Zurich Financial Services reports 35% increase in net income in the first nine months of 2004

Zurich, November 17, 2004 - Zurich Financial Services Group (Zurich) reported strong growth in net income in the first nine months of 2004 despite the impact of the most severe hurricane season in more than a century. The strong performance was built on sound underwriting and claims management as well as on the diversified portfolio across geographies, segments and lines of business. The Group's ability to absorb shocks is also reflected in the improved balance sheet.

James J. Schiro, Chief Executive Officer of Zurich Financial Services, said:

"Our job is to deliver consistent operating performance and to strengthen our balance sheet enabling us to absorb volatility inherent in the insurance business while achieving attractive returns for shareholders."

"This year's unparalleled hurricane season, which caused tragic losses in life and property, put our endeavor to a severe test. But Zurich delivered. Our claims people were out in force helping our customers put their lives and businesses back together. Despite hurricane claims payments we achieved an underwriting profit in General Insurance with a combined ratio of 98.8% of which 2.3 percentage points represent the charge for the hurricanes."

"Going forward we affirm our intention to maintain an underwriting profit and achieve our Group profitability target of 12% business operating profit return on equity after tax over the insurance cycle."

Chief Executive's Report

Comparisons refer to the first nine months of 2003 (restated for implementation of new accounting standards) unless noted otherwise. Interim results are not necessarily indicative of full-year results.

Zurich's strong performance was underpinned by solid General Insurance underwriting results, which were amplified by an improved performance in our Life Insurance segment and a continued strong income contribution by Farmers Management Services. Business operating profit improved by 65% over the first nine months of 2003 with an annualized after-tax business operating return on equity of 12.5%. Net income increased by 35% with an annualized return on equity of 13.9%.

We announced earlier in the year that we refined our reserving processes and methodology. In the third quarter, net prior year movements in loss reserves were USD 306 million bringing the nine months total to USD 962 million. To put that in perspective, since the beginning of 2003 we have strengthened reserves by USD 2.8 billion and our shareholders' equity has increased by USD 3.9 billion. At the same time our performance continued to get stronger. Last year, our return on equity was 12.1%, while in the first nine months of 2004 we achieved an annualized return of 13.9%.

We also continue to focus on managing the risks of our businesses in run-off. The sale of Turegum announced in October limits our exposure to future asbestos liabilities in the former Turegum portfolio. Likewise, Centre's portfolio continues to perform as expected since the significant reserve strengthening completed during the third quarter of 2003. Zurich Capital Markets has now completed the transfer of certain assets to BNP Paribas, leading to a sizeable reduction of debt.

In April, we announced a cost saving target of USD 200 million after tax for 2004. After nine months we have achieved USD 180 million. As part of the 2005 plan we are developing further initiatives designed to support our strong earnings trend in the face of softening market conditions.

These initiatives, amounting to an anticipated benefit of USD 500 million after tax in 2005, cover all our core processes, in particular underwriting, claims management, sales, distribution, and finance in both Life and General Insurance. A major aspect of these initiatives is the development of standard, best practice Group methodologies for these core processes which will lead to greater efficiency and consistency by defining The Zurich Way of doing business. Pilots are running in all these functions across the Business Divisions and we will begin rolling out concrete projects in early 2005.

They will be implemented and monitored with the same operational discipline used to drive our profit improvement programs over the past two years. Our goal is to maintain our profitability and strengthen the balance sheet with the objective to maximize long-run shareholder return.

General Insurance. The segment recorded gross written premiums and policy fees of USD 29.1 billion, an increase of 5%, while net earned premiums grew by 12%. After adjusting for divestments and currency effects gross written premium growth was 1%. This reflects small rate increases in key regions moderated by some volume reduction in certain lines where we have chosen to decline business that does not meet our technical price targets. Generally however, we are able to write business at rates that provide adequate compensation for the exposure, and the trend in the operating result continues to be positive. Although the combined ratio rose from 98.2% to 98.8%, the four hurricanes added 2.3 percentage points to the combined ratio. The United Kingdom, Ireland and Southern Africa (UKISA) region as well as Continental Europe reported sizeable improvements in their combined ratios of 2.8 points and 3.4 points respectively, with strong improvements in business operating profits and net income. The segment's net income declined marginally from USD 1,233 million to USD 1,206 million, while business operating profit decreased by 2.3% to USD 1,508 million.

Life Insurance. The turnaround program for the Life Insurance segment continues to make progress. Gross written premiums and policy fees decreased by 4% to USD 8.1 billion. But they grew 3% after adjusting for divestments, foreign exchange rate movements and the redesign of the group pension business model in Switzerland. Business operating profit rose by 28% to USD 738 million. Net income is USD 653 million, which, adjusted for net gains on divestments, corresponds to an increase of 35%. The continuing efforts to improve performance are also mirrored in the 1.8 percentage point increase in the new business profit margin to 10.5%. Zurich is also making progress with the new model for the distribution of life insurance products in the UK, which, subject to regulatory approval, we will begin to roll out in early 2005.

Farmers Management Services. Net income at Farmers grew 11% to USD 528 million on management fees and other related revenue which increased by 5% to USD 1.5 billion. The premium volume of the Farmers P&C Group Companies, which Zurich manages but does not own, grew by 3% to USD 10.5 billion. The Farmers P&C Group Companies increased their surplus by USD 308 million, making good progress towards their goal of strengthening the surplus by USD 400 million in the current year. This was achieved despite hurricane losses, which added 1.0 percentage point to the nine months combined ratio of 97.5%.

Group investments. Group investments increased from USD 176.0 billion at December 31, 2003, to USD 180.5 billion, driven by the positive operating cash flow and higher market valuations. Net investment income was USD 5.4 billion. Including net capital gains, the net investment result was USD 6.0 billion. Group investment return for the first nine months improved by 0.1 point to 3.8% on average investments of USD 178.2 billion. In the first nine months of 2004 the share of equity securities, for which the Group bears investment risk, was further reduced to 5% from 6.4% at the end of 2003.

Balance sheet and reserves. In the first nine months Zurich continued to improve its capital position and strengthen the balance sheet. Shareholders' equity increased USD 1.4 billion to USD 20.4 billion. The improvement reflects strong net income, offset primarily by a USD 226 million transfer arising from the initial application of the "legal quote" legislation in Switzerland and the USD 288 million paid to shareholders in the form of a nominal value reduction of common stock. In the first nine months, net reserves for losses and loss adjustment expenses increased 10% to USD 40.7 billion. Going forward, the Group's dividend policy will be one component of a capital management program to efficiently manage the capital base in line with underlying sustainable earnings and growth opportunities, but with an emphasis on maximizing long-term total shareholder value. In addition to cash dividends, other components of the Group's capital management program may, from time to time, include share buybacks or special dividends to optimize shareholder return. Similarly, share issuances may be used to meet capital needs including growth opportunities as they emerge.

Our long-term challenge is to reduce volatility and improve the profitability of our businesses to cover the cost of capital and provide satisfactory shareholder returns. In light of softening prices, we have taken action to strengthen our earnings base. Given our turnaround record and our competitive position in the market, we believe that we are well on the way to master that challenge.

Financial Highlights

The following table presents the summarized consolidated results of the Group for the nine months ended September 30, 2004 and 2003 and the financial positions as of September 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.

1) 2003 return is for the year ended December 31, 2003; 2004 return is annualized based on the nine months ended September 30, 2004 

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