Zurich to take further action on commercial business

Zurich Insurance plans further actions to improve the performance of its commercial book, after reporting underwriting losses in Europe and the US during the first quarter. Zurich’s CFO, George Quinn, told analysts that the firm will need to take more action in its commercial business in the face of challenging market conditions. He said the Switzerland-based group will continue to shrink its commercial lines business and allocate capital to consumer lines. Zurich no longer splits out results for its now defunct Global Corporate business, which was merged with commercial in 2016. However, Mr Quinn suggested that the experience of large corporate and commercial was broadly aligned. On Thursday, Zurich reported a 31% fall in net income to $607m in the first quarter, reflecting a charge for changes to the UK Ogden personal injury compensation rate. Excluding Ogden, Zurich reported a business operating profit of $1.2bn, a 14% rise on the first quarter of 2016. Mr Quinn suggested that first quarter results show Zurich is making progress after the group posted losses in its general insurance business last year. He said the property/casualty business continues to focus on cost reduction and underwriting discipline. Progress in this area was evidenced by a 2.4 percentage point reduction in the loss ratio during the first quarter, while the combined ratio, excluding Ogden, improved one percentage point to 97.2%. However, commercial insurance continues to prove challenging for Zurich. The commercial insurance combined ratio stood at 106.7% in the first quarter of 2017. Even excluding the Ogden charge, commercial’s combined ratio was 102.8%. The EMEA commercial book produced an underwriting loss of $120m in the first quarter of 2017, compared with a profit of $3m in the same period of 2016. The combined ratio was 114.1%, up on the 99.6% reported for EMEA in Q1 2016. US commercial business produced an underwriting loss of $43m in the first quarter, compared with a profit of $63m in Q1 2016. The combined ratio was 102%, compared with 96.4% in the first quarter of last year. The increased commercial combined ratio came despite a 2.4 percentage point reduction in the loss ratio for property/casualty, excluding Ogden. Zurich saw lower large and attritional losses in the first quarter of 2017, which Mr Quinn took as a sign of progress. However, he also noted that three months are not long enough to judge if this is a trend that would reflect performance over the long term. When asked about the continued unprofitability of the commercial business, Mr Quinn said: “The basic issue is the same. It is a tough market out there. There are challenges and Jim [James Shea, chief executive of Zurich’s Commercial Insurance unit] plans measures to tackle the weaker parts of the portfolio.” In particular, US commercial auto continues to perform poorly, despite increased rates. “There have been improvements, but these have not been enough to achieve the profitability we would look for. Rate will continue to be a theme for the remainder of this year,” said Mr Quinn. US workers compensation was another area highlighted by Mr Quinn. Claims were benign for US workers compensation, but rates are down. “Issues still exist and need to be managed. Commercial is still challenging in today’s market,” said Mr Quinn. “If we look at individual regions, North America is still the toughest. Even with improvements in motor, and with negative rates in workers compensation, there is still work to be done,” he said. Zurich is targeting a reduction in long-tail US exposures, he added. Analysts on the call appeared concerned about the level of rate increases achieved in property/casualty, especially given plans to bring down the commercial combined ratio. Zurich reported an average property/casualty rate increase in the first quarter of just 2%. Analysts also questioned whether Zurich is committed to its target of flat earned premiums for 2017, given it plans more actions on its commercial book and in the absence of significant rate increases. However, Mr Quinn said he does not expect a new “conversation” about commercial premium volumes. While retention rates had improved for commercial business and business flow is as expected, he warned that a negative change in market conditions would affect the top line. Zurich's group property/casualty gross premiums were flat in the first quarter and down 4% in EMEA. Net premiums were 6% lower, reflecting increased reinsurance purchasing and shrinking of the commercial book. In the US, where underlying growth in premiums was 1% in Q1, growth in high margin and specialty lines offset the decline in large commercial. Mr Quinn said Zurich would stick to its target, and that a reduction in commercial premiums should be offset by growth in retail insurance. “If price rises do not come through and we move from long to short tail, this suggests that there is a decline [in commercial]. Commercial business would shrink and retail [would] grow and we would reduce capital allocation to commercial, especially in markets where performance is weak, and allocate this to mass consumer (lines],” Mr Quinn told analysts.

Zurich to take further action on commercial business

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