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Categorized | Insurance

Zurich boss launches plan to cut costs by $1.5bn


Posted on November 17, 2016

Zurich Insurance’s new chief executive has launched a plan to strip cost and risk out of the business, eight months after he was drafted in to turn it round.

Mario Greco — who joined the Swiss group from Italian rival Generali — told the Financial Times that while Zurich was still a “sound” company, it had lost control of some parts of its business.

Zurich’s net income more than halved last year, partly because of underwriting problems in its US general insurance division.

“What went wrong is that the company had created an excessive cost base,” Mr Greco said on Thursday. “There were a lot of IT projects and a lot of growth projects in a world that was not growing. Complexity grew a lot.”

Mr Greco had already announced plans to simplify Zurich’s complicated organisational structure. On Thursday, he added financial targets. He wants return on equity, which fell to 6 per cent last year, to increase to 12 per cent.

He also plans to cut $1.5bn, or 15 per cent, of the group’s costs between 2017 and 2019.

Analysts at Keefe Bruyette and Woods pointed out that Zurich’s cost base, at 35 per cent of its income, is much higher than the sector average of 25 per cent.

Much of the saving will come from streamlining operations — for example, by reducing the number of data centres the company runs from 70 to eight. Mr Greco did not rule out job losses among the group’s 55,000 employees, but suggested that there would be some “natural attrition” as staff turnover is about 12 per cent a year.

“We have no target for employee numbers,” he said.

Zurich pledged to maintain its dividend at SFr17 per share and, for the first time, gave a firm target on future dividends, saying it would pay out 75 per cent of net earnings to shareholders.

“Zurich is an income stock … and has to remain so,” Mr Greco told investors and analysts at a presentation in London.

This relatively high payout ratio would, he said, leave little spare cash for acquisitions although he added that Zurich remains interested in deals if the opportunity arises and would ask shareholders to finance large transactions if necessary.

However, Mr Greco stressed that the company would not chase growth. “A company like Zurich does not have to chase top line growth ever. We should have targets for profits and loss ratios, but not for growth.”

Zurich’s shares rose 2 per cent in morning trading on Thursday in response to the plan.

Andy Hughes, analyst at Macquarie, said: “They do seem like stretching targets to me. The challenge is whether you believe they can do it, especially in soft market conditions.”

Mr Greco says that his plan is achievable without the need for outside help. “This is an organic, internally driven programme which does not need external support from favourable markets, rates or inflation. It is a low risk plan.”