Zurich Is a Rare Structurally Advantaged Multiline Insurer With a Narrow Moat

Equity Analyst

Henry Heathfield

Zurich Insurance is one of the best-quality companies in our European insurance coverage, and it is a truly special business. The ownership of Farmers Management Services provides the company with an unusual uplift to returns delivered to shareholders. And we believe this business and these returns are well protected by the long-standing attorney-in-fact agreement. The relationship between Farmers Exchanges and Farmers Management Services has been in place since the exchanges were founded nearly 100 years ago. This makes it unlikely that the relationship will change and any change would have to be agreed by every single Farmers Exchange policyholder. That would involve a lot of paperwork. Margins and returns in FMS touch 30%, almost unrivaled in the world of insurance.

While Farmers is a unique asset, Zurich also holds a strong commercial insurance operation where the business is the largest provider of international programs to multinational corporates. Here, dedicated account managers and underwriters service these corporations to bring a global program of policies under one umbrella, reducing the workload and administration for these individual businesses. That sort of insurance program requires vast infrastructure, data, and analytics to run successfully as well as ongoing strict controls in risk management. Zurich has the largest risk engineering network globally, which helps survey clients' assets and helps them reduce the chance of—and mitigate the damage of— claims. Complemented by Zurich’s Resilience Services, which helps clients establish how to better position themselves against climate change risk, Zurich has one of the strongest commercial insurance offerings globally. Having established a firm position with larger commercial enterprises, Zurich is now moving down to mid-market businesses and we think this is particularly centered around North America. The company is set to apply what it has learned in the large commercial space to these slightly smaller companies. However, we still think the bespoke nature of this underwriting makes it nicely profitable. Our expectation is for a continuation of a long-standing claims improvement.

Business Strategy & Outlook

We award Zurich a narrow economic moat.

Zurich owns Farmers Group, which comprises three business lines: Farmers Life; Farmers Reinsurance; and Farmers Management Services. Farmers Life and Farmers Re are relatively small units. Farmers Management Services, on the other hand, produces the majority of Farmers Group earnings and provides management and administration services to the underlying Farmers Exchanges that write personal lines insurance.

The Farmers Exchanges were founded in the 1920s by John Tyler and Thomas Leavey, who believed that farmers and ranchers tended to experience and file fewer claims on their vehicles and therefore were entitled to preferential prices. While they originally went door to door, or farm to farm, in and around Los Angeles, the business grew over the years, with a concentration on the Western states. The growth of gross premiums written by the Farmers Exchanges has tended to average midsingle digits, and around 10 years ago they began to write insurance in the Eastern states. Farmers Exchanges tend to hold around a 5% personal lines market share nationwide and are around the seventh-largest personal lines insurer in the United States. Their strength remains in the Western states, where they hold around a 10% market share, and are around the sixth or seventh across the central states and in the lower end of the top 10 up and down the Atlantic Coast. 

The acquisition of MetLife’s U.S. property and casualty business made the business a truly national operation. The acquisition included the agreement that Farmers Exchanges can sell their personal lines insurance policies through the MetLife platform for Group benefits. These MetLife platform Group benefits customers become part of Farmers Exchanges. At the time of the acquisition, this Group benefits platform stretched across 3,800 companies and nearly 40 million employees and brought close to 2.5 million policies and around $3.6 million of gross premium written onto Farmers Exchanges.

Zurich acquired Farmers Management Services, or FMS, as part of its takeover of British American Tobacco Financial Services in 1998. On Farmers Exchanges, policyholders are owners of the exchange and they appoint an attorney-in-fact to provide nonclaims services. This attorney-in-fact is Farmers Management Services. Services provided by FMS include nonclaims services such as risk selection, administering policy documents, invoices, premium collection, and investment portfolio management. FMS charges a management fee for these services. This management fee has tended to orientate around 13.6% of the gross premium earned on the exchanges. However, in reality, FMS manages to a 7% management fee after incurring expenses. The return on equity generated by Farmers Management Services tends to orientate around 25% to 30%.

The relationship between Farmers Exchanges and Farmers Management Services has been in place since the exchanges were formed and, in order for the exchanges to change to a different provider of services, all exchange customers would need to sign an agreement to change provider of administrative and management services. All policyholders sign an agreement with both Farmers Exchanges and FMS when they take out a policy.

Farmers Exchanges are not trying to compete with the likes of Geico or Progressive, which dominate direct advertising and are price-aggressive. They compete more in agency business where customers, seeking multiple policies and to establish a long-term relationship, are going to Farmers Exchange agents for insurance across all their needs. This business model is more about embedding agents in the local communities.

In Zurich’s non-life insurance business, the company runs the second-largest commercial insurer in the world, with commercial gross premiums written accounting for two-thirds of the non-life business division gross premiums written.

Over the past five years, Zurich has taken strong action to improve the performance of its commercial insurance business by tilting the weights of its four primary lines of business away from one where the business was overweight the long-tail casualty line as the line used to account for close to 50% of the gross premium written within the commercial business. Furthermore, the business has made substantial investments in data and analytics, the efficiency of its claims processing and settlement. These investments in intangible assets have all had tangible benefits. For example, Zurich’s commercial insurance claims ratio has improved by 10 percentage points over the last half decade and nearly all that improvement has come from the claims rate.

Zurich’s commercial insurance business is made up of four strong offerings, which are international programs, captives, risk engineering, and resilience services. The international programs business provides bespoke and tailored insurance programs to multinational corporates, spanning 200 companies across 7,800 international programs with 2,000 dedicated international program professionals. While these programs come up for renewal on an annual basis, because of the continued emphasis on building a strong Top 3 as well as regional broker relationships, and stronger client relationships, Zurich’s international programs business has between an 80% and 90% retention rate. Zurich’s commercial insurance business has increased its share of wallet with the largest three brokers by between 5 and 6 percentage points.

Building the infrastructure to serve large international programs is not a small task. The provider needs local knowledge of local laws, business environment, and business practices. Further, the information technology needs to be strong to serve both Zurich and the customer within this international program on a global basis. Finally, data and analytics play an important role in both risk selection and in Zurich’s risk engineering services where Zurich assesses and provides customers with feedback on how they can better manage their risk. This can be complemented by the company’s Resilience Services that are available to both customers and noncustomers of Zurich. Zurich has one of the best commercial insurance underwriting standards within our coverage, as the business has also pulled commercial peak-to-trough large loss volatility in from 12 to 5 percentage points.

Narrow

Economic Moat

Zurich Insurance Group AG

Earnings data Q1 2024

Zurich Insurance Group AG is a holding company, which engages in the provision of insurance products and related services. It operates through the following segments: Property and Casualty Regions, Life Regions, Farmers, Group Functions and Operations, and Non-Core Businesses. The Property and Casualty Regions segment provides motor, home, and commercial products and services for individuals, as well as small and large businesses on both a local and global basis. The Life Regions segment includes comprehensive range of life and health insurance products on both an individual and a group basis including annuities, endowment and term insurance, unit-linked and investment-oriented products, as well as full private health, supplemental health, and long-term care insurance. The Farmers segment focuses on non-claims administrative and management services to the Farmers Exchanges, which are owned by policyholders. The Group Functions and Operations segment is involved in group’s holding and financing and headquarters activities. The Non-Core Businesses segment offers insurance and reinsurance businesses. The company was founded in 1872 and is headquartered in Zurich, Switzerland.

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