Zurich Bounces Back with $2.1 Billion 2003 Net; Best Comments

February 20, 2004

Zurich Financial Services (ZFS) has rebounded strongly. After its disastrous $3.4 billion loss in 2002, the company reported net earnings of $2.1 billion for 2003, a return on equity of 12.5 percent.

Other highlights cited by the company’s news bulletin included:
— Business operating profit (BOP) of $2.3 billion, up 93% from 2002; BOP ROE after tax nearly doubled from 5.1 percent to 9.3 percent.
— Premiums in General Insurance of $36.3 billion, up 22 percent from 2002; combined ratio at 97.9 percent, an improvement of 5.6 percentage points before 2002 special provisions.
— Premiums and insurance deposits in Life Insurance of $20.6 billion, up 5 percent from 2002, and new business profit margin improved by 2.9 percentage points to 9.0 percent.
— Net income at Farmers Management Services of $604 million, up 7 percent from 2002; BOP of $970 million, up 6 percent from 2002.
— Investment income of $7.0 billion; return on invested assets of 4.9 percent, compared with 2.3 percent in 2002.
— Net reserves for losses and loss adjustment expenses of $37.0 billion at the end of 2003, an increase of $6.6 billion, of which $1.9 billion for prior-year development and strengthening.
— Total shareholders’ equity of $19.4 billion, up from $16.8 billion.
— Proposed payment of CHF 2.50 [$2.02] per share in form of a reduction of the nominal value from CHF 9.00 [$7.26] to CHF 6.50 [$5.242] per share. Earnings per share (diluted) of CHF 19.90 [$16.05].

ZFS said the results reflected “performance against the plan announced in September 2002,” when the company set out to “rebuild its earnings capacity, to strengthen the balance sheet, and to improve its credibility in the financial markets. More than 200 specific, measurable projects improved 2003 earnings by more than USD 1 billion, exceeding the target under the operational improvement program. Measures to reduce costs included a reduction of the workforce by more than 4,500 employees (excluding divestments).”

A.M. Best Co. issued a favorable comment following the earnings announcement, indicating the ZFS “A” (Excellent) would remain unchanged, as would best’s “positive” outlook. Best said the results were in line with its expectations, noting “ZFS restored profitability in 2003 as a consequence of a reduction in costs and improved underwriting performance. These were the result of an improvement in the capital markets in 2003 and the risk-based capital improvement programs implemented in 2002, which continued through 2003. A.M. Best expects the benefits of this restructuring to persist during 2004.”

The rating agency did note that ZFS’ “fourth quarter 2003 results were negatively impacted by a USD 0.8 billion before tax reserve strengthening. This increase in reserve provisions was due mainly to asbestos and U.S. prior years but was partially offset by realised capital gains during fourth quarter 2003. A.M. Best will continue to closely monitor ZFS’s reserves, particularly asbestos and U.S. prior years.”

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