Acquisitions Cover-More Group Limited On December 11, 2016, the Group entered into a scheme implementation agreement with Cover-More Group Limited (Cover-More) to acquire Cover-More, an ASX listed provider of travel insurance and assistance solutions via a scheme of arrangement (Scheme). Under the transaction, the Group will acquire 100% of the issued share capital of Cover-More for AUD 1.95 cash per share, with the consideration valuing Cover-More’s fully diluted equity at approximately USD 536 million. The final cash consideration payable to Cover-More shareholders under the Scheme will be reduced by the amount of any interim dividend or special dividend which is announced, declared, or paid by Cover-More prior to June 30, 2017. The implementation of the Scheme is subject to customary conditions including shareholder and court approvals, and is expected to be completed in the second quarter of 2017.
Macquarie Life Insurance Business On October 1, 2016, the Group completed the acquisition of a part of the Australian Macquarie Life insurance business from the Macquarie Group, a financial group based in Australia. The transaction involved the transfer of Macquarie’s retail life insurance protection business together with its assets, liabilities and employees for a total consideration of approximately USD 307 million subject to a price adjustment mechanism. Based on the initial purchase accounting the net tangible assets acquired amounted to USD 109 million and identifiable intangible assets, net of related deferred tax, amounted to USD 49 million consisting of the present value of profits of acquired insurance contracts. Goodwill amounted to USD 148 million and mainly reflects future growth opportunities.
Table 5.1 shows the main balance sheet line items as of the acquisition date, representing the preliminary fair value of RCIS net tangible assets acquired, intangible assets and goodwill, excluding the impact of the 25 percent quota share reinsurance contract.
RCIS preliminary Balance Sheet as of the acquisition date in USD millions, as of March 31, 2016 Total
Cash and cash equivalents 183 Reinsurers’ share of reserves for insurance contracts 235 Receivables and other assets1 2,131 Deferred tax assets 8 Property and equipment 12 Goodwill 354 Other intangible assets 101 Assets acquired 3,022
Reserves for insurance contracts 289 Accrued liabilities 4 Other liabilities 2,036 Liabilities acquired 2,329
Table 5.2 shows the result for the nine months since the acquisition date as included in the Group consolidated income statement for the year ended December 31, 2016. Furthermore, the table shows information relating to the full twelve months period to December 31, 2016. This information is based on the local statutory accounts which includes a reinsurance contract with the Group which was eliminated in the consolidated figures.
Income statement information in USD millions, information for the nine months from acquisition ended December 31, 2016 Total
For the year ended December 31, 2016, the Group incurred transaction related costs of USD 1 million included in other administrative expenses which have been excluded from BOP. For the year ended December 31, 2015, USD 6 million transaction related costs were included in other administrative expenses and were excluded from BOP.
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 approximately 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.
Loss of control On February 12, 2016, the Group entered into a forward sale agreement, for its controlling interest of a UK based distributor of the Global Life business, for a fixed sales price of USD 1 to be completed by March 1, 2020 at the latest. Therefore, the Group is deemed to have lost control of this business from an accounting perspective and has derecognized the assets and liabilities at their carrying amount. A USD 47 million gain has been recorded within net gain/(loss) on divestments of businesses.
Divestments During the nine months ended September 30, 2016, the Group entered into various agreements to sell its insurance operations in Morocco, Taiwan, South Africa and the Middle East, mainly comprising of general insurance operations.
On December 31, 2016, the sale of the insurance operations in the Middle East and Taiwan were still subject to customary closing conditions (see note 29). The respective assets and liabilities were reclassified as held for sale as of June 30, 2016. As of December 31, 2016, the total assets and total liabilities reclassified were USD 456 million and USD 290 million, respectively. These transactions are expected to close in the first quarter of 2017.
On December 7, 2016, the Group closed the sale of its insurance business in South Africa to Fairfax Financial Holdings Limited. The contractually agreed sales price amounted to approximately USD 128 million and is subject to a purchase price adjustment. A pre-tax loss of USD 200 million has been recorded within net gain/(loss) on divestments of businesses.
Transactions in 2015 In September 2015, the Group increased its shareholding in Zurich Insurance Company South Africa Limited (ZICSA) from 84.05 percent to 100 percent for a total consideration of approximately USD 34 million. Subsequently the ZICSA shares were delisted from the Johannesburg Stock Exchange.
Group investments are those for which the Group bears part or all of the investment risk. They also include investments related to investment contracts with discretionary participation features.
Debt securities: Fair value through profit or loss 5,672 3.0 6,180 3.2
As of January 1 9,865 8,784 Additions and improvements 938 1,460 Acquisitions/(divestments) (28) –
Gross unrealized gains/(losses) on Group investments 11,447 10,309 Less amount of unrealized gains/(losses) on investments attributable to: Life policyholder dividends and other policyholder liabilities (6,500) (5,814) Life deferred acquisition costs and present value of future profits (696) (654) Deferred income taxes (1,006) (968) Non-controlling interests (17) (23)
1 Net unrealized gains/(losses) on Group investments include net gains arising on cash flow hedges of USD 418 million and USD 294 million as of December 31, 2016 and 2015, respectively.
Securities lending agreements Securities lent under securities lending agreements1 3,465 4,527 Collateral received for securities lending 3,744 4,909 of which: cash collateral 126 93 of which: non-cash collateral 2 3,619 4,815 Liabilities for cash collateral received for securities lending 126 93 Repurchase agreements Securities sold under repurchase agreements 3 1,284 1,596 Obligations to repurchase securities 1,280 1,596 Reverse repurchase agreements Securities purchased under reverse repurchase agreements 4 973 194 Receivables under reverse repurchase agreements 970 193 1 The Group’s counterparties had the right to sell or repledge, in the absence of default, assets pledged as collateral with a fair value of USD 3,465 million and USD 4,527 million as of December 31, 2016 and 2015, respectively. The majority of these assets were debt securities.
2 The Group had the right to sell or repledge, in the absence of default by its counterparties, securities received as collateral with a fair value of USD 3,317 million and USD 4,573 million as of December 31, 2016 and 2015, respectively.
3 The Group’s counterparties had the right to sell or repledge, in the absence of default, assets pledged as collateral with a fair value of USD 724 million and USD 997 million as of December 31, 2016 and 2015, respectively. The majority of these assets were debt securities.
Table 7.1 shows the fair value and notional amounts for instruments which do not qualify for hedge accounting as of December 31, 2016 and 2015. Whilst these notional amounts express the extent of the Group’s involvement in derivative transactions, they do not, however, represent the amounts at risk.
Equity contracts: OTC Swaps – – – – – – 48 – –
Exchange traded Options – – – – – – 27 – –
Total Group derivative financial instruments 20,299 3,962 3,375 27,636 381 (202) 31,034 417 (249)
Equity contracts Equity contracts are entered into, either on a portfolio or on a macro level to protect equity investments against a decline in equity market prices or to manage the risk return profile of equity exposures. The majority of positions are for economic hedging purposes. Short positions are always covered and sometimes used to mitigate hedging costs.
Other contracts Other contracts predominantly include stable value products (SVPs) issued to insurance company separate accounts in connection with certain life insurance policies (Bank Owned Life Insurance (BOLI) and Company Owned Life Insurance (COLI)) with an account value of USD 9.0 billion and USD 9.2 billion as of December 31, 2016 and 2015, respectively and with a market value of the underlying investments of USD 8.9 billion and USD 9.2 billion as of December 31, 2016 and 2015, respectively. The Group closely monitors the risk of surrender of these life insurance policies and includes the likelihood of surrender as one of the input parameters to determine the fair value of the SVPs which was nil as of December 31, 2016 and 2015.
Maturity profile of notional amounts and fair values of Group derivative financial instruments in USD millions, as of December 31 2016 2015
The Group also has fair value hedge relationships consisting of cross currency swaps, forex swaps and forwards to protect the Group from foreign currency fluctuation of certain fixed income securities and hybrid equity securities denominated in a currency other than the functional currency of the reporting entity.
Gains/(losses) arising from fair value hedges in USD millions, for the years ended December 31 2016 2015
The net change of gains/(losses) deferred in OCI on derivative financial instruments designated as cash flow hedges were USD 158 million and USD (22) million before tax for the years ended December 31, 2016 and 2015, respectively.
The Group recognized gains of USD 3 million and USD 12 million in the consolidated income statement within net investment income on Group investments for the years ended December 31, 2016 and 2015, respectively. The Group also recognized net gains/(losses) of USD 4 million and USD (40) million within administrative and other operating expense for the years ended December 31, 2016 and 2015, respectively, as an offset to the foreign currency revaluation on the underlying hedged items.
Information on debt issuances designated as hedging instruments in a net investment hedge relationship is set out in note 18.
3 Total reserves for insurance contracts ceded are gross of allowances for uncollectible amounts of USD 64 million and USD 111 million as of December 31, 2016 and 2015, respectively.
Losses and loss adjustment expenses incurred: Losses and loss adjustment expenses paid: 1 The 2016 net movement of USD (430) million consists of USD 90 million relating to the acquisitions of RCIS, Kono Insurance Limited and Zurich Takaful Company Limited and USD (244) million relating to the sale of the Group’s insurance operations in Morocco and South Africa. Additionally, USD (147) million are reclassified to assets and liabilities held for sale (see note 5) and USD (128) million relate to a reinsurance agreement which transferred the benefits and risks of some of the Group’s non-core business portfolio to a third party. The 2015 net movement includes USD (44) million relating to a reinsurance agreement which transferred the benefits and risks of some of the Group’s general insurance portfolio to a third party and USD (61) million relating to the sale of the Group’s Dutch general insurance portfolio to a third party.
For the year ended December 31, 2016, the decrease of USD 2,361 million in net reserves for losses and loss adjustment expenses is driven by a net decrease of USD 430 million relating to acquisitions/(divestments) and transfers (see table 8.2) as well as a decrease of USD 1,393 million due to foreign currency translation effects. In addition, net favorable reserve development emerged from reserves established in prior years amounting to USD 429 million mainly relating to the following: kk In Europe, Middle East & Africa, favorable prior year development of USD 89 million for Swiss motor third party liability, as well as USD 85 million for UK property; kk In North America Commercial, favorable prior year development of USD 111 million for workers’ injury; kk Favorable prior year development of USD 130 million for Global Corporate driven by property.
Gross reserves for losses and loss adjustment expenses 67,890 65,218 68,126 68,274 67,762 69,986 68,312 64,472 62,971 61,155
Initial net reserves for losses and loss adjustment expenses 54,712 52,986 55,944 56,180 55,341 57,385 57,319 54,703 53,739 51,378
Cumulative (deficiency)/ redundancy of net reserves 3,183 2,866 2,610 2,031 803 686 46 (3) 429 Cumulative (deficiency)/ redundancy as a percentage of initial net reserves 5.8% 5.4% 4.7% 3.6% 1.5% 1.2% 0.1% (0.0%) 0.8%
Gross reserves re-estimated as of December 31 63,376 60,986 63,702 64,834 65,689 67,662 67,207 64,058 62,328 Cumulative (deficiency)/ redundancy of gross reserves 4,515 4,232 4,424 3,440 2,073 2,324 1,105 414 642 Cumulative (deficiency)/ redundancy as a percentage of initial gross reserves 6.7% 6.5% 6.5% 5.0% 3.1% 3.3% 1.6% 0.6% 1.0%
Losses and loss adjustment expenses incurred (13) (17) 16 5 Losses and loss adjustment expenses paid (145) (125) (162) (143) Foreign currency translation effects (345) (299) (23) (7)
The Group has considered asbestos, including latent injury, claims and claims expenses in establishing the reserves for losses and loss adjustment expenses. The Group continues to be advised of indemnity claims asserting injuries from asbestos. Coverage and claim settlement issues, such as determination that coverage exists and the definition of an occurrence, together with increased medical diagnostic capabilities and awareness have often caused actual loss development to exhibit more variation than in other lines of business. Such claims require specialized reserving techniques and the uncertainty of the ultimate cost of these types of claims has tended to be greater than the uncertainty relating to standard lines of business.
For the year ended December 31, 2016, reserves for asbestos claims decreased by USD 503 million gross and USD 441 million net. The decrease in the gross reserve primarily arose from payments of USD 145 million mainly in the UK and North America, foreign currency translation effects of USD 345 million and favorable prior year development of USD 13 million mainly in the UK.
For the year ended December 31, 2015, reserves for asbestos claims decreased by USD 170 million gross and USD 145 million net. The decrease in the gross reserve primarily arose from payments of USD 162 million mainly in the UK and North America, foreign currency translation effects of USD 23 million and an adverse prior year development of USD 16 million in the UK and North America. Reserve adequacy improved during 2015 following a commutation settlement in Centre Group Holdings Limited related to asbestos claims.
Development of future life policyholder benefits in USD millions Gross Ceded Net
Increase/(decrease) recorded in other comprehensive income (12) (335) – – (12) (335)
Future life policyholder benefits are generally calculated by a net premium valuation. In terms of USD, the weighted average discount rate used in the calculation of future life policyholder benefits is 2.6 percent and 2.7 percent as of December 31, 2016 and 2015, respectively.
Fee income and other expenses (460) (474) (6) (5) (466) (479) Interest and bonuses credited to policyholders 1,002 1,561 (75) (76) 927 1,485 Acquisitions/(divestments) and transfers1 6 381 – – 6 381 Increase/(decrease) recorded in other comprehensive income 894 (987) – – 894 (987) Foreign currency translation effects (574) (1,520) – – (574) (1,520)
1 The 2016 net movement of USD 6 million relates to the acquisition and divestment in Malaysia and Morocco, respectively, (see note 5). The 2015 net movement relates to USD 381 million reclassified from future life policyholder benefits.
Expected maturity profile for reserves for insurance contracts, net of reinsurance – current period in USD millions, as of December 31, 2016 Reserves for losses and loss adjustment expenses
Development of liabilities for investment contracts in USD millions 2016 2015
Tables 9.3a and 9.3b provide an analysis of investment contract liabilities according to maturity, based on expected cash flows as of December 31, 2016 and 2015. The undiscounted contractual cash flows for investment contract liabilities are USD 69.1 billion and USD 70.8 billion as of December 31, 2016 and 2015, respectively. Liabilities for unit-linked investment contracts amounted to USD 60.2 billion and USD 62.2 billion as of December 31, 2016 and 2015, respectively. Policyholders of unit-linked investment contracts can generally surrender their contracts at any time, leading the underlying assets to be liquidated, risks arising from liquidation of unit-linked assets are borne by the policyholders. Certain non-unit-linked contracts also allow for surrender of the contract by the policyholder at any time. Liabilities for such contracts amounted to USD 633 million and USD 767 million as of December 31, 2016 and 2015, respectively. The Group actively manages the Global Life in-force business to improve persistency and retention.
Expected maturity profile for liabilities for investment contracts – current period in USD millions, as of December 31, 2016
Amortization of deferred acquisition costs 6,145 6,145 (620) (529) 5,524 5,617 Amortization of deferred origination costs 75 98 – – 75 98 Commissions and other underwriting and acquisition expenses1 3,325 3,553 (387) (207) 2,938 3,346 Total underwriting and policy acquisition costs 9,545 9,796 (1,007) (735) 8,538 9,061 1 Net of additions related to deferred acquisition and origination costs.
Amortization (charged)/ credited to other comprehensive income – – (40) 240 – – (40) 240 1 Net of eliminations from inter-segment transactions. 2 The 2016 General Insurance movement of USD 24 million includes USD 12 million relating to the sale of businesses in South Africa and Morocco, USD 9 million reclassified to assets held for sale (see note 5) and a portfolio transfer of USD 3 million to Non-Core Businesses. The 2016 Global Life movement of USD 16 million relates to the portfolio transfer of Zurich Life Insurance Singapore Pte Ltd to Non-Core Businesses.
As of January 1 506 595 Origination costs deferred 44 51
Foreign currency translation effects (50) (41) As of December 31 426 506
Table 12 shows expenses by functional area and by type of expense.
Expenses in USD millions, for the years ended December 31 2016 2015
1 Included within commissions and other underwriting and acquisition expenses (see table 10.3). 2 Included within losses and loss adjustment expenses (see table 10.1). 3 Excludes expenses arising from investment property within investment expenses for Group investments (see table 6.1). 4 Amortization and impairments of distribution agreements are included within underwriting and policy acquisition costs starting from 2016. They amounted to
Net carrying value as of January 1, 2016 211 374 138 65 352 1,140
Gross carrying value as of December 31, 2016 168 427 378 313 727 2,013 1 Includes USD 24 million relating to the sale of businesses in South Africa and Morocco and USD 24 million reclassification to assets held for sale (see note 5).
Gross carrying value as of December 31, 2015 217 737 366 365 759 2,444 1 Following restructuring decisions in General Insurance, certain own use properties will no longer be required, resulting in an impairment of USD 32 million.
Amortization charged to other comprehensive income – – (21) – – – (21)
Gross carrying value as of December 31, 2016 1,025 2,110 2,422 3,860 4,652 251 14,321 1 Amortization of distribution agreements is included within underwriting and policy acquisition costs.
As of December 31, 2016, intangible assets relating to non-controlling interests were USD 78 million for the present value of future profits (PVFP) of acquired insurance contracts, USD 1,155 million for distribution agreements and USD 14 million for software.
Following a review, software was identified, which was not utilized as originally expected, resulting in USD 41 million of impairments, primarily in General Insurance.
Gross carrying value as of January 1, 2015 1,025 1,778 2,701 4,480 4,588 186 14,760 Less: accumulated amortization/
Amortization charged to shareholders’ equity – – 28 – – – 28
Gross carrying value as of December 31, 2015 1,025 1,667 2,501 3,715 4,672 173 13,753
Following restructuring decisions, mainly in Global Life, certain software will no longer be required, which resulted in an impairment of USD 67 million. In addition, software was identified, which was not utilized as originally expected, resulting in USD 30 million of impairments.
Intangible assets by segment – prior period in USD millions, as of December 31, 2015
Maturity schedule – other financial liabilities1 in USD millions, as of December 31 2016 2015
Expected and actual income tax expense in USD millions, for the years ended December 31 Rate 2016 Rate 2015
Net income before income taxes 5,321 3,340 less: income tax (expense)/benefit attributable to policyholders (304) (110) Net income before income taxes attributable to shareholders 5,017 3,230 Expected income tax expense attributable to shareholders computed at the Swiss statutory tax rate 22.0% 1,104 22.0% 711 Increase/(reduction) in taxes resulting from: Tax rate differential in foreign jurisdictions 322 287 Tax exempt and lower taxed income (95) (92) Non-deductible expenses 121 41 Tax losses not recognized 3 165 Prior year adjustments and other 84 72
Table 17.2 sets out the factors that cause the actual income tax expense to differ from the expected expense computed by applying the Swiss statutory tax rate of 22.0 percent, which is the rate applicable in the jurisdiction where the ultimate parent company is resident.
Deferred tax assets/(liabilities) analysis by source in USD millions, as of December 31 2016 2015
Gross deferred tax Deferred acquisition and origination costs 38 (1,017) 35 (846) Depreciable and amortizable assets 25 (63) 31 (51) Life policyholders’ benefits and deposits1 1 (2) 2 (1) Unrealized (gains)/losses on available-for-sale investments and cash flow hedges 93 (277) 178 (383) Accruals and deferred income 197 (8) 158 (2) Reserves for losses and loss adjustment expenses 449 (229) 508 (178) Reserves for unearned premiums 1,057 (24) 879 (1) Pensions and other employee benefits 696 (48) 514 (58)
Tax loss carryforwards 92 – 107 – Gross deferred tax assets/(liabilities) before valuation allowance 3,505 (8,067) 3,725 (8,200) Valuation allowance – – (23) – Gross deferred tax assets/(liabilities) after valuation allowance 3,505 (8,067) 3,702 (8,200) Deferred tax liabilities (4,562) (4,498)
As of both December 31, 2016 and 2015, the aggregate amount of temporary differences associated with investments in subsidiaries, branches and associates and interests in joint ventures, for which deferred tax liabilities have not been recognized amount to approximately USD 20 billion. In the remote scenario in which these temporary differences were to reverse simultaneously, the resulting tax liabilities would be very limited due to participation exemption rules.
The net deferred tax liabilities relating to non-controlling interests amounted to USD 338 million and USD 347 million as of December 31, 2016 and 2015, respectively.
Development of deferred income taxes included in equity in USD millions 2016 2015
For which deferred tax assets have been recognized, expiring > 20 years or with no time limitation 1,056 814
The tax rates applicable to tax losses for which a deferred tax asset has not been recognized are 23.0 percent and 23.0 percent as of December 31, 2016 and 2015, respectively.
Zurich Insurance Company Ltd 4.25% CHF 700 million perpetual notes, first callable May 20161 – 698 8.25% USD 500 million perpetual capital notes, first callable January 20181,3 499 498 4.625% CHF 500 million perpetual notes, first callable May 20181 491 496 7.5% EUR 425 million notes, due July 2039, first callable July 20191,3 447 460 2.75% CHF 225 million perpetual capital notes, first callable June 20211 221 – 2.75% CHF 200 million perpetual capital notes, first callable September 20211,2 205 209 4.75% USD 1 billion perpetual notes, first callable January 20221,3 993 – 4.25% EUR 1 billion notes, due October 2043, first callable October 20231,3 1,046 1,075 4.25% USD 300 million notes, due October 2045, first callable October 20251,3 299 298 5.625% USD 1 billion notes, due June 2046, first callable June 20261 996 – 3.5% EUR 750 million notes, due October 2046, first callable October 20261,2 785 –
ZFS Finance (USA) Trust II Series II 6.45% USD 700 million Trust Preferred Securities (ECAPS), due December 2065, first callable June 2016 – 680
2 The Group applied the fair value hedge methodology either partially or in full to hedge the interest rate exposure. 3 These bonds are part of a qualifying net investment hedge to hedge the foreign currency exposure. 4 The holders of these notes benefit from the Replacement Capital Covenant which states that if Series V Fixed/Floating Trust Preferred Securities, issued by ZFS Finance (USA)
Trust V, are called before 2047, the Group will issue a replacement debt instrument with terms and provisions that will be as or more equity-like than the replaced notes.
None of the debt instruments listed in table 18.1 were in default as of December 31, 2016 or December 31, 2015.
Credit facilities The Group has access to a multi-currency revolving credit facility of USD 3.2 billion that terminates in 2023 at the latest. It is guaranteed by Zurich Insurance Company Ltd.
The Board is authorized, when issuing bonds or similar debt instruments connected with conversion and/or option rights, to restrict or withdraw the right of shareholders for advance subscription in cases where such bonds are issued for the financing or re-financing of a takeover of an enterprise, of parts of an enterprise, or of participations. If the right for advance subscription is withdrawn by the Board, the convertible bond or warrant issues are to be offered at market conditions (including standard dilution protection provisions in accordance with market practice) and the new shares are issued at the then current convertible bond or warrant issue conditions.
Basic earnings per share 1,842 148,957,967 12.36 11.89 Effect of potentially dilutive shares related to share-based compensation plans 362,170 (0.03) (0.03) Diluted earnings per share 1,842 149,320,137 12.33 11.86 1 The translation from USD to CHF is shown for information purposes only and has been calculated at the Group’s average exchange rates for the years ended December 31, 2016 and 2015.
Basic earnings per share is computed by dividing net income attributable to shareholders by the weighted average number of shares outstanding for the year, excluding the weighted average number of shares held as treasury shares. Diluted earnings per share reflects the effect of potentially dilutive shares.
The Group operates a number of retirement benefit arrangements for employees, with the majority of employees belonging to defined benefit pension plans. Other employees participate in defined contribution plans, which provide benefits equal to the amounts contributed by both the employer and the employee plus investment returns.
Certain Group companies provide defined benefit pension plans, some of which provide benefits on retirement, death or disability related to employees’ service periods and pensionable earnings. Others provide cash balance plans where the participants receive the benefit of the accumulated employer and employee contributions (where paid) together with additional cash credits in line with the rules of the plan. Eligibility for participation in the various plans is either immediate on commencement of employment or based on completion of a specified period of continuous service.
For post-employment defined benefit plans, total contributions to funded plans and benefits paid directly by the Group were USD 424 million for 2016 compared with USD 540 million for 2015. The estimated total for 2017 is USD 422 million (actual amount may differ).
Swiss pension plan The plan provides benefits that exceed the minimum benefit requirements under Swiss pension law. It provides a lifetime pension to members at the normal retirement age of 65 (age 62 for Executive Staff). Participants can draw retirement benefits early from age 60 (age 58 for Executive Staff). Alternatively, the benefit can be taken as a lump sum payment at retirement. Contributions to the plan are paid by the employees and the employer, both for retirement savings and to finance risk benefits paid out in the event of death and disability. The accumulated balance on the pension account is based on the employee and employer pension contributions and interest accrued. The interest rate credited is defined annually by the plan’s Board of Trustees which is responsible for the governance of the plans. The amount of pension payable on retirement is a result of the conversion rate applied on the accumulated balance of the individual participant’s pension account at the retirement date. Although the Swiss plan operates like a defined contribution plan under local regulations, it is accounted for as a defined benefit pension plan under IAS 19 “Employee Benefits”, because of the need to accrue interest on the pension accounts and the payment of a lifetime pension at a fixed conversion rate under the plan rules.
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. A separate arrangement was also established in 2010 to provide for retirement obligations that were in payment at that time. Consideration is given from time to time based on the fiscal efficiency of adding recent retirees to this arrangement and to adding assets to the contractual trust. There is currently no formal plan to pay any further contributions to the contractual trust arrangement. These defined benefit plans provide benefits on either a final salary, career average salary or a cash balance basis. These plans are now closed to new entrants, who instead participate in a new cash balance arrangement, which has the characteristics of a defined contribution arrangement with a capital guarantee on members’ balances, which mirrors the capital guarantee given in a conventional life insurance arrangement in Germany.
Net post-employment benefit (expense)/income (1,038) 520 – (518) Remeasurement effects included in other comprehensive income: Return on plan assets excluding interest income – (209) – (209) Experience gains/(losses) (116) – – (116) Actuarial gains/(losses) arising from changes in demographic assumptions 172 – – 172 Actuarial gains/(losses) arising from changes in financial assumptions 797 – – 797
Change in asset ceiling – – (17) (17) Remeasurement effects included in other comprehensive income 853 (209) (17) 627 Employer contributions – 508 – 508 Employer contributions paid to meet benefits directly 31 – – 31 Plan participants’ contributions (54) 54 – – Payments from the plan (incl. settlements) 870 (870) – – Foreign currency translation effects 900 (750) – 150
Post-employment benefits are long-term by nature. However, short-term variations between long-term actuarial assumptions and actual experience may be positive or negative, resulting in actuarial gains or losses, which are recognized in full in the period in which they occur, and are included within other comprehensive income.
Tables 20.3a and 20.3b provide a breakdown of the key information included in tables 20.1a and 20.1b for the main countries for the years ended December 31, 2016 and 2015 respectively.
Key information by main country – current period in USD millions, as of December 31, 2016
Fair value of plan assets 4,711 8,488 2,687 1,014 983 17,883 Impact of asset ceiling – (9) – – – (9) Net defined benefit asset/(liability) (383) (2,570) (843) (246) (275) (4,317) Net post-employment benefit (expense)/income1 (124) (65) (28) (34) (29) (280)
Key information by main country – prior period in USD millions, as of December 31, 2015
States Germany 1 In the UK part of the liability is linked to the inflation measure of the Retail Price Index (RPI), which is assumed to be 1.0 percent higher than the Consumer Price Index (CPI) as of both December 31, 2016 and 2015.
Mortality tables and life expectancies for major plans – current period in years, as of December 31, 2016 Life expectancy at age 65 for a male currently
United Kingdom PNXA00 with CMI_2015 projection with plan specific adjustments 22.82 24.12 24.82 26.32
Defined benefit obligation1 in USD millions, as of December 31 2016 2015
a) Cash incentive plans Various businesses throughout the Group operate short-term incentive programs for executives, management and, in some cases, for employees of that business. Awards are made in cash, based on the accomplishment of both organizational and individual performance objectives. The expense recognized for these cash incentive plans amounted to USD 447 million and USD 381 million for the years ended December 31, 2016 and 2015, respectively.
The cost of share-based payments depend on various factors, including achievement of targets, and are subject to the discretion of the Remuneration Committee. Costs may therefore vary significantly from year to year. The net amounts of USD 98 million and USD 111 million for the years ended December 31, 2016 and 2015, respectively, reflect all aspects of share-based compensation, including adjustments made during the year.
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 75 and 99 participants in the plan as of December 31, 2016 and 2015, respectively.
The Group also operates a profit-sharing element of the Share Incentive Plan (Reward Shares) which was launched in 2004 with annual share allocations being made in May each year subject to business performance. The awards are based on business operating profit (BOP) after tax for the year achieved by the business unit of each participating employee. Individual awards are subject to a maximum of 5 percent of a participant’s base salary (before any flexible benefit adjustments) with an overall maximum of GBP 3,600. The total number of participating employees in Reward Shares as of December 31, 2016 and 2015 was 4,964 and 5,607, respectively.
A new Dividend Reinvest scheme was launched in 2014 which allows employees to reinvest their dividends from Partnership Shares and Reward Shares. As of December 31, 2016 and 2015, there were 346 and 303 participants in the scheme, respectively.
Target shares allocated in 2016 will vest after a period of three years following the year of allocation (three year cliff vesting), with the actual level of vesting between 0 percent and 200 percent of the target shares allocated, depending on the achievement of pre-defined performance criteria. The performance criteria used to determine the level of vesting are the Group’s return on shareholders’ equity (ROE), the position of its relative total shareholder return (TSR) measured against an international peer group of insurance companies, and the achievement of cash remittance targets. The three pre-defined performance criteria are each assessed over a period of three consecutive financial years starting in the year of allocation. One half of the shares that actually vest are sales-restricted for a further three years. To further align the participants with the interests of the shareholders, effective from January 1, 2014, the target shares are credited with dividend equivalent shares during the vesting period to compensate participants in LTIP for dividends paid to shareholders. As of December 31, 2016 and 2015, there were 1,203 and 1,268 participants in this plan, respectively.
The transition to three-year cliff-vesting has been phased in with transitional arrangements for shares allocated in 2014 and prior. Target shares allocated in 2014 are to be assessed for vesting one-third after two years in 2016 and two-thirds after 3 years in 2017. Further, for LTIP participants who joined the plan prior to 2014, additional performance shares were allocated in 2014 to maintain the same cumulative target earning opportunity for these participants during the transition period.
The shares allocated each year are based on target under the Group’s LTIP. The level of vesting will depend on the level of achievements in the performance criteria. If the vesting level is different to target for non-market conditions, the actual costs of the share-based payments is adjusted accordingly in the year when the level of vesting is determined.
Prior to 2011, for selected senior executives, performance shares and options in shares of Zurich Insurance Group Ltd were allocated. All remaining share options will expire in 2017. The number of allocated shares options amount to 172,978 and 330,888 as of December 31, 2016 and 2015, respectively. For the years ended December 31, 2016 and 2015, 141,416 and 135,161 share options, respectively, were exercised.
Quantifiable commitments and contingencies in USD millions, as of December 31 2016 2015
Guarantees and letters of credit In 2016 and 2015, USD 586 million and USD 701 million, respectively, relate to guarantees in the aggregate amount of GBP 475 million which were provided to the directors of a wholly owned subsidiary in connection with the repatriation of capital. These guarantees have no expiry date.
The Group knows of no event of default that would require it to satisfy financial guarantees. Irrevocable letters of credit have been issued to secure certain reinsurance contracts.
Future payments under non-cancelable operating leases with terms in excess of one year in USD millions, as of December 31 2016 2015
The Group has commitments to provide collateral on certain contracts in the event of a financial strength downgrading for Zurich Insurance Company Ltd from the current AA– by Standard & Poor’s. Should the rating by Standard & Poor’s fall to A+, then the additional collateral based on information available amounts to nil as of both December 31, 2016 and 2015.
Pledged assets The majority of assets pledged to secure the Group’s liabilities relate to debt securities pledged under short-term sale and repurchase agreements. The total amount of pledged financial assets including the securities under short-term sale and repurchase agreements amounted to USD 4,903 million and USD 6,208 million as of December 31, 2016 and 2015, respectively.
Terms and conditions associated with the financial assets pledged to secure the Group’s liabilities are usual and standard in the markets in which the underlying agreements were executed.
Legal proceedings and regulatory investigations The Group’s business is subject to extensive supervision, and the Group is in regular contact with various regulatory authorities. The Group is continuously involved in legal proceedings, claims and regulatory investigations arising, for the most part, in the ordinary course of its business operations. Specifically, certain companies within the Group are engaged in the following legal proceedings: An action entitled Fuller-Austin Asbestos Settlement Trust, et al. v. Zurich American Insurance Company (ZAIC), et al., was filed in May 2004 in the Superior Court for San Francisco County, California. Three other similar actions were filed in 2004 and 2005 and were coordinated with the Fuller-Austin action (collectively, the Fuller-Austin Case). In addition to ZAIC and four of its insurance company subsidiaries, Zurich Insurance Company Ltd and Orange Stone Reinsurance Dublin (Orange Stone) are named as defendants. The plaintiffs, who were historical policyholders of the Home Insurance Company (Home), pleaded claims for, inter alia, fraudulent transfer, tortious interference, unfair competition, alter ego and agency liability relating to the recapitalization of Home, which occurred in 1995 following regulatory review and approval. The plaintiffs alleged that pursuant to the recapitalization and subsequent transactions, various Zurich entities took assets from Home without giving adequate consideration in return, and contend that this forced Home into liquidation. The plaintiffs further alleged that the defendants should be held responsible for Home’s alleged obligations under their Home policies. The trial judge designated the plaintiffs’ claims for constructive fraudulent transfer for adjudication before all other claims; he subsequently ordered an initial bench trial on certain threshold elements of those fraudulent transfer claims and on certain of defendants’ affirmative defenses (Phase 1).
The Phase 1 trial commenced on November 1, 2010 and the court issued its Statement of Decision for Phase 1 on December 27, 2013. While the court found that the plaintiffs had established that Home transferred certain assets to one of the defendants in connection with the 1995 recapitalization transaction, it held that the plaintiffs’ fraudulent transfer claims, which all related to transfers allegedly made as part of the 1995 recapitalization, were time-barred. The court further held that Home’s liquidator had exclusive standing to bring fraudulent transfer claims involving Home’s assets. In addition, the court accepted the defendants’ arguments that the findings made by the regulators in approving the recapitalization transaction are binding on the plaintiffs in the Fuller-Austin Case.
Beginning in early 2015, a number of plaintiffs voluntarily dismissed their claims with prejudice in exchange for an agreement that the defendants will not pursue them for litigation costs and such dismissals have been filed with the Court. As a result of these dismissals only one of the four coordinated actions remains pending, and only one plaintiff remains in that action. Apart from these dismissals, there has been no recent litigation activity in the remaining action. The Group maintains that the Fuller-Austin Case is without merit and intends to continue to defend itself vigorously against the claims of the one plaintiff that remains in the case.
The governance framework and oversight of the Group standards and procedures regarding the valuation of financial instruments measured at fair value lies within the responsibility of Group Risk Management, Group Investment Management, Treasury Capital Management and Group Finance. Specialists from these departments ensure the adequacy of valuation models, approve methodologies and sources to derive model input parameters, provide oversight over the selection of third party pricing providers, and on a quarterly basis review the classification within the fair value hierarchy of the financial instruments in scope.
Total fair value through profit or loss securities 9,032 9,699 9,032 9,699
Total financial liabilities held at amortized cost (20,325) (17,940) (20,092) (18,468)
Fair value hierarchy – non unit-linked – current period in USD millions, as of December 31, 2016 Level 1 Level 2 Level 3 Total
Total available-for-sale securities 9,237 128,853 6,425 144,515 Fair value through profit or loss securities
Total fair value through profit or loss securities 783 5,615 2,633 9,032
Fair value hierarchy – non unit-linked – prior period in USD millions, as of December 31, 2015 Level 1 Level 2 Level 3 Total
Total fair value through profit or loss securities 92,232 29,309 476 122,018
Investment property – – 3,138 3,138 Total investments for unit-linked contracts1 92,236 29,331 3,614 125,182 Financial liabilities at FV through profit or loss
Fair value hierarchy – unit-linked – prior period in USD millions, as of December 31, 2015 Level 1 Level 2 Level 3 Total
Within level 3, the Group has classified: kk Unlisted stocks, private equity funds and certain hedge funds that are not actively traded. Such instruments are obtained from net asset value information and audited financial statements provided by the issuing hedge funds and private equity funds. Performance of these investments and determination of their fair value are monitored and reviewed closely by the Group’s in-house investment professionals and may be adjusted based on their understanding of the circumstances of individual investments.
kk Certain options and long-dated derivative financial instruments with fair values determined using counterparty valuations or calculated using significant unobservable inputs such as historical volatilities, historical correlation, implied volatilities from the counterparty or derived using extrapolation techniques.
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.
kk The Group’s private debt holdings comprise certain private placements and other Collateralized Loan Obligations (CLO) which are valued by dedicated external asset managers applying a combination of expert judgment and other specific adjustments for which interest rates as well as credit spreads serve as input parameters.
For the year ended December 31, 2016, the Group transferred USD 2,146 million of unit-linked equity securities out of level 2 into level 1 as a result of a review of the classification of certain mutual fund investments. No material transfers between level 1 and level 2 occurred for the year ended December 31, 2015.
Realized gains/(losses) recognized in income1 105 24 9 – – – 129 Unrealized gains/(losses) recognized in income1,2 (15) (34) 154 – (31) (4) 236 Unrealized gains/(losses) recognized in other comprehensive income (9) 24 – – 59 38 9
Realized gains/(losses) recognized in income1 148 5 77 – (2) – 8 Unrealized gains/(losses) recognized in income1,2 (2) (27) (28) (5) (15) 13 97 Unrealized gains/(losses) recognized in other comprehensive income (47) (97) – – 59 (55) 12
For the year ended December 31, 2015, the Group transferred USD 1,829 million of available-for-sale debt securities out of level 2 into level 3 as a result of a review of the classification of certain collateralized loan obligations and privately placed securities. The fair value of these securities is obtained from third party pricing providers, who use significant unobservable inputs and expert judgment in their valuation model. The Group also transferred derivatives with a market value of USD 124 million out of level 2 into level 3. The transfers resulted from certain significant input parameters used to derive the fair value (such as volatility) becoming unobservable.
Fee income and other expenses (172) 25 (147) Interest and bonuses credited to policyholders 78 (11) 67 Changes in assumptions (39) 3 (36)
Development assets and liabilities classified within level 3 – unit-linked – prior period in USD millions Fair value through profit or loss securities
Transfers into level 3 1 – – Foreign currency translation effects (6) (3) (235)
Non-recurring fair value measurements of assets and liabilities In particular circumstances, the Group may measure certain assets or liabilities at fair value on a non-recurring basis when an impairment charge is recognized.
Key assumptions Equity levels –20% (691) +20% 691 Discount rates +20% (68) –20% 68 Spread rates +20% (68) –20% 68 Prepayment rates –20% (1) +20% 1
Key assumptions Equity levels –20% (743) +20% 743 Discount rates +20% (141) –20% 152 Spread rates +20% (148) –20% 159 Prepayment rates –20% (2) +20% 2
Scenarios Equity levels +10% +10.0% +11.6% +11.6% +11.6% 321 Equity levels –10% –10.0% –11.5% –11.5% –11.5% (323) Discount rates +10% –0.8% +10.0% +10.0% –2.0% (27) Discount rates –10% +0.8% –10.0% –10.0% +2.0% 28 Spread rates +10% –0.8% +10.0% +10.0% +0.2% (27)
Analysis of financial assets – current period in USD millions, as of December 31, 2016
Analysis of financial assets – prior period in USD millions, as of December 31, 2015
Less: impairment allowance Impairment allowances on individually assessed financial assets – 98 20 85 204 Impairment allowances on collectively assessed financial assets – 8 – 163 171 1 USD 97 million impaired mortgage loans relate to the run-off property loans at Dunbar Assets Ireland.
Related party transactions – key personnel in USD millions, for the years ended December 31 2016 2015
a) Certificates of contribution issued by the Farmers Exchanges As of December 31, 2016 and 2015, FGI and other Group companies held the following certificates of contribution issued by the Farmers Exchanges. Originally these were purchased by FGI in order to supplement the policyholders’ surplus of the Farmers Exchanges.
Certificates of contribution in USD millions, as of December 31 2016 2015 6.15% certificate of contribution, due June 2021 707 707 Various other certificates of contribution 23 23
The Farmers Exchanges participate in an All Lines Quota Share reinsurance agreement (All Lines agreement) with Farmers Re Co and ZIC. The All Lines agreement provides for a cession of a quota share of the premiums written and the ultimate net losses sustained in all lines of business written by the Farmers Exchanges after the APD agreement has been applied.
December 31, 2015. ZIC assumed an 8.0 percent quota share, while another 12.0 percent is assumed by third parties. Farmers Re Co ceased its participation in the All Lines agreement, effective December 31, 2015.
5 Under the All Lines agreement the Farmers Exchanges catastrophe losses are subject to a provisional maximum of USD 1.3 billion dependent on loss experience and recoveries at a specified rate for each year. Based on results for 2016, the total catastrophe recoveries subject to the All Lines agreement was USD 1.2 billion.
Non-Core Businesses include insurance and reinsurance businesses that the Group does not consider core to its operations and are therefore mostly managed to achieve a beneficial run-off. In addition, Non-Core Businesses includes the Group’s management of property loans and banking activities. Non-Core businesses are mainly situated in the U.S., Bermuda, the UK and Ireland.
Business operating profit by segment in USD millions, for the years ended December 31 General Insurance Global Life Farmers Other Operating Businesses Non-Core Businesses Eliminations Total
Business operating profit before non-controlling interests 2,567 972 1,600 1,523 1,520 1,421 (763) (726) (11) 51 – – 4,913 3,240
Gross written premiums and policy fees 33,122 34,020 15,530 14,446 1,587 2,145 48 47 429 437 (101) (98) 50,615 50,998 Less premiums ceded to reinsurers (7,014) (5,634) (874) (2,489) – – (43) (41) (13) (11) 101 98 (7,843) (8,078)
Net written premiums and policy fees 26,108 28,386 14,656 11,957 1,587 2,145 6 6 416 426 – – 42,772 42,920 Net change in reserves for unearned premiums (6) (335) (119) (82) (65) 120 – – 40 – – – (150) (296)
Net investment income on Group investments 2,019 2,002 3,244 3,320 39 49 294 300 289 328 (401) (427) 5,484 5,572 Net capital gains/(losses) and impairments on Group investments 67 – 640 1,095 – – – – (6) (91) – – 701 1,004
Net investment result on unit-linked investments – – 13,298 6,168 – – – – 315 70 – – 13,613 6,238 of which: inter-segment revenues (347) (527) (318) (316) (26) (16) (1,086) (1,222) (5) (33) 1,781 2,112 Benefits, losses and expenses Insurance benefits and losses, net 17,394 20,152 11,510 8,612 1,085 1,588 – – 502 394 – – 30,491 30,746
Policyholder dividends and participation in profits, net 7 3 14,114 7,706 – – – – 398 154 – – 14,519 7,863 Income tax expense/(benefit) attributable to policyholders – – 304 110 – – – – – – – – 304 110 Underwriting and policy acquisition costs, net 5,765 5,907 2,282 2,454 487 703 – – 11 7 (7) (10) 8,538 9,061 Administrative and other operating expense (excl. depreciation/amortization) 2,963 3,636 2,396 2,463 1,297 1,340 1,181 1,225 122 137 (1,072) (1,342) 6,888 7,458 Interest credited to policyholders and other interest 104 112 455 445 – – 120 136 78 89 (281) (315) 475 467 Restructuring provisions and other items not included in BOP (321) (372) (277) (435) (2) (14) (65) (75) (1) (10) – – (666) (906) Total BOP benefits, losses and expenses (before interest, depreciation and amortization) 25,912 29,437 30,785 21,355 2,867 3,618 1,236 1,286 1,110 770 (1,360) (1,668) 60,549 54,799 Business operating profit (before interest, depreciation and amortization) 2,921 1,452 1,758 2,143 1,647 1,538 21 125 – 60 (421) (445) 5,926 4,872 Depreciation and impairments of property and equipment 109 127 22 28 33 36 9 7 – – – – 174 198 Amortization and impairments of intangible assets 148 252 126 578 93 81 49 92 – – – – 416 1,004
Add back: Business operating profit attributable to non-controlling interests 133 108 255 223 – – (6) (7) – – 382 324 Net income before shareholders’ taxes 2,610 1,066 1,537 1,328 1,526 1,427 (808) (640) 151 48 5,017 3,230 Income tax expense/(benefit) attributable to policyholders – – 304 110 – – – – – – 304 110
Total assets (after cons. of investments in subsidiaries) 115,342 114,029 246,517 245,255 6,760 7,578 22,439 21,074 24,980 25,623 (33,359) (31,587) 382,679 381,972 Liabilities
Reinsurers’ share of reserves for insurance contracts 11,852 11,073 3,447 3,657 – – – – 3,113 3,127 (64) (84) 18,347 17,774 Deposits made under assumed reinsurance contracts 142 90 82 63 1,476 1,476 – – 65 79 – – 1,764 1,708
Reserves for losses and loss adjustment expenses, gross 56,074 57,777 – – 918 1,103 22 23 4,200 4,142 (59) (75) 61,155 62,971 Reserves for unearned premiums, gross 15,781 15,664 – – 625 560 3 3 12 13 (4) (10) 16,416 16,230 Future life policyholder benefits, gross 33 36 68,428 67,717 – – 2 2 3,978 4,198 – – 72,440 71,952 Policyholder contract deposits and other funds, gross 22 25 20,579 19,858 – – – – 2,183 2,193 – – 22,785 22,076 Reserves for unit-linked contracts, gross – – 54,660 53,224 – – – – 10,870 11,169 – – 65,530 64,393
Other International Group Risk Solutions 3 209 201 – – – –
1 Includes business written under freedom of services and freedom of establishment in Europe, and the related assets. 2 Includes business written through licenses, mainly into Asia Pacific and Middle East, and the related assets. 3 Includes business written through licenses into all regions.
Zurich Insurance plc Dublin General Insurance 100 100 EUR 8.2 Zurich Financial Services EUB Holdings Limited Dublin Non Core Businesses 100 100 EUR 0.001 Italy Zurich Investments Life S.p.A. Milan Global Life 100 100 EUR 164.0 Luxembourg Zurich Eurolife S.A. Bertrange Global Life 100 100 EUR 35.5 Malaysia
Zurich Santander Seguros México, S.A.2 Mexico City General Insurance/ Global Life 51 51 MXN 190.0
Zurich Insurance Company Ltd 4 Zurich Other Operating Businesses 100 100 CHF 825.0
Allied Zurich Holdings Limited St. Hélier Other Operating Businesses 100 100 GBP 90.8
Zurich International Life Limited Douglas, Isle of Man Global Life 100 100 GBP 123.4
1 The segments are defined in note 27. 2 The controlling shareholder of this subsidiarie is Zurich Santander Holding Dos (Spain), S.L. 3 Relates to Bansabadell insurance entities which are controlled by the Group. 4 The results of the operating activities are included in the General Insurance, Global Life and Farmers segments, whereas the Headquarters’ activities are included in Other
Operating Businesses. 5 The results of the operating activities are included in the Global Life segment, whereas the Headquarters’ activities are included in Other Operating Businesses. 6 These entities are LLCs or partnerships and have no share capital. 7 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.
For Zurich Santander Insurance America, S.L. and its subsidiaries, and the Bansabadell insurance entities, certain protective rights exist, which, amongst others, include liquidation, material sale of assets, transactions impacting the legal ownership structure, dividend distribution and capital increase, distribution channel partnerships and governance, which are not quantifiable.
Dividends paid to non-controlling interests 124 133 – 28 1 Includes reserves for premium refunds, liabilities for investment contracts, deposits received under ceded reinsurance contracts, deferred front-end fees and reserves for insurance contracts.
Overview Materiality kk Overall Group materiality: USD 225 million Audit scope kk We concluded full scope audit work at 20 business units in 10 countries.
Key audit matters The following are the key audit matters we have identified: kk Valuation of actuarially determined life insurance assets and liabilities kk Valuation of General Insurance reserves kk Recoverability of goodwill, distribution agreements and attorney-in-fact contracts
We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the consolidated financial statements as a whole, taking into account the structure of the Group, the accounting processes and controls, and the industry in which the Group operates.
Based on our professional judgment, we determined certain quantitative thresholds for materiality, including the overall Group materiality for the consolidated financial statements as a whole as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of any misstatements, both individually and in aggregate on the consolidated financial statements as a whole.
Materiality Overall group materiality Overall Group materiality: USD 225 million How we determined it
We determined our materiality for the audit of the consolidated financial statements using quantitative and qualitative factors. Based on these factors we have selected a combined 3 year average of net income before income taxes (NIBIT) and business operating profit (BOP) as appropriate benchmarks for measuring materiality. We applied a 5% rule of thumb which resulted in an overall materiality of USD 225 million.
Valuation of actuarially determined life insurance assets and liabilities Key audit matter The Group’s valuation of the actuarially determined life insurance assets (including deferred policy acquisition costs, deferred origination costs, and present value of future profits) and liabilities (reserves for insurance contracts and deferred front-end fees) is based on complex actuarial methodologies and models and involves comprehensive assumption setting processes with regards to future events. Actuarial assumptions selected by the Group with respect to interest rates, investment returns, mortality, morbidity, longevity, persistency, expenses, stock market volatility and future policyholder behavior and the underlying methodologies and assumptions used may result in material impacts on the valuation of actuarially determined life insurance assets and liabilities.
How our audit addressed the key audit matter We assessed and tested the design and operating effectiveness of selected key controls over actuarial methodology, integrity of data used in the actuarial valuation, and the assumptions setting processes used by management related to the valuation of actuarially determined life insurance assets and liabilities.
In relation to the particular matters set out above, our substantive testing procedures included the following: kk Tested the completeness and accuracy of underlying data to source documentation.
kk Involved our life insurance actuarial specialists to independently test management’s methodology and the assumptions used, with particular consideration of industry studies, the Group’s experience and management’s liability adequacy testing procedures.
kk Assessed the consistency of the life actuarial methods used across the Group’s business units.
kk Challenged the Group’s methodology and assumptions, focusing on changes to life actuarial methodology and assumptions during the year, by applying our industry knowledge and experience to compare whether the methodologies are in compliance with recognized actuarial practices as well as regulatory and reporting requirements.
Specifically, long-tail lines of business, which often have low frequency, high severity claims settlements, are generally more difficult to project and subject to greater uncertainties than short-tail, high frequency claims. Further, not all catastrophic events can be modeled using actuarial methodologies, which increases the degree of judgment needed in estimating general insurance loss reserves.
How our audit addressed the key audit matter We assessed and tested the design and operating effectiveness of selected key controls over actuarial methodology, integrity of data used in the actuarial valuation, and the assumptions setting and governance processes used by management related to the valuation of general insurance reserves.
kk Utilized information technology audit techniques to analyze claims through claims data plausibility checks and recalculation of claims development patterns.
kk Performed sensitivity testing and evaluated the appropriateness of any significant adjustments made to management’s general insurance reserve estimates.
Recoverability of goodwill, distribution agreements and attorney-in-fact contracts Key audit matter As detailed in Notes 4 and 14 of the consolidated financial statements, the Group’s goodwill is allocated to cash generating units (CGUs) that are identified generally at a segment level. The valuation and recoverability of significant goodwill, distribution agreements and attorney-in-fact contracts involves complex judgments and estimates, including projections of future income, terminal growth rate assumptions, and discount rates. These assumptions and estimates can have a material impact on the valuations and impairment decisions reflected in the consolidated financial statements of the Group.
kk Tested the principles and integrity of the Group’s discounted cash flow model that supports the value-in-use calculations in order to assess the appropriateness of the methodology applied in the Group’s annual impairment assessment.
kk Engaged our internal valuation experts to assist in the testing of key assumptions and inputs.
We determined that the assumptions used in the valuation of the significant goodwill, distribution agreements and attorney-in-fact contracts were reasonable.
Responsibilities of the Board of Directors for the consolidated financial statements The Board of Directors is responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with IFRS and the provision of Swiss law, and for such internal control as the Board of Directors determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Review of the year Net income after taxes for the year was CHF 1,791 million compared with CHF 2,693 million in 2015. The decrease was mainly driven by a reduction in dividend income from its subsidiary Zurich Insurance Company Ltd of CHF 1,100 million to CHF 1,400 million in 2016 partially offset by an increase in interest income on subordinated loans to subsidiaries of CHF 206 million to CHF 512 million. Net income after taxes also includes impairments on investments in subsidiaries of CHF 62 million compared to CHF 90 million in the prior year.
Income statements in CHF thousands, for the years ended December 31 Notes 2016 2015
Other operating income 4 208 21,177 Other operating expenses 5 (14,108) (23,228) Depreciation and valuation adjustments to non-current assets 6 (62,000) (89,500)
Dividend income 1,400,000 2,500,000 Interest income 513,759 306,953 Other financial income 8,597 21,420
Assets in CHF thousands, as of December 31 Notes 2016 2015
Liabilities and shareholders’ equity in CHF thousands, as of December 31 Notes 2016 2015
Short-term liabilities Other liabilities to subsidiaries – 524,128 Other liabilities to third parties 33,024 17,636 Other liabilities to shareholders 1,192 1,032 Accrued expenses and deferred income to subsidiaries 993 996 Accrued expenses and deferred income to third parties 971 210 Derivatives with subsidiaries 1,712 – Total short-term liabilities 37,892 544,002 Total liabilities 37,892 544,002 Shareholders’ equity (before appropriation of available earnings)
Retained earnings: As of January 1 13,064,513 10,371,266 Net income after taxes 1,791,439 2,693,247
Retained earnings, as of December 31 14,855,952 13,064,513 Total shareholders’ equity (before appropriation of available earnings) 16,708,820 17,408,448 Total liabilities and shareholders’ equity 16,746,712 17,952,450 1 Dividends paid in the year, out of capital contribution reserve in respect of the 2015 result, amounting to CHF 2,537,305.
All amounts in these financial statements including the notes are shown in Swiss franc thousands, rounded to the nearest thousand, unless otherwise specified.
b) Investments in subsidiaries Investments in subsidiaries are equity interests, held on a long-term basis for the purpose of the holding company’s business activities. Each investment in subsidiaries is valued individually and carried at its cost less adjustments for impairments.
6. Depreciation and valuation adjustments to non-current assets Impairments on investments in subsidiaries amount to CHF 62 million and CHF 90 million for the years ended December 31, 2016, and December 31, 2015, respectively (also refer to note 11).
7. Financial income Financial income for the year 2016 mainly consists of dividend income of CHF 1,400 million (2015: CHF 2,500 million) received from the Company’s subsidiary Zurich Insurance Company Ltd and interest income of CHF 512 million (2015: CHF 304 million) on the subordinated loan with Zurich Insurance Company Ltd. This interest income is recognized when Zurich Insurance Company Ltd declares its intention to pay a dividend to its parent Zurich Insurance Group Ltd. During 2016, ZIC declared a dividend in March 2016 and further declared in December 2016 its intention to pay a dividend in 2017 triggering further interest income accrued in the Company in 2016.
In addition to the above mentioned directly held subsidiaries, the Company indirectly owns additional subsidiaries primarily through Zurich Insurance Company Ltd. Information regarding indirectly owned subsidiaries is included on pages 264 to 266 of this Annual Report.
12. Commitments and contingencies Zurich Insurance Group Ltd has provided unlimited guarantees in support of entities belonging to the Zurich Capital Markets group of companies. The Company has also entered into support agreements and guarantees for the benefit of certain of its subsidiaries. They amounted to CHF 2,281 million as of December 31, 2016, and CHF 3,150 million as of December 31, 2015. The decrease is mainly due to an expired guarantee in the amount of USD 700 million provided to a fully owned subsidiary to secure the subordinated debt obligation of the issuer. Furthermore, Zurich Insurance Group Ltd has issued an unlimited guarantee in favor of the Institute of London Underwriters in relation to business transferred to Zurich Insurance plc from a Group company which no longer has insurance licenses.
13. Share capital a) Issued share capital In 2016, there was no change to the ordinary share capital. At the Annual General Meeting on March 30, 2016, the shareholders approved an extension of authorized share capital with the number of shares remaining unchanged at 10,000,000 fully paid registered shares with a nominal value of CHF 0.10 each until March 30, 2018. In 2015, there were no changes to the ordinary share capital or to the authorized share capital. During the years 2016 and 2015, a total of 202,442 shares and 768,128 shares, respectively, were issued to employees out of the contingent capital.
Employee participation On January 1, 2015, the contingent share capital, to be issued to employees of Zurich Insurance Group Ltd and its subsidiaries, amounted to CHF 165,842.30 or 1,658,423 fully paid registered shares with a nominal value of CHF 0.10 each. On January 1, 2016, the contingent share capital, to be issued to employees of Zurich Insurance Group Ltd and its subsidiaries, amounted to CHF 89,029.50 or 890,295 fully paid registered shares with a nominal value of CHF 0.10 each.
Average selling price, in CHF 248 277 1 in CHF thousands 16. Free reserve
As of January 1 342,206 340,242 Transfer from capital contribution reserve 458 1,964 As of December 31 342,664 342,206 17. Shareholders According to information available as of December 31, 2016, Zurich Insurance Group Ltd is not aware of any person or institution, other than BlackRock, Inc., New York, (5.03 percent of the shares, July 29, 2014) and Norges Bank (the Central Bank of Norway), Oslo, (3.10 percent of the shares, March 25, 2016) which, directly or indirectly, had an interest as a beneficial owner in shares, option rights and/or conversion rights relating to shares of Zurich Insurance Group Ltd representing three percent or more of its issued shares.
18. Remuneration of the Board of Directors and the Executive Committee The information required by articles 14 –16 of the Ordinance Against Excessive Compensation, which prevails over article 663bbis of the Swiss Code of Obligations, is disclosed and audited in the Remuneration report on pages 76 to 109 of this Annual Report.
20. Supplementary information Cash and cash equivalents of CHF 338 million include restricted cash of CHF 0.4 million as of December 31, 2016, compared to cash and cash equivalents of CHF 1,645 million and thereof restricted cash of CHF 0.4 million in the previous year.
The Board of Directors proposes to the shareholders at the Annual General Meeting on March 29, 2017, to pay a dividend of CHF 1,702 million out of available earnings and to carry forward retained earnings of CHF 13,154 million as shown in the above table.
Appropriation of capital contribution reserve As of January 1, 2017 (incl. reserve for treasury shares) 1,154,003 Dividend payment out of capital contribution reserve 1 (858,462) Balance carried forward 1 295,541 1 These figures are based on the issued share capital as of December 31, 2016. They may change following the issuance of shares out of contingent capital for employees after the balance sheet date (see note 13). Treasury shares are not entitled to dividends.
The Board of Directors proposes to the shareholders at the Annual General Meeting on March 29, 2017, to pay a dividend of CHF 858 million from the capital contribution reserve.
If these proposals are approved, a dividend of CHF 11.30 per share, less 35 percent for Swiss withholding tax, as well as a dividend of CHF 5.70 per share exempt from Swiss withholding tax are expected to be paid starting from April 4, 2017.
In our opinion, the accompanying financial statements as at December 31, 2016, comply with Swiss law and the Company’s articles of incorporation.
Overview Materiality kk Overall materiality: CHF 170 million Audit scope kk We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the financial statements as a whole, taking into account the structure of the entity, the accounting processes and controls, and the industry in which the entity operates.
Key audit matters As key audit matter the following area of focus has been identified: kk Valuation of Investments in subsidiaries
Based on our professional judgment, we determined certain quantitative thresholds for materiality, including the overall materiality for the financial statements as a whole as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of any misstatements, both individually and in aggregate on the financial statements as a whole.
Materiality Overall materiality CHF 170 million How we determined it 1% of total assets Rationale for the materiality benchmark applied
Valuation of Investments in subsidiaries Key audit matter Investments in subsidiaries are carried at cost less necessary impairments and valued on an individual basis.
We consider this to be a key audit matter not only due to this judgment involved but also based on the magnitude of CHF 11.4 billion.
How our audit addressed the key audit matter In relation to the particular matters set out above, our substantive testing procedures included the following: kk Assessed the appropriateness of the Company’s impairment testing methodology.
kk Re-performed management’s impairment test on the carrying value of each investment in subsidiary, and challenged the impairment decisions taken.
kk Tested the required disclosures in the notes to the financial statements.
Responsibilities of the Board of Directors for the financial statements The Board of Directors is responsible for the preparation of the financial statements in accordance with the provisions of Swiss law and the Company’s articles of incorporation, and for such internal control as the Board of Directors determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
A further description of our responsibilities for the audit of the financial statements is located at the website of EXPERTsuisse: This description forms part of our auditor’s report.
Auditor’s responsibility Our responsibility is to express an opinion based on our audit as to whether the issue of new shares complies with Swiss law and the Company’s articles of incorporation. We conducted our audit in accordance with Swiss Auditing Standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the issue of new shares complies with the legal requirements and Company’s articles of incorporation.
An audit involves performing procedures to obtain audit evidence so that material breaches of the legal requirements and the Company’s articles of incorporation for the issue of new shares may be identified with reasonable assurance. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material breaches of the requirements concerning the issue of new shares, whether due to fraud or error.
Opinion In our opinion, the issue of 202,442 registered shares with nominal value of CHF 0.10 complies with Swiss law and the Company’s articles of incorporation.
Share price performance The share price at year end 2016 was CHF 280.40. The lowest price during 2016 was at CHF 196.00, on 7 April, while the highest price was at CHF 281.50 on 26 December.
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Business operating profit (BOP) is a measure that is the basis on which the Group manages all of its business units. It indicates the underlying performance of the Group’s business units, after non-controlling interests, by eliminating the impact of financial market volatility and other non- operational variables. BOP reflects adjustments for shareholders’ taxes, net capital gains/(losses) and impairments on investments (except for the capital markets and property lending/ banking operations included in Non-Core Businesses, investments in hedge funds, certain securities held for specific economic hedging purposes and policyholders’ share of investment results for the life businesses) and non-operational foreign exchange movements. Significant items arising from special circumstances, including restructuring charges, charges for litigation outside the ordinary course of business, gains and losses on divestments of businesses, impairments of goodwill and changes in estimates of earn-out liabilities (except experience adjustments, which remain within BOP) are also excluded from BOP. Business operating profit before interest, depreciation and amortization (BOPBIDA) excludes interest expense on debt, depreciation and impairments of property and equipment and amortization and impairments of intangible assets. BOPBIDA includes amortization of deferred policy acquisition costs, deferred origination costs and distribution agreements.
Return on shareholders’ equity (ROE) is a measure that indicates the level of profit or loss relative to resources provided by shareholders. It is calculated as net income after taxes attributable to shareholders, annualized on a linear basis, divided by the average value of shareholders’ equity, adjusted for net unrealized gains/ (losses) on available-for-sale investments and cash flow hedges, using the value at the beginning and end of each quarter within the period. The average shareholders’ equity for each quarter is then added together and divided by the number of quarters. If the dividend is approved at the Annual General Meeting within the first ten working days in April, then the dividend is deducted from the second quarter opening shareholders’ equity.
Net underwriting result is calculated as the difference between net earned premiums and policy fees and the sum of net insurance benefits and losses and net technical expenses.
Annual Report 2016 The Annual Report contains detailed information about Zurich’s financial performance, executive bodies, risk management, corporate governance and remuneration in 2016, and its strategy. It is available in English and German, with the financial statements in English only.
Contact information For more information please contact the appropriate office below, or visit our website at www.zurich.com
THIS COMMUNICATION DOES NOT CONTAIN AN OFFER OF SECURITIES FOR SALE IN THE UNITED STATES; SECURITIES MAY NOT BE OFFERED OR SOLD IN THE UNITED STATES ABSENT REGISTRATION OR EXEMPTION FROM REGISTRATION, AND ANY PUBLIC OFFERING OF SECURITIES TO BE MADE IN THE UNITED STATES WILL BE MADE BY MEANS OF A PROSPECTUS THAT MAY BE OBTAINED FROM THE ISSUER AND THAT WILL CONTAIN DETAILED INFORMATION ABOUT THE COMPANY AND MANAGEMENT, AS WELL AS FINANCIAL STATEMENTS.
All photography by Ivan Stefania except for pages 12, 14, 15, 17, 19 (Zurich Insurance Company), page 16 (iStock), page 18 (Getty Images), page 21 (Michael Szönyi).
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