Zurich Insurance Group

Transcription

1 INDEPENDENT RESEARCH 3 rd February 2014 A new hope for 2014 Insurance Fair Value CHF311 vs. CHF300 (price CHF264.00) BUY Bloomberg Reuters ZURN VX ZURN.VX 12-month High / Low (CHF) / Market capitalisation (CHFm) 39,307 Embedded value 37,186 Avg. 6m daily volume ('000 shares) Free Float 96.0% 3y EPS CAGR 3.0% YE December 12/12 12/13e 12/14e 12/15e Premium (USDm) 53,977 55,526 57,160 58,441 Diluted EPS (CHF) P/E 11.5x 11.3x 10.9x 10.5x EV per share (CHF) P/EV 1.3x 1.3x 1.2x 1.1x ROE Dividend per share Div yields 5.8% 5.8% 5.8% 5.8% Prices and data as at close of 30 th January /02/14 Following our recent downgrade on Allianz and in a very challenging environment for reinsurers, we continue to believe that Zurich is a strong investment proposal, alongside AXA (Buy, FV EUR23). We have increased our estimates for 2014 and 2015, by respectively 3% and 6%, driven by P&C underwriting results. Our Fair Value has also been revised upwards to CHF311. The P&C division (51% of group core operating profit) should benefit from a strong improvement in the underwriting result (19% CAGR expected over the next two years), driven by the favourable geographical mix (US/UK), continued price increases, falling reinsurance prices, reduced inflation and ongoing optimisation. True, further pressure on the investment yield is likely, but we see P&C operating profit growing by 8% on average over the next two years. The Farmers division (26% of group core operating profit) continues to offer its low risk (fee business mainly), low volatility, high return (RoAC > 25%) profile. Zurich has a comfortable capital position, with a 121% solvency margin based on the 99.95% VaR internal model, above the AA rating consistent % target. 86 ZURICH INSURANCE GROUP STOXX EUROPE 600 Source Thomson Reuters We expect the company to continue paying a CHF17 dividend, i.e. a 6.4% yield, which would cost it c. USD2.8bn compared to >USD3bn cash remittances to the holding was a sad year for Zurich, especially with the suicide of the CFO Pierre Wauthier, but the company ended the year with a fine coup by poaching Swiss Re s CFO George Quinn (47), effective 1st May He will bring solid and successful experience to a similar position (remember that he is one of the driving forces behind Swiss Re s recovery) and is highly respected by the investment community. Analyst: Olivier Pauchaut 33(0) opauchaut@bryangarnier.com r r

2 Company description Zurich operates mainly in the US and Europe. It has strong positions in non-life insurance in the US (including Farmers), in the UK and in the commercial liability field in continental Europe. Profit & Loss (USDM) e 2014e 2015e Total gross premiums written 49,964 50,200 53,977 55,526 57,160 58,441 o/w Life insurance 12,292 11,584 13,590 14,337 14,768 15,063 o/w P&C insurance 33,066 34,572 35,610 36,757 37,961 38,906 % change of GPW -7.2% 0.5% 7.5% 2.9% 2.9% 2.2% Total net premiums earned 45,509 42,901 46,756 47,973 49,236 50,237 Operating profit, insurance 4,148 3,621 3,436 4,100 4,251 4,472 o/w Life insurance 1,473 1,355 1,338 1,228 1,137 1,094 o/w P&C insurance 2,675 2,266 2,098 2,872 3,115 3,378 Operating profit, financial services 1,686 1,486 1,416 1,527 1,524 1,551 Operating profit, other (959) (842) (773) (838) (834) (833) Total operating profit 4,875 4,265 4,079 4,790 4,942 5,189 % change of operating profit -12.8% -12.5% -4.4% 17.4% 3.2% 5.0% Other non-operating items (402) 760 1, ,043 1,028 Profit before tax and minority interests 4,473 5,025 5,435 5,753 5,985 6,217 Tax (893) (1,207) (1,302) (1,263) (1,319) (1,374) Minority interests (64.0) (26.0) (162) (264) (249) (241) Net attributable profit, reported 3,516 3,792 3,971 4,227 4,417 4,601 Net attributable profit, adjusted 3,516 3,792 3,971 4,227 4,417 4,601 % change Net attributable profit -11.7% 7.8% 4.7% 6.4% 4.5% 4.2% Balance Sheet (USDM) Intangible assets 25,250 25,522 28,671 28,541 29,968 31,466 o/w Goodwill 2,104 2,060 2,107 2,072 2,176 2,284 Shareholders' equity, group share (excl. TSS/TSDI) 31,506 31,636 34,493 33,157 35,063 37,137 o/w Gross unrealised capital gains NM NM NM NM NM NM Total shareholders' equity 33,318 34,016 36,861 35,463 37,369 39,443 Subordinated debt and other debt 11,057 12,017 12,521 12,911 13,557 14,234 Life net technical reserves (excl. unit-linked policies) 88,557 88,601 96,290 97,338 99, ,270 P&C net technical reserves 103, , ,701 42,621 51,424 60,800 Technical reserves from unit-linked policies 100,890 98, , , , ,106 NAV net of intangible assets 6,256 6,114 5,822 4,616 5,095 5,671 Value of life portfolio 9,548 9,458 11,359 11,927 12,523 13,149 New business value ,264 1,352 1,447 Embedded value 34,345 33,045 35,362 37,186 39,767 42,559 Data per Share (CHF) Adjusted, diluted EPS NBV per share NAV per share EV per share Net dividend Financial Ratios Life insurance operating margin (based on technical reserves, %) P&C insurance combined ratio (%) ROE (%) Life insurance RoAC (%) P&C insurance RoAC (%) Tax rate (%) Payout (%) Source: Company Data; Bryan, Garnier & Co ests. 2

3 Table of contents 1. One of our two top picks We see a strong upside potential for the P&C underwriting result High persistency and high profitability at Farmers We expect a CHF17 dividend, i.e. a 6.4% yield Buy recommendation maintained, new Fair Value of CHF Appendix Bryan Garnier stock rating system

4 1. One of our two top picks Following our recent downgrade on Allianz (see our note dated 24th January 2014), and in a challenging environment for reinsurers (see our note dated 17th January 2014), we continue to believe that Zurich Insurance is a strong investment proposal, alongside AXA (Buy, FV EUR23), which looks more consensual to us. Zurich generates 48% of its core operating profit in the US, spread between P&C, Life and Farmers. On the other side, the share of the core operating profit generated in the Euro-zone is quite small (13%). From a business standpoint, Zurich generates 51% of its core operating profit in P&C (mainly commercial lines) and 23% in Life. The remaining 26% is the Farmers division, with the bulk of this contribution coming from management services provided by Zurich to the Farmers Exchanges, a US insurance company which is owned by its policyholders (see figure 18 on page 17 for more details). Fig. 1: Business profile (9M 2013) US Euro-zone Other Europe * Total in USDm as a % in USDm as a % in USDm as a % in USDm as a % P&C % % % 2,178 51% Life % % % % Farmers 1, % 0 0% 0 0% 1,108 26% Core operating profit 2,061 48% % 1,122 26% 4,264 * Other Europe mainly consists of UK and Switzerland Sources: Company Data; Bryan, Garnier & Co ests. The keys to our investment case are the P&C division, where we expect a strong improvement in the underwriting result, and the Farmers division, where we highlight the high level of persistency of the operating profit over time and the high profitability. The Life division is not central to our investment case. The interesting story here lies in the deal with Santander in LatAm. In 2011, Zurich took control (51%) of Santander s insurance business in LatAm (Brazil, Mexico, Chile, Argentina and Uruguay) and obtained a 25-year distribution agreement with Santander s network (5,600 branches, > 35 million customers). There has been some favourable impact on new business items, but the impact on earnings is limited so far, especially after minorities. 4

5 2. We see a strong upside potential for the P&C underwriting result In P&C, we expect Zurich to continue to improve the underwriting result: The geographical mix (US/UK) is favourable to volume, as there is some strong correlation between GDP growth and P&C volume growth. This is a true difference compared to Allianz and AXA, which both keep a clear focus on the Euro-zone area. In H2 2013, the US GDP grew 3.7%, its best second half in a decade, indicating that the US economy is on a firmer footing. The company continues to experience price increases. For 9M 2013, prices have risen by 4% overall in the commercial lines business, of which 5% in the US and 3% in Europe. A few days ago, Chubb reported renewal rates up 6% in Q in its commercial business. We expect Zurich to benefit from the cycle of falling reinsurance prices and low claims costs inflation (subdued CPI inflation). Like other players, Zurich is engaged in a transformational journey ( The Zurich Way ), which aims at optimising the risk profile of the portfolio and reducing unit costs. The reported combined ratio has shown some volatility over time, due to growing large losses (natcats and man-made) and lower run-offs. But if we exclude these items, the trend is clear and very satisfactory. Fig. 2: Combined ratio (reported and restated *), Q to Q % 103% 101% 99% 97% 95% 93% 91% 89% 87% 85% Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Reported combined ratio Restated combined ratio * Restated = excluding large losses and run-offs Sources: Company Data; Bryan, Garnier & Co ests. 5

6 Going forward, we have assumed that large losses stabilise at 10% (vs. 9.4% on average for the period) and that run-offs slightly increase to 3% (vs. 3.7% on average for the period but only 2.3% on a quarterly average since Q1 2012) due to lower-than-expected claims costs inflation. Based on all these items, we have increased our expectations for the underwriting result by 9% for 2014 and 17% for 2015, and now expect a 19% CAGR over the period. We expect the restated combined ratio to trend towards 86% by 2015 (vs. 89.4% in 2012) and the reported combined ratio to trend towards 93% by 2015 (vs. 98.4% in 2012). Fig. 3: Combined ratio (reported and restated *), e 101% 99% 97% 95% 93% 91% 89% 87% 85% e 2014e 2015e Reported combined ratio Restated combined ratio Sources: Company Data; Bryan, Garnier & Co ests. However we continue to see lacklustre prospects on the financial side because of the depressed interest rates environment and Zurich s conservative investment policy. At 9M 2013, P&C investment income was down 10.9% yoy. We expect the recurring ROI in 2013 to be 2.4%, down from 2.9% in For 2014, we expect the recurring ROI to drop a further 20bps to 2.2%, and a further 10bps in 2015 to 2.1%. Despite this ongoing negative trend in investment income, we expect an 8% CAGR operating profit growth for the P&C division over the next two years. 6

7 Fig. 4: P&C profit trend and KPIs, e In USDm e 2014e 2015e Net premiums 29,730 30,922 29,071 27,837 29,076 29,196 29,957 30,818 31,503 change (%) 4.6% 4.0% -6.0% -4.2% 4.5% 0.4% 2.6% 2.9% 2.2% Claims -20,975-22,458-20,637-19,799-20,923-20,531-20,310-20,645-20,879 Loss ratio (%) 70.6% 72.6% 71.0% 71.1% 72.0% 70.3% 67.8% 67.0% 66.3% General expense -7,449-7,870-7,505-7,460-7,811-8,201-8,123-8,301-8,460 Cost ratio (%) 25.1% 25.5% 25.8% 26.8% 26.9% 28.1% 27.1% 26.9% 26.9% Underwriting result 1, ,524 1,872 2,164 change (%) -24.6% -54.5% 56.4% -37.8% -40.8% 35.7% 228.5% 22.8% 15.6% Reported combined ratio (%) 95.6% 98.1% 96.8% 97.9% 98.8% 98.4% 94.9% 93.9% 93.1% Restated combined ratio (%) 91.1% 93.9% 93.5% 93.2% 90.6% 89.4% 87.4% 86.9% 86.1% Investment income 3,912 3,624 3,181 2,915 2,808 2,587 2,294 2,125 2,069 change (%) 7.2% -7.4% -12.2% -8.4% -3.7% -7.9% -11.3% -7.4% -2.6% Yield (%) 4.8% 4.5% 3.9% 3.4% 3.3% 3.0% 2.6% 2.3% 2.2% Recurring yield (%) 4.5% 4.6% 3.8% 3.3% 3.3% 2.9% 2.4% 2.2% 2.1% Other -1, Operating profit 4,162 3,537 3,464 2,675 2,266 2,098 2,872 3,115 3,378 change (%) 7.9% -15.0% -2.1% -22.8% -15.3% -7.4% 36.9% 8.4% 8.4% Allocated capital 11,892 12,369 11,628 11,135 11,630 11,678 11,983 12,327 12,601 Operating RoAC (%) 35.8% 29.2% 28.9% 23.5% 19.9% 18.0% 24.3% 25.6% 27.1% Sources: Company Data; Bryan, Garnier & Co ests. 7

8 3. High persistency and high profitability at Farmers The Farmers division is something very specific to Zurich s business model (see figure 18 on page 17 for more details). Basically, it provides non-claims related management services to the Farmers Exchanges, a US insurance company which is owned by its policyholders. Zurich receives fee income for its services to the Farmers Exchanges, based on premiums written by the company (no insurance risk). This segment also includes Farmers Re, which reports the reinsurance business assumed by Zurich for the Farmers Exchanges (effective 31st December 2012, the all-lines quota share reinsurance treaty participation rate is 18.5%). The Farmers Exchanges are prominent writers of personal lines and small commercial lines business in the US. For the last seven years, management services have accounted for more than 90% of the operating profit of the division. The operating profit of the division has shown some volatility due to Farmers Re, especially the impact of natcats. In 2009 and 2010, Farmers Re contributed to USD229m and USD321m respectively, or 15% and 19% respectively of the division s operating profit. In 2012, Farmers Re reported a USD26m operating loss. But the key driver is the level of fees received by the management services business and, behind this, the premium dynamics at the Farmers Exchanges. Over the period, GWP at the Farmers Exchanges grew at a 3.7% CAGR, while management fees received by Zurich grew at a 4.7% CAGR. 8

9 Fig. 5: 19,000 Premiums written by the Farmers Exchanges vs. Fees received by Zurich, e, in USDm 2,900 18,500 2,800 18,000 17,500 17,000 16,500 16,000 15,500 2,700 2,600 2,500 2,400 2,300 15, e 2014e 2015e 2,200 Farmers Exchanges GWP (lhs) Management fees received by Zurich (rhs) Sources: Company Data; Bryan, Garnier & Co ests. Going forward, we expect Farmers Re s contribution to remain limited, as we do not want to speculate on a favourable US natcat experience. Concerning the management services business, we acknowledge there are some opportunities for the Farmers Exchanges to expand the business, especially on the eastern side of the US. However the main operating focus should remain on balance sheet strengthening and portfolio management, so we see no or marginal growth coming from the Farmers Exchange in the short term. As a consequence, we expect the operating profit contribution at Zurich s level to stabilise at current levels (i.e. USD1.4bn annualised). At the end of the day, the Farmers division currently offers no specific growth profile. But considering the high level of persistency of the operating profit over time and the high profitability (>25% RoAC), we continue to see it as a key business for Zurich. 9

10 Fig. 6: Farmers profit trend and KPIs, e In USDm e 2014e 2015e Net earned premiums and policy fees 0 2,378 5,722 5,574 2,984 4,418 4,108 4,108 4,150 Management fees and other related revenues 2,266 2,458 2,690 2,778 2,767 2,846 2,816 2,798 2,826 Insurance benefits and losses, net 0-1,622-3,904-3,708-2,105-3,198-2,855-2,855-2,884 Total net technical expenses -1,215-2,028-3,159-2,998-2,337-2,850-2,723-2,695-2,704 Net underwriting result 1,051 1,186 1,349 1,646 1,309 1,216 1,346 1,356 1,387 change (%) 0.7% 12.8% 13.7% 22.0% -20.5% -7.1% 10.7% 0.7% 2.4% Investment result change (%) -35.0% 6.7% 22.4% -10.9% -14.1% -7.5% -15.1% -7.0% -3.0% Other Business operating profit 1,238 1,340 1,555 1,686 1,486 1,416 1,527 1,524 1,551 change (%) -1.3% 8.2% 16.0% 8.4% -11.9% -4.7% 7.9% -0.2% 1.8% o/w Farmers Management Services 1,238 1,187 1,326 1,365 1,370 1,442 1,426 1,428 1,455 o/w Farmers Re Allocated capital 3,161 4,293 5,813 5,856 4,853 5,554 5,374 5,374 5,427 Operating RoAC (%) 40.2% 36.0% 30.8% 28.9% 27.8% 27.2% 28.0% 28.4% 28.7% Sources: Company Data; Bryan, Garnier & Co ests. 10

11 4. We expect a CHF17 dividend, i.e. a 6.4% yield Zurich s rating is one of the highest we have in our coverage, as its insurer financial strength is rated AA- with a stable outlook by S&P. Zurich has a comfortable capital position. At end-september 2013, the Solvency I margin was 261%. But this number has a limited meaning in the current low rate environment. The economic solvency margin, based on the Swiss Solvency Test methodology (99% VaR), was 206% at end-june 2013 vs. 185% at end-2012, with very comfortable sensitivities. Fig. 7: Economic solvency (SST) and sensitivities, at end-june 2013 SST level at end-june % Interest rates +100 bps 203% Interest rates -100 bps 209% Credit spreads +100 bps 181% Equities +25% 211% Equities -25% 201% 0% 50% 100% 150% 200% 250% Source: Company Data Looking at the internal model ( Z-ECM for Zurich Economic Capital Management), which is much more stringent as it is based on a 99.95% VaR, the ratio was 121% at end-june 2013 (USD42.5bn available financial resources vs. USD35.0bn required capital) vs. 114% at end-2012, with very comfortable sensitivities as well. 11

12 Fig. 8: Internal model (Z-ECM) and sensitivities, at end-june 2013 Z-ECM level at end-june % Interest rates +100 bps 119% Interest rates -100 bps 123% Credit spreads +100 bps 105% Equities +25% 125% Equities -25% 117% 0% 20% 40% 60% 80% 100% 120% 140% Source: Company Data Remember that Zurich s target here is %, which is consistent with an AA rating. It is one of the three key strategic objectives of the 2016 plan. Zurich considers that a ratio above 120% means that it needs to increase risk taking and/or remedial actions. Fig. 9: Capital management driven by Z-ECM > 120% Consider increased risk taking and/or remedial actions = above target 100%-120% actions required as within stated objective and equivalent to a AA rating = AA target range 90%-100% Position may be tolerated for a certain time depending on the risk environment < 90% Implement de-risking and remedial actions = below risk tolerance level Source: Company Data It is worth mentioning that this 121% Z-ECM ratio includes dividend accrual, which means that a proportional fraction of the 2013 dividend (CHF17) has been deducted from the available financial resources. Of course, such a way to calculate the ratio does not represent an obligation for the company to pay a particular dividend amount. But we like to see this as a way for the company to signal it feels comfortable with this level. 12

13 On top of the solvency, Zurich also intends to focus on cash flows, and another key strategic objective of the 2016 plan is net cash remittances to the holding level in excess of USD9bn over the period after central costs and investments to expand the business. Over the period, cash remittances to the holding has been USD3.1bn on average, and the company has planned at least USD3.0bn for The main purpose of this is to pay a sustainable and attractive dividend. Our central scenario is that the company will continue to pay a CHF17 dividend, as has been the case since Such a dividend represents a global amount of CHF2.5bn or USD2.8bn, which is consistent with its cash flow guidance. Fig. 10: Dividend and payout, e e 2014e 2015e 80% 70% 60% 50% 40% 30% 20% 10% 0% Dividend (CHF) - lhs Payout (%) - rhs Sources: Company Data; Bryan, Garnier & Co ests. A CHF17 dividend would generate a 6.4% yield, which would definitely be one of the highest in the European insurance universe. 13

14 5. Buy recommendation maintained, new Fair Value of CHF311 We have kept unchanged our current estimates for 2013, and have decided to neutralise the preannounced capital gain of the sale of the New China Life stake (USD540m) with the pre-announced restructuring costs (USD m). We have increased our estimates for 2014 and 2015 (+3% and +6% respectively at both operating profit and net income levels), and this is driven by P&C underwriting results. Fig. 11: Profit trend, e In USDm e 2014e 2015e Operating profit 6,842 7,668 5,170 5,592 4,875 4,265 4,079 4,790 4,942 5,189 change (%) 12.1% -32.6% 8.2% -12.8% -12.5% -4.4% 17.4% 3.2% 5.0% Net income 4,618 5,798 3,114 3,983 3,516 3,792 3,971 4,227 4,417 4,601 change (%) 25.6% -46.3% 27.9% -11.7% 7.8% 4.7% 6.4% 4.5% 4.2% Sources: Company Data; Bryan, Garnier & Co ests. Our ROE expectations ( %) are consistent with the company s third key strategic objective: an operating ROE after tax and excluding unrealised capital gains of 12-14% over the period of the 2016 plan. Fig. 12: KPIs, e e 2014e 2015e EPS (CHF) change (%) 24.7% -50.7% 22.6% -16.3% -9.3% 11.1% 1.7% 3.8% 3.5% P/E (x) Dividend (CHF) change (%) 36.4% -26.7% 45.5% 6.3% 0.0% 0.0% 0.0% 0.0% 0.0% Yield (%) 4.2% 5.7% 4.2% 6.1% 6.4% 6.4% 6.4% 6.4% 6.4% 6.4% Pay out (%) 28% 30% 45% 53% 67% 74% 67% 66% 63% 61% Book value (CHF) change (%) 4.5% -26.8% 24.9% -0.4% -0.1% 7.2% -6.1% 5.0% 5.2% P/BV (x) ROE (%) 20.0% 21.8% 12.5% 15.8% 11.7% 12.0% 12.0% 12.5% 12.9% 12.7% Sources: Company Data; Bryan, Garnier & Co ests. 14

15 Zurich continues to benefit from a low beta compared to peers. We do not use market betas in our models, but instead betas that are derived from our proprietary methodology (see our sector note dated 27th March 2013 for more details). But the global picture is the same, and we use a 1.12 beta for the company vs on average for the companies we cover. Fig. 13: Beta applied by the market vs. BG betas Stoxx600 BG Aegon Allianz AXA CNP Zurich Hannover Re Munich Re Scor Swiss Re Euler Hermes Average Sources: Datastream; Bryan, Garnier & Co ests. Based on our new 2014 estimates, our sum-of-the-parts valuation is adjusted upwards to CHF311 vs. CHF300. Fig. 14: SOTP In USDm Net Allocated RORAC CoE Beta LT growth Multiple Valuation Valuation P/E 2013e P/E 2014e operating capital 2014e (%) (%) (x) per share (x) (x) profit 14e 2014e (CHF) P&C insurance 2,664 12, % 9.53% % , Life insurance 1,063 8, % 9.53% % , Farmers 1,147 5, % 9.53% % , Total Operating divisions 4,874 26, % 9.53% % , Other , % 9.53% % , Total 4,417 35, % 9.53% % , Source: Bryan, Garnier & Co ests. 15

16 6. Appendix Fig. 15: Investment portfolio (USD207bn) as of end-september 2013, excluding USD130bn Unit-Linked Other 11% Cash 4% Real estate 4% Govies 37% Equities 6% ABS 10% Corporate bonds - Banks 12% Corporate bonds exc. Banks 16% Source: Company Data Fig. 16: Govies portfolio (USD76bn) As a % Market/Cost US 20% n/a UK 12% n/a Italy 11% 103% Germany 10% 107% Switzerland 9% n/a France 7% 109% Spain 6% 103% Austria 4% 109% Belgium 3% 108% The Netherlands 3% 105% Brazil 3% n/a Canada 2% n/a Australia 2% n/a Portugal 0.5% 95% Ireland 0.5% 104% Other 5% n/a Total (USDbn) % Source: Company Data 16

17 Fig. 17: Corporate bonds portfolio (USD60bn), including Banks (USD26bn) By sector By country By rating Banks 44% US 24% AAA 15% Utilities 9% Germany 13% AA 18% Financial Institutions 6% UK 12% A 40% Oil & Gas 5% France 9% BBB 26% Insurance 5% Switzerland 8% < BBB 1% Telecom 4% Spain 5% Conglomerates 2% The Netherlands 4% Transportation 2% Chile 4% Pharmaceuticals 2% Rest of Europe 10% Other 21% Other 11% Source: Company Data Fig. 18: Farmers Exchanges relationship to Zurich What are the Farmers Exchanges? The Farmers Exchanges are Farmers Insurance Exchange, Fire Insurance Exchange, Truck Insurance Exchange and their subsidiaries and affiliates. The three Exchanges are California domiciled inter-insurance exchanges owned by their policyholders with governance overseen by their Boards of Governors. Relationships between the Farmers Exchanges and Zurich Through dedicated subsidiaries, Zurich has been appointed as the attorney-in-fact for the Farmers Exchanges. In that capacity, Zurich provides certain non-claims administrative and management services to the Farmers Exchanges for a fee. Zurich does not manage the Farmers Exchanges, and there is no reporting by the Farmers Exchanges officers, management or personnel to Zurich. Zurich has no interest in the Farmers Exchanges. Source: Company Data 17

18 Price Chart and Rating History /01/11 31/07/11 31/01/12 31/07/12 31/01/13 31/07/13 ZURICH INSURANCE Source Thomson Reuters GROUP Ratings Date Ratings Price 28/03/13 BUY CHF /06/11 SELL CHF205 Target Price Date Target price 06/01/14 CHF300 04/11/13 CHF285 27/06/13 CHF308 28/03/13 CHF320 11/01/13 CHF252 26/10/12 CHF248 09/03/12 CHF230 11/10/11 CHF216 09/09/11 CHF208 30/06/11 CHF182 18

19 BUY NEUTRAL SELL Bryan Garnier stock rating system For the purposes of this Report, the Bryan Garnier stock rating system is defined as follows: Stock rating Positive opinion for a stock where we expect a favourable performance in absolute terms over a period of 6 months from the publication of a recommendation. This opinion is based not only on the FV (the potential upside based on valuation), but also takes into account a number of elements including a SWOT analysis, positive momentum, technical aspects and the sector backdrop. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion. Opinion recommending not to trade in a stock short-term, neither as a BUYER or a SELLER, due to a specific set of factors. This view is intended to be temporary. It may reflect different situations, but in particular those where a fair value shows no significant potential or where an upcoming binary event constitutes a high-risk that is difficult to quantify. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion. Negative opinion for a stock where we expect an unfavourable performance in absolute terms over a period of 6 months from the publication of a recommendation. This opinion is based not only on the FV (the potential downside based on valuation), but also takes into account a number of elements including a SWOT analysis, positive momentum, technical aspects and the sector backdrop. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion. Distribution of stock ratings BUY ratings 55.4% NEUTRAL ratings 30.4% SELL ratings 14.3% 1 Bryan Garnier shareholding in Issuer 2 Issuer shareholding in Bryan Garnier Research Disclosure Legend Bryan Garnier & Co Limited or another company in its group (together, the Bryan Garnier Group ) has a shareholding that, individually or combined, exceeds 5% of the paid up and issued share capital of a company that is the subject of this Report (the Issuer ). The Issuer has a shareholding that exceeds 5% of the paid up and issued share capital of one or more members of the Bryan Garnier Group. 3 Financial interest A member of the Bryan Garnier Group holds one or more financial interests in relation to the Issuer which are significant in relation to this report 4 Market maker or liquidity provider A member of the Bryan Garnier Group is a market maker or liquidity provider in the securities of the Issuer or in any related derivatives. 5 Lead/co-lead manager In the past twelve months, a member of the Bryan Garnier Group has been lead manager or co-lead manager of one or more publicly disclosed offers of securities of the Issuer or in any related derivatives. 6 Investment banking agreement A member of the Bryan Garnier Group is or has in the past twelve months been party to an agreement with the Issuer relating to the provision of investment banking services, or has in that period received payment or been promised payment in respect of such services. 7 Research agreement A member of the Bryan Garnier Group is party to an agreement with the Issuer relating to the production of this Report. 8 Analyst receipt or purchase of shares in Issuer The investment analyst or another person involved in the preparation of this Report has received or purchased shares of the Issuer prior to a public offering of those shares. 9 Remuneration of analyst The remuneration of the investment analyst or other persons involved in the preparation of this Report is tied to investment banking transactions performed by the Bryan Garnier Group. 10 Corporate finance client In the past twelve months a member of the Bryan Garnier Group has been remunerated for providing corporate finance services to the issuer or may expect to receive or intend to seek remuneration for corporate finance services from the Issuer in the next six months. 11 Analyst has short position The investment analyst or another person involved in the preparation of this Report has a short position in the securities or derivatives of the Issuer. 12 Analyst has long position The investment analyst or another person involved in the preparation of this Report has a long position in the securities or derivatives of the Issuer. 13 Bryan Garnier executive is an officer A partner, director, officer, employee or agent of the Bryan Garnier Group, or a member of such person s household, is a partner, director, officer or an employee of, or adviser to, the Issuer or one of its parents or subsidiaries. The name of such person or persons is disclosed above. 14 Analyst disclosure The analyst hereby certifies that neither the views expressed in the research, nor the timing of the publication of the research has been influenced by any knowledge of clients positions and that the views expressed in the report accurately reflect his/her personal views about the investment and issuer to which the report relates and that no part of his/her remuneration was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in the report. 15 Other disclosures Other specific disclosures: Report sent to Issuer to verify factual accuracy (with the recommendation/rating, price target/spread and summary of conclusions removed). A copy of the Bryan Garnier & Co Limited conflicts policy in relation to the production of research is available at Yes 19

20 London Paris 26 Avenue des Champs Elysées Paris Tel: +33 (0) Fax: +33 (0) Regulated by the Financial Conduct Authority (FCA) and l Autorité des Marchés Financiers (AMF) New York 750 Lexington Avenue New York, NY Tel: +1 (0) Fax: +1 (0) FINRA and SIPC member Geneva rue de Grenus 7 CP 2113 Genève 1, CH 1211 Tel Fax Regulated by the Swiss Federal Banking Commission New Delhi The Imperial Hotel Janpath New Delhi Tel Fax Chandos Place London WC2N 4HS Tel: +44 (0) Fax: +44 (0) Authorised and regulated by the Financial Conduct Authority (FCA) Important information This independent investment research report (the Report ) was prepared by Bryan Garnier & Co Limited and is being distributed only to clients of Bryan Garnier & Co Limited (the Firm ). Bryan Garnier & Co Limited is authorised and regulated by the Financial Conduct Authority (the FCA ) and is a member of the London Stock Exchange. This Report is provided for information purposes only and does not constitute an offer, or a solicitation of an offer, to buy or sell relevant securities, including securities mentioned in this Report and options, warrants or rights to or interests in any such securities. This Report is for general circulation to clients of the Firm and as such is not, and should not be construed as, investment advice or a personal recommendation. account is taken of the investment objectives, financial situation or particular needs of any person. The information and opinions contained in this Report have been compiled from and are based upon generally available information which the Firm believes to be reliable but the accuracy of which cannot be guaranteed. All components and estimates given are statements of the Firm, or an associated company s, opinion only and no express representation or warranty is given or should be implied from such statements. All opinions expressed in this Report are subject to change without notice. To the fullest extent permitted by law neither the Firm nor any associated company accept any liability whatsoever for any direct or consequential loss arising from the use of this Report. Information may be available to the Firm and/or associated companies which are not reflected in this Report. The Firm or an associated company may have a consulting relationship with a company which is the subject of this Report. This Report may not be reproduced, distributed or published by you for any purpose except with the Firms prior written permission. The Firm reserves all rights in relation to this Report. Past performance information contained in this Report is not an indication of future performance. The information in this report has not been audited or verified by an independent party and should not be seen as an indication of returns which might be received by investors. Similarly, where projections, forecasts, targeted or illustrative returns or related statements or expressions of opinion are given ( Forward Looking Information ) they should not be regarded as a guarantee, prediction or definitive statement of fact or probability. Actual events and circumstances are difficult or impossible to predict and will differ from assumptions. A number of factors, in addition to the risk factors stated in this Report, could cause actual results to differ materially from those in any Forward Looking Information. Disclosures specific to clients in the United Kingdom This Report has not been approved by Bryan Garnier & Co Limited for the purposes of section 21 of the Financial Services and Markets Act 2000 because it is being distributed in the United Kingdom only to persons who have been classified by Bryan Garnier & Co Limited as professional clients or eligible counterparties. Any recipient who is not such a person should return the Report to Bryan Garnier & Co Limited immediately and should not rely on it for any purposes whatsoever. tice to US investors This research report (the Report ) was prepared by Bryan Garnier & Co. Ltd. for information purposes only. The Report is intended for distribution in the United States to Major US Institutional Investors as defined in SEC Rule 15a-6 and may not be furnished to any other person in the United States. Each Major US Institutional Investor which receives a copy of this Report by its acceptance hereof represents and agrees that it shall not distribute or provide this Report to any other person. Any US person that desires to effect transactions in any security discussed in this Report should call or write to our US affiliated broker, Bryan Garnier Securities, LLC. 750 Lexington Avenue, New York NY Telephone: This Report is based on information obtained from sources that Bryan Garnier & Co. Ltd. believes to be reliable and, to the best of its knowledge, contains no misleading, untrue or false statements but which it has not independently verified. Neither Bryan Garnier & Co. Ltd. and/or Bryan Garnier Securities LLC make no guarantee, representation or warranty as to its accuracy or completeness. Expressions of opinion herein are subject to change without notice. This Report is not an offer to buy or sell any security. Bryan Garnier Securities, LLC and/or its affiliate, Bryan Garnier & Co. Ltd. may own more than 1% of the securities of the company(ies) which is (are) the subject matter of this Report, may act as a market maker in the securities of the company(ies) discussed herein, may manage or co-manage a public offering of securities for the subject company(ies), may sell such securities to or buy them from customers on a principal basis and may also perform or seek to perform investment banking services for the company(ies). Bryan Garnier Securities, LLC and/or Bryan Garnier & Co. Ltd. are unaware of any actual, material conflict of interest of the research analyst who prepared this Report and are also not aware that the research analyst knew or had reason to know of any actual, material conflict of interest at the time this Report is distributed or made available.