Demand for talent is increasing as insurers compete for today’s and tomorrow’s skills. A diverse workforce is also needed to ensure a range of perspectives and approaches reflecting the diversity of customers.
We are well on track to fully achieve our 2017 to 2019 targets. We look ahead with great confidence to the next phase of our development.” Mario Greco Group Chief Executive Officer
We entered agreements with established and startup technology companies to develop new customer solutions.
We serve individuals, small and medium-sized enterprises, large companies and multinational corporations across our four regions – Europe, Middle East & Africa, North America, Latin America and Asia Pacific.
A global leader in travel We want to be there for customers wherever they journey. In 2018 we successfully expanded the Cover-More business to become the second largest travel assistance provider in the world. Through targeted acquisitions in Latin America, the UK and Ireland, as well as a five-year exclusive distribution agreement with Commonwealth Bank in Australia, we significantly increased the potential customer base for Cover-More’s innovative offerings, and have begun to create scale and efficiencies across this global platform.
Enriching lives and breaking taboos In Ireland, Zurich works closely with Rugby Players Ireland, the professional sports organization, to support Tackle Your Feelings. The campaign promotes open discussion about mental health. With almost one-third of professional rugby players in Ireland supporting it, the campaign can help others to understand and deal with what is often a taboo subject.
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.
Impact of real estate investment: CO2e emissions (kg per sqm) 1, 2 28 29 (3%)
AR 51 to 52 102-29 Identifying and managing economic, environmental, and social impacts
AR 269 to 273 102-46 Defining report content and topic boundaries
When we welcome difference, we promote innovation, boost productivity and deliver the better results.
Zurich Insurance Group Ltd is obliged to announce shareholdings by third parties in its shares when notification is received from a third party that a threshold has been reached. During 2018, the Group received two notifications by third parties that they had either exceeded or fallen below a relevant threshold.
Board of Directors and its Committees as of December 31, 2018
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. As of December 31, 2018, 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. For further information on the Group’s independence policy, please see art. 16.6 of the Annex to the Organizational Rules (www.zurich.com/en/ about-us/corporate-governance/corporate-documents).
External mandates In line with the Ordinance AEC, art. 33 of Zurich’s Articles of Association, has rules on the number of mandates members of the Board and of the ExCo are permitted to hold, as shown in the table below.
Remuneration Committee Composition and membership: Zurich Insurance Group Ltd’s Organizational Rules require the Remuneration Committee to consist of at least three independent non-executive Board members. Currently, the committee comprises Christoph Franz (Chairman), Catherine Bessant, Michel M. Liès and Kishore Mahbubani.
Activities 2018: During 2018, the following topics were discussed in particular: 33 annual and half year reporting with a strong focus on accounting and reserving matters as well as the Group's updates for the first three months and first nine months of the year 33 the effectiveness of the internal control framework, including internal controls over financial reporting (ICFR)
33 Swiss Solvency Test (SST) internal model approval program 33 Operational Risk Framework 33 regulatory risk 33 risk management aspects of the Group’s remuneration architecture, discussed during the annual joint meeting with the Remuneration Committee 33 macroeconomic developments; investment and asset/liability management, market and credit risks and controls including reports on derivatives; and performance of asset managers 33 Zurich’s approach on model risk management 33 progress made on information security management 33 Zurich’s real estate investment strategy 33 climate change-related risks
The composition as of December 31, 2018 in terms of length of tenure, gender, as well as nationality was as follows and average length of tenure was of 3 years: Group Management as of December 31, 2018
33 regulatory developments affecting the Group’s risk management and the Group’s regulatory reporting 33 the Group’s TRP assessment and related actions 33 prospective changes to capital models and methodologies that have a significant impact on economic solvency ratios 33 the Group’s model validation policy, and validation findings related to capital models and significant valuation models, including remedial actions 33 market and credit risk internal model consumption relative to the Group’s capital allocation, including remedial actions 33 any significant deviations from established target solvency levels by subsidiaries, including remedial actions if needed
For addresses see information on page 300 and further upcoming important dates, see investor section starting on page 20 (financial calendar on page 21).
For information regarding the Group’s risk management and internal control framework, see the Risk review of this Annual Report 2018 on pages 121 to 149. The Group no longer separately describes risk management and internal control information in this governance report.
Average award as a percentage of target considering the relevant BOP results and customer metrics in selected major markets, along with an assessment of overall qualitative performance for 2018 (2017: 106%).
33 ExCo: No changes are proposed to the remuneration structure of the ExCo in 2019. A benchmarking analysis including a review of best practices, market data, internal relativities and alignment with the strategy, will be carried out again in 2019.
The remuneration for key risk taker positions includes STIP and LTIP with a greater emphasis toward long-term and therefore deferred remuneration. 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 and for the target cards of the leadership team including the ExCo. This is taken into account when assessing performance and making reward decisions.
1 The number of shares issued during 2018 fell compared to 2017 as the LTIP and other employee share plans were instead predominantly funded by shares bought back from the market, as well as by treasury-owned shares. Moving forward, Zurich intends to continue purchasing shares on the market instead of issuing new shares to fund the LTIP and other employee share plans.
Annual performance-based target share allocations, subject to vesting in accordance with predefined performance criteria. Designed to support Zurich’s longer term goals, encourage participants to operate the business in a sustainable manner and align the Group’s long-term interests with those of shareholders.
Clawback framework established for members of the ExCo to allow for recovery, forfeiture and/or clawback, subject to specific conditions. Malus conditions to reduce or eliminate awards applicable to all LTIP participants. Individual hedging of share-based remuneration prohibited.
4 To assist with decisions regarding remuneration structures and amounts, a review of internal relativities is carried out, along with benchmarking analyses within the relevant market, with a view to position toward the market median. The relevant market is dependent on the nature of an individual’s role and considers, amongst other factors, geographical location and scope, and peer companies based on industry and size.
Variable remuneration Incentive plans are designed to provide a range of award opportunities linked to levels of performance. Business and individual performance may result in remuneration levels above target for superior performance, and reduced levels that are below target for performance below expectations. Variable remuneration opportunities are provided to motivate employees to achieve key short-term and long-term business goals to increase shareholder value. Variable remuneration opportunities may include both short-term and long-term incentives. Further information on the STIP and LTIP are set out below.
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 and behaviors 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.
The share price as of June 15, 2018 (CHF 297.20) was adopted to calculate the number of shares based on the fixed portion of the fee allocated in shares for the respective members. Where the value of the allocated shares did not equal the value of the portion of the fee to be allocated in shares, the difference was paid in cash.
Trading plans To facilitate the sale of shares 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, 2018, there were no trading plans in place. Further, no trading plans were entered into in 2018 or 2017.
The Group assesses risks systematically and from a strategic perspective through its proprietary Total Risk Profiling™ (TRP) process, which allows Zurich to identify and evaluate the frequency and severity of a risk scenario. The Group then develops, implements and monitors improvements. The TRP process is integral to how Zurich deals with change, and is particularly suited to evaluate strategic risks, as well as risks to Zurich’s reputation. At Group level, this process is ongoing, with regular reviews with senior management.
2 Credit spreads (CS) include mortgages, and including and excluding euro sovereign spreads. Sensitivity is net of profit sharing with policyholders. 3 The insurance risk-specific scenarios relate to natural catastrophe events that are estimated on a modeled 250-year net aggregate loss (equivalent to a 99.6 percent probability of non-exceedance).
The Group structures and aligns its external reinsurance protection to its capital position to achieve an optimum risk-return ratio. This includes participation in the underlying risks through self-retentions. The Group manages its central reinsurance purchasing according to these principles. The cession rate for P&C was 21.0 percent and 19.7 percent as of December 31, 2018 and December 31, 2017, respectively. The cession rate for Life was 7.0 percent and 8.0 percent as of December 31, 2018 and December 31, 2017, respectively.
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 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.
Financial highlights in USD millions, for the years ended December 31, unless otherwise stated 2018 2017 Change 1
Property & Casualty Business Operating Profit for the year 2018 was USD 2.1 billion, 35 percent higher than in the previous year.
Investment income for the full year increased by 5 percent in U.S. dollars and 8 percent in local currency, driven by underlying growth in investment income across North America, Latin America and Asia Pacific, while EMEA saw a decline. This improvement was more than offset by a USD 238 million reduction in the level of fair value gains on the Group’s hedge fund portfolio, which affected full year 2018 results with an USD 48 million loss compared to a favorable contribution of USD 191 million in 2017.
Life in USD millions, for the years ended December 31 2018 2017 Change
Group assets Total assets as of December 31, 2018 (in USD millions)
In 2018, we continued to execute on our strategy, increasing the allocation to less-liquid assets to capture illiquidity risk premia. We further increased our investments in high-quality real estate assets in attractive locations. Our real estate holdings increased to USD 14.6 billion and now constitute 7.5 percent of our investment portfolio. Our allocation to private debt increased to USD 9.2 billion, largely driven by senior corporate loans, AAA-rated tranches of collateralized loan obligations, and infrastructure debt investments.
For long-duration life insurance contracts, IFRS 17 is expected to have a significant impact on actuarial modeling as granular cash flow projections and regular updates of all assumptions will be required resulting in either profit or loss volatility or affecting ‘contractual service margin’, a separate component of the insurance liability representing unearned profits from in-force contracts. Further, IFRS 17 introduces different measurement approaches for the insurance contract liabilities reflecting a different extent of policyholder participation in investment or insurance entity performance (non-participating, indirect participating, direct participating).
Discount and perpetual growth rates for goodwill and AIF contracts for major CGUs Business in USD
Investments with a carrying value of USD 6.2 billion and USD 6.4 billion are held to meet local regulatory requirements as of December 31, 2018 and 2017, respectively.
Table 7.1 shows the fair value and notional amounts for instruments which did not qualify for hedge accounting as of December 31, 2018 and 2017. While these notional amounts express the extent of the Group’s involvement in derivative transactions, they do not, however, represent the amounts at risk.
Total Group derivative financial instruments 23,169 6,261 3,114 32,543 327 (245) 26,659 297 (119)
Net favorable reserve development emerged from reserves established in prior years amounting to USD 326 million mainly related to the following: 33 In North America, favorable prior year development of USD 344 million driven by workers’ injury; 33 In EMEA, excluding the Ogden impact mentioned above, favorable prior year development in retail driven by motor, largely offset by the unfavorable prior year development for commercial liability.
As a result of the acquisition of the QBE Latin America operations intangible assets increased by USD 250 million, of which USD 195 million is goodwill and USD 55 million is distribution agreements, software and other intangible assets. As a result of the acquisition of EuroAmerica in Chile, intangible assets increased by USD 143 million, of which USD 102 million is goodwill and USD 40 million is present value of future profits (PVFP). The acquisition of Travel Ace and Universal Assistance increased goodwill by USD 94 million and distribution agreements, software and other intangible assets by USD 19 million. As a result of the acquisition of Bright Box intangible assets increased by USD 77 million, of which USD 52 million related to goodwill and USD 25 million to software. As a result of the acquisition of Blue Insurance intangible assets increased by USD 56 million, of which USD 35 million is goodwill and USD 21 million is distribution agreements, software and other intangible assets. The remaining minus USD 16 million relates to a post-acquisition adjustment of Cover-More (see note 5).
As of December 31, 2017, intangible assets related to non-controlling interests were USD 76 million for the present value of future profits (PVFP) of acquired insurance contracts, USD 1.2 billion for distribution agreements and USD 15 million for software.
Following a review, software was identified, which was not utilized as originally expected, resulting in USD 156 million of impairments, primarily in Property & Casualty in the UK and in Group Functions and Operations.
The tax rates applicable to tax losses for which a deferred tax asset has not been recognized are 23.0 percent and 22.8 percent as of December 31, 2018 and 2017, respectively.
Senior debt Zurich Insurance Company Ltd 2.375% CHF 525 million notes, due November 2018 1 – 538 1.500% CHF 400 million notes, due June 2019 1,2 409 418 1.125% CHF 400 million notes, due September 2019 1,2 411 421 0.625% CHF 250 million notes, due July 2020 1,2 258 262 2.875% CHF 250 million notes, due July 2021 1 253 255 3.375% EUR 500 million notes, due June 2022 1,2,3 598 634 1.875% CHF 100 million notes, due September 2023 1,2 110 112 1.750% EUR 500 million notes, due September 2024 1,2,3 583 608 0.500% CHF 350 million notes, due December 2024 1 356 – 0.510% CHF 120 million loan, due December 2024 122 – 1.500% CHF 150 million notes, due July 2026 1,2 165 167 1.000% CHF 200 million notes, due October 2028 1 204 – 1.500% EUR 500 million notes, due December 2028 1,3 568 –
In 2017, the dividend of CHF 17 per share was partially paid out of the capital contribution reserve and partially out of the available earnings on April 4, 2017, as approved at the Annual General Meeting on March 29, 2017. The difference between the respective amounts of the dividend at transaction day exchange rates amounting to USD 2.6 billion and at historical exchange rates are reflected in the cumulative foreign currency translation adjustment.
On April 3, 2019 the Board of Directors will propose to the Annual General Meeting 2019 that Zurich Insurance Group Ltd’s ordinary share capital be reduced via the cancellation of the 1,740,000 shares with a nominal value of CHF 0.10 repurchased under the public share buy-back program.
Fair value of plan assets 5,081 9,439 3,003 1,275 1,135 19,934 Impact of asset ceiling (87) (8) – – – (95) Net defined benefit asset/(liability) 201 (2,521) (640) (149) (280) (3,388) Net post-employment benefit (expense)/income 1 (64) (80) (39) (17) (35) (235)
Employee share plans Share Incentive Plan for employees in the UK The Group established an Inland Revenue approved Share Incentive Plan and launched the Partnership Shares element of this plan in 2003, which enabled participating employees to make monthly purchases of Zurich Insurance Group Ltd shares at the prevailing market price from their gross earnings. This plan was terminated in 2007. There were 47 and 55 participants in the plan as of December 31, 2018 and 2017, respectively.
33 Non-agency MBS and ABS rated below ’AAA’ that are valued by independent pricing providers using a variety of valuation techniques which may require use of significant unobservable input parameters such as asset prepayment rate, default rates and credit curves. Quantitative unobservable inputs are not developed by the Group when measuring fair value of these assets.
For details on Group investments sensitivities, refer to section analysis by risk type in the risk review.
Financial assets (SPPI) by stages – current period in USD millions, as of December 31, 2018
Gross written premiums and policy fees 14,600 14,075 14,716 15,137 2,858 2,405 2,704 2,639 364 214 (1,736) (1,447) 33,505 33,024 Less premiums ceded to reinsurers (2,389) (2,209) (4,988) (4,549) (486) (392) (466) (419) (447) (369) 1,736 1,447 (7,041) (6,492)
Benefits, losses and expenses Insurance benefits and losses, net 7,774 7,754 267 131 522 286 1,137 1,088 2 – – – 9,702 9,259 Policyholder dividends and participation in profits, net (3,596) 10,423 (29) 117 (21) 229 1,006 1,326 – – – – (2,640) 12,095 Income tax expense/(benefit) attributable to policyholders (171) 157 – – (12) 15 – – – – – – (183) 171 Underwriting and policy acquisition costs, net 925 1,173 68 81 220 163 1,037 1,072 2 – (1) – 2,252 2,489 Administrative and other operating expense (excl. depreciation/amortization) 1,302 1,293 57 70 337 310 174 197 – – – – 1,871 1,870 Interest credited to policyholders and other interest 218 235 8 28 35 40 20 11 – – – – 282 315 Restructuring costs and other items not included in BOP (47) (104) – (1) (12) 6 10 (4) – – – – (50) (104) Total BOP benefits, losses and expenses 6,404 20,930 372 427 1,070 1,049 3,385 3,690 4 – (1) – 11,234 26,096 Business operating profit (before interest, depreciation and amortization) 1,175 1,021 37 – 212 147 571 566 8 1 (2) (2) 2,000 1,733 Depreciation and impairments of property and equipment 12 10 – – 3 2 3 3 – – – – 17 15 Amortization and impairments of intangible assets 103 133 5 1 12 13 12 14 – – – – 133 161
Gross written premiums and policy fees 10,103 9,969 407 323 1,379 1,048 2,874 2,739 20 7 (28) (16) 14,754 14,070 Net earned premiums and policy fees 9,439 9,239 392 301 1,199 792 2,473 2,478 12 1 – – 13,514 12,810
Net earned premiums and policy fees 26,431 26,033 13,514 12,810 915 2,223 5 6 141 (14) – – 41,007 41,057 Farmers management fees and other related revenues – – – – 3,204 2,892 – – – – – – 3,204 2,892
Rest of Asia Pacific 3 191 – – – – –
Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
Specifically, the continued low interest rate environment results in reduced investment returns influences policyholders’ behaviours creating a risk of accelerated amortization of deferred policy acquisition costs and a strain on the sufficiency of reserves for traditional life insurance contracts.
– Testing, on a sample basis, the calculation models applied to estimate the actuarially determined life insurance assets and liabilities.
During 2018, the Board of Directors launched a public share buy-back program for cancellation purposes of 1,740,000 Zurich Insurance Group Ltd’s own shares. The program was launched on April 11, 2018 and completed on May 18, 2018. The purchase value of the repurchased own shares corresponded to CHF 548,167,352 (average purchase price of CHF 315). For further information see the audited consolidated financial statements, note 19 on pages 225 to 227.
Proposed appropriation of available earnings as of December 31 2018 2017
Board of Directors’ responsibility The Board of Directors is responsible for the issue of new shares in accordance with the legal requirements and the Company’s articles of association.