Market segments of the Farmers Exchanges 2 Individual and commercial customers
Net investment return on Group investments 3 4.5% 3.5% 0.9 pts
• Building supporting capabilities We renewed our focus on managing talented people. We are developing advanced data analytics and continue to improve processes that support operations and customers. We extended our successful brand campaign.
Global Life delivered strong growth in the U.S. and UK priority markets for retail, bank distribution and Corporate Life & Pensions in 2014. BOP was broadly flat compared with the prior year.
Corporate customers Our customers are facing increased levels of uncertainty and are looking for holistic solutions to manage all their risk needs. Zurich is one of the few companies able to serve large corporate customers by providing them with both general and life insurance through a single, unified approach.
Spain Zurich is strengthening its position in Spain, a market where banks are by far the most important channel for life insurance, comprising close to 80 percent of total distribution. We expanded a 2008 agreement with Banco Sabadell to include the network of the former Caja de Ahorros del Mediterraneo (CAM) and acquired 50 percent of the CAM general insurance carrier Mediterraneo Seguros Diversos. With this, we gain direct access to an additional 2.4 million customers for life, pension and general insurance through more than 600 branches in Murcia and Valencia in eastern Spain, and the Balearic Islands. The agreement lets Zurich reclaim its sole provider status for insurance and pension plans throughout Spain within the bank’s network and reaffirms Banco Sabadell’s trust in Zurich.
Business review 2014 can get an extended warranty for their purchases from Zurich. On average, we are currently selling one of these warranties every 10 seconds. By providing protection to millions of customers, including some who might be buying insurance for the first time, Zurich is growing its business and becoming a more familiar brand in an attractive market.
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 by the following rules, with which Zurich complies: • Directive on Information Relating to Corporate Governance of the SIX Exchange Regulation (as of September 1, 2014).
• Global Life pursues a strategy with market-leading propositions in unit-linked and protection products as well as fee-based solutions managed through three global pillars (Bank Distribution, Corporate Life & Pensions and in-force management) to develop leading positions in its target markets.
A detailed review of the respective business segment results during 2014 can be found in the operating and financial review starting on page 98. Furthermore, an overview of the Group’s business strengths and activities is contained in the Annual Review, available on Zurich’s website www.zurich.com (www.zurich.com/_/media/dbe/corporate/docs/ financial-reports/2014/annual-review-2014.pdf?la=en).
Skills and experience Fred Kindle began working in the marketing department of Hilti AG in Liechtenstein in 1984. 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, where he also served as a board member. After joining ABB Ltd in 2004, Mr. Kindle was appointed CEO of ABB Group in January 2005, a position he held until February 2008. He then became a partner of Clayton, Dubilier & Rice LLP, a private equity firm based in New York and London. 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 vice-chairman in September 2013.
Dame Alison Carnwath Member of the Board of Directors Nationality: British Born: 1953
External appointments Dame Alison has been a senior advisor of Evercore Partners since 2011 and an independent chairman of Living Bridge Equity Partners LLP (formerly ISIS Equity Partners LLP) since 2000. She has been chairman of the board of Land Securities Group plc since 2008 and a member of the board of PACCAR Inc. since 2005. Dame Alison is also a trustee of the British Library. In September 2013, she was appointed to the advisory council of the St. George’s Society of New York. Since May 2014 she is a member of the supervisory board of BASF SE and Chairman of the Audit Committee of BASF SE.
Educational background Dame Alison graduated in economics and German from the University of Reading. She was also awarded an honorary doctorate (LLB) from the University of Reading.
Committees of the Board of Directors The Board has the following standing committees, which regularly report to the Board and submit proposals for resolution by the Board: Governance and Nominations Committee Composition and membership: The Governance and Nominations Committee consists of at least four Board members. Currently, Tom de Swaan (Chairperson), Rafael del Pino, Thomas Escher and Fred Kindle serve on this committee.
The Remuneration Committee has retained its own independent advisors, Meridian Compensation Partners, LLC and Aon Hewitt to assist in its review of the remuneration structures and practices.
For more information on the supervision and control of the external audit process, see pages 57 and 58.
The Audit Committee also discussed compliance issues and trends, such as evolving regulatory expectations with regard to the compliance function.
Panels To enhance its understanding and assessment of the challenges and risks Zurich may face, the Group continues to seek external expertise and perspective. As of December 31, 2014, the Group had access to three panels of leading academics, business and industry experts which provide feedback and insight. They are not corporate bodies of the Group and have no decision-making powers. These panels provide expertise and advice to senior management or certain functions of the Group. In particular, the International Advisory Council is mandated to provide an external perspective and expertise to the CEO and to members of the GEC on the Group’s growth and public policy strategies. The Investment Management Advisory Council offers feedback on Zurich’s investment results and strategy and on achieving superior risk-adjusted returns relative to the liabilities for the Group’s invested assets. The Natural Catastrophe Advisory Council provides insight into the patterns of occurrence, predictability and destructiveness of catastrophes and feedback about Zurich’s approach to such catastrophes in order to help improve the effectiveness of its underwriting and reinsurance purchasing.
External appointments Since 2009, Mr. Hausmann has been a member of the legal committees of the Swiss-American Chamber of Commerce and of economiesuisse. In 2011, he joined the board of trustees of the foundation that supports the Museum Haus Konstruktiv in Zurich. In May 2013 Mr. Hausmann became a member of the board of the Europa Institute at the University of Zurich.
Skills and experience Cecilia Reyes has over 20 years experience in the international financial markets. Ms. Reyes worked from 1990 until 1995 for Credit Suisse in Zurich in various roles in Credit Suisse Asset Management, global treasury and securities trading. In 1995, she started working with ING Barings in London and in 1997 she became a director and head of trading risk analytics. She moved to Amsterdam in 2000 as head of risk analytics for ING Asset Management to develop risk management methods for the asset management operation. Ms. Reyes joined Zurich in 2001 as regional manager for Group Investments with responsibility for North America, and became regional manager for Europe and International Businesses in 2004. From April 2006 until March 2010 she was Head of Investment Strategy Implementation. In April 2010, she assumed her current role as Chief Investment Officer.
Changes of control and defense measures Duty to make an offer The Articles of Incorporation of Zurich Insurance Group Ltd do not provide for opting out or opting up in the meaning of articles 22 and 32 of the Federal Act on Stock Exchanges and Securities Trading. Therefore, mandatory offers have to be submitted when a shareholder or a group of shareholders acting in concert exceed 331⁄3 percent ownership of the issued and outstanding share capital of Zurich Insurance Group Ltd.
Non-audit fees Total fees (including expenses and value added taxes) in the year 2014 for additional services (e.g., tax advice and services, internal control advice, transaction consulting services or special audits required by local law or regulatory bodies) performed by PwC and parties associated with them for Zurich Insurance Group Ltd or a Group company amounted to USD 9.6 million (USD 14.9 million in 2013). Non-audit fees were as follows: Audit and non-audit fee amounts in USD millions, as of December 31 2014 2013
We continue to ensure that our remuneration approach is aligned with the strategy, rewards appropriately for the business results achieved, and as part of our risk framework does not promote excessive risk taking. The design of our remuneration architecture complies with regulatory requirements, embraces market practices and trends, and provides attractive and balanced rewards to our employees.
The Board continues to be firmly of the opinion – also taking into account the changes to the LTIP in 2014 – that the remuneration architecture is aligned with the execution of the Group’s strategy and reflects current international best practices in terms of governance, plan design and disclosure.”
• the value of the target share allocations made during the year on the assumption that the allocations will vest in the future at the 100 percent level (e.g. vesting at 100 percent of target in 2016 and 2017).
3 Due to the potential volatility in any one year, the assessment of cash remittance performance can only meaningfully be assessed over a three year period. Therefore, the cash remittance criterion will be replaced by the BOPAT ROE for the vesting decisions in 2015 and 2016 and it will be assessed using the same vesting grid that applies to the NIAS ROE.
In recent years, more than 12,000 employees have been transferred from local incentive plans to STIP. In 2015 and 2016, Zurich aims to transfer approximately a further 1,000 employees from local incentive plans to STIP taking into account the legal and market environment.
However, if performance under exceptional or unusual circumstances warrants it exceptions to the +/–25 percent individual adjustment may be made. In this respect Zurich reserves the right to adjust and even set the vesting level to zero 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 target shares for vesting.
Based on this structure, the total aggregate fees allocated to the Directors of Zurich and Zurich Insurance Company Ltd for the year ended December 31, 2014, amounted to CHF 3,700,807. This included CHF 2,702,252 in cash and a value at the allocation date of CHF 998,555 in three year sales restricted shares. The share price at the allocation date was CHF 265.50 The corresponding amount for 2013 was CHF 4,151,009, which comprised CHF 2,992,893 in cash and a value at the allocation date of CHF 1,158,116 in three year sales restricted shares. The share price at the allocation date in 2013 was CHF 240.90. The Directors’ fees are not pensionable.
Group Executive Committee Remuneration of GEC For the members of the GEC and all other employees throughout the Group, a number of key elements are in place to provide a well-balanced and effectively managed remuneration program. These elements include a Group wide remuneration philosophy, robust short-term and long-term incentive plans, effective governance, and strong links to the business planning and risk policies of the Group.
No Replacement Payments, or allocations in restricted shares, were made in 2013 to members of the GEC.
Cash incentive awards earned for the year 1 499 530 Value of target share allocations made in the year 2,3 153 138 Total variable remuneration pool 4 652 668 Value of target share allocations from transition arrangements 3 116 n / a 1 Includes Sign-on and Severance Payments in cash.
Unvested target share allocations 1 254 236 Unvested restricted share allocations 17 9 Vested but sales restricted allocations 125 137 Value of overall outstanding deferred remuneration 396 382 1 This excludes the value of target share allocations made in 2014 from transition arrangements which amounts to USD 116m.
Return on common shareholders’ equity (ROE) 6 12.8% 13.3% (0.6 pts) Business operating profit (after tax) return on common shareholders’ equity (BOPAT ROE) 6 11.1% 11.6% (0.6 pts)
Operating and funding costs increased by USD 168 million, including the effect of investments in Global Life’s priority markets, impairment of software intangible assets and policyholder tax impacts. Acquisition costs increased by USD 75 million, reflecting higher volumes of business primarily in Europe and North America. In addition, a change in the expense allocation methodology between operating and acquisition costs resulted in an increase in operating costs and a decrease in acquisition costs by USD 30 million compared with 2013. The impact of deferrals improved the result by USD 145 million mainly due to the negative effect of one-off items in 2013.
Analysis of capital adequacy 119 Insurance financial strength rating 119 Regulatory capital adequacy 119 Economic capital adequacy 122
We expanded our training program to support local risk management teams, especially in the areas of quantifying operational risk, implementing controls, and complying with developing regulatory requirements.
The Group also has audit committees at the major business level. The committees are responsible for overseeing risk management and control functions including monitoring adherence to policies and periodic risk reporting. At the local level, these oversight activities are conducted through risk and control committees or quarterly meetings between senior executives and the local heads of governance functions.
Sensitivities for the Group’s Swiss Solvency Test ratio (as of July 1, 2014)
Regulatory requirements in Asia-Pacific, Latin America and Middle East and Africa Every country has a capital standard for insurance companies. Some jurisdictions, including Japan, Mexico and South Africa, are reviewing their economic capital requirements, considering similar approaches to Solvency II.
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
Table 4 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.
1 U.S. Catastrophe Treaty and Global Aggregate Catastrophe Treaty renewed on January 1, 2014; Europe Catastrophe Treaty and Global Catastrophe Treaty renewed on April 1, 2014; and International Catastrophe Treaty renewed on July 1, 2014. 2 Lakeside Re III – Cat Bond.
Sensitivities for the rest of the business include Farmers, Other Operating Businesses and Non-Core Businesses. In 2013, the analysis for Non-Core Businesess that included business with life insurance characteristics was based on market-consistent embedded value market-risk sensitivities. In 2014, the basis of presentation for this business is the same as for General Insurance and the rest of the business.
AUDITED See notes 1, 3 and 7 of the consolidated financial statements for additional information on foreign currency translation and transactions.
Cash and cash equivalents amounted to USD 7.6 billion as of December 31, 2014 and USD 7.2 billion as of December 31, 2013. The risk-weighted average rating of the overall cash portfolio remained stable at “BBB+” from December 31, 2013 to December 31, 2014. 57 percent of the total was with the ten largest global banks, whose average rating increased from “A–” to “A” from December 31, 2013 to December 31, 2014.
Credit risk related to debt securities The Group is exposed to credit risk from third-party counterparties where the Group holds securities issued by those entities.
Reinsurance assets in table 11 are shown before taking into account collateral such as cash or bank letters of credit and deposits received under ceded reinsurance contracts. Except for an immaterial amount, letters of credit are from banks rated “A–”. Compared with December 31, 2013, collateral decreased by USD 1.9 billion to USD 5.7 billion.
Neither past due nor impaired financial assets 156,181 8,825 11,787 15,016 191,809 Past due but not impaired financial assets. Past due by: Past due but not impaired financial assets – 304 1 2,248 2,553
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people, systems or from external events such as outsourcing, catastrophes, legislation, or external fraud.
Policy fees 2,712 2,884 Gross written premiums and policy fees 54,781 54,849
Basic earnings per share 20 26.31 27.33 Diluted earnings per share 20 26.08 27.22 in CHF
Cash and cash equivalents 7,600 7,181 Equity securities 16,099 13,183 Debt securities 153,648 156,456 Investment property 8,784 8,745 Mortgage loans 7,826 9,798 Other loans 10,834 11,789 Investments in associates and joint ventures 70 129
Cash flows from investing activities Disposals of tangible and intangible assets 86 66 Additions to tangible and intangible assets (1,381) (831) (Acquisitions)/disposals of equity method accounted investments, net 95 (24) Acquisitions of companies, net of cash acquired (100) – Divestments of companies, net of cash divested 67 – Dividends from equity method accounted investments 1 1 Net cash provided by/(used in) investing activities (1,233) (788) Cash flows from financing activities Dividends paid (2,958) (2,889) Issuance of share capital 129 44 Net movement in treasury shares 25 15 Other acquisitions and divestments related cash flows (403) – Issuance of debt 1,526 1,545 Repayment of debt (1,560) (1,948) Net cash provided by/(used in) financing activities (3,241) (3,233) Foreign currency translation effects on cash and cash equivalents (773) (17) Change in cash and cash equivalents 614 (2,046) Cash and cash equivalents as of January 1 8,162 10,208 Cash and cash equivalents as of December 31 8,776 8,162 of which: – Group investments 7,600 7,181 – Unit-linked 1,176 982
USD 718 million between the dividend at transaction day exchange rates amounting to USD 2,651 million and the dividend at historical exchange rates amounting to USD 1,933 million is reflected in the cumulative foreign currency translation adjustment.
Reserves for unit-linked contracts are based on the fair value of the financial instruments backing those contracts less any fees and assessments charged to the policyholders.
q) Leases Payments made under operating leases (net of any incentives received from the lessor) are charged to income on a straight-line basis over the period of the lease. A termination penalty, if any, is recognized immediately as expense at the time the termination is made.
Taxes payable by either the holding company or its subsidiaries on expected distributions to the holding company of the profits of subsidiaries are not recognized as deferred income taxes unless a distribution of those profits is intended in the foreseeable future.
Gross unrealized gains/(losses) on Group investments 14,456 5,988 Less amount of unrealized gains/(losses) on investments attributable to: Life policyholder dividends and other policyholder liabilities (7,628) (2,948) Life deferred acquisition costs and present value of future profits (995) (460) Deferred income taxes (1,421) (738) Non-controlling interests (38) (6)
In 2014, the Group also designated certain debt issuances as hedging instruments on a non-derivative net investment hedge relationship. As of December 31, 2014, the notional amount of these financial instruments was USD 1.5 billion and net gains/(losses) deferred in other comprehensive income were USD (35) million before tax.
Universal life and other contracts 12,626 12,833 Policyholder dividends 10,789 7,329
Change in reserves for unearned premiums 351 971 8 54 359 1,025
Development of deferred policy acquisition costs in USD millions General Insurance Global Life Other segments 1 Total
2 Included within commissions and other underwriting and acquisition expenses (see table 11.3). 3 Included within losses and loss adjustment expenses (see table 11.1). 4 Excludes expenses arising from investment property within investment expenses for Group investments (see table 6.1).
The fire insurance value of the Group’s own-use property and equipment totaled USD 2,878 million and USD 2,918 million as of December 31, 2014 and 2013, respectively.
Other liabilities in USD millions, as of December 31 2014 2013
b) Contingent share capital Capital market instruments and option rights to shareholders The share capital of Zurich Insurance Group Ltd may be increased by an amount not exceeding CHF 1,000,000 by the issuance of up to 10,000,000 fully paid registered shares with a nominal value of CHF 0.10 each (i) by exercising conversion and/or option rights which are granted in connection with the issuance of bonds or similar debt instruments by Zurich Insurance Group Ltd or one of its subsidiaries in national or international capital markets; and/or (ii) by exercising option rights which are granted to current shareholders. When issuing bonds or similar debt instruments connected with conversion and/or option rights, the pre-emptive rights of the shareholders will be excluded. The current owners of conversion and/or option rights shall be entitled to subscribe for the new shares. The conversion and/or option conditions are to be determined by the Board.
Inter-relationship analysis of level 3 investments to changes in key assumptions – current period as of December 31, 2014 Key assumptions Increase/decrease in reported fair value
Fin an cial info rm atio n 25. Related party transactions
Related party transactions – key personnel in USD millions, for the years ended December 31 2014 2013
5 Under the All Lines agreement the Farmers Exchanges catastrophe losses are subject to a maximum of USD 1.2 billion. 6 Under the APD agreement the ceding commission for acquisition expenses range between 27.1 percent and 29.1 percent and the ceding commission for unallocated loss adjustment expenses range between 8 percent and 10 percent, both based on a previous 5 year average experience. Under the All Lines agreement, the Farmers Exchanges receive a ceding commission of 26.7 percent, 8.4 percent (9 percent in 2013) of premiums for unallocated loss adjustment expenses and 5.3 percent of premiums for other expenses.
From January 1, 2014, the General Insurance business manages Middle East and Africa together with Europe to form a single market-facing business called Europe, Middle East & Africa (EMEA). This change had no impact on total General Insurance or the Group.
Investments for unit-linked contracts – – 122,446 122,423 – – – – 11,970 11,844 – – 134,416 134,267
Spain Bansabadell Pensiones, E.G.F.P, S.A. 2 Barcelona Global Life 50 50 EUR 7.8 Bansabadell Seguros Generales, S.A. 2 de Seguros y Reaseguros Barcelona General Insurance 50 50 EUR 10.0 Bansabadell Vida S.A. de Seguros 2 y Reaseguros Barcelona Global Life 50 50 EUR 43.9 Zurich Latin America Holding S.L. – Sociedad Unipersonal Barcelona
This report describes the development of embedded value of the Zurich Insurance Group (the Group) for the year ended December 31, 2014.
In Switzerland, embedded value decreased by USD 71 million due to dividend payments and foreign currency translation effects more than offsetting the positive contribution from updated assumptions and economic variances.
In Rest of Europe, APE increased by USD 10 million or 34 percent on a local currency basis. New business value increased of USD 2 million or 38 percent on a local currency basis, mainly from unit-linked business in Austria.
In Germany, dividend payments and exchange rate movements were the main drivers of the decrease in free surplus of USD 43 million partly offset by market returns.
• Other assumption changes decreased embedded value by USD 82 million. The main contributors were a decrease of USD 29 million in North America, mainly due to a reduction in the assumed take-up rate of policy loans, a decrease of USD 26 million in Australia due to increase of reinsurance premiums and a decrease of USD 23 million in Spain as a result of updated dynamic lapse assumptions and updated management fees for pension business.
p) Sensitivities The key assumption changes represented by each of the sensitivities in section 10 are as follows: Operating sensitivities
Net income after taxes for the year was CHF 2,723 million compared with CHF 2,327 million in 2013. The result was mainly driven by the higher dividend income from its subsidiary Zurich Insurance Company Ltd of CHF 2,500 million in 2014, compared with CHF 2,200 million in 2013. In 2014 other financial expenses of CHF 165 million included impairments on investments in subsidiaries of CHF 100 million.
Non-current assets Investments in subsidiaries 9 11,519,569 11,619,569 Subordinated loans to subsidiaries 10 4,878,836 4,876,670 Total non-current assets 16,398,405 16,496,239 Current assets Cash and cash equivalents 533 767 Loans to subsidiaries 1,216,919 260,314 Receivables from subsidiaries – 466,229 Receivables from third parties – 99 Accrued income from subsidiaries 346 298 Accrued income from third parties 14 14 Derivatives with subsidiaries 2,615 – Total current assets 1,220,427 727,721 Total assets 17,618,832 17,223,960
Opinion In our opinion, the financial statements for the period from January 1, 2014, to December 31, 2014, comply with Swiss law and the Company’s articles of incorporation.
Europe Zurich has major operations in Germany, Italy, Spain, Switzerland, and the UK and a significant presence in other countries.