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

In contrast to this year's $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 company's non-life reserves and nearly a $1 billion write-down of certain asset values.

In spite of 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 $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 this morning.

Other initiatives are designed to sharpen the group's business focus, improve operational efficiency, and enhance the capital base, according to James J. Schiro, Zurich's 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 reserve increase, amounting to $1.8 billion after-taxes (or 7 percent of year-end 2001 net reserves), was taken in 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, $922 million 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 related to the carrying value of goodwill associated with prior acquisitions, and $227 million 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 group's dividend policy, a 10 percent reduction in the group's 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 with the scope of the group's sharpened strategy and 12 percent return on equity goal.

"I hope you found this boring, tedious, detailed. Because that's what it is," Mr. Schiro told analysts during his concluding remarks of a conference in Zurich today, which had various business unit heads detailing the Group's 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 and which lines and regions we may be exiting, I want to be perfectly clear. I'm 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 said.

Separately, Standard & Poor's announced that it lowered long-term ratings on related entities of Zurich to "single-A-plus" from "double-A-minus," and Moody's 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 said, noting that the impact would be greatest on the group's capital markets' businesses.

Still, "our goal is to return ?to a double-A'-rating. That's part of our $5 billion capital plan and profit improvement program," he said. While "we'd like to get there as quickly as we can," he said, "this is not an event. It is a process."

At the investor's conference this morning, executives also addressed concerns about the adequacy of Zurich's strengthened reserves by having the firm's 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.