Zurich Insurance Group Ltd · SIX:ZURN
Zurich Insurance — Zurich Financial Services — Investor Day (September 2005)
128 slides from Zurich Insurance's investor day presentation, Sep 14, 2005
Slide 1: Investors' Day: Farmers - A unique business model
Investors’ Day Farmers - A unique business model Zurich, September 14, 2005
Slide 2: Disclaimer and cautionary statement
Disclaimer and cautionary statement Certain statements in this document are forward-looking statements, including, but not limited to, statements that are predictions of or indicate future events, trends, plans or objectives. Forward-looking statements include statements regarding our strategic dire
Slide 3: Introduction
Introduction James J. Schiro Chief Executive Officer Zurich Financial Services
Slide 4: Key messages
Key messages • Farmers has a unique model that provides reliable earnings growth to Zurich • The Farmers Exchanges are financially strong and have the capacity to grow profitably • Farmers is well positioned to grow profitably by leveraging its core strengths © Zurich Financial Services - Investors’
Slide 5: Overview
Overview Paul N. Hopkins President & CEO
Slide 6: Topics and speakers
Topics and speakers Overview Paul Hopkins Farmers structure and financial performance Pierre Wauthier Distribution – Tied Agents Jerry Carnahan Distribution – Independent Agents Jack Hannigan Q&A Farmers Exchanges operations Bob Woudstra Personal lines Kevin Kelso Commercial lines Mhayse Samalya Spe
Slide 7: Agenda
Agenda • U.S. market environment • Farmers Exchanges overview • Farmers’ strategy © Zurich Financial Services - Investors’ Day, Zurich, September 14, 2005 7
Slide 8: U.S. Market Overview
U.S. Market Overview U.S. market environment Total U.S. P&C market1 Top 10 U.S Personal Lines Insurers1 Market Company share (%) Mid & Large Commercial Auto State Farm Mutual Group 19.3 27.9% 34.5% Allstate Insurance Group 10.6 Farmers Insurance Group 5.5 Small Progressive Group 5.4 Commercial Natio
Slide 9: What is happening in the market?
What is happening in the market? U.S. market environment Industry premium growth is While combined ratios seem plummeting1 . . . to be holding1 . . . 14.5% 14% 110% 107 12% -93 10% % 105% si n ce 8% ye ar 100 99 100 en 100% 6% d 20 98 02 4% 95% 2% 1.0% 0% 90% 12-02 12-03 12-04 12-05E 12-05E 12-05E 1
Slide 10: A highly regulated and fractioned market
A highly regulated and fractioned market U.S. market environment • State by state regulation • Price increases approved by regulators • Department of Insurance (DOI) commissioners appointed or elected © Zurich Financial Services - Investors’ Day, Zurich, September 14, 2005 10
Slide 11: Regulatory environment is showing encouraging signs
Regulatory environment is showing encouraging signs U.S. market environment • Texas quieting down • Credit scoring widely accepted • TRIA • Encouraging reforms on: But still many • Federal oversight − Class action suits uncertainties • Demanding DOIs − Medical malpractice • Regulatory − Workers’ com
Slide 12: The Farmers Exchanges are the largest reciprocal in the U.S.
The Farmers Exchanges are the largest reciprocal in the U.S. Farmers Exchanges overview Gross Written Premiums 2004 Farmers Exchanges: Specialty Auto USD 7.7bn 9% Home USD 3.6bn Commercial Total Personal Lines USD 11.3bn 11% Commercial USD 1.6bn Auto Specialty USD 1.3bn 55% Total GWP USD 14.2bn Home
Slide 13: They have a strong, multi-channel distribution system
They have a strong, multi-channel distribution system… Farmers Exchanges overview Exclusive Agents 13,200 Reserve Agents 4,200 Exclusive agency producers 4,200 Independent Agents 32,000 Total Agents 53,600 Exclusive agency states Very strong footprint in … with more than 50,000 Western United States
Slide 14: Top market positions in the Western U.S.
… and enjoy top market positions in the Western U.S. Farmers Exchanges overview Top 5 Property 25% Top 10 Other core states Independent agent states Ranking1 29 core states Total market Auto #3 #5 Home #3 #3 Specialty (mobile homes) #1 #1 1 Source: AM Best 2004 © Zurich Financial Services - Investor
Slide 15: Recent results are the best in their history
The Farmers Exchanges’ recent results are the best in their history and… Farmers Exchanges overview Quarterly Combined ratios Farmers Exchanges’ surplus (in USD millions) 5'000 125% CA 4'000 120% 115% Wildfires 110% Hurricanes 3'000 105% 100% 95% 2'000 90% Q101 Q2 Q3 Q4 Q102 Q2 Q3 Q4 Q103 Q2 Q3 Q4 Q
Slide 16: Returned to profitability, now focus on growth
…as they have returned to profitability, they can now focus on growth Farmers Exchanges overview Policy growth Combined ratio 1'000'000 120% 800'000 17.7 million 115% 600'000 policies 400'000 110% 200'000 105% 0 -200'000 100% -400'000 95% -600'000 -800'000 90% 2001 2002 2003 2004 HY 2005 Policy grow
Slide 17: Leverage core strengths to grow profitably
The Farmers Exchanges will leverage core strengths to grow profitably Farmers’ strategy Core strengths Seizing unique opportunities • Underwriting discipline • Efficient claims management • Geographic expansion • Distribution • Expand distribution - Advice based • Expand product range - Multi-channe
Slide 18: Geographic and distribution expansion opportunities
The Farmers Exchanges have unique geographic and distribution expansion opportunities Farmers’ strategy Top 51 Property 25% Top 101 Other states Independent Agent expansion states,of which: most profitable markets over time2 - Market leader in each state we do business - Consider acquisitions to ach
Slide 19: Many competitive advantages
In summary, the Farmers Exchanges have many competitive advantages • Largest U.S. reciprocal and 3rd largest Personal Lines writer • Multiple and powerful brands • Largest multi-channel advice-based distribution system • Highly efficient claims organization • Enjoying record profitability • Organica
Slide 20: Structure and financial overview
Structure and financial overview Pierre Wauthier Executive Vice President Chief Financial Officer
Slide 21: Agenda
Agenda • Structure • Historical performance • A disciplined approach to capital management © Zurich Financial Services - Investors’ Day, Zurich, September 14, 2005 21
Slide 22: Unique structure created reliable earnings growth
Farmers’ unique structure has created a history of reliable and steady earnings growth… Structure US P&C Industry Income1 Farmers Management Services in USD billion Business Operating Profit in USD millions 50 1'200 40 1'000 30 800 20 600 10 400 0 200 -10 0 1990 1991 1992 1993 1994 1995 1996 1997 19
Slide 23: Structure insulates management company earnings
… as it insulates management company earnings from volatility of underwriting results Structure Simplified structure and premium distribution Premium 12% 88% Management Farmers Company Exchanges Administration and Underwriting risk management Zurich owned Policyholders owned © Zurich Financial Servi
Slide 24: Structure is unique compared to the industry
This structure is also unique when compared to the industry Structure Illustrative example 100 Premiums 100 Losses Reported 70 70 Adjusted & LAE combined combined ratio: 98% Commissions ratio: 91.5% 16 16 & Taxes Management fee 5.5 12 Profit portion 6.5% Adjustment © Zurich Financial Services - Inve
Slide 25: 4.1 point expense advantage
The Farmers Exchanges have a 4.1 point expense advantage compared to the industry1 Structure 4.1 point advantage to the industry 45% 42.2% 38.0% 40.0% 40% 37.1% 35.4% 33.9% 35% 30% 25% 20% 15% 10% 5% 0% Farmers 2 Industry State Farm Allstate Safeco Nationwide U/W expenses 1 Source: 2004 ISO Top 100
Slide 26: Outperformed the industry on adjusted basis
They have consistently outperformed the industry on an adjusted basis… Structure Combined ratio – Farmers compared to industry1 125 120 115 110 105 100 Industry 95 Farmers reported (unadjusted) 90 Farmers adjusted2 85 1998 1999 2000 2001 2002 2003 2004 1 Source: Analyst reports; ISO 2 Includes a red
Slide 27: Outperformed peer group
… as well as its peer group Structure Combined ratio – multi line carriers1 125 120 115 110 105 Nationwide Ins. Cos. 100 Farmers reported (unadjusted) 95 State Farm. Allstate Safeco. 90 Farmers adjusted2 85 1998 1999 2000 2001 2002 2003 2004 1 Source: Analyst reports; ISO 2 Includes a reduction for
Slide 28: Management fee has remained stable
Management fee has remained stable over time Structure 20% 16% Mgmt. 12% fee 8% 4% 0% '81 '86 '91 '96 '01 HY ‘05 Year - Part of the subscription agreement – max 20% - Management fee has been very stable, around 12% of gross earned premium - Stable operating margin © Zurich Financial Services - Inves
Slide 29: Fee not a driver of Exchanges' performance
… and is not a driver of the performance of the Exchanges Structure 20% 45% 16% 40% Mgmt. 12% 35% Surplus fee ratio 8% 30% 4% 25% 0% 20% '81 '86 '91 '96 '01 HY ‘05 Year - Loss experience is the key driver of surplus change - Farmers Exchanges have flexibility to manage surplus without changing the m
Slide 30: Proven track record of surplus growth
The Exchanges have a proven track record of sustainable surplus growth Historical performance Organic surplus change (in USD million) 1'000 500 0 -500 Mold Northridge EQ -1'000 -1'500 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 HY '05 - Organic surplus generated in 69 of the past 77 years -
Slide 31: Recent results among the best in history
Recent results are among the best in the Farmers Exchanges’ history Historical performance Quarterly combined ratios 125% 120% 115% CA Wildfires 110% 105% Hurricanes 100% 95% 90% Q101 Q2 Q3 Q4 Q102 Q2 Q3 Q4 Q103 Q2 Q3 Q4 Q104 Q2 Q3 Q4 Q105 Q2 2001 2002 2003 2004 2005 © Zurich Financial Services - In
Slide 32: Accelerated surplus growth and quality
This has accelerated surplus growth and quality of surplus Historical performance Exchanges combined surplus Exchanges surplus ratio 5'000 USD USD 4,466 40% USD 4,146 USD USD 4'000 3,462 3,473 3,684 46.7% 38% 3'000 36% 2'000 53.3% 1'000 34% 0 32% 2001 2002 2003 2004 HY 2005 Unassigned Surplus Paid i
Slide 33: Focus now on premium growth
As profitability fueled surplus growth, the focus is now on premium growth Historical performance Policy growth Combined ratio 600'000 120% 400'000 115% 200'000 110% 0 105% -200'000 100% -400'000 95% -600'000 90% 2001 2002 2003 2004 HY 2005 Policy growth Combined ratio © Zurich Financial Services -
Slide 34: 2004 ESIP to grow Exchanges' surplus
In 2004, we implemented ESIP1 to grow the Farmers Exchanges’ surplus A disciplined approach to capital management 2004 ESIP Plan Total USD 700m • USD 522m ESIP plan Capital Mgmt. 85 Finance 178 • USD 700m achieved 83 - Exceeded plan by USD 178m Comm. U/W 105 • Strict performance tracking - Monthly r
Slide 35: ESIP remains core to surplus growth strategy
… and it remains core to their surplus growth strategy A disciplined approach to capital management 2005 ESIP Plan Total USD 300m • 2005 ESIP program Capital Mgmt. 18 Finance 21 - USD 300m in ESIP initiative Comm. U/W 15 - USD 259m achieved today P.L. U/W 89 YTD, or 221% of YTD plan -200 Pricing 72
Slide 36: Well ahead of USD 1 billion surplus target
Well ahead of the USD 1 billion surplus growth target A disciplined approach to capital management in USD millions 1'500 • USD 782m added since Y/E 2003, or 78% of 3 year plan after 1.5 years 3 year target • 2005 surplus gain is USD 282m 1'000 782 ahead of plan • Committed to pursue strategy 18 mont
Slide 37: Summary
Summary • A unique and sustainable structure that has delivered strong performance − 7% earnings growth over the last 15 years for Farmers management − Strong surplus growth in recent past − Management fee rate is stable and sustainable • Restored strong operating performance − USD 782m added to sur
Slide 38: Distribution - Tied Agents
Distribution - Tied Agents Jerry J. Carnahan, Senior Vice President Chief Marketing Officer
Slide 39: Agenda
Agenda • Market position in core states • New agency growth and productivity • Future strategy © Zurich Financial Services - Investors’ Day, Zurich, September 14, 2005 39
Slide 40: Distribution creates superior customer reach
The Farmers Exchanges distribution creates superior customer reach Market position in core States • Large distribution network in core 29 states Property 25% - 13,265 community based agents - 4,179 licensed producers - 4,262 reserve agents in training • USD 12.9bn all-lines premium volume for 2004 T
Slide 41: Igniting growth and success of new agents
Igniting growth and success of new agents New agent growth and productivity Leap identified key success factors: early winners are long-term winners Quartile view of • Introduced program in 2003 agency performance • Targeted at new agents Agent productivity/Policies sold Top 25% • Performance requir
Slide 42: The new agent initiatives are working
The new agent initiatives are working… New agent growth and productivity Record levels of new agent 157% increase in new agent applicants…88% increase June 2005 appointments YTD June 2005 when over June 2002 compared to YTD June 2002 1,770 11,923 1'700 12'000 1,450 10,362 1'500 10'000 1'300 940 6'02
Slide 43: Productivity has doubled
…and productivity has doubled New agent growth and productivity 105% increase in new agent success1 100% 80% 80% 80% 60% 60% 40% 39% 20% 2002 2003 2004 HY 2005 1 Success rate is based on percentage of new agents who meet or exceed 24 month performance requirements © Zurich Financial Services - Inves
Slide 44: Productivity has doubled
…and productivity has doubled New agent growth and productivity 113% increase in new agent productivity 25 20 21.3 15 16.7 10 10.8 10 5 0 2002 2003 2004 HY 2005 # of policies sold per month per agent © Zurich Financial Services - Investors’ Day, Zurich, September 14, 2005 44
Slide 45: Expanding distribution footprint
Expanding distribution footprint New agent growth and productivity Columns represent net gain in full time agents Trend line is total Full over prior year Time Tied Agents 800 13'400 591 600 13'200 357 297 400 13'000 200 0 12'800 -200 -130 12'600 -400 12'400 -600 -800 12'200 -803 -1000 12'000 2001 2
Slide 46: Future-proofing the Farmers Exchanges' success
Future-proofing the Farmers Exchanges’ success Future strategy program • Maximize agent growth with strategic agent placement New Agents • Drive productivity using elevated performance standards • Rehabilitate or remove poor performers Existing Agents • Strengthen retention and productivity by alloc
Slide 47: Summary
Summary • Massive distribution footprint in core states • Record breaking agency growth and productivity • Dynamic strategy for the future © Zurich Financial Services - Investors’ Day, Zurich, September 14, 2005 47
Slide 48: Distribution - Independent Agents
Distribution - Independent Agents Jack Hannigan Chief Marketing Officer Independent Agency Operations
Slide 49: Agenda
Agenda • The Independent Agent channel and Farmers Exchanges’ position today • Farmers Exchanges’ growth with Independent Agents • Farmers Exchanges’ unique Independent Agent opportunity • Leveraging Farmers Exchanges’ opportunity in the future © Zurich Financial Services - Investors’ Day, Zurich, S
Slide 50: Independent Agent channel and position today
The Independent Agent (IA) channel and Farmers Exchanges’ position today Position today > 40,000 IAs in the U.S. IA Personal Lines Market = USD 75bn Farmers has USD 1.3bn or 1.7% IA market share 80% 32,000 have relationships Competing Carriers with Farmers today © Zurich Financial Services - Investo
Slide 51: Why Independent Agents choose a carrier
Key reasons why Independent Agents choose a carrier1 Position today • Market availability and product variety 9 • Technologies (ease of doing business) 9 • Price levels 9 • Accurate, timely services 9 • Income opportunity 9 1 Source: 2002 AUGIE Agency Survey National Survey of Independent Agents – R
Slide 52: Growth with Independent Agents
Farmers Exchanges’ growth with Independent Agents Growth Premium in USD millions Consolidate Farmers / Foremost 1,400 IA marketing teams USD 1.3bn 1,200 1,000 800 Begin Auto/Home 600 Farmers profit actions joins 400 Zurich 200 Farmers acquires Foremost USD 0 1998 1999 2000 2001 2002 2003 2004 © Zuri
Slide 53: Growth with Independent Agents: profitability
Farmers Exchanges’ growth with Independent Agents rofitab le P Growth Premium in USD millions C/R (%) - 19.1% CAGR in written premium for 2000 – 2004 1,400 120 - Dramatic improvements in combined ratio USD 1.3bn 1,200 115 1,000 110 USD 641m 800 105 600 100 400 200 95.4% USD 0 1998 1999 2000 2001 200
Slide 54: Drivers of growth to date
Success with Independent Agents drivers of growth to date Growth • Additional specialty products nationwide Products • Auto and home products in Eastern U.S. • Proven expertise in each product area • 32,000 IAs in 49 states with specialty authority Distribution • 2,300 IAs in 12 Eastern states with
Slide 55: Unique IA opportunity: product mix
Farmers Exchanges’ unique IA opportunity Unique opportunity Current IA Farmers’ IA Personal Lines Personal Lines Market Product Mix Product Mix Total = USD 75bn Auto & Home 33% Current Mix: Farmers USD 1.3bn Specialty 67% Home 23% Specialty 6% Auto 71% Future Mix: Reversing Auto & Specialty and Grow
Slide 56: Unique IA opportunity
Farmers’ unique IA opportunity Unique opportunity - Offer all products through IA network - Focus on growing auto/home products More than 32,000 IA contracts 2,300 IA contracts © Zurich Financial Services - Investors’ Day, Zurich, September 14, 2005 56
Slide 57: Our strategy is working
Our strategy is working Unique opportunity • New homeowners policies up 34% over 2004 • New homeowners written premium up 41.6% through June ‘05 New homeowners policies New homeowners premium in USD millions 34% 41.6% 11.1 16,805 HY HY 2005 2005 7.8 12,528 HY HY 2004 2004 © Zurich Financial Services
Slide 58: Leveraging opportunity for the future
Leveraging Farmers Exchanges’ opportunity for the future Leveraging opportunities • Introduce a new multi-vehicle auto policy Products • Implement new auto rating system • Extend Farmers auto / home authority to more agents Distribution • Accelerate growth with existing IAs with product synergies •
Slide 59: Summary
Summary • We’ve successfully grown IA channel to USD1.3bn at C/R of 95.4% 9 • The IA channel is a major opportunity 9 • We know what independent agents want 9 • We’ve have a strong team and effective strategy 9 • We’re getting good growth and profit results 9 • We are making investments to leverage
Slide 60: Farmers Exchanges Operations
Farmers Exchanges Operations Bob Woudstra Executive Vice President P&C Operations, President Specialty Lines
Slide 61: Large Personal Lines operations with big Small Business
Large Personal Lines operations with a big Small Business Farmers Exchanges overview Gross Written Premiums 2004 Specialty 9% Farmers Exchanges: Commercial 11% Auto USD 7.7bn Home USD 3.6bn Auto Total Personal Lines USD 11.3bn 55% Commercial USD 1.6bn Home 25% Specialty USD 1.3bn Total Gross Written
Slide 62: All businesses growing below combined ratio of 100%
All businesses are growing below a combined ratio of 100% Farmers Exchanges overview Premium for the six months ended June 30 2005 2004 Growth2 Auto 97.8% 100.8% 0.5% Home 80.1% 84.8% 4.7% Personal Lines 97.7% 99.9% 1.8% Commercial Lines1 93.9% 101.9% 3.7% Specialty 85.5% 89.9% 10.7% Total P&C 94.5%
Slide 63: Personal Lines
Personal Lines Kevin Kelso President Personal Lines
Slide 64: Agenda
Agenda • Perspective • Performance • Strategy • Future • Summary © Zurich Financial Services - Investors’ Day, Zurich, September 14, 2005 64
Slide 65: Major player in U.S. personal lines market
Farmers is a major player in the U.S. personal lines market and… Perspective • Operate in 41 States • Use Exclusive and Independent Agents • Produce over USD 11bn GWP in Auto and Home • Protect over 7 million households Independent Agents Exclusive Agents © Zurich Financial Services - Investors’ Day
Slide 66: Consistently outperformed the industry
… has consistently outperformed the industry Performance Combined ratio 110% 105% 100% Industry1 95% Farmers2 90% 85% 80% 2000 2001 2002 2003 2004 Jun 05 1 Source: AM Best, Company results and estimates 2 Includes a reduction for annual Farmers Management pre-tax profit © Zurich Financial Services -
Slide 67: Current loss trends support profitability
Current loss trends support continued profitability Performance Auto losses/policy Home losses/policy 490 260 250 470 240 USD USD 450 230 430 220 410 210 Jun 04 Sep 04 Dez 04 Mrz 05 Jun 05 Jun 04 Sep 04 Dez 04 Mrz 05 Jun 05 Auto loss trend1 = -2.8% Home loss trend1 = -10.1% 1 12 months ending June 2
Slide 68: Growth is gaining momentum
Growth is gaining momentum Performance Change in policies in force (thousands)1 193 165 -416 -565 2002 2003 2004 Jun '05 1 Total Personal Lines © Zurich Financial Services - Investors’ Day, Zurich, September 14, 2005 68
Slide 69: Elements of Personal Lines strategy
Elements of Personal Lines strategy Strategy • Highly recognizable brand • Proprietary claims organization • Multi-line product offering • Face-to-face, advice-based sales • Strategic segmentation © Zurich Financial Services - Investors’ Day, Zurich, September 14, 2005 69
Slide 70: Segmentation to attract high lifetime value customers
Our objective is to use segmentation to attract high lifetime value customers Strategy/segmentation Low Loss High Retention Ratio Ratio Lifetime Customer Value High Product Density © Zurich Financial Services - Investors’ Day, Zurich, September 14, 2005 70
Slide 71: Rating and underwriting integrated with strategy
Rating and underwriting approaches are integrated with our strategy Strategy/segmentation Strategy Approach Face - to -face Multi-line Help agents advise customers with explainable rating plans 9 Choose intuitive segments that agents can market to 9 Leverage customer/agent relationships for underwri
Slide 72: Example 1: New proprietary risk model
Example 1: New proprietary risk model supports face-to-face and multi-line strategies Strategy/segmentation • Leads industry as first proprietary model for Auto and Home combined • Introduced in June 2005 • Replaces third-party model deployed in 1999 • Improves loss ratio prediction • Gives agents a
Slide 73: Example 2: Agents and customers love discounts
Example 2: Agents and customers love discounts Strategy/segmentation • Customer/Agent – friendly form of segmentation • Claims-free discounts versus loss surcharges • Auto/Home and Home/Auto discounts among largest available • Affinity/Occupation discounts drive agent marketing efforts • Auto/Life a
Slide 74: Example 2 (cont.): Auto/Home discount drives performance
Example 2 (cont.): Auto/Home discount drives performance Strategy/segmentation Cross-sold Auto policies 65% • Better loss ratio, even with significant 63% discounts – Auto with Home loss ratio 57% 61% – Auto, no Home loss ratio 59% 59% • Attrition for cross sold Auto policies is less than half that
Slide 75: Example 3: New segmentation programs
Example 3: New segmentation programs Strategy/segmentation • New price points for − Electronic Funds Transfer (Auto) − Unique deductibles (Auto and Home) − Interior home inspections (Home) • Very effective for new customers because they require agent/customer discussion • Introduced July through Sep
Slide 76: Example 3 (cont.): Early adopters having success
Example 3 (cont.): Early adopters are having success with the new Auto programs Strategy/segmentation Change in Auto Sales - August vs June '05 30% 24% 20% 10% 5% 0% -10% -20% -19% -30% No Usage Occasional Frequent Agent Usage of New Programs © Zurich Financial Services - Investors’ Day, Zurich, Sep
Slide 77: Example 3 (cont.): New Auto programs results
Example 3 (cont.): New Auto programs showing great results in first 60 days Strategy/segmentation Average daily Auto sales 4'000 e % increas 3'800 9.4 3'865 3'684 3'600 3'533 3'400 3'200 3'000 June July August © Zurich Financial Services - Investors’ Day, Zurich, September 14, 2005 77
Slide 78: Example 4: New California Auto product
Example 4: New California Auto product launching October 1st, 2005 Strategy/segmentation • Farmers Value Plus product How we will compare with competitors addresses a long standing competitive challenge 1.2 Market Average • Tightened contract rate level • Improved rating segmentation • New approach
Slide 79: Future opportunities
Future opportunities Future • Apply multi-variate analysis to fine-tune rating plans • Use household characteristics to rate Auto • Leverage deeper interactions between Auto and Home © Zurich Financial Services - Investors’ Day, Zurich, September 14, 2005 79
Slide 80: Summary
Summary • Outstanding underwriting results • Loss trends are in the right direction • Creative strategies are in place to spur profitable growth © Zurich Financial Services - Investors’ Day, Zurich, September 14, 2005 80
Slide 81: Commercial Lines
Commercial Lines Mhayse Samalya President Commercial Lines
Slide 82: Agenda
Agenda • What Farmers Business Insurance is about • Our “real” market opportunity • A strategy that can be leveraged for growth © Zurich Financial Services - Investors’ Day, Zurich, September 14, 2005 82
Slide 83: How the Farmers Exchanges compare
How the Farmers Exchanges compare What Farmers Business Insurance is about • They are Big in Small Business… 2004 NWP St. Paul Travelers (Select Comm) USD 2.6bn Hartford (Small Commercial) USD 2.3bn Farmers Business Insurance USD 1.5bn Safeco (SBI Regular) USD 1.3bn • … and are even bigger in their
Slide 84: Business mix
Business mix What Farmers Business Insurance is about Annualized Gross Written Premium1 • USD 1.5bn premium volume 241 • 270,000 policies in force • USD 5,600 average premium 465 862 Commercial Multi Peril Workers' Compensation Commercial Auto 1 in USD millions , as of June 2005 © Zurich Financial S
Slide 85: Diversified customer profile
Diversified customer profile What Farmers Business Insurance is about Customer Segmentation spans “Breadth of Market” Restaurants Retail/Service 15% 16% Real Estate Whol/Distr 5% 4% Misc. 9% Auto Trades 6% Manufacturing 4% Contractors Condo/HOA 12% 10% Apartments 15% © Zurich Financial Services - In
Slide 86: Strong performance on key metrics
Strong performance on key metrics Annual Written Pricing Increases Retention rate2 What Farmers Business Insurance is about 30% 85% 81.8% 82.2% 80% 20% 79.6% 75% 76.4% 10% 70% 0% 65% 2002 2003 2004 HY 2005 60% -10% 2002 2003 2004 HY 2005 Comml Auto Comml Multi Peril Work Comp Combined ratio1 (calend
Slide 87: Is there a 'real' market opportunity? Yes!
Is there a ‘real’ market opportunity? …Yes! Our “real” market opportunity It’s a huge market • Total Small Market – 50 states USD 87.2bn • Total Small Market – (operating territory) USD 52.2bn > Target classes USD 30.6bn1 Fastest growing segment of the US commercial marketplace • Small Business grow
Slide 88: There is a 'real' market opportunity
There is a ‘real’ market opportunity Our “real” market opportunity Small Business is a better Farmers Exchanges market performer Loss ratios (calendar year) • Less price sensitive 140% “Some insurers increasing 120% minimum premiums for their 100% smallest CMP policies.”1 80% 60% • Higher retention
Slide 89: Winning attributes
Winning attributes Our “real” market opportunity Keys to Success in Small Business Farmers has the keys Many Distribution Points 13,265 exclusive agencies Scale to achieve over transactional processing • 4 million new business transactions1 efficiencies • 25 million renewal transactions1 • 50 millio
Slide 90: Strategies for growth
Strategies for growth A strategy that can be leveraged for growth • Clearly defined portfolio lines Excel at the • Alignment of product management and distribution along portfolio Core lines • Manage “Core” based on exposure rather than premium • Expand underwriting to new segments within “Core” Exp
Slide 91: Summary: Big Small Business
Summary: The Farmers Exchanges are a Big Small Business A strategy that can be leveraged for growth Enormous Market Opportunity • The market is underserved with no clear leader in our target segment • Performance is strong and sustainable • Strategies yield growth from leveraging existing capabiliti
Slide 92: Specialty Lines
Specialty Lines Bob Woudstra Executive Vice President P&C Operations, President Specialty Lines
Slide 93: Farmers Specialty is...
Farmers Specialty is… • A leader in its markets • A consistent source of profitability and double-digit premium growth • Well diversified in its risks and distribution • Positioned for continued profitable growth © Zurich Financial Services - Investors’ Day, Day Zurich, September 14, 2005 93
Slide 94: Specialty markets and market share
Specialty markets and market share A leader in its markets Product area Market share Market position Mobile Home 25% #1 Motor Home/Travel Trailer 9% #2 Motorcycle/Off-Road Vehicle 8% #3 Collectible Auto 9% #3 Marine 6% #4 Specialty Dwelling 2% Varies Source: National Family Opinion Study, 2002 - 200
Slide 95: Strong premium growth
Farmers Specialty has shown strong premium growth A consistent source of profitability in USD millions 1'500 Doubled written premium 1'400 1'300 1 th 1,245 ow 1'200 e gr rag 1,087 1'100 % a ve +18 15% 1'000 909 900 20% 800 751 700 637 21% 600 18% 500 2000 2001 2002 2003 2004 1 Compounded annual grow
Slide 96: Growing profitably
…and has been growing profitably… A consistent source of profitability Combined ratio 100 4 intense hurricanes 99.9 8.4 pts. impact 90 96.9 97.6 96.8 80 87.2 70 2001 2002 2003 2004 HY 2005 © Zurich Financial Services - Investors’ Day, Zurich, September 14, 2005 96
Slide 97: In all of its channels and markets
…in all of its channels and markets A consistent source of profitability GWP Premium Combined for the six months ended June 30 (in USD millions) growth ratio Mobile Home 371 9.5% 88.4% Motorcycle/Off-Road 96 9.2% 82.2% Marine 62 9.2% 78.4% Specialty Dwelling 138 15.5% 90.6% Motor Home/Travel Trailer
Slide 98: Specialty's book is well diversified
Specialty’s book is now well diversified… Well diversified in its risk and distribution As of December 31, 2000 As of June 30, 2005 Collectible Auto Marine Marine 2% 9% 9% Mobile Home Motorcycle/ORV 51% Motorcycle/ 13% ORV 13% MtrH/TT 8% Specialty Dwelling Specialty 19% Dwelling 2% Mobile Home MtrH/
Slide 99: Distribution is also diversified
… and distribution is also diversified Well diversified in its risk and distribution 2005 GWP by Channel of Distribution Farmers Exclusive Agents 24% Independent Agents 49% Point of Sale Agents 4% AARP/Direct 13% National Accounts 10% © Zurich Financial Services - Investors’ Day, Zurich, September 1
Slide 100: Extensive IA Distribution footprint
Extensive IA Distribution footprint Well diversified in its risk and distribution 40,000 IAs in the U.S. • More than 32,000 IA contracts • 42,373 active locations 80% 32,000 are appointed with Farmers Specialty Existing Farmers Specialty IA relationships © Zurich Financial Services - Investors’ Day,
Slide 101: Key strengths and differentiators
Key strengths and differentiators Positioned for continued profitable growth • Extensive research Market Expertise • Focused product management • Direct customer involvement • 53 years of specialty experience Claims Expertise • Intensive specialize training • Fair, accurate settlements • Sophisticat
Slide 102: Key Strengths: Distribution Network
Key Strengths: Distribution Network Positioned for continued profitable growth • One of the largest distribution footprints of any US carrier • Multiple channels • Multiple relationships National Accounts (examples): 32,000 Independent Agents 16,000 Exclusive Agents + 2,300 Independent Agents Affini
Slide 103: Growth strategies
Growth strategies Positioned for continued profitable growth • New property niche markets Grow profitably • Further customer segmentation from the “Core” • Cross-selling / household density • Web site self-service More channels • Point of sale / dealerships of distribution • Associations and partner
Slide 104: Summary
Summary Farmers Specialty is well positioned to • Continue to deliver superior combined ratio performance • Deliver a fifth consecutive year of double-digit written premium growth • Take advantage of strategic opportunities to continue its growth © Zurich Financial Services - Investors’ Day, Zurich,
Slide 105: Claims operations
Claims operations Bob Woudstra Executive Vice President P&C Operations, President Specialty Lines
Slide 106: Efficient claims organization
The Farmers Exchanges have an efficient claims organization… Auto Physical Damage 102 Industry 100 98 96 Farmers 94 • Loss expenses: 11.1% vs. 12.9% industry1 92 90 Dez 01 Jun 02 Dez 02 Jun 03 Dez 03 Jun 04 Dez 04 • Claims inflation: − flat to negative trends Auto Bodily Injury 114 for Farmers, Indu
Slide 107: Investing in people development
…as they have been investing in people development… File quality continues to be a major focus 100 • Own Claims organization 90 • Over 9,000 trained and specialized 80 claims professionals 91.3 70 - Centers of excellence 60 76.8 - national catastrophes 50 - large loss 40 30 47.8 - lines of business
Slide 108: Strong and improving customer experience
… also resulting in strong and improving customer experience % Customer satisfaction 85 80 75 70 65 Mar '03 Dec '03 Dec '04 Jul '05 • Awarded the first call center • 7.2% improvement in claims customer certification by JD Power in 2005 service since year-end 2003 • Identified by McKinsey and Co. as
Slide 109: Summary: Farmers Exchanges operations
Summary: Farmers Exchanges operations • Strong underwriting results • Innovative product segmentation • Industry leading claims organization • Multiple distribution channels © Zurich Financial Services - Investors’ Day, Zurich, September 14, 2005 109
Slide 110: Closing remarks
Closing remarks Paul N. Hopkins President & CEO
Slide 111: Key messages
Key messages • Farmers has a unique model that provides reliable earnings growth to Zurich • The Farmers Exchanges are financially strong and have the capacity to grow profitably • Farmers is well positioned to grow by leveraging its core strengths © Zurich Financial Services - Investors’ Day, Zuric
Slide 112: Q&A
@ ZURICH O&A
Slide 113: Appendix
@ ZURICH Appendix
Slide 114: Farmers Simplified Legal Structure
Farmers Simplified Legal Structure Farmers Group, Inc. Prematic Truck Fire Fire Insurance Truck Insurance Farmers Service Corp. Underwriters Underwriters Exchange Exchange Insurance Assoc. Assoc. Exchange FNWL Farmers RE Foremost P&C Insurance Farmers Subsidiaries Financial Mid-Century Solutions Dom
Slide 115: Zurich-Farmers Exchanges earnings relationship
Zurich-Farmers Exchanges earnings relationship Zurich – FGI Exchanges (P&C Group) Fee income USD 1.7bn Management 2004 Actual Management services Company ~ USD 70m • USD 14.2bn GWP Farmers Life investment income • USD 11.0bn NEP USD 1bn surplus note • USD 4.1bn surplus investment ~ USD 3bn premiums
Slide 116: Farmers is a significant earnings contributor to Zurich
Farmers is a significant earnings contributor to Zurich • 42% of Zurich’s total 2004 BOP1 of Total 2004 Farmers BOP: USD 3.7bn USD 1,535.8m (42%) - FMS, Reinsurance, Farmers Life • Stability and consistency of earnings • Effective use of capital (in USD millions) HY 2005 HY 2004 Change Farmers BOP 8
Slide 117: Management company and Exchanges responsibilities
Management company and Exchanges responsibilities Policyholder’s premium 100% Management Farmers Company Exchanges Management 12% Premium Services 88% Underwriting, policy issue, Losses, LAE, commissions, I.S., accounting, actuarial, assessments, taxes profit, dividends Equity Surplus Zurich owned P
Slide 118: Absence of dividend allows greater surplus retention
Absence of dividend payment allows greater surplus retention compared to stock companies Stock Company Exchanges Profit Profit after Tax after Tax Dividend Surplus Surplus Over the last 10 years, stock companies have paid 5.6% of premiums in dividend annually © Zurich Financial Services - Investors’
Slide 119: Surplus Creation: Exchanges vs. a Stock Company
Surplus Creation: The Exchanges vs. a Stock Company Stock Co. Exchanges Diff. Premium income 100.0 100.0 - Losses -59.0 -59.0 - LAE -13.0 -11.0 2 Other U/W expenses -25.0 -22.9 2.1 Profit margin of management co. - -6.5 -6.5 Underwriting result 3.0 0.6 -2.4 Investment income 5.0 5.0 - Pre-tax income
Slide 120: Dividends as % of net written premiums
Dividends as % of net written premiums Average of dividend/premium pay-out ratio of largest stock companies within top 100 companies Stock Company Average1 10% 8% 6% 4% 2% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1 Source: ISO top 100, AM Best © Zurich Financial Services - Investors’ Day
Slide 121: June 2005 results 3.3 points ahead of 2004
The Exchanges June 2005 results are 3.3 points ahead of 2004 Combined ratio in % YTD YTD Lines of Business June 2005 June 2004 Change Auto 97.8% 100.8% 3.1 pts Homeowners 80.1% 84.8% 4.7 pts Commercial P&C1 99.1% 100.1% 1.0 pts Workers’ Compensation 96.6% 102.3% 5.7 pts Specialty 87.2% 90.2% 3.0 pts
Slide 122: Exchanges added USD 782m over last 18 months
The Exchanges added USD 782m over the last 18 months and USD 320.4m through June 2005 YTD YTD June 2005 June 2004 in USD millions 5'000 40% Net Underwriting Gain 296.0 67.6 4'000 38% YTD Surplus Change 320.4 231.3 3'000 36% 12-month gain 550.6 2'000 34% Ending Surplus 4,466.2 3,915.6 1'000 32% Surpl
Slide 123: Quota Share Reinsurance Results – BOP Impact
Quota Share Reinsurance Results – BOP Impact in USD millions 2003 2004 June 05 GWP 3,175 3,128 1,208 BOP 115 224 113 Combined ratio 98.7% 96.0% 94.3% Gross written premiums Combined ratio 3'500 100% 3'000 98% 2'500 96% 2'000 1'500 94% 1'000 92% 500 0 90% 2003 2004 YTD June 2003 2004 YTD June 2005 20
Slide 124: Summary of quota share reinsurance arrangements
Summary of quota share reinsurance arrangements with Zurich • APD • Implemented in 1997 @ USD 2bn • Reduced to USD 1bn in 2004 • Only Physical Damage • All-Lines • Implemented in 2002 as a 10% Quota Share • Increased to 12% All Lines in 2005 • Covers all lines of business • Auto Personal • 20% quota
Slide 125: 99% Combined ratio supports 9.25% growth in premium
99% Combined ratio supports 9.25% growth in premium • Surplus ratio roughly constant @ 9.25% growth and 99% C/R • Quantity and quality of Surplus improves over time • Model is strong and substantial 12'000 40% 10'000 39% 8'000 38% 6'000 37% 4'000 36% 2'000 35% 0 34% 2005 2006 2007 2008 2009 2010 201
Slide 126: Stabilized market share while competitors are slowing
Farmers Exchanges have stabilized their market share and premium growth is increasing while competitors are slowing Market share in % Written premium growth rate Farmers core 29 states WP WP WP 12% Growth Growth Growth HY 2005 2004 2003 10% State Farm 0.2% 2.6% 8.4% 8% Farmers 2.7% 2.6% 2.3% 6% Alls
Slide 127: U.S. market overview
U.S. market overview U.S. P&C industry results 120% 25% 115% 20% 15% 110% 10% 105% 5% 100% 0% 95% -5% 90% -10% 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 Combined ratio NWP growth Source: Insurance Information Institute (III) © Zurich Financial Services
Slide 128: Distribution management of Commercial Lines
Distribution management of Commercial Lines 10% Agent segmentation 5% Winners 80% High Potential • Resource allocation • Compensation • Service 5% Core Base • Same as “Winners” based on their • Manage portfolio to knowledge and desired classes “Need Help” • Ease of doing business capabilities • De-s
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