The equity storms that have battered the earnings of many of Europe’s biggest insurers in the first half of 2002 became a class 5 hurricane for the Anglo-Swiss Group Zurich Financial Services (ZFS) which posted a net loss for the period of $2.029 billion.
The mid-year report followed a now all too familiar pattern with gross premiums up 10 percent to $30.554 billion. Then came the bad news – Asset management fee income down 40 percent; Net investment income, including capital gains and losses, dropped by $661 million -18 percent; combined ratio ballooned to 119.7 percent from 105.6 percent in the same period last year. The result, an operating loss of $1.828 billion, compared to a $1.338 billion profit in the 1st half of 2001.
It could get worse. Those figures don’t include the recent further slide in equity values, nor the $175 to $200 million net loss estimates ZFS announced it expected from the recent Eastern European floods.
After numerous profit warnings, and the departure earlier this year of Rolf Hüppi, ZFS’ longtime Chairman and CEO, analysts had expected loss figures, but nothing like these. The downturn in the capital markets hit ZFS particularly hard. It’s earnings announcement indicated that “Strong premium growth, as well as improved claims performance was more than offset by a significant decline in realized and unrealized capital gains and special provisions totaling USD 2.7 billion after tax.” That figure includes $954 million in write-offs.
ZFS CEO James J Schiro announced several measures the company intended to implement to return to profitability. He confirmed that in order to restore its capital base it would issue new shares through a rights issue which would raise between $2 and $2.5 billion.
ZFS will also cut approximately 4500 jobs, and plans to sell a portion of its equity portfolio in hopes of raising an additional $500 million. Dividends will also be reduced, and there are plans to sell off some non-core assets.
Schiro stated that “Over the last three months, we have conducted a thorough review of the Group’s strategy and operations and have decided to sharpen our focus as an insurance-based financial services provider with an international network, concentrating on chosen markets. The initiatives we announced today should create a sound financial and operational platform for Zurich from which to deliver strong earnings growth. We believe this to be in the best interest of the Group, its shareholders, customers and employees.”
To help achieve those goals “Zurich will reposition itself as an insurance-based financial services provider with an international network, focused on chosen markets. The Group will concentrate on insurance. It will build on its position in its chosen core markets of North America, the United Kingdom and Continental Europe, in particular Switzerland, Germany, Italy and Spain,” said the announcement It also indicated that “Approximately one third of the earnings improvements is expected to come from pricing and underwriting initiatives. The balance is expected from streamlining the Group’s claims management processes and cost structure.”
Schiro summed up the initiatives, stating that, “With our core strengths and our stringent focus on execution, Zurich will be well positioned to deliver strong earnings growth.”
While his optimism is understandable – after you lose $2 billion in half a year there’s really nowhere to go but up – it should be tempered by the parlous state of the world’s economy in general and the equity markets in particular. As is the case with the rest of the industry, the next four months will be a critical time. Schiro and his management team will need some good luck, as well as a sound business plan, if they are to restore profitability to Europe’s third largest insurance group. If they don’t succeed, there may be a good deal more than “non-core assets” for sale in the near future.
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