AA-/stable Standard & Poor’s financial strength rating of Zurich Insurance Company Ltd as of December 31, 2017
Zurich Insurance Group Annual Report 2017 Group overview Governance Risk review Financial review5
Manage claims At Zurich, we believe that sales, service and claims – the key touch points at which we meet our customers – are our greatest opportunity to differentiate ourselves from our competitors. For us, the most valuable form of innovation is finding new and better ways to serve our customers at these ‘moments of truth.’
Global economic conditions improved in 2017. Unemployment generally declined, while excess production capacity continued to be slowly absorbed. The U.S. and to a lesser extent Eurozone countries were already quite far along in the growth cycle, while some key emerging markets such as Brazil and Russia entered the early stages of growth. This has helped to extend the global expansion and keep inflation in check, allowing monetary policy to remain accommodative. Economic conditions should remain favorable even if growth plateaus. While inflation is expected to rise, it will likely do so at a modest pace. With private and public sector debt high, central banks will need a deft touch to maintain growth while curbing excesses.
Our strategy positions Zurich for success over the long term. It builds on our unique footprint, solid financial position, balanced portfolio, trusted brand and the skills, strengths and expertise of our people.
“ The selfie app allows us to approach serious issues in a fun and engaging way.”
Farmers Exchanges: putting customers first since 1928 Farmers Group, Inc. provides certain non-claims administrative and management services to the Farmers Exchanges as its attorney-in-fact. The Farmers Exchanges are owned by their policyholders.
Zurich Insurance Group Annual Report 2017 Group overview Governance Risk review Financial review25
Zurich believes it is the first private-sector investor to introduce impact targets for its investment portfolio. After achieving a multi-year goal of investing USD 2 billion in green bonds, we will target USD 5 billion for our entire portfolio of impact investments. And we will establish a measurement framework to track the impact of these investments, aiming to avoid five million tons of CO2 equivalent emissions annually and improve the lives of five million people per year.
On track to achieve financial targets During the Investor Day in November 2017, we provided a number of examples of how we are delivering on our plans. For details, please refer to the financial review section of the Annual Report, and the Investor Day 2017 presentation available at the link below: www.zurich.com/IR-presentations
Please refer to our website for additional information and the dividend history.
External appointments Mr. Franz was elected chairman of the board of Roche Holding Ltd in March 2014. He is also a member of the board of directors of Stadler Rail. Mr. Franz serves as a member of the board of trustees of the Ernst-Goehner-Foundation, of Avenir Suisse and of the Lucerne Festival and is a member of the advisory board of the University of St. Gallen (HSG). He was named as an honorary professor of business administration at the University of St. Gallen in May 2017. In September 2017, the International Committee of the Red Cross (ICRC) appointed Mr. Franz as a member of its Assembly, the organization’s top governing body.
The ExCo is chaired by the Group CEO. As of December 31, 2017, to reflect both lines of business and geography, members of the ExCo included the CEO EMEA (Europe, Middle East & Africa), the CEO North America, the CEODesignate North America, the CEO Latin America, the CEO Asia Pacific, the CEO of Farmers Group Inc. and the CEO Commercial Insurance. The Group CFO, the Group CIO, the Group COO, the Group CRO and the Group CRODesignate were also members of the ExCo as of December 31, 2017.
Skills and experience Urban Angehrn joined the Executive Committee as Group Chief Investment Officer in July 2015. Before taking his current position he served as Head of Alternative Investments and prior to that, from 2010 to 2012, as Head of Strategy Implementation in Investment Management. He joined Zurich in 2007 as Regional Investment Manager for Europe. Before joining Zurich, he held various positions in capital markets-related roles in the insurance and investment banking industries, including as Head of Allocation & Strategy in asset management at the Winterthur Group. He also served as an adviser to Swiss institutional clients in the use of derivatives, and held positions in derivatives marketing and fixed income sales at Credit Suisse and J.P. Morgan.
Educational background Ms. Savio earned a master’s degree in communication and a bachelor’s degree in speech communication from Illinois State University. She is also a graduate of the Harvard Business School Advanced Management Program and has participated in executive management programs at Northwestern University’s Kellogg School.
Convening of shareholders’ meetings Shareholders’ meetings are convened by the Board or, if necessary, by the auditors and other bodies in accordance with the provisions set out in articles 699 and 700 of the Swiss Code of Obligations. Shareholders with voting rights representing at least 10 percent of the share capital may call a shareholders’ meeting, indicating the matters to be discussed and the corresponding proposals. The invitation to shareholders is mailed at least 20 calendar days before the meeting is held and, in addition, is published in the Swiss Official Gazette of Commerce.
The Group’s compliance function, which consists of compliance professionals around the world, is overseen by the Group Chief Compliance Officer, who reports to the Group General Counsel and regularly provides reports to the Group’s Audit Committee. The Group Chief Compliance Officer has an additional reporting line to the Chairman of the Audit Committee and appropriate access to the Chairman of the Board.
Remuneration Structure Zurich’s remuneration architecture puts a greater emphasis on variable remuneration elements, with a higher weighting on average towards the long term, for our most senior employees. The variable remuneration is largely determined by the achievements against predefined measures which are aligned with the Group’s strategy and financial targets.
The members of the Board receive fixed remuneration as an annual fee, of which the basic fee is paid half in cash and half in five-year sales-restricted shares which are not subject to the achievement of any specific performance conditions. Total remuneration for employees, including members of the Executive Committee (ExCo), comprises as applicable, fixed remuneration consisting of base salaries, pensions and employee benefits, as well as variable remuneration consisting of short- and long-term incentive awards. The Group short-term incentive plan (STIP) and long-term incentive plan (LTIP) aim to align the remuneration architecture with the achievement of the Group’s key financial targets, the execution of the business strategy, the risk management framework and the operational plans (see the remuneration framework section for more information on the elements of Zurich’s remuneration).
The average award for plan participants across the Group (more than 37,150 employees) is slightly lower compared to 2016.
kk ExCo: No changes are proposed to the remuneration structure of the ExCo in 2018. A benchmarking analysis was carried out and given the review of best practices, market data, internal relativities and alignment with the strategy, minor changes to variable remuneration targets have been implemented.
Financial performance, together with a qualitative assessment, determines the funding and the range of STIP awards for each level of individual performance.
A detailed description of the STIP design is laid out below: Vehicle and target award STIP awards are paid in cash. Each participant has a STIP target established for the performance year at a maximum of 100 percent of the base salary at the end of the performance year (unless otherwise approved by the Board). The participant is allocated to one of the STIP pools within the overall STIP pool architecture for 2017: kk Group pools: covering the Leadership Team, control functions, Group and regional employees.
The committees on which the Directors serve are set out in the corporate governance report on page 46. In 2017, the Board consisted entirely of non-executive Directors independent from management.
7 Neither the Chairman nor the Vice-Chairman receive any additional fees for their committee work on the Board of Zurich. 8 Joan Amble stood down from her role as Chair of the Audit Committee as of June 26, 2017. Alison Carnwath took on the role from this date. 9 At the AGM on March 29, 2017, Catherine Bessant was elected to the Board. 10 In line with applicable laws, Zurich paid the company-related portion of contributions to social security systems, which amounted to CHF 177,366 in 2017. The corresponding contributions amounted to CHF 293,471 in 2016. Any personal contributions of the Directors to social security systems are included in the amounts shown in the table above. Swiss-based Directors are eligible for selected employee benefits.
Related parties to the Directors or to former Directors No benefits (or waiver of claims) have been provided to related parties of the Directors or related parties of former members of the Board during the years 2017 and 2016, nor had any related party of the Directors or of former members of the Board any outstanding loans, advances or credits as of December 31, 2017 and 2016.
2 On the basis of 14 members and former members of the ExCo, of whom 11 served during the full year in 2017. 3 On the basis of 15 (including Tom de Swaan in his position as CEO a.i.) members and former members of the ExCo, of whom 7 served during the full year in 2016. 4 Includes remuneration of Tom de Swaan in 2016 for his time in the position of Chief Executive Officer a. i. which amounted to USD 304,602 or CHF 300,000 applying the respective foreign exchange 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
None of the members of the ExCo received any remuneration from the Group or from any of the Group’s companies in 2017 and 2016 other than as set out in the tables above.
Share and vested share option holdings of the members of the ExCo 1
As in 2017, shareholders will receive the Board of Directors Report 2018 (www.zurich.com/en/investor-relations/ shareholder-area/annual-general-meeting). This includes information regarding the two remuneration votes on the total maximum amounts of remuneration for the Board and for the ExCo, which will take place at the AGM on April 4, 2018. The votes allow shareholders to have a say on the prospective remuneration for the Board and remuneration for the ExCo arising from Zurich’s remuneration policies. Shareholders will also be given the opportunity to express their opinion on the remuneration report 2017, through a consultative, non-binding vote at the AGM.
Also, I have a strong belief in our new purpose and values, which align with our customer-focused strategy to deliver on our promises, to all our stakeholders. In my role as Group Chief Risk Officer I want to be sure we manage our risks so that we can all thrive in this era of change.
The Group seeks to maintain a balance between higher returns for shareholders on equity held, and the security a sound capital position provides. Dividends, share buy-backs, and issuances and redemption of debt have a significant influence on capital levels. In 2017, the Group paid a dividend out of retained earnings and the capital contribution reserve, redeemed senior debt, and called hybrid debts that had been pre-financed during 2016.
Actual losses on claims provisions may be higher or lower than anticipated. Property and casualty insurance reserves are therefore regularly estimated, reviewed and monitored. The total loss and loss adjustment expense reserves are based on work performed by qualified and experienced actuaries at local, regional and Group levels.
Risk from interest rates and credit spreads Interest-rate risk is the risk of loss resulting from changes in interest rates, including changes in the shape of yield curves. The Group is exposed to interest-rate risk from debt securities, reserves for insurance contracts, liabilities for investment contracts, debt issued by the Group, commercial and residential mortgages, employee benefit plans, and loans and receivables.
The second-largest concentration in the Group’s debt securities portfolio is in financial institutions (including banks), at 19.6 percent, of which 38.4 percent is secured.
The Group regularly analyzes the liquidity of the investment assets, and monitors that the liquidity of assets stays in line with the liquidity needs. During 2017, the Group was within its capacity to hold illiquid assets.
The Group’s ongoing liquidity monitoring includes regular reporting to the executive management and quarterly reporting to the Risk and Investment Committee of the Board, covering aspects such as the Group’s actual and forecast liquidity, possible adverse scenarios that could affect the Group’s liquidity and possible liquidity needs from the Group’s main subsidiaries, including under conditions of stress.
1 Parentheses around numbers represent an adverse variance. 2 Details of the principles for calculating new business are included in the embedded value report in the annual results 2017. 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 Including investment cash. 4 Calculated on average Group investments.
1 Reflects management view and contains the ongoing business and certain closed books of Farmers New World Life Insurance Company (FNWL).
Assets under management decreased by USD 1.4 billion to USD 5.4 billion and total reserves decreased by USD 1.4 billion to USD 4.7 billion. Reductions in both items were related to an agreement signed in the second quarter of 2017 with Reinsurance Group of America to reinsure a portion of Farmers Life’s closed U.S. annuity book.
Basic earnings per share 19 20.02 21.51 Diluted earnings per share 19 19.90 21.36 in CHF
Additional paid-in capital 19 1,162 1,348 Net unrealized gains/(losses) on available-for-sale investments 3,078 2,809 Cash flow hedges 410 418 Cumulative foreign currency translation adjustment (8,762) (9,973) Revaluation reserve 228 235 Retained earnings 36,936 35,812 Shareholders’ equity 33,062 30,660 Non-controlling interests 1,831 1,813 Total equity 34,893 32,473 Total liabilities and equity 422,065 382,348 1 In 2017, the Group reclassified USD 29 billion of liabilities to held for sale based on agreements signed to sell businesses in the UK (see note 5). In 2016, the Group reclassified USD 290 million of liabilities to held for sale based on agreements signed to sell businesses in Taiwan and Middle East (see note 5).
Net income – – – – – – 3,211 3,211 Net unrealized gains/(losses) on available-for-sale investments – – 254 – – – – 254 Cash flow hedges – – – 125 – – – 125 Cumulative foreign currency translation adjustment – – – – (626) – – (626) Revaluation reserve – – – – – 7 – 7 Net actuarial gains/(losses) on pension plans – – – – – – (995) (995)
Net changes in capitalization of non-controlling interests – – – – – – – – (105) (105)
The following balances are mixed in nature (including both current and non-current portions): debt securities, mortgage loans, other loans, reinsurers’ share of reserves for insurance contracts, deposits made under assumed reinsurance contracts, deferred origination costs, other assets, reserves and investments for unit-linked contracts, liabilities for investment contracts, deposits received under ceded reinsurance contracts, deferred front-end fees, reserves for losses and loss adjustment expenses, reserves for unearned premiums, future life policyholder benefits, policyholder contract deposits and other funds, other liabilities, senior and subordinated debt, and assets and liabilities held for sale.
Goodwill and attorney-in-fact contracts (AIF) Goodwill is allocated to a cash generating unit (CGU) as outlined in note 3. Based on consideration of Group organizational changes, the Group has redefined the CGUs according to regions, separating Property & Casualty (P&C) and Life businesses (see note 27). The CGUs under the new structure which carry the majority of goodwill and AIF are presented in table 4.1.
Taiwan operations On January 17, 2017, the Group closed the sale of its P&C insurance operations in Taiwan to Hotai Motor Co., Ltd for a sales price of approximately USD 213 million. A pre-tax loss of USD 9 million has been recorded within net gains/ (losses) on divestment of businesses.
Kono Insurance Limited On January 29, 2016, the Group completed the acquisition of 100 percent of Kono Insurance Limited, a general insurance company incorporated in Hong Kong, for USD 27 million. Based on the final purchase accounting, net tangible assets acquired amounted to USD 13 million and identifiable intangible assets amounted to USD 1 million. Residual goodwill of USD 13 million reflects expected future growth opportunities.
Initial net reserves for losses and loss adjustment expenses 52,986 55,944 56,180 55,341 57,385 57,319 54,703 53,739 52,458 55,623
Cumulative paid as of: Seven years later (36,480) (37,324) (38,192) Eight years later (37,798) (38,695) Nine years later (38,960)
3 The Group’s life operations in the UK finalized the transfer of USD 1.6 billion of insurance assets and liabilities, associated with an annuities portfolio as of June 30, 2017. 4 The 2016 net movement of USD (32) million relates to acquisitions and divestments (see note 5).
Intangible assets by business – prior period in USD millions, as of December 31, 2016
Expected and actual income tax expense in USD millions, for the years ended December 31 Rate 2017 Rate 2016
For which deferred tax assets have not been recognized, expiring > 20 years or with no time limitation 1,731 1,247
Debt maturities reflect original contractual dates, taking early redemption options into account. For call/redemption dates, see table 18.1. The total notional amount of debt due in each period is not materially different from the total carrying value disclosed in table 18.2. Undiscounted cash flows include interest and principal cash flows on debt outstanding as of December 31, 2017 and 2016. Floating interest rates are assumed to remain constant as of December 31, 2017 and 2016. The aggregated cash flows are translated into U.S. dollars at end-of-period rates.
For post-employment defined benefit plans, total contributions to funded plans and benefits paid directly by the Group were USD 550 million for 2017 compared with USD 424 million for 2016. The estimated total for 2018 is USD 438 million (actual amount may differ).
German pension plans There are a number of legacy defined benefit plans in Germany, most of which were set up under works council agreements. In 2007, a contractual trust arrangement was set up to support all pension commitments of the employing companies in Germany. From this time, new contributions to the contractual trust arrangement relate to the pension payment refund of the employer companies.
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) (636) (149) (284) (3,388) Net post-employment benefit (expense)/income 1 (64) (80) (39) (17) (36) (235)
A revised Partnership Share Scheme was launched in March 2013. Participants benefit from purchasing shares by making deductions from gross salary up to a maximum of GBP 1,800 or 10 percent of their year-to-date earnings. There were 754 and 848 active participants in the plan as of December 31, 2017 and 2016, respectively.
Fair values of liabilities related to unit-linked investment contracts are usually determined by reference to the fair value of the underlying assets backing these liabilities. Such instruments are classified within level 2.
kk Reinsurers’ share of reserves and reserves for insurance contracts fair value option. The fair values are determined using discounted cash flow models. The discount factors used are based on derived rates for LIBOR swap forwards, spreads to U.S. Treasuries and spreads to U.S. corporate A or higher rated bond segments for financials, industrials and utilities. The liability-projected cash flows use contractual information for premiums, benefits and agent commissions, administrative expenses under third party administrative service agreements and best estimate parameters for policy decrements. The primary unobservable inputs are the policy decrement assumptions used in projecting cash flows. These include disability claim parameters for incidence and termination (whether for recovery or death) and lapse rates. Significant increases/(decreases) in claim incidence rates and significant decreases/ (increases) in claim termination rates would result in a significantly higher/(lower) fair value measurement.
1 All prior year’s business in run-off were settled in 2017. 2 The APD agreement was not renewed in 2016. Net underwriting result in 2016 reflects adverse development on prior year’s business in run-off. 3 From January 1, 2017, ZIC assumed an 8.0 percent quota share. Another 16.0 percent was assumed by third parties. Subject to the approval of the California Department of Insurance, effective December 31, 2017, Farmers Re Co assumed an 1.0 percent quota share, while another 28.0 percent was assumed by third parties. ZIC has no participation in the December 31, 2017 All Lines agreement.
Reserves for losses and loss adjustment expenses, gross 60,080 56,074 – – 809 918 22 22 4,508 4,200 (50) (59) 65,368 61,155 Reserves for unearned premiums, gross 16,976 15,781 – – 79 625 3 3 8 12 (5) (4) 17,060 16,416 Future life policyholder benefits, gross 36 33 71,828 66,440 2,073 1,988 2 2 3,596 3,978 (6) – 77,529 72,440 Policyholder contract deposits and other funds, gross 23 22 18,880 16,649 3,915 3,930 – – 2,126 2,183 – – 24,944 22,785 Reserves for unit-linked contracts, gross 1 – – 70,371 53,983 807 677 – – 4,235 10,870 – – 75,413 65,530
Equity Shareholders’ equity 33,063 30,660 Non-controlling interests 1,831 1,813 Total equity 34,893 32,473 Total liabilities and equity 422,065 382,348 Supplementary information Additions and capital improvements to property, equipment and intangible assets 264 406 185 123 174 155 31 31 – – – – 653 715 1 In 2017, the Group transferred a portfolio of stable value products (SVP) marketed with life insurance policies (Bank Owned Life Insurance, BOLI) from Non-Core Businesses to Life. The change resulted in a transfer of USD 8.3 billion of investments for unit-linked contracts and for reserves for unit-linked contracts.
Zurich Financial Services (UKISA) Limited Cheltenham, England 100 100 GBP 1,652.1
Centre Group Holdings (U.S.) Limited New York, NY 100 100 USD 0.000001 ZCM (U.S.) Limited Wilmington, DE 100 100 USD 0.00001 Zurich Capital Markets Inc. Wilmington, DE 100 100 USD 0.00001 Zurich Structured Finance, Inc. Wilmington, DE 100 100 USD 0.012 1 The controlling shareholder of this subsidiary is Zurich Santander Holding Dos (Spain), S.L. 2 Relates to Bansabadell insurance entities which are controlled by the Group. 3 The ownership percentages in Farmers Group, Inc. and its fully owned subsidiaries have been calculated based on the participation rights of Zurich Insurance Group in a situation of liquidation, dissolution or winding up of Farmers Group, Inc. 4 Shares have no nominal value in accordance with the company’s articles of incorporation and local legislation.
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 Zurich Insurance Group Ltd 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 Zurich Insurance Group Ltd or one of its group companies in a fast and expeditious manner.
Average selling price, in CHF 262 248 1 in CHF thousands