A.M. Best Co. announced that it has affirmed the financial strength ratings of “A” (Excellent) of Swiss-based Zurich Financial Services Group (ZFS) and its core subsidiaries.
It has also assigned an issuer credit rating (ICR) of “a” to each of these companies “reflecting A.M. Best’s opinion, expressed on the credit market scale, as to the overall ability of ZFS and its core subsidiaries to meet their senior obligations, which are insurance policies; hence both ratings (financial strength and ICR) are at the same level.”
Concurrently, Best affirmed the ratings of “a” and “a-” on the senior and subordinated debt instruments, respectively, issued or guaranteed by ZFS. “The outlook for all these ratings has been changed to stable from positive, reflecting A.M. Best’s opinion that future non-life earnings, at this stage in the underwriting cycle, are unlikely to be supportive of a higher rating level,” said the announcement. Best has assigned an indicative rating of “a” to the forthcoming senior notes issue.
“The ratings reflect the overall improvement of operating performance, excellent business position in selected core markets (Switzerland, Germany, Italy, Spain, United Kingdom and North America), despite slower growth, and excellent consolidated risk-based capitalisation,” said Best.
The rating agency cited two offsetting factors: “the potential for further reserve strengthening and the continuing reliance on the management fee income from the Farmers P&C Group towards overall ZFS earnings.”
The bulletin noted that, as Best had anticipated, ZFS earnings improved in the first half of 2004 to $1.4 billion from $800 million in the first half of 2003. “ZFS’ strict implementation of its aggressive global profit and risk-based capital improvement programmes focused on reducing costs and enhancing efficiency (underwriting and claims management) and by disposing of non-core subsidiaries that did not meet ZFS’ profitability targets,” Best continued. “The effect of the profit improvement programme is likely to continue to be reflected in 2004 and 2005, allowing ZFS to improve on the 2003 operating consolidated return on equity (ROE) of 12 percent. Reported half-year consolidated combined ratio fell by 2.1 percentage points to 96.7 percent and it is likely to be maintained at year-end 2004 as ZFS continues to benefit from disciplined underwriting and its focus on operational efficiency. Increased frequency and severity from catastrophe losses could, however, negatively impact 2004 earnings.”
Best also stressed: “ZFS has a leading profile as a general insurer in its selected core markets (Switzerland, Germany, Italy, Spain, United Kingdom and North America).” Best said it expects “modest consolidated non-life premium growth in 2004 and 2005 following strong growth in 2003 (22 percent),” mainly due to “some softening of premium rates.” Consolidated life premium is likely to decrease by 5to 10 percent in 2004,” as ZFS has reduced its exposure to underperforming life business.
Best also indicated that it “expects retained earnings to further improve ZFS’ level of risk-adjusted capitalization, despite rising interest rates that are likely to negatively affect the prospects for unrealised gains at the level achieved during 2003.” There were improvements in 2003, but ZFS’ net income was impacted by reserve strengthening of approximately $1.9 billion, $800 million of which related to North America Corporate and $700 million related to Bermuda-based Centre Solutions Ltd. Best said it “remains concerned about potential for further reserve strengthening.”
For a complete list of Zurich Financial Services Group’s financial strength and debt ratings, please visit http://www.ambest.com/press/091403zurich.pdf.
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