Zurich Italian sale may foretell further disposals, unleash $7.5bn share buyback

Zurich could unleash huge capital and reward shareholders to the tune of $7.5 billion as it delivers on a vow to unload select capital-heavy assets, a plan  Zurich initiated on Monday (January 3) via sale of the group's Italian back book, investment bank Berenberg said in a note to investment clients.

Zurich freed some $1.2 billion in capital for an 11-percentage point (pps) hike to solvency and called the Italian asset sale a "first step in a series planned to significantly improve capital allocation across the Group."

The second step could be the sale of Australian non-life assets at any point in time, followed by a sale later in 2022 of the German life back book, Berenberg speculates.

An Australian disposal could add a minor 1 to 2 pps to group solvency, but notably remove nat cat risks from the group. A deal on the German life back book could add a whopping 20 pps to solvency readings.

Add it all up, and Zurich could sport an uncomfortably high solvency ratio of 240%, well above the group's stated minimum of 160% and it's 200% "comfort" level, Berenberg analyst Michael Huttner estimated.

That could give Zurich the room for a massive $7.5 billion buyback and still hold its 200% solvency comfort line, Huttner said.

Don't be surprised if shares wait a bit to rally into that incipient story, Huttner notes, telling investors their best entry timing to the scenario would be with a buyback announcement which Huttner would expect at the November 2022 investor day.

The deal to unload the Italian back book not only frees capital on the transfer, but reduces exposure to higher-risk Italian government bonds, Berenberg noted of the deal. Huttner puts the exposure at some $5 billion, equivalent to reducing Zurich's peripheral Europe sovereign debt exposure by 24%.

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