EUR 850.00 For Business Accounts Only

Morningstar | Decent 1Q for Zurich; Shares Marginally Undervalued. See Updated Analyst Note from 15 May 2019

Zurich Insurance reported what we think are decent headline numbers for the first quarter. Having rolled our model and incorporated what we think is a better outlook for the nonlife division, we are increasing our fair value estimate to CHF 350 per share. We maintain our narrow moat rating.

Having been in a state of almost paralysis, the North America nonlife division reported gross written premium growth of 100 basis points and rate rises equal to 400 basis points. With the outlook for this business continuing to rise, at the moment we think we are about right in terms of forecasts for gross premium for the total nonlife division.

We are a little light on our forecasts for premium for North America, which was been created from the merger of North America commercial and global corporate. Working against this, we are heavy on our estimates for the Europe, Middle East, and Africa division. We think there may be some transfers going on, most likely from the old global corporate. In the sum of the two, North America and EMEA, we are roughly accurate. Our estimates for Asia and Latin America are also roughly decent.

Positive pricing is being seen across the board, 200 basis points in EMEA and Asia-Pacific and 100 basis points in Latin America. The business has shown very strong like-for-like growth in these emerging markets, though it is important to add that these are unaudited numbers.

In terms of profitability, while these results provide little insight, having rolled our valuation model we think 2018 was a good term for EMEA nonlife and this is likely to come in lower at something in the region of $670 million. The premium and rate results above as well as work from previous periods lead us to an improving and normalizing North America nonlife situation, and while we do not think near term that prior levels of profitability will be achieved, we do think that above $1.0 billion business operating profit will be convincingly reconfirmed. Contributions from Asia and Latin America are minimal, but we expect something in the region of $100 million-$200 million.

Little can be told from the life insurance results. We get no insight into reserve levels, so this is really only about equivalent annual premium. Half-year numbers provide more detail. Generally, the annual premium equivalent looks good but has hemorrhaged in EMEA. This appears to be because of a reduction in sales of corporate life insurance. New business margin in the division remained roughly flat, according to management.

Within our forecasts we expect to see an improving unit-linked and investment margin in EMEA kicking in in the end of 2019, along with a reduction in expenditure of acquiring business. This region in the largest contributor to earnings in the life division, and we are forecasting business operating profit earnings for the full year of something in the region of $1.1 billion.

North America is a minimal part of the overall life business, with no exposure to unit-linked and therefore just making money from spread-based business. We expect a marked reduction in acquisition costs over our full and explicit five-year periods to something more in line with Europe as well as a continuation of an improvement in the investment margin. This may all sound quite positive, but we still only forecast business operating profit of $85 million.

We do expect compression of loadings and fee-based margins in the higher-growth Asia and Latin America regions.

The financial figures for the Farmers business are stable. This continues to be a nice little franchise that represents half of our award for a moat on the business. For us, we think premium is growing steadily at around 2.0%, and we estimate a continuation of the 700-basis-point fee on managed gross earned premium. This results in roughly $1.4 billion business operating profit for Farmers Services. Farmers Life and Farmers Reinsurance have small contributions.