Bloomberg

(Bloomberg) -- Switzerland's biggest insurer, Zurich Insurance, has unveiled a shareholder-friendly shift to a simpler management structure under new chief Mario Greco. That's a positive step. Too bad it's into a brewing storm.

There's certainly a lot to like about Zurich's decision to retreat from the tangled matrix of dual geography and business reporting lines.

The focus is now on a country-by-country, region-by-region approach with a streamlined reporting structure that should ideally make it easier to cross-sell life and non-life insurance in one market -- especially in retail. The creation of a chief operating officer role will also, the company says, help "manage costs."

That's the kind of talk investors would expect from Greco, 56, who was drafted in to overhaul Zurich earlier this year after two straight quarterly losses in non-life insurance and a scrapped bid for Britain's RSA Insurance Group. Greco's previous turnaround job as Generali boss saw him shed assets and clamp down on costs.

So he's the right man for the job. Zurich had already pledged annual savings of at least $1 billion before Greco's arrival; a new structure should help him deliver.

But the scale of the challenge he faces is steep, both internally and externally. Investors should tread cautiously. 

Zurich doesn't stack up well against peers. One point of focus is the combined ratio: a reading above 100 indicates an insurer's not making any money from underwriting because it's paying out more than it's collecting in premiums. Zurich's rose above 100 percent last year. While that came down to 97.7 percent in the first quarter, it's still higher than Allianz' 93.3 percent.

But while other insurers are seeking to merge or cut costs to resist industry pressures, Zurich's internal issues are restricting its ability to compete. Its above-average combined ratio suggests there may be deep-seated underwriting issues rather than just costs that can be taken out. Its bid for RSA failed because claims in its general-insurance unit were too high; the importance and difficulty of solving that internal problem suggests the benefits of deal-making will have to be put off too. 

The external environment is a threatening one. Weak economic growth has depressed insurers' investment returns and hit the pricing growth of the products they sell. Earnings have been helped by a broadly low rate of large natural-catastrophe losses that may not be sustainable, as Bloomberg Intelligence's Charles Graham points out. Both real and metaphorical storms are on the horizon.

The company has so far kept shareholders on board by deciding to maintain its dividend, which is pretty rich -- the stock has a dividend yield of 7.5 percent versus 6.2 percent for the industry. That, along with Greco's arrival and a solid first-quarter performance, has kept them on board. The stock is up 5.2 percent over the past month, better than a peer-group average drop of 2.9 percent.

But t he company's  annual revenue is expected to shrink this year, according to Bloomberg data tracking consensus analyst estimates. On top of that, profitability is below-average, so there are plenty of challenges ahead in protecting the dividend, let alone overhauling the business. 

Zurich trades at a price-to-book discount to peers, 1.1 times price to book versus 2 times for its peer group. That discount is still justified. While Zurich's landed on its feet by taking Greco on board, the scale of the challenge he faces looks pretty daunting. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story: Lionel Laurent in London at llaurent2@bloomberg.net.

To contact the editor responsible for this story: Jennifer Ryan at jryan13@bloomberg.net.

©2016 Bloomberg L.P.

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