Zurich Financial Services

Summary

-  ■■ Zurich Financial Services Group specialises in financial protection and asset accumulation. The company is a provider of insurance services for individuals as well as small businesses, corporations and multinational companies. Zurich provides life and non-life insurance, including property, accident, auto, health and financial risk coverage.

-  ■■ Zurich is the largest Swiss-based insurance group and a global leader in its field, with offices in more than 60 countries, employing over 70,000 people and serving 38 million customers. The company's principle brands are Eagle Star, Allied Dunbar in the UK, and Farmers and Scudder Kemper in the United States.

-  ■■ For the fiscal year ended December 2003 Zurich Financial Services achieved revenues that totalled $48,919 million, an increase from $41,423 million in 2002.

-  ■■ Life insurance has been at the centre of Zurich’s operations, however this sector appears to be the weakest area in Zurich’s portfolio.

Overview

Zurich Financial Services Group specialises in the areas of financial protection and asset accumulation and is concentrated into five business divisions: four geographic (Continental Europe, UKISA/Asia Pacific, North America Consumer/Latin America and North America Corporate) and one global - Centre Group, Zurich Capital Markets and Capital Z Partners.

Zurich Financial Services provides insurance services for individuals as well as small businesses, corporations and multinational companies. Zurich provides life and non-life insurance, including property, accident, auto, health and financial risk coverage.

Zurich has grown since the early 1990s thanks to a strategy of expansion involving the acquisition of numerous strategically placed insurance companies. This has allowed Zurich to enter the UK and many Europe markets as well as North America.

Zurich is the largest Swiss-based insurance group and a global leader in its field, with offices in more than 60 countries, employing over 70,000 people, and serving 38 million customers. The company's principle brands are Eagle Star, Allied Dunbar in the UK, and Farmers and Scudder Kemper in the United States.

Zurich also works with a number of partners worldwide. Deutsche Bank offers Zurich's insurance products to its clients in exchange for Zurich offering its customers Deutsche's Banking and Asset Management services; an agreement implemented throughout a number of European countries. Another example of Zurich North America’s partnerships is the strategic alliance with ING. Together they underwrite commercial and corporate lines distributing products through approximately two-thirds of all Canadian brokerages.

For the fiscal year ended December 2003 Zurich Financial Services achieved revenues that totalled $48,919 million, an increase from $41,423 million in 2002.

History

Zurich Financial Services Group dates back to the 19th century, with the founding in 1872 of Zurich Insurance Company. Within eight years of its founding, the company was already servicing a large clientele beyond Switzerland and in 1912 commenced its operations in the United States, originally in the field of workers’ compensation. In 1923, the company opened a branch in the UK. These activities were the start of Zurich's almost continual trend of global expansion.

The following year, the company changed its name to Zurich Financial Services Group following the merger with the financial services business of B.A.T Industries. Through a dual holding structure, Zurich Financial Services was 57% owned by Swiss-quoted Zurich Allied, representing the former shareholders of Zurich Insurance, and 43% by London-listed Allied Zurich, the demerged financial services interests of B.A.T Industries.

2001 was a difficult year for Zurich with profits falling and investors pulling out. In an effort to stabilise the situation, the company sold asset manager Zurich Scudder to Deutsche Bank. In September 2002 Zurich announced its $2.5 billion rights issue had been fully underwritten, by banks Credit Suisse First Boston, Goldman Sachs, Schroder Salomon Smith Barney and UBS Warburg, as the insurer struggled to restore its balance sheet.

The company completed the sale of Threadneedle Asset Management Holdings Ltd to American Express Financial Corporation in June 2003. The transaction value of approximately Ј340 million (approximately $565 million at current exchange rates) was paid in cash on completion.

Zurich announced in November 2003 the completion of the sale to Swiss Re of the closed business of Zurich Life Assurance Company, one of Zurich's UK life businesses.

In December 2003 the board of directors of Zurich Insurance Company and Alpina Insurance Company approved to merge Alpina into Zurich.

SWOT analysis

Strengths

Global presence: Zurich has a presence in 60 countries globally and a strong focus on the key world markets of the UK, United States and Switzerland, with expanding operations in continental Europe. Zurich is the UK's third largest household insurer in terms of gross earned premiums.

Valuable strategic alliances: Zurich has entered a number of strategic partnerships, including deals with Deutsche Bank, Bank of America, Ulico Insurance Group, ING Groep, HBOS and Blue Cross of California. Thanks to these alliances Zurich has been offered opportunities for expanding its customer base and strengthening its brand name.

The development of recent strategic partnerships with Bank of America, Ulico and HBOS plc offer substantial opportunities to further expand the company's customer base. Theoretically, the deals expand Zurich's reach to a further 50 million customers.

Weaknesses

Life insurance operations: life insurance has been at the centre of Zurich’s operations, however this sector appears to be the weakest area in Zurich’s portfolio. The Life group is exposed to the less interesting markets in Europe and profitability has been low. The competition Life has been facing, namely Axa, ING, Aegon, Generali and Prudential, means that it is increasingly difficult achieve profitability in this sector.

Opportunities

Cost-reductions: according to Zurich, cost-reduction could help in recovering financial strength, in light of recent losses. The cost-cutting and streamlining process has already begun, following from initiation of a strategy of consolidation and strategic reorientation in 2001. Funds from the divestiture and streamlining of Zurich's asset management businesses are being used to expand its new insurance operations in Europe.

UK wealth management: Zurich has launched a UK high net worth division called Zurich Private Client. Zurich Private Client covers individuals with homes of Ј750,000 and upwards with contents of Ј250,000. It has attracted a number of high-profile celebrities and according to Zurich this sector is still growing. Zurich has also entered the market first, ahead of competitors Groupama and Lloyds TSB and stands to benefit from the wealth of experience and familiarity with the sector that it has gained through recruiting a number of Independent's high net worth team.

Threats

Divestment: Zurich has expressed the intention to divest itself of operations that do not fit in with its new goals and objectives. However, in order to divest, the company needs to find buyers, and in view of the financial problems that many financial services companies are still facing, it might prove to be difficult. Moreover, as potential purchasers are well aware of Zurich's desire to divest quickly, full market value of these outgoing businesses may not be attained.

Global equity market: Zurich has experienced significant declines in the group's total equity, with its share price declining drastically. Because of the nature of its business the company will continue to be exposed to equity, therefore any fluctuations in global equity markets will have a direct impact on Zurich’s performance.

Company activity snapshot

-  ■■ Computer Sciences Corporation has signed on July 27^th an IT outsourcing deal with Zurich Financial Services worth an estimated Ј700 million. Under the terms of the global agreement, CSC would provide a range of applications development and maintenance services to support Zurich in North America, Germany, Switzerland and the UK.

-  ■■ Zurich's first quarter 2004 results provide further confirmation that the insurer’s performance has been improving. Zurich earned a net income of $702 million in the first quarter of 2004, up from $134 million for the same period the previous year. This comes on the back of a full year net income of $2.1 billion for 2003, providing concrete evidence that Zurich is back on track after a couple of tough years. The turnaround is the result of a radical restructuring plan set out by the company’s chief executive, which involved the sale of its non-core businesses, including the UK asset manager Threadneedle, the reduction of headcount by 4,500 and a re-focus on the general insurance business. This has enabled Zurich to shore up its balance sheet and increase profit margins by scrapping under-performing business units. The company can now move on to the second stage of restructuring. This involves achieving a target of 12% return on equity based on business operating profit and stripping out a further $200 million of costs this year. Zurich has done well at cost cutting in the past; however, the 12% profitability target may be harder to achieve depending on how quickly the general insurance market softens. Some lines, such as property insurance in the United States, have already started to soften, which is a sign that other lines will follow. This will put pressure on Zurich to achieve profitability in its general insurance division, which accounts for the majority of the group's profits.

- ■■ Zurich issued its $1 billion bond in September 2003, as the company is seeking to consolidate after its expansion program. Zurich Financial Services has joined the ranks of insurers looking to bolster their positions with a bond issue. The Swiss group said that it would access cash through the debt market with a $1 billion bond issue that would help to strengthen its finances and restructure debt. The company is trying to rebuild both its balance sheet and its reputation following an ambitious expansion program that went wrong. The firm has committed to concentrating on profitable businesses and to this end has divested operations in France, the Netherlands, Indonesia and the UK. This policy has served Zurich well so far - the company returned to profit in the first half of 2003 and undertook a $2.5 billion rights issue. Life insurers have been hit hard by weak consumer demand and falling stock markets, which have forced them to cut bonuses. Improvements in stock markets over the last few months have provided hope of a turnaround.