Best Affirms Zurich’s ‘A’ Ratings

A.M. Best Co. has affirmed the financial strength rating (FSR) of “A” (Excellent) and the issuer credit rating (ICR) of “a+” of Zurich Insurance Company, the main operating company of Switzerland’s Zurich Financial Services Group (ZFS) and its subsidiaries. Best also affirmed the “a” ICR of Zurich Financial Services, the ultimate holding company of the ZFS Group and of Zurich Group Holding. In addition Best affirmed the ratings of the debt instruments issued or guaranteed by companies within the ZFS Group. The outlook for all the ratings remains stable.

“The ratings reflect ZFS’ strong risk-adjusted capitalization, in addition to its excellent earnings and business positions in Europe and the United States,” said Best.

The rating agency said it “expects ZFS’ consolidated risk-adjusted capitalization to remain strong in 2006, factoring higher retained earnings partly offset by lower revaluation reserves due to increased long-term interest rates and by the redemption of preferred securities.” Best also indicated that it “expects higher dividends paid to shareholders, thus limiting ZFS’ ability to further improve capitalization through retained asbestos-related reserves in the U.K., although ZFS made an overall small run-off profit on prior year consolidated claims reserves.”

In addition Best cautioned that it “believes that potential for adverse reserve development still exists and will continue to closely monitor this.”

Concerning ZFS’ earnings prospects, Best indicated that it expects them to “remain excellent and to reach approximately $4 billion (compared to $3.3 billion in 2005), translating into a return on equity of 18 percent-19 percent, as non life underwriting income and run-off business earnings are improving, partly offset by lower life investment income and regulatory settlement costs in the U.S. ZFS’ net income already increased by 44 percent to $ 3.3 billion in the first nine months of 2006. This was mainly driven by non-life business, where the consolidated combined ratio improved by 6.1 percentage points to 94.8 percent in the first nine months of 2006 as the hurricane season has been particularly mild in the U.S.

“In addition, the company is benefiting from the continuing focus on underwriting discipline and better distribution efficiencies. In the life sector, new business margins are improving (by three percentage points to 19.3 percent in the first nine months of 2006 on APE basis), mainly driven by the successful reorganization of the U.K. operations. ZFS continues to derive a substantial part of its net earnings (approximately $ 1.2 billion before tax) from management fees of Farmers Group Inc. despite higher income from other business segments.”

Best also noted that “ZFS is likely to maintain its leading position in non life business especially in its core market in Europe (U.K., Germany, Switzerland, Italy and Spain) and in the U.S. despite a competitive environment.” Best expects non life gross premiums written to grow by approximately 2 percent to $34 billion, “driven by new business and higher than expected retained business with regard to global corporate and commercial clients in the U.S.”

However, Best indicated that this growth is “partly offset by softening premium rates in the U.K. In the life business, gross premiums written and unit-linked deposits are likely to increase by approximately 5 percent to $22 billion as a result of higher sales of unit-linked products in the U.K. and Ireland, and specific products for expatriates offered through a ZFS subsidiary on the Isle of Man.”

Source: A.M. Best
For a complete list of Zurich Financial Services Group’s FSRs, ICRs and debt ratings go to: