IM value creation paper

Investment
Management
A creator of value in an
insurance company

Zurich Insurance Group Ltd
Third edition

Investment Management – A creator of value in an insurance company

Disclaimer and cautionary statement
This publication has been prepared by Zurich Insurance Group Ltd and the opinions expressed therein are
those of Zurich Insurance Group Ltd as of the date of writing and are subject to change without notice.
This publication has been produced solely for informational purposes. The analysis contained and opinions
expressed herein are based on numerous assumptions. Different assumptions could result in materially
different conclusions. All information contained in this publication has been compiled and obtained from
sources believed to be reliable and credible but no representation or warranty, express or implied, is made
by Zurich Insurance Group Ltd or any of its subsidiaries (the ‘Group’) as to its accuracy or completeness.
Opinions expressed and analyses contained herein might differ from or be contrary to those expressed
by other Group functions or contained in other documents of the Group, as a result of using different
assumptions and/or criteria.
This publication is not intended to be legal, underwriting, financial, investment or any other type
of professional advice. Persons requiring advice should consult an independent adviser. The Group
disclaims any and all liability whatsoever resulting from the use of or reliance upon this publication.
Certain statements in this publication are forward-looking statements, including, but not limited to,
statements that are predictions of or indicate future events, trends, plans, developments or objectives.
Undue reliance should not be placed on such statements because, by their nature, they are subject
to known and unknown risks and uncertainties and can be affected by other factors that could cause
actual results, developments and plans and objectives to differ materially from those expressed or
implied in the forward-looking statements.
This publication may not be reproduced either in whole, or in part, without prior written permission
of Zurich Insurance Group Ltd, Mythenquai 2, 8002 Zurich, Switzerland. Zurich Insurance Group Ltd
expressly prohibits the distribution of this publication to third parties for any reason. Neither Zurich
Insurance Group Ltd nor any of its subsidiaries accept liability for any loss arising from the use or
distribution of this presentation. This publication is for distribution only under such circumstances
as may be permitted by applicable law and regulations. This publication does not constitute an offer
or an invitation for the sale or purchase of securities in any jurisdiction.


Investment Management

Insurance companies generally recognise the importance of separating
the responsibility for managing their insurance businesses, from that
of managing the investments backing their reserves and capital. Due to
the scale of investments on an insurance company’s balance sheet and
the impact of investment results on its profitability, the management
of these investments is a key function.
At Zurich, Investment Management applies a systematic and structured
investment process, focusing on the value drivers that matter most.
This disciplined approach has worked over various market cycles and
helped achieve our mission of consistently producing superior risk-adjusted
returns relative to our liabilities. This approach is instrumental in meeting
our obligations to all our key stakeholders: our customers, shareholders,
our people and the communities in which we live and work.

1

2



Contents

3

I. Investment Management in an insurance company

4

II. Zurich’s investment philosophy

7

III. Zurich’s investment strategy in practice

10

4

I. Investment
Management in an
insurance company


The global financial crisis in 2008 highlighted the importance of having a clear
investment policy as well as a structured and disciplined investment process.
It also underlined the need for insurance companies to manage their assets
relative to their liabilities. The application and success of this activity has been
a major differentiator across the insurance industry in recent years. In addition,
a market environment that was characterized by low interest rates and falling
bond yields forced the insurance industry to focus on improving underwriting
standards and enhancing business efficiency as investment returns diminished.
The nature of the insurance business requires significant capital, which needs
to be professionally managed
Insurance companies sell protection to their customers, who pay premiums that are subsequently
invested to cover future claims or benefits, administrative expenses and profits to shareholders.
Regulators generally require insurance companies to hold sufficient assets to back liabilities
in every insurance business. The reserves must suffice to pay-out expected claims and benefits,
even in the unplanned case that the insurer stops writing new business. Thus, regulators
require that insurers do not rely on new premiums to pay for claims and benefits underwritten
in the past. As insurers continuously underwrite new business, they generally hold significant
and relatively stable amounts of investments on their balance sheet.
Reserves generated by the insurance business are invested until they are needed for pay-outs.
In addition, equity capital buffers help to ensure that the insurer has adequate funds to pay
claims or benefits in scenarios in which actual pay-outs are larger than those reserved. Therefore,
the investments on the insurer’s balance sheets include reserves for expected claims and benefits
as well as shareholder capital that acts as an additional buffer for unforeseeable events.

Capital markets will only
provide higher expected
returns when higher risks
are attached

No extra return without extra risk is the guiding principle
An insurer aims to pursue investment strategies that focus on creating value for both
policyholders and shareholders. In the insurance industry, attaining the optimum balance
between risk and return remains the key challenge. Chasing higher returns has its downside:
higher risk. Capital markets will only provide higher expected returns when higher risks are
attached. Investors will differ in their ability and willingness to chase returns and tolerate
the resulting risks. When the financial crisis ensued in 2008, some investors were forced
to sell their risky investments to mitigate the threat of insolvency, while others with
sufficient capital were able to withstand the downturn, held on and benefited when
markets recovered the following year. No extra return without extra risk is a principle that applies
to all investors. The important corollary to this principle is that investors should have sufficient
capital to bear the risks they take.
Investment risk for an insurance company has its own specific characteristics
Insurance investment risk is different from that which a typical fund manager would describe
as investment risk. A typical fund manager invests on behalf of its clients and is usually focused
on maximising the investment returns relative to a prescribed market benchmark (e.g. SP
500). Investment risk for fund managers is both absolute and relative. The absolute risk is
the chance the market value of the underlying fund will rise or fall in a particular time period.
The relative risk is the chance the fund manager may out- or underperform the benchmark in
a particular time period. However, both measures are focused on the asset side of the balance
sheet only – little consideration is given to the client’s liabilities. It is therefore left to the client
to select the investments that meet the needs of the liabilities.


5

Risk in insurance investment management is akin to the fund manager’s risk relative to its
market benchmark, only, in the case of an insurance company, the benchmark is its liabilities.
When an insurance company determines its investment risk appetite and investment strategy,
it cannot ignore the liability side of its balance sheet – the reserves for future claims and
benefits and shareholder capital. Thus, it is critical to understand the structure and duration
of liabilities to make sure that the investment strategy is commensurate with being able to
meet these future obligations.
Insurance companies have assets (investments) and liabilities (future claims and benefits),
the values of which change as capital market conditions change. The challenge for insurance
investment management is to manage the potential mismatch in value of its assets and
liabilities and to ensure that such a mismatch will not endanger the company.
Insurance investment risk, therefore, is when investments become insufficient to pay the
liabilities due to adverse changes in capital markets. The analysis and management of these
relative movements is called Asset-Liability Management (ALM).
Asset-Liability Management is the cornerstone of the investment process
Insurers must hold enough capital to cover all eventualities. As a result, insurers must hold
assets not just to cover the expected claims, but also unexpected larger claims, and be able
to absorb adverse results from any asset-liability mismatch. This additionally necessitates that,
when insurers hold more risky investments, they must have more capital to protect
policyholders in the event that the riskier investments lose value. For example, since
equities are generally more risky than government bonds, any insurance company wishing
to invest in equities must hold more capital than they would for the same amount of
government bonds. Consequently, the amount of capital required to protect policyholders
for each type of investment must be considered in any investment decision.

Insurers’ balance sheets are
dominated by investments
on the asset side and reserves
for future claims and benefits
on the liability side

Insurers’ balance sheets are dominated by investments on the asset side and reserves for future
claims and benefits on the liability side (ignoring unit-linked investments which have similar
offsetting liabilities). Therefore, relative changes in value of investments relative to insurance
liabilities can have a significant impact on shareholders’ equity.
The chart on the following page illustrates the importance of Asset-Liability Management
in managing an insurer’s investments. This particular example, based on a sample of Continental
European insurance companies, shows that, if investments were to under perform by little
more than 10% of the value of the insurance liabilities, shareholders’ equity would be wiped
out. This level of shareholder leverage makes ALM critical in insurance investment management.

6


Chart 1:
Simplified balance sheet of a typical European insurance company (%)

100%

100%

Shareholders’ equity
7%

Investments
66%
Insurance liabilities
60%
Other assets
17%

Other liabilities
15%

Unit-linked investments
17%

Unit-linked liabilities
17%

Assets

Liabilities

The investment function is conducted within a highly regulated environment
Insurers’ balance sheets are structured in-line with accounting standards that define how assets
and liabilities should be valued. These accounting values are often different from the economic
‘market’ values. This is particularly true for insurers’ liabilities which, from an accounting
perspective, are not always adjusted for market movements.
Insurance companies are regulated in every market where they conduct insurance business.
Regulators set solvency and other requirements for every local business that must be met
in all circumstances. Some also require this at the aggregated group level. The objective of
solvency requirements is to ensure that insurers hold enough assets to pay-out all claims at
all times. Furthermore, insurance regulators also set requirements regarding the types of
investments that qualify for solvency calculations, as well as governance, risk management
and disclosure.
When developing their investment strategy, insurers must comply with the various regulatory
frameworks in the countries in which they operate. For example, some regulators do not allow
certain investments, such as commodities and hedge funds, to cover reserves. In addition,
regulators often discourage holding certain asset classes by imposing significant statutory
capital requirements on them.

7


II. Zurich’s investment
philosophy

Investment Management at Zurich Insurance Group has the mission to
achieve superior risk-adjusted investment returns relative to liabilities.
The mission is focused on value creation for all of Zurich’s key stakeholders:
our customers, shareholders, our people and the communities in which we
live and work.
Chart 2:
Mission and ambition

Mission
Achieve superior risk-adjusted
investment returns relative to
liabilities.

Ambition
We aim to be the best global
insurance investment manager as
measured by our key stakeholders.

Economic value is created if the return on capital required to support the insurance investment
risk is greater than the cost of capital. Capturing this value requires that Investment Management
be a key function within the Zurich Group, in which insurance investments have to be analysed
and managed relative to liabilities. To generate additional returns requires taking additional
risks, which necessitates a structured and disciplined investment approach. Zurich’s investment
strategy can be articulated by four key principles that guide all investment decisions.

1. We aim to maximise economic objectives.
2. We aim to minimise unrewarded risks.
3. We believe that capital markets are fairly efficient over time.
4. We are a Responsible Investor.

.

1 Maximise economic objectives
The investment function of a large insurance company such as Zurich is a highly complex
business that involves many stakeholders with many different interests and opinions. Hence,
defining a clear hierarchy of targets and priorities is of high importance to guide decisionmaking. Investment Management at Zurich creates value by maximizing economic objectives.
Specifically, this means we:
• strive to create long-term value by developing and implementing a global investment
strategy that optimizes the investment risk/return trade-off for stakeholders.
• measure investment risks and returns relative to liabilities on an economic,
market value basis.
• adhere to regulatory restrictions.
• minimise short-term activism and strive for best execution when transacting
in the capital markets.

8

At Zurich we strive to
maximise rewarded risk with
our allocated capital, while
minimising unrewarded risks


2. Minimise unrewarded risks
’Rewarded’ risks are those that reward investors with a higher expected return
(risk premium) for taking them. Examples are the equity risk premium and credit spreads.
’Unrewarded’ risks are those for which investors receive no expected compensation from
markets. However, these risks can be diversified away at very little or no cost. Examples
of unrewarded risks include holding only very few shares in an equity portfolio. Different
investors have different investment strategies. However, systematically taking uncompensated
risks does not create value. Not surprisingly, at Zurich we strive to maximise rewarded risk,
and thus return, with our allocated capital, while minimizing unrewarded risks.
At Zurich, we avoid:
• holding a concentrated portfolio – this increases risk but not necessarily return.
• frequent trading – trading always increases costs. These costs are certain, while
additional returns from higher trading activity are uncertain.
• investing in instruments with complex and opaque risk and return characteristics,
such as highly leveraged structured credit products.
3. Capital markets are fairly efficient over time
Market forces exist that eliminate deviations from an equilibrium (or fair value) of freely
tradable assets over time. New public information leads to a commensurate adjustment
of prices and expectations.
In other words, Zurich agrees with the generally accepted view of academia and
practitioners that investors cannot consistently earn a higher return without incurring
higher risk. Consequently, we:

We can achieve a positive
impact on society and
the environment, with
the highest standards of
integrity, without sacrificing
investment returns

• have the efficient markets principle as a reference point.
• have realistic expectations of returns.
• have a realistic view of our skills and those of our asset managers.
• only take risks that are expected to provide excess returns relative to liabilities.
• strive to identify inefficiencies when they do occur and rationally act on them.
4. We are a Responsible Investor
There are many different approaches to Responsible Investment. For Zurich, Responsible
Investment is about achieving our mission by not only creating long-term, sustainable
financial value, in line with our fiduciary duty, but at the same time also creating nonfinancial value. Responsible Investment is not philanthropy. It is the creation of long-term
benefits for all our key stakeholders, while remaining true to our proven approach of maximizing
economic value based on a structured and disciplined investment process.
We believe that we can add this non-financial value through the proactive integration of
relevant Environmental, Social and Governance (ESG) factors into the investment process
across asset classes and alongside traditional financial metrics. By taking these actions,
for example by exercising shareholder voting rights in our equity investments that are in-line
with ESG objectives, we can achieve a positive impact on society and the environment, and
promote governance practices consistent with high standards of integrity, without sacrificing
investment returns. In addition, Impact Investing allows attractive investment returns to
be captured, while making a tangible and measurable contribution to our communities.


has defined a clear and
systematic approach to
investing

9

Sources of investment return are clear and unambiguous
Having identified our four guiding principles, we have determined three sources of investment
returns from which we can achieve our mission of superior risk-adjusted returns relative to
our liabilities.
Minimum-risk return.
In the insurance context, the minimum-risk return is normally the yield on a government
bond portfolio of the highest available credit quality. Ideally, this should have the same
maturity profile as the underlying insurance claims or benefits that need to be paid in
the future. For example, the minimum-risk investment for certain business lines in Zurich’s
non-life insurance business is close to the yield on a three-year government bond.
‘Beta’ (market return) can be earned by taking on additional market risks.
Certain types of investments, such as equities, corporate bonds and real estate, provide higher
expected returns compared to the minimum-risk return; however, investors can only capture
these extra returns if they:
• have a long-term strategy to take the necessary risks.
• understand the risks they incur.
• can afford the risks they are taking at any time by holding sufficient capital.

Zurich adopts a selective
and targeted approach
to capture Alpha

In addition, the fact that illiquid investments cannot be easily sold requires that investors
are provided with an additional ‘reward’ for taking on this risk. Insurance companies can
have long-term (30 years or more) and relatively static liabilities. This positions them well to
invest in illiquid, long-term assets such as real estate. This can provide the insurer with additional
income and may also aid in better matching assets to long-term liabilities. Consequently, Zurich
has identified a portion of its balance sheet to dedicate to capturing this illiquidity premium.
‘Alpha’ (skill-based return) can be generated through the application of skill and judgement.
Generating Alpha requires the skill to identify and exploit profitable investment opportunities.
Given that financial market prices generally adjust quickly to new information, skill-based
returns are difficult to generate and unpredictable. Across all investors, they aggregate to
zero (before cost). That is, Alpha is a zero sum game: for every investor who earns positive
Alpha, there is an investor who earns negative Alpha. The more efficient the market and skilful
investors are, the more difficult it will be for an investor to consistently earn positive Alpha.
Incremental Alpha can still be significant and worth pursuing, but investors have to be realistic
about their own skills and those of their asset managers. Only a small proportion of investment
returns can be expected to be generated this way. Consequently, Zurich adopts a selective
and targeted approach to capture Alpha.
By combining our four key principles with targeted sources of returns, Zurich has established
a philosophy enshrined in our investment process conducted globally.

10


III. Zurich’s investment
strategy in practice

The Zurich Group allocates its capital efficiently, in order to cover the various
risks to which it is exposed as an insurance company, as well as for investment
purposes. This allocation is made to maximise Zurich’s return on equity, while
simultaneously ensuring that it has enough capital to cover any exceptional
claims. Investment Management is allocated a portion of the Group’s risk
capital and is responsible for using this risk capital for the purpose of maximizing
investment returns relative to liabilities, within a detailed and disciplined
investment framework.
Investment Management has defined a clear and systematic approach to investing, supported
by both industry and academic studies. Applying this approach globally to all investment
activities is of great value to Zurich. Not only does this strategy provide consistency and
discipline, it also helps safeguard against investment decisions becoming procyclical, that is,
taking on additional investment risk during ‘good times’ and being forced to reduce risk by
selling investments at the worst possible moment during times of stress.
The strategy provides discipline across the various aspects of the investment management
process, helping to ensure that value is created on a step-by-step basis. This can be understood
through a stylized process chain, with each link conforming to the strategy (Chart 3).

Chart 3:
Investment Management Value Chain

Asset-Liability
Management

• Earn minimum-risk
investment return by
understanding the
minimum-risk
investment position.

Strategic Asset
Allocation

Market Strategy
and Tactical Asset
Allocation

Asset Manager
Selection

• Define the long-term
SAA based on allocated
risk capital.

• Define macroeconomic
outlook.

• Select high-performing
asset managers at the
right price.

• Earn market risk return
(Beta).

• Generate skill-based
returns from market
strategies (Alpha).

• Systematically monitor
and act on manager
performance.

Portfolio
Construction

• Ensure efficient
implementation of
investment strategies
across global balance
sheets, incorporating
local requirements.

Value Enablers
• Asset Manager Oversight and performance reporting

• Planning and Reporting of results

• Information solutions platform

• Governance and communication

• HR and talent management

Security Selection
and Trade
Execution
• Monitor Alpha
generation by internal
and external specialists.

11


Investments and liabilities
must be considered
to fully understand the
true exposures from
a risk perspective

Asset Liability Management
Investment Management’s first step in the process is to determine the minimum-risk
investment position. Asset-Liability Management is a key function in insurance investment
management and establishes a portfolio of investments that closely replicates the insurance
liabilities. This step is required so that the insurance liabilities can be represented by common
financial instruments, primarily duration matched government bonds. Consequently, the
minimum-risk portfolio will ensure the market values of assets and liabilities move in tandem
when interest rates move up or down.
Strategic Asset Allocation
Investment Management needs to determine the optimal mix of asset classes that offer the
highest long-term expected investment return given Zurich’s liabilities, regulatory framework
and allocated capital.
To make this allocation, Investment Management distils all investable asset classes into a set
of six easily understandable and transparent ‘risk factors’. These ‘risk factors’ consist of interest
rate risk, credit risk, liquidity risk, equity and commodity risk, as well as inflation risk.
Investment Management then works to determine what the best combination of risk factors is
to maximise the risk-adjusted return for a given amount of capital. When this is accomplished,
Investment Management then selects, from the investable universe of asset classes, the mix
that best matches the combination of risk factors. This mix of asset classes, such as government
bonds, equities and real estate, along with liquidity, is commonly referred to as the Strategic
Asset Allocation (SAA). An illustrative example can be seen in Chart 4.

Chart 4:
Illustrated Strategic Asset Allocation of Zurich (%) (excludes unit-linked)
6%
4%

2%

4%

84%

Fixed income
Cash, short-term
Equities
Real estate
Hedge funds
and private equity

12


Zurich’s investment portfolio
is balanced in terms of
investment risks taken,
and spread over a range
of different risk types

At first glance, it may appear that Zurich’s asset allocation mix
is very conservative, with a high proportion of fixed income investments.
However, this is somewhat misleading.
The potential impact of movements in financial markets on the valuation of the Group’s total
investments and liabilities and the resulting impact on shareholder equity must be considered
to fully understand the true exposures from a risk perspective. The effect diversification has
on the overall risk of the investment portfolio must be taken into account, as well as how
the risk changes when mapped with the liabilities on the balance sheet.
Diversification provides significant risk mitigation.
As illustrated in Chart 5, 55% of investment risks are diversified away, through efficient
asset allocation and effective diversification both within asset classes and between each asset
class (i.e. the risk of holding many different securities across a number of asset classes is 55%
below the sum of the individual securities’ risks). Simply put, it pays ‘not to have all of your
eggs in one basket’.

Chart 5:
Illustrative impact on risk of diversification

55% reduction in

100

75% reduction in

shareholder risks

shareholder risks

45
25

Sum of individual risk
in investment portfolio
(before diversification)

Investment risks
(diversified)

Investment view only
* Risk defined as 12-month 99.95% VAR. Excludes unit-linked liabilities.

Investment risks offset
against liabilities

Investment – liability view

13


Inclusion of liabilities reveals the true picture of risk.
When liabilities are added to the risk calculation in the explanatory chart (Chart 5), the risk to
Zurich’s shareholder equity is reduced to 25% of the sum of undiversified single investment
risks (i.e. 20 percentage points below the diversified ’investment only’ risk view discussed
above). This further illustrates that 75% of Zurich’s investment risks are eliminated by
optimizing portfolio diversification relative to liabilities.
This analysis underlines the importance of Zurich’s well-diversified portfolio, but also of
understanding the interaction between assets and liabilities. Zurich’s investment portfolio is
balanced in terms of investment risks taken, and spread over a range of different risk types.
Furthermore, Zurich employs its available risk capacity mostly in asset classes that compensate
risk-taking with long-term expected returns (Beta).
Consequently, when the asset allocation is looked at purely from a residual perspective,
it can be seen in Chart 6 that risks are much more balanced than implied from the asset
class distribution previously shown in Chart 4.

Chart 6: Illustrative breakdown of Zurich’s Investment Risk Exposure
of diversified investments relative to liabilities (%)

10%
40%

30%

Equity risk
Interest rate risk
Credit spread risk
Fx risk

20%

Having established the SAA composition, incremental returns are sought.

14

A clear understanding
of financial markets is
a prerequisite to being
able to identify and
exploit opportunities
to generate Alpha


Investment Management seeks skill-based returns in four stages of
the investment process:
• Market Strategy and Tactical Asset Allocation (TAA).
• Asset Manager Selection.
• Security Selection.
• Trade Execution.
At each stage, a business decision is made as to whether this skill should be developed
in-house or bought from external specialists. Market Strategy and Asset Manager Selection are
two skills that are internally developed. These two functions require relatively low infrastructure
and resource requirements. Also, the cost of providing these functions in-house is lower than
that of outsourcing. Furthermore, by internally centralising these decision processes, it lowers
the chance of offsetting strategies, e.g. investing with expectations of a rising market in one
portfolio while investing for a falling market in another. As a result, it ensures a globally
consistent market strategy.
Market Strategy, including TAA, generates Alpha and provides a consistent market
view for the Group
A clear view and understanding of financial markets is a prerequisite to being able to identify
and exploit any opportunities to generate Alpha. While over time markets are deemed
to be relatively efficient, there are periods in which windows of opportunity arise, allowing
a skill-based investment approach to capture Alpha across equity, credit, and government
bond markets, by spotting mispriced assets, or trends that may persist. Zurich’s dedicated
team of market specialists is focused on economic and market developments and is
responsible for recommending market strategies, including short-term tactical calls.
Asset Manager Selection is integral to Zurich’s model and is a valuable skill
Investment Management always aims to appoint the best manager for each portfolio, whether
they be internal or external. A stringent, fact-based manager evaluation process is applied.
Selection criteria include the track record of performance, investment philosophy and process,
Responsible Investment practices, research and trade execution capabilities, risk management,
organization and operations processes and costs.

applies a consistent appraisal
process to both internal and
external asset managers

Investment Management applies a consistent appraisal process to both internal and external
asset managers. Where in-house managers demonstrate the required skills and track record,
this is often an appropriate route, particularly for certain asset types in specific geographic
locations. However, in-house managers represent only about 1/3 of the mix. The asset
manager selection skill and capabilities provide a distinct competitive edge relative to Zurich’s
major insurance peers, who tend to manage their investments in-house rather than
outsourcing them to the very best investment managers.
Some examples of the advantages Zurich captures by outsourcing much of its asset
management activities include:
• access to the world’s best asset managers, often specialists in niche areas
(e.g. specialist equity or private placement mandates).
• an efficiency of scale for asset managers exists, and by outsourcing Zurich avoids
employing sub-scale investment teams.
• cost of third-party portfolio management is highly competitive and is often lower
than in-house management, while operational risks are significantly minimized.
• trade execution and security selection are enhanced through the economies of scale
of selected asset managers. Since transaction costs are certain and returns are not,
we value asset managers who are patient and aim to keep turnover low.


All of Zurich’s investments
are held in clearly defined
portfolios

15

Portfolio Construction and implementation of the investment strategy are critical
in the complex world of insurance
Implementing group-wide strategies quickly and effectively, while taking into consideration
regulatory and financial requirements, is vital. Zurich is a global company, with over
200 balance sheets in more than 30 countries. Hence, Zurich employs a team of Regional
Investment Managers, who engage with Zurich’s local investment teams, often led
by a local Chief Investment Officer, and local insurance business management. Together
they work to incorporate local constraints, such as regulatory restrictions, in addition
to Environmental, Social and Governance (ESG) factors, into the implementation of
the Group’s overall investment strategy.
Investment Management defines the portfolios in which the investments are managed
(portfolio construction):
• All of Zurich’s investments are held in clearly defined portfolios, which aggregate to the
desired asset allocation. Each portfolio has defined investment guidelines, an investment
manager and a benchmark to assess the manager’s performance.
• Portfolio construction starts with the decision as to whether a portfolio is better managed
passively (tracking a benchmark index) or actively (portfolio manager actively deviates
from the benchmark to outperform).
The decision is based on whether active returns are likely to be found in the respective market,
the availability of suitable asset managers, their expected value creation, risks, and cost.
Security Selection and efficient Trade Execution can add extra returns to
selected portfolios
Security Selection requires access to the best talent, and significant research, which in turn
is costly. Therefore we carefully analyse whether security selection is likely to add extra returns
to a portfolio on a consistent basis. When appropriate, asset managers are selected for active
portfolio management and they are carefully monitored to ensure performance is delivered
consistently. Due to the scale of Zurich’s outsourced portfolios, management fees are
highly competitive.

16


An integral part of
is its specialised
information solutions
platform

The value creation process at Zurich is dependent upon data, as well as a robust
operating structure
A bespoke information platform provides a competitive advantage
For Zurich’s strategy to function effectively, a bespoke state-of-the-art information solutions
platform has been developed and in itself provides a competitive advantage. An integral part
of Investment Management is its specialised information solutions team that develops the
systems that provide accurate and timely risk and exposure information on all of Zurich’s
portfolios around the world. This platform is intertwined across all aspects of the investment
process and provides the infrastructure to support Zurich’s distinct investment strategy.
Investment Management at Zurich is structured intuitively and with purpose
The structure of Zurich’s Investment Management function is fully aligned with its strategy.
Zurich’s Investment Management team is based on one global organization with five key
functions, with local business units reporting into a central team (Chart 7). This structure
ensures that the Group-wide investment strategy is developed in a consistent manner
and that the strategy is implemented efficiently globally, complying with applicable
regulation and governance frameworks.

Chart 7:
Structure of Zurich’s Investment Management function

Group Chief Investment Officer

Head of Strategy
Development

Chief Market
Strategist/Head of
Macroeconomics

• Strategic Asset Allocation

• Macroeconomic Analysis

• Asset-Liability
Management

• Market Strategy and
Tactical Asset Allocation

• Market Risk Analytics

Head of Strategy
Implementation

Head of Alternative
Investments

Chief Operating
Officer

• Regional Investment
Management

• Alternative Asset
Management (ZAAM)

• Finance and Investment
Services

• Manager Selection

• Global Real Estate

• Business Strategy and
Development

• Financial Engineering

• Audit, Compliance,
Governance and
Operational Risk
Management

• Investment Information
Solutions

• HR and Talent
Management
Chief Investment Officers

Head of Real Estate


Conclusion

It is important to remember that all of the activities undertaken by
Investment Management are driven by our mission to achieve superior
risk-adjusted investment returns relative to liabilities. In order to meet the
challenge of achieving this mission, Investment Management is required
to continuously explore and exploit new opportunities, and improve
its investment and business strategy. Through a clear and disciplined
framework, populated by a team of leading investment professionals,
Zurich is in a strong position to continue to meet our obligations to all
of our key stakeholders, whether they be customers, shareholders, our
people, or the communities in which we live and work.

17

Zurich Insurance Group Ltd
Zurich Investment Management
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IM value creation paper

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IM value creation paper