Speculation Grows on AIG Takeover of Zurich

Rumors of a possible takeover of Zurich Financial by U.S. insurance juggernaut American International Group (AIG) gained steam as the Swiss concern’s stock rose sharply last week.

According to Reuters, speculative buying drove Zurich’s stock price up as speculation over whether the company was in takeover talks intensified. Zurich’s shares rose more than 10 percent in response to market talk that AIG was targeting the company.

Following the takeover speculation, Zurich’s stock closed up 10.3 percent, at 160 francs—still a cheap price, according to dealers, noting that the stock has lost more than 60 percent of its value so far in 2002. Earlier in trading, Zurich shares had reached as high as 165.50 francs, a price they hadn’t reached in a month. Swiss traders attributed takeover speculation to Zurich’s cheap shares, good market position, and effective operational structure.

A New York industrial banker, insisting on anonymity, told Reuters that acquiring Zurich would prove a sensible move for AIG—and furthermore that AIG is probably the only company around that could successfully pull it off.

However, AIG is not the first potential suitor for Zurich. Earlier in August, the German insurer Allianz had reportedly considered a bid for Zurich, whose earnings by then had already been adversely affected by reserve shortfalls and decreased value of equity investments. But Allianz had its own complications to deal with: The insurer’s Dresdner Bank unit, Germany’s third largest commercial bank by assets, reported a second quarter loss of 910 million euros, attributed largely to the stagnant German economy and corporate failures related to bad loan provisions.

Zurich shares had been performing better than the European sector as a whole until French insurer Axa posted a smaller-than-expected net profit decrease for the first half of 2002. Furthermore, the French concern’s property and casualty operations grew substantially, which partially offset losses in its investment portfolio. As a result, analysts took the Axa news as an indication of how other earnings reports in the European property and casualty sector would look.

Zurich’s first-half results are due Sept. 5. In early August Standard & Poor’s downgraded its credit outlook on the company to negative, citing the effects of poorly performing equity markets on Zurich’s capitalization. S&P pointed out that the negative outlook does not necessarily indicate an automatic downgrade for the group. The ratings agency noted that Zurich has already reduced its stock market exposure. Because of market volatility and growing investor worries about the company’s financial strength, Zurich held back a bond issue in July that would have boosted capital; the issue would have proven difficult to price and place due to the aforementioned reasons. S&P commented, however, that Zurich is still vulnerable to a prolonged period of stock market weakness.

Speculation as to whether AIG will actually move to acquire Zurich is for now just that. (Neither company would comment on the matter.) According to some analysts, such a takeover could be impeded by Zurich’s capital needs, estimated to be $2 billion just to fortify reserves for increasing claims in the U.S., as well as by concerns over what effects recent flooding in Central and Eastern Europe could have on the company’s reserves. Cash is also needed to grow Zurich’s business and reduce debt resulting from former management’s overreaching expansion efforts. In addition, the company needs capital to cover stock market losses and its exposure to failed companies.

Zurich’s exposure to bankrupt telecommunications group WorldCom alone has cost it $100 million on bonds and shares.

Topics Europe AIG Germany