified as held for trading assets or liabilities and carried at fair value on the balance sheet with changes in fair value recognized in income.
All hedge relationships are formally documented, including the risk management objectives and strategy for undertaking the hedge. At inception of a hedge and on an ongoing basis, the hedge relationship is formally assessed to determine whether the hedging instruments are expected to be (prospective assessment) and have been (retrospective assessment) highly effective in offsetting changes in fair values or cash flows of hedged items attributable to the hedged risk. If the qualifying criteria for the application of hedge accounting are no longer met, the hedge relationship is discontinued prospectively, in which case the hedging instrument and the hedged item are then subsequently reported independently in accordance with the respective accounting policy.
The useful lives of computer software licenses and capitalized internal software development costs generally range from three to five years. In limited circumstances, capitalized software development costs may be amortized over a period of up to ten years, taking into account the effects of obsolescence, technology, competition and other economic and legal factors.
j) Other fees and commission income Revenues from investment management and distribution fees are based on contractual fee arrangements applied to assets under management and recognized as earned when the service has been provided. For practical purposes, the Group recognizes these fees on a straight-line basis over the estimated life of the contract.
The time required to learn of and settle claims is an important consideration in establishing the Group’s reserves. Short-tail claims, such as those for automobile and property damage, are normally reported soon after the incident and are generally settled within months. Long-tail claims, such as bodily injury, pollution, asbestos and product liability, can take years to develop and additional time to settle. For these claims, information concerning the event, such as the required medical treatment for bodily injury claims and the required measures to clean up pollution, may not be readily available. Accordingly, the reserving analysis of long-tail lines of business is generally more difficult and subject to greater uncertainties than for short-tail claims.
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.
kk its fair value has been below the weighted-average cost for a prolonged period of 24 consecutive months or longer
For goodwill impairment testing, the recoverable amount is the higher of its fair value less costs to sell and its value-in-use.
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 between the Group’s carrying amounts of assets and liabilities and their tax bases depends on the generation of sufficient taxable profits in the period in which the underlying asset or liability is recovered or settled. If applicable tax law acknowledges different types of expenses to be tax deductible, deferred tax assets are only recognized if they give rise to deductions against the same type of taxable income. 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.
Acquisitions Bright Box On December 22, 2017, the Group announced it has acquired 100 percent of the shares of Bright Box HK Limited (Bright Box) and its subsidiaries, a provider of telematics solutions linking vehicle drivers, dealers and manufacturers.
Table 5.1 shows the main balance sheet line items as of the acquisition date, representing the fair value of Cover-More and Halo net tangible assets acquired, intangible assets and goodwill.
Net assets acquired 581 Non-controlling interests (1) Total acquisition costs 580
Rural Community Insurance Services On March 31, 2016, the Group completed the acquisition of 100 percent of Rural Community Insurance Agency, Inc. (RCIA) and its fully owned subsidiary Rural Community Insurance Company (RCIC) from Wells Fargo & Company (Wells Fargo). RCIA and RCIC are collectively known as Rural Community Insurance Services (RCIS), a provider of agricultural insurance in the U.S. through a federal crop insurance program and other private crop insurance products.
Liabilities for insurance contracts 289 Other liabilities 2,040 Liabilities acquired 2,329
Total acquisition costs 692 1 Includes USD 980 million of balances which have been settled net.
Gross written premiums 1,702 Net income after taxes 122 in USD millions, local statutory information for the twelve months ended December 31, 2016 Total
For the year ended December 31, 2016, the Group incurred transaction-related costs of USD 1 million included in other administrative expenses.
Investment result, gross, for Group investments 5,433 5,607 2,034 1,560 7,467 7,167 (69) (176) Investment expenses for Group investments (218) (134) – – (218) (134) – – Investment result, net, for Group investments 5,215 5,474 2,034 1,560 7,249 7,034 (69) (176)
Equity securities: Fair value through profit or loss 3,597 1.9 3,359 1.8
Investments with a carrying value of USD 6.4 billion and USD 6.8 billion are held to meet local regulatory requirements as of December 31, 2017 and 2016, respectively.
Details of debt securities by category in USD millions, as of December 31 Fair value through profit or loss Available-for-sale Held-to-maturity Total Total
Debt securities: Government and supra-national bonds 2,982 3,041 64,491 60,941 2,109 2,342 69,581 66,325
Mortgage and asset-backed securities 397 487 17,038 16,671 – – 17,434 17,158
Debt securities: Mortgage and asset-backed securities: The analysis in table 6.4 is provided by contractual maturity. Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay certain obligations with or without call or prepayment penalties.
1 Net unrealized gains/(losses) on Group investments include net gains arising on cash flow hedges of USD 398 million and USD 418 million as of December 31, 2017 and 2016, respectively.
Securities lending, repurchase and reverse repurchase agreements in USD millions, as of December 31 2017 2016
4 The Group had the right to sell or repledge, in the absence of default by its counterparties, securities received as collateral with a fair value of nil and USD 845 million as of December 31, 2017 and 2016, respectively.
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 from these securities. 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 did not qualify for hedge accounting as of December 31, 2017 and 2016. While these notional amounts express the extent of the Group’s involvement in derivative transactions, they do not, however, represent the amounts at risk.
In certain circumstances, derivative financial instruments 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.
Fair value hedges: Cash flow hedges: Forex swaps and forwards 772 – – 772 7 – – – –
Gains/(losses) on hedging instruments 1 (38) (4) on hedged items attributable to the hedged risk 30 2 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 2021 and 2026) required for certain life insurance policies. The effective portion of the gains and losses on these swaptions are initially recognized in OCI. Subsequently the gains or losses will be recycled to profit or loss within net investment income on Group investments over the period to December 31, 2036. The gains and losses related to the ineffective portion of these hedges are recognized immediately in income within net capital gains/ (losses) on investments and impairments.
The net change of gains/(losses) deferred in OCI on derivative financial instruments designated as cash flow hedges were USD (36) million and USD 158 million before tax for the years ended December 31, 2017 and 2016, respectively.
The net change of gains/(losses) deferred in OCI were USD 59 million and USD (58) million before tax for the years ended December 31, 2017 and 2016, respectively as a result of a hedge relationship through foreign exchange forwards and swaps.
Group derivative financial instruments subject to enforceable master netting arrangements and collateral agreements in USD millions, as of December 31 Derivative assets Derivative liabilities
Related amounts not offset (71) (142) 69 141 Cash collateral (received)/pledged (758) (720) 69 79 Non-cash collateral (received)/pledged (60) (22) 35 22
8. Liabilities for insurance contracts and reinsurers’ share of liabilities for insurance contracts Table 8.1
3 In July 2017, Bansabadell Vida signed a reinsurance agreement on its individual life risk portfolio which resulted in an initial increase of USD 363 million of ceded future life policyholder benefits.
Undiscounted reserves for losses and loss adjustment expenses 66,715 62,254 (11,092) (9,796) 55,623 52,458 of which: Undiscounted amount of discounted reserves 4,235 3,649 (47) (40) 4,188 3,609
Losses and loss adjustment expenses incurred: Losses and loss adjustment expenses paid: Interest effects of discounted reserves 121 50 (1) – 120 50 1 The 2017 net movement mainly relates to the divestment of operations in Middle East and Taiwan (see note 5). The 2016 net movement of USD (430) million consists of USD 90 million related to the acquisitions of RCIS, Kono Insurance Limited and Zurich Takaful Company Limited and USD (244) million related to the sale of the Group’s insurance operations in Morocco and South Africa. Additionally, USD (147) million are reclassified to assets and liabilities held for sale (see note 5) and USD (128) million relate to a reinsurance agreement which transferred the benefits and risks of some of the Group’s non-core business portfolio to a third party.
For the year ended December 31, 2017, the increase of USD 2.9 billion in the net reserves for losses and loss adjustment expenses is driven by an increase of USD 2.2 billion due to foreign currency translation effects.
Development of insurance losses, net in USD millions, as of December 31 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Cumulative (deficiency)/ redundancy of net reserves 2,823 2,603 2,107 1,018 912 214 438 1,106 326 Cumulative (deficiency)/ redundancy as a percentage of initial net reserves 5.3% 4.7% 3.8% 1.8% 1.6% 0.4% 0.8% 2.1% 0.6%
Cumulative (deficiency)/ redundancy of gross reserves 4,116 4,331 3,437 2,249 2,498 1,233 783 1,238 662 Cumulative (deficiency)/ redundancy as a percentage of initial gross reserves 6.3% 6.4% 5.0% 3.3% 3.6% 1.8% 1.2% 2.0% 1.1%
Development of reserves for losses and loss adjustment expenses for asbestos in USD millions 2017 2016
Fee income and other expenses (3,947) (3,694) 198 151 (3,749) (3,543) Interest and bonuses credited to policyholders 2,136 2,177 (146) (117) 1,990 2,060
1 Farmers New World Life Insurance Company entered into a retrospective reinsurance agreement to transfer the risk of certain annuity portfolios with effect from April 1, 2017, which resulted in an initial increase of USD 362 million of ceded future life policyholder benefits.
2 In July 2017, Bansabadell Vida signed a reinsurance agreement on its individual life risk portfolio which resulted in an initial increase of USD 363 million of ceded future life policyholder benefits.
Future life policyholder benefits are generally calculated by a net premium valuation. In terms of U.S. dollars, the weighted average discount rate used in the calculation of future life policyholder benefits is 2.5 percent and 2.6 percent as of December 31, 2017 and 2016, respectively.
Effect of changes in assumptions for future life policyholder benefits in USD millions, for the years ended December 31 2017 2016
Policyholder contract deposits and other funds gross in USD millions, as of December 31 2017 2016
2 The 2016 net movement of USD 6 million relates to reclassifications to liabilities held for sale (see note 5).
Liabilities for investment contracts in USD millions, as of December 31 2017 2016
Development of liabilities for investment contracts in USD millions 2017 2016
Fee income and other expenses (564) (430) Interest and bonuses credited to policyholders 6,591 8,149 Acquisitions/(divestments) and transfers 1 (29,073) (2,545) Increase/(decrease) recorded in other comprehensive income 5 (12) Foreign currency translation effects 7,823 (8,775) As of December 31 55,627 69,113 1 In 2017, the Group reclassified USD 29 billion of unit-linked investment contracts to liabilities held for sale based on agreements to sell businesses in the UK (see note 5). The 2016 movement relates to the sale of unit-linked Private Banking Solutions business in Luxembourg.
Tables 9.3a and 9.3b provide an analysis of investment contract liabilities according to maturity, based on expected cash flows as of December 31, 2017 and 2016. The undiscounted contractual cash flows for investment contract liabilities are USD 56 billion and USD 69 billion as of December 31, 2017 and 2016, respectively. Liabilities for unit-linked investment contracts amounted to USD 45 billion and USD 60 billion as of December 31, 2017 and 2016, respectively. Policyholders of unit-linked investment contracts can generally surrender their contracts at any time, leading the underlying assets to be liquidated, risks arising from liquidation of unit-linked assets are borne by the policyholders. Certain non-unit-linked contracts also allow for surrender of the contract by the policyholder at any time. Liabilities for such contracts amounted to USD 558 million and USD 633 million as of December 31, 2017 and 2016, respectively. The Group actively manages the Life in-force business to improve persistency and retention.
Change in policyholder contract deposits and other funds 1,202 856 Change in reserves for unit-linked products 5,331 5,776 Change in liabilities for investment contracts – unit-linked 6,428 7,930 Change in liabilities for investment contracts – other 175 230 Change in unit-linked liabilities related to UK capital gains tax (150) (273) Total policyholder dividends and participation in profits 12,984 14,519
Foreign currency translation effects 49 (50) As of December 31 460 426
1 Included within commissions and other underwriting and acquisition expenses (see table 10.3). 2 Included within losses and loss adjustment expenses (see table 10.1). 3 Excludes expenses arising from investment property within investment expenses for Group investments (see table 6.1).
Gross carrying value as of January 1, 2017 168 427 378 313 727 2,013
Net carrying value as of January 1, 2017 162 251 154 67 319 953
Gross carrying value as of December 31, 2017 155 415 380 326 740 2,017 1 Includes USD 1 million related to the sale of businesses in Taiwan and USD 10 million re-measurement losses related to assets held for sale (see note 5).
Gross carrying value as of December 31, 2016 168 427 378 313 727 2,013 1 Includes USD 24 million related to the sale of businesses in South Africa and Morocco and USD 24 million reclassification to assets held for sale (see note 5).
Net carrying value as of January 1, 2017 1,025 1,795 504 2,713 1,450 128 7,615
Amortization charged to other comprehensive income – – 14 – – – 14
As a result of the acquisition of Cover-More intangible assets increased by USD 728 million of which USD 566 million related to goodwill and USD 163 million to distribution agreements, software and other intangible assets (see note 5).
Net carrying value as of January 1, 2016 1,025 1,289 466 2,752 1,505 43 7,080
For the year ended December 31, 2016, divestments and transfers include a USD 7 million reclassification to assets held for sale and re-measurements of goodwill and distribution agreements for Zurich Insurance Middle East of USD 33 million and USD 3 million, respectively (see note 5).
Group Functions and Operations – – – – 99 – 99
Receivables and other assets in USD millions, as of December 31 2017 2016
Financial assets Group derivative assets 903 968 Unit-linked derivative assets 19 26 Receivables from policyholders 3,281 3,139 Receivables from insurance companies, agents and intermediaries 5,665 4,860 Receivables arising from ceded reinsurance 1,179 1,432 Reverse repurchase agreements 153 970 Amounts due from investment brokers 847 562 Other receivables 2,312 2,053 Allowance for impairments 1 (258) (230) Accrued premiums 845 826 Accrued investment income 2 1,695 1,653 Assets for defined benefit plans 3 201 – Other financial assets 187 154 Non-financial assets Current income tax receivables 505 640 Prepaid expenses 350 432 Other non-financial assets 313 270 Total receivables and other assets 18,195 17,755 1 Includes receivables arising from ceded reinsurance of USD 41 million and USD 30 million as of December 31, 2017 and 2016, respectively. 2 Accrued investment income on the unit-linked investments amounts to USD 107 million and USD 91 million as of December 31, 2017 and 2016, respectively. 3 See note 20
Maturity schedule – other financial liabilities in USD millions, as of December 31 2017 2016
During the year ended December 31, 2016, the Group incurred total restructuring costs of USD 377 million, of which USD 314 million was due to net increases in restructuring provisions, affecting mainly Property & Casualty in North America and Europe, Middle East & Africa.
Income tax expense – current/deferred split in USD millions, for the years, ended December 31 2017 2016
Gross deferred tax Deferred acquisition and origination costs 52 (659) 38 (1,017) Depreciable and amortizable assets 39 (55) 25 (63) Life policyholders’ benefits and deposits 1 – (3) 1 (2) Unrealized (gains)/losses on available-for-sale investments and cash flow hedges 38 (179) 93 (277) Accruals and deferred income 96 (22) 197 (8) Reserves for losses and loss adjustment expenses 210 (238) 449 (229) Reserves for unearned premiums 691 – 1,057 (24) Pensions and other employee benefits 644 (62) 696 (48)
As of January 1 (3,114) (3,042) Net change recognized in the income statement 311 (355) Net change recognized in equity (245) 208 Net changes due to acquisitions/(divestments) (60) (12) Foreign currency translation effects (173) 87 As of December 31 (3,281) (3,114)
Development of deferred income taxes included in equity in USD millions 2017 2016
As of January 1 313 149 Net unrealized gains/(losses) on available-for-sale investments 132 (38) Cash flow hedges 14 (23) Revaluation reserve – (2) Net actuarial gains/(losses) on pension plans (392) 272 Foreign currency translation effects 5 (44) As of December 31 73 313
Zurich Holding Comp. of America Inc Euro commercial paper notes, due in less than 3 months 399 399 Zurich Santander Insurance America S.L. 7.5% EUR 42 million loan, due December 2035 11 44 Other Various debt instruments 20 24 Senior debt 3,846 4,162 Subordinated debt
Zurich Insurance Company Ltd 8.25% USD 500 million perpetual capital notes, first callable January 2018 1,3 500 499 4.625% CHF 500 million perpetual notes, first callable May 2018 1 513 491 7.5% EUR 425 million notes, due July 2039, first callable July 2019 1,3 509 447 2.75% CHF 225 million perpetual capital notes, first callable June 2021 1 230 221 2.75% CHF 200 million perpetual capital notes, first callable September 2021 1,2 212 205 4.75% USD 1 billion perpetual capital notes, first callable January 2022 1,3 994 993 4.25% EUR 1 billion notes, due October 2043, first callable October 2023 1,3 1,192 1,046 4.25% USD 300 million notes, due October 2045, first callable October 2025 1,3 299 299 5.625% USD 1 billion notes, due June 2046, first callable June 2026 1 996 996 3.5% EUR 750 million notes, due October 2046, first callable October 2026 1,2 890 785
2 The Group applied the fair value hedge methodology either partially or in full to hedge the interest rate exposure. 3 These bonds are part of a qualifying net investment hedge to hedge the foreign currency exposure. 4 The holders of the perpetual notes benefit from the replacement capital covenant which states that if Series V fixed/floating trust preferred securities, issued by ZFS Finance
None of the debt instruments listed in table 18.1 were in default as of December 31, 2017 or December 31, 2016.
To facilitate the issuance of debt, the Group has in place a Euro Medium Term Note Program (EMTN Program) allowing for the issuance of senior and subordinated notes up to a maximum of USD 18 billion. All issuances under this program are either issued or guaranteed by Zurich Insurance Company Ltd. The Group has also issued debt instruments outside this program.
Maturity schedule of outstanding debt in USD millions, as of December 31 2017 2016
New shares issued from contingent capital in 2016 20,244 202,442 0.10
New shares issued from contingent capital in 2017 73,245 732,445 0.10
a) Authorized share capital Until March 29, 2019, the Board of Zurich Insurance Group Ltd is authorized to increase the share capital by an amount not exceeding CHF 4,500,000 by issuing up to 45,000,000 fully-paid registered shares with a nominal value of CHF 0.10 each. An increase in partial amounts is permitted. The Board would determine the date of issue of any such new shares, the issue price, type of payment, conditions for exercising subscription rights, and the commencement of entitlement to dividends.
The Board is further authorized to restrict or exclude the subscription rights of shareholders and to allocate them to third parties, the Company or one of its group companies, up to a maximum of 15,000,000 fully-paid registered shares, if the shares are to be used: kk for the take-over of an enterprise, or parts of an enterprise or of participations or for investments by the Company or one of its group companies, or the financing including re-financing of such transactions; or kk for the purpose of expanding the scope of shareholders in connection with the quotation of shares on foreign stock exchanges or issuance of shares on the national or international capital markets (including private placements to one or more selected investors); or kk for the conversion of loans, bonds, similar debt instruments, equity-linked instruments or other financial market instruments (collectively, the ‘Financial Instruments’) issued by the Company or one of its group companies; or kk for the improvement of the regulatory capital position of the Company or one of its group companies in a fast and expeditious manner.
The Board is authorized, when issuing Financial Instruments to restrict or exclude the advance subscription rights in cases where they are issued: kk for the financing including re-financing of a take-over of an enterprise, of parts of an enterprise, or of participations or of investments by the Company or one of its group companies; or kk on national or international capital markets (including private placements to one or more selected investors); or kk for the improvement of the regulatory capital position of the Company or one of its group companies in a fast and expeditious manner.