Tables 8.9a and 8.9b provide an analysis of the expected maturity profile of reserves for insurance contracts, net of reinsurance, based on expected cash flows without considering the surrender values as of December 31, 2015 and 2014. Reserves for unit-linked insurance contracts amounting to USD 64.4 billion and USD 71.4 billion as of December 31, 2015 and 2014, respectively, are not included, as policyholders can generally surrender their contracts at any time, at which point the underlying unit-linked assets would be liquidated. Risks from the liquidation of unit-linked assets are largely borne by the policyholders of unit-linked contracts.
Expected maturity profile for reserves for insurance contracts, net of reinsurance – prior period in USD millions, as of December 31, 2014 Reserves for losses and loss adjustment expenses
Liabilities for investment contracts in USD millions, as of December 31 2015 2014
Development of liabilities for investment contracts in USD millions 2015 2014
Liabilities related to investment contracts with discretionary participation features Total 10. Equity component relating to contracts with DPF
As of January 1 2,840 2,338 Net unrealized gains/(losses) on investments (9) 675 Current period profit/(loss) 207 71 Foreign currency translation effects (73) (243) As of December 31 2,965 2,840
Consolidated financial statements continued 11. Gross and ceded insurance revenues and expenses Table 11.1
Change in policyholder contract deposits and other funds 1,439 1,624 Change in reserves for unit-linked products 3,241 5,537 Change in liabilities for investment contracts – unit-linked 3,092 5,325 Change in liabilities for investment contracts – other 191 238 Change in unit-linked liabilities related to UK capital gains tax (101) (157) Total policyholder dividends and participation in profits 7,863 12,568
Amortization of deferred acquisition costs 6,145 5,991 (529) (473) 5,617 5,518 Amortization of deferred origination costs 98 113 – – 98 113 Commissions and other underwriting and acquisition expenses1 3,553 4,453 (207) (249) 3,346 4,204 Total underwriting and policy acquisition costs 9,796 10,557 (735) (721) 9,061 9,835 1 Net of additions related to deferred acquisition and origination costs.
12. Deferred policy acquisition costs and deferred origination costs Table 12.1
As of December 31, 2015 and 2014, deferred policy acquisition costs relating to non-controlling interests were USD 326 million, USD 422 million, respectively.
Acquisitions/(divestments) and transfers1 – (19) Foreign currency translation effects (41) (55) As of December 31 506 595 1 The 2014 movement relates to USD (19) million transferred to deferred policy acquisition costs (see note 1 of the Consolidated financial statements 2014).
Table 13 shows expenses by functional area and by type of expense.
Expenses in USD millions, for the years ended December 31 2015 2014
1 Included within commissions and other underwriting and acquisition expenses (see table 11.3). 2 Included within losses and loss adjustment expenses (see table 11.1). 3 Excludes expenses arising from investment property within investment expenses for Group investments (see table 6.1).
Buildings held for own use and equipment are carried at cost less accumulated depreciation and any accumulated impairment loss. These assets are depreciated usually on a straight-line basis to income over the following estimated useful lives: • Buildings 25 to 50 years; • Furniture and fixtures five to ten years; and • Computer equipment three to six years.
Land held for own use is carried at cost less any accumulated impairment loss.
Net carrying value as of January 1, 2015 233 471 148 69 353 1,273
Property and equipment – prior period in USD millions Land held for own use
Consolidated financial statements continued 15. Attorney-in-fact contracts, goodwill and other intangible assets Table 15.1
Net carrying value as of January 1, 2014 1,025 1,852 729 3,553 1,640 81 8,880
Amortization charged to other comprehensive income – – (50) – – – (50)
Net carrying value as of December 31, 2014 1,025 1,661 556 3,577 1,543 53 8,415
The Group extended the long-term distribution agreements with Banco de Sabadell S.A. (Banco Sabadell) in Spain to sell life, pension and general insurance products across Banco Sabadell’s extended network, resulting in an addition to distribution agreements of USD 314 million, of which 50 percent was funded by Banco Sabadell. There was a further addition to distribution agreements of USD 408 million, which mainly related to new distribution agreements entered into by General Insurance operations in Brazil, which includes USD 362 million relating to a distribution agreement with Via Varejo S.A. for the exclusive sale of extended warranty insurance.
Following a review of subsidiaries in Global Life, the Group reassessed the recoverability of goodwill resulting in USD 98 million of impairments, mainly in the UK, Brazil and Malaysia.
Following a review, software was identified, primarily in Global Life and General Insurance, which was not utilized as originally expected, resulting in USD 69 million of impairments.
Intangible assets by segment – prior period in USD millions, as of December 31, 2014
Consolidated financial statements continued 16. Receivables and other assets Table 16
Receivables and other assets in USD millions, as of December 31 2015 2014
Financial assets Group derivative assets 1,120 1,230 Unit-linked derivative assets 7 19 Receivables from policyholders 3,035 3,561 Receivables from insurance companies, agents and intermediaries 4,877 5,227 Receivables arising from ceded reinsurance 926 872 Reverse repurchase agreements 193 290 Amounts due from investment brokers 328 604 Other receivables 1,918 2,211 Allowance for impairments 1 (249) (266)
Table 17.2 shows the maturity schedule of other financial liabilities as of December 31, 2015 and 2014.
As of January 1 125 188 Provisions made during the period 467 104 Increase of provisions set up in prior years 11 17 Provisions used during the period (181) (150) Provisions reversed during the period (20) (24) Foreign currency translation effects (15) (10) As of December 31 386 125
During the year ended December 31, 2014, restructuring programs with estimated costs of USD 104 million were announced and impacted mainly Other Operating Businesses, Global Life in the UK as well as General Insurance in Ireland and the UK. This included USD 63 million relating to the Group’s strategic initiative for organizational alignment to reduce complexity and cost while enhancing agility. USD (6) million related to net decreases of provisions for restructuring which were initiated in prior years.
Actual income tax expense attributable to shareholders 36.6% 1,183 27.0% 1,564 plus: income tax expense/(benefit) attributable to policyholders 110 106 Actual income tax expense 38.7% 1,294 28.3% 1,670
Table 18.2 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 2015 2014
Gross deferred tax Deferred acquisition and origination costs 35 (846) 20 (765) Depreciable and amortizable assets 31 (51) 33 (48) Life policyholders’ benefits and deposits1 2 (1) 4 – Unrealized (gains)/losses on available-for-sale investments and cash flow hedges 178 (383) 176 (467) Accruals and deferred income 158 (2) 168 (1) Reserves for losses and loss adjustment expenses 508 (178) 477 (196) Reserves for unearned premiums 879 (1) 801 – Pensions and other employee benefits 514 (58) 632 (6)
Tax loss carryforwards 107 – 69 – Gross deferred tax assets/(liabilities) before valuation allowance 3,725 (8,200) 3,926 (8,924) Valuation allowance (23) – (22) – Gross deferred tax assets/(liabilities) after valuation allowance 3,702 (8,200) 3,904 (8,924) Deferred tax liabilities (4,498) (5,020)
The Group’s deferred tax assets and liabilities are recorded by its tax paying entities throughout the world, which may include several legal entities within each tax jurisdiction. Legal entities are grouped as a single taxpayer only when permitted by local legislation and when deemed appropriate. The first part of table 18.3 includes single taxpayers with a net deferred tax asset position and the second part includes single taxpayers with a net deferred tax liability position.
As of December 31, 2015 and 2014, 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 and USD 24 billion, respectively. 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 347 million and USD 431 million as of December 31, 2015 and 2014, respectively.
For which deferred tax assets have been recognized, expiring > 20 years or with no time limitation 814 1,230
For which deferred tax assets have not been recognized, expiring > 20 years or with no time limitation 1,310 976
Management assesses the recoverability of the deferred tax asset carrying values based on future years taxable income projections and considers that the carrying values of the deferred tax assets as of December 31, 2015, are recoverable.
Senior and subordinated debt in USD millions, as of December 31 2015 2014
Zurich Finance (USA), Inc. Euro Commercial Paper Notes, due in less than 3 months 400 400 6.50% EUR 600 million notes, due October 20151,4 – 726
Zurich Finance (UK) plc 6.625% GBP 450 million perpetual notes, first callable October 2022 4 658 694
Zurich Finance (USA), Inc. 4.5% EUR 269 million notes, due June 2025, first callable June 2015 4,6 – 330
ZFS Finance (USA) Trust II Series II 6.45% USD 700 million Trust Preferred Securities (ECAPS), due December 2065, first callable June 2016 680 680
ZFS Finance (USA) Trust V Series V 6.5% USD 1 billion Trust Preferred Securities, due May 2067, first callable May 2017 2 501 501
Other Various debt instruments 41 41 Subordinated debt 5,614 5,857 Total senior and subordinated debt 10,086 11,236 1 The Group applied the cash flow hedge methodology to hedge the interest rate and foreign currency exposure. 2 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. 3 The Group applied the fair value hedge methodology either partially or in full to hedge the interest rate exposure. 4 Issued under the Group’s Euro Medium Term Note Programme (EMTN Programme). 5 These bonds are part of a qualifying net investment hedge to hedge the foreign currency exposure. 6 The Group applied the fair value hedge methodology to hedge the interest rate and foreign currency exposure.
Debt issued is recognized initially at fair value of the consideration received, net of transaction costs incurred, and subsequently carried at amortized cost using the effective interest rate method.
Maturity schedule of outstanding debt in USD millions, as of December 31 2015 2014
No borrowings were outstanding under any of these facilities as of December 31, 2015 or 2014.
New shares issued from contingent capital in 2014 73,361 733,614 0.10
Treasury shares number of shares, as of December 31 2015 2014
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
Basic earnings per share 3,949 148,032,821 26.68 24.39 Effect of potentially dilutive shares related to share-based compensation plans 1,317,728 (0.24) (0.22) Diluted earnings per share 3,949 149,350,549 26.44 24.17 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, 2015 and 2014.
Most of the Group’s defined benefit pension plans are funded through contributions by the Group and, in some cases also by employees, to investment vehicles managed by trusts or foundations independent of the Group’s finances, or by management committees with fiduciary responsibilities. Where a trust or foundation exists, it is required by law or by articles of association to act in the interests of the fund and of all relevant beneficiaries to the plan, which can also include the sponsoring company, and is responsible for the investment policy with regard to the assets of the fund. The trust/foundation board or committee is usually composed of representatives from both employers and plan members. In these cases, the annual funding requirements are determined in accordance with the Group’s overall funding policy and local regulation. Independent actuarial valuations for the plans are performed as required. It is the Group’s general principle to ensure that the plans are appropriately funded in accordance with local pension regulations in each country.
UK pension plan The major UK pension plan is a hybrid arrangement and benefits accrued to December 31, 2015 increase in line with salary increases. Normal retirement age for the plan is 60. The plan is split into distinct sections and the two defined benefit sections are closed to new entrants and, with effect from January 1, 2016, to future benefit accrual. All employees now participate in a defined contribution section within the same trust. The notes that follow consider only the defined benefit sections. The UK Pension Trustee Board is responsible for the governance of the plan. The employer contributions are determined based on regular triennial actuarial valuations which are conducted using assumptions agreed by the Trustee Board and the sponsoring company. A valuation was carried out during 2013 and the results were finalized on August 28, 2014. The local statutory valuation revealed a funding deficit and an assetbacked funding arrangement was agreed with the Trustee Board.
Movement in defined benefit obligation and fair value of assets – current period in USD millions Defined benefit obligation
Net post-employment benefit (expense)/income: Current service cost (398) – – (398) Interest (expense)/income (640) 520 – (120) Settlements gains/(losses) 9 – – 9 Past service (cost)/credit (9) – – (9)
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)
Table 21.2 provides a breakdown of plan assets by asset class.
As a matter of policy, pension plan investment guidelines do not permit investment in any assets in which the Group or its subsidiaries have an interest, including shares or other financial instruments issued and own use property. Exceptions to the policy require approval by the Group Pension Committee.
Tables 21.3a and 21.3b provide a breakdown of the key information included in tables 21.1a and 21.1b for the main countries for the years ended December 31, 2015 and 2014 respectively.
Fair value of plan assets 4,615 8,705 2,495 965 932 17,713 Impact of asset ceiling – (17) – – – (17) Net defined benefit asset/(liability) (427) (1,471) (915) (208) (227) (3,248) Net post-employment benefit (expense)/income (130) (180) (137) (38) (33) (518)
Key information by main country – prior period in USD millions, as of December 31, 2014
Fair value of plan assets 4,524 9,162 2,676 1,092 1,007 18,461 Net defined benefit asset/(liability) (509) (1,977) (962) (244) (355) (4,046) Net post-employment benefit (expense)/income1 25 (195) (111) (37) (25) (343)
Key financial assumptions used for major plans as of December 31 2015 2014
Life expectancy at age 65 for a female currently aged 65 aged 45 aged 65 aged 45
Country Mortality table for major plans Switzerland BVG 2010 Generational 21.49 23.24 23.96 25.67 United Kingdom PNXA00 with CMI_2015 projection 22.82 24.13 24.83 26.33
Mortality tables and life expectancies for major plans – prior period in years, as of December 31, 2014 Life expectancy at age 65 for a male currently
United States RP 2000 Generational, partially with projection 22.24 22.86 24.79 25.43
Maturity profile of future benefit payments for major plans as of December 31 2015 2014
Maturity analysis of benefits expected to be paid (in USD millions): < 1 year 151 253 195 47 149 251 163 49 1 to 5 years 650 1,178 839 192 643 1,182 719 203 5 to 10 years 929 1,913 1,176 256 923 1,936 1,087 273
Discount rate +50 bps 1,742 1,910 Discount rate –50 bps (1,997) (2,161) Salary increase rate +50 bps (155) (172) Salary decrease rate –50 bps 148 155 Price inflation increase rate +50 bps (1,322) (1,430) Price inflation decrease rate –50 bps 1,161 1,254 Cash balance interest credit rate +50 bps (121) (118) Cash balance interest credit rate –50 bps 84 81 Mortality 10% increase in life expectancy (1,527) (1,617) Mortality 10% decrease in life expectancy 1,557 1,635 1 A negative number indicates an increase and a positive number indicates a decrease in the defined benefit obligation.
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 159 million and USD 141 million for the years ended December 31, 2015 and 2014, respectively.
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 381 million and USD 525 million for the years ended December 31, 2015 and 2014, 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 883 and 905 active participants in the plan as of December 31, 2015 and 2014, respectively.
A new Dividend Reinvest scheme was launched in 2014 which allows employees to reinvest their dividends from Partnership Shares and Reward Shares. The number of participants in the scheme as at 31 December 2015 is 303 and for 2014 187.
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 2015, 4,633 employees were eligible to participate in the share incentive plan, compared with 4,764 in 2014. For the years ended December 31, 2015 and 2014, 1,775 and 1,574 employees, respectively, purchased shares under the 2014 and 2013 share plans.
The Group Long-Term Incentive Plan (LTIP) Participants in this plan are allocated a target number of performance shares as notional shares of Zurich Insurance Group Ltd in April each year (target shares). The number of target shares is calculated as a percentage of annual base salary of each participants.
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. As the cash remittance target is potentially volatile in any one year, this target has been replaced for LTIP performance during the transition vesting years 2015 and 2016 with the former target of business operating profit after tax return on shareholders´ equity (BOPAT ROE).
Prior to 2011, for selected senior executives, performance shares and options in shares of Zurich Insurance Group Ltd were allocated. All share options will have expired in 2017. The number of shares allocated under option amount to 330,888 and 780,763 as of December 31, 2015 and 2014, respectively. For the years ended December 31, 2015 and 2014, 135,161 and 436,828 share options, respectively, were exercised.
The Group carries certain contingencies in the ordinary course of business in connection with the sale of its companies and businesses. These are primarily in the form of indemnification obligations provided to the acquirer in a transaction in which a Group company is the seller. They vary in scope and duration by counterparty and generally are intended to shift the potential risk of certain unquantifiable and unknown loss contingencies from the acquirer to the seller.
Indemnity agreements The Group, through certain of its subsidiaries, has agreed to arrangements that cap Converium’s (now Scor Holding (Switzerland) AG) and its successor companies’ net exposure for losses arising out of the September 11, 2001 World Trade Center event in New York. As of December 31, 2015 the Group has recorded provisions of USD 38 million, for losses in excess of USD 289 million.
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 December 31, 2015 and 2014.
In common with other insurance companies in Europe, the Group is faced with the continued trend towards enhanced consumer protection. Significant uncertainty exists regarding the ultimate cost of these consumer protection trends. The main areas of uncertainty concern court decisions as well as the volume of potential customer complaints related to sales activities and withdrawal rights, and their respective individual assessment.
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 6,208 million and USD 9,249 million as of December 31, 2015 and 2014, respectively.
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 have been 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 are historical policyholders of the Home Insurance Company (Home), plead 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 allege that pursuant to the recapitalization and subsequent transactions, various Zurich entities took assets of Home without giving adequate consideration in return, and contend that this forced Home into liquidation. The plaintiffs further allege 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. Closing arguments were heard on February 22 and 23, 2012.
While the Group believes that it is not a party to, nor are any of its subsidiaries the subject of, any unresolved current legal proceedings, claims, litigation and investigations that will have a material adverse effect on the Group’s consolidated financial condition, proceedings are inherently unpredictable, and it is possible that the outcome of any proceeding could have a material impact on results of operations in the particular reporting period in which it is resolved.
Table 24.1 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 and 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 financial liabilities held at amortized cost (17,940) (19,282) (18,468) (19,084)
All of the Group’s financial assets and financial liabilities are initially recorded at fair value. Subsequently, available-forsale 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 – – 270 270
Reserves for insurance contracts fair value option 2 – – (2,927) (2,927)
Total available-for-sale securities 11,653 139,691 3,693 155,037 Fair value through profit or loss securities
Total fair value through profit or loss securities 979 7,157 2,603 10,740
1 Included within reinsurers’ share of reserves for insurance contracts 2 Included within reserves for insurance contracts
Total fair value through profit or loss securities 90,592 30,381 380 121,353 Derivative assets – 7 – 7 Investment property – – 4,341 4,341 Total investments for unit-linked contracts1 90,592 30,388 4,721 125,701 Financial liabilities at FV through profit or loss
Fair value hierarchy – unit-linked – prior period in USD millions, as of December 31, 2014 Level 1 Level 2 Level 3 Total
Total fair value through profit or loss securities 89,008 39,866 265 129,139
Investment property – – 4,100 4,100 Total investments for unit-linked contracts1 89,011 39,882 4,366 133,259 Financial liabilities at FV through profit or loss
• 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.
• The Group’s private debt holdings comprise certain private placements and other CLOs 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.
Transfer from assets held for own use – – – – – – 22 Transfer to assets held for sale – – – – – – (16)
Transfers out of level 3 – (20) – – (4) – –
Development of assets and liabilities classified within level 3 – non unit-linked – prior period in USD millions Available-for-sale securities
Realized gains/(losses) recognized in income1 64 13 4 – – (33) 1 Unrealized gains/(losses) recognized in income1,2 (6) (29) 283 10 (5) 23 140 Unrealized gains/(losses) recognized in other comprehensive income 78 16 – – – – 31
Transfers into level 3 1 – – Transfers out of level 3 – – – Foreign currency translation effects (6) (3) (235)
Realized gains/(losses) recognized in income1 – 3 (46) Unrealized gains/(losses) recognized in income1 2 4 634
The Group has valued USD 4 million and USD 477 million of mortgage loans at fair value on a non-recurring basis as of December 31, 2015 and 2014, respectively. These are classified within level 3 as the fair value measurement is based on internal pricing models, using significant unobservable inputs.
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 3,378 million and USD 3,347 million for Group investments and USD 336 million and USD 198 million for investments for unit-linked contracts as of December 31, 2015 and 2014, 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 sensitivity analysis is intended to reflect the uncertainty inherent in the valuation of these investments under current market conditions, and its results cannot be extrapolated due to non-linear effects that changes in valuation assumptions may have on the fair value of these investments. 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 fair value of these investments. Any management actions that may be taken to mitigate the inherent risks are not reflected in this analysis.
Inter-relationship analysis of level 3 investments to changes in key assumptions – current period as of December 31, 2015 Key assumptions Increase/decrease in reported fair value
Scenarios Equity levels +10% +10.0% –1.4% –1.4% –1.4% 343 Equity levels –10% –10.0% +1.3% +1.3% +1.3% (342) Discount rates +10% +0.5% +10.0% +7.5% –2.0% (109) Discount rates –10% –0.4% –10.0% –7.5% +2.0% 114 Spread rates +10% +0.5% +7.0% +10.0% +0.2% (110)
Analysis of financial assets – current period in USD millions, as of December 31, 2015
Neither past due nor impaired financial assets 137,414 6,965 9,568 11,203 165,150 Past due but not impaired financial assets. Past due by: Past due but not impaired financial assets – 60 – 1,827 1,887
Less: impairment allowance Impairment allowances on individually assessed financial assets – 598 19 80 698 Impairment allowances on collectively assessed financial assets – 38 – 186 224 1 USD 100 million past due but not impaired and USD 1.1 billion impaired mortgage loans relate to the run-off property loans at Dunbar Assets Ireland.
Tables 25.2a and 25.2b show how the allowances for impairments of financial assets in tables 25.1a and 25.1b developed during the periods ended December 31, 2015 and 2014, respectively.
Increase/(Decrease) in allowance for impairments 44 1 61 Amounts written-off1 (543) – (54) Foreign currency translation effects (31) – (24)
Increase/(Decrease) in allowance for impairments 22 – 23 Amounts written-off (109) – (26) Divestments1 – – (3) Foreign currency translation effects (64) – (25)
1 Due to the sale of the Group’s General Insurance retail business in Russia (see note 5 of the Consolidated financial statements 2014).
Related party transactions – key personnel in USD millions, for the years ended December 31 2015 2014
Remuneration of key personnel of the Group Cash compensation, current benefits and fees 27 27 Post-employment benefits 4 4 Share-based compensation 15 15 Other remuneration 11 5 Total remuneration of key personnel 57 50
a) Certificates of contribution issued by the Farmers Exchanges As of December 31, 2015 and 2014, 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.
The Auto Physical Damage (APD) Quota Share reinsurance agreement (APD agreement) with the Farmers Exchanges provides for annual ceded premiums of USD 500 million and USD 900 million in 2015 and 2014, respectively. In addition, Farmers Re Co and ZIC assume a quota share percentage of ultimate net losses sustained by the Farmers Exchanges in their APD lines of business.
Net earned premiums and policy fees 500 900 1,766 3,056 2,266 3,956 Insurance benefits and losses, net 5 (365) (646) (1,223) (2,004) (1,588) (2,650)
5 Under the All Lines agreement the Farmers Exchanges catastrophe losses are subject to a maximum of USD 1.2 billion. 6 Under the APD agreement the ceding commission for acquisition expenses range between 27.1 percent and 29.1 percent and the ceding commission for unallocated loss adjustment expenses range between 8.0 percent and 10.0 percent, both based on a previous 5 year average experience. Under the All Lines agreement, the Farmers Exchanges receive a ceding commission of 26.7 percent, 8.4 percent of premiums for unallocated loss adjustment expenses and 5.3 percent of premiums for other expenses.
Global Life is managed on a regional-based structure within a global framework, including: • North America • Latin America • Europe, Middle East & Africa (EMEA) • Asia-Pacific
From January 1, 2015, the management of the UK asbestos business, which is in run-off, has been transferred from General Insurance to Non-Core Businesses. This change had no impact on the Group. Comparative figures have been restated to reflect this change.
Business operating profit The segment information includes the Group’s internal performance measure, business operating profit (BOP). This measure 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 the change in estimates of earn-out liabilities (with the exception of experience adjustments, which remain in BOP) are also excluded from BOP.
Net investment income on Group investments 2,002 2,149 3,320 3,815 49 68 300 387 328 415 (427) (628) 5,572 6,206 Net capital gains/(losses) and impairments on Group investments – 89 1,095 1,173 – – – – (91) 347 – – 1,004 1,610
Business operating profit before non-controlling interests 972 3,073 1,523 1,512 1,421 1,573 (726) (973) 51 (226) – – 3,240 4,959 1 Global Life included approximately USD 2,701 million and USD 1,551 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, 2015 and 2014, respectively (see note 3).
Policyholder dividends and participation in profits, net 3 6 7,706 12,097 – – – – 154 465 – – 7,863 12,568 Income tax expense/(benefit) attributable to policyholders – – 110 106 – – – – – – – – 110 106 Underwriting and policy acquisition costs, net 5,907 5,946 2,454 2,654 703 1,240 – – 7 6 (10) (10) 9,061 9,835 Administrative and other operating expense (excl. depreciation/amortization) 3,636 3,758 2,463 2,711 1,340 1,315 1,225 1,144 137 115 (1,342) (1,198) 7,458 7,845 Interest credited to policyholders and other interest 112 61 445 400 – – 136 3 89 126 (315) (68) 467 523 Restructuring provisions and other items not included in BOP (372) (119) (435) (174) (14) 3 (75) (13) (10) – – – (906) (303) Total BOP benefits, losses and expenses (before interest, depreciation and amortization) 29,437 29,572 21,355 28,478 3,618 5,208 1,286 1,128 770 1,828 (1,668) (1,275) 54,799 64,938 Business operating profit (before interest, depreciation and amortization) 1,452 3,489 2,143 2,042 1,538 1,706 125 105 60 (215) (445) (629) 4,872 6,497 Depreciation and impairments of property and equipment 127 87 28 33 36 46 7 7 – – – – 198 173 Amortization and impairments of intangible assets 252 213 578 452 81 86 92 89 – – – – 1,004 840
Net income before income taxes 1,066 3,580 1,439 1,929 1,427 1,611 (640) (987) 48 (235) 3,340 5,898 Income tax (expense)/benefit (1,294) (1,670)
Net income after taxes 2,047 4,228 attributable to non-controlling interests 205 280 attributable to shareholders 1,842 3,949 1 In 2014, General Insurance and Other Operating Businesses relate to the sale of the Group’s General Insurance retail business in Russia (see note 5). 2 The impact on Group level relates to foreign currency translation differences. 3 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 15 and 14 respectively, and USD 100 million of other restructuring related costs) relating to initiatives announced in 2015. In addition it includes other adjustments in the amount of USD (24) million. For the year ended December 31, 2014, General Insurance includes real estate transfer tax of USD 40 million relating to the acquisition of non-controlling interests of Deutscher Herold AG (see note 5).
Reconciliation of BOP to net income after income taxes in USD millions, for the years ended December 31 General Insurance Global Life Farmers Other Operating Businesses Non-Core Businesses Total
Change in estimates of earn-out liabilities 29 (19) (21) (31) – – – – – – 8 (50)
Add back: Business operating profit attributable to non-controlling interests 108 95 223 239 – – (7) (13) – 1 324 322 Net income before shareholders’ taxes 1,066 3,580 1,328 1,822 1,427 1,611 (640) (987) 48 (235) 3,230 5,792 Income tax expense/(benefit) attributable to policyholders – – 110 106 – – – – – – 110 106
Reinsurers’ share of reserves for insurance contracts 11,073 11,345 3,657 1,979 – – – – 3,127 3,330 (84) (103) 17,774 16,550 Deposits made under assumed reinsurance contracts 90 38 63 73 1,476 1,952 – – 79 142 – (2) 1,708 2,203
Total assets (after cons. of investments in subsidiaries) 114,029 119,597 245,255 261,545 7,578 9,002 21,074 20,726 25,623 29,246 (31,587) (33,586) 381,972 406,529 Liabilities
Reserves for insurance contracts, gross 73,502 74,566 140,799 153,334 1,663 2,231 28 31 21,715 23,661 (84) (104) 237,622 253,719
Equity Shareholders’ equity 31,178 34,735 Non-controlling interests 1,725 2,095 Total equity 32,904 36,830 Total liabilities and equity 381,972 406,529 Supplementary information Additions and capital improvements to property, equipment and intangible assets 357 781 127 409 162 144 31 51 – – – – 677 1,384
General Insurance – Revenues and non-current assets by region in USD millions Gross written premiums and policy fees from external customers
Significant subsidiaries are defined as those subsidiaries, which either individually or in aggregate, contribute significantly to gross written premiums, shareholder’s equity, total assets or net income attributable to shareholders.
Australia Zurich Australia Limited Sydney Global Life 100 100 AUD 0.5 Zurich Australian Insurance Limited Sydney General Insurance 100 100 AUD 6.6 Austria
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 16.5 Malaysia
Zurich Finance Company AG Zurich Other Operating Businesses 100 100 CHF 0.2
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
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.
8 Shares have no nominal value in accordance with the company’s articles of incorporation and local legislation.
Non-controlling interests in USD millions, as of December 31 Zurich Santander Insurance
Opinion In our opinion, the Consolidated financial statements for the year ended December 31, 2015 give a true and fair view of the financial position, the results of operations and the cash flows in accordance with the International Financial Reporting Standards (IFRS) and comply with Swiss law.
Net income after taxes for the year was CHF 2,693 million compared with CHF 2,723 million in 2014. The result was mainly driven by the dividend income from its subsidiary Zurich Insurance Company Ltd of CHF 2,500 million and by the interest income of CHF 307 million earned on subordinated loans with subsidiaries. Net income after taxes also includes impairments on investments in subsidiaries of CHF 90 million compared to CHF 100 million in the prior year.
Income statements 261 Balance sheets 262 Notes to the financial statements 263 Proposed appropriation of available earnings and capital contribution reserve 268 Report of the statutory auditor 270
Other operating income 4 21,177 20,778 Other operating expenses 5 (23,228) (21,680) Depreciation and valuation adjustments to non-current assets 6 (89,500) (100,000)
Current assets Cash and cash equivalents 1,645,111 1,217,452 Accrued income and prepaid expenses from subsidiaries 396 346 Accrued income and prepaid expenses from third parties – 14 Derivatives with subsidiaries 170 2,615 Total current assets 1,645,677 1,220,427 Non-current assets Subordinated loans to subsidiaries 10 4,876,704 4,878,836 Investments in subsidiaries 11 11,430,069 11,519,569 Total non-current assets 16,306,773 16,398,405 Total assets 17,952,450 17,618,832
Capital contribution reserve1 14 3,645,548 5,983,320 General capital contribution reserve 3,342,187 5,668,198 Reserve for treasury shares 15 303,361 315,122
2. Basis of presentation Zurich Insurance Group Ltd presents its financial statements in accordance with Swiss law. The latest changes within the Swiss Code of Obligations have been applied effective January 1, 2015. Prior year comparatives have been revised to conform with the current year’s presentation.
7. Financial income Financial income mainly consists of the dividend income received from the Company’s subsidiary Zurich Insurance Company Ltd of CHF 2,500 million (2014: CHF 2,500 million) and the interest income earned on the subordinated loan of CHF 4,832 million with Zurich Insurance Company Ltd. It also includes CHF 21.4 million of other financial income, thereof CHF 15.8 million of foreign exchange gains.
9. Direct taxes Direct taxes include income and capital taxes in Switzerland.
Zurich Financial Services EUB Holdings Ltd 183,436 99.90 99.90 272,936 99.90 99.90 1 in CHF thousands
In addition to the above mentioned directly held subsidiaries, the Company indirectly owns further subsidiaries primarily through Zurich Insurance Company Ltd. The information on indirectly owned subsidiaries is included on pages 254 to 256 of this Annual Report.
Zurich Insurance Group Ltd knows of no event of default that would require it to satisfy any of these guarantees or to take action under a support agreement.
b) Authorized share capital Until April 2, 2016, 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.
During 2015 and 2014, 768,128 and 733,614 shares, respectively, were issued to employees out of the contingent share capital. Of the total 768,128 registered shares issued to employees during the year 2015, 684,061 shares were issued in the period from January 1, 2015, to March 31, 2015, and 84,067 registered shares were issued as from April 1, 2015, to December 31, 2015. As a result, on December 31, 2015 and 2014, respectively, the remaining contingent share capital, which can be issued to employees of Zurich Insurance Group Ltd and its subsidiaries, amounted to CHF 89,029.50 and CHF 165,842.30 or 890,295 and 1,658,423 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 1 340,242 338,443 Transfer from capital contribution reserve 1,964 1,799 As of December 31 342,206 340,242 17. Shareholders According to information available as of December 31, 2015, Zurich Insurance Group Ltd is not aware of any person or institution, other than BlackRock, Inc., New York, (>5 percent of the shares) 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 Group Executive Committee The Ordinance Against Excessive Compensation in articles 14 –16 prevails over article 663bbis of the Swiss Code of Obligations. The information required by article 663bbis of the Swiss Code of Obligations is therefore disclosed and audited in the Remuneration report on pages 68 to 101 of this Annual Report.
20. Supplementary information Cash and cash equivalents of CHF 1,645 million include restricted cash of CHF 0.4 million in 2015, compared to CHF 1,217 million cash and cash equivalents and thereof restricted cash of CHF 0.5 million in the previous year.
Proposed appropriation of available earnings and capital contribution reserve as of December 31 2015 2014
Registered shares eligible for dividends Eligible shares 150,404,964 149,636,836 in CHF thousands 2015 2014
As statutory auditor, we have audited the accompanying financial statements of Zurich Insurance Group Ltd, which comprise the balance sheet, income statement and notes, for the year ended December 31, 2015.
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.
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.
Shareholder information In this section Registered share data 276 Financial calendar 278 Contact information 279 Glossary 280
Number of shares issued and registered1 150,404,964 149,636,836 Number of dividend-bearing shares 2 150,404,964 149,636,836 Market capitalization (in CHF millions at end of period) 38,865 46,642 Authorized capital, number of shares 10,000,000 10,000,000 Contingent capital, number of shares1 10,890,295 11,658,423 1 Register of commerce 2 Treasury shares are not entitled to dividends.
Gross dividend1 17.00 17.00 Basic earnings per share 11.89 24.39 Diluted earnings per share 11.86 24.17 Book value per share, as of December 31 209.27 232.65 Nominal value per share 0.10 0.10 Price at end of period 258.40 311.70 Price period high 332.90 314.70 Price period low 233.90 247.10 1 Proposed dividend, subject to approval by shareholders at the Annual General Meeting 2016; expected payment date as from April 5, 2016. As the dividend payment will be paid from the capital contribution reserve, it will be exempt from Swiss withholding tax.
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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) is BOP before interest expense on debt, depreciation and impairments of property and equipment and amortization and impairments of intangible assets, but including amortization of deferred policy acquisition costs and deferred origination costs.
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 unit-linked 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.
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.
Source of earnings (SOE) reporting presents the key drivers of Global Life BOP identifying specific profit sources. This information provides the shareholders’ view of earnings, thereby the components attributable to policyholders and non- controlling interests are included in each line item and are not separately identified.
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 48559–1602