The insurance company promises investors high returns and dividends over the next three years — by doing what it’s already doing, just a little bit better. Will this work?
The Zurich insurance group has set itself high goals.
More profit and more money for shareholders, little change in direction: The Zurich Insurance Group presented its strategy for the next three years on Wednesday. The ambitious goal of achieving a return on equity of 20 percent is obvious.
However, Zurich wants to achieve these ambitious goals for the period up to 2025 with tried and tested means: it promises “targeted sales growth, disciplined risk selection and cost discipline”. Zurich’s mission remains the same, CEO Mario Greco told investors. We have already weathered tough times in recent years and achieved the latest financial targets despite many adversities. “We know what we have to do.”
In particular, Zurich aims to further reduce the volatility of its earnings in order to meet investors’ expectations of a typical dividend-paying stock. In the past seven years under Greco, the insurance group has already made progress in this regard. First, Zurich sorted out unprofitable insurance covers from property and casualty insurance, and later it sold old life insurance policies with guaranteed interest rates. These tied up a lot of capital, which Zurich can now use elsewhere.
Lots of small steps
But how does the journey continue? Zurich relies on evolution instead of revolution. In life insurance, she wants to make more profits by expanding existing sales partnerships. According to CEO Mario Greco, especially with partners who have a similar customer-oriented culture.
The growth ambitions in property and casualty insurance are greater. In these business areas, the margins in particular should continue to grow. Zurich has recently gradually increased its prices in business with corporate customers and assumes that this will continue to be possible, at least in the near future. With inflation remaining very high in many markets, this pricing power will remain important.
The insurer wants to grow particularly with medium-sized corporate customers, also in order to balance out the existing strength with large customers. Relationships with these, while profitable, also introduce more volatility into Zurich’s numbers.
Business with private customers should also make an important contribution. The insurance group wants to continue to focus on digitization in order to understand customers even better, make them happier and thus retain them in the longer term. From their point of view, Zurich still has a lot of potential for improvement here. It has a large number of customers in the retail sector who have only taken out a single insurance policy with the company. In Germany, such “transactional customers” make up 64 percent of all customers, according to Zurich, for example.
Since 2020, Zurich has also been counting on a revival of the travel business, somewhat anti-cyclically, and has invested accordingly: The in-house travel service provider Cover-More has suffered from the pandemic, but should now benefit from the further opening of the world thanks to these investments.
The US insurer Farmers Exchanges, for which Zurich provides a very wide range of services, is expected to continue growing in the mid-single-digit percentage range. Investments in “technical expertise” should enable growth.
High return targets
The newly targeted return on equity of 20 percent is attracting the most attention. The value is very ambitious. He first recalls the promises made by the big banks in the run-up to the 2008 financial crisis: Josef Ackermann, then head of Deutsche Bank (and later also chairman of the board of directors of Zurich), as is well known, promised a return on equity of 25 percent, which could not be achieved in a sustainable way and the Bank to a daring business policy seduced.
Insurance companies are not investment banks. Nevertheless: For the current strategy period, Zurich had planned a value of 14 percent. It will almost certainly surpass it, but there is still a long way to go before the new target is reached.
The previous 14 percent and the new 20 percent cannot be compared directly: Zurich is currently adapting its financial accounting to the new industry standard IFRS 17. That shouldn’t have a huge impact on the profit numbers, but ceteris paribus it will show lower equity. This, in turn, causes their reported return on equity to increase. The new 20 percent should roughly correspond to a return of 18 percent under the old rules.
Other goals are more comparable: Zurich has promised shareholders a total of 11.5 billion dollars in cash inflows in the current strategy period; the insurer will achieve or exceed this goal. In the next three years, it should now be $13.5 billion, or $4.5 billion a year. Earnings per share are expected to grow 8 percent annually, and Zurich plans to continue paying out three-quarters of its profits to shareholders. This ratio is among the highest in the Swiss market and is one reason why Zurich shares are popular with dividend seekers.
Zurich intends to achieve these goals primarily through organic growth. Further acquisitions are a second priority if Zurich’s capital base continues to be well above its own minimum target (a capital ratio of 160 percent according to the “Swiss Solvency Test”). Greco explains that they do not want to eliminate any weaknesses with any takeovers, but rather, as before, want to strengthen themselves primarily in regions and business areas in which Zurich has already built up a strong position and dedicated teams.
The stock is slightly up
The financial analysts also see Zurich’s goals as ambitious, but take them rather positively; After all, the insurer has kept what it promised in recent years. The shareholders also seem convinced. Zurich shares gained around 1.5 percent on Wednesday morning – in a slightly falling overall market.