Zurich advances its strategic positioning in a quarter impacted by significant loss events

• Zurich reports solid underlying business performance, with BOP and NIAT¹ for the quarter impacted by natural catastrophes
• Continued focus on pricing discipline and portfolio management
• Further expansion of Zurich's presence in fast-growing emerging markets
• Extension of distribution agreement with Deutsche Bank reaffirms Zurich's successful track record in bank distribution
• Balance sheet position and solvency remain at strong levels, with Swiss Solvency Test capitalization ratio of 223%² as filed with the regulator for the year ended December 31, 2010

Select financial highlights³ for the Group as of March 31, 2011 (unaudited)

Zurich, May 5, 2011 - Zurich Financial Services Group (Zurich) today reported a business operating profit (BOP) of USD 849 million and net income after tax¹ (NIAT) of USD 637 million for the three months ended March 31, 2011.

"In a quarter marked by natural catastrophes, Zurich again delivered a solid underlying operating performance," said Chief Executive Officer Martin Senn.

Results were impacted by the significant catastrophe events in the Asia-Pacific region during the first three months of the year. Aggregate losses of USD 517 million were recorded for the five natural disasters in Australia, New Zealand and Japan.

The slow economic recovery in the U.S. and much of Europe also impacted results.

The Group remains focused on its strategy to maintain margins and pricing discipline.

Zurich continued to make significant strategic progress during the quarter, strengthening its emerging markets presence and bank distribution agreements.

"Our alliance in Latin America with Banco Santander, which we announced in February, will enable us to access millions of new customers in Brazil, Mexico, Chile, Argentina and Uruguay," Mr Senn said.

Zurich also announced today the signing of a Memorandum of Understanding with Deutsche Bank to extend an existing exclusive distribution agreement for life and general insurance products in Germany for a further 10 years until December 31, 2022. Zurich and Deutsche Bank intend to complete definitive agreements during 2011.

"This extension of our existing distribution agreement with Deutsche Bank reaffirms Zurich's position as a leading bank distribution partner," Mr Senn said.

Zurich's capital position and solvency remain strong, and the capitalization ratio under the new Swiss Solvency Test (SST), as filed with the regulator for the year ended December 31, 2010, was 223%². In March 2011, Moody's Investor Service announced upgrades of Zurich Insurance Company Ltd's insurance financial strength rating from A1 to Aa3.

Segment performance

General Insurance

Business operating profit from General Insurance was USD 276 million, a decline of 56%. The decrease compared with prior year was mainly due to the unusual frequency and severity of loss events during the first three months of the year, while the underlying loss ratio improved based on the continued focus on disciplined underwriting and profit margins. Aggregate losses of USD 517 million were recorded for the five natural disasters in Asia-Pacific, namely the earthquakes in Japan and New Zealand, as well as the Victoria storms, cyclone Yasi and the Brisbane floods in Australia. In addition, higher levels of large losses in the Global Corporate business also contributed to the deterioration in the combined ratio. Volumes were impacted by the competitive market environment and the Segment's focus on profitable business through risk selection and segmentation strategies. Driving selective growth were the Global Corporate business, Latin America and Asia-Pacific. Despite the slow economic recovery in the U.S. and some European countries, average rate increases of 3 percentage points were achieved in the first three months of the year. The rate increases reflected a continuing strong focus on protecting profit margins through targeted underwriting actions.

Global Life

New business value⁷, after tax, reached USD 230 million, up 17% in local currency terms. The reported figure reflects the impact of a methodology refinement for the calculation of new business value for Corporate Risk business, which is more reflective of the underlying economics. Excluding this refinement both new business value and new business margin, after tax, were still at similar levels to the strong prior year comparatives, despite significant volume pressures in Ireland and Spain. New business volumes (in terms of annual premium equivalent or APE) increased by 2% but were flat in local currency reflecting offsetting developments across pillars and regions. Main drivers of growth were the continued diversification of the Segment's geographic presence into higher-growth markets such as Latin America, Asia-Pacific and Middle East. In Europe, growth benefited from the continuing momentum generated by the Corporate Life & Pensions pillar, particularly in the UK and Switzerland, and contributions from the Private Banking Client Solutions pillar. This was offset by challenging market conditions in Ireland and reductions in Bank Distribution in Spain arising from the deconsolidation of Caixa Sabadell and the continued focus on profitability of new business, with a shift from higher-volume but lower-margin savings business towards higher-margin protection business. While these pressures also contributed to lowering net policyholder inflows⁸ in the quarter, they remained positive at USD 285 million. Business operating profit was USD 362 million, an increase of 3% and unchanged in local currency. Fee income from business in force continued to grow, offset by expenses incurred in business expansion activities and operational transformation projects.

Farmers

Management fees and other related revenues from Farmers Management Services (FMS) decreased by 3% to USD 682 million reflecting an underlying decrease of 3% in gross earned premiums of the Farmers Exchanges (Exchanges), which are managed but not owned by Farmers Group, Inc., a wholly-owned subsidiary of Zurich. Despite continuing premium growth from 21st Century's direct channel, the Exchanges recorded overall lower volumes compared with prior year as a result of the planned run-off of the 21st Century agency auto book of business. The gross management result of FMS decreased by 8% primarily driven by one-off costs for IT investments to improve operational efficiency, with business operating profit declining to USD 329 million and a lower gross earned premium margin of 7.1%. Gross written premiums at Farmers Re decreased compared with prior year reflecting the reduction to 12% from 35% of the participation level of the quota share reinsurance treaty. Farmers Re's business operating profit decreased to USD 51 million mainly as a result of the change in the participation level, slightly higher loss trends in the Exchanges and lower investment income. As a result, the overall Farmers segment reported a reduced business operating profit of USD 380 million.

Other Operating Businesses

Other Operating Businesses, predominantly consisting of the Group's Headquarter expenses and external financing activities, reported a decrease in business operating loss of USD 25 million to USD 174 million primarily as a result of an improvement in net financing costs and favorable movements in foreign currencies.

Non-Core Businesses

The Non-Core Businesses segment, including the Group's run-off insurance businesses and banking activities, reported a business operating profit of USD 6 million compared with USD 24 million in 2010.

Group investments

Total return on Group investments, including investment income, realized gains and losses, impairments as well as changes in unrealized gains and losses reported in shareholders' equity, was 0.3% (not annualized). The net investment result for Group investments, which includes investment income, realized gains and losses, and impairments, contributed USD 1.7 billion to the Group's net income, a return of 0.9% on invested assets. Net capital losses on investments and impairments amounted to USD 81 million and included negative asset revaluations, impairments, and active gain realizations in equities. Net unrealized gains reported in shareholders' equity as of March 31, 2011 decreased by USD 1.1 billion due to debt securities as yields on government bonds and corporate credit rose.

Note to editors:

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