Zurich announces USD 1.5 billion quarterly operating profit

Zurich, August 6, 2009 – Zurich Financial Services Group (Zurich) reported today its 26^th straight quarter of profitability and its third consecutive quarter-on-quarter profit increase since the financial crisis started in the latter half of 2008.

Business operating profit for the discrete second quarter was USD 1.5 billion, a 41% increase over the previous quarter, while net income¹ was USD 892 million, a 147% increase over the previous quarter.

“I am proud of how we have proactively managed our way through this global economic downturn, strengthening our financial position while capitalizing on opportunities,” remarked Zurich’s Chief Executive Officer James J. Schiro. “These results demonstrate our ability to generate consistently strong profitability, and underscore our confidence that we will enter the recovery period from a position of strength.”

Half-year performance highlights² include:

• Business operating profit (BOP) of USD 2.6 billion, a decrease of 28% from the first six months of 2008. Annualized BOP ROE³ after tax of 16.6%
• Net income of USD 1.3 billion, a decrease of 53% from the first six months of 2008. Annualized return on equity (ROE) of 10.8%
• General Insurance gross written premiums and policy fees of USD 18.2 billion, down 11% or 2% in local currencies, and a basically unchanged combined ratio of 96.2%
• Global Life new business value⁴, after tax, of USD 332 million, down 3% but up 9% in local currencies. New business margin, after tax (as % of APE), of 21.0%, with APE up 3% or 19% in local currencies
• Farmers Management Services’ management fees and other related revenues up 4% to USD 1.2 billion
• Shareholders’ equity of USD 25.2 billion, an increase of 14% over year end

“We are particularly pleased with our ability to increase shareholders’ equity and strengthen our solvency ratio despite the challenging market conditions,” said Zurich’s Chief Financial Officer Dieter Wemmer.

The company is well on track to meet its operational improvement target under The Zurich Way initiatives of USD 900 million after tax as well as its expense saving target of USD 400 million for the current year. In addition, the company continued to broaden its product range and distribution capabilities organically as well as through entry into new market segments and the ongoing successful integration process of its recent acquisitions completed in Europe, the U.S. and emerging markets.

General Insurance

Benefiting from a successful focus on underwriting discipline and expense management, General Insurance posted a steady 96.2% combined ratio as well as an average increase of 3 percentage points in renewal rates, signaling an improved pricing environment in the global General Insurance market over the first six months of 2009. Business operating profit for the period was USD 1.7 billion, a 16% reduction from the first half of 2008 when excluding foreign currency effects, driven largely by reductions in investment income and the effects of slower economic activity. Gross written premiums and policy fees decreased 2% in local currencies, reflecting lower volumes in North America.

In Europe General Insurance, premium volumes were largely flat in local currencies, driven by difficult economic conditions. Inside Europe, Italy showed a weak result, while Switzerland and Germany continued to deliver good performances. In North America Commercial, the ability to drive rates and capitalize on growth opportunities in targeted market segments helped to partially mitigate the impact on volume and profitability from ongoing economic pressures. Global Corporate continued to focus on underwriting and pricing discipline, successfully driving average rate increases of more than 5% on business written during the first six months of 2009. All regions within the Group’s International Markets exhibited volume growth on a local currency basis, with the successful integration of last year’s acquisition in Brazil underpinning a 19% increase in Latin America.

Global Life

In executing successfully on its customer and distributor focused strategy, the Global Life segment continued to deliver volume growth and a solid performance through the first six months of 2009, despite facing volatile equity markets, low interest rates and continued consumer uncertainty regarding the global financial crisis. Reflecting foreign currency movements, new business value, after tax, declined 3% to USD 332 million but increased by 9% on a local currency basis, primarily as a result of the acquisitions in Spain, growth in sales volumes in Latin America and improved margins in the UK. Business operating profit decreased by 17% or 5% in local currencies to USD 641 million, mainly due to the impact of movements in the financial markets in the UK and Australia. Additionally, net policyholder cash inflows further increased during the second quarter and now exceed USD 1.5 billion year to date.

New business annual premium equivalent (APE) grew by 3% or 19% in local currencies, with a continuing strong new business margin of 21.0% reflecting the quality of new business. APE growth was primarily driven by the Spanish bank distribution agreements and growth from Corporate Life & Pensions activities. Adverse market conditions, affecting in particular the Asian region, led to overall volume reductions within the International/Expatriate and Agent pillars, though many countries proved resilient to the financial crisis, with customer and distributor focused programs in Latin America, Switzerland, Spain, Italy and Portugal contributing to sales growth in local currencies.

Farmers⁵

Farmers Management Services (FMS) continued to successfully manage the Farmers Exchanges (Exchanges), the third largest personal lines insurer in the U.S.⁶, which Zurich manages but does not own. Over the first six months of 2009, management fees and other related revenues grew by 4% to USD 1.2 billion, driven by a 4% earned premium growth at the Exchanges, which reflects the transfer of North America Commercial’s Small Business Solutions book to the Exchanges in June 2008, as well as targeted investments in distribution capabilities and product enhancements. In combination with a continued strict expense discipline, FMS’ gross management result improved by 6%, resulting in a 4% higher business operating profit and an improved managed gross earned premium margin of 7.3%. Integration initiatives relating to Farmers’ recently closed acquisition of 21st Century Insurance are progressing in line with Farmers’ previously successful integration track record.

Farmers Re, which provides reinsurance to the Exchanges, shows a much higher premium volume compared with the same period last year due to an increase of the existing all lines quota share reinsurance treaty from 5% to 25% as of September 30, 2008. As part of the acquisition of 21st Century Insurance, Farmers Re has further increased its participation in the treaty from 25% to 37.5% as of June 30, 2009. In combination with improved loss trends in the underlying business of the Exchanges, Farmers Re’s business operating profit rose to USD 80 million, contributing thereby to an increased business operating profit for the Farmers segment to USD 724 million.

Other Operating Businesses

The Other Operating Businesses segment, predominantly consisting of the Group’s Headquarter, Holding & Finance and Banking activities, reported for the first six months of 2009 an increase of USD 41 million in its business operating loss to USD 264 million, primarily as a result of higher loan loss provisions in the banking operations.

Non-Core Businesses

The Non-Core Businesses segment, comprising the Group’s run-off businesses, reported a discrete second quarter business operating profit of USD 66 million, reducing its business operating loss during the first six months of 2009 to USD 263 million, compared with a profit of USD 92 million in the prior six month period. The loss for the first six months resulted from an increase in certain life reserves addressing policyholders’ behavior in current market conditions.

Group investments

The net investment result for Group investments, which includes investment income and realized losses and impairments, contributed USD 2.4 billion to Zurich’s profit and loss statement for the first six months of 2009, a return of 1.3% (not annualized). Net capital losses on investments and impairments amounted to USD 1.3 billion, of which impairments accounted for USD 738 million, roughly equally split between write-downs on equity and debt securities. The remainder included realized losses of USD 234 million from the sale of investments and net unrealized losses of USD 370 million on investments from revaluations of trading securities. Net unrealized losses reported in shareholders’ equity for the six months reduced by USD 601 million, with gains of USD 2 billion in the discrete second quarter reversing losses of USD 1.4 billion in the first quarter, lifting the Group’s total return to 1.6% (not annualized). This improvement was driven by narrowing credit spreads in the second quarter of 2009 and, in addition, by realizing losses and booking impairments on equity securities. The positive contribution attained by the Group’s Investment Management demonstrates once again the benefit of managing assets relative to liabilities on a risk-adjusted basis.

Capital management-related issues

Underscoring the Group’s strong balance sheet and capital position, shareholders’ equity increased 14% over year end, while at the same time Zurich paid out to its shareholders approximately CHF 1.5 billion in gross dividends as from April 7, 2009. Zurich’s capital surplus as of June 30, 2009, translated into a strong Group solvency position (Solvency I) of 180%. This reflects the successful placing of 6.7 million shares during April related to the acquisition of AIG’s personal auto business (21^st Century Insurance). The Group remains confident that it is not only well positioned to weather the current financial-market crisis but to take advantage of opportunities both currently and once a more stable economic environment returns.

Note to editors:

There will be an analyst and media presentation today at 9:30 a.m. CEDT at Zurich’s headquarters, Mythenquai 2, Zurich. Analysts and reporters who cannot participate in person may dial in by telephone. Please note that during the Q&A session no questions will be taken from reporters dialing in.

Dial-in numbers:

• Europe   +41 (0)91 610 56 00
• UK    +44 (0)207 107 06 11
• USA   +1 (1) 866 291 41 66

The presentation to analysts and investors will be video webcast on our Web site www.zurich.com live, followed by a webcast replay available after 2:00 p.m. CEDT.

Supplemental financial information, including information on the business divisions, will be available on our Web site www.zurich.com. The presentation for analysts and media will be published at 6:45 a.m. CEDT. Please click on the “Half year results reporting 2009 – Media View“ link on the bottom right corner of our homepage.

Multimedia material will be available after 2:00 p.m. CEDT on The NewsMarket at http://www.thenewsmarket.com/zurich. If you are a first-time user, please take a moment to register. In case you have any questions, please e-mail: journalisthelp@thenewsmarket.com.