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Morningstar | Zurich Insurance: Decent Fiscal Year 2018 Results; Remain Cautious on Non-Life North America

While we think these are a fairly decent set of full-year results for Zurich Insurance, we remain a bit skeptical over the non-life North America division. We maintain our CHF 312 fair estimate for the moment while we roll our financial model, and we also maintain our narrow moat rating.

It is clear that the non-life division is better. A couple of things we like about this full-year posting is that we have seen a slowing of like-for-like premium growth to 40 basis points, and given the condition of one of its most important markets, we think this is helping drive an improved combined ratio. For example, the 97.8% combined ratio includes 400 basis points of natural catastrophes, and while this is a 180-basis points improvement on prior year, this also potentially demonstrates that the business has a better grip on its risk management, i.e. ceding to reinsurance. There is also a 110-basis-point improvement in prior-year development to 230 basis points. The trend here is clear as we have seen a shift from positive 10 basis points in 2015 to negative 180 basis points, negative 140 basis points, and negative 230 basis points, respectively, over the past three years.

The item that concerns us is the slowing of rate changes. The division has managed to push through positive rates of between 2% and 3% depending on region, and the most encouraging element of this has been North America where this has risen to up to 3.8% of the middle part of 2018, which has been much needed. However, the pace of rate has slowed significantly and has fallen to 270 basis points in the final quarter of 2018. We are wary of this North America market and think management needs to hold on to positive rate of above 2% in order to not get drawn into competitive pressure driven by poor underwriting conditions.

We think the life division looks to be performing well with an 80-basis-point increase in new business margin and better operating profit mainly driven by EMEA. Zurich Life’s new business value and annual premium equivalent is dominated by unit-linked and protection business with very little coming in from savings and annuities, and we think this a pretty attractive mix given the savings and investment environment. To us, the business seems to be betting on EMEA going forward here. And although this is a group level metric, we find it more relevant for life, the gap between the income and reinvestment yields has dropped from 70 to 30 basis points, which highlights significant slowing of compression in the investment yield.

Within Farmers, while we are seeing a slowdown in underlying exchange premium growth, retention is at a high and the exchanges combined ratio is at a three-year low. As a result, the managed gross earned premium margin continues to remain stable at 7.0% and operating profit is slightly ahead of last year.