The FINANCIAL -- Zurich Financial Services Group (Zurich) reported today a solid nine-month operating performance, with balance sheet strength and solvency margins at near-record levels, and continued profitable growth in Global Life and Farmers underpinning the Group’s 27th consecutive quarter of profitability.
Business operating profit for the discrete third quarter 2009 was USD 1.5 billion, a 138% increase over the same prior-year quarter, with net income1 of USD 909 million, a 490% increase over the same prior-year quarter. Both figures represent the fourth consecutive quarter-on-quarter improvement since the third quarter 2008.
“In this period of ongoing economic uncertainty, our focus remains on maintaining our strong balance sheet, driving operational excellence and delivering sustained profitable growth,” remarked Zurich’s Chief Executive Officer James J. Schiro. “By effectively balancing these levers, we have generated excellent quarterly results and ensured that Zurich is well positioned for the future under any economic scenario.”
Nine-month performance highlights2 include:
Business operating profit (BOP) of USD 4.1 billion, down 3% but an increase of 2% as measured in local currencies, with all core operating segments improving on a local currency basis. Annualized BOP ROE3 after tax of 16.9%
Net income of USD 2.2 billion, a decrease of 24%. Annualized return on equity (ROE) of 11.6%
General Insurance gross written premiums and policy fees of USD 26.3 billion, down 10% or 3% in local currencies, and an improved combined ratio of 96.9%
Global Life new business value4, after tax, of USD 520 million, up 2% or 11% in local currencies. New business margin, after tax (as % of APE), of 21.8%, with APE up 5% or 17% in local currencies
Farmers Management Services’ management fees and other related revenues up 8% to USD 2.0 billion, with business operating profit also up 8% to USD 992 million
Shareholders’ equity of USD 28.5 billion, an increase of 29% over year end 2008, boosting the Group’s solvency position to 209%.
"The Group continued to exploit emerging opportunities, expanding its product range and distribution capabilities organically as well as through the ongoing successful integration of its recent acquisitions completed in Europe, the U.S. and emerging markets. Furthermore, Zurich continued to transform its operating platforms in ways that improve the effectiveness and efficiency of its business. The company is well on track to meet its operational improvement target under The Zurich Way initiatives of USD 900 million after tax, as well as its additional expense saving target of USD 400 million for the current year," Zurich informs.
General Insurance continued to deliver a robust operating performance against the backdrop of challenging market conditions, characterized by contracting economic activity in both North America and Europe. The Group’s continued focus on underwriting discipline, portfolio management and differentiated rate actions has proven successful in marking a turning point in the underlying loss trend. The combined ratio improved to 96.9%, supported by a benign catastrophe experience and strict expense management. Business operating profit was USD 2.5 billion, down 3% in USD but up 4% in local currencies, as an improved underwriting result was partially offset by lower investment income. Gross written premiums and policy fees decreased 3% in local currencies, mainly reflecting lower volumes in North America and difficult market conditions across Western Europe.
In Europe General Insurance, premium volumes in local currencies were down 1%. A lower underwriting result and the drop in investment income reduced profitability. In contrast, North America Commercial posted an improved underwriting result and profitability, reflecting improved rates and lower catastrophe losses, while the ability to capitalize on growth opportunities in targeted market segments helped to partially mitigate the impact on volume. Global Corporate also markedly improved its profitability, demonstrating its continued focus on underwriting and pricing discipline, with average rate increases of 5.8% on business written during the first nine months of 2009. The Group’s International Markets exhibited a 5% volume growth on a local currency basis, with the successful integration of last year’s acquisition in Brazil underpinning a 22% increase in Latin America.
Global Life
The Global Life segment continued to deliver profitable growth, performing well on all key metrics despite a difficult market environment. New business value, after tax, reached USD 520 million, an increase of 11% on a local currency basis, primarily as a result of the acquisitions in Spain, growth in sales volumes in Latin America and further improved margins in the UK, Ireland, the U.S. and Australia. The new business value has grown in each successive quarter of this year, driven by expense efficiencies and focused efforts to shift the new business mix towards protection business, driving up margins. Business operating profit of USD 1.2 billion was up 4% on a local currency basis, mainly driven by a more favorable view on future mortality, with the underlying business remaining strong. Net policyholder cash inflows increased to USD 2.6 billion during the first nine months, driven by net inflows from Spain, Ireland, Germany and within the International/Expatriate pillar.
New business annual premium equivalent (APE) grew by 5% or 17% in local currencies, with a continuing strong new business margin of 21.8% reflecting the quality of new business. APE growth was primarily driven by the Spanish bank distribution agreements, growth from Corporate Life & Pensions activities, higher sales of long-term savings products and successful sales campaigns through major banking partners in the UK. Propositions within the recently launched Private Banking Client Solutions pillar also performed well. The Agents pillar experienced growth in Latin America, Germany, Switzerland, Ireland, Spain and Austria via customer and distributor focused programs. However, this was offset by a decrease in Hong Kong due to recent market conditions, which also led to overall volume reductions within the International/Expatriate pillar in Asia.
Farmers
Farmers Management Services (FMS) grew its management fees and other related revenues by 8% to USD 2.0 billion, reflecting the successful management of the Farmers Exchanges (Exchanges), the third largest personal lines insurer in the U.S.6, which Zurich manages but does not own. Underlying the increased revenue stream was a 7% gross earned premium growth at the Exchanges, driven by the acquisition of 21st Century in July of this year, the transfer of North America Commercial’s Small Business Solutions book to the Exchanges in June 2008, as well as targeted investments in distribution capabilities and product enhancements. In combination with a continued strict expense discipline, the gross management result of FMS improved by 9%, contributing to an 8% higher business operating profit of USD 992 million and an improved managed gross earned premium margin of 7.2%. The integration of 21st Century continues to progress in line with Farmers’ previously successful integration track record.
Farmers Re, which provides reinsurance to the Exchanges, more than doubled its premium volume compared with the same period last year due to an increase of the existing All Lines quota share reinsurance treaty, first from 5% to 25% as of September 30, 2008, and then from 25% to 37.5% in connection with the acquisition of 21st Century, effective June 30, 2009. In combination with improved loss trends in some core underlying businesses of the Exchanges and a higher investment income, Farmers Re’s business operating profit rose to USD 141 million, contributing thereby to an increased business operating profit for the Farmers segment of USD 1.1 billion.
Other Operating Businesses
The Other Operating Businesses segment, predominantly consisting of the Group’s Headquarter and its Holding & Finance activities, reported a nearly halved business operating loss of USD 298 million, with improvement primarily arising from gains on buybacks of subordinated debt executed in advantageous market conditions.
Non-Core Businesses
The Non-Core Businesses segment, including the Group’s run-off insurance businesses and, for the first time, the Group’s banking activities (previously reported under Other Operating Businesses), reported a business operating loss of USD 433 million. The loss primarily resulted from an increase in certain life reserves predominantly addressing policyholders’ behavior and from increased loan loss provisions in the banking operations.
Group investments
The total return for Group investments for the first nine months of 2009, including the change in unrealized gains and losses reported in shareholders’ equity, was an excellent 5.4% (not annualized). The net investment result for Group investments, which includes investment income and realized losses and impairments, added USD 4.3 billion to Zurich’s profit and loss, a non-annualized return of 2.3%. Net capital losses on investments and impairments were USD 1.2 billion, which was largely driven by impairments of USD 1.1 billion and realized losses of USD 324 million from the sale of equities and bonds, partly offset by positive revaluations. Net unrealized gains reported in shareholders’ equity as of September 30, 2009 amounted to USD 1.6 billion as a result of positive movements of USD 5.9 billion during the first nine months. The greater part of this improvement, USD 5.3 billion, occurred in the third quarter as credit spreads continued to narrow, yields on government securities fell and equity markets posted further gains.
Capital management
Shareholders’ equity improved by 29% over year end 2008, driven by the Group’s solid operating performance as well as recovering financial markets. This translated into a Group Solvency I position of 209%, which underscores the Group’s strong balance sheet and capital position. The Group remains confident that it is not only well positioned to continue its shareholder-oriented capital management strategy and weather the current financial-market crisis but also take advantage of opportunities both currently and once a more stable economic environment returns.
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