Allied Zurich hit by asbestos costs

ZURICH FINANCIAL Services, the Anglo-Swiss insurance giant formed out of the $18.7bn (pounds 11.6bn) merger between Zurich Insurance and BAT Industries' insurance operations last year, yesterday blamed the escalating costs of settling asbestos claims as it raised its estimate of the cost of integrating the businesses by $1bn to $2.4bn.

News of the higher charge caught the City unawares. Shares in Allied Zurich, the UK quoted arm of the group, fell 13p to 900p, while Zurich Allied fell Sfr25 to Sfr930.

Andrew Ritchie, insurance analyst at Fox-Pitt Kelton, said: "It is a nasty surprise." But he pointed out that, having taken the hit, the group is unlikely to have to do so again.

The bulk of yesterday's increased merger charge - about $800m - is a result of the new management's decision to set aside further reserves at Eagle Star, the UK general insurer, to cover potential asbestos and pollution-related claims following costly settlements in the UK and US over the past year.

That is on top of the $750m that was added to Eagle Star reserves when the merger was announced, reflecting the more conservative Swiss provisioning policy. The move has doubled non-life technical reserves to $1.6bn. Most of the claims' exposures have durations of 20 years or more.

As with most UK insurers, Eagle Star had been less conservative about provisioning than European competitors.