Zurich Insurance Company Group Company ZurichInsurance Annual Report 2016 AnnualReport 2016 Zurich Insurance Company Group Zurich Insurance Company Group www.zurich.com Mythenquai 2 8002 Zurich, Switzerland Phone +41 (0) 44 625 25 25 www.zurich.com 46930 –1703 ZICG_2016_06_AR16_Disclaimer_en.indd 4 07.03.2017 11:27:46 ZICG_2016_01_AR16_Contents_en.indd 1 07.03.2017 11:27:21 Zurich Insurance Company Group Zurich Insurance Company Group Annual Report 2016 Annual Report 2016 Zurich Insurance Group is a leading 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 multi-line insurer that serves its 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 customers in global and local markets. 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 With about 54,000 employees, 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 it provides a wide range of property 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 and casualty, and life insurance 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 products and services in more than 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 210 countries and territories. 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. Zurich’s customers include individuals, It should be noted that past performance is not a guide to future performance. small businesses, and mid-sized Persons requiring advice should consult an independent advisor. This communication does not constitute an offer or an invitation for the sale or purchase of securities in any jurisdiction. and large companies, as well as THIS COMMUNICATION DOES NOT CONTAIN AN OFFER OF SECURITIES FOR SALE IN THE UNITED STATES; SECURITIES MAY NOT BE OFFERED OR SOLD IN THE UNITED STATES ABSENT REGISTRATION OR EXEMPTION FROM REGISTRATION, AND ANY PUBLIC OFFERING OF SECURITIES TO BE MADE IN THE UNITED STATES WILL BE MADE BY MEANS OF A PROSPECTUS THAT MAY BE OBTAINED FROM THE ISSUER AND THAT WILL CONTAIN multinational corporations. DETAILED INFORMATION ABOUT THE COMPANY AND MANAGEMENT, AS WELL AS FINANCIAL STATEMENTS. The Group is headquartered in Zurich, Switzerland. Design by Radley Yeldar, www.ry.com Photography by Zurich Insurance Company Publishing system: ns.publish by Multimedia Solutions AG, www.mmsag.ch Cover printed on Heaven 42, an environmentally friendly paper sourced from well-managed forests independently certified according to the rules of the Forest Stewardship Council ® (FSC). Content printed on PlanoJet, an environmentally friendly paper made from totally chlorine-free pulp also sourced from well-managed forests independently certified according to the rules of the Forest Stewardship Council ® (FSC). Printed climate neutrally with ClimatePartner using green electricity in March 2017 by Neidhart + Schön AG, www.nsgroup.ch. ISO 14001 certified. ZICG_2016_01_AR16_Contents_en.indd 2 07.03.2017 11:27:21 ZICG_2016_06_AR16_Disclaimer_en.indd 3 07.03.2017 11:27:46 Zurich Insurance Company Group 01 Annual Report 2016 Contents Risk review 2 Operating and financial review 26 Consolidated financial statements 36 Financial statements – statutory accounts 144 Zurich Insurance Company Group 02 Annual Report 2016 Risk review The risk review is an integral part of the consolidated financial statements. Risk and capital are managed at the Zurich Insurance Group, segment, region and business unit level according to our risk and capital management framework. The principles of the Zurich Insurance Group’s enterprise risk management described in the ‘risk and capital management section’ are equally applicable to the Zurich Insurance Company Ltd (ZIC) and its consolidated subsidiaries (collectively the ‘ZIC Group’). There is no material difference in how risk and capital are managed at the Zurich Insurance Group and the ZIC Group. The figures presented are prepared on a ZIC Group basis. Contents Risk and capital management 3 – Objectives of risk management 3 – Risk management framework 3 – Risk governance and risk management organization 4 – Objectives of capital management 4 – Capital management framework 5 – Capital management program 5 – Insurance financial strength rating 6 – Regulatory capital adequacy 6 Analysis by risk type 8 – Insurance risk 8 – Market risk including investment credit risk 15 – Other credit risk 21 – Operational risk 23 – Liquidity risk 24 – Strategic risk and risks to the Zurich Insurance Group’s reputation 25 Zurich Insurance Company Group 03 Annual Report 2016 Risk and capital management Objectives of risk management Taking risk is inherent to the insurance business, but such risk-taking needs to be made in an informed and disciplined manner, and within a pre-determined risk appetite and tolerance. The major risk management objectives at Zurich Insurance Group are to: kkSupport achievement of the Group strategy and protect capital, liquidity, earnings and reputation by monitoring that risks are taken within the Group’s risk tolerance kkEnhance value creation by embedding disciplined risk taking in the company culture and contributing to an optimal risk-return profile where risk reward trade-offs are transparent, understood, and risks are appropriately rewarded kkEfficiently and effectively diversify risk and mitigate unrewarded risks kkEncourage openness and transparency to enable effective risk management kkSupport decision-making processes by providing consistent, reliable and timely risk information kkProtect Zurich Insurance Group’s reputation and brand by promoting a sound culture of risk awareness, and disciplined and informed risk taking Risk management framework The risk management framework is based on a governance process that sets forth clear responsibilities for taking, managing, monitoring and reporting risks. The Zurich Risk Policy is Zurich Insurance Group’s main risk governance document; it specifies the Zurich Insurance Group’s risk tolerance, risk limits and authorities, reporting requirements, procedures to approve any exceptions and procedures for referring risk issues to senior management and the Board of Directors. Limits are specified per risk type. Ongoing assessments verify that requirements are met. The Zurich Insurance Group regularly reports on its risk profile at local and Zurich Insurance Group levels. The Zurich Insurance Group has procedures to refer risk issues to senior management and the Board of Directors in a timely way. To foster transparency about risk, the Board receives quarterly risk reports and risk updates. In 2016, reporting was enhanced with in-depth risk insights into historical large losses and risk selection and pricing, and into the potential effects on Zurich Insurance Group of such topical issues as the Brexit vote in the UK, cyber risk, climate risk, and the Zika virus. The Zurich Insurance Group assesses risks systematically and from a strategic perspective through its proprietary Total Risk Profiling™ (TRP) process, which allows Zurich Insurance Group to identify and evaluate the probability and severity of a risk scenario. The Zurich Insurance Group then develops, implements and monitors improvements. The TRP process is integral to how Zurich Insurance Group deals with change, and is particularly suited to evaluate strategic risks as well as risks to Zurich Insurance Group’s