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UPDATE 2-Zurich says targets tougher to meet as profit drops
August 15, 2013 / 5:47 AM / 4 years ago

UPDATE 2-Zurich says targets tougher to meet as profit drops

* Q2 net profit falls 27 pct

* General insurance, Farmers targets “more challenging”

* Q2 combined ratio rises to 96.2 pct

* Shares fall 3.7 percent (Adds detail on targets, analyst, share price)

By Alice Baghdjian and Martin de Sa‘Pinto

ZURICH, Aug 15 (Reuters) - Zurich Insurance Group cautioned that it would be challenged to meet certain performance targets after posting a 27 percent fall in second-quarter net profit due to natural disaster payouts.

Zurich said it was on track to achieve its three-year performance targets for its life insurance business and spending cuts, but that meeting those for its general insurance and U.S. segment Farmers would be “more challenging”.

The company, which like other insurers shies away from giving outlooks, did not give further details on specific targets which include profitability and costs, but said low interest rates were weighing on investment income.

Ultra-loose monetary policies pursued by the world’s major central banks have pushed down bond yields and made generating higher investment returns difficult for insurers.

“The targets of 2010 were built according to an interest rate environment which was already low, but much better than the current level,” said Atanasio Pantarrotas, an analyst at Kepler Cheuvreux.

The company saw its net investment return slip to 1.6 percent in the first six months of the year compared with 2.1 percent in 2012.

“The economic environment remains challenging with continued low interest rates exerting pressure on our investment income,” Zurich’s chief executive Martin Senn said.

CHALLENGING ENVIRONMENT

Zurich’s warnings for general insurance mark a sharp contrast to the tone set by its biggest rivals in Europe.

Exposure to natural disasters has also weighed on Zurich’s general insurance - which includes property, car, and a range of other non-life-insurance lines - a segment which helped rivals Allianz and AXA post stronger than expected gains in operating profit earlier this month.

In its results, Allianz also noted a challenging economic environment but was more confident about targets, telling investors it would likely reach the upper end of its full year profit target range.

Zurich’s general insurance unit posted a 16 percent loss in business operating profit in the first half, due to flooding in Europe, tornadoes in the United States and meagre investment returns.

The 2011 acquisition of the Santander business in Latin America helped mitigate the interest rate impact for Zurich’s life insurance segment, Pantarrotas said.

The insurer’s second quarter net profit fell to $789 million, below the $839 million forecast in a Reuters poll.

Shares in Zurich fell 3.7 percent to a seven-week low of 242.8 Swiss francs by 1216 GMT, making it the worst performer in the European insurers index, which was 1.2 percent weaker.

Analysts at J. Safra Sarasin called the Zurich results uninspiring but said they were unlikely to lower 2013 estimates materially, adding that a relatively attractive 2013 dividend yield of 6.8 percent offering some downside protection.

The insurer’s combined ratio, which measures expenses to revenues, increased by 1.1 points to 96.2 percent compared with the prior-year period, as weather-related losses hit underwriting profitability.

Zurich said it estimated losses from the flooding that swept across central and eastern Europe in June at approximately $140 million, and $52 million from two severe tornadoes that hit Oklahoma City in May.

The Zurich-based company said last month losses from the tornadoes would deal a $138 million blow to its North American businesses. (Editing by David Cowell and Thomas Atkins)

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