Zurich will pay $455 million in farmers class action settlement

Zurich Financial Services AG, Switzerland's largest insurer, will pay $455 million to settle a U.S. class action lawsuit related to its Farmers Group unit and incur attorneys' fees of as much as $90 million.

The settlement will cut net income by $295 million in the third quarter, the Zurich-based company said today in a statement. Total post-tax charges related to the settlement will cut shareholders' equity by about 2.40 Swiss francs ($2.49) per share, the insurer said.

The settlement will resolve all claims, dating back to 1999, in an August 2003 lawsuit that challenged management services fees paid by the Farmers Exchanges to Farmers Group Inc., a unit of Zurich Financial. As many as 13 million policyholders may qualify for an average payout of about $35, the company said.

"It is bad news of course, but frankly it is part of the business when being active in a market like the U.S.," Marc Effgen, a London-based analyst with Helvea commented via e-mail.

Zurich Financial fell 0.4 percent to 229.80 francs as of 9:37 a.m. in Swiss trading, paring the stock's gain this year to 1.5 percent and valuing the insurer at 33.6 billion francs.

The company started a mediation process late last year, leading to today's settlement, Zurich Financial Chief Executive Officer Martin Senn said on a conference call today.

'Reputational damage'

Zurich Financial inherited Farmers Group following the merger of B.A.T Financial Services Ltd. and Zurich Insurance Co. in 1998. The company said it may have been difficult to produce all the documents needed to defend itself in the class action lawsuit in the state court in Los Angeles.

Litigation "would potentially lead to destruction of the business and it could have reputational damage to the Farmers Group," said Senn.

Farmers Group charged an average service fee of 12 percent to 13 percent of the premium for managing three exchanges selling policies, said Zurich Financial spokesman Angel Serna.

"The third quarter charge equates to 1 percent off of the book value, whilst the dividend policy remains unchanged so the direct economic impact is limited," Richard Burden, a London- based analyst with Credit Suisse, said in an e-mail.

Farmers Group contributed almost 37 percent of Zurich Financial's first-half business operating profit of $2.29 billion.

(Published by Bloomberg - October 7, 2010)

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