Zurich reports 93% increase in net income to USD 1,448 million in the first half of 2004

Zurich, August 19, 2004 - Zurich Financial Services Group (Zurich) reported a near doubling of net income to USD 1,448 million in the first half of 2004. The annualized return on equity (ROE) was 16.8% compared with 12.1% for the full year 2003. Zurich's strong performance was supported by a significant improvement in the General Insurance underwriting result. The Group's high-quality portfolio benefited from low claim frequencies, absence of large catastrophes, and the strong rate increases achieved in prior years. The Life Insurance segment showed further progress on its path to recovery as a result of focusing on more profitable businesses, expense reductions, and the better alignment of products and services with current investment yields. The Group net investment result rose by 20% to USD 3,859 million.

James J. Schiro, Chief Executive Officer of Zurich Financial Services, said: "Zurich's recovery continues. Success is coming from the sharp focus on core businesses, financial discipline and sound underwriting. While the Group exceeded its targeted return on equity, it also further strengthened its balance sheet. Zurich is positioned to leverage its global capacity in order to continue to benefit from attractive markets."

He continued: "The markets we are operating in continue to be fragile. We knew that the benign environment we have seen in the last 18 months, which was characterized by the absence of large catastrophes and low claim frequencies, would not continue forever. Now hurricane Charley has reminded us of this point rather painfully. We reckon with losses of about USD 150 million net of reinsurance."

He concluded: "The constant monitoring of external developments ensures that we can continue to take actions to further strengthen our balance sheet when necessary. Our commitment to operational and financial discipline is unwavering. We are not prepared to chase prices down below a technically sound level. On the contrary, we will consistently aim for underwriting profitability over growth."

Performance highlights

Comparisons refer to the first half of 2003 (restated) unless noted otherwise. Interim results are not necessarily indicative of full year results.

General Insurance. The performance in General Insurance is underscored by the more than threefold increase in the net underwriting result from USD 158 million to USD 487 million and the improvement in net income to USD 981 million, an increase of 25%. The segment's business operating profit rose by 37% to USD 1,302 million. Gross written premiums and policy fees grew to USD 20.6 billion, an increase of 6% (1% in local currency). Growth was driven by a mixture of rate and volume increases as well as favorable exchange rate movements. Excluding divestments and foreign exchange impacts, premium growth was approximately 2%, while net earned premiums, benefiting from the strong rate increases in prior years, rose by 12% (6% in local currency) to USD 14.6 billion. Disciplined underwriting and the geographically well-balanced portfolio contributed to the sizeable 2.1 percentage point improvement in the combined ratio from 98.8% to 96.7%. Net reserves for losses and loss adjustment expenses increased 4.1% to USD 38.5 billion, with prior year reserve strengthening amounting to USD 656 million. As a result of the Group's focus on operational efficiency the expense ratio remained constant at 24.6%.

Life Insurance. The Life Insurance segment continued to deal with challenges on its path to recovery. The new business profit margin rose from 8.2% to 9.7%, an improvement of 1.5 percentage points, while embedded value operating profit, after tax, was USD 553 million, corresponding to a 5.2% operating return on embedded value. The Group's commitment to cost-efficient delivery resulted in a reduction of administrative expenses. Net income was USD 393 million, an increase of 3%, while gross written premiums and policy fees declined by 10% (18% in local currencies) to USD 5,676 million. This decrease is primarily due to the sale or exclusion of underperforming operations. Business operating profit was USD 453 million, a decrease of 2%.

Farmers Management Services. The segment's net income was USD 344 million, an increase of 10%, while business operating profit rose by 5% to USD 539 million. These improvements were the result of higher premiums at the Farmers P&C Group Companies, which Zurich manages, but does not own. In the first six months, the surplus of the Farmers P&C Group Companies grew by USD 231 million to USD 3.9 billion.

Group investments. The Group net investment result (net investment income and net capital gains and losses on investments) rose by 20% to USD 3.9 billion. Net capital gains were USD 252 million, following losses of USD 398 million in the first half of 2003. The positive swing in net capital gains and losses reflects the improvement in global equity markets as well as favorable foreign exchange movements.

Shareholders' equity The Group's equity rose USD 113 million from USD 18.9 billion at the end of 2003 to USD 19.0 billion reflecting the benefit of strong net income, which was offset primarily by a USD 758 million reduction in net unrealized gains on investments and the USD 288 million in nominal value reduction of common stock in lieu of a dividend payment. Shareholders' equity at December 31, 2003 was restated by USD 450 million in accordance with a new accounting standard.

Financial Highlights

The following table presents the summarized consolidated results of the Group for the six months ended June 30, 2004 and 2003 and the financial positions as of June 30, 2004 and December 31, 2003. The 2003 amounts have been restated following the adoption of new accounting standards in 2003 and 2004. Certain prior year balances have also been reclassified to conform to the 2004 presentation.

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