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Zurich Financial's Fallen Star

Investors used to love Rolf H?ppi, chairman and chief executive of Switzerland's Zurich Financial Services Group. During the 1990s, they applauded his ebullience and charisma. His feat: aggressively transforming the once-sleepy 130-year-old Zurich Insurance Co. into a global powerhouse with a growing range of businesses and a reputation for innovation. Zurich's share price surged as H?ppi made deal after deal, boosted returns on equity, and pushed profits up by more than 15% a year. "H?ppi was a star," says Alistair Smith, who follows the company for Fox-Pitt, Kelton Inc., a London securities house owned by Swiss Reinsurance Co. that specializes in insurance. "The markets liked his vision and style."

Not now. Shareholders, analysts, and even competitors shake their heads with a mixture of astonishment and sorrow when asked about H?ppi's performance today. Zurich shares have lost almost two-thirds of their value since the beginning of last year, and investors and analysts say poor management by H?ppi is largely responsible. On Jan. 25, the CEO suffered the ultimate humiliation: After rumors that he was quitting flew around Switzerland's financial community, the company's share price rallied, only to fall back when an official denied them (chart). "The only people who buy [Zurich] shares now are traders speculating on whether H?ppi will go," says Julia M?nchschwander, an analyst at Metzler Bank, a Frankfurt private bank.

No wonder. Zurich issued four profit warnings and endured two management upheavals last year as investment income plunged and costs surged. When annual results are announced on Mar. 21, the company is likely to report a loss of $200 million to $400 million on revenue that analysts expect to total $37 billion. That's a shocking result for investors long accustomed to bumper profits. And it's yet another blow for the image of Switzerland Inc., already tarnished by last year's collapse of Swissair and a slew of problems at companies as diverse as tourist operator Kuoni and engineering company ABB.

But H?ppi has no intention of stepping down. "I'm confident in my ability to manage turnaround situations," he says. The board is backing him--for now. "Rolf can put Zurich back on track," says one director, who admits that the annual shareholders' meeting will be a tempestuous affair.

Certainly, not all of Zurich's problems are of H?ppi's making. The September 11 attack on the U.S. will cost the group an estimated $900 million in insurance payouts, and the sad state of the equity markets cut Zurich's realized capital gains from investments by $2.3 billion in 2001. But critics suspect that Zurich was overexposed to Internet stocks. "If the [investment] operation had been better managed, things wouldn't have been so bad," says a board member at a rival international money manager.

A daring dealmaker, the 58-year-old H?ppi has tripled Zurich's premium income since taking over the chairmanship in 1995, four years after he became CEO. In 1995, he spent $2 billion to buy Chicago asset manager Kemper Corp. Two years later, he raised his bet with the $1.6 billion purchase of 70% of Boston-based Scudder, Stevens & Clark Inc. The ink was hardly dry on that deal when he pulled off the move that propelled Zurich into the big time: its 1998 merger with the financial-services subsidiaries of British American Tobacco Industries (BAT), a London-headquartered tobacco company with large insurance and money-management operations in the U.S. and Britain. By the end of 1998, Zurich was a major player in property and casualty insurance, life insurance, and fund management in Switzerland, the U.S., and Britain. "Not every transaction was a resounding success," admits H?ppi. "But acquiring Kemper and Scudder [and the other companies] gave us the size we needed to do the deal with BAT. They were important stepping stones."

Maybe. But they brought Zurich plenty of problems, partly because they weren't successfully integrated into the group. Kemper and Scudder were merged to form Zurich Scudder Investments--which might have been a good idea were it not for their radically different corporate cultures. Scudder sold no-load funds directly to customers, while Kemper marketed load funds via brokers. Scudder's more aggressive executives quickly gained control, leading to an exodus of Kemper's money managers and customers. In 2000, a boom year for many rivals, customers yanked $5 billion from ZSI, which has about $300 billion in funds under management. Then they pulled an additional $2 billion in the first half of 2001.

Meanwhile, in the late 1990s, problems were surfacing at headquarters. Expenses were mounting faster than income as the company added more and more head-office staff to oversee its expanding empire. Managing the sprawling group got even harder, say critics, because H?ppi wasn't willing to delegate, leading several senior executives to jump ship last year. The biggest loss was the departure on Dec. 10 of his heir apparent, Constantine Iordanou, a strong-willed American known for his hands-on style. He had turned around Zurich's flagging U.S. operations by taking a scalpel to costs; the hope was that he would do the same at the head office. But H?ppi didn't give him enough free rein, say some insiders.

H?ppi argues that a radical restructuring, cost-cutting, and divestment plan under way for a year will overcome many of the group's problems. Since September, H?ppi has raised $5 billion by selling ZSI, with the exception of its British operations, to Deutsche Bank; reinsurance subsidiary Converium through an initial public offering; and Zurich's 21% stake in Swiss insurer B?loise. Last July, H?ppi combined the group's 11 global and regional businesses into five units. After Iordanou quit, he appointed two chief operating officers: longtime Zurich stalwart Peter Eckert, who would handle the day-to-day operations; and James J. Schiro, a former CEO of PricewaterhouseCoopers, who would take charge of finance. "This is absolutely a delegation of power," he says.

Investors cheer many of these moves. In particular, they welcome the Deutsche deal because it strengthens Zurich's position in the Continental European market, where the enormous potential of managing pensions and investment-linked savings is only now beginning to be realized. As part of the bargain, Zurich will acquire Deutsche Herold and other Deutsche insurance operations. The deal's arrangements also call for Zurich to distribute its products through Deutsche's branch networks while giving it continued access to Scudder's investment products.

H?ppi's star has fallen so low that few investors expect Zurich to regain its momentum as long as he is there. But Zurich's boss isn't giving up. On Jan. 26-27, he was grilled at a no-holds-barred meeting of Zurich's 1,200-member Swiss sales force. Attendees say that the group was won over by H?ppi's optimism and enthusiasm. It might take more than that, though, to restore Zurich's reputation as a firm of, well, Swiss reliability. By David Fairlamb in London

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