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Analysts question rationale of Zurich's Australian push

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Analysts question rationale of Zurich's Australian push

Analysts have questioned whether Australia is the right market for Zurich Insurance Group AG to make a big push into following its announced acquisition of Australia & New Zealand Banking Group Ltd.'s OnePath life insurance business.

Zurich announced Dec. 11 that it was buying OnePath for US$2.14 billion, which it said would make it the largest retail life insurer in Australia by expanding its market share to 19% from 7%. The acquisition also includes a 20-year deal to distribute life insurance products to ANZ's 6 million customers.

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Speaking to analysts on a Dec. 12 conference call, Zurich Group CEO Mario Greco said the deal "concludes our growth in Australia and brings us to the position we wanted to achieve there."

The company had been building up its Australian business; it completed the acquisition of Sydney-based travel insurance and assistance business Cover-More in April and bought the life insurance business of Australian bank Macquarie in 2016.

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Berenberg analyst Trevor Moss said OnePath will fit in well with Zurich's existing Australian business and that the Swiss insurer "has acquired a decent-looking asset which takes the company forward strategically." But he added that one question that needed to be answered was whether a leading position in Australian life insurance was compelling for Zurich's shareholders.

"Some companies have been busy disposing of various assets around the world to tighten the focus of the group," he said. "One could argue one of the issues with Zurich has been a lack of focus over the years. This allowed it to get sloppy, which is why it is going through a restructuring of its underwriting now.

"Is widening the focus and getting bigger in Australia the right thing to do? Do you want to own a share in Zurich for being bigger in Australia? That is the debate to be had."

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Bernstein analyst Thomas Seidl observed that 17% of OnePath's book is disability income, or DI, insurance, which he said has had "huge issues in recent years." According to the Australian Prudential Regulation Authority, individual DI insurance country-wide made a loss of A$368 million in the year to June 30.

Reinsurer Hannover Re said in a 2016 report that Australian DI insurance business has run into problems over recent decades for reasons including loose policy wording that means claimants can receive outsized benefits for many years; stiff competition that leads to generous policy terms and pricing conditions; and the ability for claimants to continue receiving payouts even if they are able to resume part-time work.

Seidl said in a note to investors that they "need to get comfortable with the earnings and capital risks of owning a large Australian life business, which has cost reinsurers dearly [in recent years]."

He added in an interview that, "Strategically, one of my biggest questions is: Is Australian life business so attractive and why is Zurich the best owner? ... When you read what the regulators and companies say, it is not an easy sector. It is not like U.K. life where the earnings profile seems a lot clearer.

"Australian life has some segments that are more difficult than others, such as disability and group life, and what we really need to understand is what type of business they have purchased here and what the outlook is for this."

Zurich CFO George Quinn told analysts on the conference call that although OnePath had not avoided the challenges in the Australian disability income insurance market, it had been able to tackle them by repricing the business.

He said: "The DI business has had the challenges that you have seen elsewhere in the market and [OnePath has] addressed them promptly. It hasn't seen some of the significant volatility you have seen more around the group products because it is a much smaller player. We reckon this is a high-quality life business with a good track record and one we would expect to continue into the future."

Quinn added that the "vast bulk" of the acquired business was term life, which he said is where the profitability was strongest, both within OnePath and the market as a whole.