Company Reports

Zurich Insurance is one of the best-quality companies in our European insurance coverage, and it is a truly special business. The ownership of Farmers Management Services provides the company with an unusual uplift in returns delivered to shareholders. And we believe this business and these returns are well protected by the long-standing attorney-in-fact agreement. The relationship between Farmers Exchanges and Farmers Management Services has been in place since the exchanges were founded nearly 100 years ago. This makes it unlikely that the relationship will change and any change would have to be agreed by upon every single Farmers Exchange policyholder. That would involve a lot of paperwork. Margins and returns in FMS touch 30% and in the world of insurance that's almost unrivaled.

Zurich Insurance is one of the best-quality companies in our European insurance coverage, and it is a truly special business. The ownership of Farmers Management Services provides the company with an unusual uplift to returns delivered to shareholders. And we believe this business and these returns are well protected by the long-standing attorney-in-fact agreement. The relationship between Farmers Exchanges and Farmers Management Services has been in place since the exchanges were founded nearly 100 years ago. This makes it unlikely that the relationship will change and any change would have to be agreed by every single Farmers Exchange policyholder. That would involve a lot of paperwork. Margins and returns in FMS touch 30%, almost unrivaled in the world of insurance.

Zurich Insurance has reported a net income of $4.4 billion for 2023, or $29.96 in basic EPS. These figures are slightly below the $4.6 billion and $30.96 per share that we forecast respectively, but slightly ahead of company-compiled consensus. Zurich’s board is proposing a dividend of CHF 26 per share, higher than we estimated, and is supplementing this distribution with a share buyback of up to CHF 1.1 billion. Zurich’s buoyant results have been driven by a 7% rise in business operating profit in the property and casualty division as the unit has kept its underwriting quality and reserve strength stable. Commercial insurance, one of the moaty parts of Zurich’s business, at 90.7%, delivered a better result than the division combined. The life business has reported a double-digit rise in operating profit as sales have been particularly strong in retail products across Spain through the firm’s joint venture with Banco Sabadell. Sales of protection in the Asia-Pacific region and sales of unit-linked products in South America have also helped. Farmers Group's operating profit has risen 10% over the year, with mid-single-digit growth in the top line as the fee margin increased after Zurich acquired and integrated the MetLife business.

Zurich Insurance has reported a solid first nine-month set of results. Its property and casualty unit has grown the premium it writes across all four regions with good mid-single-digit rate increases across the board and low-single-digit growth in volume of sales. Commercial insurance, in particular, has been able to achieve a 7% rise in prices. Rate rises in North America have been strong in property and motor insurance lines. In life insurance, Zurich has reported a double-digit rise in the present value of new business premiums that has mainly been driven by its Asia-Pacific and Latin America businesses. Fee revenue on investment contracts, mostly written in EMEA, has posted a double-digit percentage-point rise. New business has decreased in North America because of lower corporate contract sales. In the Farmers business gross premium written on the exchanges has grown by 2% over these first nine months. Farmers Management Services fees have correspondingly grown by 2% with stable margins. Zurich’s capital position has improved marginally to a Swiss Solvency Test of 266%.

Zurich Insurance is one of the best-quality companies in our European insurance coverage, and it is a truly special business. The ownership of Farmers Management Services provides the company with an unusual uplift to returns delivered to shareholders. And we believe this business and these returns are well protected by the long-standing attorney-in-fact agreement. The relationship between Farmers Exchanges and Farmers Management Services has been in place since the exchanges were founded nearly 100 years ago. This makes it unlikely that the relationship will change and any change would have to be agreed by every single Farmers Exchange policy. That would involve a lot of paperwork. Margins and returns in FMS touch 30%, almost unrivaled in the world of insurance.

Zurich Insurance has reported a business operating profit of $3.7 billion for the first six months of the year. While this is in line with what the company delivered in the first six months of 2022, this 14.6% business operating profit return on equity means the business is on track to deliver on its financial target of greater than or equal to 20% business operating profit after-tax return on equity for the full year. Net income delivered in these first six months has come in at $2.67 billion, which means that the business is on track to meet or exceed our $4.1 billion net income estimate for the full year. Zurich’s net income is equal to $16.96 in EPS and that implies $33.92 in EPS for the full year. And versus the $30.77 in EPS that Zurich delivered in EPS for full-year 2022 results, the company is on track to meet another one of its financial targets, which is to grow EPS by 8% per year. Our full-year EPS target is $27.44, so the business is on track to beat this. However, the results look a little light on the full-year $37.82 EPS consensus collected by Refinitiv. So far, the results suggest a full-year return on equity that is well above the 10% cost of capital that we apply to the business. We maintain our CHF 480 per-share fair value estimate and narrow moat rating.

Zurich reported a strong start to the year. In the first quarter of 2023 the business reported good top-line growth within its property and casualty division and that has been equally balanced between price increases and volume. Pricing has been among the strongest within its commercial insurance division and North America region. The life business has also demonstrated good top-line growth, but margins have been pressured here. That looks like it is the result of a differing business mix into investment contracts in Europe, the Middle East, and Africa and short-term life contracts such as protection in the Latin America region. However, investment contract net flows are also down by 31%, which is significant. A lot of this appears to be lower sales in Switzerland. EMEA is Zurich’s core life region. Farmers is broadly in line with the services and fee result, up by only 1% to $1.12 billion. That takes it to a little below our full-year expectations. Solvency remains strong with 258% Swiss solvency test, well above the 160% target capital level. We lower our fair value estimate to CHF 480 per share based on currency. We maintain our narrow moat rating.

When looking at the exposure of insurers to the unfolding banking crisis, we believe this is limited. The main impact of the crisis currently seems to be contagion, so investors are selling shares cheaply. However, exposure to United States bonds is either in government bond securities, or exposure to Credit Suisse, Silicon Valley Bank, and other U.S. regional banks is immaterial, which is 50 basis points or less of their investment portfolio. Some do hold larger bank debt holdings of up to 5.5% of shareholder investments, but nearly all that debt ranks as senior. AT1 debt tends to be very minimal or there is no exposure as a policy with board-level approval. The vast majority of corporate debt held is investment-grade. We maintain our fair value estimates and moat ratings across our European insurance coverage. Allianz remains our Best Idea. Admiral is one of our top picks.

Zurich Insurance has reported financial results for full-year 2022 that have failed to flatter in our view.

Zurich Insurance is a good-quality insurance enterprise that offers commercial insurance to leading businesses around the world. The company embeds dedicated underwriters with clients, and that leads to a strong service culture and a helping hand that underlying clients can rely on. Risk mitigation is crucial in choosing an insurer to partner with, and Zurich’s reputation and expertise shine through in its retention rates. While the business has been through a bad patch in terms of under-reserving and risk concentration, its management team has been first rate in the swiftness and thoroughness of the executed turnaround. Further, the business is resilient to current conditions in capital markets and macroeconomics that can change the quality of its underwriting. We see this resilience not only in the company’s Swiss Solvency Test sensitivities but more importantly in its ability to action good price increases, highlighting Zurich’s overall pricing power.

Zurich reported mixed numbers for the first nine months of this year. The property and casualty division reported a 13% rise in gross written premiums on a constant-currency basis with solid mid-single-digit rate increases. Most of these rates are moderating, but the business is experiencing a tailwind in South America pricing. The commercial insurance business continues to do well particularly in crop insurance. A rebound in travel insurance in Australia has been driving the good performance in Asia-Pacific.

Many European insurance companies have fallen into 5-star territory year to date. However, we still like and support our preferred picks of two primary firms. In our personal lines subindustry, we still like Admiral. That is because we believe the business is adept at growing its customer numbers ahead of peers and the market. Though we do anticipate slower motor insurance growth over the immediate time frame, coupled with a fall in home insurance volumes due to lower U.K. completed home sales, we still believe in the prospects for Admiral’s long-term growth. Yet, while the business clearly outstrips the competition in terms of expansion, its development is not aggressive. Admiral has grown its U.K. motor market share by 5 percentage points over the last 10 years.

Zurich Insurance is a quality insurance enterprise that offers commercial insurance to leading businesses around the world. The company embeds dedicated underwriters with clients, and that leads to a strong service culture and a helping hand that underlying clients can rely on. Risk mitigation is crucial in choosing an insurer to partner with, and Zurich’s reputation and expertise shine through in its retention rates. While the business has been through a bad patch in terms of under-reserving and risk concentration, its management team has been first rate in the swiftness and thoroughness of the executed turnaround. Further, the business is resilient to current conditions in capital markets and macroeconomics that can change the quality of its underwriting. We see this resilience not only in the company’s Swiss Solvency Test sensitivities but more importantly in its ability to action good price increases, highlighting Zurich’s overall pricing power.

Zurich Insurance is a quality insurance enterprise that offers commercial insurance to leading businesses around the world. The company embeds dedicated underwriters with clients, and that leads to a strong service culture and a helping hand that underlying clients can rely on. Risk mitigation is crucial in choosing an insurer to partner with, and Zurich’s reputation and expertise shine through in its retention rates. While the business has been through a bad patch in terms of underreserving and risk concentration, its management team has been first rate in the swiftness and thoroughness of the executed turnaround. Further, the business is resilient to current conditions in capital markets and macroeconomics that can change the quality of its underwriting. We see this resilience not only in the company’s Swiss Solvency Test sensitivities but more importantly in its ability to action good price increases, highlighting Zurich’s overall pricing power.

Zurich’s property and casualty division has reported a 13% rise in gross premiums written, balanced across both commercial and retail. While that growth has been aided by the strength of the USD, at constant currency the growth is still in the high single digits. This growth has been supported by higher premium rates in the commercial insurance market. This is a dynamic that Zurich expects to continue into 2023. The higher volume and better pricing have flowed straight down to profit as the USD 2.1 billion operating result, a rise of 32%, has also been aided by the strong underwriting standards. The 91.9% combined ratio is purely loss ratio improvement-driven. While unfavorable claims experience in the United Kingdom was offset within EMEA, the North America combined ratio improved by 7.3 percentage points, showing how far that commercial market has traveled, and is a stellar result from the division.

Zurich Insurance reported strong growth in its Farmers division for the first quarter, with its gross written premium up to $6,883 million, a rise of 29%. While that increase does include the contribution from MetLife, that inclusion only accounts for 17 percentage points of the rise. This rise in premium led to a nice bump in the fee and income of Farmers Management Services, which rose to $1,106 million, a climb of 21%, broadly in line with premium earned on the exchanges. Performance of the property-casualty division also looked good, increasing gross written premium by 8%. That was accompanied by low- to high-single-digit rate changes through all four geographies, though most of those rates changes are expected to moderate. The regional rise in gross premium was buoyed by currency and strong performance in crop insurance in the United States. The division that dragged down indicators was life, with new business value showing a 10% decline. We think this is down to an increased mix of capital-efficient product sales. We maintain our fair value estimate and our narrow economic moat rating.

Zurich Insurance has reported a strong full-year 2021. We raise our fair value estimate to CHF 475 per share. We maintain our narrow economic moat.

Since some problems started to arise a little over half a decade ago, Zurich has shifted its organization to an underwriting culture. The model that the business operated on previously was one that valued process and key performance indicators over expertise and autonomy of its product leaders, its underwriters. In taking strong measures and paring back its problematic books of business, not concerned about earnings growth or retention, management set a new standard and path for the business. If it wasn't going to be profitable from underwriting, Zurich avoided writing. This can be seen quite clearly in the tilting of the portfolio away from longer-tail lines. As Zurich carried out these actions, we think it entrenched its position. Where lines were dropped and books tiered, the best and deepest relationships for Zurich were elevated. Here the concept of trust cannot be underestimated.

On Jan. 3, 2022, Zurich Insurance announced its Italian life and pensions back book sale. This block of business consists of both traditional and modern policy styles and is being purchased by GamaLife, a Portuguese insurance business. The main reason for the transaction seems to be capital release, with the sale releasing USD 1.2 billion of capital requirement. This, according to Zurich, should increase its Swiss Solvency Test by 11 percentage points. Furthermore, the transaction is expected to increase liquidity at Group by around USD 200 million. The sale is subject to regulatory approvals and expected to complete in the second half of 2022. We maintain our CHF 444 fair value estimate and our narrow economic moat rating.

Since some problems started to arise a little over half a decade ago, Zurich has shifted its organization to an underwriting culture. The model that the business operated on previously was one that valued process and key performance indicators over expertise and autonomy of its product leaders, its underwriters. In taking strong measures and paring back its problematic books of business, not concerned about earnings growth or retention, management set a new standard and path for the business. If it wasn't going to be profitable from underwriting, Zurich avoided writing. This can be seen quite clearly in the tilting of the portfolio away from longer-tail lines where the business lacked visibility. As Zurich carried out these actions, we think it entrenched its position. Where lines were dropped and books tiered, the best and deepest relationships for Zurich were elevated. Here the concept of trust cannot be underestimated.