Financial results and reports (consolidated financial statements annual results 2025)

Consolidated financial statements

Annual results 2025

Zurich Insurance Group

Zurich Insurance Group

Annual results 2025

2

Consolidated financial statements

Contents

Consolidated income statements 3

Consolidated statements of

comprehensive income 4

Consolidated balance sheets 6

Consolidated statements of cash flows 8

Consolidated statements of changes

in equity 10

1. Basis of presentation 12

2. New accounting standards and amendments to published

   accounting standards 14

3. Summary of material accounting policies and critical accounting

   estimates and judgments 15

4. Acquisitions and divestments 34

5. Group investments 36

6. Group derivative financial instruments

   and hedge accounting 39

7. Insurance and reinsurance contracts 43

8. Liabilities for investment contracts 67

9. Insurance revenue 69

10. Fee result 70

11. Expenses 71

12. Property and equipment 72

13. Attorney-in-fact contracts, goodwill

    and other intangible assets 74

14. Receivables and other assets 76

15. Other liabilities 77

16. Income taxes 79

17. Senior and subordinated debt 82

18. Shareholders' equity, dividends and earnings per share 84

19. Employee benefits 87

20. Share-based compensation and

    cash incentive plans 95

21. Commitments and contingencies, legal proceedings and regulatory

    investigations 96

22. Fair value measurement 98

23. Expected credit loss measurement 105

24. Related-party transactions 108

25. Relationship with the

    Farmers Exchanges 109

26. Segment information 111

27. Interest in subsidiaries 126

28. Events after the balance sheet date 129

Report of the statutory auditor 130

in USD millions, for the years ended December 31 Notes 2025 2024

in USD

in CHF

The notes to the consolidated financial statements are an integral part of these consolidated financial statements.

‌Consolidated income statements | Consolidated statements of comprehensive income | Consolidated balance sheets | Consolidated statements of cash flows Consolidated statements of changes in equity | Notes to the consolidated financial statements

1 For 2024, USD (116) million related to the cumulative foreign currency translation adjustment were presented as part of net unrealized gains/(losses) on financial assets.

The notes to the consolidated financial statements are an integral part of these consolidated financial statements.

Consolidated income statements | Consolidated statements of comprehensive income | Consolidated balance sheets | Consolidated statements of cash flows Consolidated statements of changes in equity | Notes to the consolidated financial statements

‌Consolidated income statements | Consolidated statements of comprehensive income | Consolidated balance sheets | Consolidated statements of cash flows Consolidated statements of changes in equity | Notes to the consolidated financial statements

Assets in USD millions, as of December 31 Notes 2025 2024

Assets

1 As of December 31, 2025, the Group had USD 1.3 billion of assets held for sale based on agreements signed to sell portfolios of Zurich Insurance Europe AG and Zurich Insurance Company Ltd, UK Branch (see note 4). In 2024, the Group had USD 1.2 billion of assets held for sale based on agreements signed to sell portfolios of Zurich Insurance Europe AG and Zurich Insurance Company Ltd, UK Branch (see note 4).

The notes to the consolidated financial statements are an integral part of these consolidated financial statements.

Consolidated income statements | Consolidated statements of comprehensive income | Consolidated balance sheets | Consolidated statements of cash flows Consolidated statements of changes in equity | Notes to the consolidated financial statements

Liabilities and equity

in USD millions, as of December 31 Notes 2025 2024

Liabilities

Equity

1. Includes restructuring provisions, litigation and regulatory provisions and other provisions (see note 15).

2. As of December 31, 2025, the Group had USD 1.3 billion of liabilities held for sale based on agreements signed to sell portfolios of Zurich Insurance Europe AG and Zurich Insurance Company Ltd, UK Branch (see note 4). In 2024, the Group had USD 1.2 billion of liabilities held for sale based on agreements signed to sell portfolios of Zurich Insurance Europe AG and Zurich Insurance Company Ltd, UK Branch (see note 4).

   The notes to the consolidated financial statements are an integral part of these consolidated financial statements.

   ‌Consolidated income statements | Consolidated statements of comprehensive income | Consolidated balance sheets | Consolidated statements of cash flows

   Consolidated statements of changes in equity | Notes to the consolidated financial statements

   Consolidated statements of cash flows

   in USD millions, for the years ended December 31 2025 2024

   Net income attributable to shareholders

   6,798

   5,814

   Net (gains)/losses on divestment of businesses	7	(114)
   (Income)/expense from equity method accounted investments	6	3
   Depreciation, amortization and impairments of fixed and intangible assets	858	911
   Other non-cash items	105	(2)
   Underwriting activities:	14,461	16,983
   Net changes in insurance contracts assets/liabilities	9,896	7,352
   Net changes in reinsurance contracts assets/liabilities	(2,073)	217
   Net changes in liabilities for investment contracts	6,638	9,414
   Investments:	(16,989)	(16,507)
   Net capital (gains)/losses on total investments	(15,244)	(16,295)
   Net changes in derivatives	(203)	63
   Net changes in money market investments	156	(1,252)

   Cash flows from operating activities Adjustments for:

   Sales and maturities

   Debt securities	80,215	75,261
   Equity securities	92,883	68,553
   Other	5,213	4,679

   Purchases

   Debt securities	(83,837)	(76,490)
   Equity securities	(92,828)	(67,614)
   Other	(3,343)	(3,412)
   Net changes in sale and repurchase agreements	240	395
   Net changes in receivables and payables	(255)	(445)
   Net changes in other operational assets and liabilities	(73)	286
   Net changes in deferred tax assets and liabilities	744	278
   Net cash provided by/(used in) operating activities	5,903	7,603

   The notes to the consolidated financial statements are an integral part of these consolidated financial statements.

   Consolidated income statements | Consolidated statements of comprehensive income | Consolidated balance sheets | Consolidated statements of cash flows

   Consolidated statements of changes in equity | Notes to the consolidated financial statements

   in USD millions, for the years ended December 31 2025 2024

   Cash flows from investing activities

   Additions to tangible and intangible assets	(480)	(370)
   Disposals of tangible and intangible assets	41	9
   (Acquisitions)/disposals of equity method accounted investments, net	(108)	(85)
   Acquisitions of companies, net of cash acquired	(50)	(1,078)
   Divestments of companies, net of cash divested	-	115
   Dividends from equity method accounted investments	4	5
   Net cash provided by/(used in) investing activities	(593)	(1,404)

   Cash flows from financing activities

   Dividends paid	(5,082)	(4,467)
   Net movement in treasury shares	(450)	(1,309)
   Issuance of debt	744	728
   Repayment of debt	(463)	(1,117)
   Lease principal repayments	(220)	(207)
   Net cash provided by/(used in) financing activities	(5,470)	(6,372)
   Foreign currency translation effects on cash and cash equivalents	555	(382)
   Change in cash and cash equivalents1	394	(555)
   Cash and cash equivalents as of January 1	7,090	7,645
   Cash and cash equivalents as of December 31	7,484	7,090
   of which: Cash and cash equivalents	7,086	6,768
   of which: Unit-linked2	398	322

   Other supplementary cash flow disclosures3

   Other interest income received	5,316	5,119
   Dividend income received	1,351	1,240
   Other interest expense paid	(543)	(507)
   Income taxes paid	(2,192)	(1,702)

   1. There were no cash and cash equivalents reclassified to assets held for sale as of December 31, 2025 and 2024, respectively (see note 4).

   2. These amounts are included within Investments for unit-linked contracts on the balance sheet.

   3. These amounts are primarily included in the operating activities of the cash flow statement.

Cash and cash equivalents

in USD millions, as of December 31 2025 2024

Cash and cash equivalents comprise the following:

For the periods ended December 31, 2025 and 2024, cash and cash equivalents held to meet local regulatory requirements were USD 232 million and USD 306 million, respectively.

The notes to the consolidated financial statements are an integral part of these consolidated financial statements.

‌Consolidated income statements | Consolidated statements of comprehensive income | Consolidated balance sheets | Consolidated statements of cash flows

1. On October 30, 2024, Zurich Insurance Group Ltd completed its public share buyback program of up to CHF 1.1 billion which it launched on June 17, 2024. 2,221,529 shares were repurchased at an average purchase price of CHF 495.15.

2. As approved by the Annual General Meeting of shareholders on April 9, 2025, the dividend of CHF 28 per share was paid out of retained earnings on April 15, 2025.

The notes to the consolidated financial statements are an integral part of these consolidated financial statements.

Consolidated income statements | Consolidated statements of comprehensive income | Consolidated balance sheets | Consolidated statements of cash flows

‌Consolidated income statements | Consolidated statements of comprehensive income | Consolidated balance sheets | Consolidated statements of cash flows Consolidated statements of changes in equity | Notes to the consolidated financial statements

Zurich Insurance Group Ltd and its subsidiaries (collectively the Group) is a provider of insurance products and related services. The Group operates in Europe, Middle East & Africa (EMEA), North America, Latin America and Asia Pacific through subsidiaries, as well as branch and representative offices.

Zurich Insurance Group Ltd, a Swiss corporation, is the holding company of the Group and its shares are listed on the SIX Swiss Exchange. Zurich Insurance Group Ltd was incorporated on April 26, 2000, in Zurich, Switzerland. It is recorded in the Commercial Register of the Canton of Zurich under its registered address at Mythenquai 2, 8002 Zurich.

On February 18, 2026, the Board of Directors of Zurich Insurance Group Ltd authorized these audited consolidated financial statements for issue. These financial statements will be submitted for approval to the Annual General Meeting of shareholders to be held on April 8, 2026.

1. Basis of presentation General information

   The consolidated financial statements of the Group have been prepared in accordance with IFRS Accounting Standards and comply with Swiss Law. The accounting policies used to prepare the consolidated financial statements comply with IFRS Accounting Standards, including the adoption and implementation of new accounting standards and amendments for the financial year beginning January 1, 2025 as set out in note 2.

   The accounting policies applied by the reportable segments are the same as those applied by the Group. The Group accounts for intersegment revenues and transfers as if the transactions were with third parties at current market prices. Dividends and realized capital gains and losses, as well as gains and losses on the transfer of net assets, are eliminated within the segment, whereas all other intercompany gains and losses are eliminated at Group level. In the consolidated financial statements, intersegment revenues and transfers are eliminated.

   Certain amounts recorded in the consolidated financial statements reflect estimates and assumptions made by management about insurance and reinsurance contract assets and liabilities, investment valuations, interest rates and other factors. For more information about significant judgments applied, please see note 3.

   All amounts in the consolidated financial statements, unless otherwise stated, are shown in U.S. dollars rounded to the nearest million, with the consequence that the rounded amounts may not add up to the rounded total in all cases. All ratios and variances are calculated using the underlying amounts rather than the rounded amounts.

   The following balances are generally considered to be non-current: equity securities, investment property, investments in associates and joint ventures, deferred tax assets, property and equipment, goodwill, attorney-in-fact contracts, other intangible assets and deferred tax liabilities.

   The following balances are mixed in nature (including both current and non-current portions): debt securities, mortgage loans, other loans, insurance and reinsurance contract assets and liabilities, other assets, investments for unit-linked contracts, liabilities for investment contracts, obligations to repurchase securities, other liabilities, and senior and subordinated debt.

   Capital management and the effect of regulatory frameworks

   The Group manages capital to maximize long-term value while meeting regulatory, solvency and rating agency requirements. The Group's capital management framework forms the basis for actively managing capital using a number of different capital models, taking into account economic, regulatory and rating agency constraints. The Group's capital and solvency position is monitored and regularly reported to the Executive Committee and Board of Directors.

   Zurich's policy is to allocate capital to businesses earning the highest risk-adjusted returns, and to pool risks and capital as much as possible to operationalize its risk diversification. The Group's executive management determines the capital management strategy and sets the principles, standards and policies to execute the strategy, which is carried out by Group Treasury and Capital Management.

   The Group's capital management program comprises various actions to optimize shareholders' total return and to meet capital needs, while enabling Zurich to take advantage of growth activities. Such activities include paying and receiving dividends, capital repayments, share buybacks, issuance of shares, issuance of senior and hybrid debt, securitization and purchase of reinsurance.

   Consolidated income statements | Consolidated statements of comprehensive income | Consolidated balance sheets | Consolidated statements of cash flows Consolidated statements of changes in equity | Notes to the consolidated financial statements

   The Group endeavors to manage its capital so that its regulated entities meet local regulatory capital requirements. In each country in which the Group operates, the local regulator specifies the minimum amount and type of capital that each of the regulated entities must hold in addition to their liabilities. In addition to the minimum capital required to comply with the solvency requirements, the Group aims to hold an adequate buffer under local solvency requirements to ensure regulated subsidiaries can absorb a level of volatility and meet local capital requirements. In addition, the Group is subject to minimum capital requirements in Switzerland.

   Principle exchange and discount rates

   Table 1.1 summarizes the principal exchange rates used for translation purposes. Net gains/(losses) on foreign currency transactions included in the consolidated income statements were USD (41) million and USD (153) million for the years ended December 31, 2025 and 2024, respectively. Foreign currency exchange forward and swap gains/ (losses) included in these amounts were USD (241) million and USD 370 million for the years ended December 31, 2025 and 2024, respectively.

   Principal exchange rates

   Table 1.1

   USD per foreign currency unit

   Consolidated balance sheets

   Consolidated income statements and statement of cash

   Euro	1.1741	1.0353	1.1301	1.0821
   Swiss franc	1.2610	1.1035	1.2065	1.1365
   British pound	1.3457	1.2520	1.3187	1.2781
   Brazilian real	0.1827	0.1619	0.1791	0.1865
   Australian dollar	0.6669	0.6189	0.6448	0.6599
   Japanese yen	0.0064	0.0064	0.0067	0.0066

   at end-of-period exchange rates flows at average exchange rates 12/31/2025 12/31/2024 12/31/2025 12/31/2024

   Tables 1.2 and 1.3 summarize the closing discount rates used for the Group's most relevant insurance portfolios in the measurement of the (re-)insurance contract assets and liabilities as of December 31, 2025 and 2024, by major currency:

   Discount rates by major currency -liquid products

   Discount rates by major currency - more illiquid products

   Table 1.2

   as of December 31 2025 2024

   U.S. dollar Swiss franc Euro British pound U.S. dollar Swiss franc Euro British pound

   1 year	3.43%	(0.04%)	2.08%	3.54%	4.18%	0.05%	2.24%	4.46%
   5 years	3.47%	0.32%	2.48%	3.67%	4.02%	0.17%	2.14%	4.04%
   10 years	3.84%	0.67%	2.86%	4.04%	4.07%	0.38%	2.27%	4.07%
   20 years	4.28%	1.13%	3.21%	4.54%	4.10%	0.89%	2.26%	4.30%
   40 years	4.06%	1.58%	3.27%	4.43%	3.65%	1.46%	2.54%	4.03%

   Table 1.3

   as of December 31 2025 2024

   1 year	3.81%	0.27%	2.22%	3.78%	4.55%	0.50%	2.48%	4.70%
   5 years	3.85%	0.63%	2.62%	3.91%	4.39%	0.62%	2.38%	4.28%
   10 years	4.22%	0.98%	3.00%	4.28%	4.44%	0.83%	2.51%	4.31%
   20 years	4.66%	1.43%	3.35%	4.78%	4.47%	1.32%	2.50%	4.54%
   40 years	4.40%	1.79%	3.37%	4.67%	3.99%	1.75%	2.70%	4.27%

   U.S. dollar Swiss franc Euro British pound U.S. dollar Swiss franc Euro British pound

   ‌Consolidated income statements | Consolidated statements of comprehensive income | Consolidated balance sheets | Consolidated statements of cash flows Consolidated statements of changes in equity | Notes to the consolidated financial statements

2. New accounting standards and amendments to published accounting standards Standards, amendments and interpretations effective or early adopted as of January 1, 2025 and relevant for the Group's operations

   Table 2.1
   		Effective date
   Amended standards
   IAS 21	Lack of Exchangeability	January 1, 2025

   Table 2.1 shows new accounting standards or amendments to, and interpretations of, standards relevant to the Group that have been implemented for the financial year beginning January 1, 2025, with no impact on the Group's consolidated financial statements.

   Standard/ Interpretation

   Standards, amendments and interpretations issued that are not yet effective or adopted by the Group

   Table 2.2 shows new accounting standards or amendments to, and interpretations of, standards relevant to the Group, which are not yet effective or adopted by the Group.

   Standard/ Interpretation

   Table 2.2

   IFRS 18	Presentation and Disclosure in Financial Statements	January 1, 2027
   IFRS 19	Subsidiaries without Public Accountability: Disclosures	January 1, 2027

   New standards/interpretations

   Effective date

   Amended standards

   IFRS 9/IFRS 7	Amendments to the Classification and Measurement of Financial Instruments	January 1, 2026
   IFRS 9/IFRS 7	Contracts Referencing Nature-dependent Electricity	January 1, 2026
   IAS 21	Translation to a Hyperinflationary Presentation Currency	January 1, 2027

   IFRS 9 Amendments to the Classification and Measurement of Financial Instruments

   The Group invests in sustainability-linked bonds, which include contractually defined contingencies linked to the issuer's environmental, social and governance (ESG) goals. The Group expects these investments to continue to meet the solely payments of principal and interest (SPPI) criteria, as the contingent features give rise to contractual cash flows that remain consistent with a basic lending arrangement. These amendments are not expected to have a material impact on the Group's financial position or performance.

   IFRS 18 Presentation and Disclosure in Financial Statements

   IFRS 18 will become effective on January 1, 2027 and will replace IAS 1 - Presentation of Financial Statements. It will impact the presentation and disclosure in the financial statements, notably by introducing defined subtotals in the consolidated income statements, adding new principles for aggregation and disaggregation of information and requiring disclosures about management-defined performance measures. These amendments will not impact the Group's financial position or performance and are not considered to be material.

   Other standards, amendments and interpretations shown in table 2.2 are not expected to have a material impact on the Group's financial position or performance. Furthermore, amendments resulting from the IFRS Accounting Standards annual improvements Volume 11 will have no material impact on the Group's consolidated financial statements.

   ‌Consolidated income statements | Consolidated statements of comprehensive income | Consolidated balance sheets | Consolidated statements of cash flows Consolidated statements of changes in equity | Notes to the consolidated financial statements

3. Summary of material accounting policies and critical accounting estimates and judgments Material accounting policies applied in these consolidated financial statements are set out below. These policies have been consistently applied to all years presented unless otherwise stated.

   Other accounting policies are presented as part of the respective note disclosures.

   Critical accounting estimates and judgments

   The preparation of these consolidated financial statements requires critical accounting estimates that involve discretionary judgments and the use of assumptions which are susceptible to change due to inherent uncertainties. Because of the uncertainties involved, actual results could differ significantly from the assumptions and estimates made by management.

   Such critical accounting estimates are of significance to consolidation principles, measurement of insurance contracts issued and reinsurance contracts held, the determination of fair value for financial assets and liabilities, expected credit losses, impairment of goodwill and attorney-in-fact contracts, employee benefits and deferred taxes.

Scope

The Group applies accounting policies outlined in this section to insurance contracts issued that transfer significant insurance risk from policyholders or other insurance companies to the Group and reinsurance contracts held that transfer significant insurance risk from the Group to third-party reinsurers. The significant insurance risk transfer is determined by comparing the present value of benefits payable if an insured event occurred with the present value of benefits payable if the insured event did not occur. This assessment is made on a contract-by-contract basis at initial recognition and not subsequently reassessed unless the contract has been modified (see below). Investment contracts with discretionary participation features (DPF) are accounted for as insurance contracts if the reporting entity also issues insurance contracts. Furthermore, financial guarantee contracts and certain fixed-fee service contracts (e.g., roadside assistance) issued by the insurance entities in the normal course of business are also accounted for as insurance contracts.

Separating components

The Group assesses its insurance contracts issued and reinsurance contracts held to determine whether they contain any of the following components which need to be separated and accounted for under another IFRS Accounting Standard:

• Derivatives embedded in insurance contracts where the economic characteristics and risks of the derivative contract are not closely related to those of the host contract, and a separate financial instrument with the same terms as the embedded derivative would meet the definition of a derivative;

• Investment components that are not highly interrelated with the insurance components and for which contracts with equivalent terms are sold, or could be sold, separately in the same market or the same jurisdiction are accounted for as investment contracts; or

• Distinct service components, such as unattached risk engineering service contracts, claims handling service contracts provided to policyholders within their layer of risk retention or captive fronting services, are accounted for as service contracts.

  Level of aggregation

  Generally, a single contract is the smallest unit of account. However, under certain circumstances, a single contract contains components that are separated and treated as if they were stand-alone contracts, provided the criteria below are fulfilled:

• The insurance components are priced separately and are, or could be, sold separately in the same jurisdiction;

• The substance of the contract to be separated is the same as issuing multiple separate contracts; or

• There is no interdependency between the different risks covered and a lapse or cancellation of one insurance component does not cause a lapse or cancellation of another insurance component.

  Consolidated income statements | Consolidated statements of comprehensive income | Consolidated balance sheets | Consolidated statements of cash flows Consolidated statements of changes in equity | Notes to the consolidated financial statements

  Similarly, for insurance and reinsurance contracts entered into with the same counterparty, the Group makes an evaluation of whether they are designed to achieve an overall commercial effect and therefore need to be combined and treated as one contract. The Group combines certain captive arrangements, where the policyholder and the captive reinsurer are the same counterparty, that are designed to achieve an overall commercial effect, which results in the net retention by the Group presented both on balance sheet and in profit or loss.

  The level of aggregation is determined by dividing the business written into portfolios comprising contracts subject to similar risks and managed together. Portfolios are further divided into annual cohorts with contracts issued no more than one year apart, which are divided into groups of contracts based on their expected profitability: (i) onerous contracts, if any; (ii) contracts with no significant possibility of becoming onerous, if any; and (iii) remaining contracts, if any. Depending on the characteristics of the portfolio, an annual cohort may consist of just one group. The Group chose to group together those contracts that would fall into different groups only because law or regulation specifically constrains its practical ability to set a different price or level of benefits for policyholders with different characteristics. The effect of such grouping is not material to the Group.

  Initial recognition

  The Group recognizes groups of insurance contracts it issues from the earliest of the following:

• The beginning of the coverage period of the group of contracts;

• The date when the first payment from a policyholder becomes due (or when the first payment is received, if there is no due date); or

• An earlier date, if facts and circumstances indicate that the group is onerous.

  Contract boundary

  The measurement of a group of insurance contracts includes all future cash flows within the boundary of each contract in the group. Cash flows are within the boundary of an insurance contract if they arise from substantive rights and obligations that exist during the reporting period in which the Group can compel the policyholder to pay the premiums, or in which the Group has a substantive obligation to provide the policyholder with insurance contract services. A substantive obligation to provide insurance contract services ends when:

• The Group has the practical ability to reassess the risks of the particular policyholder and, as a result, can set a price or level of benefits that fully reflects those risks, or

• Both of the following criteria are satisfied: (i) the Group has the practical ability to reassess the risks of the portfolio of insurance contracts that contain the contract and, as a result, can set a price or level of benefits that fully reflects the risk of that portfolio; and (ii) the pricing of the premiums up to the date when the risks are reassessed does not take into account the risks that relate to periods after the reassessment date.

  Insurance contract classification

  The Group issues non-life products including a variety of motor, home and commercial products for individuals as well as small and large businesses on both local and global basis predominantly through its Property & Casualty (P&C) operations. The majority of such insurance contracts are short-term and either have a contract boundary of one year or less or qualify for the simplified approach (or the premium allocation approach (PAA)) because the measurement of the liability for remaining coverage under PAA does not deviate significantly from the measurement that would apply under the general model (or the building block approach (BBA)). Therefore, such contracts are measured under PAA. Some non-life entities also issue individual accident and health products with a long-term contract boundary which are accounted for under BBA. The proportion of contracts accounted for under BBA is not material in the context of P&C insurance contract assets and liabilities.

  Moreover, the Group issues life insurance products on both an individual and a group basis, including annuities, endowment and term insurance, unit-linked and traditional savings products, as well as private health, supplemental health and long-term care insurance. The majority of such insurance contracts are long-term and measured under BBA. Some life entities also issue short-term protection products that fulfill the eligibility criteria and are accounted for under PAA. The proportion of contracts accounted for under PAA is not material in the context of Life insurance contract assets and liabilities. Unit-linked insurance contracts and some traditional savings contracts issued in Switzerland, Germany, Italy, Portugal and Austria include policyholder participation features. Such contracts are classified as direct participating contracts and measured under the variable fee approach (VFA) if, at inception, all of the following criteria are met:

• The contractual terms specify that the policyholder participates in a share of a clearly identified pool of underlying items;

• The Group expects to pay to the policyholder an amount equal to a substantial share of the fair value returns on the underlying items; and

• The Group expects a substantial proportion of any change in the amounts to be paid to the policyholder to vary with the change in fair value of the underlying items.

  Consolidated income statements | Consolidated statements of comprehensive income | Consolidated balance sheets | Consolidated statements of cash flows Consolidated statements of changes in equity | Notes to the consolidated financial statements

  Some participating contracts do not meet the above criteria to be measured under VFA because of either the Group's discretion over the cash flows to be paid to policyholders (either in their timing or in their amount), or absence of a clearly identifiable pool of underlying items. Those contracts are accounted for under BBA indirect participating and presented as contracts measured under BBA in note 7. Furthermore, the Group applies BBA indirect participating measurement to certain contracts for which changes in assumptions that relate to financial risk have a substantial effect on the amounts paid to the policyholders. For example, BBA indirect participating approach is applied to contracts where contractual cash flows are adjusted for inflation based on a market-observable index of prices or rates.

  Insurance acquisition cash flows (IACF)

  Insurance acquisition costs are selling, underwriting and initiating costs typically incurred prior to or at the start of the coverage period of a contract that are directly attributable to the acquisition of portfolios of insurance contracts, including, for example, sales commissions, direct response marketing, premium taxes and in-house expenses directly attributable to sales and policy issuance activities.

  The Group allocates IACF to groups of insurance contracts in a systematic and rational way, differentiating between groups of contracts that have been recognized as of the reporting date and groups of contracts that will be recognized in the future, including expected contract renewals. IACF allocated to groups of insurance contracts not yet recognized as of reporting date are recognized as an asset presented within the insurance contract asset or liability attributable to the portfolio of insurance contracts until they are included in the measurement of the group of contracts recognized. At each reporting date, the Group assesses the recoverability of such assets for pre-coverage IACF based on the expected fulfillment cash flows of the related groups of contracts, if facts and circumstances indicate that the asset may be impaired.

  IACF are amortized in a systematic way over the coverage period using the same pattern as for insurance revenue recognition. For contracts accounted for under PAA, certain acquisition cash flows are expensed as incurred for contracts where the coverage period of each contract in the group does not exceed one year.

  Insurance service expenses

  These expenses consist of claims and other insurance service expenses that the Group incurs to fulfill its obligations toward the policyholders that arise within the contract boundary of the underlying (re-)insurance contracts. They also include amortization of insurance acquisition cash flows, changes in the fulfillment cash flows relating the liability for incurred claims (LIC), losses on groups of onerous contracts and reversals of such losses, and impairment and reversal of impairment of assets for pre-coverage insurance acquisition cash flows. Costs incurred that cannot be directly attributed to portfolios of insurance contracts (e.g., costs incurred in connection with future business opportunities) are excluded.

  Investment components

  Investment components that are not separated based on the requirements outlined above are accounted for as part of the underlying insurance contract. Such investment components, which are treated as non-distinct components, represent amounts that the Group is required to repay to a policyholder under the terms of the insurance contract in all circumstances, regardless of whether an insured event occurs. For most life products measured under VFA, particularly for unit-linked insurance contracts, the Group defines the cash surrender value as the non-distinct investment component. Any cash flows related to investment components are excluded from insurance revenue and insurance service expenses.

  Measurement under PAA

  For non-participating insurance contracts that are eligible for PAA, the measurement of the liability for remaining coverage (unexpired risk) is simplified as compared with the measurement under BBA and is accounted for separately from incurred claims (expired risk).

  The liability for remaining coverage (LRC) is measured initially based on the premium received less any payments that relate to eligible IACF. Subsequently, the LRC is reduced by the amount recognized as insurance revenue for services provided in the period less any amortization of IACF recognized as an expense in the period. Insurance revenue is generally recognized on a straight-line basis, unless a different pattern represents a better approximation of the release from risk under the insurance contract. Certain insurance contracts (e.g., extended warranty contracts) may include a significant financing component when the premium from the policyholder is due more than 12 months before the Group provides insurance coverage. In this case, the LRC is adjusted for the time value of money.

  Where facts and circumstances indicate that a group of contracts is onerous at initial recognition, the Group performs additional analysis to determine if a net outflow is expected. The net outflow is recorded immediately in profit or loss, resulting in the recognition of a loss component for the liability for remaining coverage and the carrying amount of the liability for the group of contracts being equal to the fulfillment cash flows.

  Consolidated income statements | Consolidated statements of comprehensive income | Consolidated balance sheets | Consolidated statements of cash flows Consolidated statements of changes in equity | Notes to the consolidated financial statements

  The liability for incurred claims (LIC) reflects a current, explicit, unbiased and probability-weighted estimate of the present value of the expected future cash outflows considering all reasonable and supportable information available without undue cost or effort about the amount, timing, and uncertainty of those future cash flows. It includes an explicit adjustment for non-financial risk (the risk adjustment, see below). The risk adjustment is recognized as and when the claims are incurred and subsequently released to insurance service expense as the uncertainty associated with the amount and timing of claim payments is resolved.

  Generally, the LIC is adjusted for the effect of time value of money and financial risk, unless the respective claims are expected to be paid within one year of being incurred. The Group selected the accounting policy to disaggregate the movement in the LIC resulting from changes in discount rates and to present this in OCI. The unwind of the discount on the LIC based on locked-in accident year discount rates is presented in profit or loss.

  The Group accounts for premiums collected from the policyholders by intermediaries as future cash flows included in the measurement of corresponding groups of insurance contracts until they are settled or recovered in cash. Any premium receivables or accrued premium or claims payables that remain outstanding as of the reporting date are presented as part of the insurance contract assets or liabilities.

  Measurement under BBA (including indirect participating BBA)

  Each group of insurance contracts under BBA is measured as the sum of the fulfillment cash flows, comprising (i) estimates of future cash flows and (ii) risk adjustment for non-financial risk (see below), and the contractual service margin (CSM). The estimates of the future cash flows represent a current, present value, probability-weighted estimate that is consistent with observable market information and is adjusted to reflect financial risk. The CSM represents the margin the Group is charging for the service it provides in addition to the compensation it requires for bearing risk. The Group requires each group of contracts to be denominated in a single predominant currency of the cash flows within the group of contracts, which is not necessarily the same as the functional currency of the reporting entity issuing such insurance contracts.

  On initial recognition, the CSM is measured as the difference between the expected present value of cash inflows and cash outflows, after adjusting for uncertainty and any cash flows received or paid before or on initial recognition.

  Subsequently, at the end of each reporting period, each group of insurance contracts is measured as the sum of (i) the LRC reflecting the fulfillment cash flows related to future service; (ii) the CSM; and (iii) the LIC reflecting the fulfillment cash flows related to past service. The LIC is created when the Group has an obligation to pay valid claims for insured events that already occurred and other amounts related to past service.

  The Group recognizes income and expense for the following changes in the carrying amount of the LRC:

• Insurance revenue - for the reduction in the LRC due to services provided in the period, excluding any investment components (see note 9 for the composition of insurance revenue recognized in the period);

• Insurance service expenses - for losses on groups of onerous contracts, and reversals of such losses; and

• Insurance finance income or expense - for the effect of the time value of money and financial risk.

  The Group recognizes income and expense for the following changes in the carrying amount of the LIC:

• Insurance service expense - for the increase in the liability because of claims and expenses incurred in the period, excluding any investment components;

• Insurance service expense - for any subsequent changes in fulfillment cash flows relating to incurred claims and incurred expenses; and

• Insurance finance income or expense - for the effect of the time value of money and financial risk.

  As part of the subsequent measurement, the fulfillment cash flows are updated to reflect current estimates, and the changes in the fulfillment cash flows are treated as follows:

• Experience adjustments that relate to current or past service are recognized immediately in profit or loss;

• Changes related to future service adjust the CSM measured using the discount rates as described below;

• Changes resulting from changes in discount rates are presented in OCI. The Group selected the accounting policy of disaggregating the movement in fulfillment cash flows between profit or loss and OCI; and

• Changes in estimates that arise as a result of changes in the application of discretion for groups of BBA indirect participating contracts, such as changes in the crediting percentage for policyholder participation, affect the future consideration that the Group will receive from the contract and adjust the CSM.

  Consolidated income statements | Consolidated statements of comprehensive income | Consolidated balance sheets | Consolidated statements of cash flows Consolidated statements of changes in equity | Notes to the consolidated financial statements

  The CSM at the end of the reporting period is allocated over the current and remaining coverage period based on the coverage units. The coverage units represent the quantity of insurance contract services provided by the contracts in the group, determined by considering for each contract the quantity of the benefits provided under the contract and its expected coverage period. The Group has determined the sum assured (or annuity) in force as the main driver of coverage units for insurance contract service for non-participating contracts. The CSM allocated to coverage units provided in the period is recognized in profit or loss as insurance revenue.

  The Group may provide an investment-return service in addition to insurance contract service under some traditional savings insurance contracts without direct participating features (e.g., endowment contracts). Such service is deemed to exist only if such contracts involve an investment component or the policyholder has a right to withdraw an amount. The Group expects the investment component or amount the policyholder has a right to withdraw to include an investment return and the Group expects to perform investment activity to generate that investment return. Whenever the Group provides both insurance contract and investment-return services to the policyholder, the coverage units are appropriately weighted to reflect both services to allocate the CSM over the current and remaining coverage period. The Group has determined the assets under management (or equivalent) as the main driver of coverage units for investment-return service.

  The risk adjustment is released as part of insurance revenue as the uncertainty associated with the amount and timing of benefit payments is decreased or resolved.

  (Re-)insurance finance income or expense recognized in profit or loss are determined by a systematic allocation of the expected total finance income or expense over the duration of the group of insurance contracts. Depending on the nature of the insurance contracts, it reflects the effect of time value of money and financial risk as follows:

• For groups of contracts for which changes in assumptions that relate to financial risk do not have a substantial effect on the amounts paid to the policyholder (e.g., term life contracts), the systematic allocation is determined using a risk-free rate, plus an illiquidity premium that is locked at the inception of the group of contracts; and

• For groups of contracts for which changes in assumptions that relate to financial risk have a substantial effect on the amounts paid to the policyholders (e.g., savings contracts with policyholder participation based on an index or a rate or other indirect participating contracts), the systematic allocation is determined using a rate that allocates the remaining revised expected insurance finance income or expense over the remaining duration of the group of contracts at a constant rate (effective yield).

  Measurement under variable fee approach (VFA)

  Insurance contracts that fulfill all the participating contracts criteria specified above are measured under VFA. These criteria ensure that insurance contracts with direct participation features are contracts under which the Group's obligation to the policyholder is the net of:

• The obligation to pay the policyholder an amount equal to the fair value of the underlying items; and

• A variable fee that the Group will deduct from the above in exchange for the future service provided by the insurance contract, consisting of the amount of the Group's share of the fair value of the underlying items less fulfillment cash flows that do not vary based on the returns on underlying items.

  The underlying items for unit-linked insurance contracts are the unit-linked assets typically held in pooled investment vehicles that meet the specific investment objective of the policyholders, who fundamentally bear the credit, market and liquidity risk of the related investments. The underlying items for traditional savings contracts issued in Switzerland, Germany, Italy, Portugal and Austria are the net assets, or a specified subset of the net assets, of the issuing insurance entity. The net assets, or a subset of the net assets, typically include financial instruments held in the Group investment portfolio (debt securities, equity securities, investment properties, mortgage loans and other assets).

  For such contracts, in addition to the insurance contract service, the Group provides an investment-related service to the policyholders managing the underlying items on their behalf. The coverage units are appropriately weighted to reflect both services to allocate the CSM over the current and remaining coverage period. For these direct participating contracts and other savings contracts, the sum assured in force and assets under management (or equivalent) are included to reflect the weighting for insurance and investment services and the pattern of delivery of those services.

  Measurement under VFA reflects the nature of participating contracts; therefore, changes in the amount of the entity's share of the fair value of the underlying items relate to future service and adjust the CSM. Similarly, the change in the effect of time value of money and financial risks not arising from the underlying items (for example, the effect of financial guarantees) relates to future service and adjusts the CSM, except where risk mitigation applies.

  Consolidated income statements | Consolidated statements of comprehensive income | Consolidated balance sheets | Consolidated statements of cash flows Consolidated statements of changes in equity | Notes to the consolidated financial statements

  Risk mitigation applies in limited circumstances where the Group hedges the risks associated with such financial guarantees using derivative financial instruments or reinsurance contracts held under a documented risk management objective and strategy. In such cases, the changes in the effect of financial guarantees are recognized immediately in profit or loss in the same way as the changes in fair value of the derivative instruments. Other changes in the fulfillment cash flows are treated consistently with BBA measurement, i.e., they adjust CSM if related to future service, or are recognized immediately in profit or loss if related to current or past service. However, unlike BBA, all the adjustments are measured using current discount rates.

  Where the underlying items are the net assets or a specified subset of the net assets of the issuing insurance entity, in addition to the participation in the returns from underlying financial assets, the policyholder participates in the risk and/ or expense results. While the risk and expense results are included within the insurance service results, the policyholder participation thereof is included within the insurance finance income or expense.

  Changes in the obligation to pay the policyholder an amount equal to the fair value of the underlying items do not relate to future service and do not adjust the CSM.

  For all contracts with direct participation features where the Group holds the underlying items, the Group applies the accounting policy choice of disaggregating insurance finance income or expense for the period to include in profit or loss an amount that eliminates accounting mismatches, with income or expense included in profit or loss on the underlying items held.

  Reinsurance contracts held

  The Group enters into reinsurance contracts in the normal course of business to limit the potential for losses arising from certain exposures. Reinsurance contracts do not relieve the Group as the originating insurer of its liability. Reinsurance contracts held are recorded separately unless the contract combination criteria specified above are fulfilled.

  Similar to insurance contracts issued, reinsurance contracts held are accounted for under PAA, if the qualifying criteria for PAA are fulfilled, or BBA in all other cases. The following differences specifically apply to reinsurance contracts held:

• Classification: Reinsurance contracts held can never be classified as direct participating contracts; hence, measurement under VFA does not apply.

• Level of aggregation: Reinsurance contracts held cannot be onerous; therefore, at initial recognition, the groups of reinsurance contracts held comprise (i) contracts in a net gain position, if any; (ii) contracts with no significant possibility of turning into a net gain position subsequently, if any; and (iii) remaining contracts, if any.

• Recognition of the CSM: As reinsurance contracts held cannot be onerous, for the groups of reinsurance contracts held accounted for under BBA, the CSM is recognized regardless of whether the reinsurance contract is a net gain or a net cost for the Group.

• Recognition of the risk of non-performance: The measurement of reinsurance contracts held includes the effect of non-performance risk of the reinsurer which considers the reinsurer's credit rating and the expected recovery period.

• Presentation: The Group presents the income or expense from reinsurance contracts held, other than reinsurance finance income or expense, as a single amount in profit or loss.

Reinsurance contracts held are measured using assumptions consistent with the assumptions used for the underlying insurance contracts for the fulfillment cash flows. The risk adjustment for non-financial risk represents the amount of risk being transferred by the holder of the reinsurance contract to the issuer of that contract. Consistent with the underlying insurance contracts, the Group made an accounting policy choice of disaggregating the reinsurance finance income or expense between profit or loss and OCI.

If reinsurance contracts held cover underlying onerous insurance contracts, a loss recovery component is established if the Group enters into such reinsurance contracts at or before the date when the losses or reversals of losses on the underlying insurance contracts are recognized. The loss recovery component is measured by reference to the percentage of claims from underlying onerous insurance contracts expected to be recovered from the reinsurance contracts held.

Consolidated income statements | Consolidated statements of comprehensive income | Consolidated balance sheets | Consolidated statements of cash flows Consolidated statements of changes in equity | Notes to the consolidated financial statements

Critical accounting estimates and judgments Non-life contracts

The Group is required to establish a LIC for payment of losses and loss adjustment expenses that arise from the Group's non-life products. These liabilities represent the expected ultimate cost to settle claims occurring prior to, but still outstanding as of, the balance sheet date. The Group establishes its liabilities by product line, type and extent of coverage, and year of occurrence. There are two categories of the LIC: liability for reported losses, and liability for incurred but not reported (IBNR) losses. Additionally, the LIC is held for loss adjustment expenses, which contain the estimated legal and other expenses expected to be incurred to finalize the settlement of the losses.

The Group's liability for reported losses and loss adjustment expenses is based on estimates of future payments to settle reported claims. The Group bases such estimates on the facts available at the time the liability is established, considering the estimated costs of bringing pending claims to final settlement. The liability takes into account inflation, as well as other factors that can influence the amount required to fulfil the Group's obligations, some of which are subjective and some of which are dependent on future events. In determining the level of the liability, the Group considers historical trends and patterns of loss payments, pending levels of unpaid claims and types of coverage. In addition, court decisions, economic conditions and public attitudes may affect the ultimate cost of settlement and, as a result, the Group's estimation of the liability. Between the reporting and final settlement of

a claim, circumstances may change which may result in changes to established liability. Items such as changes in law and interpretations of relevant case law, results of litigation or changes in medical costs, as well as costs of vehicle and home repair materials and labor rates can substantially impact ultimate settlement costs. Accordingly, the Group reviews and reevaluates claims and their liabilities on a regular basis. Amounts ultimately paid for losses and loss adjustment expenses can vary significantly from the level of liabilities originally set.

The Group establishes the liability for IBNR losses to recognize the estimated cost of losses for events which have already occurred, but for which the Group has not yet been notified. This liability is established to recognize the estimated costs required to bring such claims to final settlement. As these losses have not yet been reported, the Group relies upon historical information and statistical models, based on product line, type and extent of coverage, to estimate its IBNR liability. The Group uses reported claim trends, claim severities, exposure growth and other factors in estimating its IBNR liability. The liability is revised as additional information becomes available and as claims are actually reported.

The time required to learn of and settle claims is an important consideration in establishing the Group's LIC.

Short-tail claims, such as those for motor and property damage, are normally reported soon after the incident and are generally settled within months. Long-tail claims, such as bodily injury, pollution, asbestos and product liability, can take years to develop and additional time to settle. For these claims, information concerning the event, such as the required medical treatment for bodily injury claims and the required measures to clean up pollution, may not be readily available. Accordingly, the reserving analysis of long-tail lines of business is generally more difficult and subject to greater uncertainties than for short-tail claims.

Since the Group does not establish a liability for catastrophes in advance of the occurrence of such events, these events may cause volatility in the levels of its LIC subject to the effects of reinsurance recoveries. This volatility may also be contingent upon political and legal developments after the occurrence of the event.

The Group uses a number of accepted actuarial methods to estimate and evaluate the amount of the LIC. The nature of the claims being reserved for and the geographic location of the claims influence the techniques used by the Group's actuaries. Additionally, the Group's Corporate Center actuaries perform periodic reserve reviews of the Group's businesses throughout the world. Management considers the results of these reviews and adjusts its liabilities, where necessary.

The process of establishing the amount of the LIC is complex and deals with uncertainty, requiring the use of informed estimates and judgments considering the time value of money and the uncertainty about the amount and timing of the cash flows that arise from non-financial risk. Any changes in estimates or judgments are reflected in profit or loss in the period in which estimates and judgments are changed.

Significant delays may occur in the notification and settlement of claims, and a substantial measure of experience and judgment is involved in assessing outstanding liabilities, the ultimate cost of which cannot be known with certainty as of the balance sheet date. The LIC is determined on the basis of the information available. However, it is inherent in the nature of the business written that the ultimate liabilities may vary as a result of subsequent developments.

Consolidated income statements | Consolidated statements of comprehensive income | Consolidated balance sheets | Consolidated statements of cash flows Consolidated statements of changes in equity | Notes to the consolidated financial statements

Risk adjustment for non-financial risk

The risk adjustment for non-financial risk is the compensation that the Group requires for bearing the uncertainty about the amount and timing of the cash flows of groups of insurance contracts that arises from non-financial risk (insurance risk and other non-financial risk such as lapse risk). The risk adjustment is an explicit adjustment to the estimates of future cash flows to reflect the compensation the Group would require to make it indifferent between fulfilling a liability that has a range of possible outcomes arising from non-financial risk and fulfilling a liability that will generate fixed cash flows with the same expected present value as the insurance contracts.

The Group estimates the risk adjustment using a confidence level approach, taking into account the Group's internal view of the level of capital required in order to continue operating on a going-concern basis based on the Group's target Swiss Solvency Test (SST) ratio. The risk adjustment is calibrated as the value at risk (VaR) at the defined target confidence level minus the expected value of the future cash flows using simulations of the distribution of the future cash flows. This distribution is based on the SST framework and model, with a few modifications considering the different purpose of the IFRS 17 risk adjustment.

Separate target confidence levels apply to the distribution of cash flows of long-duration (predominantly life) and short-duration (predominantly non-life) (re-)insurance contracts. The confidence levels fall within the following ranges: 74 - 79 percent for short-duration and 90 - 95 percent for long-duration (re-)insurance contracts.

In line with the internal capital model used by the Group, these ranges are defined net of external reinsurance. The risk adjustment for the reinsurance contracts held is determined consistently with the risk adjustment for insurance contracts issued.

The Group disaggregates the change in the risk adjustment for non-financial risk between the insurance service result and insurance finance income or expense, and the latter between profit or loss and OCI, so that the movement in risk adjustment resulting from changes in discount rates is presented in OCI.

Consolidated income statements | Consolidated statements of comprehensive income | Consolidated balance sheets | Consolidated statements of cash flows Consolidated statements of changes in equity | Notes to the consolidated financial statements

Critical accounting estimates and judgments

The risk adjustment is the measure of the compensation required by the Group for the uncertainty arising from non-financial risks. As such, it is based on subjective considerations that take into account Zurich's internal view of the capital required to continue operating on a going-concern basis.

To support the selection of the confidence levels, a quantitative analysis is performed. This quantitative analysis is aimed at defining ranges of justifiable percentiles for life and non-life businesses separately, determined by calculating, with different sets of assumptions, the financial compensation the Group requires on the SST capital (defined accordingly with the internal capital targets) to cover the non-financial risks over the outstanding run-off period of the insurance liabilities.

As with any other risk capital model, the SST model is subject to simplification and application of expert judgments. These include, for example, assumptions on the shape of the distributions and on the geographical and risk dependencies, among others. The full list of assumptions, simplifications and expert judgments applied in the model are outlined in the documentation regularly provided to FINMA. These are validated regularly by the Group to ensure the overall adequacy of the risk model.

The Group percentiles selected for life and non-life businesses are expected to fall within the ranges described above. However, an additional uplift factor may be applied locally to the risk adjustment for specific contracts or groups of contracts, where there is a higher level of uncertainty around the compensation required for bearing non-financial risks. For example, an uplift factor may be applied to a specific contract or group of contracts where key long-term best estimate assumptions used to project the fulfillment cashflows have been set based on expert judgment in the absence of credible experience data.

The key assumptions in the determination of the risk adjustment percentiles are:

• Assumed cost of capital rate: the long-term mean of the weighted average cost of capital is used;

• Level of group diversification: the risk adjustment allows for diversification of non-financial risks among the Group's reporting entities as well as diversification of non-financial risks with financial risks;

• Target capitalization under the Group's internal capital model: the Group's target capitalization under SST is used. Under SST, the Group has defined a minimum solvency ratio target requirement only (≥ 160 percent SST ratio); hence, assumptions are made on the level of capitalization that Zurich would be expected to maintain on a

  going-concern basis over and above the minimum target;

• Level of segmentation: separate percentiles are defined for life and non-life businesses; and

• Higher levels of expert judgment in the absence of credible demographic assumptions used in cashflow projection: an uplift may be applied to the risk adjustment in respect of a portfolio or product where the Group has concerns over the credibility of assumptions used.

Discount rates

The Group applies bottom-up discount rates for most groups of insurance contracts issued and reinsurance contracts held. Bottom-up discount rates are constructed using risk-free rates, plus an illiquidity premium, where applicable.

Risk-free rates are determined by reference to the market interest rates (either swap rates or yields of highly liquid sovereign securities) in the currency of the underlying cash flows for the groups of (re-)insurance contracts. Whenever the expected timing of the cash flows exceeds the liquid part of the yield curve in the respective currency (the last liquid point), the risk-free interest rate is extrapolated to converge toward a long-term rate (the ultimate forward rate) using widely accepted extrapolation techniques (Smith-Wilson algorithm). The illiquidity premium is determined by reference to observable market spreads for a reference portfolio of illiquid instruments (e.g., corporate debt, etc.) adequately corrected to remove credit risk. Top-down discount rates are used for certain groups of insurance contracts (e.g., traditional savings contracts in Switzerland, Germany and Italy measured under VFA), whereby the illiquidity premium is derived from the specific asset portfolios backing such groups of contracts.

Derecognition and contract modification

The Group derecognizes an insurance contract only when the obligation specified in the insurance contract expires or is discharged or canceled, or if the contract is modified in a way that requires derecognition of the original contract and recognition of the new contract with modified terms. The exercise of a right included in the terms of a contract is not a modification.

When an insurance contract is extinguished, the entity is no longer at risk and is therefore no longer required to transfer any economic resources to satisfy the insurance contract. Typically, when the Group buys reinsurance, the underlying insurance contract(s) continue to be recognized as the respective obligations are not extinguished.

Consolidated income statements | Consolidated statements of comprehensive income | Consolidated balance sheets | Consolidated statements of cash flows Consolidated statements of changes in equity | Notes to the consolidated financial statements

If the terms of an insurance contract are modified, for example, by agreement between the parties to the contract or by a change in regulation, the Group derecognizes the original contract and recognizes the modified contract as a new contract, if any of the conditions below are satisfied:

1. If the modified terms had been included at contract inception:

   • The modified contract would not be an insurance contract; or

   • The Group would have separated different components from the host insurance contract resulting in a different insurance contract; or

   • The modified contract would have had a substantially different contract boundary; or

   • The modified contract would have been included in a different group of contracts.

2. The original contract met the definition of an insurance contract with direct participation features, but the modified contract no longer meets that definition, or vice versa; or

3. The entity applied the premium allocation approach to the original contract, but the modifications indicate that the contract no longer meets PAA eligibility criteria.

If a contract modification meets none of the above conditions, the changes in cash flows caused by the modification are treated as changes in estimates of fulfillment cash flows.

A reinsurance contract is derecognized when the contractual rights to the cash flows expire. Treatment of accounting estimates

The Group prepares interim financial statements semi-annually and applies an accounting policy choice to change the

treatment of accounting estimates made in the first semi-annual financial statements when preparing the annual financial statements (i.e., applying a year-to-date approach). This accounting policy choice applies to all (re-)insurance contracts issued and reinsurance contracts held.

Summary of IFRS 17 transition approach and effect

IFRS 17 was applied to (re-)insurance contracts issued and reinsurance contracts held retrospectively from January 1, 2022. The Group determined the transition approach for groups of insurance contracts, depending on the availability of reasonable and supportable historic information. The selected transition approach affected the measurement of the CSM on initial adoption of IFRS 17 as follows:

• Fully retrospective approach - the CSM is based on initial assumptions when groups of contracts were incepted and rolled forward to the date of transition as if IFRS 17 had always been applied;

• Modified retrospective approach - the CSM is calculated using modifications allowed by IFRS 17, taking into account the actual pre-transition fulfillment cash flows; and

• Fair value approach - the CSM at transition is calculated as the difference between the fair value of a group of contracts, without the consideration of the demand deposit floor requirement, and the respective fulfillment cash flows measured at the transition date.

  In applying the modified retrospective and fair value approaches for certain groups of non-life and life (re-)insurance contracts, the Group used the modifications allowed under IFRS 17, such as grouping contracts issued more than one year apart into a single group for measurement purposes or applying interest rates as of the transition date and setting the cumulative amount of (re-)insurance finance income or expense recognized in OCI to nil. In addition, the Group applied a modification for certain groups of non-life insurance contracts with long-tail outstanding claims at the transition date. The unwinding of the discount on the liability for incurred claims was based on the locked-in discount rates as of the transition date instead of the locked-in accident year discount rates. Furthermore, where the Group applied a modification for certain groups of life direct participating insurance contracts that were accounted for under VFA where the Group holds the underlying items, the cumulative difference in OCI was set equal to the cumulative amount recognized in OCI on the underlying items as of the transition date.

  The relevant disclosures for (re-)insurance contracts issued and reinsurance contracts held are presented in note 7.

  1. Liabilities for investment contracts (without DPF)

     Investment contracts are contracts that do not transfer significant insurance risk and do not contain discretionary participation features (DPF). The Group mainly issues investment contracts without fixed terms, such as unit-linked investment contracts, and to a lesser extent, investment contracts with fixed and guaranteed terms (e.g., fixed interest rate). Liabilities for investment contracts are primarily designated at fair value through profit or loss. However, certain contracts are measured at amortized cost using the effective interest rate method.

     Consolidated income statements | Consolidated statements of comprehensive income | Consolidated balance sheets | Consolidated statements of cash flows Consolidated statements of changes in equity | Notes to the consolidated financial statements

     Unit-linked investment contracts

     Unit-linked investment contracts are contracts referencing unit-linked asset portfolios maintained to meet the specific investment objectives of policyholders who bear the credit, market and liquidity risks related to the investments. The liabilities are carried at fair value, which is determined by reference to the underlying financial assets. Changes in fair value are recorded in profit or loss. The related assets for unit-linked investment contracts are designated at fair value through profit or loss (FVPL) to reduce measurement inconsistencies. The services provided by the Group under such contracts are investment management and policy administration services that are provided over time and are not contingent on meeting specified performance criteria. Fees from such services are recognized ratably over the service period as fee income. Refer to note 10 for further information.

  2. Group investments, investments for unit-linked contracts and other financial assets excluding derivative financial instruments

     Classification, measurement and presentation of financial assets

     The classification and measurement of Group investments is driven by the business model under which these assets are held and by their contractual cash flow characteristics. The combined effect of the business model and contractual terms assessment (also referred to as 'solely payments on principal and interests test' (SPPI test)) determines whether the debt instruments are measured at amortized cost, fair value with changes recognized in other comprehensive income (FVOCI) or fair value through profit or loss (FVPL).

     The Group primarily holds financial assets to fund insurance liabilities. Specifically, financial assets and insurance liabilities are economically linked and jointly managed with the aim of matching the duration of the assets with the expected obligation toward policyholders. To ensure that the contractual cash flows from the financial assets are sufficient to settle insurance liabilities as they become due, the Group may undertake significant buying and selling activities on a regular basis to rebalance its asset portfolio and to meet day-to-day cash flow needs as they arise. Consequently, the majority of the financial assets, including government and supra-national bonds, mortgage- and other asset-backed securities (MBS/ABS), as well as syndicated loans and other corporate debt, are 'held to collect contractual cash flows and for sale' (HtC&S). Furthermore, the Group has identified specific portfolios that are managed with the aim of holding assets only to collect contractual cash flows over the life of the instrument. These financial assets are managed in the business model 'held to collect contractual cash flows' (HtC) and include certain private debt portfolios (for example, commercial real estate, infrastructure and other private debt), mortgage loans and other financial assets (bank deposits, lease and trade receivables), as well as high-quality government bonds held in the Zurich Italy Bank S.p.A.'s proprietary portfolio to cover structural excess liquidity.

     Debt instruments with contractual terms that give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding (SPPI) are measured at either amortized cost or FVOCI, unless they are managed on a fair value basis.

     Debt instruments held under the HtC&S business model that pass the SPPI test are measured at FVOCI. Interest income is determined using the effective interest rate method and included in net investment income. The cumulative unrealized fair value gains or losses recorded in OCI are net of the expected loss allowance and income taxes. When financial assets measured at fair value through OCI are derecognized, the cumulative gains or losses are reclassified from OCI to profit or loss as net capital gains/(losses) on investments. Loss allowances for expected credit losses and any subsequent changes are recorded in profit or loss within net capital gains/(losses) on investments.

     Debt instruments held under the HtC business model that pass the SPPI test are carried at amortized cost using the effective interest rate method. Loss allowances for expected credit losses and individual credit impairments are recognized in profit or loss within net capital gains/(losses) on investments, with a corresponding reduction in the carrying amount of the financial asset.

     Financial assets that fail the SPPI test are always measured at fair value through profit or loss (FVPL). Such assets include equities, fund investments, callable bonds with significant prepayment features, hybrid bonds with certain cash flows at the discretion of the issuer and some MBS/ABS that do not fulfill the SPPI criteria for contractually linked instruments. The significance of the prepayment feature is assessed at the date of the initial recognition of the financial asset as well as whenever additional purchases of the same instrument occur within the same portfolio.

     In addition to financial assets that fail the SPPI test, the Group designates investments held for unit-linked insurance and investment contracts as well as some other investment portfolios backing specific portfolios of insurance contracts at FVPL in order to eliminate or significantly reduce a measurement inconsistency that would otherwise arise from measuring assets or recognizing the gains and losses on these assets on a different basis to the liabilities.

     Realized and unrealized gains and losses arising from changes in the fair value of such investments are recognized in profit or loss within net capital gains/(losses) on investments in the period in which they arise. Interest income determined using the effective interest rate method and dividend income from non-unit-linked financial assets at FVPL are included in net investment income. Interest income and dividend income from unit-linked financial assets at FVPL are included in the net investment result on unit-linked investments.

     Consolidated income statements | Consolidated statements of comprehensive income | Consolidated balance sheets | Consolidated statements of cash flows Consolidated statements of changes in equity | Notes to the consolidated financial statements

     The Group did not make use of the option to present changes in fair value of certain equity instruments that are not held for trading in OCI with no subsequent reclassification of realized gains or losses to profit or loss.

     The Group recognizes regular purchases and sales of financial assets on the trade date, which is the date on which the Group commits to purchase or sell the asset.

     Group investments are grouped together based on their nature and considering their shared risk characteristics as follows: - Equity securities and unconsolidated investment funds include equity instruments held that do not result in control

     or significant influence by the Group, and fund investments where the Group does not have control over the investment vehicle;

• Debt securities include government and supra-national bonds, corporate debt and MBS/ABS;

• Mortgage loans include predominantly retail residential mortgages; and

• Other financial assets mainly include private debt investments (such as infrastructure and commercial real estate loans and private placements) typically managed by third-party asset managers and subject to a ratings-based approach for credit risk monitoring, as well as lease receivables and non-unit-linked deposits held as part of Group investments.

  Group investments further include investment property accounted for at FVPL. Rental income from investment property is recognized on a straight-line basis over the lease term and included in net investment income, net of operating rental expenses. Please see note 5 for further information on Group investments.

  Cash on hand, deposits held at call with banks, cash collateral received and other highly liquid investments with maturities of three months or less from the date of acquisition that are readily convertible into cash and are subject to an insignificant risk of changes in fair value are included in cash and cash equivalents.

  Trade receivables are presented as part of other assets.

  Critical accounting estimates and judgments

  In determining the fair values of investments in debt and equity instruments traded on exchanges and in over-the-counter (OTC) markets, the Group makes extensive use of independent, reliable and reputable third-party pricing providers, and only in rare cases places reliance on valuations that are derived from internal models.

  In addition, the Group's policy is to ensure that independently sourced prices are developed by making maximum use of current observable market inputs derived from orderly transactions and by employing widely accepted valuation techniques and models. When third-party pricing providers are unable to obtain adequate observable information for a particular financial instrument, the fair value is determined either by requesting selective non-binding broker quotes or by using internal valuation models.

  Valuations can be subject to significant judgment, especially when the fair value is determined based on at least one significant unobservable input parameter; such items are classified within level 3 of the fair value hierarchy. See notes 5 and 22 for further information regarding the estimate of fair value.

Recognition of expected credit losses

Expected credit loss (ECL) is recognized for debt securities measured at amortized cost, debt securities measured at FVOCI, mortgage loans, lease and trade receivables, and reflects the difference between the contractual cash flows of the instrument and the cash flows the Group expects to receive. ECL is recognized on the following basis:

• 12-months ECL is recognized from the initial recognition of a debt instrument and reflects a portion of lifetime expected credit losses that would result from default events that are possible within 12 months after the reporting date (12-months ECL). The Group applies the low credit risk simplification to recognize 12-months ECL for all financial instruments that have an internal or external investment grade credit rating. Instruments for which

  12-months ECL is recognized are referred to as stage 1; and

• Lifetime ECL is recognized in the event of a significant increase in credit risk (SICR) since initial recognition and reflects lifetime expected credit losses over the expected life of the financial instrument (lifetime ECL). The Group applies a permitted simplification to recognize lifetime ECL for all trade receivables. Instruments with lifetime ECL are referred to as stage 2. Lifetime ECL is also recognized for credit-impaired financial instruments, referred to as stage

  3. Stage 3 includes instruments that are non-performing or for which a default event has occurred.

  At each reporting date, an assessment is conducted to determine whether a SICR has occurred since the initial recognition of a financial asset not covered by the low credit risk practical expedient and/or whether the financial asset has become credit-impaired.

  Consolidated income statements | Consolidated statements of comprehensive income | Consolidated balance sheets | Consolidated statements of cash flows Consolidated statements of changes in equity | Notes to the consolidated financial statements

  Critical accounting estimates and judgments

  In the assessment for SICR, the Group considers all relevant reasonable and supportable information, including information about past events and current and future economic conditions, available either on an individual or on a collective basis.

  When an external or internal rating is available, the Group applies the low credit risk practical expedient by assuming that no increase in credit risk has occurred since initial recognition for financial assets that have an external or internal rating equivalent to 'investment grade' (i.e., AAA to BBB-) at the reporting date. This approach is applied to government and supra-national bonds, mortgage- and other asset-backed securities, as well as corporate debt, including commercial real estate, infrastructure and other private debt.

  For all debt instruments rated below investment grade, the Group determines SICR thresholds that vary depending on the credit rating at initial recognition and the residual life of the instruments. The SICR threshold is calibrated such that the lower the probability of default at inception, the higher the relative credit deterioration is required to trigger a SICR. If the credit rating of the instrument at the reporting date is equal to or below the trigger level, the instrument is deemed to have experienced SICR.

  Irrespective of the SICR assessment based on default probabilities, credit risk is generally deemed to have significantly increased if the contractual payments are more than 30 days past due. SICR is no longer observed if the rating at the reporting date is above the trigger level indicated in the notching table and the rating has improved by at least one notch since the previous reporting date, in which case the instrument transitions back to stage 1.

  For all material exposures, including those with low credit risk at the reporting date, the SICR assessment outlined above is supplemented by a qualitative assessment of the issuer's credit quality through a forward-looking watch list that includes exposures with negative rating outlook and downward rating momentum and that are close to the thresholds for stage change. This is further complemented by fundamental research and expert opinion and presented to the Credit Valuation Committee (CVC) comprising representatives of Group Investment Management, Group Risk and Group Finance. The CVC takes the final decision on the stage allocation.

  The mortgage loan portfolio predominantly consists of residential and small commercial real estate loans. The exposures are grouped into homogenous buckets in terms of geographic location (mainly Switzerland, Germany, Italy) and property type (residential versus commercial). The forward-looking loan-to-value (LTV) is within the range of 40 - 67 percent for the Swiss portfolio and 10 - 25 percent for the German portfolio. The SICR is assessed using the number of past due days, the actual affordability on the customer level as well as forward-looking LTV, which is derived from the expected evolution in the property prices.

  Forward-looking scenarios and measurement of expected credit losses

  Expected credit losses reflect an unbiased, probability-weighted estimate based on possible default events either over the next 12 months or over the remaining life of a financial instrument. The ECL is calculated using a combination of the following main input parameters: probability of default (PD), loss given default (LGD) and exposure at default (EAD).

  For originated residential and small commercial mortgage loan portfolios, the forward-looking parameters are derived from the evolution of the real estate prices by property type, as well as actual affordability of the loan for a customer. The Group records expected credit losses on mortgages; however, the ECL amount may be rather insignificant for mortgages with very low LTV.

  For unrated exposures, for example, trade receivables, the ECL is measured using an expected loss rate provision matrix, based on historical observed default rates (adjusted and regularly updated for forward-looking estimates), depending on the past due status. For this purpose, the exposures are grouped into sub-portfolios that are homogeneous in terms of loss pattern, and specific loss rates are assigned depending on the number of days past due. From the provision matrix, the calculation of the ECL is determined by multiplying the gross carrying amount of the exposure by the given expected loss rate.

  Consolidated income statements | Consolidated statements of comprehensive income | Consolidated balance sheets | Consolidated statements of cash flows Consolidated statements of changes in equity | Notes to the consolidated financial statements

  Critical accounting estimates and judgments

  For rated debt securities, the Group determines the forward-looking inputs by evaluating a range of possible outcomes. A scenario-based approach is applied whereby three scenarios (downside scenario, base case and upside scenario) are modelled once a year, taking into consideration potential developments of relevant macroeconomic variables (GDP growth, 10-year interest rates and credit spreads) in the U.S. and eurozone over a one-year horizon.

  If no internal or external credit rating is available (e.g., due to timing constraints), the Group assigns a fallback rating which is used to derive the ECL parameters (i.e., exposures are assigned A- if the issuer is domiciled in a country with investment grade sovereign rating, while B- is assigned to other exposures).

  Each of the forward-looking scenarios applied is based on management assumptions about future macroeconomic conditions. Additional judgment is required to assign a weight to each scenario which reflects the probabilities that the respective set of macroeconomic variables will materialize. The economic scenarios are developed by Group Investment Management - Market Strategy and Macroeconomics, which proposes the scenario weightings based on Group forward-looking expectations. The final decision on scenario weighting lies with the CVC where Group functions can challenge the selection and weights of different scenarios. Changes to the scenario weights and macroeconomic assumptions taken could have a significant effect on ECL. See note 23 for further details.

Exchange or modification of financial assets

The Group may enter into transactions involving the exchange of financial assets with one or multiple financial assets. Furthermore, the terms of financial assets may be modified subsequent to initial recognition. When the contractual terms of the financial asset(s) received in an exchange transaction or upon modification are significantly different from the original financial asset, the Group derecognizes the original asset. In certain cases, such exchange or modification results from the financial distress of the original debtor, in which case an exchange or modification of financial assets may involve recognition of purchased or originated credit-impaired (POCI) financial instruments. POCI financial instruments are initially recognized at fair value with interest income subsequently being accrued based on a credit-adjusted effective interest rate. Changes in lifetime ECL since initial recognition are recognized in profit or loss within net capital gains/(losses) on investments.

If an exchange or modification does not result in derecognition of the financial asset held, any modification gain or loss is recorded in profit or loss within net capital gains/(losses) on investments. Furthermore, the SICR assessment is performed by comparing the current risk of default with the risk of default at initial recognition based on the original and unmodified contractual terms.

Defaulted and credit-impaired financial assets

The Group considers the financial asset as defaulted when one or a combination of events with detrimental impact on the estimated cash flows of the financial asset have occurred (i.e., an incurred credit loss event). The Group places emphasis on counterparty specific factors, such as significant financial difficulty, default or delinquency on interest or principal payments. In addition, the Group usually considers that default does not occur later than when a financial asset is 90 days past due. Nevertheless, for certain exposures, such as Swiss residential mortgage loans, historical evidence indicates there is no correlation between default and payments being more than 90 days past due, but such correlation can be identified, for example, when payments are more than 180 days past due. Therefore, these latter exposures are considered defaulted when payment is overdue for more than 180 days. If one or more default events have occurred, the Group considers the financial assets as credit-impaired and recognizes individual credit impairment directly as a reduction of the gross carrying amount. In the rare case of default on mortgage loans, the Group may enter forbearance measures, including temporary postponement of contractual payments, to enable the recovery of the mortgage loan.

Financial assets and the related credit impairment allowances are partially or fully written off when the Group has no reasonable expectations of recovering the financial asset in its entirety or a portion thereof. The write-offs represent partial or full derecognition events.

1. Derivative financial instruments and hedge accounting

   Derivative financial instruments are used by the Group to economically hedge risks. Derivative financial instruments are carried at fair value. The changes in fair value of derivative financial instruments are recognized in profit or loss, except where such derivative financial instruments are designated under a qualifying cash flow or net investment hedge relationship.

   Derivative financial instruments that qualify for hedge accounting

   In limited circumstances, derivative financial instruments are designated as hedging instruments for accounting purposes in:

   • Fair value hedges, which are hedges of the exposure to changes in the fair value of a recognized asset or liability;

   • Cash flow hedges, which are hedges of the exposure to variability in cash flows attributable to a particular risk either associated with a recognized asset or liability, or a highly probable forecast transaction that could affect profit or loss; or

   • Net investment hedges, which are hedges of a net investment in a foreign operation.

   Consolidated income statements | Consolidated statements of comprehensive income | Consolidated balance sheets | Consolidated statements of cash flows Consolidated statements of changes in equity | Notes to the consolidated financial statements

   All hedge relationships are formally documented, including the risk management objectives and strategy for undertaking the hedge, the identification of the hedging instrument, the hedged item, the nature of the risk being hedged, and how the hedge effectiveness assessment is made, including the analysis or sources of hedge ineffectiveness and description of how the hedge ratio is determined. Differences in critical terms, the effect of credit risk or differences in the time value of money could be sources of ineffectiveness. To a limited extent, ineffectiveness may also arise from the currency basis spread of cross-currency swaps, or from the forward elements of forward contracts, if these are not excluded from the hedge designation.

   At inception of a hedge, the hedge relationship is formally assessed to determine whether the hedging instruments are expected to be highly effective in offsetting changes in fair values or cash flows of hedged items attributable to the hedged risk. Subsequently, the hedge effectiveness is assessed on a quarterly basis (or upon a significant change in circumstances) on a forward-looking basis. Any ineffectiveness is recorded in profit or loss.

   Hedge accounting is not discontinued on a voluntary basis as long as the risk management objective is still being pursued and other qualifying criteria are fulfilled. If the qualifying criteria for the application of hedge accounting are no longer met for the entire hedging instrument (or a part of it), the hedge relationship is discontinued prospectively, in which case the hedging instrument and the hedged item are then subsequently reported independently in accordance with the respective accounting policy.

   The accounting treatment of qualifying hedge relationships is further described in note 6.

2. Goodwill and attorney-in-fact contracts (AIF)

Goodwill

Goodwill is recognized at the amount of the consideration transferred in a business combination in excess of the fair value of the identifiable assets acquired and liabilities assumed. Goodwill is not amortized but tested for impairment annually, or more frequently if there are indications that the amount of goodwill is not recoverable. For the purpose of impairment testing, goodwill is allocated to cash-generating units (CGUs) based on the level at which management monitors operations and makes decisions related to the continuation or disposal of assets and operations. The Group has defined the CGUs according to regions, separating P&C, Life businesses and other (see note 26). The CGUs which carry the majority of goodwill and AIF contracts are presented in table 3.1. If goodwill has been allocated to a CGU and an operation within that unit is disposed of, the carrying amount of the operation includes attributable goodwill when determining the gain or loss on disposal.

AIF contracts

The AIF contracts reflect the ability of the Group to generate future revenues through Farmers Group, Inc. (FGI) based on the FGI's relationship with the Farmers Exchanges. In determining that these contracts have an indefinite useful life, the Group took into consideration the organizational structure of inter-insurance exchanges, under which subscribers exchange contracts with each other and appoint an attorney-in-fact to provide non-claims services, and the historical AIF relationship between FGI and the Farmers Exchanges. The value of the AIF contracts is tested for impairment annually, or more frequently if there are indications that the carrying amount of AIF contracts is not recoverable.

The services provided by FGI under such contracts are non-claims services including risk selection, preparation and mailing of policy documents and invoices, premium collection, management of the investment portfolios and certain other administrative functions. The multiple performance obligations covered by the consideration received are considered to be a series with the same pattern of transfer; therefore, the performance obligations are not separated. The fee income for the services provided includes Farmers management fees, membership fees and revenues for ancillary services. Farmers management fees are determined as a percentage of gross premiums earned by the Farmers Exchanges, subject to an agreed margin cap, and recognized ratably over the period the services are provided. Membership fees are one-time fees charged at the time of the policy issuance that do not cover a distinct performance obligation. Such fees are recognized as revenue over the expected life of the customer relationship. The revenue for ancillary services includes remuneration for services provided that are not covered by Farmers management fees where FGI acts as a principal. Typically, these services are provided over time, so that the revenue is also recognized over time. The incremental costs incurred in connection with the customer setup activity are recognized as an asset and subsequently amortized using the same pattern as the related revenue. Please see notes 10 and 25 for further information.