Zurich Insurance Group’s reunderwriting program is starting to bear fruit—as evidenced by the company’s improved third-quarter results—but CFO George Quinn readily admits there is still work to be done.

george-quinn Zurich 2016It’s important to know that the achievement of a 97, 98 combined ratio is not the limit of our ambition.”

George Quinn, Group CFO, Zurich Insurance Group

The steps that the company took at the beginning of the year around reunderwriting and around the use of reinsurance will start to have a bigger impact on the business as time goes on, he affirmed during last week’s analysts’ call to discuss the company’s financial results.

On the sales volume side, in general for the year to date, “we’re still seeing reductions in GWP [gross written premium] that is consistent with what we had anticipated we’ve been needing to achieve the profitability we had targeted for the year,” Quinn said.

And the company seems to be on track for continuing improvement. For the nine months ended Sept. 30, 2016, Zurich Insurance reported a business operating profit of $3.4 billion, which was up 36 percent from the prior year period. Net income attributable to shareholders of $2.5 billion was up 11 percent, due to underlying improvements in General Insurance and continued strong performance from Global Life and Farmers. The group also reported a business operating profit after tax return-on-equity of 11.9 percent for the period.

(Editor’s Note: Business operating profit and net income figures for the third-quarter–$1.2 billion and $0.9 billion, respectively—compared favorably to ailing profit figures reported in last year’s third quarter. Third-quarter 2015 numbers like a business operating profit of $256 million, net income of just $207 million and a General Insurance combined ratio of 108.9 pushed steps to repair the General Insurance business into high gear.)

The 2016 combined ratio through nine months improved by 3.5 percentage points over the prior year period to 98.4 percent. Gross written premiums declined by 3.3 percent in U.S. dollar terms, largely due to reunderwriting and further actions to improve performance announced last year.

Quinn predicted a combined ratio to be in the range of 97-98 percent for the fourth quarter, which means that the full year 2016 combined ratio would be slightly above 98.

“It’s important to know that the achievement of a 97, 98 combined ratio is not the limit of our ambition for the combined ratio,” Quinn added.

Despite the good news for the first nine months, Zurich will continue to reunderwrite its business through the rest of this year and into 2017 because there are areas of the portfolio that “are not yet achieving the profitability we want,” Quinn said.

He specifically pointed to Global Corporate, which had a combined ratio of 105 percent during third-quarter 2016. With Global Corporate, if you drill down, there several big themes, he noted. “One is the market in general is very competitive, so it’s been much harder, despite the reductions we’ve pushed through on the volume side, to achieve quite the rate outcomes that we were looking for.”

Also, he went on to say, Global Corporate is exposed to one of the markets that is particularly soft: U.S. property.

U.S. property is a difficult line of business to underwrite at a profit currently, he affirmed. “You need to take relatively ambitious assumptions around nat cat incidents to really feel happy about North American property exposure currently.”

In addition, Global Corporate had a particular challenge in the third quarter as a result of European lines –one was medical malpractice in Spain, and the other was financial lines in Europe, Quinn explained. “And that’s why you see this very high combined ratio for Global Corporate for the quarter.”

Asked about future sales volumes and external market impacts going forward, Quinn said: “My guess is that Global Corporate will continue to be very competitive and we’ll still achieve higher rate outcomes on the remainder of the book. That would be better than the overall market performance currently.”

“We’ll focus on making sure we achieve the required profit and that should leave us with a reduction in GWP for the year, [excluding] the RCIS acquisition.” (Zurich completed its acquisition of RCIS Crop Insurance Business from Wells Fargo in April 2016.)

In a statement from Zurich Insurance, the company said: “Global Corporate’s combined ratio of 105 percent for Q3-16 is significantly lower than for Q3-15 and FY-15. This is mainly driven by a favorable impact from prior-year reserves, the absence of major catastrophes and the Tianjin port explosion in Q3-15. Global Corporate has not yet achieved a satisfactory level of profitability and the focus remains on further improvement.”

Commercial Auto

Quinn then discussed trends in commercial auto, which generally “continues to be a difficult market.” “We are seeing—at least on the surface—what appears to be significant rate [improvements] but the underlying loss cost inflation is being driven by a combination of frequency and severity, and is still higher we believe than the price action we’re seeing in the market.”

Commercial auto is a line that is not yet improving at the pace the company would like to see, Quinn said. “From a capital allocation perspective, we are acting accordingly,” he added.

Reinsurance and Quota Share Arrangements

Part of the company’s move to turnaround its business involved changes in its reinsurance purchasing. Quinn explained that the two most significant things Zurich did was to place an annual aggregate across the entire group to cover large losses.

The large loss reinsurance contract has not been attached because the quarterly losses have not been large enough, he explained, emphasizing, however, that the steps Zurich has taken to re-underwrite its portfolio should address the large loss issue.

In addition, Zurich also put a number of quota share programs in place, including one that covers North American corporate business, Quinn said. “We have had benefits from some of the quota share we’ve put in place. It doesn’t change the ratios but it certainly has impacted some of the individual line size exposures that we would have had, had we’d gone without it.”


While Quinn predicts a 97 to 98 percent combined ratio for the fourth quarter, he admits there will still be some volatility.

He said he is happy with the drivers of the company’s underlying performance.

“We are going to get there but we will be subject to some volatility even when we’ve completely reunderwritten the book, whether that’s by the end of this year or the end of next year. But [in] the underlying position, the thing that’s most important for me, I can see the improvement and that will show up in the financial performance.”

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In late September, Zurich announced that it would combine its Corporate and Commercial businesses into a single global business unit, to be called Commercial Insurance effective Oct. 1, as part of its process to simplify and strengthen its organization overall.

Group CEO Mario Greco pledged to simplify the organization earlier this year. Later this week, Greco is expected to disclose more information on go-forward financial targets and strategic objectives at an Investor Day event.