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Zurich Financial Third-Quarter Profit Rises on Hedging Gain

Source: Businessweek

Posted on 10 Nov 2011

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Zurich Financial Services AG, Switzerland’s biggest insurer, posted a bigger-than-estimated third-quarter profit as lower German interest rates and a drop in U.K. equities produced a hedging gain of $720 million.

Net income rose 64 percent to $1.24 billion, the Zurich- based company said today in a statement, beating the $810 million mean estimate of seven analysts surveyed by Bloomberg.

Zurich Financial, which aims to cut costs by $500 million over the next three years, said in August that it plans to keep its dividend policy unchanged after increasing its 2010 payout to an 11-year high of 17 Swiss francs ($18.68). Property and casualty rates for companies rose 4 percent during the quarter while personal cover climbed 5 percent, the insurer said.

“The result was helped by higher realized gains,” said Stefan Schuermann, a Zurich-based analyst with Vontobel Holding AG. The overall result was “solid,” especially the increase in non-life rates, he said.

Zurich Financial fell 0.6 percent to 195.40 francs as of 9:26 a.m. in Swiss trading, compared with a 0.9 percent decline in the 28-company Bloomberg Europe 500 Insurance Index. The stock has dropped 14 percent this year compared with the 19 percent and 21 percent declines at larger European rivals Axa SA and Allianz SE.

Hedging Gains

The gains on the hedging derivatives included protection against “the downside on U.K. equities” and lower interest rates in Germany, Pierre Wauthier, who became chief financial officer on Oct. 1, said on a conference call.

“The strong third-quarter net income was supported by sound risk management actions,” the company said.

Profit in the year-earlier quarter was cut by $295 million after Zurich Financial settled a lawsuit related to its Farmers Group unit.
Zurich Financial said its solvency ratio under the new Swiss requirements was above 200 percent at the end of the third quarter.

The insurer’s combined ratio, which measures spending on claims and costs as a percentage of premiums in the general insurance business, worsened to 97.8 percent following a $105 million loss from Hurricane Irene, which made landfall on Aug. 27 in North Carolina, and $130 million of losses from hailstorms in Switzerland and Germany. A ratio below 100 percent means a profit from underwriting.

Target Ratio

Zurich Financial aims to improve the ratio, a key measure of profitability in general insurance, by 3 percentage points to 4 percentage points in comparison to its peers by 2013.

Irene may cost insurers $3 billion to $6 billion, according to risk-modeling firm AIR Worldwide.

The insurer’s property and casualty unit, the biggest contributor to earnings, reported a 4.2 percent increase in third-quarter operating profit to $617 million. Written premiums for the unit rose 7.7 percent to $8.17 billion in the quarter.

The company targets a business operating profit after-tax return on equity of 16 percent over the medium term and plans the release $1.5 billion of capital from non-core businesses by 2015.