Eyes on Australia: Zurich Insurance Group

With a significant market share in the Australian individual life-insurance market after recent acquisitions, Zurich Insurance Group (Zurich) is going on a roadshow to Australian and Asian investors towards the end of April. Mathias Meisel, head of capital markets in Zurich, talks to KangaNews about the issuer’s Australian business and its funding plans.

KangaNews Zurich has incrementally increased its presence in Australia in recent years, with the acquisition of Macquarie Group’s life-insurance business in 2016, Cover-More Group in April 2017 and ANZ’s OnePath in December. What is so attractive about the region?

MEISEL Australia is one of our core markets in the Asia Pacific region and for the group. We have a long history in Australia – in 1961 Commonwealth General Assurance Corporation became part of the Zurich Insurance Group. Since then, our Australian business has grown significantly, now employing more than 1,000 people across Australia and New Zealand.

Australia has attractive long-term fundamentals. The country ranks among the top 15 global economies and is well-positioned to benefit from the broader growth in the Asia Pacific region. The country also has a stable and well-established legal and regulatory framework.

KangaNews To what extent has the opportunity to increase Zurich’s presence in Australia been created by the divestment of insurance assets by Australian banks?

MEISEL Our Australian life business has been growing very successfully over many years. Elsewhere, the group has had a lot of success globally through working with top tier bank partners such as Banco Santander across Latin America, Banco Sabadell in Spain and Deutsche Bank in Germany, Italy and Spain.

The decision of some Australian banks to divest some of their insurance assets as part of their efforts to increase their own focus has provided the opportunity for Zurich to increase our presence and bring our global knowledge of working with banks to our new local partners.

KangaNews Do you see growth in Australia as a chance to increase Zurich’s presence in the Asian region?

MEISEL We already have a good presence in the region but especially after the last acquisition Australia will be the most important country in that region in terms of its relative sizing.

KangaNews What plans, if any, does Zurich have for further opportunistic or strategic acquisitions in Australia?

MEISEL We constantly scan the global landscape. If and where a deal makes strategic sense and fits our internal hurdle rates, we will look at it.

Given our overall scale in the Australian market we don’t see any need to strengthen the business through further acquisitions. However, as with all our core markets, we will assess new opportunities as they emerge against both our strategic priorities as well as the strict financial criteria we apply.

KangaNews The three acquisitions give Zurich a 19 per cent individual life-insurance market share, making it Australia’s largest life insurer. What effect does this have on the financial footprint of the global business?

MEISEL The recent transactions will moderately increase our exposure to the Asia Pacific region. As of full-year 2017, the region accounted for roughly 6 per cent of our group business operating profit (BOP). Post synergies and ignoring one-off deal and integration costs we expect the OnePath life transaction to be about 5 per cent accretive to group earnings. This will likely increase the Asia Pacific region share of our group BOP to slightly above 10 per cent.

KangaNews What does the acquisition mean for Zurich’s Australian funding plans? You have scheduled a non-deal Australian roadshow towards the end of April. Presumably this means you are at least exploring the idea of funding the local business in the local currency?

MEISEL We highly value close interaction with our debt and equity investors. While we regularly engage with European debt investors, we would like to broaden this to Australian and Asian investors given our commitment to the region which is evidenced by the recent acquisitions.

For the roadshow we are interested in a two-way dialogue where we present the investment proposition Zurich has to offer and understand investor interests.

We are very interested in the local Australian market and would like for the local market to reciprocate by embracing us and the quality and global diversification that we bring.

KangaNews How has Zurich’s Australian business been funded historically?

MEISEL The Zurich Australian business has been largely funded with equity and debt from the group, as well as via reinvestment of profits earned in Australia.

KangaNews The OnePath acquisition isn’t expected to complete until November this year – subject to regulatory approval. What does this mean for your funding plans specifically in terms of the timeline?

MEISEL We intend to fund the acquisition through a combination of internal resources and senior debt in the course of this year.

KangaNews How large is Zurich’s funding need likely to be on an annual basis for the Australian business and with what frequency are you likely to come to market?

MEISEL We have around US$11 billion of group debt, of which some US$1-3 billion matures and/or is callable every year On maturity or when called we tend to refinance that debt, although refinancing doesn’t necessarily occur in equally spread proportions over time. Basically, if you look at the maturity profile of our outstanding debt you get a rough idea of what we tend to refinance and by when (see Chart 1). Then deal situations like M&A and other activities may add or change that general profile.

CHART 1: ZURICH INSURANCE GROUP DEBT MATURITY PROFILE

2 Maturity profile based on first call date for subordinated debt and maturity date for senior debt

Source: Zurich Insurance Group 17 April 2018

As for the Australian business, we do not expect to require further funding beyond what we are considering for OnePath. However, we will maintain a certain gearing related to our capital deployed in Australia. This will make a recurring refinancing of debt instruments very likely, also if sensible in the AUD debt market.

It’s hard for us to commit to a specific frequency in terms of future issuance because we fund on a global basis for the entire group. But very roughly speaking, if we would enter the local market, investors could expect to see us in that market every few years.

KangaNews What are your thoughts on the value of establishing an Australian dollar domestic issuance programme? We have seen a number of global financial institutions issuing AUD off EMTN programmes in recent times – is it necessary to have a domestic programme?

MEISEL We have an EMTN programme but to be able to reach a broad domestic investor base we feel it’s important to also be able to issue in Kangaroo format. Having said this, we are open to looking at alternative market structures.

We have looked at the advantages and disadvantages of setting up a new Australian wholesale debt-issuance programme, as opposed to issuing off an existing EMTN programme using a long-form pricing supplement. Recently, we added an Australian issuer to the EMTN programme, which provides us with sufficient flexibility to be issuing in Kangaroo format using a long-form pricing supplement, at relatively short notice, should the need or opportunity arise.

KangaNews QBE very successfully issued US dollar AT1 securities in and Asian-focused deal last year. What role do you see Asian investors playing in funding the expanded Zurich Australian business? Is additional-capital issuance likely to be on the cards?

MEISEL We understand that in recent Australian dollar benchmark senior financing a meaningful portion has been allocated to Asian investors. We ourselves have benefited significantly from Asian investor demand in our USD issuances over the last few years. In light of this, we also intend to conduct investor marketing in the Asian region. While we hope the bulk of the funding for the Zurich Australian business to come from the domestic investor base, we very much welcome the demand and diversification from Asian accounts.

As a group we also issue capital instruments in debt format. This is done on a group level. It’s a possibility we may contemplate this type of issuance in Australia but initially we would like to focus on the senior market.

We think we offer real value in terms of credit quality and global diversity. There are not many non-bank names in the financial industry with a Swiss home base and such a diversified global setup as the Zurich group. Given the rather concentrated and bank-weighted nature of the Australian debt market, we hope Australian investors appreciate the very rare diversification opportunity that we bring combined with the high franchise and credit quality that they expect.

KangaNews The other notable facet of the QBE AT1 deal was that it was a green bond. Zurich is a market leader in sustainable finance including as an investor – but could green and/or social bonds be an option for funding the Australian business?

MEISEL Zurich is committed globally to maintaining a green footprint and acting in a socially responsible manner. We monitor the market for green and social bonds but we don’t yet have any specific plans to be issuing these types of bonds. We would be in a position to issue such instruments, but other than just putting a label on a bond there also needs to be additional benefits for issuers and investors. As we monitor the markets, if and when such a value opportunity arises we would consider issuing such instruments.

KangaNews What does the growth in scale mean for Zurich as a fixed-income investor in Australia? Will the firm be more prominent, including as an active investor on its own account?

MEISEL The increased scale will better position Zurich to improve our profitability in what is expected to become a more competitive market with fewer and larger participants. The level of our investments will increase accordingly.

KangaNews Does Zurich have any plans to acquire any life insurance businesses in New Zealand and if so what does this mean for its capital markets footprint in the New Zealand dollar market?

MEISEL As a general principle, as a group we don’t comment on our M&A strategy for specific markets, nor do we need M&A to achieve our group targets. Zurich is a financially strong company with the ability to invest.

As a matter of course we continuously scan the market globally to assess if there are potentially interesting opportunities, which we would explore in our usual disciplined manner. Any opportunities would have to be aligned to our strategic priorities and fit culturally within the Zurich group, while also adding value to our shareholders by achieving our group hurdles.

KangaNews Do you have any final message for Australian and other investors you will be meeting on your upcoming roadshow?

MEISEL We are very much looking forward to visiting Australia. We have been invested in the country for a long time so it would now be a natural step for us to enter the local debt market. We bring a lot of the ingredients for investors to be happy to embrace us and we are very much looking forward to meeting investors and take their feedback on board in shaping our issuance plans.