Zurich to Cut Costs by $1.5B with Simplification ‘Name of Game’: CEO Greco

Zurich Insurance Group AG plans to cut costs by $1.5 billion from 2015 through 2019 as Chief Executive Officer Mario Greco overhauls Switzerland’s largest insurer and seeks to boost the firm’s dividend.

The new plan replaces a previous goal to save at least $1 billion by the end of 2018. Zurich Insurance will also target a payout ratio of 75 percent of net income after tax, the firm said in a statement on Thursday. A minimum dividend of 17 Swiss francs ($17) a share will be maintained.

“The insurance industry has a cost issue,” Greco said in an interview with Bloomberg Television. “We decided to attack it.” The shares rose as much as 2.2 percent and were trading at 268.4 Swiss francs at 09:34 a.m. in Zurich trading.

Zurich, along with its European rivals, has struggled to improve profitability as lackluster economic growth and record-low interest rates hurt investment income and prices remain subdued in some markets. To boost returns, Greco is selling assets and pushing through changes to the insurer’s organization and management.

“The name of the game there is simplification,” the CEO, who took over in March, said in the interview. The “business has become very, very complicated over the last years and I’m trying to slim it down and make it simple again.”

Zurich CEO Mario Greco
Zurich CEO Mario Greco

Zurich Insurance’s shares had risen 1.6 percent this year before the start of trading on Thursday, compared with a 11 percent decline in the Bloomberg Europe 500 Insurance Index.

The announcement lacks “a clear new strategic direction,” Thomas Seidl, an analyst at Sanford C. Bernstein, wrote in a note to investors. “The new CEO dodges a dividend cut and has raised the cost-cutting target.”

The cuts should boost operating return on equity by as much as three percentage points through 2019, Seidl said, but the cost-cutting measures and charges related to them will leave “very marginal capital flexibility for developing the group.”

The insurer expects to take restructuring charges of $500 million on average in both 2017 and 2018 as the firm reviews its technology systems and procurement processes for shared services, according to the statement. Zurich is targeting an after-tax return on equity of more than 12 percent next year.

“Greco has a mandate to turn around the fortunes of Zurich Insurance after a series of losses dented the company’s share price,” Charles Graham, senior industry analyst at Bloomberg Intelligence, said in a Nov. 11 note. “After taking action to improve underwriting performance, Greco now seeks to make Zurich simpler and more customer-oriented.”

The CEO wants underwriting performance to improve in the commercial business and to improve the firm’s digital offerings. He will also seek new retail partnerships.