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CEO: Zurich Sticks by Tough Criteria in Deciding Whether a Deal is Worth Doing

Source: WSJ - Anita Griel

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Posted on 07 Jun 2012 by Neilson

Zurich Insurance has a reputation of being dull. For an insurance company, however, that's not a bad reputation to have, and, in fact, one that took some hard work to achieve.

Over the past decade the company has turned into one of the world's sturdiest global insurers. Now it is shifting its focus to growth, identifying opportunities in emerging markets and untapped niches in Europe and the U.S.

Zurich emerged from the financial-markets crisis of 2008 unscathed and strong enough to report a $3.7 billion net profit for 2011, even as the industry faced an unprecedented number of costly natural catastrophes, including a devastating earthquake and tsunami in Japan, deadly tornadoes in the U.S. and earthquakes and floods in the Asia-Pacific region.

But at the start of the millennium things looked very different. This Swiss insurer was forced to tap shareholders for cash and spin off its reinsurance operations in a fire sale, after an ill-fated expansion strategy. Zurich brought in a new chief executive, James Schiro, who turned the company around during eight years at the top. Mr. Schiro also coined the phrase, "what gets measured, gets done," to describe his management style of setting specific numerical targets for all managers and asking for monthly progress reports to make sure the company's strategy was being implemented.

Martin Senn, a 55-year-old Swiss, who took the reins at the beginning of 2010, doesn't use the expression, but he still lives by it. Zurich's disciplined approach when it comes to growth through acquisitions is a testament to that.

"You cannot make endless acquisitions. You have to prioritize because you have to be able to digest them," Mr. Senn says. "You have to have the financial resources, but also the human resources, which means there is a limit to how many you can do in a given period of time."

With a market capitalization of $30.13 billion, Zurich Insurance is Europe's second-largest insurer in terms of market value, behind Allianz SE  of Germany with $41.13 billion and ahead of Prudential in the U.K. with $26.65 billion.

Like most Western companies, Zurich Insurance sees the rapidly expanding economies in Asia and Latin America as potential growth areas. As these countries get richer and more people make enough money to afford cars, big-ticket household items and even luxury goods, demand for insurance to protect this wealth is also rising.

Over the past year, Zurich closed a number of deals to expand its presence in Latin America and Asia, topped by the takeover of a majority stake in the insurance operations of Spain's Banco Santander STD +0.88% in Brazil, Mexico, Chile, Argentina and Uruguay for $1.7 billion. Zurich and

Santander have also signed a strategic 25-year distribution agreement. The transaction sees Zurich strengthening its position considerably in the growth market of Latin America, as it gains access to the Spanish bank's network of 5,600 branches in the region and makes Zurich the fourth-largest insurer in Latin America.

The Santander deal was by far the biggest, but the company has concluded six acquisitions over the past two years. Most of them were small, with only the takeover of a Malaysian insurer in 2011 big enough to have the deal value, $109.7 million, disclosed.
Speaking from the company's headquarters overlooking Lake Zurich, Mr. Senn talked to The Wall Street Journal about his company's recipe for successful dealmaking.

"When we are considering a deal, we first ask ourselves, does it make strategic sense? If it is about growth, it usually does," he says. "Then we turn to the business case. This is a tougher decision, because we are working with assumptions. We have to ask ourselves, will we really achieve all the expected synergies to justify the price? We would never compromise on our internal criteria."

Among these exacting criteria is Zurich's long-term target of achieving a return on equity of 16%.

He concedes that there is some consideration as to how fast profit goals must be reached, but says Zurich won't wait too long for a deal to start generating cash and contribute to earnings-per-share growth.

"We typically want to get there within a year," he says. "In the case of Santander, this was a deal that was immediately cash-accretive."

Landing a deal is one thing, executing it another. Whether an acquisition will live up to the acquirer's expectations is something that is only revealed over time, sometimes months, more often years after the deal has been concluded. And many a deal has failed to deliver because management proved unable to integrate two different corporate cultures.

This becomes particularly significant when Western companies attempt to grow in emerging markets where they often operate in societies with very different values, which itself can exacerbate the challenge of integrating the two companies. Before embarking on an acquisition, one therefore needs to make sure that the two companies are operating on similar principles, Mr. Senn says.

"The cultural aspect is the most difficult one to get good judgment on, and it often can be a deal-breaker" he says. Among the questions that need to be asked, is: "Do we have the resources on the ground, together with the acquired company or business, to make that acquisition a success?" Once the deal has been signed, it is important to integrate the acquired company quickly. For this, local staff must be involved from the beginning, which "is very important when you get into other cultural zones," he says.

For Zurich, which has been present in Latin America for more than 50 years and is celebrating the centenary of its U.S. operations, finding this local expertise is usually not a big problem, he says.

Overall, Mr. Senn is pleased with the company's track record when it comes to acquisitions. "That's because we are disciplined before making an acquisition; we are not diving headlong into it and we are not getting deal fever. We're not tending to overpay, because the financials for any acquisition have to meet our internal criteria. This is where the buck stops. We are not going any further just because of the allure of growing into new markets. The economic driver always prevails."

Mr. Senn concedes that the integration of Santander's insurance operations has presented a particular challenge, because they span several countries, each with its own accounting standards and regulations. This led some analysts to express disappointment about the contribution from Latin America during the first quarter, but Mr. Senn says that integration of the business is on track and he expects it to be fully integrated by the end of the third quarter this year.

But while emerging markets are important for future growth, so too are the established markets, Mr. Senn is quick to point out. "The balance is very important." There is lots of room, he insists, to sell more products to more clients.

"I see growth opportunities in the developed world, both in general insurance and in life insurance, by getting more market share through focused market targeting," he says. An example of this strategy is Zurich's plan, as one of the largest corporate business insurers in the world, to increasingly offer the kind of wide-ranging insurance services available to big international organizations to mid-sized companies.

"Now what we haven't done consistently, is leveraging this expertise [with multinational clients] into the next level, to medium-sized companies. These may have global activities, but not necessarily a global brand. We can offer them coverage for anything, starting with political risk all the way through to property and casualty insurance, as well as corporate life and pension insurance for their workforce," Mr. Senn says.

Insuring global companies is a lucrative business and has recently prompted Swiss Re SREN.VX +1.48% —a Swiss reinsurance company, and Zurich Insurance's next-door neighbor—to start offering insurance coverage to large global corporations. Detailing its strategy, Swiss Re said growing that business won't necessarily mean grabbing market share from rivals because the market overall is expanding as companies become more global and risks grow more complex.

Mr. Senn seems unworried about budding competition. "This business needs a serious infrastructure. And once you have that established, the entry barrier is very high because for a customer to move away from this strong relationship is a very serious undertaking. So with that, I feel very good about that."


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