Best Revises Zurich Outlook to ‘Positive,’ Affirms ‘A’ Ratings

December 12, 2007

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 (ZIC), the main operating company of Swiss-based Zurich Financial Services Group (ZFS) and its subsidiaries. Best also revised the outlook on the ratings from stable to positive, and affirmed the ICR of “a” of Zurich Financial Services, the ultimate holding company of the ZFS Group, and of Zurich Group Holding (ZGH).

Concurrently, Best affirmed the ratings of the debt instruments issued or guaranteed by companies within the ZFS Group. The outlook for the ratings of the main operating company, ZIC, and the debt instrument issued or guaranteed by ZIC and its subsidiaries has also been revised to positive from stable. The outlook for the ratings of ZFS and ZGH and the debt instruments issued or guaranteed by the holding companies remains stable.

In addition Best upgraded the ICR to “a+” from “a” and affirmed the FSR of A (Excellent) of Universal Underwriters Insurance Company (Kansas) and Universal Underwriters of Texas Insurance Company (Texas). The outlook for both ratings has also been revised to positive from stable.

“The ratings reflect ZFS’ strong risk-adjusted capitalization, excellent earnings and business positions in Europe and the United States,” said Best. “The positive outlook on ZFS’ rated operating companies reflects A.M. Best’s view that the ratings could be upgraded if ZFS’ improvements in its underwriting performance remain sustainable, and ZFS Enterprise Risk Management continues to provide enhancement to the company’s risk profile.”

Best also indicated that it “expects ZFS’ consolidated risk-adjusted capitalization to remain strong in 2007, factoring higher retained earnings that partly offset the share buy back earlier this year, lower revaluation reserves due to increased long-term interest rates and higher goodwill from recent acquisitions.” The rating agency also foresees higher dividends paid to shareholders, “thus limiting ZFS’ ability to further improve capitalization.”

Best also noted that in its opinion “ZFS has been pursuing a more cautious reserving policy since 2004, leading to a constant positive run off on a current year basis, while prior year development has become slightly positive.” Best said it would “continue to monitor closely any potential for adverse reserve development on long-tail claims for prior years, although this is likely to be offset by redundancies of the more recent underwriting years.”

Earnings are expected to remain excellent and to reach approximately $4.8 to $5 billion (compared to $4.5 billion in 2006), translating into a return on equity of 20 to 22 percent, “due,” Best said, to “positive non life underwriting results and positive earnings from its run-off business. ZFS’ net income already increased by 25 percent to $4.2 billion in the first nine months of 2007. This was mainly driven by higher investment income, Center run-off business and higher profit contribution from the life business. Non life underwriting result was slightly lower compared to 2006.”

Best also noted that the “published combined ratio deteriorated by 2.4 percentage points to 96.9 percent in the first nine months of 2007 as a result of Kyrill and the UK floods (leading to a loss of $761 million net, 3.4 percentage points), whereas the attritional loss ratio remains remarkably stable despite a softening rate environment.”

Best said it “believes that the company is benefiting from the continuing focus on underwriting discipline and better distribution efficiencies. In the life sector, new business margins reached an excellent 24 percent (improving by 4.8 percentage points in the first nine months of 2007 on an annual premium equivalent basis), mainly driven by a strong recovery in Germany and a more efficient reinsurance program in the U.S. protection business. ZFS continues to derive a substantial part of its net earnings (approximately $1.2 billion before tax or 20 percent of total net income before tax) from management fees of Farmers Group Inc. despite higher income from other business segments.

“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 the United States despite a competitive environment.”

In addition Best said it “expects non life gross premiums written to grow by approximately 2 percent to $35 billion, mainly due to exchange rate effects as high growth in emerging markets is offset by softening markets in the North America Commercial and Global Corporate business.

“In the life business, gross premiums written and unit-linked deposits are likely to increase slightly to $22 to $23 billion while remaining stable in local currency as the company is continuing to transfer the Swiss group life business off the balance sheet.”

Best commented that the “upgrade of the ICRs of Universal Underwriters Insurance Company and Universal Underwriters of Texas Insurance Company follows the further integration of these companies to Zurich American Insurance Company (ZFS’ main company in the United States).

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

Source : A.M. Best

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