ZFSVF - Zurich Insurance: Attractive Combined Ratios Despite Catastrophic Losses

2023-08-23 05:53:33 ET

Summary

• Zurich Insurance Group has continued to see low combined and loss ratios in spite of an increase in catastrophic losses across North America.
• Return on equity for the company has increased, driven in part by an improvement of 8% in Property & Casualty insurance revenue.
• Rising reinsurance rates could also bolster premiums over the longer term.

Investment Thesis

I take the view that Zurich Insurance Group ( ZFSVF ) has the capacity to see upside on the basis of low combined and loss ratios, as well as rising reinsurance rates.

In a previous article back in May, I made the argument that Zurich Insurance Group could see further upside going forward, on the basis of premium growth in spite of inflationary pressures as well as the company's loss ratio remaining below its 20-year historical average.

Since then, the stock has descended to a price of $463.62 at the time of writing:

The purpose of this article is to assess whether Zurich Insurance Group has the ability to see continued growth from here taking recent performance into consideration.

Performance

When looking at the most recent financial results for Zurich Insurance Group, we can see that return on equity is up to 20.3% for the six months ended June 2023 as compared to 17.7% for the same period in the previous year.

This was in part driven by an improvement of 8% in Property & Casualty insurance revenue, as well as an improvement of 11% in operating profit across the Life business.

In my previous article, I outlined the historical loss ratio for Zurich Insurance Group's Property & Casualty segment from 2003 to the present (assumed to be termed as General Insurance pre-2016).

Source: Figures sourced from historical Zurich Insurance Group annual reports (2003-present).

As we can see, P&C showed a loss ratio of 63.7% for 2022. For the half-year of 2023, the loss ratio came in at 64.1%. Given the performance to date, I am optimistic that Zurich Insurance Group can achieve a loss ratio at the lower end of the trend that we have seen over the last 20 years.

It is also interesting to visualise the combined ratio for P&C by means of a heatmap - we can see that while the combined ratio of 92.9% for H1 2023 is marginally higher than that of last year - the ratio still remains below that seen in 2021 and previously.

The fact that the combined ratio has consistently been lower than 100 over the past six years is encouraging, as this indicates that Zurich Insurance Group has consistently brought in more in revenues relative to claims and other expenses.

That said, the combined ratio for the North American region increased from 87.6% from H1 2022 to 91.6% for H1 2023. We can see that this has corresponded with a decline in business operating profit across this region from $1.40 billion to $1.24 billion over the same period.

The reason for the decline in the combined ratio across this region was primarily down to increased catastrophic losses as well as higher commission expenses.

My Perspective

As regards my take on the above results and the implications for the growth trajectory of the stock going forward, the fact that both the loss and combined ratios have remained near the lower ends of their historical trends is quite encouraging - especially considering the impact of inflation in increasing the costs of settling claims. Essentially, a low combined ratio means that Zurich Insurance Group continues to bring in more in premiums than that which is paid in claims expenses - indicating that premium demand remains vibrant.

I expect that this trend is set to continue - with catastrophic damages to property partially due to climate change having boosted demand for property reinsurance. With that being said, property catastrophe reinsurance rates in the United States rose by as much as 50% at the beginning of July - given the higher costs of insuring catastrophic property damage. This has led to a situation whereby an increasing number of insurance firms (who need to themselves purchase reinsurance at these higher rates) are no longer offering insurance to their customers in this area.

This could be a risk if the market becomes overly thin - and fewer insurance companies demand reinsurance to insure their customers in turn against catastrophic property damage. However, should we see the combined ratio remain below levels seen in 2022 for the whole of this year - then this would serve as an indication that premium demand is remaining vibrant. I see a strong probability of this being the case - given increasing demand on the part of customers for insuring properties against catastrophic losses.

Conclusion

To conclude, Zurich Insurance Group has seen encouraging performance as indicated by its combined and loss ratios. While operating profit and the combined ratio across North America saw a deterioration as a result of catastrophic losses - I take the view that continued demand and higher rates for reinsurance should help to bolster premiums over the longer-term.

I continue to take a bullish view on Zurich Insurance Group.

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