ZFSVF - Zurich: Another Dividend Increase

Summary

• All financial targets for the 2020-2022 cycle were exceeded by Zurich.
• The company's operating income delivered a plus 12% to $6.5 billion. We decide to update our 10-year analysis and Zurich is safer and more profitable.
• Strong growth in cash remittance coupled with a 9% dividend increase. Our buy rating is then confirmed.

Zurich Insurance Group ( OTCQX:ZURVY ) just released its quarterly update. Here at the Lab, we positively welcome the Swiss insurer's results; however, Wall Street is penalizing the company's stock price and is currently down by more than 2%. Our readers know that we provided a 10-year analysis of the company's main financial indicators and Zurich: Again A Buy , and we are updating our estimates today.

1. Zurich's combined ratio was in a slightly upward trend. This evolution was not great compared to Allianz and AXA. Below, we reported our previous 10 years' presentation from 2010 vs. 2020 (Fig 1). After the COVID-19 outbreaks, the Zurich P&C division delivered a solid 94.3% (Fig 2) which was driven by a lower expense ratio (31.2% vs 30.6%) and improvement in commercial margins. For this reason, P&C's operating profit recorded a plus 14% to USD 3.6 billion compared to the previous year's end;
2. Last time, we reported that the Swiss insurer player was able to maintain a lower Solvency Ratio versus its peers. In addition, the ratio was upward (Fig 3). Currently, Zurich is the safest company in our EU insurer universe coverage with a Solvency Ratio II at 265% and well above the standard requirement imposed by the Swiss regulators (minimum at 160% or above) - (Fig 4).

Fig 1

Fig 2

Fig 3

Fig 4

Q4 and FY results

Starting with the CEO's words , we are happy to report that Zurich has " exceeded its financial targets for the second consecutive three-year period ". Here at the Lab, in our publication called In Uncertain Times, Buy A Swiss Safe Haven , we already incorporated higher estimates vs Wall Street average consensus.

Key takeaways from the year are:

• Full-year 2022 business operating profit reached $6.5 billion with an increase of 12% from $5.7 billion recorded in 2021. This was due to performance improvements in nearly all operating segments. Return on equity was at 15.7%, the highest since 2009, and well above the 2020-2022 management target of >14%. Net income after tax attributable to shareholders was $4.6 billion, a decrease of 12% from the prior period. This result was primarily driven by lower capital gains, net losses on asset disposals, and hyperinflation charges related to the Latin American business which more than offset the higher level of BOP. This resulted in earnings per share of $30.8 on a fully diluted basis;
• As already mentioned above, the P&C division delivered a strong set of numbers as well as the Life BOP segment which grew by 8% to $2.0 billion, with lower capital intensity. Farmers division was up 18% to $1.9 billion thanks to MetLife's integration;
• Over the past three years, customer loyalty has significantly improved with 2.1 million net new retail customers in 2022;
• Reinvestment yield is a positive catalyst that is currently not priced in. Zurich's yield is now at 3.7% compared to the 1.8% recorded last year. This will enhance the company's operating profitability thanks also to Zurich's ability to lower its expenses ratio over time.

Conclusion and Valuation

Aside from our 10 years update, Zurich reported a solid set of numbers, with the highest operating profit since 2007. Given the solid results, the company announced a 9% dividend increase to CHF 24 per share. In our last release , we analyzed the US investigation, confirming that was marginal to Zurich's P&L accounts. Regarding the valuation, taking into consideration the new strategic plan, and following its Q4 stands out results, we believe that the Swiss insurer will reach a higher sustainable ROE. Thanks to continued strong growth in cash remittance, fundamentals are better than before. In addition, Zurich is now yielding 5.5% and we are already ahead of consensus estimates, so we leave unchanged our buy target at CHF 475 per share.

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