FT LEX – Zurich: bland ambition

Simplicity may be a virtue to new Zurich Insurance boss Mario Greco; ambition certainly is not. On Thursday the CEO, who joined from Generali in March, branded previous growth targets “a mistake” and revealed plans to slim down the insurer and grow its dividend. Cost savings should allow him to achieve this — but do not expect much in the way of earnings growth.

In Swiss franc terms, Zurich has underperformed the FTSE Eurofirst 300 Insurance index by 21 per cent over five years. Blame that on a dividend that has not increased since 2010, volatile revenues and operating costs that grew 9 per cent a year between 2011 and 2015. A series of big claims in US commercial property last year did not help, either; they forced Zurich to drop a bid for UK rival RSA.

This year’s expected SFr17 per share dividend is covered by forecast earnings, unlike last year’s payout. And although $ 500m of restructuring costs will be absorbed over the next two years, Zurich says they will be offset “dollar for dollar” by falling expenses. More cost cuts could support higher dividends. Take 2016’s forecast net income of $ 3.3bn. Assume an additional $ 500m in savings by 2019, taking the total to $ 1.5bn. The additional profit, taxed at 30 per cent, could result in dividend increases of about 8 per cent a year in each of those three years. Any revenue growth in Zurich’s largely western markets could boost that a little more.

Such a high payout ratio carries risk. It would be hard to avoid cutting the dividend if there were a sudden rise in claims. Organic earnings growth, generally correlated to GDP, will be subdued. But the alternatives are worse. Looser underwriting is obviously riskier, while acquisitions are expensive — witness Allianz preparing to return its war chest to shareholders.

In a low-yield environment, that suggests a strong balance sheet and a dividend yield of 6 per cent is just the kind of unexciting, unambitious insurer that shareholders want to own.