Table 20.7 sets out the sensitivity of the defined benefit obligation to changes in key actuarial assumptions. The effect on the defined benefit obligation shown allows for an alternative value for each assumption while the other actuarial assumptions remain unchanged. Whilst this table illustrates the overall impact on the defined benefit obligation of the changes shown, the significance of the impact and the range of reasonably possible alternative assumptions may differ between the different plans that comprise the overall defined benefit obligation. In particular, the plans differ in benefit design, currency and average term, meaning that different assumptions have different levels of significance for different plans. The sensitivity analysis is intended to illustrate the inherent uncertainty in the evaluation of the defined benefit obligation under market conditions at the measurement date. Its results cannot be extrapolated due to non-linear effects that changes in the key actuarial assumptions may have on the overall defined benefit obligation. Furthermore, the analysis does not indicate a probability of such changes occurring and it does not necessarily represent the Group’s view of expected future changes in the defined benefit obligation. Any management actions that may be taken to mitigate the inherent risks in the post-employment defined benefit plans are not reflected in this analysis.
b) Defined contribution pension plans Certain of the Group’s companies sponsor defined contribution pension plans. Eligibility for participation in such plans is either immediate on commencement of employment or based on completion of a specified period of continuous service. The plans provide for voluntary contributions by employees and contributions by the employer which typically range from 2 percent to 10 percent of annual pensionable salary, depending on a number of factors. The Group’s contributions under these plans amounted to USD 190 million and USD 159 million for the years ended December 31, 2016 and 2015, respectively.
A revised Partnership Share Scheme was launched in March 2013. Participants benefit from purchasing shares by making deductions from gross salary up to a maximum of GBP 1,800 or 10 percent of their year-to-date earnings. There were 848 and 883 active participants in the plan as of December 31, 2016 and 2015, respectively.
Share Incentive Plan for employees in Switzerland Under this plan, employees have the option to acquire sales-restricted shares at a 30 percent discount to the market value. The maximum permitted investment in shares is equivalent to CHF 3,500 per employee per annum. During 2016, 4,551 employees were eligible to participate in the share incentive plan, compared with 4,633 in 2015. For the years ended December 31, 2016 and 2015, 1,710 and 1,775 employees, respectively, purchased shares under the 2015 and 2014 share plans.
Remaining commitments under investment agreements 2,009 1,431 Guarantees and letters of credit1 799 895 Future operating lease commitments 1,962 1,512 Undrawn loan commitments 7 8 Other commitments and contingent liabilities 199 574 1 Guarantee features embedded in life insurance products are not included.
Commitments under investment agreements The Group has committed to contribute capital to third parties that engage in making investments in direct private equity, private equity funds and real estate. Commitments may be called by the counterparty over the term of the investment (generally three to five years) and must be funded by the Group on a timely basis.
Commitments under lease agreements The Group has entered into various non-cancellable operating leases as lessee for office space and certain computer and other equipment. Lease expenses totalled USD 262 million and USD 254 million for the years ended December 31, 2016 and 2015, respectively.
Legal, compliance and regulatory developments In recent years there has been an increase in the number of legislative initiatives that require information gathering and tax reporting regarding the Group’s customers and their contracts, including the U.S. Foreign Account Tax Compliance Act (FATCA) and the expected introduction of other automatic tax information exchange regimes based on the Common Reporting Standard (CRS). The Group’s compliance activities in this area could result in higher compliance costs, remedial actions and other related expenses for its life insurance, savings and pension business. There has also been increased scrutiny by various tax and law enforcement officials into cross-border business activities, including in particular by U.S. government authorities looking into U.S. taxpayers with investments held outside the U.S. and the non-U.S. financial institutions that hold such investments.
Following a hearing to consider the effect of the initial decision on the plaintiffs’ remaining claims, on February 27, 2015, the court issued its Statement of Decision for Phase 1A. The court ruled that all of the plaintiffs’ fraudulent transfer causes of action were barred, and plaintiffs later confirmed on the record that their unfair competition claims were also barred as a result of the Decision for Phase 1A. The court allowed the plaintiffs’ remaining claims to proceed, but held that the plaintiffs are bound by the insurance regulators’ determinations that the 1995 recapitalization was fair and in the best interests of Home’s policyholders, including the plaintiffs.
Table 23.1 compares the fair value with the carrying value of financial assets and financial liabilities. Certain financial instruments are not included within this table as their carrying value is a reasonable approximation of their fair value. Such instruments include cash and cash equivalents, obligations to repurchase securities, deposits made under assumed reinsurance contracts, deposits received under ceded reinsurance contracts and other financial assets and liabilities. This table excludes financial assets and financial liabilities relating to unit-linked contracts.
Total available-for-sale securities 144,515 143,535 144,515 143,535 Fair value through profit or loss securities
Held-to-maturity debt securities 3,213 4,086 2,543 3,369 Investments in associates and joint ventures 20 18 20 18
Liabilities related to investment contracts (637) (913) (506) (754) Liabilities related to investment contracts with DPF (8,011) (6,447) (8,374) (7,629)
All of the Group’s financial assets and financial liabilities are initially recorded at fair value. Subsequently, available-for-sale financial assets, fair value through profit or loss financial assets, and derivative financial instruments are carried at fair value as of the balance sheet date. All other financial instruments are carried at amortized cost and the valuation techniques used to determine their fair value measurement are described below.
Reinsurers’ share of reserves for insurance contracts fair value option1 – – 237 237
Reserves for insurance contracts fair value option 2 – – (2,720) (2,720)
Fair value hierarchy – unit-linked – current period in USD millions, as of December 31, 2016 Level 1 Level 2 Level 3 Total
kk Non-agency MBS and ABS rated below ’AAA’ that are valued by independent pricing providers using a variety of valuation techniques which may require use of significant unobservable input parameters such as asset prepayment rate, default rates and credit curves.
kk Certain investment properties for which fair value is based on valuations performed annually by internal valuation specialists and generally on a rotation basis at least once every three years by an independent qualified appraiser. The valuation methods applied are income capitalization, discounted cash flow analysis, and market comparables taking into account the actual letting status and observable market data. The majority of such investments have been categorized within level 3 because the valuation techniques used include significant adjustments to observable data of similar properties. Some of these investments have been categorized within level 2, where there are active and transparent markets and no significant adjustments to the observable data are required.
Transfer from/to assets held for own use – – – – – – (5) Transfer to assets held for sale – – – – – – (74) Transfers into level 3 – 29 1 – – – – Transfers out of level 3 – (228) – (6) (130) – – Acquisitions and divestments (6) – – – – – –
1 Presented as net capital gains/(losses) and impairments on Group investments in the consolidated income statements. 2 Unrealized gains/(losses) recognized in income for available-for-sale securities relate to impairments.
Transfer from/to assets held for own use – – – – – – 22 Transfer to assets held for sale – – – – – – (16)
Development of reserves for insurance contracts fair value option classified within level 3 – current period in USD millions Gross Ceded Net
Fee income and other expenses (38) 10 (28) Interest and bonuses credited to policyholders 60 (8) 52 Changes in assumptions 56 (7) 49
Development of reserves for insurance contracts fair value option classified within level 3 – prior period in USD millions Gross Ceded Net
Development assets and liabilities classified within level 3 – unit-linked – current period in USD millions Fair value through profit or loss securities
Transfers into level 3 1 1 – Foreign currency translation effects (2) (6) (659)
1 Presented as net investment result on unit-linked investments in the consolidated income statements.
Sensitivity of fair values reported for level 3 instruments to changes to key assumptions Within level 3, the Group classified non-agency ABS/MBS, CLOs, and private debt placements amounting to USD 5,605 million and USD 6,108 million for Group investments and USD 30 million and USD 43 million for investments for unit-linked contracts as of December 31, 2016 and 2015, respectively.
Within level 3, the Group also classified investments in private equity funds, certain hedge funds and other securities which are not quoted on an exchange amounting to USD 3,453 million and USD 3,378 million for Group investments and USD 446 and USD 336 million for investments for unit-linked contracts as of December 31, 2016 and 2015, respectively. These investments are valued based on regular reports from the issuing funds, and their fair values are reviewed by a team of in-house investment professionals and may be adjusted based on their understanding of the circumstances of individual investments.
The key assumptions driving the valuation of these investments include equity levels, discount rates, credit spread rates and prepayment rates. The effect on reported fair values of using reasonably possible alternative values for each of these assumptions, while the other key assumptions remain unchanged, is disclosed in tables 23.7.a and 23.7b. While these tables illustrate the overall effect of changing the values of unobservable inputs by a set percentage, the significance of the impact and the range of reasonably possible alternative assumptions may differ significantly between investments, given their different terms and circumstances. Inter-relationships between those unobservable inputs are disclosed in tables 23.8a and 23.8b. The correlation is based on the historical correlation matrix derived from the risk factors which are assigned to each of the level 3 exposures (equity and debt securities). The main market drivers are equity markets and rate indicators and the impact of such changes on the other factors. The spread scenario analyzes the impact of an increase of borrowing cost for entities.
Sensitivity analysis of level 3 investments to changes in key assumptions – current period as of December 31, 2016
Sensitivity analysis of level 3 investments to changes in key assumptions – prior period as of December 31, 2015
Within level 3, the Group also classified: kk Investment property amounting to USD 8,555 million and USD 7,828 million for Group investments and USD 3,138 million and USD 4,341 million for investments for unit-linked contracts as of December 31, 2016 and 2015, respectively. A large portion of this portfolio is valued using an internal income capitalization model. The model is asset specific and capitalizes the sustainable investment income of a property with its risk specific cap rate. This cap rate is an “all risk yield” with components such as asset class yield for core assets (lowest risk) plus additional premiums for additional risks, for example second tier location or deterioration risk. All cap rate components (risk premiums) are reviewed and, if necessary, adjusted annually before revaluations are performed. The model takes into consideration external factors such as interest rate, market rent and vacancy rate. The significant unobservable inputs which are outside this model, are estimated rental value, rental growth, long term vacancy rate and discount rate. Significant increases/(decreases) in rental value and rental growth, in isolation, would result in a significantly higher/(lower) fair value measurement. Significant increases/(decreases) in the long term vacancy rate and discount rate, in isolation, would result in a significantly lower/(higher) fair value measurement.
kk USD 237 million and USD 270 million for reinsurers’ share of reserves fair value option and, USD 2,720 million and USD 2,927 million reserves for insurance contracts fair value option as of December 31, 2016 and 2015, respectively. The significant unobservable inputs used in the fair value measurement are the policy decrement assumptions used in projecting cash flows. Significant increases/(decreases) in claim incidence rates and significant decreases/ (increases) in claim termination rates would result in a significantly higher/(lower) fair value measurement.
Tables 24.1a and 24.1b provide an analysis, for non unit-linked businesses, of the age of financial assets that are past due but not impaired and of financial assets that are individually determined to be impaired.
Increase/(decrease) in allowance for impairments (5) 2 33 Amounts written-off (47) (2) (19) Acquisitions and divestments – – (31) Foreign currency translation effects (3) (1) (2)
Increase/(decrease) in allowance for impairments 44 1 61 Amounts written-off1 (543) – (54) Foreign currency translation effects (31) – (24)
1 Includes USD 542 million related to the run-off property loans at Dunbar Assets Ireland.
As of December 31, 2016 and 2015, there were no loans, advances or credits outstanding from members of the Executive Committee. Outstanding loans and guarantees granted to members of the Board of Directors amounted to nil for the years ended December 31, 2016 and 2015. The terms “members of the Board of Directors” and “members of the Executive Committee” in this context include the individual as well as members of their respective households. The figures in table 25 include the fees paid to members of the Board of Directors of Zurich Insurance Group Ltd and Zurich Insurance Company Ltd, which were USD 5 million for both years ended December 31, 2016 and 2015, respectively.
The Auto Physical Damage (APD) Quota Share reinsurance agreement (APD agreement) with the Farmers Exchanges provided for annual ceded premiums of USD 500 million in 2015. The APD agreement was not renewed in 2016.
1 The APD agreement was not renewed in 2016. Net underwriting result in 2016 reflects adverse development on prior year’s business in run-off. 2 Farmers Re Co assumed 7.0 percent and ZIC assumed 64.0 percent. The remaining 29.0 percent was assumed by a third party on the same terms as Farmers Re Co and ZIC. 3 From January 1, 2016, ZIC assumed a 8.0 percent quota share. Another 12.0 percent was assumed by third parties. Subject to the approval of the California Department of
Insurance, effective December 31, 2016. ZIC assumed an 8.0 percent quota share, while another 16.0 percent is assumed by third parties. 4 From January 1, 2015, Farmers Re Co and ZIC assumed a 1.0 percent and 9.0 percent respective quota share. Another 4.0 percent was assumed by a third party. Effective
6 Under the APD agreement the ceding commission for acquisition expenses was 27.7 percent and the ceding commission for unallocated loss adjustment expenses was 10.0 percent. Under the All Lines agreement, the Farmers Exchanges receive a ceding commission of 26.7 percent, 8.2 percent of premiums for unallocated loss adjustment expenses (8.4 percent in 2015) and 5.3 percent of premiums for other expenses.
FGI has historically charged a lower management fee than the amount allowed by policyholders. The range of fees has varied by line of business over time and from year to year. The gross earned premiums of the Farmers Exchanges were USD 19,528 million and USD 18,885 million for the years ended December 31, 2016 and 2015, respectively.
The Group also manages two of the three core segments on a secondary level.
Global Life is managed on a regional-based structure within a global framework, including: kk North America kk Latin America kk Europe, Middle East & Africa (EMEA)
Change in the structure of the Group On June 10, 2016, Zurich announced a planned change in the structure of the Group, effective July 1, 2016, which will lead to a simpler, more customer-oriented structure and reduced complexity. The new business structure will be focused on geographic regions in our core businesses of Property and Casualty (P&C) and Life – Asia Pacific, Europe, Middle East and Africa (EMEA), Latin America and North America – as well as Farmers, Group Functions and Operations and Non-Core Businesses. On September 20, 2016, Zurich announced further changes to the business structure of the Group by creating a new unit, called Commercial Insurance, which will combine its Corporate and Commercial business into a single global business. The new reporting structure will be reflected in the consolidated financial statements in 2017.
Net earned premiums and policy fees 26,102 28,051 14,537 11,876 1,521 2,266 6 6 456 426 – – 42,622 42,624 Farmers management fees and other related revenues – – – – 2,867 2,786 – – – – – – 2,867 2,786 Net investment result on Group investments 2,086 2,002 3,884 4,415 39 49 294 300 282 236 (401) (427) 6,185 6,576
Global Life includes approximately USD 3,968 million and USD 2,701 million of gross written premiums and future life policyholder benefits for certain universal life-type contracts in the Group’s Spanish operations for the years ended December 31, 2016 and 2015, respectively (see note 3).
Net income before income taxes 2,610 1,066 1,841 1,439 1,526 1,427 (808) (640) 151 48 5,321 3,340 Income tax (expense)/benefit (1,843) (1,294)
2 The impact on Group level relates to foreign currency translation differences. 3 For the year ended December 31, 2016, total Group includes non-operating charges of USD (169) million and accounting and other restructuring charges of USD (65) million.
For the year ended December 31, 2015, total Group includes accounting and other restructuring charges of USD (199) million (of which USD (67) million relates to software impairments and USD (32) million to impairments of own use properties (see note 14 and 13, respectively) and USD 100 million of other restructuring related costs) relating to initiatives announced in 2015. In addition, it includes other adjustments amounting to USD 24 million.
Revenues/(expenses) not included in BOP: Net capital gains/(losses) on investments and impairments, net of policyholder allocation 499 466 167 240 8 20 23 152 164 8 860 887 Net gain/(loss) on divestments of businesses1 (134) – 47 – – – (2) 10 – – (89) 10
Net income/(expense) on intercompany loans 2 (12) (17) (15) (17) – – 27 33 – – – (1) Impairments of goodwill – – – (281) – – – – – – – (281) Change in estimates of earn-out liabilities (29) 29 (89) (21) – – – – – – (119) 8
Net income after taxes 3,478 2,047 attributable to non-controlling interests 268 205 attributable to shareholders 3,211 1,842 1 In 2016, USD 134 million of losses in General Insurance include USD (137) million relating to the sale of businesses in South Africa and Morocco and the remeasurements of assets held for sale and USD 47 million of gains in Global Life relate to a forward sale agreement of a UK based distributor (see note 5).
Equity Shareholders’ equity 30,660 31,178 Non-controlling interests 1,813 1,725 Total equity 32,473 32,904 Total liabilities and equity 382,679 381,972 Supplementary information Additions and capital improvements to property, equipment and intangible assets 406 357 129 127 148 162 31 31 – – – – 715 677
General Insurance Global Life Farmers Other Operating Businesses Non-Core Businesses Eliminations Total in USD millions, as of December 31 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015
Investments for unit-linked contracts – – 115,038 115,559 – – – – 10,868 11,169 – – 125,907 126,728
Reserves for insurance contracts, gross 71,910 73,502 143,667 140,799 1,543 1,663 26 28 21,243 21,715 (64) (84) 238,326 237,622
Global Corporate as of December 31 for the years ended for the years ended
Brazil Zurich Santander Brasil Seguros e Previdência S.A. Sao Paulo Global Life 51 51 BRL 1,659.2
Zurich Minas Brasil Seguros S.A. Belo Horizonte General Insurance/ Global Life 100 100 BRL 3,109.6
Chile Chilena Consolidada Seguros de Vida S.A. Santiago Global Life 98.99 98.99 CLP 24,484.0 Zurich Santander Seguros de Vida Chile S.A. Santiago Global Life 51 51 CLP 24,252.9 Germany Deutscher Herold Aktiengesellschaft Bonn Global Life 100 100 EUR 18.4 Zürich Beteiligungs-Aktiengesellschaft (Deutschland) Frankfurt General Insurance 100 100 EUR 152.9 Zurich Deutscher Herold Lebensversicherung Aktiengesellschaft Bonn Global Life 100 100 EUR 68.5 Zurich GI Management Aktiengesellschaft (Deutschland) Frankfurt General Insurance 100 100 EUR 10.0 Ireland Zurich Life Assurance plc Dublin Global Life 100 100 EUR 17.5
Zurich Insurance Malaysia Berhad Kuala Lumpur General Insurance/ Global Life 100 100 MYR 579.0
Spain Bansabadell Pensiones, E.G.F.P, S.A. 3 Barcelona Global Life 50 50 EUR 7.8 Bansabadell Seguros Generales, S.A. 3 de Seguros y Reaseguros Barcelona General Insurance 50 50 EUR 10.0 Bansabadell Vida S.A. de Seguros 3 y Reaseguros Barcelona Global Life 50 50 EUR 43.9 Zurich Latin America Holding S.L. – Sociedad Unipersonal Barcelona
Zurich Life Insurance Company Ltd 5 Zurich Other Operating Businesses 100 100 CHF 60.0
Zürich Rückversicherungs- Gesellschaft AG Zurich General Insurance 100 100 CHF 11.7 Taiwan Zurich Insurance (Taiwan) Ltd. Taipei General Insurance 99.73 100 TWD 2,000.0 Turkey Zurich Sigorta A.S. Istanbul General Insurance 100 100 TRY 168.9 United Kingdom
Zurich Employment Services Limited Cheltenham, England Global Life 100 100 GBP 154.0
Zurich UK General Services Limited Fareham, England Other Operating Businesses 100 100 GBP 173.1
United States of America Farmers Group, Inc. 7 Reno, NV Farmers 100 100 USD 0.001 Farmers New World Life Insurance Company 7
Zurich American Corporation Wilmington, DE Non-Core Businesses 100 100 USD 0.00001 Zurich American Insurance Company (and subsidiaries) New York, NY General Insurance 100 100 USD 5.0 Rural Community Insurance Company Anoka, MN General Insurance 100 100 USD 5.0
Zurich American Life Insurance Company Schaumburg, IL Global Life/Non-Core Businesses 100 100 USD 2.5
Zurich Holding Company of America, Inc. 8 Wilmington, DE Other Operating Businesses 100 100 USD –
For details on the Group’s capital restrictions, see the capital management section in the Risk review, which forms an integral part of the consolidated financial statements.
Table 28.2 shows the summarized financial information for each subsidiary that has non-controlling interests that are material to the Group.
Opinion We have audited the consolidated financial statements of Zurich Insurance Group Ltd and its subsidiaries (the Group), which comprise the consolidated income statement, consolidated statement of comprehensive income, consolidated balance sheet, consolidated statement of cash flows, consolidated statement of changes in equity and notes to the consolidated financial statements (pages 167 to 268 and the audited sections of the risk review on pages 117 to 147) for the year ended December 31, 2016.
In our opinion the accompanying consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at December 31, 2016, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with the International Financial Reporting Standards (IFRS) and comply with Swiss law.
Basis for opinion We conducted our audit in accordance with Swiss law, International Standards on Auditing (ISAs) and Swiss Auditing Standards. Our responsibilities under those provisions and standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report.
We are independent of the Group in accordance with the provisions of Swiss law and the requirements of the Swiss audit profession, as well as the IESBA Code of Ethics for Professional Accountants, and we have fulfilled our other ethical responsibilities in accordance with these requirements.
kk The full scope audit work addressed 70% and 81% of the Group’s gross written premiums and policy fees (GWP) and total assets, respectively. kk In addition, specific procedures were performed on a further 19 business units in 11 countries representing a further 11% and 8% of the Group’s GWP and total assets, respectively.
Audit scope We designed our audit by determining materiality and assessing the risks of material misstatement in the consolidated financial statements. In particular, we considered where subjective judgments were made; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including among other matters consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud.
The Group’s business units vary significantly in size and we identified 20 which, in our view, required an audit of their complete financial information, due to their size or risk characteristics. Audits of these business units were performed using materiality levels lower than the materiality level for the Group as a whole, ranging from USD 20 million to USD 130 million, and established by reference to the size of, and risks associated with, the business concerned. Specific audit procedures on certain balances and transactions were performed at a further 19 business units. Together these accounted for 81% and 89% of Group GWP and total assets, respectively.
Our involvement included various site visits and component auditor working paper reviews across significant business units, together with discussions around audit approach and any issues arising from the work, and conference calls with the component audit teams.
We chose NIBIT as a benchmark because, in our view, it is the benchmark against which the Group’s performance is most commonly measured, and is a generally accepted benchmark. We also consider BOP as a benchmark because, in our view, BOP is a key indicator for analysts and external parties and may influence the users of the consolidated financial statements.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above USD 20 million as well as any misstatements below that amount which, in our view, warranted reporting for qualitative reasons.
Specifically, the continued low interest rate environment results in reduced investment returns creating a risk of accelerated amortization of deferred policy acquisition costs and a strain on the sufficiency of reserves for traditional life insurance contracts and also influences policyholders’ behaviors.
Based on the work performed we determined the methodologies and assumptions used in the valuation of actuarially determined life insurance assets and liabilities are reasonable and in line with financial reporting requirements and industry accepted practice.
Valuation of General Insurance reserves Key audit matter The valuation of general insurance loss reserves involves a high degree of subjectivity and complexity. Reserves for losses and loss adjustment expenses represent estimates of future payments of reported and unreported claims for losses and related expenses at a given date. The Group uses a range of actuarial methodologies to estimate these provisions. General insurance loss reserves require significant judgment relating to factors and assumptions such as inflation, claims development patterns and regulatory changes.
kk Involved our actuarial specialists to independently test management’s general insurance loss reserve studies and evaluate the reasonableness of the methodology and assumptions used against recognized actuarial practices and industry standards.
Based on the work performed we determined the methodology and assumptions used in the valuation of general insurance reserves are reasonable and in line with financial reporting requirements and industry accepted practice.
How our audit addressed the key audit matter We assessed and tested the design and operating effectiveness of selected key controls over projections of future income, terminal growth rate assumptions, and discount rates related to the recoverability of goodwill, distribution agreements and attorney-in-fact contracts.
In relation to the particular matters set out above, our substantive testing procedures included the following: kk Corroborated the justification of the CGUs defined by management for goodwill allocation.
kk Tested the reasonableness of the methodology and assumptions used including projections on future income (including forecast to actual results), terminal growth rate assumptions, discount rates and sensitivity analyses to determine the impact of those assumptions.
Other information in the annual report The Board of Directors is responsible for the other information in the annual report. The other information comprises all information included in the annual report, but does not include the consolidated financial statements, the stand- alone financial statements of Zurich Insurance Group Ltd, the audited sections of the risk review on pages 117 to 147, the Remuneration report of Zurich Insurance Group Ltd and our auditor’s reports thereon. Our opinion on the consolidated financial statements does not cover the other information in the annual report and we do not express any form of assurance conclusion thereon.
A further description of our responsibilities for the audit of the consolidated financial statements is located at the website of EXPERTsuisse: This description forms part of our auditor’s report.
Report on other legal and regulatory requirements In accordance with article 728a paragraph 1 item 3 CO and Swiss Auditing Standard 890, we confirm that an internal control system exists which has been designed for the preparation of consolidated financial statements according to the instructions of the Board of Directors.
The Annual General Meeting on March 30, 2016, approved a dividend of CHF 17.00 per share to be paid free of Swiss withholding tax to the shareholders out of the capital contribution reserve.
Shareholders’ equity decreased by CHF 700 million to CHF 16,709 million as of December 31, 2016, from CHF 17,408 million as of December 31, 2015. The decrease was mainly driven by the dividend of CHF 2,537 million paid in 2016, partially offset by net income after taxes for the year as well as by capital contributed through the issuance of new shares to employees out of contingent capital. The Board of Directors will propose a distribution of a dividend partially from the available earnings for 2016 and partially from the capital contribution reserve. The portion from the capital contribution reserve will be exempt from Swiss withholding tax.
General capital contribution reserve 860,481 3,342,187 Reserve for treasury shares 15 293,522 303,361
Notes to the financial statements 1. General information Zurich Insurance Group Ltd (the Company) is a public limited company domiciled in Zurich, Switzerland, and its shares are listed on the SIX Swiss Exchange. It was incorporated on April 26, 2000, and is the holding company of the Zurich Insurance Group with the principal activity of holding subsidiary companies. The Company does not employ staff, as employees work in a joint capacity for Zurich Insurance Company Ltd.
4. Other operating income The decrease in other operating income is due to the positive impact in 2015 of the release of CHF 21.1 million of the irrevocable commitment made by the Company on behalf of the Zurich Insurance Group to the Z Zurich Foundation in 2011, as another Group company made the payments for 2015. In 2016, the commitment no longer exists.
8. Financial expenses Financial expenses for the year 2016 decreased by CHF 6.5 million to CHF 15.7 million mostly driven by realized and unrealized foreign exchange losses of CHF 9.9 million compared with CHF 16.1 million in the previous year.
Zurich Financial Services EUB Holdings Ltd 121,436 99.90 99.90 183,436 99.90 99.90 1 in CHF thousands.
The investment in Zurich Financial Services EUB Holdings Limited was impaired by CHF 62 million in 2016 compared with an impairment of CHF 90 million in the previous year.
b) Authorized share capital Until March 30, 2018, the Board of Zurich Insurance Group Ltd is authorized to increase the share capital by an amount not exceeding CHF 1,000,000 by issuing up to 10,000,000 fully paid registered shares with a nominal value of CHF 0.10 each. An increase in partial amounts is permitted. The Board would determine the date of issue of any such new shares, the issue price, type of payment, conditions for exercising pre-emptive rights, and the commencement of entitlement to dividends.
c) Contingent share capital Capital market instruments and option rights to shareholders The share capital of Zurich Insurance Group Ltd may be increased by an amount not exceeding CHF 1,000,000 by the issuance of up to 10,000,000 fully paid registered shares with a nominal value of CHF 0.10 each (i) by exercising of conversion and/or option rights which are granted in connection with the issuance of bonds or similar debt instruments by Zurich Insurance Group Ltd or one of its subsidiaries in national or international capital markets; and/or (ii) by exercising option rights which are granted to current shareholders. When issuing bonds or similar debt instruments connected with conversion and/or option rights, the pre-emptive rights of the shareholders will be excluded. The current owners of conversion and/or option rights shall be entitled to subscribe for the new shares. The conversion and/or option conditions are to be determined by the Board.
During 2016 and 2015, 202,442 and 768,128 shares, respectively, were issued to employees out of the contingent share capital. Of the total 202,442 registered shares issued to employees during the year 2016, 74,979 shares were issued in the period from January 1, 2016, to March 31, 2016, and 127,463 registered shares were issued as from April 1, 2016, to December 31, 2016. As a result, on December 31, 2016 and 2015, respectively, the remaining contingent share capital, which can be issued to employees of Zurich Insurance Group Ltd and its subsidiaries, amounted to CHF 68,785.30 and CHF 89,029.50 or 687,853 and 890,295 fully paid registered shares, respectively, with a nominal value of CHF 0.10 each. Pre-emptive rights of the shareholders, as well as the right for advance subscription, are excluded. The issuance of shares to employees is subject to one or more regulations to be issued by the Board and take into account performance, functions, levels of responsibility and criteria of profitability. Shares or option rights may be issued to the employees at a price lower than that quoted on the stock exchange.
As of January 1 3,645,548 5,983,320 Transfer to free reserve (adjustment capital contribution reserve) (458) (1,964) Dividend payment out of capital contribution reserve (2,537,305) (2,534,052) Agio on share-based payment transactions 46,218 198,244 As of December 31 1,154,003 3,645,548 15. Reserve for treasury shares This reserve corresponds to the purchase value of all Zurich Insurance Group Ltd shares held by companies of the Zurich Insurance Group as shown in the table below. The Company itself does not hold any treasury shares.
Proposed appropriation of available earnings and capital contribution reserve as of December 31 2016 2015
The Board of Directors proposes to the shareholders at the Annual General Meeting on March 29, 2017, a total dividend of CHF 17.00 per share.
Appropriation of available earnings as proposed by the Board of Directors Net income after taxes 1,791,439 2,693,247 Balance brought forward 13,064,513 10,371,266 Dividend payment out of available earnings 1 (1,701,864) – Retained earnings 13,154,088 13,064,513 Balance carried forward 1 13,154,088 13,064,513
Opinion We have audited the financial statements of Zurich Insurance Group Ltd, which comprise the balance sheet as at December 31, 2016, income statement and notes for the year then ended, including a summary of significant accounting policies.
We agreed with the Audit Committee that we would report to them misstatements above CHF 17 million identified during our audit as well as any misstatements below that amount which, in our view, warranted reporting for qualitative reasons.
Report on key audit matters based on the circular 1/2015 of the Federal Audit Oversight Authority Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
We determined that the carrying value of investments in subsidiaries and the decisions made in connection with potential impairments thereof are reasonable and supportable.
We have audited the issue of new shares by Zurich Insurance Group Ltd in the period from January 1, 2016, to December 31, 2016, pursuant to the resolution of the general meeting of March 30, 2010, in accordance with article 653f para. 1 Code of Obligations (CO).
Board of Directors’ responsibility The Board of Directors is responsible for the issue of new shares in accordance with the legal requirements and the Company’s articles of incorporation.
For more information Learn more about our shares and share performance, our terminology, our financial calendar and find contact details in this section.
Zurich shares Zurich had a market capitalisation of CHF 42 billion on 31 December 2016. The shares are listed on the SIX Swiss Exchange and traded on the SIX Swiss Exchange Blue Chip Segment; ticker symbol: ZURN; the Swiss security number (Valorennummer) is 1107539. Trading in Zurich Insurance Group Ltd shares on the Blue Chip Segment is conducted in Swiss Francs.
For further information on shareholders or capital structure, see corporate governance report on page 26.
Dividend policy The Group intends to maintain its current attractive dividend policy and proposes a target pay-out ratio of around 75% of net income attributable to shareholders, subject to a minimum of CHF 17, with dividend increases based on sustainable earnings growth.
Payment date as from 1 Proposed dividend, subject to approval by shareholders at the Annual General Meeting 2017; expected payment date as from April 4, 2017.
Investments Total investments in the consolidated balance sheets include Group investments and investments for unit- linked contracts. 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. Average invested assets exclude cash collateral received for securities lending. The Group manages its diversified investment portfolio to optimize benefits for both shareholders and policyholders while ensuring compliance with local regulatory and business requirements under the guidance of the Group’s Asset/Liability Management and Investment Committee. Investments for unitlinked contracts include investments where the policyholder bears the investment risk, and are held for liabilities related to unit-linked investment contracts and reserves for unit-linked contracts. They are managed in accordance with the investment objectives of each unit-linked fund. The investment result for unit-linked products is passed to policyholders through a charge to policyholder dividends and participation in profits.
Loss ratio is a performance measure that indicates the level of claims during the period relative to net earned premiums and policy fees. It is calculated as insurance benefits and losses net, which include paid claims, claims incurred but not reported (IBNR) and claims handling costs, divided by net earned premiums and policy fees.
New business annual premium equivalent (APE) is calculated as new business annual premiums plus 10 percent of single premiums, before the effect of non-controlling interests. Present value of new business premiums (PVNBP) is calculated as the value of new business premiums discounted at the risk-free rate, before the effect of non-controlling interests.
New business value, after tax is a measure that reflects the value added by new business written during the period, including allowances for frictional costs, time value of options and guarantees, and the cost of non-market risk, and is valued at the point of sale. It is calculated as the present value of the projected after-tax profit from life insurance contracts sold during the period using a valuation methodology consistent with the EV principles, after the effect of non-controlling interests.
Operating and funding costs include administrative and operating expenses, interest expense on debt, depreciation and amortization of fixed assets and non-acquisition related intangible assets. Acquisition expenses include commissions and other new business expenses, as well as costs related to business combinations, including amortization of acquisition related intangible assets. The impact of deferrals is the net effect of deferral and amortization of policy acquisition and origination costs and front-end fees, which may be affected by movements in financial markets and changes in assumptions as well.
Managed gross earned premium margin is a performance measure calculated as the gross operating profit of Farmers Management Services divided by the gross earned premiums of the Farmers Exchanges, which are owned by their policyholders. Farmers Group, Inc., a wholly owned subsidiary of the Group, provides certain non-claims administrative and management services as attorney-in-fact and receives fees for its services.
Annual Review 2016 The Annual Review provides an overview of Zurich’s business and strategy, and its financial and operating performance in 2016. It is available in English and German.
Disclaimer and cautionary statement Certain statements in this document are forward-looking statements, including, but not limited to, statements that are predictions of or indicate future events, trends, plans or objectives of Zurich Insurance Group Ltd or the Zurich Insurance Group (the Group). Forward-looking statements include statements regarding the Group’s targeted profit, return on equity targets, expenses, pricing conditions, dividend policy and underwriting and claims results, as well as statements regarding the Group’s understanding of general economic, financial and insurance market conditions and expected developments. 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 and plans and objectives of Zurich Insurance Group Ltd or the Group to differ materially from those expressed or implied in the forward-looking statements (or from past results). Factors such as (i) general economic conditions and competitive factors, particularly in key markets; (ii) the risk of a global economic downturn; (iii) performance of financial markets; (iv) levels of interest rates and currency exchange rates; (v) frequency, severity and development of insured claims events; (vi) mortality and morbidity experience; (vii) policy renewal and lapse rates; and (viii) changes in laws and regulations and in the policies of regulators may have a direct bearing on the results of operations of Zurich Insurance Group Ltd and its Group and on whether the targets will be achieved. Zurich Insurance Group Ltd undertakes no obligation to publicly update or revise any of these forward-looking statements, whether to reflect new information, future events or circumstances or otherwise.
All references to “Farmers Exchanges” mean Farmers Insurance Exchange, Fire Insurance Exchange, Truck Insurance Exchange and their subsidiaries and affiliates. The three Exchanges are California domiciled interinsurance exchanges owned by their policyholders with governance oversight by their Boards of Governors. Farmers Group, Inc. and its subsidiaries are appointed as the attorneys-in-fact for the Farmers Exchanges and in that capacity provide certain non-claims administrative and management services to the Farmers Exchanges. Neither Farmers Group, Inc., nor its parent companies, Zurich Insurance Company Ltd and Zurich Insurance Group Ltd, have any ownership interest in the Farmers Exchanges. Financial information about the Farmers Exchanges is proprietary to the Farmers Exchanges, but is provided to support an understanding of the performance of Farmers Group, Inc. and Farmers Reinsurance Company.
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Zurich Insurance Group Mythenquai 2 8002 Zurich, Switzerland Phone +41 (0) 44 625 25 25 www.zurich.com 48559–1702