Zurich Insurance Group

CRNHR is calculated as a charge on the capital held for residual non-hedgeable risks. This is calculated according to Zurich’s internal risk based capital model by applying 2,000 shocks to the embedded value assumptions. To align with the MCEV Principles the risk based capital is scaled to a 99.5 percent confidence level by using empirical distributions where available, or by assuming probability distributions as appropriate. The capital is projected over the lifetime of the business using appropriate risk drivers for each risk type. The present value of the risk capital is calculated by applying the swap curve as of the valuation date. The CRNHR allows for diversification across risk types and across geographical segments. As a result of the restatement applied in 2015 no allowance for diversification between covered and non-covered business was allowed for. Therefore, starting in 2015 the CRNHR calculation is in line with the MCEV principles and guidance set by the CFO Forum. A 4 percent cost of capital charge has been applied to the diversified present value of non-hedgeable risk based capital. e) New business New business covers new contracts sold during the reporting period and includes recurring single premiums, new premiums written during the period on existing contracts and variations to premiums on existing contracts where these premiums and variations have not previously been assumed to be part of business in-force. Where recurring single premiums are projected over time to derive the corresponding new business value, they are treated as annual premium for the volume definition. Corporate Life business valued with a contract renewal assumption is treated as annual premium. New business is valued at the point of sale. Explicit allowance is made for FC, TVFOG, and CRNHR. New business value is valued using actual new business volumes. The value generated by new business written during the period is the present value of the projected stream of after tax distributable profits from that business. In certain profit sharing funds, the new business written can affect the TVFOG for business written in prior years. This effect is taken into account in the new business value by valuing the new business on a marginal approach, the difference between embedded value with and without the new business. This captures the effect of cross-subsidies between business in-force and new business due to, for example, different interest rate guarantees operating in a shared common pool of assets. New business is valued on a discrete quarter basis. Once calculated and reported, new business value for a quarter will not change in subsequent quarters in local currency terms. For details on the assumptions used for new business see section 13. New business amounts in the embedded value report are reported after the effects of non-controlling interests. f) Asset and liability data The majority of the Group’s embedded value has been calculated using a “hard close” approach, such that all asset and liability data reflect the actual position as of the valuation date. Germany has followed an approach where liability model points are set up in advance, using the structure of a previous run, and then projected to the valuation date by scaling to match the expected balance sheet figures. g) Market consistent discounting The Group has adopted a “bottom-up” market consistent approach for the projection and discounting of future cash flows in the calculation of embedded value. As a result, the risks inherent in the cash flows are allowed for in a way that is consistent with the way the market is expected to allow for such risks. In principle, this method values each cash flow using a discount rate consistent with that applied to such a cash flow in the capital markets. For example, an equity cash flow is valued using an equity risk discount rate, and a debt security cash flow is valued using a debt security discount rate. If a higher return is assumed for equities, the equity cash flow is discounted at this higher rate. Zurich Insurance Group Annual results 2015 27 In practice, the Group has applied a computational method known as a “risk neutral” approach. This involves projecting the assets and liabilities using a distribution of asset returns where all asset types, on average, earn the same risk free rate. The risk free yield curve assumptions are based on the swap curve in each major currency (U.S. dollars, Euro, British pounds and Swiss francs). For liabilities where payouts are either independent or move linearly with markets, deterministic techniques (referred to as “certainty equivalent”) have been used. In such cases, the projection and discounting are based on the same risk free yield curve. Further details are set out under “Economic assumptions” in section 13. h) Economic scenario generator All operations use actual yield curves observable as of the valuation date for the calculation of the certainty equivalent value of business in-force. The calculations of the TVFOG are based on stochastic simulations using an economic scenario generator provided by Moody’s Analytics. The outputs (“simulations”) have been calibrated to conform to the economic parameters specified by the Group. The simulations used for calculation of TVFOG reflect the actual yield curves and implied volatilities observable as of the valuation date. Simulations are produced for the economies in the U.S., the UK, Switzerland and the Eurozone. In each economic area, risk free nominal interest rates are modeled using a LIBOR market model. Negative nominal interest rates, if any, are floored to zero. The excess return on other asset classes relative to the total returns on risk free assets are then modeled using a multi-factor lognormal model. Hong Kong uses U.S. dollar simulations because their principal liabilities are U.S. dollar-denominated. Chile uses closed form solutions rather than simulations. Other operations, not mentioned above, have no significant options and guarantees. Further details are set out under “Economic assumptions” in section 13. i) Holding companies Holding companies allocated to Global Life have been consolidated in embedded value at their shareholders’ equity. Related expenses have been included in the projection assumptions. Holding companies outside Global Life are not included in embedded value of the covered business. j) Consolidation adjustments Where a reinsurance arrangement exists between two life companies within Global Life, the value of the reinsurance is shown in embedded value of the region to which the ceding company belongs. k) Debt Where a loan exists between a company in Global Life and a Group company outside Global Life, the loan is included in embedded value at the same value included in the balance sheet of the other Group company. l) “Look through” principle – service companies There are some companies within Global Life that provide administration and distribution services. These are valued on a “look through” basis. The results do not include any Group service companies outside Global Life. In Germany, the majority of distribution and administration is provided by service companies. These are valued on a “look through” basis. These companies also provide limited services to companies outside Global Life. The value of business in-force and new business value reflect the services provided to companies within Global Life. The shareholders’ net assets of Global Life include, however, the full shareholders’ net assets of these service companies. In Switzerland, an investment management company provides asset management services to pension schemes written in foundations and other pension funds. The present value of the net asset management fees, after tax, is included in embedded value and new business value. Embedded value report Financial information 28 Financial information Annual results 2015 Zurich Insurance Group Embedded value report continued m) Employee pension schemes In the Group’s Consolidated financial statements, actuarial gains and losses arising from defined benefit pension and other defined benefit post-retirement plans are recognized in full in the period in which they occur and are presented on a separate line in the statement of comprehensive income, with a liability recognized for employee benefit deficits under IAS 19. This adjustment has not been made in the detailed embedded value described in this Embedded value report. If the adjustment had been made embedded value as of the valuation date would have been lower by USD 915 million. The actuarial and economic assumptions used for this adjustment are consistent with those used for the equivalent allowance made in the Group’s Consolidated financial statements. Expense assumptions for each life business include expected pension scheme costs in respect of future service entitlements. n) Change in legislation or solvency regime The impacts of changes in legislation or solvency regimes are included in economic variance for the analysis of movement when they occur. o) Translation to Group presentation currency To align embedded value reporting with the Group’s Consolidated financial statements, relevant results have been translated to the Group presentation currency, U.S. dollar, using average exchange rates for the period. This applies to new business value and new business volumes (APE and PVNBP) for the current period and comparative figures. This approach has also been applied to the analysis of movement. Valuations as at a specified date are translated at end-of-period exchange rates. The rates can be found in note 1 of the audited Consolidated financial statements as of December 31, 2015. p) Sensitivities The key assumption changes represented by each of the sensitivities in section 10 are as follows: Operating sensitivities A 10 percent increase in initial expenses was considered for new business value only. A 10 percent decrease in maintenance expenses means that, for example, a base assumption of USD 30 per annum would decrease to USD 27 per annum. A 10 percent decrease in voluntary discontinuance rates means that, for example, a base assumption of 5 percent per annum would decrease to 4.5 percent per annum. A 5 percent improvement in mortality and morbidity assumptions for assurances means that, for example, if the actuarial mortality assumption for assurances was 90 percent of a particular table, this would decrease to 85.5 percent. A 5 percent improvement in mortality assumptions for annuities means that, for example, if the actuarial mortality assumption for annuities was 90 percent of a particular table, this would decrease to 85.5 percent. Required Capital set to Minimum Solvency Capital means that frictional costs are applied to minimum solvency capital only and frictional costs on excess solvency capital are released. Economic sensitivities A 100 basis points increase and decrease was applied to the risk free forward yield curve across all durations. For the 100 basis points decrease sensitivity, if a risk free forward annual yield at a given duration is less than 100 basis points, the decrease is to zero at that duration, not to a negative rate. A 10 percent fall in equity and property market values was assessed for embedded value only. A 25 percent increase in implied risk free volatilities means that, for example, a volatility of 20 percent per annum would increase to 25 percent per annum.