August 15, 2013 10:39 am

Zurich Insurance faces struggle to hit targets

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Zurich Insurance may struggle to meet some of its long-term targets, its chief executive said, as the group reported a bigger-than-expected drop in second-quarter profits.

Zurich set itself a number of three-year goals in 2010, including expenses savings, as well as plans to expand its life and farmers’ divisions, while bolstering the profitability of its general insurance division.

However, with the three-year mark looming, Martin Senn conceded that some of those ambitions might be a stretch.

“If you stopped the clock now, and benchmarked where we are, on some of the targets, such as in our life division, and on efficiency, we are very comfortable. Others, such as general insurance and growth in the farmers division, are more challenging,” he said.

Like many of its peers, Zurich is battling with the impact of persistently low interest rates around the world, which make it more difficult for insurers to earn returns on their traditional core investments, such as government bonds.

Zurich said in May that it would attempt to offset this effect by investing in riskier asset classes, such as commercial property, but Mr Senn said that it would take time for this approach to bear fruit.

“This is not a matter of one or two quarters,” he said. “You have to be disciplined, otherwise you fall into the trap of being a trader. We are a long-term investor.”

In the second quarter, Zurich also had to contend with a series of natural disasters, ranging from floods that swamped large swaths of central Europe, and cost Zurich $140m, to tornadoes in the US, which cost it $52m.

As a result of the disaster losses, as well as a decline in investment income, Zurich’s net income for the three months to the end of June came in at $789m – or SFr4.99 per share – down 27 per cent on the same period a year earlier. Analysts had forecast $824m.

Meanwhile, Zurich’s premia and policy fees ticked up 2 per cent to $13.4bn. The group’s combined ratio – an industry yardstick for costs and claims as a proportion of premiums – rose 1.1 percentage points to 96.2 per cent. A figure below 100 indicates profitable underwriting.

Marc Thiele, an analyst at Mediobanca, said the results presented a mixed picture. “It is a miss, but they also managed to improve their pricing, and their prior year reserve development was back to a normal level after a wobble in the first quarter. I think that will provide a degree of relief,” he said.

Shares in the company were down 3 per cent at SFr244.30 in a falling market in early morning trading in Zürich.

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