Standard & Poor’s Ratings Services has raised to “AA-” from “A+” its long-term counterparty credit and insurer financial strength ratings on the various operating entities of Swiss-based Zurich Financial Services (collectively ZFS), including the members of the Zurich U.S. Intercompany Pool (ZUS). S&P also raised its short-term counterparty credit rating on various operating entities to “A-1+” from “A-1”. In addition S&P raised the counterparty credit rating on the intermediate holding Zurich Group Holding to “A” from “A-.” The outlooks on all entities are stable.
“The upgrade reflects the better-than-expected major and sustained improvements in ZFS’ operating performance, strong and credible management commitment to value creation combined with a successful execution track record, and a positive impetus from a continuously improving enterprise risk-management program,” explained S&P credit analyst Hiltrud Besgen. The ratings also reflect ZFS “very strong competitive position and increased certainty about the adequacy of ZFS’ overall reserve position.”
S&P cited “a capitalization below that commensurate with the current rating level, ZFS’ significant exposure to volatile industrial line business, and the strategic challenge to achieve profitable growth in the saturated European personal line business and in selected new emerging markets,” as “counterbalancing” factors.
Besgen indicated that the stable outlook reflects S&P’s “expectation that ZFS will maintain a very strong profitability reflected in a ROE (after tax) of close to 16 percent in 2007 and 2008. This view is based on management’s commitment to value creation through underwriting rigor, efficiency improvements, and the realization of meaningful growth in selected European personal line business segments and emerging markets.”
S&P expects a non-life combined ratio in a range of between 95 percent and 97 percent over the cycle and ROR that should exceed 10 percent. Furthermore, profit contribution from life insurance should continuously improve based on an operating return on embedded value of well above 10 percent and a new business margin exceeding 2.5 percent of the present value of new business premiums. Capitalization is expected to remain at a strong level, benefiting from retained earnings. Reserves should be maintained at least at an adequate level. Risk-management practices are expected to be further enhanced.
In conclusion, S&P said that, “the prospect for further upward potential is remote at this stage. A negative outlook could be considered, in case of a major deterioration of earnings or capitalization, or if ZFS failed to meet expected operational improvements.”
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