Zurich Favors Spending Its $3B on Acquisitions; Q3 Net Income Plunges

Zurich Insurance Group would rather invest the company’s $3 billion in excess capital on acquisitions than return the cash directly to shareholders, Chief Financial Officer George Quinn said in an interview on Thursday.

“Obviously we would like to invest in the future of the firm,” Quinn said. “That would influence our ability to grow, generate higher earnings, and those would eventually lead to higher dividends. It’s always the preference to keep the money in the business, and shareholders would have that preference too.”

Zurich’s September decision to drop a bid for U.K. competitor RSA Insurance Group Plc left the company with the surplus cash, prompting speculation on how the company will use it. The insurer expects to provide more details in February, it said in an earnings report on Thursday.

“We always continue to look at the opportunities that are out there,” Quinn said, declining to comment on whether the company has specific acquisition targets. Volumes at general insurance, the company’s largest unit, will probably decline slightly next year, making organic growth less likely, he said.

Asked specifically during an investor call whether he could “make a bold statement” ruling out “a major M&A transaction like RSA,” Quinn responded: “I think we have actually made that bold statement already. That’s what actually happened in September. Given the challenges we face in general insurance, we’ve made it clear that that’s the No. 1 priority for us,” he said, referring to efforts to address underlying performance issues.

“So for me to now turn around and then open up the possibility that we would execute a major acquisition, that would be really odd,” Quinn said, explaining that the choice Zurich faces with respect to the $3 billion is whether deploy it for small bolt-on acquisitions strengthening strategic positions or to return it to shareholders.

(CM Editor’s Note: During a conference call with investment analysts, Quinn made it clear that Zurich would target bolt-on deals rather than major acquisitions. See related quote at right.)

The company will “invest in the markets that we currently sit in,” rather than trying to enter new emerging markets, where it can take a long time to generate returns, Quinn said. Zurich is well-positioned in Latin America and in some Asia-Pacific markets, he added.

“We prefer to invest in our distinctive positions” rather than “sprinkling our capital around the planet,” he said.

Zurich has paid out 17 Swiss francs ($17.05) a share for every year since 2010. Subject to board and shareholder approval, that’s unlikely to change “unless there is a major natural catastrophe that causes industrywide issues or unanticipated, very significant financial-market gyration,” Quinn said.

Third-quarter net income fell 79 percent to $207 million, the company reported on Thursday. Its general insurance unit also reported a combined ratio of 108.9 for Q3. The insurer said it has taken the first steps to improve the profitability of its general insurance unit, including 200 job cuts this year and an exit from part of the U.S. transportation business. It is also considering adding more reinsurance coverage for the unit and may exit a number of underperforming portfolios. The division had an operating loss of $183 million in the third quarter.

*Additional data was added to this story concerning the combined ratio. Accompanying quote from Zurich’s investor conference was also added by Carrier Management.