Zurich Financial Services Ltd. and its Farmers Group Inc. subsidiary are paying around $545 million (includes legal fees) to settle a class-action lawsuit challenging management service fees paid to Farmers, Zurich said Thursday.
The settlement stems from a complaint against the company's U.S. unit Farmers Group Inc.. The unit was accused of overcharging for fees paid by the Farmers Exchanges. Zurich Financial Services manages the Farmers Exchanges, which is one the largest personal lines insurers in the U.S., selling products such as home, car and life-insurance policies. Zurich receives fees for these services, which are collected by Farmers Group.
The charges were brought by Farmers Exchanges client Benjamin Fogel in 2003, who claimed that business practices between Zurich Financial and Farmers were unfair.
Chief Executive Officer Martin Senn said that while Zurich Financial sees no basis for the claims, which will be made available to up to about 13 million policy holders, "we wanted to settle the case to reduce damaging our reputation and business."
Mr. Senn said that since a potential lawsuit could have lasted for years and an outcome was unclear, Zurich Financial decided to settle because the business outlook for the Farmers Exchanges, a key profit contributor for Zurich Financial, is sound.
"I am very excited about the business prospects for the Farmers Exchanges," he said. The Farmers Exchanges, which own a broad network in the U.S., have been a substantial profit booster for the Swiss insurer. In 2009, management fees from Farmers were around $2.7 billion, resulting in a business operating profit of about $1.6 billion—roughly a quarter of Zurich Financial's total business operating profit.
Chief Financial Officer Dieter Wemmer said although the settlement charge of $455 million and the legal fees of $90 million will be booked in the third quarter, the costs will neither hurt the company's balance sheet nor undermine its ability to pay a sustainable and attractive dividend. Zurich Financial will report third-quarter earnings on Nov. 4.
Analysts said the charges were relatively high but added that it was better to settle the issue than risk prolonged litigation that could have hurt Zurich Financial's relationship with the Farmers Exchanges and its business in the U.S.
"Psychologically it's not good, but fundamentally it's not dramatic," said Rainer Skierka, analyst at Bank Sarasin. The company made loan-loss provisions of about $330 million in the second quarter due to a deterioration of the commercial property market in the U.K. and Ireland.