Zurich: $2 Billion Loss, 4,500 Staff Cuts

Zurich Financial Services Group announced a $2 billion after-tax loss for the first half of 2002, with plans to cut its work force by 4,500 employees.

The company said strategic initiatives going forward include plans to raise $2 billion to $2.5 billion in capital through a rights offering.

In contrast to this years $2 billion loss, the company earned $861 million after taxes in the first half of 2001.

Contributing to the $2 billion loss this year was a $2 billion pre-tax boost to the companys non-life reserves, and a nearly $1 billion write-down of certain asset values.

Despite recording 30 percent premium growth in its non-life operations, non-life income fell to $123 million (excluding the impact of the reserve strengthening), down from income of $429 million last year.

Zurich attributed the sharp decline to the negative impacts of a decline in capital gains and investment income.

For the group overall, shareholders equity dropped to $14.9 billion from $17.7 billion at year-end 2001, primarily as a result of the $2 billion net loss. The drop was also attributable, in part, to a reduction in net unrealized gains.

The loss reserve increase and the asset write-down–described by the company as “initiatives to strengthen the balance sheet”–were among many outlined by executives during presentations to analysts, the media, and in a written statement.

Other initiatives are designed to sharpen the groups business focus, improve operational efficiency, and enhance the capital base, according to James J. Schiro, Zurichs chief executive officer.

Explaining the initiative to “sharpen strategic focus,” Zurich said it will attempt to reposition itself as “an insurance-based financial services provider,” focusing on “chosen core markets” in North America, the United Kingdom and Continental Europe.

Mr. Schiro described the goal of “improving operational efficiency,” by saying that Zurich would target a 12 percent return on equity over the medium term. With plans for implementing revenue-enhancing and cost-saving initiatives, the group expects to record a 2003 profit in excess of $1 billion after taxes, he said.

Zurich said that over half of the expected 2003 earnings improvement will come from approximately 4,500 job cuts and reduced expenses for technology, procurement, and head office costs. Another one-third of the earnings improvements is expected to come from pricing and underwriting initiatives.

Restructuring costs of roughly $500 million will be charged in second-half 2002, the company said.

The reserve increase, amounting to $1.8 billion after-taxes (or 7 percent of year-end 2001 net reserves), was taken after consultations with an outside actuarial firm, Zurich said.

Breaking down portions of the pre-tax reserve charge, the company said in a presentation to the media that $922 million is related to U.S. corporate exposures, $270 million to exposures in Continental Europe, and $360 million related to asbestos exposures.

Breaking down the asset write-offs, which totaled $954 million after taxes, Zurich said that $727 million is related to the carrying value of goodwill associated with prior acquisitions, and $227 million is related to previously capitalized software expenses.

In addition to raising capital, Zurich said it also proposes to implement a risk-based capital savings program that will include a revision of the groups dividend policy, a 10 percent reduction in the groups equity exposure in its investment portfolio, and selective use of cost-effective reinsurance.

Together, capital raising efforts and risk-based capital savings initiatives are expected to improve the capital position by $5 billion, the company said.

In addition, Zurich plans to reallocate its capital to businesses that fall within the scope of the groups sharpened strategy and its 12 percent return-on-equity goal.

“I hope you found this boring, tedious, detailed. Because thats what it is,” Mr. Schiro told analysts during his concluding remarks at a conference in Zurich on Sept. 5, which had various business unit heads detailing the Groups plans.

“I want you to leave here with an understanding that behind this profit improvement goal is a very detailed plan–one that can be measured and that we can be held accountable to as individuals and collectively as a team,” he said during the conference, which was broadcast over the Internet.

Some details, however, he deliberately refused to divulge.

“To the question of which assets we may be disposing of and which lines and regions we may be exiting, I want to be perfectly clear–Im not going to answer that question,” beyond describing the process of “rigorous” capital allocation and plans to achieve a 12 percent return.

“It is not in the best interests of our shareholders to be more specific at this time. It is also not in the best interests of our employees to discuss possible changes until we have definitive plans in place and we have dealt with the regulatory requirements,” he added.

Separately, Standard & Poors announced that it lowered long-term ratings on related entities of Zurich to “single-A-plus” from “double-A-minus,” and Moodys Investor Service affirmed its ratings, which include “A1″ financial strength rating and an “A2″ senior debt rating for Zurich Insurance Company.

“We anticipated that,” Mr. Schiro said at the analysts conference, referring to the S&P downgrade. “But we do not see the downgrades having a significant impact on our core insurance businesses,” he added, noting that the effect would be greatest on the groups capital markets businesses.

Still, “our goal is to return to a 'Double-A rating. Thats part of our $5 billion capital plan and profit improvement program,” he said. While “wed like to get there as quickly as we can,” he added, “this is not an event. It is a process.”

At the investors conference, executives also addressed concerns about the adequacy of Zurichs strengthened reserves by having the firms outside actuary affirm his belief that the reserves, which are now set at the midpoint of his range, are “reasonable.” The actuary–Steven Lehmann of Miller, Herbers, Lehmann & Associates–called his use of the term, “a pretty high complement in the parlance of actuaries.”

During the conference, executives also said that Zurich expects to incur $175 million to $200 million in losses from European floods.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 16, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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Zurich: $2 Billion Loss, 4,500 Staff Cuts

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