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.