Strong half-year results as second-quarter operating profits rise 13%

CEO on half year results 2017

Business performance 
(for the half year ended June 30, 2017)

Property & Casualty

• Improved underwriting results, lower absolute expenses and stable customer retention

Property & Casualty (P&C) business operating profit for the six months ended June 30 rose 2% in U.S. dollar terms, and 6% on a local currency basis, to USD 1.2 billion, excluding the impact of the Ogden¹ discount rate in the UK announced in the first quarter, while the combined ratio for the half-year strengthened by 0.3 points over the full-year 2016 to 97.8%. Including Ogden, BOP fell by USD 184 million to USD 1.0 billion. 

The stronger underlying performance over the half year reflects rate actions, a declining cost base over the period and an improved underwriting result. The accident year loss ratio excluding catastrophes for the period improved by 0.6% points over the full-year 2016 result, driven by the continued underwriting measures taken by the Group. The impact from natural catastrophes was slightly higher than seasonal expectations, while reserves remained strong over the half year.

On a like-for-like basis, excluding foreign exchange movements and businesses exited in South Africa, Morocco, Middle East and Taiwan, gross written premiums and policy fees were up slightly on a local currency basis, reflecting a targeted approach to reshaping the portfolio. In U.S. dollar terms premiums were down 3% or USD 512 million. Overall, rates rose by around 1% in the first half year of 2017 despite challenging market conditions.

Life

• Continued strong performance and increased new business value with growing margins due to improved product mix and higher yields

Life continues to deliver on its unit-linked and protection-oriented strategy with BOP up 16% or USD 88 million to USD 650 million in U.S. dollar terms, and 18% in local currency, with increases in all segments on a local currency basis. The Asia Pacific region was the strongest driver of this growth, helped by the successful integration of the Macquarie Life retail insurance protection business in Australia and continued growth in Japan. Latin America also delivered strong growth, with increased BOP from Zurich Santander and Zurich branded businesses. In Europe, Middle East & Africa (EMEA), lower costs combined with growth in the UK, Ireland, Spain and Italy partly compensated for lower BOP across the rest of the region. 

Gross written premiums, policy fees and insurance deposits decreased by USD 481 million to USD 14.4 billion, or by 3% in U.S. dollar terms. The Group’s bancassurance joint-ventures in Latin America and Spain continued to perform strongly, fueling a 32% increase in new business value across the bancassurance channel. On a local currency basis, there were improvements in Latin America, from higher sales of individual protection products in Zurich Santander and a large corporate contract in the Zurich branded business in Chile, and in Asia Pacific, where business has been growing. EMEA had a reduction in sales of individual savings products in Germany and Spain. 

Farmers 

• Continued growth in fee income at Farmers Management Services (FMS), a stronger underwriting result at Farmers Re and a stable performance from Farmers Life⁵

BOP rose 4% from the prior year period to USD 794 million, driven by continued premium growth at the Farmers Exchanges², which are owned by their policyholders, and an improved underwriting result at Farmers Re. 

Farmers Management Services BOP rose by USD 3 million to USD 700 million, largely due to an increase in fee income supported by higher gross earned premiums at the Farmers Exchanges². Rate and underwriting actions taken by the Farmers Exchanges² also contributed to a 4.1% improvement in the combined ratio of Farmers Re, which helped lift BOP at the reinsurer by USD 25 million to USD 6 million. New business value at Farmers Life⁵ increased by 16% to USD 49 million, mainly due to improved persistency and sales mix, while BOP remained stable at USD 87 million.

The 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 83 million excluding Ogden¹, compared to USD 26 million in the prior year period. This was largely due to the release of long-term reserves as a consequence of a buy-back program for a variable annuity product in the U.S., lower expenses and reserve releases related to other products in run-off. 

Group Functions & Operations reported a net operating expense of USD 301 million for the half year, an improvement of USD 95 million or 24% over the prior year period, largely due to lower holding and financing expenses and a net underlying reduction in expenses at Zurich’s headquarters.

The net investment result on Group investments, which includes net investment income, realized net capital gains and losses and impairments, contributed USD 3.1 billion to the Group's total revenues for the first half of 2017, a net return of 1.6% (not annualized) compared to 1.9% in the prior year period. 

Shareholders’ equity increased by USD 56 million to USD 30.7 billion over the period after the payment of around USD 2.6 billion in dividends.

With effect from the third quarter, the Group intends to move to reporting full financial disclosure for the half-year and full-year only. For first and third quarter reporting, the Group will release a statement providing highlights for the quarter focusing on top-line development, together with qualitative comments on recent trading and market trends as well as the development of the Group's capital position and notable exceptional items. The Group will continue to host an analyst conference call with management in each quarter.

¹ Ogden is the discount rate for calculating personal injury and accident claims in the UK. A change to the rate in February had a USD 289 million impact on the Group’s profitability in Q1. This commentary therefore focuses on operating results ‘ex-Ogden’ to more accurately reflect Zurich’s performance in the first half of 2017.
² Zurich Insurance Group has no ownership interest in the Farmers Exchanges. Farmers Group, Inc., a wholly owned subsidiary of the Group, provides certain non-claims administrative and management services to the Farmers Exchanges as its attorney-in-fact and receives fees for its services.
³ Reflects midpoint estimates as of June 30, 2017 with an error margin of +/- 5pts for Z-ECM.
⁴ Parentheses around numbers represent an adverse variance.
⁵ Reflects management view and contains the ongoing business and some closed books of Farmers New World Life Insurance Company

Financial highlights (unaudited)

The following table presents the summarized consolidated results of the Group for the six months ended June 30, 2017 and June 30, 2016, and the financial position as of June 30, 2017 and December 31, 2016, respectively. All amounts are shown in U.S. dollars and rounded to the nearest million unless otherwise stated, with the consequence that the rounded amounts may not add up to the rounded total in all cases. All ratios and variances are calculated using the underlying amounts rather than the rounded amounts. This document should be read in conjunction with the Annual Report 2016 for the Zurich Insurance Group and with its consolidated financial statements 2016. In addition to the figures stated in accordance with International Financial Reporting Standards (IFRS), the Group uses business operating profit (BOP), new business measures and other performance indicators to enhance the understanding of its results. Details of these measures are set out in the separately published Glossary. These should be viewed as complementary to, and not as substitutes for the IFRS figures.

¹  Parentheses around numbers represent an adverse variance.
²  Details of the principles for calculating new business are included in the embedded value report in the annual results 2016. New business value and new business margin are calculated after the effect of non-controlling interests, whereas APE is presented before non-controlling interests.
³  Including investment cash.
⁴ Calculated on average Group investments
⁵ As of June 30, 2017 and December 31, 2016, respectively.
⁶ Ratios as of June 30, 2017 and December 31, 2016, respectively. Ratio for June 30, 2017 reflects midpoint estimate with an error margin of +/- 5 pts.
⁷ Shareholders’ equity used to determine ROE and BOPAT ROE is adjusted for unrealized gains/(losses) on available-for-sale investments and cash flow hedges.

Further information

Supplemental information will be available from 06.45 CEDT on www.zurich.com. The Group’s half year report 2017 will be published on www.zurich.com on August 23, 2017.

There will be a media conference call in English starting at 08.00 CEDT for questions by journalists to the Group Chief Executive Officer Mario Greco and Group Chief Financial Officer George Quinn. In addition, there will be a conference call Q&A session for analysts and investors starting at 13.00 CEDT. Media may listen in. A podcast of this Q&A session will be available from 17.00 CEDT. 

Please dial-in to register 10 minutes prior to the start of the respective call. 

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