To Be More Than A Yield Play, Zurich Insurance Needs More Self-Improvement

Apr. 05, 2018 2:24 PM ETZurich Insurance Group AG (ZURVY), ZFSVFAXAHY, CB
Stephen Simpson profile picture
Stephen Simpson


  • Zurich Insurance's performance has been dragged down by high loss ratios and high expense ratios, both of which the company is targeting with multiyear improvement strategies.
  • Management believes its high loss ratios are a byproduct of strategic mistakes, not a sign of poor underwriting quality, and that business mix shifts will lead to meaningful improvements soon.
  • The company's Farmers business is a source of lucrative low-risk fee income, but the underlying performance at Farmers hasn't been so good lately.
  • Successfully reducing losses and expenses could drive the shares into the high $30s, but this is a "show me" story that will be driven by management execution.

With a dividend yield close to 6% and a healthy capital/solvency position, Zurich Insurance (OTCQX:ZURVY) (OTCQX:ZFSVF) (ZURN.S) is by no means a bad insurance company. With high expense ratios, high loss ratios, and weak trailing premium growth, though, it is likewise hard to say that Zurich is a particularly good insurance company. The extent to which Zurich Insurance's management can execute on cost-cutting and underwriting targets will shape the company's earnings growth potential, as "more of the same" is not going to be enough to move the shares significantly higher.

I would say that I'm cautiously optimistic on Zurich's potential from here. Shifting the business mix and delivering improved underwriting results will take time, but there is a pathway to mid-teens ROE and stronger total annual investment returns from here.

Weak Underwriting Needs To Be Fixed

One of the largest P&C insurers in North America, and a large player in Europe as well, I believe it's harder lately to argue that Zurich is one of the best - at least in terms of the underlying profitability of the business. Likewise, growth has not been all that impressive, with low single-digit annualized growth in the non-life business that is well below the likes of other Europe-based global insurers AXA (OTCQX:AXAHY), Allianz (OTCPK:AZSEY), Aviva (OTCPK:AVVIY), and Generali (OTCPK:ARZGY).

The reported combined ratio for 2017 was almost 101 and still much too high (in the mid-to-high 90%'s) depending upon how you adjusted for cats and reserve developments. Although the adjusted figure did improve close to one point on a year-over-year basis, the accident-year loss ratio of 65% is still too high when compared to other well-run insurers like Chubb (NYSE:CB), and the company's combined ratio of over 100 in its commercial business (versus is retail) is likewise not good.

This is not a

This article was written by

Stephen Simpson profile picture
Stephen Simpson is a freelance financial writer and investor. Spent close to 15 years on the Street (sell-side, buy-side, equities, bonds); now a semi-retired raccoon rancher. That last part isn't entirely true. Probably.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Recommended For You


To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.