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Zurich addresses losses, but planned changes may not be enough

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Zurich Insurance Group Ltd.'s nonlife underwriting results likely will remain under pressure as the insurer continues to make changes to address a string of recent losses, analysts say.

Zurich last week announced that it expected to report a $100 million loss in its nonlife division for the fourth quarter of 2015.

The insurer said that based on preliminary estimates, it expects to report losses of about $275 million from three storms that hit the United Kingdom and Ireland in December, as well as large losses from other natural catastrophe and accident-year claims.

It said that its general insurance unit likely would report a $100 million loss for the fourth quarter of 2015 and said that it had accelerated a cost saving drive.

In a briefing note on Monday, Moody's Investors Service Inc. said it expected Zurich's underwriting results to remain under pressure this year.

“Zurich is also reducing expenses, but the benefits to net income will be offset by restructuring costs,” the New York-based rating agency said.

Moody's said it expects Zurich to incur further restructuring charges in 2016.

“These headwinds will come in addition to the low interest rates, which push investment income downwards and led Zurich to write off around $230 million of goodwill related to its German life business,” Moody's said.

“The persistent occurrence of large losses that have affected Zurich's performance during the year continues to generate concerns about the extent of the problems underpinning the general insurance segment and the effectiveness of Zurich's underwriting risk management framework,” rating agency A.M. Best Co. Inc. said Monday in a briefing note.

“Given the short term nature of the affected contracts, a material improvement in technical results is anticipated during 2016 and beyond, although A.M. Best recognises that remedial actions taken to restore profitability are expected to take time to materialize into a better quality insurance portfolio,” the Oldwick, New Jersey-based rating agency said.

Recent changes to manage structure mean that there may be execution risk associated with the company's turnaround plans, Best added.

Sami Taipalus, an analyst at Berenberg Bank A.G. in London, said Zurich's general insurance business likely will remain weak in 2016 and 2017.

In a Thursday note to investors, Mr. Taipalus said given that many of the general insurance problems are related to “one-off events,” Zurich's management “appears to have concluded that the issues it faces can be managed through rate increases, selective re-underwriting and an acceleration of ongoing cost-cutting.”

But he said Berenberg questions this approach for three reasons: “the persistence of recent adverse large loss experience implies issues with the group's underwriting protocol; reserve development has been choppy for some time, suggesting thin margins; and the 94% combined ratio reported for the bulk of general insurance at nine months benefitted materially from favorable natural catastrophe losses.”

“These issues require more fundamental change than that planned for Zurich in 2016 and could even by aggravated by too aggressive cost-cutting,” he said.