As Zurich Insurance Group AG begins the search for a chief executive officer, investors may need to prepare for more than a new face. An end to the company’s generous dividends could also be on the horizon.
Switzerland’s biggest insurer said it is looking for an “entrepreneurial” outsider with deep experience in the industry to replace Martin Senn, who stepped down Tuesday after six years as CEO. Chairman Tom de Swaan will fill in until a successor can be found.
One of the new CEO’s first challenges will be to boost income. After two years of growth barely above zero, Zurich expects an outright decline in revenue this year.
Shareholders have called for a change in strategy, and Zurich responded by announcing cost cuts and layoffs earlier this year. Still, generating more revenue remains a tall order with prices forinsurance coverage under pressure and low interest rates holding down returns from investments.
The new CEO will have to “review an overly optimistic dividend policy or clearly demonstrate a new strategy to improve cash flows in a challenging environment,” said Stefan Schuermann, an analyst at Vontobel in Zurich. While this year’s payout appears safe, “the mid-term outlook in this regards appears less certain,” he said.
De Swaan said in a call with journalists Tuesday that the company isn’t planning to change its policy of paying “a sustainable and attractive dividend.”
Under Senn, Zurich has maintained a dividend of 17 Swiss francs per share for the past five years and plans to do so again for this year. That works out to about 6.3 percent of Zurich’s share price, the highest yield in the Swiss Market Index of the country’s 20 leading companies, according to data compiled by Bloomberg.
Spare Capital
The new CEO will have some ammunition in the form of $3 billion in excess capital. Zurich would prefer to spend it on internal growth but an acquisition is another possibility, according to de Swaan. The company could also return the money to shareholders — a less desirable option, he said. Zurich said it would elaborate on plans for the money in February, when it presents its full-year results.
“If you continuously signal very high dividends you may deprive yourself of strategic possibilities,” said Daniel Haeuselmann, who helps manage almost 120 billion Swiss francs at GAM Holding, including Zurich shares. “I would expect the company to continue developing globally, to go into new markets and most importantly to continue growing. I don’t just want a high dividend but a growing dividend.”
Last month, the company posted a 79 percent drop in third- quarter profit after booking $275 million in losses from the Tianjin disaster and setting aside $367 million in reserves to cover mainly North American auto and construction liabilities. That led to a $183 million operating loss in generalinsurance and prompted Zurich to abandon its offer for RSA Insurance Group Plc.
Zurich is now revamping its non-life insurance business under a plan that includes job cuts and an exit from some businesses. The company said it will still reach its targets through 2016.