Zurich reports business operating profit of USD 3.2 billion for the first nine months of 2012

Select financial highlights – first nine months (9M) and third quarter (Q3) of 2012

(For a more comprehensive set of financial highlights covering the nine months ended September 30, see page 8)

Zurich, November 15, 2012 – Zurich Insurance Group (Zurich) today reported a business operating profit (BOP) of USD 3.2 billion and net income attributable to shareholders (NIAS) of USD 2.7 billion for the nine months ended September 30, 2012.

“Our strong overall underlying profitability clearly demonstrates that Zurich's strategy is delivering. While the third quarter was adversely affected by the previously reported adjustment in the German General Insurance business, we continue to see the benefit of our strong focus on pricing discipline and portfolio management,” said Chief Executive Officer Martin Senn.

“We are particularly pleased with the robust performance in some mature markets, notably the U.S. where we are celebrating 100 years of doing business, and our continued success in the high potential growth markets in Latin America and Asia.”

General Insurance remains focused on delivering its strategic targets through disciplined underwriting and expense management. The underlying loss ratio for General Insurance continued to improve in the first nine months of 2012 to 61.6% and the business segment showed a robust BOP. The improvement in profitability benefited from a lower level of catastrophes and weather-related events compared with the same period of 2011, although these positive developments were partially offset by a reassessment of loss reserves and deferred acquisition costs in Germany.

Global Life continued to show the positive impact of organic growth in selected markets. In an environment of persisting low yield in many significant markets, the segment remains focused on continuing to shift its product mix from traditional savings toward protection and fee-based products and leveraging its global strength in Corporate Life & Pensions and Bank Distribution. Overall gross written premiums, policy fees and insurance deposits increased by 9% compared with the same period of 2011.

Farmers showed an increase in BOP of 5% in the management services company, while the second consecutive year of significant weather-related events and the absence of favorable prior year loss development compared with the same period of 2011 led to losses from reinsurance operations.

The non-core businesses recorded improved net income, mainly resulting from positive developments from run-off life insurance portfolios.

Zurich’s capital position and solvency remain strong, with the capitalization ratio under the Swiss Solvency Test (SST), as filed with regulators as of July 1, 2012, at 178%. Shareholders’ equity stands at USD 34 billion, an increase of 7% since December 31, 2011.

Segment performance

(for the nine months ended September 30)

General Insurance

General Insurance business operating profit increased by USD 80 million to USD 1.8 billion, or by 5% in U.S. dollar terms and 6% on a local currency basis, with the increase driven by an improved underwriting result. The improvement reflects the sustained focus on disciplined underwriting and expense management, and is evident in the favorable underlying loss experience in the portfolio. Further contributing to the improvement are significantly lower levels of losses related to catastrophe and weather-related events compared with the same period of 2011. Investment income decreased, mainly reflecting continued declines in yields.

As previously announced, as a result of the review of the German General Insurance business, the Group has strengthened its claims provisions, primarily in the long-tail liability lines, which by their nature fluctuate over time, and reassessed a portion of its deferred acquisition costs. These financial adjustments have impacted BOP by USD 550 million in the discrete third quarter. Despite this impact the General Insurance business still achieved a 5% increase in BOP for the nine month period.

The review included an analysis of claims and actuarial reserves as well as of their respective processes and methodologies. Although further analysis is on-going and is expected to be essentially completed by the time the Group reports year-end, Zurich is confident that it has addressed the bulk of the issues, that Germany is an isolated case and there are no similar issues of significance elsewhere in General Insurance.

General Insurance gross written premiums and policy fees increased by USD 262 million to USD 27.3 billion, or by 1% in U.S. dollar terms and 6% on a local currency basis. In line with the strategic focus on selective and profitable growth, Zurich achieved average rate increases of 3.6%, while continuing a disciplined approach to underwriting. Premiums continued to increase in Zurich’s North America business, driven by improvements in customer retention and new business while also reflecting upward adjustments to prior year policies. In Europe, premium volumes remained under pressure due to the subdued economic environment in all significant markets as well as profit improvement efforts in selected portfolios such as personal lines motor. International markets continue to show organic growth from existing business as well as contributions from the acquired insurance businesses in Latin America and Malaysia.

Global Life

Global Life business operating profit decreased by USD 47 million to USD 959 million or by 5% in U.S. dollar terms, but increased by 1% on a local currency basis. Improvements in the expense, risk and other profit margins were largely offset by a reduction in the net investment margin and a lower net contribution from the impact of acquisition deferrals. The reduction in the investment margin was primarily driven by lower interest rates, particularly in the traditional in-force book in Germany, which continued to be indirectly influenced by the “Zinszusatzreserve” requirements introduced in 2011.

Global Life gross written premiums, policy fees and insurance deposits increased by USD 1.8 billion to USD 21.1 billion or by 9% in U.S. dollar terms and 17% on a local currency basis, benefiting from the acquired insurance business in Latin America as well as higher volumes of single premium products in Corporate Life & Pensions and Private Banking Solutions partially offset by a reduction in single premium business in some Retail pillars in Europe.

Global Life continues to benefit from its investment in organic growth in selected markets, while maintaining focus on shifting its product mix from traditional savings business towards protection and fee-based products and leveraging its global strength in Corporate Life & Pensions and Bank Distribution. The recent acquisitions in Latin America and Asia-Pacific further strengthen the position of Global Life in those regions, but have not yet been included in new business results for the first nine months of 2012.

Overall new business value (NBV) of USD 635 million declined by 13% in U.S. dollar terms or 8% on a local currency basis. Excluding a transitional impact of a methodology refinement for corporate protection renewals, new business value on a local currency basis remained flat. NBV in North America, Latin America and the UK increased, offsetting a decline in Germany where NBV continues to be impacted by a reduction in interest rates. New business annual premium equivalent (APE) increased by USD 203 million or by 7% in U.S. dollar terms and 12% on a local currency basis, also benefiting from volume increases in North America, Latin America and the UK.

Farmers

Farmers business operating profit decreased by USD 97 million to USD 998 million, or by 9%, primarily due to a net underwriting loss by Farmers Re. Farmers Management Services business operating profit increased by USD 46 million to USD 1.1 billion, or by 5%, driven by the increase in gross earned premiums in the Farmers Exchanges, which are managed but not owned by Farmers Group, Inc., a wholly owned subsidiary of the Group. Farmers Re business operating profit decreased by USD 144 million to a loss of USD 68 million, mainly reflecting the second consecutive year of significant weather-related events and the absence of favorable development of reserves established in prior years compared with the same period of 2011. Although weather-related losses improved in 2012 compared to 2011 they remained well above historic levels.

Farmers Management Services management fees and other related revenues increased by USD 63 million to USD 2.1 billion, or by 3%, which was driven by the 3% increase in gross earned premiums in the Farmers Exchanges. The 50% increase to USD 3.4 billion in gross written premiums of Farmers Re reflected the increase from 12% to 20% in the All Lines quota share reinsurance agreement with the Farmers Exchanges and the 4% gross written premiums growth in the Farmers Exchanges.

Other Operating Businesses: Other Operating Businesses, predominantly consisting of the headquarters’ expenses and external financing activities, reported an increased operating loss of USD 645 million, up USD 58 million from the same period in 2011. This was driven mainly by the absence of favorable foreign currency movements compared with the first nine months of 2011.

Non-Core Businesses: Non-core businesses reported a business operating profit of USD 118 million compared with a business operating profit of USD 13 million in the same period of 2011. This improvement resulted mainly from positive developments from run-off life insurance portfolios.

Group investments

The net investment result on Group investments, which includes investment income, realized gains and losses, and impairments, contributed USD 6.1 billion to the Group’s total revenues for the nine months ended September 30, 2012, a net return of 3.0% (not annualized). The decrease compared to the previous period is driven by currency movements, lower reinvestment yields on debt securities and much lower net realized capital gains on investments and impairments. Net unrealized gains increased by USD 4.6 billion since December 31, 2011, as bonds increased in value due to tighter credit spreads and lower government bond yields, and equity markets rose. Total return on Group investments was stronger at 5.3% (not annualized), compared to the 4.4% achieved in the same period of 2011.

Zurich CFO on the results of the first nine months 2012

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