Zurich results rebound but large losses challenge Global Corporate

On Thursday, Switzerland-based Zurich posted group net income of $2.5bn for the first nine months – up 11% – while operating profit rose 36% to $3.4bn. Third quarter net income increased 342% to $912m. Operating profits were up 372% to $1.2bn. This reflected an ongoing turnaround of the group’s general insurance business.

Zurich’s general insurance unit swung from a $183m operating loss in the third quarter of 2015 to a $618m profit in the third quarter of 2016. General insurance’s combined ratio improved to 98.4%, from 101.9%. This is despite a 7% decline in gross written premiums in the third quarter and reflects steps taken to improve profitability.

Zurich’s Global Corporate business also saw improvements in the third quarter. The unit is due to be merged with Zurich’s commercial insurance business under the leadership of James Shea, who joined the insurer in October 2016 from AIG.

A spokesperson for Zurich said that Mr Shea in the process of building the new unit. “The creation of the new unit will take time, and right now our people remain focused on delivering for our customers as before,” he told CRE.

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Global Corporate produced a combined ratio of 105% for the third quarter of 2016, significantly lower than the 137% reported in the same period of 2015. The explosions at the port of Tianjin accounted for 17.3% in Q3 2015, it should be noted.

The improvement at Global Corporate was mainly driven by favourable impact from prior-year reserves and the absence of major catastrophes. However, Global Corporate has not yet achieved a satisfactory level of profitability and the focus remains on further improvement, Zurich said.

“The general insurance underlying combined ratio is improving and the business will continue to work to further improve the result over coming quarters, particularly within the Global Corporate portfolio,” it explained.

Speaking during a media conference call, Zurich’s chief financial officer George Quinn said the bulk of Zurich Global Corporate’s re-underwriting is complete. However, profits at the unit are not yet where they should be, he added. Further expense measures are needed, while the insurer will continue to address underwriting during 2017, he explained. This will be achieved through “normal portfolio management”, said Mr Quinn.

Large losses remain an issue for Global Corporate, according to Mr Quinn. “The biggest challenge is large losses. We still see more than we anticipated,” he said.

After a particularly benign second quarter, Zurich’s general insurance business saw higher impact from large losses in Q3. Two events in Germany and the UK added nearly $60m in losses – or approximately 1% to the combined ratio.

Results are still exposed to large losses from contracts written before the recent review of Zurich’s Global Corporate portfolio, explained Mr Quinn. Zurich’s largest loss in 2016 occurred during the first quarter and was underwritten before the insurer reviewed its Global Corporate portfolio. Had Zurich’s new underwriting guidelines been applied earlier the firm could have reduced the nine month 2016 combined ratio by 0.5 to 1 percentage point, Mr Quinn said.

Zurich’s general insurance turnaround has not been delivered without an impact on the top line, especially at Global Corporate where gross written premium was down 11% in the third quarter. The reduction reflects the group’s focus on actions to improve performance, together with lower business volumes.

“This trend is expected to continue for the remainder of the year,” Zurich said.

Gross premiums also reduced in other parts of Zurich’s general insurance business. This includes a 4% decrease for North America and a 15% fall in international business, as the insurer exits lines in Australia that did not meet required profit levels.

For the Europe, Middle East and Africa (EMEA) region, premiums declined 5% in the third quarter, driven by the competitive environment in the UK and Italy, as well as further premium declines in Germany.

Although Zurich said it has achieved rate increases on Global Corporate through “rigorous execution on tiering plans”, the aggregate rate rise in the third quarter was just 1%.

Zurich said it achieved rate increases in the EMEA region for Global Corporate. Rate increases in Europe were, however, partially offset by falling rates in the US – particularly in property.

Improvements at Zurich followed AIG’s return to third-quarter profitability, although its commercial lines unit continues to post underwriting losses.

The US-based global insurer posted third-quarter net earnings of $462m, compared with a loss of $231m in the same period of 2015. AIG’s result was boosted by higher investment income and a reduction in general operating expenses, which declined 12% in the first nine months of 2016.

However, AIG’s commercial property/casualty business saw a doubling of its underwriting loss to $236m in the third quarter, while the combined ratio deteriorated 3% to 105.3%.

The increased losses reflected a $306m in adverse reserve development for US programme business and higher catastrophe losses.

AIG’s “portfolio optimisation” saw its commercial net premiums fall 17% in the third quarter to $4.37bn.

“This decrease was primarily due to the continued execution of our strategy to enhance risk selection in our casualty and property product portfolios, the non-renewal of certain underperforming classes of business, the increased use of reinsurance, and adherence to our underwriting discipline in competitive market conditions,” AIG said in a statement.