Z-ECM 122% Zurich Economic Capital Model ratio 3 estimated as of December 31, 2016
Zurich reports business operating profit of USD 4.5 billion and net income attributable to shareholders of USD 3.2 billion for 2016. It also proposes a dividend of CHF 17 per share.
We will upgrade the way we deliver products to our customers and expand our go-tomarket approach by providing greater clarity on our risk appetite, making it clearer which risks we will and will not insure, and by creating industry-specific propositions.
For the retail business, we see an opportunity to build on the successes of the Farmers Exchanges, which have improved cross-sell and retention rates by delivering a better experience to their customers. Using the same tools and approach will also allow us to target the most promising customers and distributors in our chosen retail markets.
In 2016, a group of Zurich employees got a unique opportunity. As part of a small team they became the architects of Zurich’s future. Out of over 2,000 applications from across our business, 40 employees were chosen to form the Group Strategy Task Force. For several months they worked intensely alongside 12 senior Zurich executives to develop the new strategy that Zurich unveiled in November – all the while continuing to work in their daily jobs.
Virtual and augmented realities Next-step interfaces between humans and computers, involving immersive environments, holographic readouts and digitally produced overlays for mixed- reality experiences.
The ‘Internet of Things,’ for example, allows individuals to link devices, making their lives easier, but raises concerns about personal privacy and data and identity theft. Businesses, too, benefit from new technology, but face special risks that may have huge implications for security and supply chains. Insurers can offer knowledge and expertise to address cyber risks suited to customers’ specific needs, and provide products to counter cyber threats.
While ensuring customers get the same high-quality service no matter how they approach us, technology is also allowing us to become more cost-effective and efficient. We are investing in technology to ensure we have the best systems in place for claims, payments and renewals.
Increasing the value of our in-force business We aim to generate more value for customers and shareholders through a dedicated focus on our existing life insurance business. From the beginning of 2014 to the end of 2016, our active approach to in-force business across 10 retail and corporate businesses delivered over USD 170 million in additional annual (‘run-rate’) BOP. This includes over USD 70 million of annual BOP in 2016 alone.
kk On October 1, 2016 the Group combined its corporate and commercial businesses into a single global business called Commercial Insurance.
At the AGM on March 30, 2016, all Board members were re-elected for another one-year term. Mr. Jeffrey Hayman and Mr. David Nish were newly elected. The shareholders 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. Mr. Don Nicolaisen, Mr. Rafael del Pino and Mr. Thomas K. Escher did not stand for re-election.
Activities 2016: During 2016, in particular the following topics were discussed: kk quarterly reporting with a strong focus on accounting and reserving matters; kk the effectiveness of the internal control framework, including SOX; 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.
Changes to the ExCo On March 7, 2016, Mario Greco was appointed Group CEO and member of the ExCo. Gary Shaughnessy, CEO Global Life and member of the ExCo since January 1, 2016, was appointed CEO EMEA (Europe, Middle East & Africa) on July 1, 2016. Robert Dickie stepped down as Chief Operations and Technology Officer and member of the ExCo on July 1, 2016 and Kristof Terryn, who was CEO General Insurance up to that date, was appointed Group COO. On October 1, 2016, Claudia Dill was appointed member of the ExCo in her function as CEO Latin America, Jack Howell was appointed CEO Asia Pacific and member of the ExCo, and James Shea was appointed CEO Commercial Insurance and member of the ExCo. As of July 1, 2016, the Group General Counsel and the Group Human Resources Officer were no longer members of the ExCo. The Group General Counsel attends all ExCo meetings ex officio.
The Asset/Liability Management Investment Committee, chaired by the Group CIO, acts as a cross-divisional body and has primary responsibility for monitoring and reviewing the Group’s asset/liability management and the strategic asset allocation of Zurich’s invested assets.
In 2016 we saw good results, with an overall increase in business profitability compared to 2015. As a result, the average award for the plan participants across the Group (more than 41,600) is significantly higher than the corresponding amount for 2015.
kk The Swiss Code of Best Practice for Corporate Governance (Swiss Code of Best Practice), issued in 2002 by economiesuisse, as amended in October 2007 and in August 2014.
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.
Eligibility All employees. Country specific (more than 41,600 plan participants in 2016).
Group NIAS or the respective segment BOP or Farmers growth and profitability
Paid in cash and capped at 200 percent of individual STIP target.
The calculated vesting level is applied to all LTIP participants and defines the percentage of target shares that will ultimately vest. Half of the vested shares are sales restricted for an additional three-year period after the date of vesting.
FX rate. 5 In line with applicable laws where the executives are employed, Zurich paid the company-related portion of contributions to social security systems, which amounted to
With regard to the LTIP, the amount included in the total of USD 44.9 million above is the value of target share allocation of USD 17.2 million allocated in 2016 and assumed to vest at 100 percent of target in 2019. As mentioned above, the vesting level for the allocations from previous years vesting in 2017 is 121 percent (compared to zero percent last year), reflecting the performance levels under the three performance metrics over the three-year performance period. The value of the shares vesting in 2017 from the regular LTIP allocations made in prior years to all members of the ExCo who served in full or for part of the year is USD 7.1 million. As a result, the actual earned total remuneration for the period ending December 31, 2016 was USD 34.8 million compared to the total remuneration of USD 44.9 million shown above.
3 This excludes the value of target share allocations from transition arrangements. 4 The remuneration is paid in Swiss francs. The amounts have been translated from Swiss francs to U.S. dollars at the relevant exchange rates throughout the year and the cash incentive paid in 2017 and 2016 has been translated at the year-end rate in 2016 and 2015 respectively.
The following section includes information regarding the total remuneration earned by employees for the financial year 2016 across the Group, including remuneration for members of the ExCo.
Total remuneration 5,490 5,624 Value of target share allocations from transition arrangements – 6 1 Includes employee benefits like health and dental insurance and other fringe benefits.
Analysis of the Group’s Z-ECM available financial resources USD billions, as of July 1, 2016 1 Shareholders’ intangible assets adjusted for taxes less deferred front-end fees and deferred tax liabilities. 2 All debt issues (senior and subordinated) excluding those classified as operational debt or maturing within one year.
Analysis of sensitivities for general insurance risk Tables 2.a and 2.b show the sensitivity of net income before tax and the sensitivity of net assets, using the Group effective income tax rate, as a result of adverse development in the net loss ratio by one percentage point. Such an increase could develop either due to the insured events happening more frequently or due to resulting claims becoming more severe, or from a combination of frequency and severity. The sensitivities do not indicate a probability of such an event and do not consider any non-linear effects of reinsurance. Based on the assumptions applied in the sensitivity analysis in tables 2.a and 2.b, each additional percentage point increase in the loss ratio would have a linear impact on net income before tax and net assets. The Group also monitors insurance risk by evaluating extreme scenarios, taking into account the non-linear effects of reinsurance contracts.
Observing best-estimate assumptions on cash flows related to benefits of insurance contracts gives some indication of the size of the exposure to risks and the extent of risk concentration. Table 3 shows the Group’s concentration of risk within the life business by region and line of business based on reserves for life insurance on a net basis. The Group’s exposure to life insurance risks varies significantly by geographic region and line of business and may change over time. See note 8 of the consolidated financial statements for additional information on reserves for insurance contracts.
All programs can be reinstated once, except the Combined Global Catastrophe Occurrence/Aggregate Treaty
In addition to debt exposure, the Group had loan exposure of USD 4.3 billion and USD 4.7 billion to the German Central Government or the German Federal States as of December 31, 2016 and 2015, respectively. For more information, see the ‘other loans’ section.
Strategic risks can arise from: kk Inadequate assessment of strategic plans kk Ineffective implementation of strategic plans kk Unexpected changes to assumptions underlying strategic plans
General Insurance gross written premiums and policy fees 33,122 34,020 (3%) Global Life gross written premiums, policy fees and insurance deposits 30,347 29,037 5% Farmers Management Services management fees and other related revenues 2,867 2,786 3% Farmers Re gross written premiums and policy fees 1,587 2,145 (26%)
2 Details of the principles for calculating new business are included in the embedded value report in the annual results 2016. New business value and new business margin are calculated after the effect of non-controlling interests, whereas APE is presented before non-controlling interests. 3 Calculated on average Group investments. 4 As of December 31, 2016 and December 31, 2015, respectively.
The Group’s business operating profit of USD 4.5 billion increased by USD 1.6 billion, or 55 percent in U.S. dollar terms and 62 percent on a local currency basis compared with 2015, as underlying performance in all core businesses improved. The General Insurance result progressed favorably following the impact of re-underwriting and pricing actions initiated in the second six months of 2015. The result also benefited from lower catastrophe losses and weather related events, as well as favorable prior year development. Global Life achieved a strong result and continued to grow, while maintaining its focus on priority markets and on extracting value from in-force business. Farmers Management Services also continued its positive momentum from premium growth, though Farmers Re incurred higher losses, mainly as a result of higher catastrophe events.
Gross written premiums and policy fees 11,917 10,742 11% Net underwriting result 311 146 nm Business operating profit 973 768 27% Loss ratio 65.4% 67.0% 1.6 pts Expense ratio 30.7% 31.2% 0.4 pts Combined ratio 96.1% 98.2% 2.0 pts
Gross written premiums and policy fees decreased by USD 793 million to USD 10.2 billion, or by 7 percent in U.S. dollar terms and 4 percent on a local currency basis. This reflects the outcome of re-underwriting measures taken to restore profitability from both existing books and new business and the exit of business in South Africa and Morocco in the fourth quarter of 2016. Premiums written declined in some markets where competitive pressure remained.
NBV, APE and NBM by pillar in USD millions, for the years ended December 31
In Corporate Life & Pensions, NBV increased by USD 2 million to USD 320 million, or by 1 percent in U.S. dollar terms and 9 percent on a local currency basis, largely benefiting from improved business mix in the UK and a refinement in the modeling of policyholder participation in Switzerland.
Net investment result on unit-linked investments 13,613 6,238 Net gain/(loss) on divestments of businesses (89) 10 Other income 1,187 1,448 Total revenues 67,245 60,568 Benefits, losses and expenses Insurance benefits and losses, gross of reinsurance 10 35,173 36,076 Less ceded insurance benefits and losses 10 (4,682) (5,330) Insurance benefits and losses, net of reinsurance 10 30,491 30,746 Policyholder dividends and participation in profits, net of reinsurance 10 14,519 7,863 Underwriting and policy acquisition costs, net of reinsurance 10 8,538 9,061 Administrative and other operating expense 12 7,478 8,659 Interest expense on debt 423 431 Interest credited to policyholders and other interest 475 467 Total benefits, losses and expenses 61,924 57,227 Net income before income taxes 5,321 3,340 Income tax (expense)/benefit 17 (1,843) (1,294)
attributable to policyholders 17 (304) (110) attributable to shareholders 17 (1,539) (1,183)
Amended Standards IFRS 11 Accounting for Acquisitions of Interests in Joint Operations January 1, 2016 IAS 1 Disclosure initiative January 1, 2016 IAS 16/IAS 38 Clarification of Acceptable Methods of Depreciation and Amortisation January 1, 2016
Group investments include the following in cash and cash equivalents: cash on hand, deposits held at call with banks, cash collateral received and other highly liquid investments with maturities of three months or less from the date of acquisition that are readily convertible into cash and are subject to an insignificant risk of change in fair value. Cash and cash equivalents are stated at current redemption value.
k) Employee benefits Share-based compensation and cash incentive plans The Group operates long-term incentive plans that are accounted for as equity-settled share-based compensation plans. The fair value of these incentive plans is determined at the grant date and is recognized as an expense in income over the vesting period, with a corresponding increase recorded in additional paid-in capital.
In the UK, the Government mandates the discount rates to be applied to personal injury claims. Payment to claimants is either via a lump sum amount or a periodic payment option. The lump sum amount is calculated using Ogden tables defined by the Lord Chancellor of the UK Ministry of Justice. A critical component of the Ogden tables is the discount rate, currently 2.5%, which has been in effect since 2001 when the Ogden rate was last changed. The Ministry of Justice announced its intention to review the discount rate in December 2016. The outcome of the review is currently uncertain. The Group is reserved at an assumed discount rate of 1%, each further 1% reduction in the level of the discount rate used within the tables would add approximately USD 180 million to the reserves, but the effect is not linear.
kk Assumptions are determined with reference to current and historical client data, as well as industry data. Interest rate assumptions reflect expected earnings on the assets supporting the future policyholder benefits. The information used by the Group’s qualified actuaries in setting such assumptions includes, but is not limited to, pricing assumptions, available experience studies and profitability analysis.
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. 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.
Market value revaluation 281 132 Transfer from/to assets held for own use (5) 28 Transfer to assets held for sale (84) (16) Foreign currency translation effects (222) (436) As of December 31 10,562 9,865
Securities lending, repurchase and reverse repurchase agreements in USD millions, as of December 31 2016 2015
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.
Interest rates 152 276 Investment return 8 (96) Changes in modeling 12 (2)
Expected maturity profile for liabilities for investment contracts – prior period in USD millions, as of December 31, 2015
Losses and loss adjustment expenses 22,402 24,771 (3,868) (2,909) 18,534 21,862 Life insurance death and other benefits 12,771 11,305 (814) (2,422) 11,957 8,884 Total insurance benefits and losses 35,173 36,076 (4,682) (5,330) 30,491 30,746
Receivables and other assets in USD millions, as of December 31 2016 2015
Development of net deferred tax liabilities in USD millions 2016 2015
Senior debt Zurich Insurance Company Ltd Floating rate CHF 200 million notes, due June 20161 – 200 2.25% CHF 500 million notes, due July 20171 492 498 2.375% CHF 525 million notes, due November 20181 515 522 1.50% CHF 400 million notes, due June 20191,2 405 415 1.125% CHF 400 million notes, due September 20191,2 409 420 0.625% CHF 250 million notes, due July 20201,2 254 259 2.875% CHF 250 million notes, due July 20211 244 247 3.375% EUR 500 million notes, due June 20221,2,3 564 587 1.875% CHF 100 million notes, due September 20231,2 109 111 1.750% EUR 500 million notes, due September 20241,2,3 538 545 1.500% CHF 150 million notes, due July 20261,2 163 164
UK pension plan The major UK pension plan is a hybrid arrangement and benefits accrued to December 31, 2015 increase in line with salary increases. Normal retirement age for the plan is 60. The plan is split into distinct sections and the two defined benefit sections are closed to new entrants and, with effect from January 1, 2016, to future benefit accrual. All employees now participate in a defined contribution section within the same trust. The notes that follow consider only the defined benefit sections. The UK Pension Trustee Board is responsible for the governance of the plan. The employer contributions are determined based on regular triennial actuarial valuations which are conducted using assumptions agreed by the Trustee Board and the sponsoring company. A valuation was carried out during 2013 and the results were finalized on August 28, 2014. The local statutory valuation revealed a funding deficit and an asset-backed funding arrangement was agreed with the Trustee Board. The effective date of the next valuation is 30 June 2016 and it will be finalized during 2017.
U.S. pension plans There are two major pension plans in the U.S., the Zurich North America (ZNA) plan and the Farmers Group, Inc. (FGI) pension plan. These are both cash balance pension plans funded entirely by the participating employers. The ZNA plan is entirely cash balance and the FGI pension plan provides benefits on a cash balance pension formula for benefits accruing after January 1, 2009, except with respect to certain grandfathered participants. A final average pay defined benefit formula applies for the grandfathered participants. For both cash balance plans, an amount is credited to the cash balance plan each quarter, determined by an employee’s age, service and their level of earnings up to and above the social security taxable wage base. The minimum annual interest earned on the account balance is 5 percent. The retirement account is available from age 65, or age 55 with five years of service. The benefit can be taken as a monthly annuity or as a lump sum. Both the ZNA plan and the FGI pension plan have fiduciaries as required under local pension laws. The fiduciaries are responsible for the governance of the plans. Actuarial valuations are completed regularly and the Group has historically elected to make contributions to the plans to maintain a funding ratio of at least 90 percent as valued under local pension regulations. The annual employer contributions are equal to the present value of benefits accrued each year, plus a rolling amortization of any prior underfunding. The FGI plan will be frozen with effect from December 31, 2018 following a decision late in 2016. The impact of this is reflected in the 2016 financial disclosures. Farmers Group employees will earn only defined contribution retirement benefits starting January 1, 2019.
Maturity analysis of benefits expected to be paid (in USD millions): < 1 year 213 219 215 45 151 253 195 47 1 to 5 years 856 996 907 197 650 1,178 839 192 5 to 10 years 1,085 1,602 1,168 257 929 1,913 1,176 256
Inter-relationship analysis of level 3 investments to changes in key assumptions – current period as of December 31, 2016 Key assumptions Increase/decrease in reported fair value
Table 25 summarizes related party transactions with key personnel reflected in the consolidated financial statements. Key personnel includes members of the Board of Directors of Zurich Insurance Group Ltd and Zurich Insurance Company Ltd and members of the Executive Committee.
Remuneration of key personnel of the Group Cash compensation, current benefits and fees 21 27 Post-employment benefits 4 4 Share-based compensation 17 15 Other remuneration 2 11 Total remuneration of key personnel 43 57
Net earned premiums and policy fees – 500 1,521 1,766 1,521 2,266 Insurance benefits and losses, net 5 (1) (365) (1,084) (1,223) (1,085) (1,588)
Investments in associates and joint ventures 5 4 13 11 – – – 1 2 3 – – 20 18
Australia Zurich Australia Limited Sydney Global Life 100 100 AUD 426.5 Zurich Australian Insurance Limited Sydney General Insurance 100 100 AUD 6.6 Austria
On January 17, 2017, the Group completed the sale of its general insurance operations in Taiwan to Hotai Motor Co., Ltd. for a sales price of approximately USD 214 million.
In relation to the particular matters set out above, our substantive testing procedures included the following: kk Tested the completeness and accuracy of underlying claims data utilized by the Group’s actuaries in estimating general insurance loss reserves.
10. Subordinated loans to subsidiaries Subordinated loans include a loan to Zurich Insurance Company Ltd of CHF 4,832 million as of December 31, 2016 and 2015, respectively, and additionally of a loan to Zurich Financial Services EUB Holdings Ltd of GBP 30 million as of December 31, 2015, which was re-paid in May 2016.
The Board is authorized, when issuing bonds or similar debt instruments connected with conversion and/or option rights, to restrict or withdraw the right of shareholders for advance subscription in cases where such bonds are issued for the financing or re-financing of a takeover of an enterprise, of parts of an enterprise, or of participations. If the right for advance subscription is withdrawn by the Board, the convertible bond or warrant issues are to be offered at market conditions (including standard dilution protection provisions in accordance with market practice) and the new shares are issued at the current convertible bond or warrant issue conditions.
19. Shareholdings of the Board of Directors and the Executive Committee The information on share and share option holdings of Directors and of the members of the Executive Committee (ExCo), who held office as of December 31, 2016, as required by article 663c paragraph 3 and article 959c paragraph 2 cif 11 of the Swiss Code of Obligations is included and audited in the Remuneration report on pages 76 to 109 of this Annual Report.
The determination whether an investment in subsidiary needs to be impaired includes assumptions about the profitability of the underlying business and growth, which involves management’s judgment.