Zurich Insurance Group Ltd · SIX:ZURN
Zurich Insurance — Zurich Financial Services — FY2001 Earnings Presentation
53 slides from Zurich Insurance's earnings presentation, Mar 21, 2002
Slide 1: Annual results 2001
Annual results 2001 Analysts‘ presentation March 21, 2002 © Zurich Financial Services
Slide 2: Disclaimer & Cautionary statement
Disclaimer & Cautionary statement Certain statements in this document are forward-looking statements, including, but not limited to, statements that are predications of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their na
Slide 3: Agenda/Structure
Agenda/Structure • Key messages • Results • Looking ahead • Special topics/Appendix © Zurich Financial Services 3
Slide 4: 2001 was a disappointing year...
2001 was a disappointing year... …for Zurich • Net IAS loss • Poor underwriting performance • Several profit warnings • Very poor share price performance …for the industry • September 11th was the largest insured loss in history • Negative equity returns worldwide for 2 years in a row • Prior year a
Slide 5: …but we made progress as we addressed several key issues
…but we made progress as we addressed several key issues Commitments as of March 2001 Achievements as of March 2002 Focus businesses Strengthened positions in key markets and exited reinsurance Divest $4 billion $5 billion divested Reduce debt by up to $2 billion Debt reduced to date by $1 billion E
Slide 6: Agenda
Agenda • Key messages • Results • Looking ahead • Special topics/Appendix © Zurich Financial Services 6
Slide 7: Results overview
Results overview In USD million 2001 2000 Normalized net income pre Sep. 11th and disposed businesses1 1,049 2,008 Insurance losses from Sept. 11th - 706 -- Results from disposed businesses2 5 59 Normalized net income 348 2,067 Asset impairment charges3 -517 -41 Actual realized gains4 versus normali
Slide 8: Per share data
Per share data In CHF, per common share 2001 2000 % change Normalized net income excl. Sep. 11th and disp. businesses1 21.17 39.91 -47% Normalized net income1 7.00 41.08 -83% IAS EPS 1 -7.78 46.03 NM Book value 332 397 -16% Proposed gross dividend 8.00 17.15 -53% 1: fully diluted, based on 83.56 mil
Slide 9: IAS net income by segment
IAS net income by segment In USD million 1600 1'514 2001 1400 2000 1200 965 1000 800 621 501 559 600 400 200 102 51 101131 89 80 103 0 -29 -200 fe re g s e e e er in at Lif Li -400 nt nc t en rm nk or Ce ra n -460 em rp Ba No Fa su -600 Co in ag Re an -800 tm -1000 se As -1200 -1'087 -1400 -1'312 -1
Slide 10: Normalized income by segment
Normalized income by segment In USD million 1600 2001 1400 1'258 2000 1200 991 1000 800 723 537 531 600 400 133 89 135 200 105 60 63 80 0 -24 -200 fe re g fe s e e er in Li at nt Li nc t -400 rm en nk or -378 Ce on ra em Ba rp Fa su N -600 Co in ag Re an -800 tm -767 se -1000 As -1200 -1'121 -1400 ©
Slide 11: Strong premium growth achieved, but unacceptable combined ratio in Non-life
Strong premium growth achieved, but unacceptable combined ratio in Non-life Combined ratios In USD millions 2001 2000 % change1 Total GWP 23,345 19,290 +25% Other NEP 16,744 14,235 +20% RoW Loss ratio 84.2% 75.5% +8.7 pts Expense ratio 26.4% 28.0% -1.6 pts Cont. Eur. Combined ratio2 111.0% 104.2% +6
Slide 12: Deterioration in non-life underwriting result was due to a number of adverse factors
Deterioration in non-life underwriting result was due to a number of adverse factors In USD millions Total Sept. 11th Other impact impact Decline in NL U/W result 1,231 284 Of which: NA Corporate 355 177 Prior year losses Continental Europe 174 -- Corporate business Other Covariance release (2000) 3
Slide 13: Strong business growth recorded in life, but with lower margins
Strong business growth recorded in life, but with lower margins New business margins In USD millions 2001 2000 % change1 in % GWP & deposits 17,871 16,296 +13% al Tot IAS net income 621 965 - 36% RoW Normalized income 723 991 - 27% New bus. prems. (APE) 2,008 1,915 +10% UKI SA 2000 New business marg
Slide 14: Farmers Management Services recorded good underlying growth
Farmers Management Services recorded good underlying growth In USD millions 2001 2000 % chg. Management fees 1,690 1,589 +6.4% Gross operating income 854 792 +7.8% Operating margin1 50.5% 49.8% +0.7pts Investment result2 43 199 -78.4% IAS net income excl. investment result 474 436 +8.7% IAS reported
Slide 15: Centre and ZCM produced strong underlying results
Centre and ZCM produced strong underlying results In USD millions 2001 2000 % change1 Centre IAS net income pre Sep. 11th 161 131 +23% IAS net income 101 131 -23% Normalized net income 63 133 -53% Banking & Capital Markets Net income 89 80 +11% Of which: ZCM 117 60 +95% 1) in local currencies © Zuri
Slide 16: Reinsurance results were adversely affected by Sept.11th
Reinsurance results were adversely affected by Sept.11th 2001 Converium1 Zurich Other Total in USD millions Conv. 2 Retained GWP 2,109 877 2,986 NEP 1,733 466 2,199 Losses -1,897 -222 -501 -2,620 of which: Sept. 11th -289 -171 0 -460 Other expenses -705 -68 -773 Investment result 159 29 188 IPO gain
Slide 17: Corporate: cost improvements more than offset by realized losses
Corporate: cost improvements more than offset by realized losses In USD millions 2001 2000 change Net U/W result1 -136 -204 68 Investment income 239 217 22 Realized gains -381 206 -587 Other income 374 326 48 Adm. & oper. Expenses -725 -991 266 Interest expense -716 -605 -111 Others 33 -36 69 Net IA
Slide 18: Underlying Corporate expenses are lower than reported
Underlying Corporate expenses are lower than reported • Service Centers render services and invoice the business divisions • Expenses should be netted off with the related income In USD millions 2001 2000 % change Oper. & admin. Expenses -725 -991 -27% Other income 374 326 +15% Net oper. & admin. Ex
Slide 19: Equity was primarily affected by adverse financial markets and foreign exchange rates
Equity was primarily affected by adverse financial markets and foreign exchange rates in USD millions 2001 2000 change Pref. Securities 1,096 0 1,096 Common shares 626 626 0 Treasury stock -3 -2 -1 APIC & Ret.earnings 15,607 16,368 -761 Net unrealized gains 1,567 4,065 -2,498 Cumulative translation
Slide 20: But capitalization remains strong and leverage was reduced
But capitalization remains strong and leverage was reduced In USD millions 2001 2000 % change Total capital 1 22'403 26'547 -15.6% Subordinated debt 1'500 1'531 -2.0% Senior debt 3'187 4'270 -25.4% Senior debt/total capital 14.2% 16.1% -1.9pts. Interest expense2 430 398 +8.0% Zurich Insurance Rating
Slide 21: Divestitures will facilitate debt reduction and fund growth
Divestitures will facilitate debt reduction and fund growth • Zurich will achieve $5 bn of divestitures Consideration Net proceeds Capital gains – Converium 2 bn ~1 bn 0.3 bn – ZSI/DB (pending) 2 bn 0.7 bn 0.2 bn1 – Baloise 1 bn 1.0 bn 0.1 bn – Total 5 bn 2.7 bn 0.6 bn • Proceeds will be used to – R
Slide 22: Agenda
Agenda • Overview • Results • Looking ahead • Special topics/Appendix © Zurich Financial Services 22
Slide 23: Repositioning of the Group is now largely achieved
Repositioning of the Group is now largely achieved • Trusted provider of financial protection and wealth accumulation solutions – Key manufacturing expertise in life and non-life • In markets where we have a sustainable advantage – US, UK and Continental Europe – Other selected markets • Customer or
Slide 24: Emphasis continues to be on execution
Emphasis continues to be on execution Focus • Selectively divest in markets where we do not have a sustainable or competitive strength • Reallocate capital to businesses with most attractive prospects Profitable Growth • Reap benefits of upturn in US and UK Non-life commercial lines • Benefit from f
Slide 25: Chairman and CEO roles
Chairman and CEO roles • Separation of Chairman and CEO roles • Nominations committee working on new CEO appointment • Decision taken by Board of Directors © Zurich Financial Services 25
Slide 26: Capital position
Capital position • Strong capital position at Y/E 2001 • MILES issue and ZSI/DB transaction will further strengthen capital adequacy in 2002 • Expected strong premium growth will require to increase our capacity to underwrite new business • Several options are available to facilitate this © Zurich F
Slide 27: Contradictory trends reduce visibility for 2002
Contradictory trends reduce visibility for 2002 • Strong cyclical growth in Non life driven by rate increases in commercial lines, partially offset by increased claims trends • Favorable long term trend in Life, but margins under pressure • A fragile economic recovery and volatile financial markets
Slide 28: Outlook for Zurich in 2002
Outlook for Zurich in 2002 Zurich has a portfolio of strong businesses and is well positioned to take advantage of favorable conditions in life and non life, but remains cautious in light of the current uncertain risk and economic environment © Zurich Financial Services 28
Slide 29: Summary
Summary • 2001 was a very difficult year for Zurich and the industry • Portfolio of strong businesses • New management team • Well positioned in our key markets • Committed to deliver and perform © Zurich Financial Services 29
Slide 30: Agenda
Agenda • Key messages • Results • Looking ahead • Special topics/Appendix © Zurich Financial Services 30
Slide 31: Special topics
Special topics • Farmers P&C Group • Centre • Zurich Capital Markets • Alternative investments • Reserves • Disposed and acquired businesses • Other General information © Zurich Financial Services 31
Slide 32: Farmers P&C Group: Key Developments in 2001
Farmers P&C Group Companies Farmers P&C Group (Farmers Exchanges): Key Developments in 2001 • A downturn in US personal P&C lines hit the industry… Farmers as well. – Farmers adjusted combined ratio still outperformed the personal lines sector (109%1 vs. 112%) – Farmers results were adversely affect
Slide 33: Strong actions have already been taken
Farmers P&C Group Companies Strong actions have already been taken • Significant rate increases were implemented in 2001, and further increases are planned for 2002. Their revenue impact should be partially offset by reduction in number of policies. • 4th quarter results already show significant imp
Slide 34: Rate Changes by Line of Business
Farmers P&C Group Companies Rate Changes by Line of Business Line Amount of Rate Rate total Change Change premiums 2001 2002 (%) (Filed) (Planned) Auto 59.3% 7.1% 9.8% Fire 23.6% 26.3% 20.3% Specialty 6.0% 3.0% 6.0% Commercial P&C 7.9% 13.5% 19.5% Work Comp 3.2% 35.2% 22.4% 100%
Slide 35: Surplus position
Farmers P&C Group Companies Surplus position • 2001 Year-end Surplus ratio of 31.2% was slightly below our historical norm of 33%. • Ended 2001 with $3.5 billion of Total Surplus including $2.1 billion of surplus notes. – Split between internal and external placed notes is 50/50. • Rating agencies g
Slide 36: Combined Ratio Improvement
Farmers P&C Group Companies Combined Ratio Improvement 2001 – All territories Auto 115.0% Earned premium growth fueled by 110.0% rate changes and 105.0% underwriting actions, plus improved 100.0% severity loss trends continue to lower 95.0% the Auto combined 1st Qtr 01 2nd Qtr 01 3rd Qtr 01 4th Qtr
Slide 37: Centre
Centre Centre • Portfolio Diversification - critical mass of 400+ transactions • Capital adequacy ratio in „AAA“ range at Y/E 2001 • Dynamic financial analysis simulation for each transaction, stress testing for entire portfolio • P&C transactions – Average limit/premium for current portfolio: 2.5,
Slide 38: Centre's Portfolio by Line of Business (# of transactions)
Centre Centre’s Portfolio by Line of Business (# of transactions) 2% 5% 3% 10% 8% 19% 16% 8% 14% 5% 14% 39% 2% 55% 2000 2001 Life/Health Real Estate Structured Asset Finance Project Finance Insurance/Reinsurance CBO/CDO Residual Value Insurance © Zurich Financial Services 38
Slide 39: Zurich Capital Markets: Controlled risk
ZCM Zurich Capital Markets: Controlled risk • Goal is to maintain a market neutral position • Structured transactions: 52% of revenues – Asset matching principle, no principal risk – Average credit quality of credit exposure at “AA” • Managed assets: 47% of revenues – USD 6 billion of loans collater
Slide 40: ZCM Key data
ZCM ZCM Key data In USD millions 2001 2000 % change Revenues net of interest expense 547 451 +21% Operating expenses 333 278 +20% Net income 117 60 +95% Total assets 11,777 8,751 +35% Debt 5,763 3,158 +82% Minority interests (incl. preferred) 2,380 1,913 +24% Equity 256 189 +35% Return on equity 53%
Slide 41: Alternative investments
Alternative investments Alternative investments In USD millions Net IRR Fair value to date at Y/E 2001 CZI appr. 4% 995 Capital Z FS II -10 to -15% 287 Other 3rd parties 1,0011 Affiliates 273 Total alt. investments 2,556 1. split across approximately 100 investments, of which the largest amounts to
Slide 42: Alternative Investment portfolio mix at 31 Dec 2001
Alternative investments Alternative Investment portfolio mix at 31 Dec 2001 including strategic private equity investments Hedge Funds Other • Includes over 60 1% 1% investments • Largest • Largest investment: investment: Endurance Direct Capital Z Investments Fund of Investments, LP 25% Funds (CZI1
Slide 43: Survival ratios - Asbestos & Environmental exposures
Reserves Survival ratios - Asbestos & Environmental exposures In USD million 2001 2000 Net 3-year Net 3-year reserves survival reserves survival ratio1 ratio Asbestos 2 1,653 22 1,283 30 of which: US 1,086 19 of which: UK 567 33 Environmental 3 628 8 838 11 Total 2,281 14 2,121 18 1) Outstanding cas
Slide 44: Non-life reserve ratios and claims paid
Reserves Non-life reserve ratios and claims paid Non-Life loss reserves/premiums 190 In USD millions 2001 2000 % change Rate increases 180 Adjusted* Net Earned 170 Reported Premiums 16,744 14,235 +17.6% 160 Claims paid 12,388 12,640 -2.0% 150 Claims paid/incurred 89% 119% -30%pts 140 130 Underwritin
Slide 45: Share of ZSI operations to be disposed in Zurich's accounts
Disposed & acquired businesses Share of ZSI operations to be disposed in Zurich’s accounts 2001 in USD millions Total ZSI1 Retained Management fees 1,517 1,237 280 Investment result 102 49 53 Total revenues 1,646 1,296 350 Operating income -31 -98 67 Net income -29 -79 50 IAS equity 1,707 1,647 60 3
Slide 46: Zurich's main retained exposures from Converium
Disposed & acquired businesses Zurich’s main retained exposures from Converium • Sept. 11th losses in excess of USD 289 million. • Unicover settlement/dispute in excess of USD 59 million • Pre-1987 liabilities © Zurich Financial Services 46
Slide 47: Breakdown of 2001 premiums
Other General Breakdown of 2001 premiums Non Life GWP + Life Premiums & Deposits Premiums written by the Farmers P&C Group Companies USD 17.9 billion USD 34.7 billion 7% 1% 17% 30% 31% 27% 17% 5% 35% 30% NA Consumer UKISA Continental Europe Rest of the World NA Corporate FARMERS P&C Group Companies
Slide 48: Positions in key markets
Other General Positions in key markets 2001 UK Life Non-life Premiums $5.8bn $3.3bn Rank (overall) 4th Market Share 6% Cont. Europe* Life Non-lIfe Premiums $7.6bn $6.3bn Rank (overall) 5th Market Share 2.7% US Commercial Personal+ Life Premiums $11bn $12bn $5.4bn Rank 3rd 3rd Market Share ~4% ~6% +:
Slide 49: Rate increases in non-life 2001
Other General Rate increases in non-life 2001 Country Personal Commercial Motor Household Motor Liability Property US 7% 26% ---------- 21% ------------ UK 9% 4% 14% 30% 23% Switzerland stable 0-5% 10% 1% -1% Germany 0-5% 0-5% ---------- ~20% ------------ © Zurich Financial Services 49
Slide 50: Pre-tax asset impairment charges & write downs
Other General Pre-tax asset impairment charges & write downs In USD million 2001 2000 Fixed maturities -72 -41 Equities -674 -11 Other -92 -14 Total asset impairment charges -838 -66 © Zurich Financial Services 50
Slide 51: Breakdown of September 11th losses by segment
Other General Breakdown of September 11th losses by segment In USD million pre-tax post-tax Non-life 284 222 Reinsurance 460 424 Centre 63 60 Total 807 706 Claims paid 44 © Zurich Financial Services 51
Slide 52: Asset Management results
Other General Asset Management results In USD millions 2001 2000 % change Fees 1,517 1,650 -8.8% IAS net income -29 51 n.m. Normalized income -24 60 n.m. Operating margin 4.3% 12.0% AuM 398,003 435,005 -9.3% 3rd party assets 219,504 253,735 -13.0% Net funds inflow -21,367 6,839 n.m. Mkt. & currency
Slide 53: 2001 Equity and RoE by segment
Other General 2001 Equity and RoE by segment Segment IAS Equity Net Income ROE 1) Non Life 9,040 102 1.1% Life 9,295 621 6.4% Asset Management 1,707 -29 -1.5% Farmers 2,197 501 23.0% Capital Markets & Bkg 624 89 14.2% Centre 524 101 18.8% Reinsurance 133 -460 -37.9% ∑ Business segments 23,520 925 3.
Zurich Financial Services — FY2001 Earnings Presentation on 6ix