The FINANCIAL -- Group Chief Executive Officer Mario Greco said: “In a year of historic weather events, our focus and discipline delivered strong performance. We improved underwriting, reduced costs and expanded our service offerings, while growing premiums and improving our customer retention levels. These achievements made us resilient in the face of challenges and give us confidence as we look ahead to delivering our 2017 to 2019 targets.”
Business operating profit (BOP) for the 12 months ended December 31, 2017 was USD 3.8 billion, down 15% over the previous year. This was largely due to higher levels of natural catastrophe losses over the year, measures related to the Group’s restructuring recognized within BOP and a one-time item resulting from changes to capital gains relief in the UK. Adjusting for these items, BOP rose 6% over the prior year period to USD 4.8 billion, according to Zurich.
Zurich is well on track to achieve its 2017 to 2019 targets. As of December 31, 2017 cumulative cost savings of USD 700 million have been achieved towards the target of USD 1.5 billion. Cash remittances for the year of USD 3.7 billion are consistent with the target of in excess of USD 9.5 billion over the 2017 to 2019 period, and the estimated Z-ECM ratio stands at a very strong 132%2, above the 100% to 120% target range. The underlying business operating profit after tax return on equity for the year was 12.1%,1 in line with the target of in excess of 12% and growing over the three-year period.
Reflecting the underlying earnings growth and positive earnings outlook, Zurich’s Board of Directors will propose an increase of approximately 6% in the dividend to CHF 18 per share to shareholders at the Group’s annual general meeting on April 4, 2018.
Zurich also announced that, in line with the Group’s policy on anti-dilution, it plans to implement measures that consist of the repurchase of shares of approximately USD 1 billion. The anti-dilution measures will consist of two actions: a cancellation of repurchased shares5 in the amount of up to 1.74 million shares to reverse dilution from vestings of shares in recent years as part of the Group’s long-term compensation awards; and the intention to purchase shares on the market instead of issuing new shares for long-term compensation awards in future years.
In 2017, Zurich made significant investments to better anticipate and meet evolving customer needs and provide cutting-edge digital solutions. Zurich has made considerable progress in refocusing on its core business, exiting under-performing or non-strategic units while building capabilities in select growth markets through targeted acquisitions totaling USD 2.7 billion in 2017.
During the year, the company underpinned its position as one of the top-three global providers of travel services with the acquisitions of Cover-More Group Limited and Halo Insurance Limited. Building on these positions, Zurich has begun offering travel insurance to customers of easyJet and in December acquired a majority stake in FitSense, an analytics company that uses data from mobile applications and online devices to provide customized insurance products.
The Group also strengthened its proposition to drivers and the automobile industry with the acquisition in December 2017 of Bright Box HK Limited, a provider of telematics solutions linking drivers, dealers and manufacturers.
Also in December, Zurich announced plans to strengthen its leadership in distributing insurance products through banks with the acquisition of OnePath Life, the Australian life insurance business of Australia and New Zealand Banking Group (ANZ). The agreement, which is subject to regulatory approval, will make the company the leading retail life insurer in Australia.
Zurich has further widened its distribution partnerships in 2017 with new agreements with well-established brands such as Arsenal and Porsche.
These investments have been supported by continuing business transformation and a commitment to adopt new technologies. Zurich is investing about USD 700 million per year to enhance customer service, modernize its IT and deliver sustainable savings. For example, in April 2017 Zurich signed a global agreement with Expert System to supply cognitive computing solutions that significantly accelerate response times to processing claims and improve how they are evaluated.
Property & Casualty
Property & Casualty (P&C) results show that management actions to improve underwriting delivered results in 2017. The combined ratio as reported was 100.9% due to the exceptional impact of hurricanes Harvey, Irma, and Maria. Adjusting for these the combined ratio was stable at 98.2%. At the adjusted level, the accident year loss ratio and other underwriting expense ratio both improved by approximately 1% compared to 2016, demonstrating the effectiveness of the group’s underwriting and expense actions. This improvement was in part offset by an increase in the commission ratio by about 1%. As outlined in the Group’s news release of October 19, 2017, hurricanes Harvey, Irma and Maria had a combined impact on P&C of USD 700 million after reinsurance but before tax.
Gross written premiums increased by 1% in local currency after adjusting for acquisitions and disposals. This reflects improved levels of retention and new business, with a strengthening trend over the second half of the year. Rates overall increased by around 2%. In North America, rate increase accelerated in the fourth quarter as the market reacted to the impact of hurricane losses.
The Group continued to demonstrate strong expense discipline, with the majority of the Group’s 2017 net expense savings of around USD 400 million achieved within P&C, mainly in EMEA and North America.
The underlying P&C BOP1 in 2017, adjusting for the losses from the hurricanes Harvey, Irma and Maria, fell 4% to USD 2.3 billion. The net investment result increased by USD 80 million, largely due to gains in North America. This was more than offset by higher non-technical expenses, lower foreign exchange gains than in 2016 and non-recurring charges.
Portfolio growth, improved product mix and reduced costs deliver strong growth in profitability and new business value
Life performed strongly in 2017 with BOP up 11% to USD 1.3 billion. This was driven by a combination of portfolio growth, particularly in Asia Pacific and Latin America, expense reductions, positive market developments and a more favorable claims experience. Adjusting for the impact of a tax change in the UK, underlying BOP was USD 1.4 billion, up 22%.
BOP in Asia Pacific rose 73% to USD 132 million, mostly due to the acquisition of Macquarie Group’s retail life insurance protection business in 2016, continued growth in Japan, Australia and Malaysia, and supportive financial markets across the region. In Latin America, overall BOP increased 19% to USD 296 million with growth across the portfolio. In EMEA, BOP decreased by 7% as growth in Switzerland, Spain, Ireland and Italy was offset by lower earnings from the UK related to a one-time change in capital gains indexation relief announced in the 2017 UK government budget. In North America, BOP improved by USD 83 million.
Annual premium equivalent (APE) sales rose 4% to USD 4.9 billion, with growth in EMEA, Asia Pacific and North America offsetting a decline in Latin America. This growth was accompanied by an improvement in the business mix, with increased volumes of retail protection and unit-linked business offsetting reduced sales of traditional savings products. The combination of improved business mix with higher yields particularly in Germany and Switzerland and improved assumptions led to an increase in new business margins and a resulting expansion in new business value by 28%. Within this growth in new business value through the Group’s bank distribution partners remained strong at 44%, with agency and broker channels also contributing strong growth.
The Farmers Exchanges3, which are owned by their policy holders, continued to deliver robust top-line growth in 2017, with gross written premiums from continuing operations up 2.9% over the prior year, largely driven by higher rates, especially in the auto book. Rate and underwriting actions also contributed to a 2.3% improvement in the combined ratio of the Farmers Exchanges over the year to 101.6%.
Having fallen in the first half following rate actions at the Farmers Exchanges, the net promoter score – a key measure of customer satisfaction – rebounded strongly in the second half to reach a record high of 46.9% for the month of December 2017. This was reflected in an improvement in customer retention in the fourth quarter.
The growth at the Farmers Exchanges resulted in a USD 25 million, or 1%, increase in management fees and other related revenues at Farmers Management Services (FMS). FMS BOP fell by USD 64 million to USD 1.4 billion, reflecting a USD 86 million one-time gain in 2016 related to the Farmers’ pension plan.
Farmers Re BOP increased by USD 15 million to USD 57 million, driven by a 3.2% improvement in the combined ratio following underwriting actions at the Farmers Exchanges.
At Farmers Life, BOP increased by USD 17 million to USD 220 million, due in part to favorable assumption updates. The new business value rose 18%, driven by a favorable sales mix and lower acquisition expenses.
The Group’s Non-Core Businesses, which comprise run-off portfolios that are managed with the intention of proactively reducing risk and releasing capital, reported BOP of USD 39 million compared to a loss of USD 15 million in the prior-year period.
Group Functions & Operations reported a net operating expense of USD 731 million for the year, an improvement of 6% over the prior-year period, largely due to cost savings at Zurich’s headquarters, lower external debt charges and non-recurring items in the 2016 financial year.
The net investment result on Group investments, which include net investment income, realized net capital gains and losses and impairments, contributed USD 7.2 billion to the Group’s total revenues for 2017, up 3% on the prior year. The net investment return on Group investments was stable at 3.8%.
Shareholders’ equity increased by 8% to USD 33.1 billion over the year.