Zurich Financial Services
Year named CFO: 2007
Number of employees: 60,000
2008 earnings: $3.0 billion
As rival insurers were chasing higher returns by investing in exotic financial instruments, Dieter Wemmer, CFO of Zurich Financial Services, stuck to his knitting.
The decision to stay focused on the companys core insurance business has paid off. In April, when troubled American International Group was obliged to put its U.S. Personal Auto Group up for sale to reduce its massive debt, its Swiss competitor scooped up the business for $1.9 billion. The deal transformed Zurichs U.S. subsidiary, Farmers Group, into the third-largest property-and-casualty insurer in the country. It also demonstrated how Zurich can wield its financial strength to grow through selective acquisitions, says Wemmer.
"In the current market there will be opportunities coming as more people become willing to sell at reasonable prices," he notes.
Not that Zurich has been immune to the economic downturn. Its net income fell 47 percent last year, to $3 billion, and dropped 75 percent year-over-year in the first quarter, to $362 million. The declines reflect both weaker underwriting performance and reduced earnings on investments. With many companies cutting back on insurance expenses, Zurichs general insurance arm the p/c unit that generates roughly 60 percent of premium income posted a 12 percent drop in first-quarter payments, to $9.8 billion.
Market declines knocked the value of Zurichs average invested assets down to $176.7 billion at the end of March, off 10 percent; investment income plunged 62 percent, to $816 million. "We lost a substantial amount last year, especially on our bond portfolio," says Wemmer.
Zurich is acting on several fronts to offset the impact of the crisis. Wemmer, considered a candidate for the top job when CEO James Schiro retires at the end of this year, says the company has reduced its investment exposure to stocks, credit instruments and short-term bonds, preferring to put money into long-term, high-grade corporate bonds. He says the insurer does not invest in derivatives, and it avoids complex instruments. "We take risks, but on the insurance side," he says.
The company has also pushed through price increases of 1 to 2 percent on insurance policies for businesses. In light of the increased possibility of corporate failures, "balance sheet protection is getting expensive," Wemmer says. And the company froze salaries this year to keep a lid on costs.
Zurich is already reaping rewards from its cautious investment strategy, according to Christoph Bieri, an analyst with Credit Suisse Private Banking in Zurich. "This put them in a better position than some of their competitors going into the crisis," he says. "This strong position should help them gain market share from weaker players."
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