ZURICH FINANCIAL SERVICES AUSTRALIA LIMITED A.B.N ANNUAL REPORT

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1 A.B.N ANNUAL REPORT For the year ended Contents Page Number Directors Report 1 6 Financial Report Statements of Comprehensive Income 7 Balance Sheets 8 Statements of Changes in Equity 9 Cash Flow Statements 10 Notes to the Financial Statements Directors Declaration 96 Independent Auditor s Report to the Members of Zurich Financial Services Australia Limited This annual report covers both Zurich Financial Services Australia Limited as an individual entity and the Consolidated Entity consisting of Zurich Financial Services Australia Limited and its controlled entities. Zurich Financial Services Australia Limited is a company limited by shares, incorporated in and domiciled in Australia. Its registered office and principal place of business is: 5 Blue Street North Sydney NSW 2060 A description of the nature of the Consolidated Entity s operations and its principal activities is included in the Directors Report on pages 1 6. The annual report was authorised for issue by the directors on 26 March The Directors have the power to amend and reissue the report.

2 Directors Report Your directors present their report on the Consolidated Entity consisting of Zurich Financial Services Australia Limited ( the Company ) and the entities it controlled at the end of, or during, the year ended. Directors The following persons were directors of the Company during the whole of the financial year and up to the date of this report: Terence John Paradine Robert Olivier Dolk Ian Clifton Carroll Michael Ronald Vos Johnny Chen (Chairman) The following persons were directors of the Company for part of the financial year or at the date of this report: James Richard Sykes was a director of the Company from the beginning of the financial year until his resignation on 1 January Shane Peter Doyle was a director of the Company from the beginning of the financial year until his resignation on 1 June Julian McQueen Lipman was a director of the Company from 1 April 2012 until his resignation on 22 October Daniel Luke Fogarty was appointed as a director of the Company on 1 August 2012 and continues in this office at the date of this report. Officers Cathy Anne Manolios and David George Hallahan were company secretaries of the Company during the whole of the financial year and up to the date of this report. Principal Activities During the year the principal continuing activities of the Consolidated Entity consisted of: Underwriting various classes of General Insurance; Underwriting various classes of ordinary and superannuation Life Insurance; Investment advice and funds management services; Investment in owner-occupied properties. There was no significant change in the nature of the Consolidated Entity s principal activities during the year. Dividends Dividends paid by the Company to the Immediate Controlling Company, Zurich Insurance Company (incorporated in Switzerland) during the financial year were as follows: 2012 $ $ 000 Ordinary dividend paid on 10 January ,000 - Ordinary dividend paid on 8 June ,000 - Ordinary dividend paid on 23 October ,000 - No dividends were declared or recommended to members but not paid during the year. 1

3 Directors Report (continued) Review of Results and Operations A summary of consolidated revenues and results is set out below: Consolidated revenues and other income $ 000 $ 000 Life insurance premiums and fees 296, ,792 Non-life insurance premiums 1,227,081 1,164,175 Reinsurance and other recoveries 242,575 1,349,872 Investment income 436, ,256 Share of associate profits - 1,397 Other revenue 26,800 36,515 Other income 7,069 13,410 2,236,357 2,984,417 Consolidated results Profit attributable to the member of the Consolidated Entity 162,207 65,193 Significant Changes in the State of Affairs Significant changes in the state of affairs of the Consolidated Entity during the financial year were as follows: a) On 13 February 2012, the following investment schemes were deregistered: - Zurich Investments Australian Fixed Interest Pool - Zurich Investments Australian Indexed Bond Pool - Zurich Investments Reserve Corporate Bond Pool b) On 1 August 2012, Zurich Investments Reserve Short Term Maturities Fixed Interest Pool and Zurich Investments Reserve Long Term Maturities Fixed Interest Pool, managed investment schemes were closed. c) On 26 September 2012, Zurich Investments Global Small Companies Share Pool, a managed investment scheme was closed. d) On 1 December 2012, the Company became the provisional head tax entity of the Zurich Australia tax consolidated group. Matters Subsequent to the End of the Financial Year Subsequent to the end of the financial year, there have been a number of catastrophes which will impact the Consolidated Entity s 2013 results. Refer to Note 41 of the annual report for details. Apart from this, the directors are not aware of any matter or circumstance which has arisen since, other than dealt with in the financial statements, that has significantly affected or may significantly affect: a) the Consolidated Entity s operations in future financial years; or b) the results of those operations in future financial years; or c) the Consolidated Entity s state of affairs in future financial years. Likely Developments and Expected Results of Operations The directors do not make any other reference to likely developments and expected results at this time, apart from comments made elsewhere in this report, as such references could be prejudicial to the interests of policyholders and shareholders. Accordingly, this information has not been included in this report. Environmental Regulations The Company has assessed whether there are any particular or significant environmental regulations which apply to it and has determined that there are none. 2

4 Directors Report (continued) Information on Directors Director Qualifications Experience Special Responsibilities Terence John PARADINE ACII, FNIBA Chairman of Zurich Financial Services Australia Limited, Zurich Australian Insurance Limited and Zurich Australia Limited, with over 48 years of experience in the Financial Services industry. Non-Executive Director; Chairman Robert Olivier DOLK BEc. ACA, GAICD Former Regional Head Corporate Client Coverage, Territory Management - North America, Japan and Australia for BNP Paribas. Over 27 years of experience in financial services internationally. Director of numerous companies including Alinta Holdings and Chairman of Lawcover Insurance Pty Limited, Lawcover Pty Limited and PT Indonesia Infrastructure Finance. Non-Executive Director; Chairman of Risk, Compliance and Audit Committee Ian Clifton CARROLL OAM BA LLB LLM(Hons) Retired partner of the national law firm, Clayton Utz. Over 42 years of experience as a corporate and commercial lawyer specialising in mergers and acquisitions, revenue law, corporations law and trust law. Director of several companies including Global Life Reinsurance Company of Australia Pty Limited, The National Trust of Australia (New South Wales) and Australian Council of National Trusts. Non-Executive Director; Chairman of Board Remuneration Committee Michael Ronald VOS M Applied Finance and Investments, BEc Managing Director and Chief Operating Officer, Investment Management for Zurich Insurance Group Ltd. Over 18 years of financial services experience. Non-executive Director Johnny CHEN B.Acc, M.Sc (Acc) Chief Executive Officer, Asia Pacific General Insurance for Zurich Insurance Group with over 25 years of experience in financial services. Former executive member of PricewaterhouseCoopers Greater-China Management Board and the Operating Committee, as well as the Managing Partner of the Beijing office. Non-executive Director Daniel Luke FOGARTY B.Com (Accounting & Finance), MSc Chief Executive Officer with over 25 years experience in the financial services industry. Former Chief Operating Officer, General Insurance for Zurich Financial Services Australia Limited, prior to this held several Executive General Manager positions at Suncorp and senior roles at Westpac Banking Corporation. Executive Director, Chief Executive Officer Shane Peter DOYLE Chief Executive Officer with over 22 years experience in the financial services industry internationally. Former General Manager, General Insurance for Zurich Financial Services Australia Limited, prior to this was the Senior Vice President Regional Manger Financial Lines for AIG UK Limited and AIG Europe and Vice President Regional Manager Financial Lines for AIG Middle East, Mediterranean and South Asia. Executive Director, Chief Executive Officer 3

5 Directors Report (continued) Information on Directors (continued) Director Qualifications Experience Special Responsibilities James Richard SYKES MSc and BSc(Hons) Chief Operations Officer, Global Life Asia Pacific with over 28 years of experience in the Insurance Industry and is a qualified actuary. Non-executive Director Julian McQueen LIPMAN B Ec. Head of Retail Distribution, Global Life Asia Pacific Middle East with over 26 years of experience in the Insurance industry and is a qualified actuary. Non-executive Director Information on Officers Officer Qualifications Experience Special Responsibilities Cathy Anne BA, LLM, Formerly General Manager Legal & Corporate Services Company Secretary MANOLIOS FAICD (Australian Financial Services) at the Colonial Group, Special Counsel at Ernst & Young Legal, General Counsel at Legal & General Life of Australia Limited, Senior Associate at Mallesons Stephan Jacques. Areas of practice include corporate and commercial law. David George HALLAHAN B.Com, LLB Former Partner at Blake Dawson. Over 20 years of experience in commercial law. Company Secretary Meetings of Directors The following table sets out the number of meetings of the Company s directors (including meetings of committees of directors) held during the year ended, and the numbers of meetings attended by each director. Meetings Attended Total of all Meetings Eligible to Attend Full Meetings of Directors Meetings of Risk, Compliance and Audit Committee Meetings for Board of Remuneration Committee Number of meetings held Number of meetings attended by: Terence John Paradine Robert Olivier Dolk Ian Clifton Carroll Michael Ronald Vos N/A Johnny Chen 9 8 N/A N/A Daniel Luke Fogarty 5 5 N/A N/A Julian McQueen Lipman 4 4 N/A N/A N/A = Not applicable, not a member of the Risk, Compliance and Audit Committee and/or the Board of Remuneration Committee. Insurance of Officers During the financial year, the Company has paid a premium to insure all present and past directors, secretaries and executive officers of the Company or a related body corporate. The insurance grants indemnity against liabilities permitted to be indemnified by the Company under the Corporations Act In accordance with normal commercial practice, the insurance policy prohibits disclosure of the terms of the policy including the nature of the liability insured against and the amount of the premium. 4

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8 Statements of Comprehensive Income For the year ended Consolidated Parent Entity Note $'000 $'000 $'000 $'000 Revenue from continuing operations 6(a) 1,792,556 2,826,354 91,628 84,657 Investments income 6(b) 436, ,256 (14,936) (29,222) Other income from continuing operations 6(c) 7,069 13, (1,047) Share of associates profit 6(d) - 1, Life insurance expenses (580,915) (171,745) - - Non-life insurance and Parent Entity expenses (1,396,853) (2,690,681) (91,659) (85,670) Expenses from continuing operations (1,977,768) (2,862,426) (91,659) (85,670) Movement in external unitholders liabilities (25,767) Profit/(loss) from continuing operations before income tax 7(a) 232, ,904 (14,015) (31,282) Income tax (expense)/credit 9(a) (70,615) (57,711) 190 (886) Profit/(loss) for the year 162,207 65,193 (13,825) (32,168) Other comprehensive income Items that may be classified to profit or loss (net of tax) Exchange difference (161) (1,100) - - Impairment charge (6,000) (2,850) - - Net expense recognised directly in equity (6,161) (3,950) - - Total comprehensive income/(expense) for the year attributable to: Zurich Financial Services Australia Limited 156,046 61,243 (13,825) (32,168) The above Statements of Comprehensive Income should be read in conjunction with the accompanying notes. 7

9 Balance Sheets As at Consolidated Parent Entity Note $'000 $'000 $'000 $'000 Assets Cash and cash equivalents , , ,207 Receivables , ,373 31,443 21,871 Equity Securities 12(a) 1,511,698 1,419, Debt Securities 12(a) 2,627,602 2,134, Other financial assets 12(a) 298 1, Reinsurance and other recoveries 13 1,571,334 1,862, Deferred acquisition costs 15 93,354 54, Deferred origination costs 16 4,897 6, Gross policy liabilities ceded under reinsurance , , Other assets , ,980 4,723 6,242 Deferred tax asset 14 56,748 74,100 15,536 15,636 Investments in controlled entities 12(b) , ,188 Property, plant and equipment 21 41,766 44,550 17,833 19,380 Intangible assets 20 30,941 40,179 30,941 34,179 Total Assets 7,318,210 7,206, , ,703 Liabilities Payables , ,211 87,766 84,509 Provisions 23 48,990 42,172 28,367 27,505 Unearned premium , , Unexpired risk liability 26 3,503 41, Deferred origination fees 27 4,311 5, Gross policy liabilities 30 1,854,129 1,880, Outstanding claims 28 2,739,799 2,942, Defined benefit superannuation fund deficit 17 1,341 2,105 1,341 2,105 Unvested policyholder benefits 35,383 37, Deferred tax liabilities , Net assets attributable to unitholders , , Total Liabilities 6,035,259 6,053, , ,119 Net Assets 1,282,951 1,152, , ,584 Equity Contributed equity , , , ,273 Reserves 33 (127) 6, Retained profits 33 1,181,805 1,045, , ,311 Total Parent Entity interest 1,282,951 1,152, , ,584 Total Equity 1,282,951 1,152, , ,584 The above Balance Sheets should be read in conjunction with the accompanying notes 8

10 Statements of Change in Equity For the year ended Consolidated Attributable to owners of Zurich Financial Services Australia Limited Contributed Retained Equity Reserves profits Total $ 000 $ 000 $ 000 $ 000 Balance at 1 January ,273 9, ,405 1,091,662 Total comprehensive income/(expense) for the year - (3,950) 65,193 61,243 Balance as at 31 December ,273 6,034 1,045,598 1,152,905 Total comprehensive income/(expense) for the year - (6,161) 162, ,046 Transactions with owners in their capacity as owners: Dividends paid to Immediate Controlling Company - - (26,000) (26,000) Balance as at 101,273 (127) 1,181,805 1,282,951 Parent Entity Contributed Retained Equity profits Total $ 000 $ 000 $ 000 Balance at 1 January , , ,752 Total comprehensive expense for the year - (32,168) (32,168) Balance as at 31 December , , ,584 Total comprehensive income for the year - (13,825) (13,825) Transactions with owners in their capacity as owners: Dividends paid to Immediate Controlling Company - (26,000) (26,000) Balance as at 101, , ,759 The above Statements of Changes in Equity should be read in conjunction with the accompanying notes. 9

11 Cash Flow Statements For the year ended Consolidated Parent Entity Note $'000 $'000 $'000 $'000 Cash Flows from Operating Activities Premiums and deposits received 1,405,421 1,128, Policy and withdrawal payments (907,372) (1,116,517) - - Payment to suppliers and employees (496,339) (498,176) (91,842) (81,909) Proceeds from sale of investment assets 2,993,904 2,010, Payments for investments (3,228,523) (1,913,284) - - Interest received 172, , Fees and commissions received 163, ,754 98,894 90,963 Fees and commissions paid (110,067) (100,592) - - Payment to head tax entity/ato (38,521) 6,832 5,098 4,256 Other income received/(paid) non-life insurance business 184 (46) 184 (45) Dividends received life insurance business 86,642 56,076-10,000 Dividends received non-life insurance business 4,558 44,070 16,000 - Net cash inflows/ (outflows) from operating activities 34 46,340 (98,492) 28,467 23,337 Cash Flows from Investing Activities Proceeds from sale of plant and equipment Purchase of plant and equipment (4,552) (5,328) (4,508) (5,328) Purchase of software development (6,345) (9,109) (6,345) (9,109) Repayment of policy loans Minority interest in net proceeds/redemptions of units (3,110) 13, Proceeds from sale of associates - 35, Proceeds from sale of controlled entities - 16, Net cash inflows/ (outflows) from investing activities (13,809) 50,292 (10,853) (14,437) Cash Flows from Financing Activities Dividends paid (26,000) - (26,000) - Net cash outflows from financing activities (26,000) - (26,000) - Net Increase / (Decrease) in Cash Held 6,531 (48,200) (8,386) 8,899 Cash and cash equivalents at the beginning of the financial year 769, ,197 9, Cash and cash equivalents at the beginning of the financial year held by controlled entities and unit trusts no longer controlled (223,654) (134,496) - - Exchange rate effect on cash balances 3, Cash and cash equivalents at the end of the financial year , , ,207 The above Cash Flow Statements should be read in conjunction with the accompanying notes. 10

12 1. Summary of significant accounting policies This general purpose financial report includes the financial report of Zurich Financial Services Australia Limited (the Company or Parent Entity ), as at and all entities which it controlled for the year then ended. The Company and its controlled entities together are referred to in this financial report as the Consolidated Entity. For details of the principles of consolidation refer to part (a) of this note. This general purpose financial report has been prepared in accordance with Australian Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board (AASB), Urgent Issues Group Interpretations and the Corporations Act It is prepared in accordance with the historical cost convention, except in the case of: (i) certain financial assets, as noted in the accounting policies below, which are measured on the basis of fair value as required by AASB 139 Financial Instruments: Recognition and Measurement, and provisions for long-tail outstanding claims which have been inflated and discounted as required by AASB 1023 General Insurance Contracts (ii) the assets, liabilities, revenues and expenses of the Consolidated Entity s life insurance operations, conducted by Zurich Australia Limited (ZAL), which are measured as required by AASB 1038 Life Insurance Contracts and AASB 139 Financial Instruments: Recognition and Measurement. Compliance with IFRSs The financial statements of the Company also comply with International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB). The Consolidated Entity has elected to apply AASB 8: Operating Segments. The Consolidated Entity does not issue any publicly traded debt or equity instruments and is exempted from the disclosure of reportable segments. Segmented disclosure required by the Life Insurance Act 1995 is given in Note 42. Critical accounting estimates The preparation of financial statements in conformity with Australian Accounting Standards requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Consolidated Entity s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in Notes 2 and 3. Early adoption of standards The Consolidated Entity has elected to apply the following amendment to Australian Accounting Standards to the annual reporting period beginning 1 January 2012: AASB 101 Presentation of Financial Statements which requires entities to separate items presented in other comprehensive income into two groups, based on whether they may be recycled to profit or loss in the future. This will not affect the measurement of any of the items recognised in the balance sheet or the profit or loss in the current period. This standard is applicable for periods beginning on or after 1 July New Accounting Standards and Interpretations Certain new accounting standards and interpretations have been published that are not mandatory for reporting periods. The Consolidated Entity s assessment of the impact of these new standards and interpretations is set out below. AASB 9 Financial Instruments addresses the classification, measurement and derecognition of financial assets and financial liabilities. The standard is not applicable until 1 January 2015 but is available for early adoption. There will be no impact on the Consolidated Entity upon adoption. AASB 10 Consolidated Financial Statements replaces all of the guidance on control and consolidation in AASB 127 Consolidated and Separate Financial Statements, and Interpretation 12 Consolidation Special Purpose Entities. The core principle that a consolidated entity presents a parent and its subsidiaries as if they are a single economic entity remains unchanged, as do the mechanics of consolidation. However, the standard introduces a single definition of control that applies to all entities. The standard is not applicable until 1 January 2013 but is available for early adoption. There will be no impact on the Consolidated Entity upon adoption. 11

13 1. Summary of significant accounting policies (continued) New Accounting Standards and Interpretations (continued) AASB 12 Disclosure of Interests in Other Entities sets out the required disclosures for entities reporting under the two new standards, AASB 10 and AASB 11, and replaces the disclosure requirements currently found in AASB 127 Consolidated and Separate Financial Statements and AASB 128 Investments in Associates and Joint Ventures. Application of this standard by the Consolidated Entity will not affect any of the amounts recognised in the financial statements, but will impact the type of information disclosed in relation to the Consolidated Entity s investments. The standard is not applicable until 1 January 2013 but is available for early adoption. There will be no impact on the Consolidated Entity upon adoption. AASB 13 Fair Value Measurement and AASB Amendments to Australian Accounting Standards arising from AASB 13 explains how to measure fair value and aims to enhance fair value disclosures. The Consolidated Entity has yet to determine which, if any, of its current measurement techniques will have to change as a result of the new guidance. It is therefore not possible to state the impact, if any, of the new rules on any of the amounts recognised in the financial statements. The Consolidated Entity does not intend to adopt the new standard before its operative date, which means that it would be first applied in the annual reporting period ending 31 December (a) Principles of consolidation (i) Controlled entities The consolidated financial statements incorporate the assets and liabilities of all entities controlled by the Company as at and the results of all controlled entities for the year then ended. The effects of all transactions between entities in the Consolidated Entity are eliminated in full. Minority interests in the results and equity of controlled entities are shown separately in the consolidated Statements of Comprehensive Income, Balance Sheets and Statements of Changes in Equity respectively. Where control of an entity is obtained during a financial year, its results are included in the consolidated Statements of Comprehensive Income from the date on which control commences. Where control of an entity ceases during a financial year its results are included for that part of the year during which control existed. The financial statements of the controlled life insurance entity, comprising policyholders funds and shareholder s funds, are included in the consolidated financial report on a line by line basis. Other categories of assets and liabilities of the Consolidated Entity are an aggregation of the non-life and life insurance assets and liabilities. Other assets include non-life insurance operating assets measured at historical cost and fair value (as applicable) and life insurance operating assets measured at fair value. (ii) Associates Associates are all entities over which the Consolidated Entity has significant influence but not control or joint control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for in the consolidated financial statements using the equity method of accounting, after initially being recognised at cost. The Consolidated entity s share of its associates post-acquisition profits or losses is recognised in the Statement of Comprehensive Income, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Consolidated Entity s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured long-term receivables, the Consolidated Entity does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. 12

14 1. Summary of significant accounting policies (continued) (b) Principles of life insurance and investment contracts and general insurance contracts The accounting treatment of certain transactions in this financial report varies depending on the nature of the contract underlying the transactions. The three major contract classifications relevant to the Consolidated Entity are life insurance contracts, life investment contracts and general insurance contracts. Life insurance and investment contracts The life insurance operations of ZAL are conducted within separate funds as required by the Life Insurance Act 1995 ( the Life Act ) and are reported in aggregate with the shareholders fund in the Statement of Comprehensive Income, Balance Sheets, Cash Flow Statements and Statements of Changes in Equity of the Consolidated Entity. The life insurance operations of the Consolidated Entity comprise the selling and administration of life insurance and life investment contracts. Life insurance contracts involve the acceptance of significant insurance risk. Insurance risk is defined as significant if and only if, an insured event could cause an insurer to pay significant additional benefits in any scenario, excluding scenarios that lack commercial substance (i.e. have no discernible effect on the economics of the transaction). In addition, there are some policies that are similar to investment contracts (as defined below) but the timing and vesting of the profit attributable to the policyholders is at the discretion of ZAL. These policies are referred to as having discretionary participating features. When any such contracts are issued by a registered life insurance entity, and administered through separate Life statutory funds in accordance with the requirements of the Life Act, the underlying contracts are treated as life insurance contracts. Insurance contracts include those where the insured benefit is payable on the occurrence of a specified event such as death, injury or disability caused by accident or illness. The insured benefit is either not linked or only partly linked to the market value of the investments held by ZAL, and the financial risks are substantially borne by ZAL. Products sold that do not meet the definition of a life insurance contract, and are regulated under the Life Act, are classified as life investment contracts. Life investment contracts include investment-linked contracts where the benefit amount is directly linked to the market value of the investments held in the particular investment-linked fund. While the underlying assets are registered in the name of ZAL and the investment-linked policy owner has no direct access to the specific assets, the contractual arrangements are such that the investment-linked policy owner bears the risks and rewards of the fund s investment performance. ZAL derives fee income from the administration of investment-linked policies and funds. Policy contracts that include both investment and insurance elements are separated into these two elements and reported accordingly. Non-life insurance contracts The general insurance operations of Zurich Australian Insurance Limited (ZAIL) comprise the underwriting of various classes of direct and reinsurance contracts. These contracts transfer significant insurance risk by agreeing to compensate the insured on the occurrence of a specified insured event, such as damage to property or the crystallisation of a third party liability (or the reinsurance thereof), within a given timeframe. These contracts are defined as general insurance contracts. (c) Insurance premium and related revenue Non-life insurance contracts Direct and inwards reinsurance premium comprises amounts charged to the policyholders or other insurers, including fire service levies in Australia, but excluding stamp duties, Goods and Services Tax (GST), fire service levies in New Zealand and other amounts collected on behalf of third parties. Inwards reinsurance is insurance contracts entered into by ZAIL under which the contract holder is another insurer. The earned portion of premiums received and receivable, including bound but not incepted and unclosed business, is recognised as revenue. Premium revenue is treated as earned from the date of attachment of risk. Premiums on unclosed business are brought to account by reference to the previous year s premium processing delays, with due allowance for any changes in the pattern of new business and renewals. 13

15 1. Summary of significant accounting policies (continued) (c) Insurance premium and related revenue (continued) The pattern of recognition of income over the policy or indemnity periods is based on time, which closely approximates the pattern of risks underwritten. The proportion of premiums received and receivable not earned in the Statement of Comprehensive Income at the reporting date is recognised in the Balance Sheets as an unearned premium liability. The unearned portion of commissions and other acquisition costs are also deferred and shown as deferred acquisition costs in the Balance Sheets. Life Insurance Contracts Premium revenue is earned on life insurance contracts. Premiums with no due date are recognised as revenue on a cash received basis. Premiums with a regular due date are recognised as revenue on an accruals basis. Unpaid premiums are only recognised as revenue during the days of grace or where secured by the surrender value of the policy and are included as Receivables in the Balance Sheets. Premiums due after but received before the end of the financial year are shown as Payables in the Balance Sheets. Life Investment Contracts On-going fees for investment management services are recognised as revenue as the services are provided. Entry fees charged to the client on inception are deferred as Deferred Origination Fees (DOF) liability on the Balance Sheets and then earned over the period that the services are provided. (d) Fee and other revenue Fees are charged to customers in connection with investment contracts and other financial services contracts. Revenue is recognised at the time services are provided. In some cases services are provided at the inception of the contract while other services are performed over the life of the contract. (e) Dividend and interest income Interest income is recognised in the Statement of Comprehensive Income using the effective interest rate method. Dividends are recognised when the company obtains control of the right to receive the revenue. This applies even if they are paid out of pre-acquisition profits. However, the investment may need to be tested for impairment as a consequence, refer to Note 1(y). (f) Insurance claims and related expenses Non-life Insurance Contracts Claims expense represents payment for claims (and claims related expenses) and the movement in outstanding claims liabilities. Life Insurance Contracts Claims incurred relate to life insurance contracts (providing services and bearing risks including income protection business) and are treated as expenses. Claims are recognised when the liability to the policyholder under the policy contract has been established, or upon notification of the insured event depending on the type of claim. Surrenders are recognised when the policyholder formally notifies of their intention to end the policy previously contracted to. Life Investment Contracts There is no claims expense in respect of life investment contracts. Surrenders and withdrawals which relate to life investment contracts are treated as a movement in life investment contract liabilities. Surrenders are recognised when the policyholder formally notifies of their intention to end the policy previously contracted to. (g) Outwards reinsurance expense Amounts paid to reinsurers under insurance contracts held by the Consolidated Entity are recorded as outwards reinsurance expense and are recognised in the Statement of Comprehensive Income from the attachment date over the period of indemnity of the reinsurance contract in accordance with the expected pattern of the incidence of the risk ceded. Accordingly, a portion of outwards reinsurance expense is treated as a prepayment and presented as deferred outward reinsurance expense on the balance sheet as at reporting date. 14

16 1. Summary of significant accounting policies (continued) (h) Basis of expense apportionment life insurance Expenses in ZAL are allocated to statutory fund, class, category of business, and between insurance contracts and investment contracts based on the fees incurred under a service agreement between ZAL and the Company. The fees within the service agreement are based on the results of an activity based costing exercise which allocates expenses across product groups and functions. Expenses are allocated directly where possible, or are apportioned using business drivers and statistics such as policy counts, annual premiums, funds under management and claim payments. The expense apportionments are carried out in accordance with Division 2 of Part 6 of the Life Insurance Act. Apportionment between policy acquisition, policy maintenance and investment management expenses has been made in line with principles set out in APRA Prudential Standard LPS 1.04 Valuation of Policy Liabilities. (i) Borrowings and finance costs Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Borrowings are classified as current liabilities unless the Consolidated Entity has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. Finance costs are recognised as expenses in the period in which they are incurred. Borrowing costs comprise interest on bank overdrafts. (j) Employee benefits Wages and Salaries, Annual Leave and Sick Leave Liabilities for wages and salaries, annual leave and sick leave are recognised, and are measured at the amount expected to be paid when the liabilities are settled. Long Service Leave A liability for long service leave is recognised, and is measured at the present value of expected future payments to be made in respect of services provided by employees up to the reporting date. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Retirement benefit obligations All employees of the Consolidated Entity are entitled to benefits from the Consolidated Entity s superannuation fund on retirement, disability or death. The Consolidated Entity has two superannuation funds, one which is a defined benefit fund (now closed to new members) and another fund which is a defined contribution fund. The defined benefit fund provides pensions and lump sum benefits based on years of service and final average salary. A liability or asset in respect of the defined benefit superannuation fund is recognised in the Balance Sheets, and is measured as the present value of the defined benefit obligation at the reporting date plus unrecognised actuarial gains (less unrecognised actuarial losses) less the fair value of the superannuation fund s assets at that date and any unrecognised past service cost. The present value of the defined benefit obligation is based on expected future payments which arise from membership of the fund to the reporting date, calculated annually by an independent actuary using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service, and mortality and morbidity rates. Expected future payments are discounted using market yields at the reporting date on national government bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to the Statement of Comprehensive Income. Contributions to the defined contribution fund are recognised as an expense as they become payable. 15

17 1. Summary of significant accounting policies (continued) (j) Employee benefits (continued) Share-based payments Share-based compensation benefits are provided to certain executive employees of the Company via the Zurich Financial Services Global Long Term Performance Share Plan and the Zurich Financial Services Global Share Option Plan which are administered globally by a central share holding vehicle. The Company purchases the right to shares from this holding vehicle on behalf of executives who participate in the plans for an amount approximating their fair value. This purchase by the Company is recorded as a prepayment asset which is amortised over the vesting period, typically a 3 year period, and reflects the cost to the Company of the share-based benefits. When shares vest with the participants, the central share vehicle transfers those shares directly to the participants. (k) Leases In the Consolidated Entity, for leases entered into, all of the risks and benefits of ownership are effectively retained by the lessor and, therefore, these leases are classified as operating leases. Operating lease payments are charged to the Statement of Comprehensive Income over the period of expected benefit. (l) Income tax The income tax expense or benefit for the period is the tax payable or receivable on the current period s taxable income based on the applicable income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements, and to unused tax losses. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the company s subsidiaries and associates operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred tax assets and liabilities are recognised using the liability method for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities are settled, based on those tax rates which are enacted or substantively enacted. The relevant tax rates are applied to the cumulative amounts of deductible and taxable temporary differences to measure the deferred tax asset or liability. An exception is made for certain temporary differences arising from the initial recognition of an asset or liability. No deferred tax asset or liability is recognised in relation to these temporary differences if they arose in a transaction, other than a business combination, that at the time of the transaction did not affect either accounting profit or taxable profit or loss. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in controlled entities where the Parent Entity is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity. 16

18 1. Summary of significant accounting policies (continued) (l) Income tax (continued) Tax consolidation legislation The Consolidated Entity is part of a tax Consolidated group, of which the Company is the head entity, and which implemented the tax consolidation legislation on 1 October On 1 January 2012, the Company replaced ZCM Asia Holdings Pty Limited as the head entity of the tax consolidated group, following the sale of ZCM Asia Holdings Pty Limited to the Company. The head tax entity, the Company and the entities in the tax Consolidated group (including the Consolidated Entity) continue to account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax Consolidated group continues to be a stand-alone taxpayer in its own right. In addition to its own current and deferred tax amounts, the Company also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from entities in the tax Consolidated group. Assets or liabilities arising under the tax funding agreement with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the group. Any difference between the amounts assumed and amounts receivable or payable under the tax funding agreement are recognised as a contribution to (or distribution from) tax Consolidated entities. For further details see income tax Note 9. (m) Goods and Services Tax (GST) Revenues, expenses and assets, liabilities are disclosed net of the amount of GST, except where the amount of GST incurred is not recoverable from the Australian Tax Office (ATO) and New Zealand Inland Revenue (IRD). In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense. Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the ATO and IRD is included as a current asset or current liability in the Balance Sheets. Cash flows are included in the Cash Flow Statement on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the ATO and IRD are classified as operating cash flows. (n) Fire brigade and other statutory charges A liability for fire brigade and other statutory charges is recognised on business written to the balance date. Levies and charges payable are expensed on the same basis as the recognition of premium revenue, with the portion relating to unearned premium being recorded as a prepayment. (o) Foreign currency translation The financial statements of the Consolidated Entity are presented in Australian dollars, which is the functional and presentation currency. Foreign currency transactions are initially translated into Australian currency at the rate of exchange at the date of the transaction. At balance date, amounts payable and receivable in foreign currencies are translated into Australian currency at rates of exchange current at that date. Resulting exchange differences are brought to account in determining the profit or loss for the year. The results and financial position of foreign operations are translated into the presentation currency as follows: Assets and liabilities at closing rate at balance date. Income and expenses at average exchange rate. All resulting exchange gains are recognized as a separate component of equity. 17

19 1. Summary of significant accounting policies (continued) (p) Cash and cash equivalents Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash which are subject to an insignificant risk of change in value, and bank overdrafts. Bank overdrafts are shown within interest bearing liabilities in liabilities on the balance sheet. (q) Investment assets backing insurance liabilities The assets of the controlled general insurance company have been determined as being assets backing policy liabilities and are therefore valued at fair value through profit or loss. The assets within the statutory funds of the controlled life insurance company have been determined as backing policy liabilities and are therefore recorded at fair value through profit or loss. The assets held within the shareholder fund do not back policy liabilities and are valued at fair value through equity. It is considered that the use of fair value through profit or loss results in more relevant information because it eliminates or significantly reduces a measurement or recognition inconsistency. Investments in associates held by ZAL are regarded as being assets backing policy liabilities and are recorded in the consolidated financial statements at fair value through profit or loss. Investments in associates that do not back insurance liabilities are accounted for in the parent entity financial statements using the cost method and in the consolidated financial statements using the equity method of accounting, after initially being recognised at cost. (r) Financial assets The Consolidated Entity classifies its financial assets into the following categories: Financial assets at fair value through profit or loss, Financial assets at fair value through equity and Loans and receivables. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition. The Consolidated Entity assesses at each balance date whether there is objective evidence that a financial asset or group of financial assets is impaired. Financial assets at fair value Purchases and sales of investments are recognised on trade-date the date on which the Consolidated Entity commits to purchase or sell the asset. Financial assets are initially recognised at cost. These assets are subsequently measured at fair value. Realised and unrealised gains and losses arising from changes in the fair value of the financial assets at fair value through profit or loss category are included in the Statement of Comprehensive Income in the period in which they arise. The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Consolidated Entity establishes fair value by using valuation techniques. These include reference to the fair values of recent arm s length transactions, involving the same instruments or other instruments that are substantially the same, discounted cash flow analysis, and option pricing models refined to reflect the issuer s specific circumstances. Financial assets are derecognised when the right to receive cash flows from the financial assets have expired or have been transferred and the Consolidated Entity has transferred substantially all the risks and rewards of ownership. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Consolidated Entity provides money, goods or services directly to a debtor with no intention of selling the receivable. Loans and receivables are included in receivables in the Balance Sheets (Note 11). 18

20 1. Summary of significant accounting policies (continued) (r) Financial assets (continued) Receivables are carried at cost which is the best estimate of fair value, as they are usually settled within twelve months and subsequently subject to impairment testing. Impairment testing is based on the collectibility of receivables and is reviewed on an ongoing basis. An impairment charge is recognised when there is objective evidence that the entity will not be able to collect all amounts due according to the original terms of the contracts. The impairment charge is recognised in the Statement of Comprehensive Income. (s) Reinsurance and other recoveries receivable Reinsurance and other recoveries receivable on non-life and life insurance paid claims, reported claims not yet paid, claims incurred but not reported (IBNR), claims incurred but not enough reported and unexpired risk liabilities are recognised as revenue. Non-life insurance recoveries receivable are assessed in a manner similar to the assessment of non-life insurance outstanding claims. Recoveries receivable in relation to long-tail classes are measured as the present value of the expected future receipts, calculated on the same basis as the liability for non-life insurance outstanding claims and life insurance policyholder liabilities to which they relate. (t) Deferred acquisition costs Non-life insurance contracts The fixed and variable costs of acquiring new business, the acquisition costs, include commission, advertising, policy issue and underwriting costs, agency expenses and other sales costs. A portion of acquisition costs relating to unearned premium revenue is deferred and recognised as an asset, where it can be reliably measured and where it is probable that it will give rise to premium revenue that will be recognised in the Statement of Comprehensive Income in future periods. Deferred acquisition costs are measured at the lower of cost and recoverable amount and are amortised in accordance with the earning pattern of the corresponding premium revenue. Life insurance contracts and investment contracts with discretionary participation features The costs incurred in acquiring specific life insurance contracts include advisor fees, commission payments, underwriting costs, application processing costs, relevant advertising costs, and promotion of products and related activities. Life insurance contract acquisition costs are deferred provided that these amounts are recoverable out of future product margins. Losses arising on acquisition are recognised in the Statement of Comprehensive Income in the year in which they occur. The deferred amounts are recognised in the Balance Sheets as a reduction in the life insurance liabilities and are amortised through the Statement of Comprehensive Income over the expected duration of the relevant policies. (u) Deferred origination costs Life Insurance contracts and investment contracts with non discretionary participation features Life investment contracts issued result in commissions and payments to external service and advice providers. Acquisition costs arising in relation to investment contract business can only be deferred to the extent they are incremental and directly attributable to securing the contracts. Non-incremental costs are recognised and expensed as they occur. The deferred portion of the expenses is recognised as Deferred Origination Cost (DOC) asset. The DOC asset is recognised in the Balance Sheets as an intangible asset and is amortised over a period of seven years. 19

21 1. Summary of significant accounting policies (continued) (v) Property, plant and equipment Owner-occupied land and buildings in the Consolidated Entity are shown at historical cost less depreciation. Land and Buildings are initially recorded at cost, plus transaction costs. Buildings are subsequently depreciated on a straight line basis so as to write off the net cost of each building over the expected useful life to the Consolidated Entity. Land is not depreciated. Subsequent costs are included in the asset s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Consolidated Entity and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the Statement of Comprehensive Income during the financial period in which they are incurred. Plant and equipment is initially recorded at cost, plus transaction costs. It is subsequently depreciated on a straight line or reducing balance basis so as to write off the net cost of each item over its expected useful life to the Consolidated Entity. The written down amount will usually approximate fair value. Estimates of remaining useful lives are made on a regular basis for all assets, with annual reassessments for major items. An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is greater than its estimated recoverable amount (Note 1(y)). The expected useful lives are as follows: Buildings: Plant and equipment: 25 years 3 15 years Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the Statements of Comprehensive Income. (w) Intangible assets Brand Acquired intangible assets, such as the Associated Marine Insurers Agents Pty Limited (AMIA) brand, which are not recognised by the controlled entities, are recognised at deemed cost being fair value on initial recognition. The AMIA brand is regarded as an indefinite useful life intangible asset (refer Note 20). Software and systems Costs incurred in developing products or systems and costs incurred in acquiring software and licenses that will contribute to future period financial benefits through revenue generation and cost reduction are capitalised to software and systems. Costs capitalised include external direct costs of materials and service, direct payroll and payroll related costs of employees time spent on the project. Amortisation is calculated on straight-line basis over periods generally ranging from 3 to 5 years. Software development Software development costs which are recognised as intangible assets include only those costs attributable to the development phase and are only recognised following completion of technical feasibility and where the Consolidated Entity has an intention and ability to use the asset to generate probable future economic benefits. Other development expenditure which does not satisfy these criteria is recognised as expenses when incurred. Software development costs recognised as intangible assets are amortised over their useful lives which does not exceed 5 years. The carrying value of intangible assets is assessed according to the accounting policy for impairment of assets as set out in accounting policy Note 1(y). 20

22 1. Summary of significant accounting policies (continued) (x) Acquisitions of assets The purchase method of accounting is used for all acquisitions of assets regardless of whether equity instruments or other assets are acquired. Cost is measured as the fair value of the assets given up, shares issued or liabilities undertaken at the date of acquisition plus incidental costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Consolidated Entity s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the Statement of Comprehensive Income, but only after a reassessment of the identification and measurement of the net assets acquired. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of the acquisition. The discount rate used is the incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions. (y) Impairment of assets Financial assets measured at fair value, where changes in value are reflected in the Statement of Comprehensive Income, are not subject to impairment testing. Investments in associates and other assets such as property, plant and equipment and intangibles are subject to impairment testing where at each balance date the Consolidated Entity assesses whether there is objective evidence that these assets are impaired. Assets that have an indefinite useful life, such as identifiable intangible assets, are not subject to amortisation and are tested at least annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the carrying amount of an asset exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value (including realisation costs) and its value in use. (z) Payables These amounts represent liabilities for goods and services provided to the Consolidated Entity prior to the end of the financial year and which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition. (aa) Provisions Provisions are recognised when the Consolidated Entity has a present legal or constructive obligation as a result of past events; it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount can be reliably estimated. Provisions are not recognised for future operating losses. (bb) Dividends Provision is made for the amount of any dividend declared on or before the end of the financial year but not distributed at balance date. (cc) Outstanding claims Non-life Insurance The liability for outstanding claims is measured as the central estimate of the present value of expected future payments against claims incurred at the reporting date under general insurance contracts issued by the controlled entity ZAIL, with an additional risk margin to allow for the inherent uncertainty in the central estimate. The expected future payments include those in relation to claims reported but not yet paid, claims incurred but not reported (IBNR), claims incurred but not enough reported (IBNER) and anticipated claims handling costs. 21

23 1. Summary of significant accounting policies (continued) (cc) Outstanding claims (continued) Claims handling costs include costs that can be associated directly with individual claims, such as legal and other professional fees, and costs that can only be indirectly associated with individual claims, such as claims administration costs. The expected future payments are discounted to present value using a risk free rate. (dd) Policy liabilities life insurance Policy liabilities consist of life insurance contract liabilities and life investment contract liabilities. Life insurance contract liabilities (including investment contracts with discretionary participation features) The value of life insurance contract liabilities is calculated using the Margin on Services methodology. Under this methodology, planned profit margins and an estimate of future liabilities are calculated separately for each related product group at each reporting date. Profit margins are released over each reporting period in line with the services that have been provided. The balance of the planned profits is deferred by including them in the value of policy liabilities. Further details of the actuarial assumptions used in these calculations are set out in Note 3. Life investment contract liabilities (without discretionary participation features) Life investment contract liabilities are valued at fair value, which is based on the account balance of the investment contracts, subject to a minimum of the current surrender value. (ee) Unexpired risk liabilities Non-life insurance contracts At each reporting date ZAIL assesses whether the unearned premium liability is sufficient to cover all expected future cash flows relating to future claims against current insurance contracts. This assessment is referred to as the liability adequacy test and is performed separately for each group of contracts subject to broadly similar risks and managed together as a single portfolio. If the present value of the expected future cash flows relating to future claims plus the additional risk margin to reflect the inherent uncertainty in the central estimate exceeds the unearned premium liability less related intangible assets and related deferred acquisition costs then the unearned premium liability is deemed to be deficient. ZAIL applies a risk margin to achieve the same probability of sufficiency for future claims as is achieved by the estimate of the outstanding claims liability, see Note 1(cc). A write down to recoverable amount is recognised when the present value of expected future claims (including settlement costs) in relation to business written to the reporting date exceeds related unearned premium revenue. The entire deficiency, net of reinsurance, is recognised immediately in the Statement of Comprehensive Income. The deficiency is recognised first by writing down any related intangible assets and then related deferred acquisition costs, with any excess being recorded in the Balance Sheets as an unexpired risk liability. (ff) Rounding of amounts The Company is a kind referred to in Class Order 98/0100 issued by the Australian Securities and Investments Commission, relating to the rounding off of amounts in the financial report. Amounts in the financial report have been rounded off to the nearest thousand dollars in accordance with that Class Order. (gg) Comparative information Where necessary, the amounts shown for the previous year have been reclassified to facilitate comparison. 22

24 2. Critical accounting judgements and estimates The Consolidated Entity makes estimates and assumptions in respect of certain key assets and liabilities. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The key areas in which critical estimates are applied are described below. It has been determined that no critical accounting judgements have been made in the year. (a) The ultimate liability arising from claims made under non-life insurance contracts in ZAIL Provision is made at the year end for the estimated cost of claims incurred but not settled at the balance sheet date, including the cost of claims incurred but not yet reported to ZAIL. The estimated cost of claims includes direct expenses to be incurred in settling claims gross of the expected value of salvage and other recoveries. ZAIL takes all reasonable steps to ensure that it has appropriate information regarding its claims exposures. However, given the uncertainty in establishing claims provisions, it is likely that the final outcome will prove to be different from the original liability established. The estimation of claims incurred but not reported (IBNR) is generally subject to a greater degree of uncertainty than the estimation of the cost of settling claims already notified to ZAIL, where information about the claim event is generally available. IBNR claims may often not be apparent to the insured until many years after the events giving rise to the claims has happened. In addition, the estimation of claims incurred but not enough reported ( IBNER ) is also the subject of uncertainty. The long-tailed classes of business will typically display greater variations between initial estimates and final outcomes because there is a greater degree of difficulty in estimating IBNR and IBNER reserves. For the shorttailed classes, claims are typically reported soon after the claim event, and hence tend to display lower levels of volatility. In calculating the estimated cost of unpaid claims ZAIL uses a variety of estimation techniques, generally based upon statistical analysis of historical experience, which assumes that the development pattern of the current claims will be consistent with past experience. Allowance is made, however, for changes or uncertainties which may create distortions in the underlying statistics or which might cause the cost of unsettled claims to increase or reduce when compared with the cost of previously settled claims including: changes in ZAIL s processes which might accelerate or slow down the development and/or recording of paid or incurred claims, compared with the statistics from previous periods changes in the legal environment the effects of inflation (both economic and superimposed) changes in the mix of business the impact of large losses movements in industry benchmarks medical and technological developments changes in policyholder behaviour A component of these estimation techniques is usually the estimation of the cost of notified but not paid claims. In estimating the cost of these, ZAIL has regard to the claim circumstance as reported, any information available from loss adjusters and information on the cost of settling claims with similar characteristics in previous periods. Large claims impacting each relevant business class are generally assessed separately, being measured on a case by case basis or projected separately in order to allow for the effect of the development and incidence of these large claims. Where possible ZAIL adopts multiple techniques to estimate the required level of provisions. This assists in giving greater understanding of the trends inherent in the data being projected. The projections given by the various methodologies also assist in setting the range of possible outcomes. The most appropriate estimation technique is selected, taking into account the characteristics of the business class and the extent of the development of each accident year. 23

25 2. Critical accounting judgements and estimates (continued) (a) The ultimate liability arising from claims made under non-life insurance contracts in ZAIL (continued) Provisions are calculated gross of any reinsurance recoveries. A separate estimate is made of the amounts that will be recoverable from reinsurers based upon the gross provisions. Details of specific assumptions used in deriving the outstanding claims liability at year end are detailed in Note 3. (b) Life insurance contract liabilities in ZAL Life insurance contract liabilities are computed using statistical or mathematical methods. The computations are made by suitably qualified personnel on the basis of recognised actuarial methods, with due regard to relevant actuarial principles. The methodology takes into account the risks and uncertainties of the particular classes of life insurance business written. Deferred acquisition costs are connected with the measurement basis of life insurance contact liabilities and are equally sensitive to the factors that are considered in the liability measurement. The deferred acquisition costs are included within the life insurance liabilities. The key factors that affect the estimation of these liabilities and related assets are: (a) the cost of providing benefits and administering these insurance contracts; (b) mortality and morbidity experience on life insurance products, including enhancements to policyholder benefits; (c) discontinuance experience, which affects ZAL s ability to recover the cost of acquiring new business over the lives of the contracts; and (d) the amounts credited to policyholders accounts compared to the returns on invested assets through asset-liability management and strategic and tactical asset allocation. In addition, factors such as regulation, competition, interest rates, taxes, securities market conditions and general economic conditions affect the level of these liabilities. In some contracts, ZAL shares experience on mortality, morbidity, persistency and investment results with its customers, which can offset the impact of these factors on profitability from those products. Details of specific actuarial policies and methods are set out in Note 3. (c) Assets arising from reinsurance contracts Assets arising from reinsurance contracts are also computed using the above methods. In addition, the recoverability of these assets is assessed on a periodic basis to ensure that the balance is reflective of the amounts that will ultimately be received, taking into consideration factors such as counterparty and credit risk. Impairment is recognised where there is objective evidence that the Consolidated Entity may not receive amounts due to it and these amounts can be reliably measured. (d) Recognition of deferred tax assets in ZAL Deferred tax assets (DTA) for deductible temporary differences and tax losses carried forward are recognised where future income is expected to become available to absorb the deductible temporary differences and losses not previously used. Due to the recent significant falls in the investment markets, substantial realised and unrealised losses have arisen within the companies investments. Although a recovery is expected, the timing is uncertain. For superannuation business, if policyholders redeem their policy before sufficient gains have occurred to offset past losses, the potential deferred tax asset on the related investments will not be recoverable. ZAL has been monitoring the impact of the global downturn on policyholder investment performance and the expected timing of redemptions from the superannuation class of business and has implemented a capping of deferred tax asset for unit pricing and financial reporting. For the superannuation class of business the value of the deferred tax assets recognised has been limited to approximately 1.80% (2011: 2.55%) of the value of funds under management. The capping of the DTA results a reduction of approximately $28.4 million (2011: $39.2 million) in the value of DTA as at. DTAs on investment losses on other classes of business have not been capped as ZAL has judged that sufficient gains will become available to recover these assets. 24

26 3. Actuarial assumptions and methods (a) Non-life insurance ZAIL writes both short-tailed and long-tailed business. The process for determining the value of outstanding claims liabilities including the cost of claims handling is described below. Case estimates are established by individual claims officers. The provision for large losses is reviewed by senior claims managers. The ultimate undiscounted cost of claims by year of accident and line of business is then established by actuaries using a variety of statistical bases at a line of business level. IBNR/IBNER is then derived by subtracting from the ultimate cost, the amount of paid claims and case reserves. The estimation of IBNR/IBNER is subject to a greater degree of uncertainty than the estimate of the cost of settling claims already notified and the estimate of the ultimate cost of long-tail lines is generally more uncertain than the estimate for short-tail lines where claims are often reported and settled within one year of occurrence. The methods used to establish the ultimate cost of claims include the following: Projecting ultimate numbers of claims and multiplying by projected ultimate average cost Projecting ultimate claim payments Projecting ultimate incurred claim amounts Applying plan or forecast loss ratios to earned premiums Claims inflation is incorporated into the resulting projected payments, to allow for both general economic inflation (generally wage inflation) as well as any superimposed inflation detected in the modelling of payments experience. Superimposed inflation arises from non-economic factors such as legal developments. Future wage inflation is based on current levels and economic indicators. Future superimposed inflation is assessed based on current trends and industry information. Projected reinsurance assets are derived using similar methods or applying net to gross ratios. Projected payments are discounted to allow for the time value of money, based on current Commonwealth Government interest rates. All these methods rely on future development being consistent with historical development and are thus subject to uncertainty surrounding changes to these patterns from whatever cause. In addition, there is uncertainty arising from the underlying assumptions for future wage inflation and superimposed inflation and of discount rates. Significant events, such as catastrophes, close to the balance sheet date also increase the level of uncertainty. The presence of asbestos claims in the portfolio and the potential emergence of new types of latent claim also increase the potential variability of the outcome. For these reasons a risk margin is added to the central estimate established above. The establishment of the risk margin takes into account the variability of the outcome of each line of business and the diversification benefit of writing a number of lines of business. The Board and Management have decided that the level of risk margin shall be established to provide a probability of adequacy of 85% (2011: 85%). 25

27 3. Actuarial assumptions and methods (continued) (a) Non-life insurance (continued) (i) Selected key variables The following indicators reflect the key variables that have been used in determining the outstanding claims liabilities Long-tail Short-tail Long-tail Short-tail Average weighted term to settlement 4.5 years 0.4 years 4.8 years years Discount rate 3.02% 2.77% 3.46% N/A Wage inflation 3.50% N/A 4.00% N/A Superimposed inflation 0 to 4.5% N/A 0 to 4.5% N/A 1 The 2011 numbers have been restated to reflect the correct disclosure. (ii) Sensitivity analysis non-life insurance contracts ZAIL conducts sensitivity analysis to quantify the exposure to risk of changes in the key underlying variables. The valuations included in the reported results are calculated using certain assumptions about these variables as disclosed above. The movement in any key variable will impact the performance and equity of ZAIL. The tables below give an analysis of the sensitivity of the profit/(loss) and equity, to changes in these assumptions both gross and net of reinsurance. Impact of changes in key variables December 2012 Profit - ZAIL Gross of reinsurance Net of reinsurance Equity $'000 $'000 $'000 Recognised amounts per the financial statements 226, , ,256 Movement Variable in variable Adjusted amounts Long-tail Average weighted term to settlement years , , , , , ,191 Discount rate 1% 255, , ,414-1% 193,921 97, ,692 Wage inflation and superimposed inflation rates 1% 193,207 97, ,229-1% 256, , ,106 Financial assets Shift in Yield Curve 1% 196,663 87, ,646-1% 255, , ,865 Equity Prices 20% 236, , ,370-20% 216, , ,142 26

28 3. Actuarial assumptions and methods (continued) (a) Non-life insurance (continued) (ii) Sensitivity analysis non-life insurance contracts (continued) December 2011 Profit/(loss) - ZAIL Gross of reinsurance Net of reinsurance Equity $'000 $'000 $'000 Recognised amounts per the financial statements (686,004) ,250 Movement Variable in variable Adjusted amounts Long-tail 0.5 (670,485) 8, ,680 Average weighted term to settlement years -0.5 (700,010) (10,802) 590,315 1% (660,976) 14, ,609 Discount rate -1% (712,462) (18,799) 582,318 1% (713,454) (19,254) 581,863 Wage inflation and superimposed inflation rates -1% (660,079) 15, ,570 Financial assets 1% (711,813) (25,677) 575,440 Shift in Yield Curve -1% (660,195) 25, ,058 20% (679,129) 7, ,124 Equity Prices -20% (692,879) (6,743) 594,374 27

29 3. Actuarial assumptions and methods (continued) (b) Life insurance The effective date of the actuarial report on policy liabilities and solvency reserves is. The Appointed Actuary, Greg Della, FIAA, is satisfied as to the accuracy of the data upon which policy liabilities have been determined. The amount of policy liabilities has been determined in accordance with methods and assumptions disclosed in this financial report, with the applicable accounting standards and with the requirements of the Life Insurance Act Policy liabilities comprise life insurance contract liabilities and life investment contract liabilities. The nature of the terms of the life insurance contracts written is such that certain external variables can be identified on which related cash flows for claim payments depend. The tables below provide an overview of the key variables upon which the amount of related cash flows are dependent. Type of contract Detail of contract workings Nature of compensation for claims Key variables that affect the timing and uncertainty of future cash flows Non-participating life insurance contracts with fixed terms (Term, Total and Permanent Disablement ( TPD ), Trauma and Disability Income) Benefits paid on death or ill health that are fixed and not at the discretion of the issuer. Benefits, defined by the insurance contract, are determined by the contract and are not directly affected by the performance of underlying assets or the performance of the contracts as a whole. Mortality Morbidity Interest rates Lapses Expenses Dormancy Life insurance contracts with discretionary participating benefits (endowment and whole of life) These policies include a clearly defined initial guaranteed sum assured which is payable on death. Regular bonuses are also added annually at the discretion of ZAL and these are also payable on death or maturity where applicable. Once declared, bonuses cannot be removed. Benefits arising from the discretionary participation feature are based on the performance of a specified pool of contracts or a specified type of contract. Mortality Morbidity Market earning rates Interest rates Lapses Expenses (i) Policy liabilities These amounts, together with future premiums and investment earnings, are required to: a. meet the payment of future benefits and expenses; and b. provide for future profits. The life insurance contract liabilities have been calculated in accordance with the requirements of APRA Prudential Standard LPS 1.04 Valuation of Policy Liabilities under section 114 of the Life Insurance Act The Actuarial Standard requires the life insurance contract liabilities to be calculated in a way which allows for the systematic release of planned margins as services are provided to policyholders and premiums are received. 28

30 3. Actuarial assumptions and methods (continued) (b) Life insurance (continued) (i) Policy liabilities (continued) The life investment contract liabilities are the financial instrument element of the life investment contracts. These are valued using a fair value approach. The investment contracts give rise to a further liability, the deferred origination fees (DOF), and an asset, the deferred origination costs (DOC), which are explained in Note 1. These are considered to be separate assets and liabilities under the relevant accounting standards. Under the APRA Prudential Standard LPS 1.04 Valuation of Policy Liabilities the investment contract liability includes the DOC and DOF. The methods and profit carriers for particular policy types are as follows: Business Type Method (projection or other) Profit Carrier(s) Individual Non-participating Conventional Projection Premiums Lump Sum Risk Income Stream Risk Projection (Inforce Business) Accumulation (New Business) Projection (Inforce Business) Accumulation (New Business) Premiums Premiums Lifetime Annuity Projection Annuity Payments Group Non-participating Lump Sum Risk Accumulation n/a Group Salary Continuance Accumulation n/a Individual Participating Conventional Participating Value Supporting Assets (VSA) Cost of Bonus The methods for valuing insurance contract liabilities vary as follows: The projection method determines a best estimate value of the liabilities being the net present value of the expected future payments and receipts under the policy, based on obligations at the reporting date. Added to that is the best estimate value of the expected future profits to emerge under the policies to form the Policy Liability. Best estimate assumptions are neither deliberately overstated nor deliberately understated. 29

31 3. Actuarial assumptions and methods (continued) (b) Life insurance (continued) (i) Policy liabilities (continued) The Value of Supporting Assets (VSA) method is a form of projection method that is used where the policies include benefits that provide a discretionary entitlement to share in the investment experience of assets backing them. Part (ii) below explains how the key assumptions used in the calculations were derived, any significant differences by type of business or class of business and any changes in the assumptions from those of the previous year. There were no significant changes in the methodology used to set the assumptions from last year. (ii) Actuarial assumptions a. Discount Rates The discount rates assumed for contracts that are contractually linked to the performance of the assets held are derived from the expected long-term average rates of return for the relevant asset pools based on the benchmark asset mix in line with the documented investment policy for each pool. The earnings assumption for fixed interest is based on the 5 year Commonwealth bond rate. Earnings assumptions for other asset classes take into account the expected future long-term margins over or under the fixed interest rate. For contracts which are not contractually linked to the performance of the assets held, a risk free discount rate based on current observable, objective rates that relate to the nature, structure and term of the future obligations has been used. No shallow market allowance of has been added to the Commonwealth bond rates in determining the risk free rates (2011: No shallow market allowance added). Discount rates assumed (before tax), range from 2.63% p.a. to 4.30% p.a. (2011: 2.89% p.a. to 5.32% p.a). b. Bonus and Interest Crediting Rates Ordinary declared Bonus 2.75% p.a. (2011: 3.50% p.a.) Par Interest 5.50% p.a. (2011: 6.75% p.a.) Non Par Interest 4.50% p.a. (2011: 5.00% p.a.) Superannuation declared Bonus 4.25% p.a. (2011: 5.00% p.a.) Par Interest 5.75% p.a. (2011: 7.00% p.a.) Non Par Interest 4.70% p.a. (2011: 5.75% p.a.) The declared bonus rates are for the year ending at the valuation date. Bonus rates applying to different whole of life policies and endowment series will vary according to the respective bonus linkages applying to each series. The declared rate applying to different classes of investment account business will vary according to the respective policy conditions applying under each contract. c. Future Expenses and Indexation Future maintenance expenses per policy have been assumed at service fee levels. The fees within the service agreement are based on the results of an activity based costing exercise which allocates expenses across product groups and functions. Expenses are allocated directly where possible, or are apportioned using business drivers and statistics such as policy counts, annual premiums, funds under management and claim payments. The expense apportionments are carried out in accordance with Division 2 of Part 6 of the Life Insurance Act Future expenses are assumed to increase by 3.5% p.a. (2011: 3.5% p.a.). 30

32 3. Actuarial assumptions and methods (continued) (b) Life insurance (continued) (ii) Actuarial assumptions (continued) c. Future Expenses and Indexation (continued) Future investment expense assumptions at have been assumed to vary depending on the product type from between 0.07% to 0.32% (2011: 0.07% to 0.31%). Benefits and/or premiums under most of the life risk policies are automatically indexed. Assumed future take-up of these indexation options has been based on ZAL s previous experience. d. Inflation The inflation assumption is set taking into account a number of factors including market implied inflation rate, average weekly ordinary time earnings compared to inflation, RBA long-term inflation target and the impact of project expense amortisation. The assumption is set at 3.5% p.a. (2011: 3.5% p.a). e. Future Participating Benefits For participating business, ZAL s policy is to set bonus rates so that over long periods, the returns to policyholders are commensurate with the investment returns achieved on relevant assets, together with other sources of profit arising from this business. Distributions are split between policyholders and shareholders with the valuation allowing for shareholders to share in distributions at the maximum allowable rate of 20%. In applying the policyholders share of distributions to provide bonuses, consideration is given to equity between generations of policyholders and equity between the various classes and sizes of policies in force. Assumed future bonus rates included in policy liabilities are set such that the present value of policy liabilities equates to the present value of assets supporting the business together with assumed investment returns, allowing for the shareholder s right to participate in distributions. Assumed future bonus and interest rates for the major classes of individual participating business are: Ordinary Bonus 0.54% p.a. (2011: 0.65% p.a.) Par Interest 3.87% p.a. (2011: 3.73%p.a.) Superannuation Bonus 2.30% p.a. (2011: 2.09%p.a.) Par Interest 4.02% p.a. (2011: 3.89%p.a.) These future bonus and interest rates make no allowance for future distribution of unvested policyholder benefits. f. Voluntary Discontinuances and Premium Dormancy Discontinuance assumptions were set having regard to analysis of recent Company experience of voluntary discontinuances and premium dormancy. The structure of the individual risk voluntary discontinuance assumption has been revised in 2012 to include calendar-year-based factors. This is to account for expected peak in lapse rate from current observed levels, and expected subsequent improvement from current levels over the long term. The base lapse assumptions with which these factors are applied are still distinguished between age-based and duration-based assumptions. Voluntary discontinuance assumptions are in the range of 4.0% p.a to 38.5% p.a. (2011: 4.0% to 33.5% p.a.). Dormancy assumptions for most business ranged from 4.0% p.a. to 19.0% p.a. (2011: 4.0% p.a. to 17.5% p.a.). g. Surrender Values Future surrender values have been calculated assuming that the approach used at the valuation date remains in place. 31

33 3. Actuarial assumptions and methods (continued) (ii) Life insurance (continued) a. Actuarial assumptions (continued) h. Unit Prices A fair value approach has been used to determine policy liabilities for unit-linked life investment contract business and no assumptions are needed about rates of growth of unit prices. i. Mortality and Morbidity The mortality assumption was based on the IA95-97 rates, after adjusting for expected mortality improvements. The factor applied to the adjusted rates ranged from 70% to 150%, depending on the product type (2011: 75% to 135%). The assumption is set based on an internal analysis of recent mortality experience. Assumed rates vary by age, sex, smoker status and product type. j. Lifetime Annuity Products The mortality assumption for Lifetime Annuities is 100% IM80 / IF80 adjusting for mortality improvements (2011: 100%). k. Disability Morbidity assumptions were based on recent company and Australian industry experience. The incidence rate assumption ranges from 55% to 140% of IAD89-93 depending on sex, occupation and smoker status (2011: 50% to 140%). The recovery rate assumption is 96% of IAD89-93 for males and 80% of the table for females (2011: 88% for males and 70% for females). l. Trauma Incidence The underlying reference table for trauma incidence is based on overseas experience. A percentage assumption is then applied to this table. The assumption is set having regard to an internal analysis of recent Company experience. m. TPD incidence The assumption for TPD incidence is based on an internal analysis of recent TPD experience. n. Taxation and Commission The taxation basis and commission scale assumed are those applying to each class of business as at the valuation date. (iii) Effect of Changes in Actuarial Assumptions from 31 December 2011 to Assumption Category Effect of Changes on Profit Margins $m increase / (decrease) Effect of Changes on Policy Liability $m increase / (decrease) Mortality / Morbidity Discontinuance Rates (15.2) 0 Maintenance Expenses (36.2) 0 Other Assumptions (3.7) 0 32

34 3. Actuarial assumptions and methods (continued) (b) Life insurance (continued) (iv) Sensitivity analysis ZAL conducts sensitivity analysis to quantify the exposure to risk of changes in the key underlying variables such as interest rate, equity prices, mortality, morbidity, discontinuance rates and inflation. The valuations included in the reported results and ZAL s best estimate of future performance is calculated using certain assumptions about these variables. The movement in any key variable will impact the performance and net assets of ZAL and as such represents a risk. The table below illustrates how changes in the key assumptions and assumed experience would impact the profit and equity of ZAL for the following years. Impact of change in variable Percentage Change in Variable Gross of Reinsurance Profit/(Loss) and equity $m Life Insurance Contract Liability $m Net of Reinsurance Profit/(Loss) and equity $m Life Insurance Contract Liability $m December 2012 Assumption Worsening of mortality 10% Worsening of morbidity 10% (5.8) 8.2 (5.8) 8.2 Increase of discontinuance rate 10% (0.2) 0.3 (0.2) 0.3 Increase in interest rates 1% (20.5) 5.9 (27.7) 16.2 Decrease in interest rates 1% 21.4 (7.3) 30.5 (20.3) Increase in equity prices 10% Decrease in equity prices 10% (0.1) (2.8) (0.1) (2.8) December 2011 Assumption Worsening of mortality 10% Worsening of morbidity 10% (3.2) 4.6 (3.2) 4.6 Increase of discontinuance rate 10% Increase in interest rates 1% (16.5) 3.7 (22.9) 12.8 Decrease in interest rates 1% 17.4 (4.9) 25.3 (16.2) Increase in equity prices 10% Decrease in equity prices 10% (0.2) (2.7) (0.2) (2.7) Policy liabilities include a component for profits that are expected to be earned over the life of the contract. These profits are released over the life of the contract according to an appropriate profit carrier. Policy liabilities are recalculated for changes in economic assumptions. However, when the non economic assumptions are changed and the expected future profit is recalculated, the impact is absorbed into future profit margins such that there is no change to the total level of policy liabilities. The only exception to this is where the business is expected to make future losses. In this case all future losses must be recognised immediately and hence there will be a change in the policy liability. The impact on reported profit and shareholder equity of changes in interest rates and equity prices include impact on all financial assets (except those backing investment linked contracts) as well as impact on Life insurance contracts liability. Changes in interest rates impact the discount rate used to calculate life insurance contracts liability. 33

35 3. Actuarial assumptions and methods (continued) (b) Life insurance (continued) (iv) Sensitivity analysis (continued) The sensitivities presented in the analysis show the impact of changes to assumptions on the year s profit if the assumption change is made (and policy liabilities recalculated as described above). The Profit/(Loss) and equity column shows both the cashflow and liability impacts, whereas the life insurance contract liability column shows only the liability impact. For investment linked contracts, the policyowner bears the risks and rewards of the underlying financial assets. The impact of changes in interest rates and equity prices on these financial assets affects policyowner returns and has no direct impact on ZAL s reported profit for the current year. This does not apply to a small portfolio of policies that contain an investment return guarantee. For these, the value of the guarantee is impacted by changes in interest rates and equity prices and hence the ZAL s reported profit. (v) Solvency requirements These are amounts required to meet the prudential standards specified by the Life Insurance Act 1995 to provide protection against the impact of fluctuations and unexpected adverse circumstances on ZAL. The methodology and bases for determining Solvency Requirements are in accordance with the requirements of APRA s former Prudential Standard LPS 2.04 Solvency Standard as applicable at in accordance with subsection 230A(1) of the Life Insurance Act

36 4. Financial risk management policies and procedures The Consolidated Entity s activities expose it to a variety of risks that could potentially impact the financial standing of the company, including market risk credit risk and liquidity risk. The Consolidated Entity s overall risk management program seeks to manage risks to within the Board s risk appetite. This includes a focus on potential adverse effects on the financial performance of the Consolidated Entity, in particular capital and solvency. The Consolidated Entity has an Internal Capital Adequacy Assessment Process (ICAAP) that addresses the potential impact of all risk types to capital and solvency. Under the ICAAP, the authority to hold this risk is clearly delegated through the Board s risk appetite statement. Clear accountability for management risk is assigned to the subject matter experts within the executive. The measurement of risk and the reconciliation to delegated authority is facilitated by a dedicated risk management function. The risk management framework, and the roles within, are outlined in the Consolidated Entity s Risk Management Strategy (RMS). The objective of the RMS is to provide a summary of the policies and controls in place to address enterprise risks including certain operational and financial risks and the procedures for assessing compliance with these policies and controls. In addition, the Ultimate Controlling Entity, Zurich Insurance Group Ltd s Zurich Risk Policy (ZRP) provides constraints on the mix of investment assets. ZAIL negotiated Investment Management Agreements (IMA) with external investment managers. ZAL has delegated its investment management responsibilities to Zurich Investment Management Limited (ZIM), which has in turn negotiated Investment Management Agreements (IMA) with external investment managers, with all funds managed in accordance with these IMAs. The overall investment strategy (and in particular the use of derivatives) is governed by the Zurich Investment Series Consolidated Constitution, the relevant IMAs, and the relevant funds offer documents and Product Disclosure Statements. The use of derivatives is consistent and subordinate to the investment strategy of each of the funds. From 1 August 2012, ZAL negotiated IMAs directly with external investment managers for its shareholders investments. The risks within the business are subject to at least an annual review by the Internal Audit Department, resulting in an annual audit plan which is approved by the Risk, Compliance and Audit Committee. The Internal Audit Department is independent of the day to day operational management of the Company. The Internal Audit Department executes a review of components of the internal control systems in accordance with the annual audit plan to assess the effectiveness of the internal controls, risk management within the Consolidated Entity and compliance with the RMS. The following list of factors are considered and addressed as part of the Consolidated Entity s financial risk management policies and procedures. (a) Market risk Market risk is the risk of diminution in value of the Consolidated Entity s investment portfolio arising from adverse movements in the levels and volatility of interest rates, foreign exchange rates and equity prices. The risk is controlled by ensuring that all activities are transacted in accordance with approved mandates, strategies and limits. Market risk analysis is conducted on a regular basis and risk management controls ensure that positions are monitored against the portfolio risk limits. Market risk analysis is conducted on a total portfolio basis, incorporating both physical investments and the effective exposure of all derivative positions. Separate analysis is also performed on derivative positions in isolation. Refer to Note 3 (a)(ii) and 3 (b)(iv) for an analysis of the impact of changes in key assumptions on reported profit and equity of the Consolidated entity. The analysis includes the impact of changes on financial assets. (b) Net fair value of financial assets and liabilities On-Balance Sheet The aggregate carrying values of financial assets and financial liabilities approximate their net fair values. The methods used to determine the carrying values of financial assets and liabilities are included in the summary of significant accounting policies in Note 1. Off-Balance Sheet The Company and certain controlled entities have potential financial liabilities which may arise from certain contingencies disclosed in Note 37. No material losses are anticipated in respect of any of those contingencies, and the net fair value of those contingencies is assessed as an immaterial amount. 35

37 4. Financial risk management policies and procedures (continued) (c) Credit risk Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The carrying amounts of financial assets included in the Consolidated Balance Sheets represent the Consolidated Entity s maximum exposure to credit risk in relation to these assets. Where entities have a right of setoff and intend to settle on a net basis, this set-off has been reflected in the financial statements in accordance with accounting standards. Cash and financial assets Standard and Poors (S&P) rating for Cash at bank disclosed in Note 10 is AA- (2011: AA-). The debt securities and related accrued investment income disclosed in Note 12 are analysed in the table below using Standard and Poors (S&P) and Moody s $ 000 $ 000 Non-life insurance debt securities AAA 1,050, ,393 AA 330, ,942 A 361, ,242 BBB 37,434 63,656 Not rated 2,127 4 Total debt securities 1,782,543 1,547,237 Current debt securities 165, ,405 Non-current debt securities 1,616,842 1,277,832 Total debt securities 1,782,543 1,547, $ 000 $ 000 Life insurance debt securities AAA 424, ,214 AA 144,678 74,239 A 189, ,413 BBB 14,078 9,518 Not rated 74,247 67,144 Total debt securities 847, ,528 Current debt securities 326, ,303 Non-current debt securities 519, ,365 Accrued Interest 1,747 6,860 Total debt securities 847, ,528 The Consolidated Entity s concentrations of credit risk, greater than $200m (excluding ZAL s Statutory Fund No. 3) are limited to Commonwealth Government of Australia ($329.6m), Westpac Bank Corporation ($302.4m), Queensland Treasury Corporation ($211.8m) and Western Australia Treasury Corporation ($210.4m). In 2011, the Consolidated Entity s concentration of credit risk was limited to Commonwealth Government of Australia ($387.1m) and Commonwealth Bank of Australia ($240.5m). 36

38 4. Financial risk management policies and procedures (continued) (c) Credit risk (continued) Premium receivable Non-life premiums receivable in ZAIL disclosed in Note 11 include amounts past due but not impaired which are analysed below $ 000 $ 000 < 30 days 43,141 35, days 6,154 8,094 > 91 days 3,629 12,290 Total premiums receivable past due but not impaired 52,924 56,368 Life outstanding premiums are in the most part secured by the surrender value of the related policy. Reinsurance receivables When selecting a reinsurer ZAL only considers those reinsurers on a list approved by Zurich Group, which assesses reinsurer security using rating information from the public domain or gathered through internal investigations. With the exception of ZAL s international pooling arrangement and catastrophe reinsurance arrangement, which are reinsured by Zurich Insurance Company Limited, Switzerland (ZIC), all of ZAL s reinsurers are regulated by the industry regulator, the Australian Prudential Regulation Authority (APRA), and are governed by the same Prudential Standards as ZAL The S&P credit ratings for reinsurers that ZAL has treaties with at are A or better (2011: A or better). At the balance date, the highest exposure to a single third party reinsurer was 31.8% (2011: 33.0%) of total ceded policy liabilities. This reinsurer has an S&P rating of AA-. In order to limit concentrations of credit risk in purchasing reinsurance, ZAIL has regard to existing reinsurance assets including the level of exposure to any single reinsurer or group of related reinsurers. Placing reinsurance with other companies in the Zurich Group is used as an initial step on a significant portion of the reinsurance program to enable group-wide reinsurance purchasing efficiencies. Reinsurance security is monitored continuously taking advantage of the Group s Security Committee analyses and there are strict controls around the use of individual reinsurers. Reinsurance accumulations are also monitored closely and used in deciding the appropriate placement programme at renewal. Other receivables All other receivables in the Company and the Consolidated Entity do not include material amounts that are either past due or impaired. (d) Liquidity risk Liquidity risk is the risk that the Consolidated Entity will encounter difficulty in meeting obligations associated with financial liabilities. Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close-out market positions. ZAL s financial assets are shown in Note 12. The current and non-current classification of these assets is based on the maturity terms of the underlying securities held by the unit trusts or directly held by ZAL. As most of the securities held by the unit trusts of ZAL have maturity dates of more than 12 months, they have been classified as non-current assets. However, these securities are liquid assets and can be sold quickly if short term funding is required to meet financial liabilities. 37

39 4. Financial risk management policies and procedures (continued) (d) Liquidity risk (continued) (i) Life insurance The table shows expected cash flows from insurance contracts. Year ended Carrying amount Expected cash flows (undiscounted) 0-5 yrs 5-10 yrs yrs yrs >20yrs $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 Insurance contracts (Note 30) (59,023) (184,976) (154,888) (138,265) (118,489) (377,553) Year ended 31 December 2011 Carrying amount Expected cash flows (undiscounted) 0-5 yrs 5-10 yrs yrs yrs >20yrs $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 Insurance contracts (Note 30) (51,330) (181,577) (136,773) (110,635) (85,917) (269,189) Investment contracts are payable on demand. The carrying amount of these investment contracts is $1.763 billion (2011: $1.799 billion). (ii) Non-life insurance The table shows expected cash flow from outstanding claims (notified claims, IBNR and claims handling costs) and premium liability (expected future claims). Both are net of reinsurance and non-insurance recoveries and before risk margin. Carrying amount (undiscounted) Expected cash flows (undiscounted) yrs 1-5 yrs 5-10 yrs yrs >15yrs $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 Insurance contracts Outstanding Claims (Note 13, 28) 1,151, , ,039 64,329 19,195 62,961 Premium Liability 407, , ,934 33, Total 1,559, , ,973 97,881 20,179 62,998 Carrying amount (undiscounted) Expected cash flows (undiscounted) yrs 1-5 yrs 5-10 yrs yrs >15yrs $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 Insurance contracts Outstanding Claims (Note 13, 28) 1,013, , ,886 73,754 17,955 36,033 Premium Liability 378, , ,559 33,759 1, Total 1,392, , , ,513 19,320 36,060 Contractual Maturity Analysis The loan and bank guarantees provided by the Company and the Consolidated entity (Note 38) are due on demand. A contractual maturity analysis is not provided in respect of other financial liabilities in the Company and the Consolidated Entity as typically the credit terms for other financial liabilities are up to 30 days. 38

40 4. Financial risk management policies and procedures (continued) (e) Derivative holdings A derivative transaction is a contract where value is derived from the value of an underlying asset or index. ZAIL does not hold any direct derivative contracts. ZAL does not generally hold any direct derivative contracts itself but its policyholders investments in unit trusts have exposures to these instruments. The trusts use derivatives for portfolio management purposes. Derivatives are used as an effective alternative to physical asset in order to achieve a desired level of total exposure and as a means to hedge against market movements. Total exposure is the sum of the market value of the physical assets plus the equivalent physical asset value attributed to the derivatives. Deliberate gearing up or leverage exposure to an asset is not permitted. The most common derivatives used by the trusts are exchange traded futures contracts and options. Exchange traded futures and options are used to hedge against adverse market fluctuations in the underlying security. Overseas currency options are entered into to hedge exposures to adverse movements in the Australian dollar. Forward foreign exchange contracts are entered into to hedge certain investment exposures denominated in foreign currencies. Derivatives in the trusts are valued on a mark-to-market value basis such that the trust valuations reflect all unrealised gains and losses on derivatives. As at the trusts had no significant counterparty exposure to one single entity, other than normal clearing house exposure associated with dealings through recognised exchanges (2011: nil). (f) Fair value measurement The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes. The Consolidated Entity adopted AASB 7 Financial Instruments: Disclosures which requires disclosure of fair value measurements by level of the following fair value measurement hierarchy: (a) quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1); (b) inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (level 2); and (c) inputs for the asset or liability that are not based on observable market data (unobservable inputs) (level 3). The following tables present the Consolidated Entity s financial assets measured and recognised at fair value at 31 December 2012 and 31 December Consolidated - As at Level 1 $ 000 Level 2 $ 000 Level 3 $ 000 Total $ 000 Equity securities 1,179, , ,511,698 Debt securities 1,161,937 1,463,083 2,880 2,627,900 Total 2,341,288 1,795,277 3,033 4,139,598 Consolidated - As at 31 December 2011 Level 1 $ 000 Level 2 $ 000 Level 3 $ 000 Total $ 000 Equity securities 1,210, ,378-1,419,579 Debt securities 785,540 1,334,582 15,787 2,135,909 Total 1,995,741 1,543,960 15,787 3,555,488 The fair value of financial instruments traded in active markets (such as trading and available-for-sale securities) is based on quoted market prices at the end of the reporting period. The quoted market price used for financial assets held by the Consolidated Entity is the current bid price. These instruments are included in level 1. 39

41 4. Financial risk management policies and procedures (continued) (f) Fair value measurement (continued) The fair value of financial instruments that are not traded in an active market is determined using valuation techniques. The Consolidated Entity uses a variety of methods and makes assumptions that are based on market conditions existing at the end of each reporting period. Quoted market prices or dealer quotes for similar instruments are used to estimate fair value for long-term debt for disclosure purposes. Other techniques, such as estimated discounted cash flows, are used to determine fair value for the remaining financial instruments. The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows. The fair value of forward exchange contracts is determined using forward exchange market rates at the end of the reporting period. These instruments are included in level 2 and comprise debt investments and derivative financial instruments. In the circumstances where a valuation technique for these instruments is based on significant unobservable inputs, such instruments are included in level 3. The following table presents the changes in level 3 instruments for the year ended and 31 December Debt Securities $ 000 Equities Securities $ 000 Total $ 000 Opening balance 1 January Additions 16,292-16,292 Losses recognised in Statement of Comprehensive Income (505) - (505) Closing balance 31 December ,787-15,787 Transfer into level 2 (9,175) - (9,175) Transfer into level Additions Disposals (5,000) - (5,000) Gains recognised in Statement of Comprehensive Income Closing balance 2, ,033 In 2012, ZAL changed its investment structure for the non-unit linked debt securities from investing in unit trusts that held debt securities to the direct holding of debt securities. As a result, these investments most of which represent nonagency backed-asset backed securities have been classified as level 3 as they are valued using unobservable valuation inputs. The carrying amount of trade receivables and payables are assumed to approximate their fair values due to their short term nature. The fair value of financial liabilities approximates their carrying amount, as the impact of discounting is not significant. 40

42 5. Insurance contracts risk management policies and procedures The financial condition and operation of the Consolidated Entity are affected by a number of key risks including insurance risk, investment market risk (including interest rate risk and currency risk), credit risk, liquidity risk, financial risk, compliance risk and operational risk. The Consolidated Entity s policies and procedures in respect of managing these insurance risks are set out in this note. Non-life insurance contracts (a) Objectives in managing risks arising from insurance contracts and policies for mitigating those risks ZAIL has an objective to manage insurance risk thus reducing the volatility of operating profits. In addition to the inherent uncertainty of insurance risk, which can lead to significant variability in the loss experience, profits from insurance business are affected by market factors, particularly competition and movements in asset values. Short-term variability is, to some extent, a feature of insurance business. Various procedures are put in place to control and mitigate the risks faced by ZAIL depending on the nature of each risk. ZAIL s exposure to risks is monitored by the Appointed Actuary and this exposure is reported to the Board in the annual Financial Condition Report. In accordance with General Insurance Prudential Standards GPS 220 Risk Management and GPS 230 Reinsurance Arrangements issued by the Australian Prudential Regulation Authority (APRA), the Board and senior management of ZAIL have developed, implemented and maintained a Risk Management Strategy (RMS) and a Reinsurance Management Strategy (REMS). The RMS and REMS identify ZAIL s policies and procedures, processes and controls that comprise its risk management and control systems. These systems address all material risks, financial and non-financial, likely to be faced by ZAIL. Annually, the Board certifies to APRA that adequate strategies have been put in place to monitor those risks, that ZAIL has systems in place to ensure compliance with legislative and prudential requirements and that the Board has satisfied itself as to compliance with the RMS and REMS. The RMS and REMS have been approved by the Board. Key aspects of the processes established in the RMS to mitigate risks arising from insurance contracts include: A formal annual high-level hazard assessment that focuses on key risks that impact the achievement of strategic and business objectives, including the development of action plans for the treatment and continuous monitoring of identified risks. This is bolstered by formal quarterly reviews of risk issues and progress against action plans. The maintenance and use of appropriate management information systems, which provide up to date, reliable data on the risks to which the business is exposed at any point in time. Actuarial models, using information from the management information systems, are used in calculating premiums and monitoring claims patterns. Past experience and statistical methods are used as part of the process. Formally delegated authorities and documented guidelines are followed for underwriting and accepting insurance risks. Natural disasters exposure is monitored through use of models involving the collation of ZAIL s own exposure and wider environmental data, which support decisions on limiting exposure. Reinsurance is used to limit ZAIL s exposure to large single claims and catastrophes. When selecting a reinsurer ZAIL only considers those companies on a list approved by Zurich Group head office, which assesses reinsurer security using rating information from the public domain or gathered through internal investigations. If ZAIL selects a reinsurer not on the approved list, a separate approval by Zurich Group is required before placing the risk. In order to limit concentrations of credit risk in purchasing reinsurance, ZAIL has regard to existing reinsurance assets including the level of exposure to any single reinsurer or group of related reinsurers. Placing reinsurance with other companies in the Zurich Group is used as an initial step on a significant portion of the reinsurance program to enable group-wide reinsurance purchasing efficiencies. The mix of assets in which ZAIL invests is driven by the nature and term of the insurance liabilities. The management of assets and liabilities is closely monitored to broadly align the sensitivity of asset values to changes in interest rates with the equivalent sensitivity of the expected pattern of claim payments. 41

43 5. Insurance contracts risk management policies and procedures (continued) Non-life insurance contracts (continued) (a) Objectives in managing risks arising from insurance contracts and policies for mitigating those risks (continued) The diversification of business over various classes of insurance and large numbers of uncorrelated individual risks reduces variability in loss experience. (b) Terms and conditions of insurance business The terms and conditions attaching to insurance contracts affect the level of insurance risk accepted by ZAIL. The majority of direct insurance contracts written are entered into on a standard form basis. Any non standard terms and conditions are signed off by appropriately experienced underwriters within a framework, which includes delegated authorities, in line with the RMS. (c) Concentration of insurance risk ZAIL s exposure to concentration of insurance risk is mitigated by a portfolio of diversified individual risks. Specific processes for monitoring identified key concentrations are set out below. Risk Source of concentration Risk management measures Natural catastrophes Properties and motor vehicles concentrated in regions that are subject to: Earthquakes Cyclones Hail storms Other significant natural events ZAIL s underwriting strategy requires individual risk premiums to be differentiated in order to reflect the higher loss frequency in particular geographical. ZAIL has modelled aggregated risk using commercially available catastrophe models. Based on the probable maximum loss per the models, ZAIL purchases catastrophe reinsurance cover to limit exposure to any single event. Direct premium revenue disclosed in Note 6 is split by product in the table below $ 000 $ 000 Property 273, ,578 Motor 288, ,772 Marine & Aviation 99, ,708 Public & Product Liability 118, ,349 Compulsory Third Party (CTP) 123, ,467 Employers Liability 101,087 92,290 Professional Indemnity 61,902 60,723 Other 129, ,377 Total direct premium revenue 1,196,376 1,136,264 (d) Development of claims There is a possibility that changes may occur in the estimate of ZAIL s obligations at the end of a contract period. The tables in Note 28 (d) show ZAIL s estimates of total claims outstanding for each accident year at successive year ends for classes of business that are typically resolved in more than one year. 42

44 5. Insurance contracts risk management policies and procedures (continued) (e) Interest rate risk None of the financial assets or liabilities arising from insurance or reinsurance contracts entered into by ZAIL is directly exposed to interest rate risk. Insurance and reinsurance contracts are generally entered into annually. At the time of entering into the contract all terms and conditions are negotiable or, in the case of renewals, renegotiable. (f) Credit risk Financial assets and liabilities arising from insurance and reinsurance contracts are stated in the Balance Sheets at the amount that best represents the maximum credit risk exposure at balance date. At balance date: 1.38% (2011: 3.13%) of the reinsurance and other recoveries receivable in Note 13 had a single third party reinsurer as a counter party; and 85.16% (2011: 72.74%) of the reinsurance and other recoveries receivable in Note 13 had other companies in the Zurich Group as a counter party. There are no other significant concentrations of credit risk. During 2012, irrevocable standby letters of credit for a total of up to $410m were issued by Australian banks on behalf of other entities in the Zurich Group in favour of ZAIL. These letters of credit relate to all reinsurance contracts entered into between ZAIL and other entities in the Zurich Group on or after 31 December $320m is due to expire on 31 December 2013 and $90m is due to expire on 31 December As at, $410m (2011: $273m) of reinsurance recoverables due from other entities in the Zurich group were secured under these letters of credit. Reinsurance receivable on incurred claims disclosed in Note 13 are analysed in the table below using Standard and Poors (S&P) rating $ 000 $ 000 AAA or AA 1,081,763 1,339,105 A 51,201 80,453 BBB or unrated 17,690 14,798 Total reinsurance receivable on incurred claims (excluding Risk Margin) 1,150,654 1,434,356 Life insurance contracts (a) Life insurance contracts - Risk management objectives and policies ZAL s objective is to satisfactorily manage the financial, insurance and compliance risks in line with ZAL s Risk Management Strategy which is approved by the Board. Various procedures are put in place to control and mitigate the risks faced by ZAL depending on the nature of each risk. ZAL s exposure to risks is monitored by the Appointed Actuary and this exposure is reported to the Board in the annual Financial Condition Report. Financial risks are generally monitored and controlled by selecting appropriate assets to back policy liabilities. The assets are regularly monitored by the Capital and Investment Management Committee to ensure that there is no material asset and liability mismatching issues and other risks such as liquidity risk and credit risk are maintained within acceptable limits. For those life insurance contracts and life investment contracts where the benefits paid are directly impacted by the value of the underlying assets, ZAL is exposed to the risk of future decreased asset management fees as a result of a decline in assets under management. 43

45 5. Insurance contracts risk management policies and procedures (continued) Life insurance contracts (continued) (a) Life insurance contracts - Risk management objectives and policies (continued) Insurance risks are controlled through the use of underwriting procedures, adequate premium rates and policy charges, the ability to change premium rates for yearly renewable business and extensive reinsurance arrangements. Controls are also maintained over claims management practices to ensure the correct and timely payment of insurance claims. Compliance risk and operational risk are both monitored by internal committees which report regularly to the Board. (b) Strategy for managing life insurance risk Portfolio of risks ZAL currently issues term life, total and permanent disablement, trauma and disability income insurance contracts. The performance of ZAL and its continuing ability to write profitable business depends on its ability to identify and control risks. ZAL has a Risk Management Strategy which has been approved by the Board. It summarises ZAL s approach to risk and risk management. Risk strategy In compliance with contractual and regulatory requirements, a strategy is in place to ensure that the risks underwritten satisfy shareholders risk and reward objectives whilst not adversely affecting ZAL s ability to pay benefits and claims when due. The strategy involves the identification of risks by type, impact and likelihood, the implementation of processes and controls to mitigate the risks, and continuous monitoring and improvement of the procedures in place to reduce the chance of an adverse compliance or operational risk event occurring. Included in this strategy is the process for underwriting and product pricing to ensure products are appropriately priced. Capital requirements are measured using the various regulatory reporting requirements to which ZAL is subject. Allocation of capital Capital is allocated by ZAL to the portfolios of contracts or is held in a central reserve based on management s assessment of the risks to which each line of business is exposed and its view of the profitability of the products that are sold. Solvency and capital adequacy requirements established by the Australian Prudential Regulation Authority (APRA) are in place to reinforce safeguards for policyholders interests, which are primarily the ability to meet future claims payments to policyholders and to meet policyholders reasonable expectations. The APRA compliance requirements must be met continuously throughout the year. These solvency and capital adequacy requirements also take into account specific risks faced by ZAL. (c) Methods to monitor and assess life insurance risk exposures Exposure to risk In an effort to protect and enhance shareholder value, ZAL manages its exposure to risks so that it can react in a timely manner to changes in financial markets, insurance cycles, and economic and political environments. Statutory capital adequacy requirements ZAL s insurance operations are subject to regulatory capital requirements which prescribe the amount of capital to be held depending on the risks associated with the products issued by ZAL and the type, quality and concentration of investments held. Management reporting ZAL reports quarterly financial and operational results to the management. In addition, monthly results are prepared to provide indicative results in between quarterly valuation reporting. 44

46 5. Insurance contracts - risk management policies and procedures (continued) Life insurance contracts (continued) (d) Methods to limit or transfer life insurance risk exposures Reinsurance Reinsurance is used to limit exposure to large single claims and reduce the volatility of expected profits. New reinsurance treaties are assessed to indicate how they will impact the level and volatility of expected profits as well as the impact on ZAL s capital position to ensure the achievement of the appropriate choice of type of reinsurance and retention levels. Underwriting procedures Strategic underwriting decisions are put into effect using the underwriting procedures detailed in ZAL s underwriting manual. Such procedures include limits to delegated authorities and signing powers. The underwriting process is regularly monitored by ZAL s internal auditors to ensure adequate controls are in place over the underwriting process and that the controls are effective. Claims management Strict claims management procedures ensure the timely and correct payment of claims in accordance with policy conditions. Asset and liability management techniques Assets are allocated to different classes of business using a risk based approach. Duration analysis is primarily used for interest-sensitive products and policies with long-term fixed payout patterns. Sensitivity analysis is primarily used for participating products and simulate the impact of certain market fluctuation scenarios on future cash flows, fair values or forecasted earnings. For non-discretionary participation insurance products, such as unit-linked products, the interest and market risks are with the policyholder. Management of market risk is generally less critical for short-term insurance products as the amount of assets backing the liability and capital is generally small. The timing of claims are reasonably predictable and do not vary significantly with interest rates or other market changes. (e) Concentration of life insurance risk Insurance risks associated with human life events ZAL predominantly writes individual risk business through independent financial advisors, it is experiencing growth in the group life business where protection against death or disablement is typically provided to employers of large work forces where concentration risks may emerge. ZAL has established a catastrophe reinsurance treaty with its parent company to reduce the risk of high losses by a single event. The nature of ZAL s overall business mix results in a large spread of risks across the country and age ranges, further mitigating concentration risk. 45

47 6. Revenue and other income (a) Revenue from continuing operations Consolidated Parent Entity $'000 $'000 $'000 $'000 Premium and related revenue Premium revenue - Non-life insurance 1,196,376 1,136, Premium revenue - Life insurance 264, , Inwards reinsurance revenue 30,705 27, ,491,873 1,404, Reinsurance and other recoveries Non-life insurance 177,438 1,286, Reinsurance and other recoveries Life insurance 65,137 63, Fees for management services rendered 31,308 35, Total premiums and related revenue 1,765,756 2,789, Other revenue Management fees 26,787 25,101 91,628 84,657 Commission - 11, Other revenue Total other revenue 26,800 36,515 91,628 84,657 Total revenue from continuing operations 1,792,556 2,826,354 91,628 84,657 (b) Investment income Dividend 113, ,499 16,000 10,000 Interest 117,443 77, Net realised and unrealised gain/(loss) on financial assets at fair value trhough profit and loss 204,929 (101,414) Impairment expense on investments in controlled entities - - (31,252) (39,294) Other 768 2, Total investments income 436, ,256 (14,936) (29,222) (c) Other income from continuing operations Other income 7,069 (560) 952 (1,047) Gain on sale of controlled entities (Note 39) - 12, Gain on sale of associates - 1, Total other income from continuing operations 7,069 13, (1,047) (d) Share of associates profits - 1, Total revenue and other income 2,236,357 2,984,417 77,644 54,388 46

48 7. Profit/(loss) from continuing operations (a) Profit/ (loss) from continuing operations Consolidated Parent Entity $'000 $'000 $'000 $'000 Life and Non-life Insurance 258, ,991 (14,015) (31,282) Movement in external unitholders liabilities (25,767) Profit/ (loss) from continuing operations before income tax 232, ,904 (14,015) (31,282) - Premium revenue - Non-life insurance 1,227,081 1,164, Premium revenue - Life insurance 264, , Fees for management services rendered 31,308 35, Outwards reinsurance expense Non-life insurance (304,055) (307,940) - - Outwards reinsurance expense Life insurance (81,396) (73,936) - - Net premium revenue 1,137,730 1,058, Claims expense - Non-life insurance (797,461) (1,970,376) - - Claims expense - Life insurance (113,700) (104,149) - - Reinsurance and other recoveries - Non-life insurance 177,438 1,286, Reinsurance and other recoveries - Life insurance 65,137 63, Net claims incurred (668,586) (724,652) - - Gross movement in unexpired risk liability 38,492 (5,491) - - Reinsurance recoveries on unexpired risk liability (29,248) 1, Net movement in unexpired risk liability 9,244 (3,768) - - Decrease/(Increase) in policy liabilities 7,693 34, Decrease/(Increase) in gross investment contract liabilities (212,759) 42, Decrease/( Increase) in unvested policyholder benefits 2,201 2, (202,865) 79, Acquisition costs (60,981) (73,215) - - Other underwriting costs (243,600) (225,192) - - Underwriting expenses (304,581) (298,407) - - Underwriting result (29,058) 110, Investment income 436, ,256 (14,936) (29,222) Other revenue 26,800 25,113 91,628 84,657 Other income 7,069 24, (1,047) Non-underwriting expenses (182,954) (183,175) (91,659) (85,670) Share of Associates profits - 1, Operating profit /(loss) before income tax 258, ,991 (14,015) (31,282) 47

49 7. Profit/(loss) from continuing operations (continued) (b) Net gains and expenses Consolidated Parent $'000 $'000 $'000 $'000 Net gains/(losses) Net foreign exchange gains/(losses) 184 (46) 184 (46) Losses on disposal of plant and equipment (1,064) (553) (1,064) (524) Total net losses (880) (599) (880) (570) Expenses Amortisation (14,636) (6,844) - - Depreciation (5,826) (5,515) (4,775) (4,106) Bad and doubtful debts written off 105 (256) - - Movement in provision for doubtful debts 235 (3,357) - - Provision for employee entitlements (426) 3 (426) 2 Claims expense (911,161) (2,074,525) - - Acquisition expense (136,185) (139,279) - - Movement in unexpired risk liability 9,244 (3,768) - - Outwards reinsurance expense (385,451) (381,876) - - Other underwriting expense (243,600) (225,192) - - Policy maintenance (75,242) (72,523) - - Investment management (4,812) (5,774) - - Increase in policy liabilities (202,865) 79, Other (7,148) (22,844) (86,458) (81,566) Total expenses (1,977,768) (2,862,426) (91,659) (85,670) Employee benefits expenses of $52,326,367 (2011: $55,414,149) have been included in the above Other (Parent). Total employee benefits expenses of $160,449,007 (2011: $158,760,307) have been included above in Other underwriting expense and Other (Consolidated). Increase in policy liabilities includes the change in unvested policyholder benefits and bonuses vested in policyholders during the financial year. (c) Life insurance profit/(loss) from continuing operations after income tax Life insurance profit/(loss) from continuing operations after income tax arose from: Investment earnings on shareholder s retained profits and capital 19,881 23, Emergence of shareholder s planned profits 22,122 21, Experience profit/(loss) (2,657) 20, Management services profit 6,028 3, Shareholder fund profits , Life insurance profit from continuing operations after income tax 46,045 84,

50 8. Net claims incurred Non-life insurance Consolidated Parent Entity $ 000 $ 000 $ 000 $ 000 Gross claims incurred and related expenses: - Direct 615,241 1,876, Inwards Reinsurance 165,917 78, Discount 16,303 15, ,461 1,970, Reinsurance and other recoveries: - Direct 31,937 1,193, Inwards Reinsurance 150,985 71, Discount (5,484) 20, ,438 1,286, Net incurred claims 620, , Claims development Current year claims relate to risks borne in the current financial year. Prior years claims relate to a reassessment of the risks borne in all previous financial years. Consolidated Consolidated Current Year Prior Years Total Current Year Prior Years Total $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 Gross claims expense Undiscounted 1,050,017 (268,859) 781,158 2,024,719 (70,310) 1,954,409 Discount (34,576) 50,879 16,303 (35,486) 51,453 15,967 1,015, 441 (217,980) 797,461 1,989,233 (18,857) 1,970,376 Reinsurance and other recoveries: Undiscounted 324,205 (141,283) 182,922 1,208,080 57,348 1,265,428 Discount (11,343) 5,859 (5,484) (11,868) 32,851 20, ,862 (135,424) 177,438 1,196,212 90,199 1,286,411 Net claims incurred discounted 702,579 (82,556) 620, ,021 (109,056) 683,965 1 The 2011 numbers have been restated to reflect the correct classification of the direct and inward reinsurance within the gross claims incurred and reinsurance and other recoveries. 49

51 9. Income tax Consolidated Parent Entity $'000 $'000 $'000 $'000 (a) Total operations (i) Income tax expense Current tax 57,779 25, (2,682) Deferred tax 14,448 35, ,373 Under/(over) provision in prior years (1,612) (2,985) (651) 1,195 Total income tax expense/(credit) 70,615 57,711 (190) 886 Deferred income tax expense included in income tax expense comprises: Decrease in deferred tax assets (Note 14) 19,156 32, ,373 (Decrease)/increase in deferred tax liabilities (Note 29) (4,708) 2, ,448 35, ,373 (ii) Numerical reconciliation of income tax expense to prima facie tax payable Profit/ (Loss) before tax 232, ,904 (14,015) (31,282) Tax at the Australian tax rate of 30% ( %) 69,847 36,871 (4,205) (9,385) Tax effect of amounts which are not deductible/taxable in calculating taxable income: Tax offset for franked dividends (813) (1,173) - - Non taxable dividends - (2,346) (4,800) (3,000) Unrealised foreign exchange transaction (52) 38 (148) - Unrealised book (gain)/loss on investment in controlled entities ,095 9,376 11,751 Unrealised book (gain)/loss on investment assets (6,377) 14, Non deductible expenses Policyholder tax expense (including under provisions in prior years) - 5, Other 8,161 (878) (801) 9 72,114 62, (332) Under/(Over) provision in prior year (1,499) (5,982) (537) 1,218 Difference in overseas tax rates Income tax expense/(credit) 70,615 57,711 (190) 886 (iii) Temporary differences relating to investment in controlled entities As there is no intention of the Company to sell the investments in controlled entities, and it is expected that the controlled entities will remain in the tax consolidated group for the foreseeable future, the reversal of the temporary differences will have no income tax consequences for the Company. The transactions between a tax consolidated subsidiary and its parent, including the distribution of dividends from the subsidiary to the parent, are not taken into account for income tax purposes. Accordingly, the tax balance sheet value of the investment in the controlled entities is equal to its accounting carrying value and no temporary difference exists. Similarly, with the investment in 100% owned unit trusts, the Company does not recognise any temporary differences with respect to its holdings in those trusts. As the 100% owned unit trusts are tax transparent entities, deferred taxes are recognised by the Company on temporary differences on the investments held in the unit trusts as if the investments are directly held by the Company. 50

52 9. Income tax (continued) Consolidated Parent Entity $'000 $'000 $'000 $'000 (b) Life insurance operations (i) Income tax expense Current tax 22,732 25, Deferred tax 8,701 12, Over provision in prior years (2,074) Total income tax expense 29,359 38, Deferred income tax expense included in income tax expense comprises: Decrease in deferred tax assets 13,414 10, (Decrease)/increase in deferred tax liabilities (4,713) 2, ,701 12, (ii) Numerical reconciliation of income tax expense to prima facie tax payable Profit before tax 75, , Tax at the Australian tax rate of 30% ( %) 22,621 36, Tax effect of amounts which are not deductible/taxable in calculating taxable income: Franking credits (323) (612) - - Non assessable intragroup dividend (480) (1,044) - - Unrealised loss on liquidation of controlled entity - (1,114) - - Deferred gain on sale of controlled entity - (251) - - Exempted management fee income (610) (290) - - Policyholder tax expense (including under provisions in prior years) 10,297 5, Other (72) (933) ,433 38, Over provision in prior year (2,074) Income tax expense 29,359 38,

53 9. Income tax (continued) (b) Life insurance operations (continued) (iii) Temporary differences relating to investment in controlled entities As there is no intention of ZAL to sell the investments in controlled entities, and it is expected that the controlled entities will remain in the tax consolidated group for the foreseeable future, the reversal of the temporary differences will have no income tax consequences for ZAL. The transactions between a tax consolidated subsidiary and its parent, including the distribution of dividends from the subsidiary to the parent, are not taken into account for income tax purposes. Accordingly, the tax balance sheet value of the investment in the controlled entities is equal to its accounting carrying value and no temporary difference exists. (iv) Income tax expense of the Life insurance operations The income tax expense of ZAL has been determined after aggregating various classes of business, each with different tax rates. The rates of taxation applicable to the taxable income of significant classes of business are as follows: Class of business % % Complying superannuation (VPST) Ordinary class (including accident and disability) Shareholder (general) funds Current pension and immediate annuity (SEA) Exempt Exempt Assessable income comprises: 1. Complying superannuation business (VPST) taxable contributions transferred from superannuation funds, specified rollover amounts and investment income. 2. Shareholder and ordinary life insurance business investment income, premiums received, transfers from VPST and SEA classes of business. The gains and losses on sale of investments to the extent referable to the complying superannuation business are determined under the capital gains tax provisions of the Income Tax Assessment Act The exceptions are gains on fixed interest securities and foreign exchange gains or losses to the superannuation business, which are taxed primarily under the ordinary income provisions. The gains and losses on the sale of investments to the extent referable to other taxable classes of business are taxed primarily under the ordinary income provisions, with the capital gains tax provisions potentially applying depending on the circumstance. In addition to sales made externally by the company, transfer of non-cash assets between different classes of business within the company (internal transfers) are immediately assessable by that class of business if a gain is generated. Losses generated from internal transfers are not deductible within that class of business until the asset is sold externally by the company. Allowable deductions include: 1. Complying superannuation business (VPST) investment related expenses, cash transfers to the ordinary class of business. 2. Shareholder and ordinary life insurance business acquisition costs in relation to investment related life, superannuation and other business, investment expenses, general management expenses, cash transfers to the VPST and SEA asset pools, capital component of ordinary premiums, risk business claims. Movements in relevant policy liabilities also may increase assessable income or increase allowable deductions. 52

54 9. Income tax (continued) (c) Tax consolidation The Company and the members of the tax consolidated group implemented the tax consolidation legislation on 1 October The accounting policy in relation to this legislation is set out in Note 1(l). The entities in the tax consolidated group have entered into a tax sharing agreement which, in the opinion of the directors, limits the joint and several liability of the wholly-owned entities in the case of a default by the head entity, the Company. Under a separate tax funding agreement, the Company is compensated by member entities for any current tax payable assumed and compensates member entities for any current tax receivable and deferred tax assets relating to unused tax losses or unused tax credits that are transferred to the Company under the tax consolidation legislation. The funding amounts are determined by reference to the amounts recognized (notional tax) in the Company s financial statements. The amounts receivable/payable under the tax funding agreement is due upon receipt by the member entities of the funding advice from the head entity, the Company, which is issued as soon as practicable after the end of each financial year. The head entity may also require payment of interim funding amounts to assist with its obligations to pay tax installments. The funding amounts are recognized as current intercompany receivables (see Note 11) or payables (see Note 22). 53

55 10. Cash and cash equivalents Consolidated Parent Entity $'000 $'000 $'000 $'000 Current Cash at bank and on hand 223, , ,207 Deposits at call 332, , , , ,207 Cash and cash equivalents were invested at floating interest rates between 3.06% and 4.42% (2011: 4.35% and 5.5%). 11. Receivables Consolidated Parent Entity $'000 $'000 $'000 $'000 Current Premiums receivable Non-life insurance 290, , Unclosed premiums Non-life insurance 101, , , , Provision for impairments Non-life insurance (235) (3,613) , , Outstanding premiums Life insurance 17,823 18, Investment income accrued and receivable 31,730 26, Unsettled investment sales 1, Due from related entities (Note 39) 23,244 8,260 31,039 16,156 Tax Related Receivable ,109 Other 8,335 15, Total current receivables 474, ,373 31,443 21,871 54

56 12. Other financial assets and investments (a) Financial assets at fair value through profit or Consolidated Parent Entity $'000 $'000 $'000 $'000 (i) Non-life insurance financial assets Current Equity securities 72,243 49, Debt securities 165, , , , Non-current Debt securities 1,616,842 1,277, Total Non-life insurance financial assets at fair value through profit or loss 1,854,786 1,596, (ii) Life insurance financial assets Current Equity securities 1,439,455 1,370, Debt securities 325, , Other 298 1, ,765,459 1,493, Non-current Debt securities 519, , Total life insurance financial assets at fair value through profit or loss 2,284,812 1,959, Total financial assets at fair value through profit or loss 4,139,598 3,555, Current 2,003,403 1,812, Non-current 2,136,195 1,743, ,139,598 3,555, (b) Investment in controlled entities Non-current Shares in controlled entities (Note 40) , , , ,188 55

57 13. Reinsurance and other recoveries Consolidated Parent Entity $'000 $'000 $'000 $'000 Analysis of Non Life Reinsurance and other recoveries Non-Life Insurance Expected future reinsurance recoveries undiscounted - on claims paid 6,030 8, on outstanding claims 1,195,342 1,467, ,201,372 1,476, Discount to present value (50,718) (42,199) - - Reinsurance receivable on incurred claims 1,150,654 1,434, Other recoveries undiscounted 230, , Discount to present value (8,470) (9,828) , , Risk Margin 188, , Discount to present value (6,456) (8,123) , , Reinsurance and other recoveries receivables on incurred claims Expected future reinsurance recoveries on unexpired risk liability Reinsurance and other recoveries receivable - Non-life Insurance 1,554,840 1,816, ,503 32, ,558,343 1,848, Life Insurance Reinsurance and other recoveries receivable - Life insurance 12,991 13, Current Non-Life Insurance 964,722 1,021, Life Insurance 12,991 13, ,713 1,034, Non Current Non-Life Insurance 593, , Total reinsurance and other recoveries 1,571,334 1,862,

58 14. Deferred tax asset Consolidated Parent Entity $'000 $'000 $'000 $'000 The balance comprises temporary differences attributable to: Amounts recognised in profit or loss Doubtful debts 67 1, Depreciable fixed assets 1,589 1, ,333 Accrued expense 7,386 2,178 6,748 1,615 Provision - others 573 5, ,014 Provision for leave 6,497 6,367 6,497 6,367 Software amortisation 382 1, ,280 DAC Write off & unexpired Risk Liabilities 842 7, Indirect Claim adjustment 15,741 14, Deferred Origination Fees 2, Difference in policy liability between accounting and tax 2,089 2, Unrealised Net Capital Loss on superannuation business 25,044 33, Unrealised loss on investment assets 1,598 5, Tax Losses Other 649 (2,276) Set-off of deferred tax assets pursuant to set-off provision (Note 29) (8,464) (5,769) - - Net deferred tax asset 56,748 74,100 15,536 15,636 Deferred tax assets movements: Opening balance at 1 January 74, ,550 15,636 18,009 Currency translation difference (28) Charged to Income Statement (Note 9) (19,156) (32,412) (100) (2,373) Set-off of deferred tax assets pursuant to set-off provision (Note 29) 1, Closing balance at 31 December 56,748 74,100 15,536 15,636 The Consolidated Entity only recognises deferred tax assets in respect of unused tax losses incurred by the ZAIL New Zealand branch (ZAIL NZ) to the extent that it is probable that future taxable profit will be available against which the unused tax losses can be utilised. The Consolidated Entity has undertaken a prima-facie analysis of future taxable profits to determine the likelihood of being able to recover the unused tax losses over the short term. The Consolidated Entity has concluded that, based on profit history and the uncertainty of future profits, no deferred tax asset should be recognised for the unused tax losses. The deferred tax asset that has not been recognised as at is $25,299,185 (2011: $29,783,631). 57

59 15. Deferred acquisition costs Consolidated Parent Entity $'000 $'000 $'000 $'000 Deferred acquisitions costs as at 1 January 54,535 41, Acquisition costs deferred 113, , Amortisation charged to Statement of Comprehensive Income (70,379) (59,780) - - Write down for premium deficiency (4,136) (38,118) - - Deferred acquisitions costs as at 31 December 93,354 54, Current 89,754 53, Non-current 3,600 1, ,354 54, Deferred originating costs Consolidated Parent Entity $'000 $'000 $'000 $'000 Deferred originating costs as at 1 January 6,222 7, Acquisition costs deferred 794 1, Amortisation charged to Statement of Comprehensive Income (2,119) (2,716) - - Deferred originating costs as at 31 December 4,897 6, Current 1,679 2, Non-current 3,218 4, ,897 6,

60 17. Defined benefit fund deficit/surplus (a) Superannuation funds All employees of the Consolidated Entity are entitled to benefits from the Consolidated Entity s superannuation funds on retirement, disability or death. The Consolidated Entity has two superannuation funds, a defined benefit fund (closed to new members) and a defined contribution fund. The defined benefit fund provides lump sum benefits based on years of service and final average salary. The following sets out details in respect of the defined benefit fund only. (b) Balance sheet amounts Consolidated Parent $ 000 $ 000 $ 000 $ 000 Fair value of defined benefit fund assets 7,269 6,533 7,269 6,533 Present value of the defined benefit obligation 8,610 8,638 8,610 8,638 Net assets deficit (1,341) (2,105) (1,341) (2,105) (c) Categories of fund assets The major categories of fund assets are as follows: Australian Shares 2,979 2,991 2,979 2,991 Australian Fixed Interest 2,976 2,096 2,976 2,096 Listed Property Trusts 1,262 1,277 1,262 1,277 Cash ,269 6,533 7,269 6,533 (d) Reconciliations Reconciliation of the present value of the defined benefit obligation, which is partly funded: Balance at the beginning of the year 8,638 8,186 8,638 8,186 Service Cost Interest cost Actuarial (gains)/losses Benefits paid (869) (896) (869) (896) Balance at the end of year 8,610 8,638 8,610 8,638 Reconciliation fair value of fund assets: Balance at the beginning of the year 6,533 7,196 6,533 7,196 Expected return on fund assets Actuarial (gains)/losses 601 (741) 601 (741) Contributions by company Benefits paid (869) (896) (869) (896) Balance at the end of year 7,269 6,533 7,269 6,533 59

61 17. Defined benefit fund deficit/surplus (continued) (e) Amounts recognised in Statements of Comprehensive Income The amounts recognised in the Statements of Comprehensive Income are as follows: Consolidated Parent $ 000 $ 000 $ 000 $ 000 Total net movement 764 (1,115) 764 (1,115) (f) Principal actuarial assumptions The principal actuarial assumptions used (expressed as weighted averages) were as follows: Consolidated Parent $ 000 $ 000 $ 000 $ 000 Expected rate of return 8.73% 8.45% 8.73% 8.45% Discount rate (gross) 3.25% 4.00% 3.25% 4.00% Discount rate (net) 3.00% 3.50% 3.00% 3.50% Consumer Price Index 2.50% 2.50% 2.50% 2.50% Future pension increases 0.00% 0.00% 0.00% 0.00% Future salary increases 3.00% 3.00% 3.00% 3.00% The expected rate of return on assets has been based on historical and future expectations of returns for each of the major categories of asset classes as well as the expected and actual allocation of plan assets to these major categories. The gross discount rate has been assumed to be the 10 year Government Bond rate rounded to nearest 0.25% as at calculation date. The net investment rate was the gross interest rate less allowance for investment income tax at the rate of 15% rounded to nearest 0.25%. The Consumer Price Index has been derived from the rate implicit in Australian Government Indexed Bond yields rounded to nearest 0.25% as at the calculation date. The Wage Inflation rate was assumed to be 0.50% higher than the Consumer Price Index. (g) Employer contributions Employer contributions to the defined benefit fund are based on a recommendation by the fund s actuary. Actuarial assessments are made annually, and the last such assessment was made as at. Contributions for the year amounted to $510,000 (2011: $430,000) The objective of funding is to ensure that the benefit entitlements of members and other beneficiaries are fully funded. (h) Net financial position of fund In accordance with AAS25 Financial Reporting by Superannuation Plans the fund s net financial position is determined as the difference between the present value of the accrued benefits and the net market value of fund assets. This has been determined as at being the most recent financial report (unaudited) of the superannuation. The resulting financial position has been disclosed as a deficit of $298,499 (2011: $1,090,868 deficit). 60

62 17. Defined benefit fund deficit/surplus (continued) (h) Net financial position of fund (continued) The deficit under AAS25 Financial Reporting by Superannuation Plans differs from the net liability of $1,340,499 (2011: $2,104,868) recognised in the balance sheet because of different measurement rules in the relevant accounting standards AAS25 and AASB 119 Employee Benefits. (i) Historic summary Consolidated Parent Entity $ 000 $ 000 $ 000 $ 000 Fund assets 7,269 6,533 7,269 6,533 Defined benefit fund obligation (8,610) (8,638) (8,610) (8,638) Deficit (1,341) (2,105) (1,341) (2,105) 18. Policy liabilities ceded Consolidated Parent Entity $'000 $'000 $'000 $'000 Current 700 1, Non Current 149, , Total 149, , Other assets Consolidated Parent Entity $'000 $'000 $'000 $'000 Current Deferred outwards reinsurance expense 164, , Fire service levy 25,300 23, Prepayments 4,652 6,156 4,652 6,156 Other 4,519 6, , ,980 4,723 6, Intangibles Consolidated Parent Entity $'000 $'000 $'000 $'000 Software development 5,258 12,088 5,258 12,088 Software 45,683 34,977 45,683 34,977 Less: accumulated amortisation (20,000) (12,886) (20,000) (12,886) Acquired Brand - AMIA - 6, ,941 40,179 30,941 34,179 61

63 20. Intangibles (continued) The carrying value of the AMIA brand is nil as at as the Consolidated Entity does not consider the AMIA brand to have a commercial value on an ongoing basis. This assessment is in accordance to the accounting policy for impairment of assets as set out in Note 1(y). Consolidated Software and systems $ 000 Software development $ 000 Acquired Brand $ 000 Total $ 000 At 1 January 2011 Opening net book amount 23,641 8,322 8,850 40,813 Additions 12 9,110-9,122 Disposal (62) (62) Transfer 5,342 (5,342) - - Amortisation charge (6,844) - - (6,844) Impairment charge - - (2,850) (2,850) Closing net book amount at 31 December ,089 12,090 6,000 40,179 At 1 January 2012 Opening net book amount 22,089 12,090 6,000 40,179 Additions - 6,345-6,345 Transfer 13,177 (13,177) - - Amortisation charge (8,636) - - (8,636) Impairment charge (947) - (6,000) (6,947) Closing net book amount at 25,683 5,258-30,941 Parent Entity Software and systems $ 000 Software development $ 000 Acquired Brand $ 000 Total $ 000 At 1 January 2011 Opening net book amount 23,558 8,322-31,880 Additions - 9,110-9,110 Transfer 5,342 (5,342) - - Amortisation charge (6,811) - - (6,811) Closing net book amount at 31 December ,089 12,090-34,179 At 1 January 2012 Opening net book amount 22,089 12,090-34,179 Additions - 6,345-6,345 Transfer 13,177 (13,177) - - Amortisation charge (8,636) - - (8,636) Impairment Charge (947) - - (947) Closing net book amount at 25,683 5,258-30,941 62

64 21. Property, plant and equipment Consolidated At 1 January 2012 Plant and Land Building equipment Total $ 000 $ 000 $ 000 $ 000 At cost 10,018 22, , ,584 less: accumulated depreciation - (9,503) (89,531) (99,034) Net book amount 10,018 12,665 21,867 44,550 Reconciliation Reconciliations of the carrying amounts of plant and equipment at the beginning and end of the current financial year are set out below. Carrying amount at 1 January ,018 12,665 21,867 44,550 Additions 4,552 4,552 Disposals (1,559) (1,559) Depreciation expense (note 7(b)) (887) (4,939) (5,826) Movement in foreign currency translation Carrying amount at 10,018 11,778 19,970 41,766 - At At cost 10,018 22, , ,833 less: accumulated depreciation - (10,390) (93,677) (104,067) Net book amount 10,018 11,778 19,970 41,766 Parent entity At 1 January 2012 Plant and Land Building equipment Total $ 000 $ 000 $ 000 $ 000 At cost , ,055 less: accumulated depreciation - - (87,675) (87,675) Net book amount ,380 19,380 Reconciliation Reconciliations of the carrying amounts of plant and equipment at the beginning and end of the current financial year are set out below. Carrying amount at 1 January ,380 19,380 Additions - - 4,508 4,508 Disposals - - (1,329) (1,329) Depreciation expense (Note 7(b)) - - (4,775) (4,775) Currency translation difference Carrying amount at ,833 17,833 At At cost 110, ,294 less: accumulated depreciation - - (92,461) (92,461) Net book amount ,833 17,833 63

65 22. Payables Consolidated Parent Entity $'000 $'000 $'000 $'000 Current Reinsurance creditors 66,359 48, Policy claims in process of settlement 12,654 7, Unsettled investment purchases 25,643 5, Commissions payable 29,837 31, Due to related entities (Note 39) 264,527 52,932 20,785 16,047 Tax related payable 26,275 11, Other creditors 24,901 33,460 2,490 2,949 Accruals 27,747 28,926 24,922 25, , ,211 48,197 44,940 Non Current Loans from related parties (Note 39) ,569 39, ,569 39,569 Total payables 477, ,211 87,766 84, Provisions Current Consolidated Parent Entity $'000 $'000 $'000 $'000 Employee entitlements (Note 24) 19,451 20,596 19,451 20,596 Fire Service Levy 10,993 7, Stamp Duty 7,899 5, Other 6,013 5,255 5,971 5,203 Non Current 44,356 39,348 25,422 25,799 Employee entitlements (Note 24) 2,945 1,706 2,945 1,706 Other 1,689 1, ,634 2,824 2,945 1,706 Total provisions 48,990 42,172 28,367 27,505 64

66 23. Provisions (continued) Movements in provisions Fire Service Stamp Duty Other Total Levy $ 000 $ 000 $ 000 $ 000 Consolidated Current Carrying amount at start of year 4,016 6,255 10,209 20,480 Additional provision recognised 43,964 62,358 4, ,155 Payments / Other sacrifices of economic benefits (40,176) (62,920) (9,787) (112,883) Carrying amount at end of year 7,804 5,693 5,255 18,752 Non-current Carrying amount at start of year - - 1,118 1,118 Carrying amount at end of year - - 1,118 1,118 Parent Entity Current Carrying amount at start of year ,193 10,193 Additional provision recognised - - 4,797 4,797 Payments / Other sacrifices of economic benefits - - (9,787) (9,787) Carrying amount at end of year - - 5,203 5,203 Movements in provisions Fire Service Stamp Duty Other Total Levy $ 000 $ 000 $ 000 $ 000 Consolidated Current Carrying amount at start of year 7,804 5,693 5,255 18,752 Additional provision recognised 51,441 76,299 11, ,081 Payments / Other sacrifices of economic benefits (48,252) (74,093) (10,583) (132,928) Carrying amount at end of year 10,993 7,899 6,013 24,905 Non-current Carrying amount at start of year - - 1,118 1,118 Additional provision recognised Carrying amount at end of year - - 1,689 1,689 Parent Entity Current Carrying amount at start of year - - 5,203 5,203 Additional provision recognised ,351 11,352 Payments / Other sacrifices of economic benefits - - (10,583) (10,583) Carrying amount at end of year - - 5,971 5,971 65

67 24. Employee benefits Consolidated Parent Entity $'000 $'000 $'000 $'000 (a) Employee entitlement liabilities Provision for employee entitlements Current (Note 23) 19,451 20,596 19,451 20,596 Non current (Note 23) 2,945 1,706 2,945 1,706 Aggregate employee entitlement liability 22,396 22,302 22,396 22,302 (b) Employee numbers Number Number Number of employees at the end of the year 1,270 1,268 1,270 1,268 Long service leave Provision is made for long service leave for all employees who have been employed by the Consolidated Entity for more than five years. The provision is based on the present value of the liability. (c) Superannuation commitments All employees of the Consolidated Entity are entitled to benefits on retirement, disability or death from various Zurich Staff Superannuation Funds ( the Funds ). The Funds provide both defined contribution benefits and defined benefits based on years of service and final average salary. Entities in the Consolidated Entity contribute to the Funds sufficient amounts to meet the benefits provided under the Funds. These entity contributions are not legally enforceable except as stipulated under the Superannuation Guarantee Act. Employees also contribute to some of the Funds at various rates. (Refer to Note 17). 25. Unearned premium liability Consolidated Parent Entity $'000 $'000 $'000 $'000 Unearned premium liability as at 1 January 690, , FX difference on opening balance 1, Deferral of premiums on contracts written in the period 1,258,565 1,209, Earning of premiums written in previous periods (1,227,081) (1,164,291) - - Unearned premium liability as at 31 December 723, , Unearned Premium - current 674, , Unearned Premium - Non-current 48,914 58, , ,

68 26. Unexpired risk liability (a) Unexpired risk liability Consolidated Parent Entity $ 000 $ 000 $ 000 $ 000 Unexpired risk liability as at 1 January 41,792 36, Currency transaction difference Recognition of additional unexpired risk liability in the period - 5, Release of unexpired risk liability recorded in previous periods (38,493) (191) - - Unexpired risk liability as at 31 December 3,503 41, Unexpired risk liability current 3,503 41, (b) Deficiency recognised in the Statements of Comprehensive Income Gross movement in unexpired risk liability (38,493) 5, Reinsurance recoveries on unexpired risk liability 29,248 (1,727) - - Net movement in unexpired risk liability (9,245) 3, Write down of deferred acquisition costs 4,136 38, Total amount recognised in the Statements of Comprehensive Income (5,109) 41, (c) Calculation of deficiency Unearned premium liability 698, , Related reinsurance asset (159,856) (182,104) - - Related deferred acquisition costs (67,854) (62,643) - - Total net unearned premium liability 470, , Total net for business that has deficiency only (A) 209, , Central estimate of present value of gross expected future cashflows arising from future claims on insurance contracts issued 525, , Risk margin of 16.58% (2011: 16.05%) 64,163 60, Present value of expected future cash inflows arising from reinsurance recoveries (88,835) (108,254) - - Present value of expected future cash inflows arising from non-reinsurance recoveries (49,665) (57,786) - - Total net premium liability 451, , Total net for business that has deficiency only (B) 213, , Net deficiency (A) (B) (4,163) (28,572) - - Add back recoveries element of present value of expected future cash flows for future (3,476) (51,317) - - Gross deficiency (7,639) (79,889)

69 26. Unexpired risk liability (continued) The liability adequacy test is applied at a level of portfolios of contracts that are subject to broadly similar risks and that are managed together as a single portfolio. The test has been done using a split between long tail and short tail business. In 2011, the test has been applied at a more detailed level than a split between long tail and short tail business. The test has identified a deficiency for a few portfolios of contracts to which it was applied both at and for 31 December This is primarily a consequence of the inclusion of a risk margin in excess of the central estimate in performing the test. The process for determining the overall risk margin, including the way in which diversification of risks has been allowed for is discussed in Note 28. As with outstanding claims, the overall risk margin is intended to achieve an 85% (2011: 85%) probability of adequacy. 27. Deferred origination fees Deferred Originating Fees Consolidated Parent Entity $'000 $'000 $'000 $'000 Deferred originating fees as at 1 January 5,212 6, Amount deferred over the year Amortisation charge for the year (1,667) (1,903) - - Deferred originating fees as at 31 December 4,311 5, Current 1,374 1, Non-current 2,937 3, ,311 5,

70 28. Outstanding claims (a) Outstanding claims liability Consolidated Parent Entity $ 000 $ 000 $ 000 $ 000 Central estimate 2,505,681 2,690, Discount to present value (153,596) (163,784) - - 2,352,085 2,527, Claims handling costs 72,548 62, Discount to present value (5,022) (6,117) ,526 56, Risk margin 341, , Discount to present value (21,162) (26,164) , , Gross outstanding claims liability 2,739,798 2,942, Consolidated $ 000 $ 000 Undiscounted expected future claims payments 2,919,579 3,139,009 Discount to present value (179,781) (196,065) Liability for outstanding claims 2,739,798 2,942,944 Current 1,472,627 1,437,634 Non-current 1,267,171 1,505,310 2,739,798 2,942,944 (b) Risk margin Process for determining risk margin The overall risk margin was determined allowing for diversification between the different portfolios and the relative uncertainty of the outstanding claims estimate for each portfolio. Uncertainty was analysed for each portfolio taking into account potential uncertainties relating to the actuarial models and assumptions, the quality of the underlying data used in the models, the general insurance environment, and the impact of legislative reform. The estimate of uncertainty is greater for long tailed classes when compared to short tail classes due to the longer time until settlement of outstanding claims. The assumptions regarding uncertainty for each class were applied to the net central estimates, and the results were aggregated, allowing for diversification in order to arrive at an overall provision which is intended to have an 85% probability of adequacy in In 2011, this was also set to achieve an 85% probability of adequacy. 69

71 28. Outstanding claims (continued) (b) Risk margin (continued) Risk Margins Applied APRA Class Net Outstanding Claims Margin Net Outstanding Claims Margin Short-tail Domestic Motor Vehicle 7.8% 8.3% Commercial Motor Vehicle 8.4% 9.0% Houseowners/Householders 9.5% 10.0% Travel 9.8% 8.3% Fire and ISR (incl Inwards Treaty) 14.0% 13.0% Other 28.7% 12.0% Marine & Aviation 15.8% 13.0% Other Accident 18.3% 18.3% Average short-tail 12.6% 12.0% Long-tail Employers' Liability 14.1% 11.9% Public & Product Liability (incl Inwards Treaty) 15.0% 13.9% Professional Indemnity 23.1% 24.3% CTP Motor Vehicle 11.5% 11.6% Inward Treaty 26.9% 23.5% Average long-tail 13.3% 12.5% Overall 13.2% 12.3% (c) Reconciliation of movement in discounted outstanding claims liability Gross Reinsurance Net Gross Reinsurance Net $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 Brought forward 2,942,944 1,807,770 1,135,174 1,951, ,436 1,073,504 Effect of changes in assumptions (193,226) (110,670) (82,556) 24,927 89,746 (64,819) Increase in claims incurred/recoveries anticipated over the year 990, , ,579 1,945,449 1,196, ,784 Incurred claims recognised in the Statement of Comprehensive Income 797, , ,023 1,970,376 1,286, ,965 Exchange rate adjustment 31,307 28,417 2, (1,155) 1,872 Claim payments/recoveries during the year (1,031,914) (464,814) (567,100) (980,089) (355,922) (624,167) Carried forward 2,739,798 1,548,811 1,190,987 2,942,944 1,807,770 1,135,174 70

72 28. Outstanding claims (continued) (d) Claims development tables The following tables show the development of gross and net undiscounted outstanding claims relative to the ultimate expected claims for the five most recent accident years for classes of business that are typically resolved in more than one year, plus the provision for short tail claims. Gross outstanding claims include claims from inwards reinsurance. (i) Gross incurred Accident Year Total $'000 $'000 $'000 $'000 $'000 $ 000 End of Accident Year 296, , , , ,147 One Year Later 292, , , ,668 Two years later 265, , ,728 Three years later 243, ,842 Four years later 226,509 Current Estimate of Incurred 226, , , , ,147 1,776,894 Cumulative Payments 146, ,177 95,687 75,439 28, ,551 Outstanding claims - Undiscounted 79, , , , ,675 1,293,343 Discount (92,628) Claim Handling Expense 34, and prior years 316,533 Outstanding claims - Discounted 1,551,275 Short Tail Outstanding Claims 1,188,523 Total Gross 2,739,798 (ii) Net incurred Accident Year Total $'000 $'000 $'000 $'000 $'000 $'000 End of Accident Year 236, , , , ,912 One Year Later 218, , , ,124 Two years later 203, , ,275 Three years later 193, ,063 Four years later 181,483 Current Estimate of Incurred 181, , , , ,912 1,167,857 Cumulative Payments 118,173 99,429 89,470 54,634 40, ,207 Outstanding claims - Undiscounted 63,310 92, , , , ,650 Discount (44,945) Claim Handling Expense 31, and prior years 181,625 Outstanding claims - Discounted 934,152 Short Tail Outstanding Claims 256,835 Total Net 1,190,987 71

73 29. Deferred tax liabilities Consolidated Parent Entity $'000 $'000 $'000 $'000 The balance comprises temporary differences attributable to: Amounts recognised in profit or loss Unrealised gain on investments 3,602 6, Deferred origination costs 2,863 1, Receivables 2,196 1, Provisions for DAC write off and Unexpired Risk Liability Set-off of deferred tax liabilities pursuant to set-off provision (Note 14) (8,464) (5,769) - - Net deferred tax liability 926 3, Deferred tax liabilities movements: Opening balance at 1 January 3, Charged to Income Statement (Note 9) (4,708) 2, Set-off of deferred tax assets pursuant to set-off provision (Note 14) 1, Closing balance at 31 December 926 3,

74 30. Policy liabilities Valuation of net policy liabilities at end of period 2012 $ 000 Previous Year s Basis (5) 2012 $ 000 Current Year s Basis 2011 $ 000 Previous Year s Basis Insurance Contracts - Best estimate liability (1) - Value of future policy benefits (2) 1,149,536 1,137, ,965 - Value of future expenses 579, , ,932 - Value of future premiums (2,112,756) (2,168,238) (1,887,844) Total Best Estimate liability for Insurance Contracts (383,402) (400,678) (356,947) Insurance Contracts - Value of future profits (1) - Value of future policyholder bonuses (3) 16,209 10,539 13,999 - Value of future Shareholder profit margins 316, , ,178 Total Value of future profits 332, , ,177 Total value of declared bonuses (4) 4,227 4,227 5,442 Net Policy Liabilities for Insurance Contracts (46,669) (59,023) (51,328) Investment Linked Contracts - Value of investment contract liability 1,552,216 1,551,687 1,564,329 Net Policy Liabilities for Investment Linked Contracts 1,552,216 1,551,687 1,564,329 Other Investment Contracts - Value of investment contract liability 212, , ,097 Net Policy Liabilities for Other Investment Contracts 212, , ,097 Net policy liabilities 1,717,662 1,704,142 1,748,098 Total Statutory Funds 2012 $ $ 000 Current Gross Policy Liabilities 32,125 34,893 Non-Current Gross Policy Liabilities 1,822,004 1,845,228 Total Gross Policy Liabilities 1,854,129 1,880,121 Current Gross Policy Liabilities Ceded Under Reinsurance (700) (1,117) Non-Current Gross Policy Liabilities Ceded Under Reinsurance (149,287) (130,908) Total Gross Policy Liabilities Ceded Under Reinsurance (149,987) (132,025) Total Net policy liabilities 1,704,142 1,748,096 Explanatory notes: 1. All business regardless of method of valuation. 2. Future policy benefits include bonuses credited to policyholders in prior periods but exclude current year bonuses [as shown in (4)] and future bonuses [as shown in (3)]. 3. Future bonuses exclude current year bonuses. 4. Current year declared bonus valued in accordance with the actuarial standard. 5. Using the actuarial methods and assumptions relevant at the previous reporting date, but on current in force business. 73

75 31. Net assets attributable to unitholders Consolidated Value of holding External Unitholders Interest Holding $ 000 $ 000 % % Total holdings in unit trusts Zurich Investments Australian Cash Pool 14,439 58, Zurich Investments Diversified Australian Share Pool 44,057 41, Zurich Investments International Fixed Interest Pool 28,595 30, Zurich Investments Australian Value Share Pool 17,838 15, Zurich Investments Global Property Securities Scheme 6,943 7, Zurich Investments Australian Property Securities Pool 22,317 23, Zurich Investments Global Growth Shares Fund 8,193 6, Zurich Investments Alternative Global Equity Scheme 2,864 3, Total net assets attributable to unitholders 145, ,587 74

76 32. Contributed equity Consolidated and Parent Entity No. of No. of $ 000 $ 000 Shares Shares (a) Share capital Ordinary shares fully paid 11,383 11, , ,273 (b) Movements in ordinary share capital Consolidated and Parent Entity No. of $ 000 Shares 000 Date Details 1/01/2011 Opening balance 11, ,273 31/12/2011 Balance 11, ,273 31/12/2012 Closing balance 11, ,273 Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the Consolidated Entity in proportion to the number of and amounts paid on the shares held. The Consolidated Entity manages its capital to ensure that the parent entity and controlled entities will be able to continue as a going concern including compliance with capital requirements imposed by relevant legislation and the industry regulators, Australian Prudential Regulation Authority (APRA) and Australian Securities and Investment Commission (ASIC). The Consolidated Entity aims to maintain capital beyond minimum requirements as described below. The capital structure of the Consolidated Entity consists of issued capital, reserves and retained earnings. The board's risk appetite statement sets out the level of capital to be targeted by the Consolidated Entity. Life insurance operations ZAL is required by the Life Insurance Act 1995 to meet its Capital Adequacy requirement on a continuous basis and this drives the need for a buffer of additional capital known as Target Surplus. The Target Surplus is the excess capital required to ensure that ZAL can meet its Capital Adequacy Requirement over the next 12 months under a range of adverse and foreseeable events. Non-life insurance operations ZAIL is required by APRA to maintain capital in excess of its minimum capital requirement (MCR). The MCR is intended to be broadly commensurate with the full range of risks to which an insurer is exposed (including risks relating to insurance claims, investments, counterparty default, asset-liability mismatches, catastrophic events and operational errors and problems). Certain assets (such as deferred tax assets, goodwill and other intangibles) cannot be used to meet the MCR. MCR will be replaced by Prudential Capital Requirement (PCR) from 1 January PCR is the required level of capital for regulatory purposes. It is calculated as the sum of the prescribed capital amount and any supervisory adjustment determined by APRA. The amendments to the methodology for calculating the prescribed capital amount include: introducing an explicit operational risk charge; significant revisions to the calculation of the asset risk and insurance concentration risk charges; revisions to the specified limits for calculating the asset concentration risk charge; and minor modifications to the factors and class of business groupings used to calculate the insurance risk charge. 75

77 32. Contributed equity (continued) Controlled entities that hold Australian Financial Services licences issued by ASIC must comply with licence conditions including: the entity must be able to pay all its debts as and when they become due and payable have total assets that exceed total liabilities or adjusted assets that exceed adjusted liabilities meet the cash needs requirements as set out in its licence must hold at least $5 million net tangible assets 33. Reserves and retained profits Consolidated Parent Entity $ 000 $ 000 $ 000 $ 000 (a) Composition: Asset revaluation reserve - 6, Foreign currency reserve (127) (127) 6, (b) Movement: Balance at beginning of the year 6,034 9, Impairment of intangible assets (6,000) (2,850) foreign exchange (161) (1,100) - - Balance at end of the year (127) 6, (c) Retained profits Retained profits at the beginning of the year 1,045, , , ,479 Profit attributable to the member of Zurich Financial Services Australia Limited 162,207 65,193 (13,825) (32,168) Dividends Paid (26,000) - (26,000) - Retained profits at the end of the year 1,181,805 1,045, , ,311 (d) Nature and purpose of reserves The asset revaluation reserve represents the fair value of identifiable intangible asset on consolidation of AMIA. 34. Franking Credits 76 Consolidated Parent Entity $'000 $'000 $'000 $'000 Total franking credits available for subsequent reporting periods based on a tax rate of 30% ( %) 489, The above amounts represent the balance of the franking account as at the end of the reporting period, adjusted for franking credits that will arise from the payment of the amount of the provision for income tax. The comparative amount for 2011 was nil as the Company was not the head company of the tax consolidated group. The franking credits ($470,130,098) were transferred to the Company when the Company became the head company of the tax consolidated group on 1 January 2012.

78 35. Statements of cash flows reconciliation Reconciliation of profit/(loss) after income tax to net cash inflows/(outflows) from operating activities Consolidated Parent Entity $ 000 $ 000 $ 000 $ 000 Profit / (loss) for the year 162,207 65,193 (13,825) (32,168) Bonus credited to policyholder accounts (216) (167) - - Depreciation & amortisation 22,917 17,447 15,639 12,612 Provisions on impairment - receivables (3,378) 3, Profit/(loss) on sale of investments 15,796 (11,766) - - Net purchase/(disposal) of investments 129, , Net unrealised gains/(losses) (530,264) (166,056) - - Impairment on investments in associates - (3,894) - - Impairment expense on investments in controlled entities ,252 39,248 Net exchange difference (4,016) (1,100) - - Sale/deregistration of controlled entities - (13,999) - - Deferred origination costs/fees (Increase) / decrease in operating assets: Premiums outstanding (9,406) (51,788) - - Outstanding interest, dividends & rents (5,628) 1, Acquisition costs (38,819) (12,986) - - Reinsurance and other recoveries 290,591 (924,641) - - Other receivables 13,564 (18,068) (9,572) (227) Defined benefit superannuation fund surplus (764) 1,115 (764) 1,115 Deferred tax assets 17,352 31, ,374 Other assets 20,473 (18,134) 1,521 (1,796) Increase / (decrease) in operating liabilities: Provisions for deferred tax (2,876) 3, Unearned premiums 33,059 44, Unexpired risk liability (38,289) 5, Outstanding claims (198,324) 986, Other provisions and payables 218,460 (23,787) 4,117 2,179 Vested / unvested policy holder benefits (1,985) (2,218) - - Net policy liabilities (43,954) (374,622) - - Net cash inflows/(outflows) from operating activities 46,340 (98,492) 28,467 23,337 77

79 36. Remuneration of auditors Remuneration for audit or review of the financial reports of the Parent Entity or any entity in the Consolidated Entity: Consolidated Parent Entity $ $ $ $ Statutory audit fees 1,119,056 1,042, , ,773 Audit of superannuation fund and unit trusts 465, , ,584,072 1,603, , ,773 Remuneration for other services: Taxation compliance and assurance services 18, Other regulatory and assurance services 387, ,980 53,568 35,924 Advisory services 160,341 18,307-18,307 Total other services 566, ,287 53,568 54, Commitments for expenditure (a) Capital commitments Capital commitments for which no provision has been made in the financial statements: Consolidated Parent Entity $'000 $'000 $'000 $'000 Capital expenditure on building contracts (Not later than one year) 1,149 2,946 1,104 2,799 (b) Lease commitments Total non-cancellable lease expenditure contracted for at balance date but not provided for in the financial statements: Not later than one year 6,172 6,357 6,172 6,184 Later than one year but not later than five years 13,028 12,428 13,028 12,428 Later than five years 1,087-1,087-20,287 18,785 20,287 18,612 The Consolidated Entity leases various offices under non-cancellable operating leases expiring within one to eight years. The leases have varying terms, escalation clauses and renewal rights. On renewal, the terms of the leases are renegotiated. The lease payments recognised in the Statements of Comprehensive Income in the year were $6,846,832 (2011: $6,135,335) and in the Parent Entity Statements of Comprehensive Income were $6,846,832 (2011: $5,753,077). (c) Other commitments The Company currently has no other commitments. 78

80 38. Contingent liabilities The Consolidated Entity had the following unsecured contingent liabilities for which no provision has been made in the financial statements: Note Consolidated Parent Entity $ 000 $ 000 $ 000 $ 000 Loan guarantees (i) 5,000 5, Performance guarantees: - State Transit Authority of NSW (ii) Warranties and indemnities (iii, iv, v) 21,980 21,980 16,000 16,000 27,280 27,280 16,250 16,250 Details of contingent liabilities are as follows: i. Loan guarantees relate to a subordinated loan facility provided by ZAL to its controlled entity, Zurich Investment Management Limited, largely to meet the Dealers License requirements of ASIC. (2011: subordinated loan facility provided by ZAL to Zurich Investment Management Limited of $5.0m) ii. The State Transit Authority NSW performance guarantee relates to an undertaking by ZAIL in respect of any failure by ZAIL in relation to its agreement with this entity (2012: $50,000 and 2011: $50,000). A deed of Guarantee of $250,000 (2011: $250,000) whereby the Company is substituted for ZAIL in the event of a default by ZAIL under a contract of services between it and the State Transit Authority of NSW for the provision of CTP insurance services. iii. Warranties and indemnities relate to the disposal of ZAL s holding in Financial Lifestyle Solutions Pty Limited (FLS). On 30 June 2008, ZAL completed the sale of all issued shares in FLS to Millennium3 Financial Services Group Pty Limited (Millennium3). Under the terms of the Share Sale Agreement, ZAL made various representations and warranties to Millennium3 concerning the past conduct of FLS and its business. ZAL is obliged to indemnify Millennium3 against losses arising out of breaches of those representations and warranties up to a maximum of $5,931,516 for a period of 7 years after the completion date. iv. An indemnity was provided to Tower Australia Limited in respect of certain life insurance policies issued to a superannuation fund previously administered by ZAL. The indemnity is capped at $49,000. v. Warranties and indemnities were provided by the Company to the purchaser of ZAL s former controlled entity, Lonsec Limited for losses suffered by the purchaser due to breaches of vendor warranties, tax claims relating to the period prior to completion and legal costs in connection with an investigation by the Australian Securities and Investment Commission (ASIC) (2012: $16,000,000 and 2011: $16,000,000). 79

81 39. Related parties (a) Directors The names of persons who were directors of the Company at any time during the financial year are as follows: Terence John Paradine Ian Clifton Carroll Robert Olivier Dolk Michael Ronald Vos Johnny Chen Daniel Luke Fogarty James Richard Sykes Shane Peter Doyle Julian McQueen Lipman (b) Key management personnel compensation Key management personnel compensation for the years ended and 2011 is set out below. The key management personnel are all the directors of the Company and the following executive of the Consolidated Entity (2011: three): - Colin William Morgan All key management personnel compensation is paid by the Company. The amount disclosed below reflects the total compensation paid/attributable to the key management personnel in their duties as employees of the Company (and or directors of various entities) and is not able to be allocated to the individual entities whose affairs they manage or control. Consolidated Notes 2012 $ 2011 $ Parent Entity 2012 $ 2011 $ Short term employee benefits 2,708,657 3,069,553 1,508,780 1,390,816 Termination benefits 39,133 1,460,000 39,133 1,460,000 Share-based payments / benefits (i) 327, , , ,696 (i) Share based payments / benefits 3,075,457 5,213,198 1,725,526 3,167,512 The Global Long Term Performance Share Plan, Global Share Option Plan and Global Special Share Plan are executive incentive plans administered globally by a central share holding vehicle for Australian resident executives who participate in the plans. When shares vest with the participants, the central share vehicle transfers those shares directly to the participants. The Company does not bear any exchange or price risk in relation to payments for these rights to shares. The payment for global incentive plans shown later in this note represents the cost to the parent company and Consolidated Entity for purchasing these rights to shares. 80

82 39. Related Parties (continued) (c) Aggregate amounts receivable from related entities at balance date Consolidated Parent Entity $ $ $ $ Current Controlled entities ,259,548 14,729,770 Other related entities 23,244,449 8,260, ,240 1,426,215 Head tax entity ,034 5,108,773 23,244,449 8,260,230 31,339,822 21,264,758 (d) Aggregate amounts payable to related entities at balance date Consolidated Parent Entity $ $ $ $ Current Ultimate Controlling entities 13,664,586 11,248,782 13,664,586 11,248,782 Controlled entities - - 6,012,195 4,782,826 Other related entities 250,862,211 41,683,658 1,107,745 15,751 Head tax entity - 11,745, ,526,797 64,678,156 20,784,526 16,047,359 Non-current Controlled entities ,569,000 39,569,000 81

83 39. Related parties (continued) (e) Aggregate amounts recognised in respect of the following types of transactions and each class of related party involved were: Consolidated Parent Entity $ $ $ $ Payment of rent Controlled entity - - 6,718,908 6,468,912 Reinsurance claims received Other related entities 384,293, ,587, Reinsurance claims paid Other related entities 22,469,925 1,334, Reinsurance commission received 1 Other related entities 30,660,777 33,854, Reinsurance premium expense Other related entities 245,221, ,130, Reinsurance premium receipts Other related entities 20,438,350 17,790, Dividend income Controlled entity ,000,000 10,000,000 Dividend Paid Immediate Controlling entity 26,000,000-26,000,000 - Receipt of management fees Controlled entity ,145, ,075,526 Receipt of other income Ultimate controlling entity 1,418,869 7,349,484 1,418,869 7,349,484 Other related entities 6,611,976-6,611,976 - Payment of other expenses Immediate Controlling entity 29,415,336 30,564,733 29,415,336 30,564,733 Other related entities 14,149,529-14,149,529 - Expenses for global incentive plans Immediate Controlling entity 1,936,634 2,143,364 1,936,634 2,143,364 Payments for global incentive plans Immediate Controlling entity 1,544,404 1,889,920 1,544,404 1,889,920 The above transactions were made on commercial terms and conditions at market rates. Interests held in controlled entities are included in Notes The 2011 numbers have been restated to reflect the correct disclosure. 82

84 39. Related parties (continued) (f) Related parties of the Consolidated Entity fall into the following categories: (i) Controlling entities The ultimate controlling entity is Zurich Insurance Group Ltd (incorporated in Switzerland). This entity provides the Company with general management services. The amount accrued at balance date for these services was $4,011,946 (2011: $2,589,971 ). The immediate controlling entity is Zurich Insurance Company (ZIC), incorporated in Switzerland. (ii) Other related entities The Company provides some of its controlled entities with computer services, general management, communication, employee benefits and human resource services. The amount paid for these services was $287,145,504 (2011: $264,075,526). Included in the reinsurance and other recoveries amounts in Note 13 is $1,327,085,217 (2011: $1,344,899,756) owing by related entities. Included in other assets Note 19 is $97,765,438 (2011: $95,062,751) in respect of Deferred Outwards Reinsurance Expense by related entities. The Reinsurance Arrangements for outward treaties ceded to related overseas reinsurers are in accordance with APRA Prudential Standard GPS Reinsurance Management. (g) Subordinated Loan facility ZAL provided a subordinated loan facility to its controlled entities, Zurich Investment Management Limited (ZIM), refer to Note 38. (h) Loan from controlled entity Included in the Company s payable Note 22 is a loan of $39,569,000 from ACN Limited, a controlled entity of the Company. The loan has no fixed terms of repayment and is interest-free. 83

85 40. Investment in controlled entities Class of shares Equity holding Controlled entities 2012 % 2011 % ZAL and its controlled entities Zurich Investment Management Limited Ordinary ZAL controlled unit trusts Zurich Investments Australian Cash Pool Zurich Investments Diversified Australian Share Pool Zurich Investments Short Term Maturities Fixed Interest Pool Zurich Investments International Fixed Interest Pool Zurich Investments Hedged Global Thematic Share Scheme Zurich Investments Australian Value Share Pool Zurich Investment Equity Income Scheme Zurich Investments Global Property Securities Scheme Zurich Investments Australian Property Securities Pool Zurich Investments Global Growth Share Scheme Zurich Investments Unhedged Global Thematic Share Scheme Zurich Investments Alternative Global Equity Scheme Zurich Investments Reserve Long Term Maturities Fixed Interest Pool ZAIL and its controlled entities Zurich Australian Insurance Properties Pty Limited Ordinary Zurich Properties Pty Limited Ordinary Other entities directly held by the Company Zurich Australian Superannuation Pty Limited Ordinary ACN Limited (In liquidation) Ordinary Associated Marine Insurers Agents Pty Limited Ordinary ZCM Asia Holdings Pty Limited Ordinary The directors are satisfied that the carrying value of investments in controlled entities is not in excess of recoverable amount. Minority interests in controlled unit trusts are considered to be liabilities and are shown in Note 31. Zurich Australian Insurance Properties Pty Ltd and Zurich Properties Limited are 100% held by various entities in the Group. All companies in the Consolidated Entity are incorporated in Australia. 84

86 40. Investment in controlled entities (continued) (a) Disposal of controlled entities On 13 February 2012, the following investment schemes were deregistered: - Zurich Investments Australian Fixed Interest Pool - Zurich Investments Australian Indexed Bond Pool - Zurich Investments Reserve Corporate Bond Pool On 1 August 2012, ZAL disposed its holding in Zurich Investments Reserve Short Term Maturities Fixed Interest Pool and Zurich Investments Reserve Long Term Maturities Fixed Interest Pool On 26 September 2012, ZAL disposed its holding of Zurich Investments Global Small Companies Share Pool (b) Carrying amount of assets and liabilities of disposed subsidiaries not considered to be discontinued operations No disposal of subsidiaries that are not considered to be discontinued operations in 2012 (2011: two). Consolidated $ 000 $ 000 Cash - 7,096 Receivables - 20,399 Investments Property, plant and equipment Total assets - 28,493 Payables - 22,796 Current tax liability - 23 Total liabilities - 22,819 Net assets - 5,674 (c) Details of sale of subsidiaries Consolidated $ 000 $ 000 Consideration received - 16,075 Transaction costs - (1,791) Gain on disposal (Note 6) - 12, Events occurring after reporting date During January 2013 floods occurred in Queensland and Northern New South Wales in Australia. The gross claims are expected to be less than $60m, with net result of $10m after reinsurance recoveries. Apart from above, the directors have not become aware of any matter or circumstance not otherwise dealt with in the financial statements that has significantly affected or may significantly affect the operations of the Consolidated Entity, the results of those operations or the state of affairs of the Consolidated Entity in subsequent financial years. 85

87 42. Statutory fund and segment information (a) Statutory Fund Information ZAL operates predominantly in the life insurance industry. The principal activities of ZAL are the underwriting of various classes of ordinary and superannuation life insurance and the investment of related funds. ZAL operates in one geographical area, being Australia. In accordance with the requirements of the Life Insurance Act 1995, ZAL has established separate Statutory Funds to account for the different type of life insurance business written by the Company. Details are as follows: Type of Business No.2 Statutory Fund Non Investment Linked Ordinary and Superannuation Business No.3 Statutory Fund Investment Linked Ordinary and Superannuation Business Major Products Term Insurance, Income Protection Insurance, Total and Permanent Disablement Insurance, Trauma Insurance, Investment Account, Quality Life, Group Life, Deferred Annuities, Whole of Life and Endowment Insurance, Term Certain Annuity Investment Linked Business Regular and Single Premiums, Allocated Pensions, Deferred Annuities 86

88 42. Statutory fund and segment information (continued) (b) Segment Information Abbreviated Statement of Comprehensive Income at Fund Level for the Year Ended Statutory Fund Statutory Fund Total Statutory Shareholder s No.2 No.3 Funds Funds $ 000 $ 000 $ 000 $ 000 Insurance premium revenue 264, ,792 - Outward reinsurance expense (81,396) - (81,396) - Net Insurance premium revenue 183, ,396 - Fees for management services rendered 3,919 27,389 31,308 - Investment Income 47, , ,281 2,666 Other income 779 4,006 4,785 6 Total revenue and other income 235, , ,770 2,672 Claims expense (113,700) - (113,700) - Reinsurance recoveries 65,137-65,137 - Administration expenses (130,036) (25,209) (155,245) (4,365) Increase in net policy liabilities 408 (205,474) (205,066) - Decrease in unvested policyholder benefits 2,201-2,201 - Total operating expenses (175,990) (230,683) (406,673) (4,365) Profit from continuing operations before income tax 59,289 17,808 77,097 (1,693) Income tax expense (20,710) (11,013) (31,723) 2,364 Profit from continuing operations after income tax 38,579 6,795 45, Appropriations: - Transfers to shareholders funds (1,504) - (1,504) 1,504 Profit/(loss) from continuing operations after appropriations 37,075 6,795 43,870 2,175 Statutory Fund No. 2 is wholly non-investment linked. Statutory Fund No. 3 is wholly investment linked. 87

89 42. Statutory fund and segment information (continued) (c) Segment information abbreviated Statement of Comprehensive Income at Fund Level for the Year Ended 31 December 2011 Statutory Fund Statutory Fund Total Statutory Shareholder s No.2 No.3 Funds Funds $ 000 $ 000 $ 000 $ 000 Insurance premium revenue 240, ,480 - Outward reinsurance expense (73,936) - (73,936) - Net Insurance premium revenue 166, ,544 - Fees for management services rendered 4,259 31,053 35,312 - Investment Income 51,578 (48,619) 2,959 10,403 Other income 817 5,371 6,188 12,208 Total revenue and other income 223,198 (12,195) 211,003 22,611 Claims expense (104,149) - (104,149) - Reinsurance recoveries 63,461-63,461 - Administration expenses (114,236) (30,114) (144,350) (5,029) Increase/(Decrease) in net policy liabilities 22,311 54,628 76,939 - Decrease in unvested policyholder benefits 2,385-2,385 - Total operating expenses (130,228) 24,514 (105,714) (5,029) Profit/(loss) from continuing operations before income tax 92,970 12, ,289 17,582 Income tax benefit/(expense) (31,165) (4,238) (35,403) (2,988) Profit/(loss) from continuing operations after income tax 61,805 8,081 69,886 14,594 Appropriations: - Transfers to shareholders funds (1,943) - (1,943) 1,943 - Dividends (10,000) Profit/(loss) from continuing operations after appropriations 59,862 8,081 67,943 6,537 Statutory Fund No. 2 is wholly non-investment linked. Statutory Fund No. 3 is wholly investment linked. 88

90 42. Statutory fund and segment information (continued) (d) Segment Information Abbreviated Statement of Comprehensive Income at Category Level for the Year Ended STATUTORY FUND 2 STATUTORY FUND 2 STATUTORY FUND 3 TOTAL STATUTORY FUNDS AUSTRALIAN AUSTRALIAN AUSTRALIAN Ordinary Superannuation Ordinary Superannuation Participating Non Participating Total Participating Non Participating Total Non Participating Non Participating Total $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 Insurance premium revenue 1, , , ,171 46, ,792 Outward reinsurance expense (52) (63,366) (63,418) (3) (17,975) (17,978) (81,396) Net insurance premium revenue 1, , , ,196 28, ,396 Fees for management services rendered ,382 3,401 1,232 26,157 27,389 31,308 Investment Income 19,035 14,590 33,625 5,971 7,589 13,560 12, , , ,281 Other income ,004 4,006 4,785 Total revenue and other income 20, , ,257 6,325 39,697 46,022 13, , , ,770 Claims expense (8,715) (84,911) (93,626) (3,993) (16,081) (20,074) (113,700) Reinsurance recoveries - 54,519 54,519-10,618 10, ,137 Administration expenses (880) (112,286) (113,166) (331) (16,539) (16,870) (731) (24,478) (25,209) (155,245) Increase in net policy liabilities (6,338) 12,677 6,339 (1,121) (4,810) (5,931) (7,267) (198,207) (205,474) (205,066) Decrease in unvested policyholder benefits 1,739-1, ,201 Total operating expenses (14,194) (130,001) (144,195) (4,983) (26,812) (31,795) (7,998) (222,685) (230,683) (406,673) Profit from continuing operations before income tax 5,902 39,160 45,062 1,342 12,885 14,227 5,535 12,273 17,808 77,097 Income tax expense (5,441) (13,339) (18,780) (850) (1,080) (1,930) (3,004) (8,009) (11,013) (31,723) Profit from continuing operations after income tax ,821 26, ,805 12,297 2,531 4,264 6,795 45,374 Appropriations: - Transfers to shareholders funds (899) - (899) (605) - (605) (1,504) Profit/(loss) from continuing operations after appropriations (438) 25,821 25,383 (113) 11,805 11,692 2,531 4,264 6,795 43,870 89

91 42. Statutory fund and segment information (continued) (e) Segment Information Abbreviated Statement of Comprehensive Income at Category Level for the Year Ended 31 December 2011 STATUTORY FUND 2 STATUTORY FUND 2 STATUTORY FUND 3 TOTAL STATUTORY FUNDS AUSTRALIAN AUSTRALIAN AUSTRALIAN Ordinary Superannuation Ordinary Superannuation Participating Non Participating Total Participating Non Participating Total Non Participating Non Participating Total $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 Insurance premium revenue 1, , , ,791 44, ,480 Outward reinsurance expense (26) (55,937) (55,963) (2) (17,971) (17,973) (73,936) Net insurance premium revenue 1, , , ,820 26, ,544 Fees for management services rendered ,647 3,686 1,347 29,706 31,053 35,312 Investment Income 18,994 17,979 36,973 6,289 8,316 14, (48,885) (48,619) 2,959 Other income ,352 5,371 6,188 Total revenue and other income 20, , ,132 6,716 39,350 46,066 1,632 (13,827) (12,195) 211,003 Claims expense (9,380) (71,383) (80,763) (3,333) (20,053) (23,386) (104,149) Reinsurance recoveries - 46,592 46,592-16,869 16, ,461 Administration expenses (659) (95,770) (96,429) (502) (17,305) (17,807) (1,090) (29,024) (30,114) (144,350) Increase in net policy liabilities (5,408) 34,105 28,697 (2,753) (3,633) (6,386) ,727 54,628 76,939 Decrease in unvested policyholder benefits 1,260-1,260 1,125-1, ,385 Total operating expenses (14,187) (86,456) (100,643) (5,463) (24,122) (29,585) (189) 24,703 24,514 (105,714) Profit from continuing operations before income tax 6,095 70,394 76,489 1,253 15,228 16,481 1,443 10,876 12, ,289 Income tax expense (5,253) (20,396) (25,649) (755) (4,761) (5,516) 696 (4,934) (4,238) (35,403) Profit from continuing operations after income tax ,998 50, ,467 10,965 2,139 5,942 8,081 69,886 Appropriations: - Transfers to shareholders funds (1,164) - (1,164) (779) - (779) (1,943) Profit/(loss) from continuing operations after appropriations (322) 49,998 49,676 (281) 10,467 10,186 2,139 5,942 8,081 67,943 90

92 42. Statutory fund and segment information (continued) (f) Segment Information Abbreviated Balance Sheet at Fund Level as at Statutory Fund No.2 Statutory Fund No.3 Total Statutory Funds Shareholder s Fund $ 000 $ 000 $ 000 $ 000 Equities 81,285 1,158,740 1,240,025 9,519 National government interest bearing securities 122,703 33, ,883 10,946 Other public sector interest bearing securities 184,748 89, ,896 18,295 Private sector interest bearing securities 258, , ,205 26,517 Loans 1,767-1,767 - Other Total investment assets 649,235 1,546,839 2,196,074 65,277 Gross policy liabilities ceded 149, ,987 - Other assets 45,506 69, ,734 10,444 Total assets 844,728 1,616,067 2,460,795 75,721 Gross policy liabilities insurance contracts 62,333-62,333 - Gross policy liabilities investment contracts 240,109 1,551,687 1,791,796 - Unvested policyholder benefits 35,383-35,383 - Other liabilities 39,219 7,001 46,220 2,163 Total liabilities 377,044 1,558,688 1,935,732 2,163 Net assets 467,684 57, ,063 73,558 Shareholder s equity - Reserves ,246 - Share capital ,000 - Shareholder s retained profits (Aust par) 8,846-8, Shareholder s retained profits (Aust non par) 458,838 57, ,217 58,312 Total equity 467,684 57, ,063 73,558 Statutory Fund No. 2 is wholly non-investment linked. Statutory Fund No. 3 is wholly investment linked. 91

93 42. Statutory fund and segment information (continued) (g) Segment information Abbreviated Balance Sheet at Fund Level as at 31 December 2011 Statutory Fund No.2 Reclassified $ 000 Statutory Fund No.3 Reclassified $ 000 Total Statutory Funds Shareholder s Fund Reclassified $ 000 $ 000 Equities 74,384 1,137,600 1,211,984 9,509 National government interest bearing securities 20,145 36,818 56,963 - Other public sector interest bearing securities 43,845 84, ,408 - Private sector interest bearing securities 487, , ,137 78,024 Loans 1,965-1,965 - Other 29 1,498 1,527 - Total investment assets 627,592 1,570,392 2,197,984 87,533 Gross policy liabilities ceded 132, ,025 - Other assets 62,716 56, ,048 (9,830) Total assets 822,333 1,626,724 2,449,057 77,703 Gross policy liabilities insurance contracts 46,636-46,636 - Gross policy liabilities investment contracts 269,156 1,564,329 1,833,485 - Unvested policyholder benefits 37,584-37,584 - Other liabilities 38,350 11,809 50,159 6,333 Total liabilities 391,726 1,576,138 1,967,864 6,333 Net assets 430,607 50, ,193 71,370 Shareholder s equity - Reserves ,233 - Share capital ,000 - Shareholder s retained profits (Aust par) 9,397-9, Shareholder s retained profits (Aust non par) 421,210 50, ,796 56,137 Total equity 430,607 50, ,193 71,370 Statutory Fund No. 2 is wholly non-investment linked. Statutory Fund No. 3 is wholly investment linked. 92

94 42. Statutory fund and segment information (continued) (h) Segment Information Abbreviated Balance Sheet at Category Level as at STATUTORY FUND 2 STATUTORY FUND 2 STATUTORY FUND 3 TOTAL STATUTORY FUNDS AUSTRALIAN AUSTRALIAN AUSTRALIAN Ordinary Superannuation Ordinary Superannuation Participating Non Participating Total Participating Non Participating Total Non Participating Non Participating Total $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 Equities 35,095 36,334 71,429 2,583 7,273 9,856 51,367 1,107,373 1,158,740 1,240,025 National government interest bearing securities 42,582 39,619 82,201 10,615 29,887 40,502 10,732 22,448 33, ,883 Private sector interest bearing securities 83,761 77, ,694 25,433 71,605 97,038 34, , , ,205 Other public sector interest bearing securities 60,931 56, ,623 17,593 49,532 67,125 19,686 69,462 89, ,896 Loans , ,767 Other Total investment assets 223, , ,714 56, , , ,509 1,430,330 1,546,839 2,196,074 Gross policy liabilities ceded - 134, ,787-15,200 15, ,987 Other assets (15,796) 35,361 19,565 15,786 10,155 25,941 (13,440) 82,668 69, ,734 Total assets 207, , ,066 72, , , ,069 1,512,998 1,616,067 2,460,795 Gross policy liabilities insurance contracts 162,241 (107,751) 54,490 28,664 (20,821) 7, ,333 Gross policy liabilities investment contracts 7,563 58,914 66,477 35, , ,632 64,332 1,487,355 1,551,687 1,791,796 Unvested policyholder benefits 29,431-29,431 5,952-5, ,383 Other liabilities ,540 48,438 (48) (9,171) (9,219) 2,427 4,574 7,001 46,220 Total liabilities 200,133 (1,297) 198,836 70, , ,208 66,759 1,491,929 1,558,688 1,935,732 Net assets 7, , ,230 1,491 75,963 77,454 36,310 21,069 57, ,063 Shareholder s equity - Shareholder s retained profits (Aust par) 7,355-7,355 1,491-1, ,846 - Shareholder s retained profits (Aust non par) - 382, ,875-75,963 75,963 36,310 21,069 57, ,217 Total equity 7, , ,230 1,491 75,963 77,454 36,310 21,069 57, ,063 93

95 42. Statutory fund and segment information (continued) (i) Segment information Abbreviated Balance Sheet at Category Level as at 31 December 2011 Participating STATUTORY FUND 2 STATUTORY FUND 2 STATUTORY FUND 3 AUSTRALIAN AUSTRALIAN AUSTRALIAN Ordinary Superannuation Ordinary Superannuation Non Non Non Non Participating Total Participating Participating Total Participating Participating Total TOTAL STATUTORY FUNDS $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 Equities 32,791 32,839 65,630 2,552 6,202 8,754 52,191 1,085,409 1,137,600 1,211,984 National government interest bearing securities 4,020 3,575 7,595 3,657 8,893 12,550 5,428 31,390 36,818 56,963 Private sector interest bearing securities 159, , ,851 54, , ,373 54, , , ,137 Other public sector interest bearing securities 8,749 7,780 16,529 7,960 19,356 27,316 12,043 72,520 84, ,408 Loans 1, , ,965 Other (914) (813) (1,727) 512 1,244 1,756 2,038 (540) 1,498 1,527 Total investment assets 205, , ,843 68, , , ,023 1,444,369 1,570,392 2,197,984 Gross policy liabilities ceded - 117, ,190-14,835 14, ,025 Other assets (209) 54,998 54,789 9,393 (1,466) 7,927 (26,548) 82,880 56, ,048 Total assets 205, , ,822 78, , ,511 99,475 1,527,249 1,626,724 2,449,057 Gross policy liabilities insurance contracts 156,702 (119,011) 37,691 29,704 (20,759) 8, ,636 Gross policy liabilities investment contracts 8,424 68,101 76,525 40, , ,631 65,350 1,498,979 1,564,329 1,833,485 Unvested policyholder benefits 31,170-31,170 6,414-6, ,584 Other liabilities 1,164 52,425 53, (15,591) (15,239) ,467 11,809 50,159 Total liabilities 197,460 1, ,975 76, , ,751 65,692 1,510,446 1,576,138 1,967,864 Net assets 7, , ,847 1,607 64,153 65,760 33,783 16,803 50, ,193 Shareholder s equity - Shareholder s retained profits (Aust par) 7,790-7,790 1,607-1, ,397 - Shareholder s retained profits (Aust non par) - 357, ,057-64,153 64,153 33,783 16,803 50, ,796 Total equity 7, , ,847 1,607 64,153 65,760 33,783 16,803 50, ,193 94

96 42. Statutory fund and segment information (continued) (j) Segment Information Life Insurance Act Operating Profit and Retained Profits Statutory Fund No.2 Statutory Fund No.3 Total Statutory Funds $ 000 $ 000 $ 000 Life Insurance Act operating profit after tax 42,391 6,795 49,186 Allocated to - Policyholders 3,812-3,812 - Shareholders 38,579 6,795 45,374 42,391 6,795 49,186 Policyholder retained profits at start of year 37,584-37,584 Operating profit allocated 3,812-3,812 Bonuses to policyholders (6,013) - (6,013) Policyholder retained profits at end of year 35,383-35,383 Shareholder s retained profits (Aust participating) at start of 9,397-9,397 year Operating profits allocated Transfers to Shareholder s Fund (1,504) - (1,504) Shareholder s retained profits (Aust participating) at end of year 8,846-8,846 Shareholder s retained profits (non-participating) at start of the year as reported Transfer from other Statutory Fund Transfer to other Statutory Fund Shareholder s retained profits (non-participating) at start of the year Operating profits allocated Transfer from other Statutory Fund Transfer to other Statutory Fund 421, ,212 37, , ,584 6, , ,796 44, Shareholder s retained profits (non-participating) at end of year 458,838 57, ,217 95

97

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