Zurich reports solid operating performance for the first nine months of 2010

Available in English only

Zurich, November 4, 2010 - Zurich Financial Services Group (Zurich) today reported a business operating profit of USD 1.2 billion and net income¹ of USD 751 million for the third quarter as part of a solid operating performance for the nine months ended September 30, 2010. Global Life and Farmers supported the Group's profitability by delivering ongoing top-line growth coupled with strong profit margins. General Insurance benefited from past rate increases earning in and managed to successfully continue targeted rate increases into the third quarter. However, it was impacted by a high occurrence of catastrophe- and weather-driven events particularly in the first half of the year. Zurich's business operating profit for the nine months includes the impact of increased banking loan loss provisions of USD 330 million, before tax, as reported at the half year. Net income takes into account a previously announced third-quarter charge of USD 295 million related to the proposed comprehensive settlement agreement in the matter of Fogel vs. Farmers Group, Inc. The Group's capital and regulatory solvency positions remain strong, underpinning a well-diversified portfolio of businesses.

Nine-month performance highlights² include:

• Business operating profit (BOP) of USD 3.5 billion, a decrease of 13%. Annualized BOP ROE³ after tax of 12.2%
• Net income of USD 2.4 billion, a decrease of 18%. Annualized return on equity (ROE) of 10.7%
• Total Group business volumes, comprising gross written premiums, policy fees, insurance deposits and management fees, of USD 50.2 billion, a decrease of 1% or flat on a local currency basis
• Shareholders' equity of USD 31.0 billion, a 6% increase over year end after paying USD 2.2 billion in dividends. Solvency I ratio up 50 percentage points over year end to 245%

Zurich’s Chief Executive Officer Martin Senn said: “Our core businesses continued to deliver a robust operating performance in spite of the difficult economic environment in our major markets.”

“At Global Life, our focus on delivering relevant solutions for the growing protection needs of our customers is paying off resulting in both higher margin and increased volumes.”

“Farmers continues to show good results generating strong operating margins. I am particularly pleased by the enduring appeal of the Farmers brand and the value propositions offered by the Farmers Exchanges to their customers.”

“In General Insurance, we are managing the business with a strong focus on protecting profit margins, as demonstrated by our successful efforts to implement targeted underwriting actions.”

“We are investing in growth markets, while continuing to focus on sustained profitability, operating efficiency and effective risk management.”

Dieter Wemmer, Chief Financial Officer, added: “Our capital and regulatory solvency positions remain strong and we are confident that we are well prepared for new regulatory requirements.”

Segment performance

General Insurance:

Business operating profit within General Insurance was USD 2.0 billion, a reduction of 22%. The decrease against prior year was mainly attributable to a higher occurrence of weather-related losses globally, the earthquake in Chile in the first quarter, a continuing decline in investment returns and a goodwill impairment charge of USD 104 million in Russia in the third quarter. Rate increases and targeted underwriting actions implemented over past quarters contributed to improvements in the underlying loss ratio thereby compensating for the lower investment income. However, the higher occurrence of severe weather- and catastrophe-driven events particularly in the first half of 2010 compared with prior year, combined with lower volume of earned premiums, resulted in a deterioration of the combined ratio. Lower volumes were driven by a continued decline in insured customer exposure as a result of depressed levels of economic activity, a competitive market environment as well as the Group's continued disciplined approach to underwriting. Demonstrating the strong focus on protecting profit margins through targeted underwriting actions, average rate increases of 2 percentage points were achieved during the first nine months of the year in line with trends at the half year.

Global Life:

New business value⁴, after tax, reached USD 571 million, up 12% in local currency terms. The strong increase in new business value was driven by higher sales into Italy, Ireland and the UK, higher corporate life and pension sales volumes in the UK and Latin America, increased contributions from protection products in Spain and the Asia-Pacific & Middle East region, as well as a strong value contribution from Germany. These improvements were partially offset by higher average interest rates reducing the margin on protection products in the U.S. and the impact of lower sales volumes in Switzerland. Overall, the new business margin, after tax, was a strong 22.9%, an increase of 1.1 percentage points compared with the same period of the prior year. New business volumes (in terms of annual premium equivalent or APE) increased by 7% in local currency, reflecting growth in the Private Banking Client Solutions, Corporate Life & Pension and IFA/Broker businesses. Net policyholder flows increased by USD 1.1 billion driven by new business flows particularly in single premium products as well as focused efforts on in-force management. Business operating profit decreased to USD 1.1 billion as the prior year period had benefited from a high level of special operating items. Allowing for these non-recurring items, the underlying result improved by 15% in local currency mainly driven by improved expense and risk margins.

Farmers:

Farmers Management Services (FMS) grew its management fees and other related revenues by 6% to USD 2.1 billion driven by a 5% increase in gross earned premiums at the Farmers Exchanges (Exchanges). The Exchanges are managed but not owned by a wholly-owned subsidiary of Zurich. Growth at the Exchanges was driven by the contribution from 21^st Century, partially offset by the impact of continuing economic pressures in the U.S. particularly on the Exchanges' auto and homeowner line of business. In conjunction with continued strict expense discipline, the gross management result of FMS improved by 8% resulting in a 6% higher business operating profit of USD 1.0 billion and an improved gross earned premium margin of 7.4%. Gross written premiums at Farmers Re decreased compared with the prior year period due to changes in the participation level of the quota share reinsurance treaty, which as of September 30, 2010 stood at 25%, the level it was prior to the acquisition of 21^st Century. Farmers Re's business operating profit rose to USD 248 million as a result of improving loss trends at the Exchanges contributing to an increased business operating profit for the overall Farmers segment of USD 1.3 billion.

Other Operating Businesses: The Other Operating Businesses segment, predominantly consisting of the Group's Headquarter and its Holding & Finance activities, reported an increase in business operating loss by USD 275 million to USD 573 million mainly reflecting a more normalized run-rate for Group financing costs as the prior year result included one-off gains associated with buying back subordinated debt

Non-Core Businesses: The Non-Core Businesses segment, including the Group's run-off insurance businesses and banking activities, reported a sharply smaller business operating loss of USD 256 million compared to USD 433 million in the prior year. The loss in the first nine months of the year arose from the increase in banking loan loss provisions already reported at the half year of USD 330 million as a result of a review of the loans for commercial property development in the UK and Ireland. The loss in the same period of the prior year arose from reserve increases in other run-off businesses driven by volatile markets, which were mitigated in the current year through the dynamic hedge strategy implemented in March 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 a strong 6.1% (not annualized) driven primarily by lower interest rates. The net investment result for Group investments, which includes investment income, realized gains and losses and impairments, contributed USD 6.3 billion to the Group's total revenues for the first nine months of 2010, a return of 3.2% on invested assets (not annualized). Net capital gains on investments and impairments amounted to USD 981 million compared with losses of USD 1.3 billion in the prior year period, comprising USD 953 million of gains realized from active management, USD 882 million of asset revaluations and impairments of USD 854 million. As a consequence of lower interest rates and stronger equity markets, net unrealized gains reported in shareholders' equity increased by USD 5.7 billion over year end.

Note to editors:

A pre-recorded video presentation to accompany the analysts and investors slide presentation will be available from 7:00 a.m. CET on our website www.zurich.com.

In addition, there will be a conference Q&A session for analysts and investors with the CFO, Dieter Wemmer, starting at 1:00 p.m. CET. Media may listen in. Please dial-in to register approximately 3 to 5 minutes prior to the start of the Q&A session.

Dial-in numbers:

• Europe +41 (0)91 610 56 00
• UK +44 (0)203 059 58 62
• USA +1 (1) 866 291 41 66

Supplemental financial information, including information on the business divisions and the discrete third quarter is available on our Web site www.zurich.com. Please click on the “Third quarter 2010 results: November 4, 2010 – Media View“ link on the bottom left corner of our homepage.

Multimedia material is available on www.zurich.com/multimedia. If you are a first-time user of this portal, please take a moment to register. In case you have any questions, please e-mail: journalisthelp@thenewsmarket.com.