Zurich turnaround plan ‘well on track’, CFO tells investors

George Quinn, group CFO at Zurich, has told investors and analysts that the insurer is “well on track” to meet the financial targets contained within its stringent turnaround plan, instigated by Mario Greco after he returned to take charge in May 2016. Mr Greco was a popular appointment among investors following his success at Generali. Zurich suffered a torrid time in the couple of years leading up to his appointment and was forced to post two profit warnings within the space of four months, prior to him coming on board. The former Global Corporate business was partly to blame for the poor results as big reserve additions were needed for liability business in particular. This unit was merged back into the main business as part of the recovery plan. Mr Greco detailed the financial targets in November 2017 within a new three-year plan. He committed to net savings of $1.5bn from the 2015 basis by 2019. Mr Greco said the savings target would be delivered mainly through a “comprehensive review” of IT systems and contracts, and shared-services procurement processes. These changes would allow Zurich to target a business operating profit after tax return on equity (BOPAT) in excess of 12% starting in 2017, and growing in the following three years even with a higher equity base resulting from planned asset allocation changes. The group aimed to generate cash remittances in excess of $9.5bn and, at the same time, retain its capital position. Given the scale of the problems within the Global Corporate business and decision to close the dedicated unit, some risk managers and brokers were clearly worried about Zurich’s future commitment to this section of the market. Mr Greco assured investors that the book would be sorted out and underwriting discipline strengthened to deliver an acceptable combined ratio in future. But at the same time, he reassured customers and brokers that the multinational programme business would remain core for Zurich. “The group will continue to build on its distinct capabilities in the management of international programmes for large multinationals. This will be supported by improved global capabilities, such as the creation of its global specialties team, and increased accountability in customer-facing businesses,” he said. “The group will enhance underwriting performance to improve profitability in commercial through more disciplined underwriting tools, through initiatives to reduce portfolio volatility by limiting risk exposures and through talent management initiatives, training and career development,” added Mr Greco. Mr Quinn updated investors and analysts on progress of this ambitious plan at the recent Bank of America Merrill Lynch 23rd Annual Financials CEO Conference in London on 25 September. The CFO said the group is “well on track” to deliver its group financial targets on the back of its “uniquely” diversified business, strong franchises and well-balanced access to distribution, backed by a strong balance sheet. He said that reduced expenses, together with a changing business mix and effective use of reinsurance, are improving both the level and variability of the group’s P&C performance. The numbers backed up Mr Quinn’s bullish claims. For full-year 2017, the BOPAT, excluding unrealised gains and losses and after adjusting for the hurricanes of that year, was 12.1%. The half-year 2018 BOPAT was 12.3%. The target was greater than 12%. The expense savings of $1.5bn by the end of 2019 are actually ahead of schedule, explained Mr Quinn. Full-year 2015 was the cost base, with a total $10.3bn. Of this,11% were group costs, 59% business unit costs and 31% operations costs. Up to half-year 2018, some $900m of costs savings have already been achieved, of which 25% is attributed to group, 36% business units and 39% operations. Of the $600m still to go, Mr Quinn explained this will comprise a further 17% from group, 41% from business units and 41% from operations. Mr Quinn also explained that at the same time, the “rebalancing” in the P&C portfolio is supporting an improvement in the combined ratio. For full-year 2015, the combined ratio was 103.6% with an accident-year loss ratio – excluding catastrophes at 3.5% – of 68.2%. The full-year 2016 combined ratio was 98.1%, with an accident-year ratio of 65.7%. The full-year 2017 combined ratio was 98.2%, with an accident-year ratio of 64.8%. The half-year 2018 combined ratio was 97.5%, with a 64.5% accident-year loss ratio. Mr Quinn explained that large loss volatility has reduced significantly, by some six points, when comparing the second quarter of 2014 up to the last quarter of 2015 with the period from the first quarter of 2016 up to the second quarter of this year. This rebalancing has seen quite a big shift from liability business towards specialty business, as his figures revealed. For full-year 2015, the P&C book comprised 15% specialty, 28% motor, 27% property, 21% liability and 10% workers’ compensation. For half-year 2018, the mix was 20% specialty, 27% motor, 27% property, 16% liability and 9% workers’ compensation. Zurich’s capital position is also improving, as demonstrated by Mr Quinn’s figures. The Swiss Solvency Test position stood at 185% in 2012 and rose to 216% for the full-year 2017. And the group has managed to continue to deliver “attractive” payouts to shareholders during this phase. It paid out $3.9bn in 2015, $2.8bn in 2016 and $3.7bn in 2017. Part of this release has been enabled by extracting capital from non-core portfolios and returning $3.8bn to shareholders, explained Mr Quinn. In 2017, for example, Zurich sold its P&C business in the Middle east and Taiwan. This year, it has sold a Singapore Life portfolio and Endsleigh, the UK affinity broker, among other deals. The good news for customers and brokers, however, is that such disposals do not appear to represent a worrying retrenchment and retreat by one of the world’s leading insurance groups. Zurich has also made some interesting acquisitions in recent times. The insurer has just revealed that it has entered into agreements to acquire 80% of PT Asuransi Adira Dinamika (Adira Insurance), a top-ten P&C insurer in Indonesia, from PT Bank Danamon Indonesia and a minority investor. This means that Zurich will become the largest foreign P&C insurer in Indonesia. The transaction “reinforces Zurich’s strategy of achieving positions of scale in target markets”, stated the group. This followed the news in February that Zurich had entered into an agreement to acquire the operations of QBE in Latin America for a total aggregate price of $409m. That deal makes Zurich the leading insurer in Argentina, the number three insurer in Ecuador and bolsters its existing position in Brazil, Colombia and Mexico. The three-year turnaround plan is not complete yet of course, and who knows what catastrophe may lie around the corner to wreck everyone’s plans? But based on Mr Quinn’s figures and the recent results posted by the group, it does seem to be well on track. If the performance of the share price since Mr Greco’s arrival is a good measure, then he and his team must be doing pretty well. On 28 April 2016, a few days before Mr Greco took the helm, Zurich’s share price was CHF217. On 1 October this year, it stood at a far healthier CHF311.20.

Zurich turnaround plan ‘well on track’, CFO tells investors

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