insurer's risk A Bold Gamble for Zurich Insurance

Conservative Swiss insurance giant Zurich is contemplating a takeover of Britain’s RSA, but it’s a high-risk deal that may not pay off. Germany’s Allianz, Europe’s largest insurer, is unlikely to respond.
Is it a sure thing?

Zurich Insurance Group has long been a quiet giant of the industry. Now it looks like the giant might be waking up.

Zurich, Switzerland’s largest insurer and in the world’s top 20, is making an aggressive play for Royal Sun Alliance, or RSA, Britain's second-largest property insurer.

The potential €7.7 billion deal would be one of the largest in Europe in recent years and has some wondering whether a wave of consolidation might soon be in the cards for an insurance industry that has struggled to turn a consistent profit in the recent years of record low interest rates.

But Zurich’s new bravado is unlikely to provoke a reaction from Germany’s Allianz, Europe’s market leader, or other major rivals, analysts say.

The Zurich share has been under pressure ever since the potential transaction was first mentioned. This will probably serve as a warning to other insurance executives that the market does not take a positive view of these kinds of takeovers. Andreas Schäfer, insurance analyst

Perhaps that’s because some analysts worry Zurich might be shooting itself in the foot rather than building a new industry behemoth. Shareholders have responded to the RSA takeover news by pushing Zurich’s share price down to its lowest value this year.

"The Zurich share has been under pressure ever since the potential transaction was first mentioned," said Andreas Schäfer, an insurance analyst with Germany’s Bankhaus Lampe based in Düsseldorf. "This will probably serve as a warning to other insurance executives that the market does not take a positive view of these kinds of takeovers."

That kind of tough scrutiny is new for Zurich’s chief executive, Martin Senn, who took over the company’s management in 2010.

Zurich’s chief executive has long preferred to maintain a low profile for the company, about half the size of high-profile rivals like Germany’s Allianz, Europe’s largest insurer by market capitalization.

He abhors headlines like the ones that appeared in the summer of 2013, when the suicide of finance chief Pierre Wauthier rocked the company, as Mr. Wauthier’s family accused then-chairman Josef Ackermann of an overly aggressive leadership style.

Mr. Senn prefers to let the numbers do the talking. With a market value of €37 billion, or $43 billion, as well as €36 billion in net premiums and 55,000 employees worldwide, Zurich Insurance Group has long been among the  insurers most valued by shareholders.

Instead of promoting wild growth, he has preferred to stock up capital reserves and market the Zurich share as a reliable provider of dividends. The distribution of 17 Swiss francs (€15.68) per share, unchanged since 2010, is considered sacrosanct.

The strategy has made the company’s shares popular with investors. Zurich’s price-to-book ratio, a financial measure of the value of its shares compared to its assets, is 1.3 percent. That’s higher than Allianz, for example, which has a relatively undervalued stock of 1.1 percent.

But now it seems the Zurich boss is preparing to cash in on his prudence and popularity. It’s a gamble that has been met with a muted reaction by shareholders, who worry the new venture might yet blow up in his face.

Zurich's intentions to acquire RSA were first reported about a month ago. In a statement on Tuesday, Zurich raised the stakes by announcing it had presented RSA management with a "proposal" for a takeover bid.


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The Swiss company is now offering 550 pence per RSA share, a markup of about 25 percent over the share price four weeks ago.

The RSA board declared that it was "willing" to accept the possible offer if further conditions were met, but both companies have been tight-lipped on what those conditions are. Zurich has until September 22 to decide whether to submit a binding offer, abandon its bid or request another deadline extension.

With about €9 billion in net premiums, RSA is less than a third the size of Zurich. Yet the bid is worth the equivalent of €7.7 billion and would make it one of the largest European company takeovers this year.

At first glance, Britain’s RSA is a good fit for Zurich. The acquisition would make the Swiss insurer a top player in the British market, strengthen Zurich in the lucrative Scandinavian market and allow it to expand its presence in South America, especially in Argentina.

"From where we stand, the takeover price still seems okay," said Georg Marti, an analyst with Zürcher Kantonalbank. One of the problems, he added, is that Zurich would have to cut the company’s combined costs by at least £400 million (€544 million) to make the deal pay off.

Such “synergies” amount to about 7 percent of the takeover bid – a substantial sum. Especially in the United Kingdom, where Zurich already has a strong presence, this would likely mean layoffs.

The Zurich foray has raised some question of whether a wave of consolidation might break out in Europe, much as it has in the United States in recent years. But that seems unlikely for now.

"I do not expect to see a wave of consolidations in Europe, as well," said Mr. Schäfer of Bankhaus Lampe. "Most insurance companies, like Allianz, Munich Re and Axa, are not in any hurry to make any moves."

Allianz chief executive Oliver Bäte recently stepped on the brakes, at least for larger transactions. His last big deal came in 2013.

Video: Zurich Insurance's CEO, Martin Senn, on half year results 2015.

Nor are any major acquisitions in line for Munich Re, the world’s largest re-insurer. Nikolaus von Bomhard, head of Munich Re, has said he could imagine strengthening direct insurance subsidiary Ergo with an acquisition or acquiring smaller specialty providers in the reinsurance business, but nothing of the scale that Zurich is now aiming for.

In other words, there is currently no one in sight who is interested in challenging Zurich boss Mr. Senn over the RSA deal. Mr. Schäfer suggests the muted reaction of shareholders explains why others are not likely to respond with deals of their own.

That reluctance contrasts with the United States, where a number of insurers and reinsurers have merged recently. The most sensational deal was the takeover of U.S. insurer Chubb by ACE for about $28 billion, creating the world's fourth-largest insurance company, after AIG, France’s Axa and Germany’s Allianz.

Despite these reservations, Zurich’s new aggressive bid will be welcomed by some in the company as a sign that it might finally shed its conservative image. Former Zurich Chairman Josef Ackermann, who stepped down in 2013, isn't the only one who felt that Zurich isn't taking sufficient advantage of the strength of its capital resources.

Much to Mr. Ackermann's displeasure, the mild-mannered Mr. Senn lost out to German insurance giant Allianz in the battle over the insurance division of Turkish bank Yapi & Kredi back in 2013.

Mr. Senn has never reeled in such a big fish. His predecessor James Schiro completed the company’s last major takeover when he acquired auto insurer 21st Century six years ago.

Mr. Senn, the chief executive, did not want to be pushed and chose to wait patiently for the right opportunity instead, which he now sees in RSA.

But the deal is neither cut-and-dry, nor is it without risk.


Kerstin Leitel covers banks and insurance companies. Holger Alich is Handelblatt's Switzerland correspondent, covering the financial industry. To contact the authors: [email protected] and [email protected]m