The FINANCIAL -- Zurich Financial Services Group (Zurich) reported on February 4 continued strong operating performance, sustained profitability in all its core business segments and targeted growth in profitable market segments, particularly in Global Life and Farmers.
“For the year 2009, the Group generated an increased business operating profit and net income1 after tax of USD 5.6 billion and USD 3.2 billion, respectively. Reflecting its confidence in the sustainability of these results, the Zurich Board of Directors will propose to the shareholders a gross dividend of CHF 16.00,” Zurich Financial Services Group says.
“2009 was an excellent year for Zurich. We generated a strong operating performance across all our core businesses and emerged from a challenging year with one of our strongest balance sheets ever,” remarked Zurich’s Chief Executive Officer Martin Senn. “It is that proven ability to generate consistent earnings and achieve growth in targeted market segments that underpins my confidence looking forward, as it enables Zurich to face both challenges and opportunities from a position of strength.”
Performance highlights2 include:
During the course of 2009, Zurich generated operating profits as well as a continuously improved net income in each discrete quarter, compensating successfully for the lower yield environment. This includes a business operating profit of USD 1.5 billion and net income after tax attributable to shareholders of USD 1.1 billion in the fourth quarter stand-alone. Demonstrating its continued commitment to operational and financial discipline, the Group met its expense saving target for 2009 of USD 400 million and achieved in its General Insurance segment average rate increases of 3 percentage points during 2009. The Zurich Board of Directors will propose to the Annual General Meeting on March 30, 2010 a gross dividend of CHF 16.00 per share, representing a 66% payout of earnings to shareholders and a 45% increase over last year’s CHF 11.00 gross dividend. Furthermore, the Board will propose the destruction of the remaining 1.8 million shares from the share buyback program 2008. “The dividend proposal reflects the Board’s confidence in Zurich’s business strategy and the sustainability of its results,” remarked Senn. “Furthermore, I am particularly proud of our ability to continue generating such long-term shareholder value, while balancing the need to retain the strong and prudent solvency position our customers expect.” In 2009, the Group continued to capitalize on its selective growth efforts by delivering profitable growth in attractive life and general insurance markets. Growth was driven by expanding the product range and distribution capabilities, both organically as well as through the ongoing successful integration of recent acquisitions in Europe, the U.S. and emerging markets. Furthermore, efforts to enhance the effectiveness of Zurich’s customer-focused brand positioning resulted in an overall improvement of Zurich’s brand awareness scores. Zurich also continued to transform its operating platforms to bolster the effectiveness and efficiency of its business. The benefits from these initiatives in 2009 comfortably exceeded the after-tax operational improvement target under The Zurich Way initiatives of USD 900 million after tax, with similar targets for 2010 and 2011.
General Insurance
General Insurance continued to focus on maintaining strong profit margins through successful rate actions, delivering a robust operating performance against the backdrop of contracting insurance markets. The Group’s continued focus on underwriting discipline, portfolio management and differentiated pricing proved successful in maintaining margins, though also negatively impacting volumes in a competitive market environment. Business operating profit was USD 3.5 billion, down 2% in USD but up 1% in local currencies, as an improved underwriting result partially offset lower investment income. The combined ratio improved to 96.8% as a result of careful underwriting practices and lower levels of natural catastrophe losses. Gross written premiums and policy fees decreased 4% in local currencies, mainly driven by lower volumes in North America and difficult market conditions in Western Europe.
Across the segment’s commercial businesses, comprising large corporate customers as well as small and mid-sized commercial firms, a continued focus on differentiated rate actions and underwriting discipline generated strong operating performances, with average rate increases of 4%. Global Corporate achieved a significant improvement in profitability, with the remaining commercial businesses maintaining a solid operating performance. The ability to capitalize on growth opportunities in targeted market segments helped to mitigate the impact of pricing discipline and lower economic activity on volumes, which particularly affected certain market segments in North America. Underwriting results and profitability also benefited from a more favorable loss experience, including lower levels of natural catastrophe losses.
The segment’s personal lines businesses generally performed well, while operating in a continually competitive environment. Profitability was impacted by industry-wide weak results in the motor business in Italy and the UK, reflecting the challenges posed by the economic and competitive market environment in these two European markets. Decisive underwriting actions across these areas also impacted the ability to grow volumes. Latin America achieved significant growth in local currency terms through both organic growth and as a result of an acquisition in Brazil in 2008.
Global Life
The Global Life segment continued to deliver strong results, achieving profitable growth in a difficult market environment and performing well on all key metrics. New business value, after tax, reached USD 782 million, an increase of 9% on a local currency basis, growing not only in each successive quarter of 2009 but accelerating over the course of the year, underpinned by efficiency gains and focused efforts to shift the new business mix towards protection business. New business volumes (in terms of annual premium equivalent or APE) increased by 12% or 19% in local currencies, with a continuing strong new business margin of 21.3%.
Most of the six pillars, which underlie Global Life’s distribution and proposition-oriented strategy, contributed to APE growth: Bank Distribution in Spain, where both the existing business and the 2008 acquisitions performed above targets, Corporate Life & Pensions activities in the UK and Ireland, IFA/Broker with strong sales in the UK and cross-border sales into Italy, as well as the successfully launched Private Banking Client Solutions pillar, producing in Luxemburg and the UK. The Agents pillar experienced growth in almost all countries via customer and distributor-focused programs, though margins were affected by interest rate declines. Reflecting the impact of adverse financial market conditions in the first half of 2009, new business volumes decreased in Hong Kong, leading to overall volume reductions within the International/Expatriate pillar in Asia.
Business operating profit of USD 1.5 billion was up 5% on a local currency basis, with the underlying business benefiting from strong expense management and improved risk and investment margins. A strong focus on in-force management drove net policyholder cash inflows of USD 5.4 billion compared with net policyholder outflows of USD 2.2 billion in 2008, contributing to total assets under management5 of USD 215 billion at the end of 2009 against USD 180 billion a year before.
In addition, the segment further advanced the industrialization of its business model, benefiting overall growth through a notable increase in cross-border sales manufactured in new regional hubs, while also improving efficiency with reduced unit costs in Ireland.
Farmers
Farmers Management Services (FMS) grew its management fees and other related revenues by 9% to USD 2.7 billion, reflecting an 8% gross earned premium growth at the Farmers Exchanges (Exchanges), which Zurich manages but does not own. Underlying drivers of this growth were the acquisition of 21st Century in July of 2009 and the transfer of North America Commercial’s Small Business Solutions book to the Exchanges in June 2008. In combination with a continued strict expense discipline, the gross management result of FMS improved by 13%, contributing to a 10% higher business operating profit of USD 1.3 billion and an improved managed gross earned premium margin of 7.2%. The integration of 21st Century continues to progress in line with Farmers’ successful integration track record.
Farmers Re, which provides reinsurance to the Exchanges, nearly doubled its premium volume due to an increase of the existing All Lines quota share reinsurance treaty, executed in various steps, from 5% to 35% as of December 31, 2009 in connection with the acquisition of 21st Century. In combination with a higher investment income as a result of the increased participation in the All Lines quota share reinsurance treaty, Farmers Re’s business operating profit rose to USD 228 million, contributing thereby to an increased business operating profit for the Farmers segment of USD 1.6 billion.
Other Operating Businesses
The Other Operating Businesses segment, predominantly consisting of the Group’s Headquarter and its Holding & Finance activities, reported a reduced business operating loss of USD 611 million, with the improvement of USD 161 million primarily arising from gains on repurchases 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 the Group’s banking activities (previously reported under Other Operating Businesses), reported a reduced business operating loss of USD 290 million, reversing the trend from the first three quarters of 2009 as the Group benefited from the further recovery in financial markets during the fourth quarter and an increase in commutation gains in a number of run-off businesses.
Group investments
The Group’s total return on Group investments, including investment income, realized losses and impairments as well as changes in unrealized losses reported in shareholders’ equity, was an excellent 6.3%. The net investment result for Group investments, which includes investment income and realized losses and impairments, contributed USD 6.1 billion, a return of 3.2%, to the Group’s net income. Net capital losses of USD 1.4 billion were driven by impairments on both debt and equity securities. Net unrealized gains reported in shareholders’ equity as of December 31, 2009 amounted to USD 1.4 billion as a result of positive movements of USD 5.7 billion during 2009. This improvement largely occurred in the third quarter as credit spreads narrowed, yields on government securities fell and equity markets rose. The strong total investment return continues to reflect the Group’s commitment to managing assets relative to liabilities on a risk-adjusted basis.
Capital management
Shareholders’ equity improved by 34% over year end 2008, driven by the Group’s operating performance as well as recovering financial markets. This translated into an improvement of the Group Solvency I position to 198%, which underscores the Group’s strong balance sheet and capital position.
As reflected in the proposed payout to shareholders in the form of a gross dividend of CHF 16.00 per share and the destruction of the remaining 1.8 million shares from the share buyback program 2008, the Group’s dividend policy targets to strike a reasonable balance between a prudent capital management strategy that reflects caution over the economic environment and preserving competitive dividend levels.
The Group remains confident that it is well positioned to continue its shareholder-oriented capital management strategy and take advantage of opportunities both currently and once a more stable economic environment returns.
Related Stories
