Zurich Bounces Back – Posts $701 Million 1st Half Net Income

August 20, 2003

Zurich Financial Services has apparently turned the corner after some very rough times. The company’s 1st half results show net income of $701 million – well above most analysts’ expectations – compared to a $2.029 billion loss in the same period in 2002.

Business operating profit increased by 56 percent to $1.265 billion from $812 million in the same period last year, while operating cash flow rose 25 percent to $ 4.5 billion. P/C premiums rose 29 percent to $19.3 billion, while ZFS combined ratio fell by almost 21 percent from 119.7% in the first half of 2002 to 98.8% in 1st half 2003.

It seems evident that the James J. Schiro, an American and former head of PricewaterhouseCoopers, who became ZFS’ COO in March of 2002 and took over as CEO in May, has been remarkably successful in fulfilling his announced goal of returning ZFS to profitability. The company was particularly hard hit by the global decline in equity values, calls for reserve strengthening and a perhaps overly ambitious expansion program, all of which combined to produce a $3.4 billion net loss in 2002.

Schiro’s strategy to sell off non-core assets and concentrate on ZFS most profitable business lines has been rigorously implemented. The company has cut costs and reduced its work force, and has refocused its energies on its core businesses. Schiro’s overriding concern, as he said at the recent International Insurance Society Seminar in New York is to “rebuild trust and credibility” in the company. Whiled he admitted that it would be “a long road back,” the changes he’s implemented seem to have gotten the company well on the way.

As part of the refocusing ZFS “continued to exit peripheral markets and activities considered non-core or not aligned with performance goals,” said the earnings bulletin. “Transactions announced in the first six months include the sale of Zurich Life in the US to Bank One, the sale of Threadneedle to American Express, and a framework agreement for the transfer of certain ZCM transactions and assets to BNP Paribas. In July, the closure of Zurich Life Assurance in the UK and its sale to Swiss Re was announced. Most of these transactions are expected to close in the second half of 2003.” The result has been a strengthening of the company’s balance sheet by more than $5 billion.

ZFS also benefited from the hard market and rising premiums. Gross written premiums and policy fees in the company’s P/C operations increased by $4.3 billion, from $15 billion for the first half of 2002 to $19.3 billion for the same period of 2003. “This result was supported by increases in all geographic segments. Total benefits, losses and expenses increased by USD 2.9 billion, or 27%, from USD 10.5 billion for the first half of 2002 to USD 13.4 billion in 2003,” said the announcement.

One of ZFS major operations is Farmers Group, Inc. and its subsidiaries (FGI), which provide management services to the Farmers P&C Group Companies. FGI oversees and processes premiums and claims from all of the Farmers Exchanges, and ZFS indicated that “this segment continued to show strong earnings growth in the first half of 2003.” Income primarily consists of management fees from the Farmers P&C, which increased by 6 percent from $885 million to $935 million for the same period of 2003, “due mainly to a 4.1% increase in gross earned premiums of the Farmers P&C Group Companies.” Net income increased by $44 million, or 16 percent, from $269 million to $313 million, “reflecting strong revenue growth and successful expense reductions. Business Operating Profit improved USD 68 million, or 15%, from USD 445 million to USD 513 million.”

Schiro’s reforms are not only aimed at restoring ZFS to profitability, but also at reaffirming the company’s credibility with investors. He looks like a winner in both areas. Shares in ZFS fell by over 60 percent in 2002, following several profit warnings and the disastrous losses. So far this year they’ve risen by more than 40 percent and most analysts continue to have “buy” ratings on the company’s stock, reflecting continued confidence in ZFS’ ability to continue its comeback.

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