Zurich Insurance Group AG, Switzerland’s largest insurer, lowered its profit goal as Chief Executive Officer Martin Senn signaled he’s ready to sell some businesses to bolster earnings growth.
Zurich Insurance is seeking a return on equity of 12-14 percent in the three years through 2016, it said in a statement Thursday. That’s down from 16 percent. Senn declined to comment on possible divestments at a meeting with investors about the new strategy.
“These are credible targets,” said Daniel Bischof, a Zurich-based analyst at Helvea with a buy recommendation on shares. “The new strategic targets unveil strong cash generation in the next planning period, which is positive.”
The shares gained 2.2 percent to 250.10 Swiss francs ($277) at 1 p.m. in Zurich. They are up 2.7 percent this year, while the Bloomberg Europe 500 Insurance Index rose 22 percent.
Zurich said new targets through 2016 will include maintaining a “strong capital position” and generating “high levels of free cash flow. It plans to distribute at least $9 billion in cash to the holding company over the next three years, such as in dividends. That’s unchanged from the previous period, said interim Chief Financial Officer Vibhu Sharma.
“This should assure a continued high dividend payout going forward,” said Stefan Schuermann, a Zurich-based analyst with Vontobel Holding AG with a hold rating on the stock. He forecasts the insurer will maintain a dividend of 17 francs.
Cost cuts have already started, according to Senn. The company has eliminated 53 jobs across its general insurance operations in the Middle East, he said.
Zurich said it expects as much as $600 million in restructuring costs over the next 12 months, with two-thirds affecting the global life unit and one-third general insurance.
Senn has been seeking to restore investor confidence in the company’s financial strength following the suicide of CFO Pierre Wauthier in August. While the insurer said last month that third-quarter net income rose to $1.1 billion from $672 million a year earlier—beating analyst estimates—it said targets for its general insurance and home and auto units would be “more challenging.”
The company plans to update investors on the targets every six months, Senn said.
“We are very strong in some areas, but we lack scale or profitability in others,” Senn said in the statement. “We will invest in priority markets but manage other businesses for value. This will mean improving the profitability of certain businesses while we will either turn around or exit those that are underperforming.”
Zurich’s targets previously included a 16 percent operating profit after tax ROE created in 2007—a plan introduced three years later to increase the market share of the Farmers business, which sells U.S. home and auto policies, as well as an improvement in the combined ratio of its general insurance business by 3-4 percentage points relative to global competitors including Germany’s Allianz SE.
The company said that it will miss its three-year targets for the end of 2013 for general insurance and the Farmers unit while achieving goals set for the global life business as well as on savings.
In the future, “investors will own shares in a better, more profitable business,” Senn said.
(Editors: Simone Meier, Steve Bailey)