Zurich Insurance's Aussie Deal Paves Way for Higher Dividend

(Bloomberg) -- Zurich Insurance Group AG’s decision to acquire the life-insurance businesses of Australia & New Zealand Banking Group Ltd. should help Switzerland’s biggest insurer fulfill its ambition to increase its dividend.

Already famous as a dividend stock, Zurich signaled last month that it wanted to boost payouts to investors. The A$2.85 billion ($2.2 billion) deal for OnePath Life will be earnings-accretive from the start and increase the firm’s return on equity, the Swiss company said on Monday -- potentially helping Chief Executive Officer Mario Greco realize his goal.

“As ever with Zurich, the focus will be on the impact on the dividend,” said Paul De’Ath, an analyst at RBC Capital Markets in London. “The potential to grow the ordinary dividend is only enhanced by this transaction. There could be scope to fund this transaction and also leave room for special dividends, should Zurich decide this is the best use of capital.”

Zurich Insurance has been restructuring under Greco, who has sold assets, cut jobs and lowered the insurer’s risk profile after losses in its North American auto business prompted the company to abandon a high-profile takeover bid for RSA Insurance Group Plc.

The Swiss insurer has also been on an acquisition spree: as well as the ANZ deal, it agreed to buy Macquarie Group’s life unit in March 2016, the same month Greco started as CEO, and took over Australian travel insurer Cover-More Group Ltd. earlier this year.

Expanding Business

“It’s positive to see Zurich continue to expand its life business,” Bloomberg Intelligence analyst Charles Graham said. “The deal builds on their strength in bancassurance and is consistent with the group’s focus.”

Greco said on Nov. 15 that he’s confident that improving performance will allow Zurich to “increase returns to our shareholders.” At the time the company confirmed it would maintain a minimum dividend of 17 Swiss francs a share.

In his statement on the latest deal, the CEO said the acquisition will “support dividend growth beyond that implied by our existing plan.” The OnePath Life portfolio “provides a highly cash-generative business that will add to our cash remittances” and increase Zurich’s business operating profit after tax return on equity, or BOPAT ROE, target by 50 basis points, Greco said.

When contacted by Bloomberg News, a spokesman for Zurich said that December is not the right time to talk about dividends.

‘Cash Generative’

“We see this acquisition as a welcome cash generative add-on for the Zurich group, somewhat lowering future earnings volatility and improving the group’s diversification and dividend-paying profile,” Stefan Schuermann, an analyst at Vontobel, said in a note. He confirmed his firm’s hold rating on the stock.

The deal is expected to close by the end of next year and will make the firm the largest retail life insurer in Australia, with a market share of about 19 percent.

Zurich will use a mixture of cash and senior debt to fund the purchase, which will have a “modest” effect on the company’s capital position, according to its statement. OnePath Life had net earned premiums of $1.1 billion in the 12 months through September and a net profit after tax of $142 million. The strong cash flows will support future dividend growth, according to the statement.

As part of the deal, Zurich will enter into a 20-year distribution agreement with ANZ in Australia to distribute life-insurance products through bank channels. That gives the insurer access to six million potential customers.

Zurich’s shares were little changed as of 2:15 p.m. in the Swiss city, while ANZ rose 1.1 percent in Sydney trading.

For ANZ, the deal makes the bank the latest of Australia’s biggest lenders to exit the life-insurance industry, which has been hit by rising claims, anemic investment returns and policy cancellations. National Australia Bank Ltd. sold 80 percent of its life unit to Nippon Life Insurance Co. for A$2.4 billion in 2015, and Commonwealth Bank of Australia agreed to sell its life-insurance arm to AIA Group Ltd. for A$3.8 billion in September.

“ANZ’s portfolio of non-traditional and profitable retail products fits well with Zurich’s strategy to focus on capital-light protection and unit-linked business,” Greco said. “Furthermore, it strengthens the group’s position in Asia Pacific, while building on our strong bank distribution capabilities.”

--With assistance from Julie Edde

To contact the reporters on this story: Jan-Henrik Förster in Zurich at jforster20@bloomberg.net, Ruth Liew in Sydney at rliew6@bloomberg.net.

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Paul Armstrong, Keith Campbell

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