Best Affirms Zurich Ratings; Revises Outlook to Stable

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 Zurich Financial Services (ZFS) and its subsidiaries. Best also revised the ratings to stable from positive.

Best also affirmed the ICR of “a” of ZFS and Zurich Group Holding (ZGH). Concurrently, A.M. Best has affirmed the ratings of the debt instruments issued or guaranteed by members of ZFS. The outlook for the debt instrument issued or guaranteed by ZIC and its subsidiaries has been revised to stable from positive. The outlook for the ratings of ZFS and ZGH and the debt instruments issued or guaranteed by the holding companies remains stable.

Best said the ratings reflect its view that “ZFS’ risk-adjusted capitalization remains supportive of the rating, despite a deterioration in 2008. Other rating factors include ZFS’ robust operating earnings and excellent business positions in Europe and the United States.

However, Best noted that “ZFS’ consolidated risk-adjusted capitalization has been impacted by significant unrealized losses on the bonds and equities portfolio induced by the recent financial market turmoil, while the company’s recent acquisitions increased intangible assets.” Going forward Best expects ZFS to “continue to defend its capitalization and to recover part of the unrealized losses benefiting from the recent drop in interest rates.”

Best also said it “expects ZFS to achieve lower earnings in 2008 mainly due to significant impairments in the investment portfolio and to reach approximately $3.3 to $3.8 billion (compared to $5.6 billion in 2007),” translating into a return on equity of 12 to14 percent.

ZFS’ net income “decreased significantly to $2.8 billion in the first nine months of 2008, driven by impairments and mark to market unrealized losses in run-off businesses,” Best noted. However, the rating agency added that “business operating profit for the General Insurance, Global Life and Farmers Management Services business divisions remained resilient at $4.2 billion, compared to $4.3 billion in 2007.

“In non-life, underwriting performance deteriorated in the first nine-months of 2008 (with the combined ratio increasing slightly) primarily due to a number of larger claims in North America Commercial and Global Corporate, whereas catastrophe losses were lower than in the previous period despite the Ike and Gustav hurricane losses. The recent increase of ZFS’ quota share treaty with Farmers Exchange (FE) could have a negative effect on the overall underwriting performance for the full year due to a higher combined ratio compared to the group.”

However, Best said it believes, “that ZFS is well positioned to benefit from a potentially improved price environment in 2009 in corporate and commercial lines.” Prospectively, Best said it is “expecting that the continuation of the Zurich Way cost saving program should have a positive impact on overall expenses.

“In the life sector, new business margins remained excellent at 22.4 percent. Prospectively, A.M. Best expects the embedded value operating income to be reduced due to a lower margin on guaranteed products and lower fees induced by the decreasing value of unit-linked products.

“ZFS is likely to maintain its leading position in non-life business,
especially in its core market in Europe (UK, Germany, Switzerland, Italy and Spain) and the United States despite a competitive environment.”

Best said it “expects non-life gross premiums written to grow slightly in 2008 to $37 billion as high growth in Europe general insurance (coming equally from acquisitions and organic growth) and emerging markets is compensating the 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 decrease by approximately 4 percent to 6 percent to $21 billion as the adverse market conditions in the UK and Ireland are partly compensated by continuing growth in the emerging markets, Spain (due to the recent acquisitions) and Germany (pension fund business).”

ZFS U.S. operations are led by Zurich American Insurance Company (ZAIC), headquartered in Schaumburg, Ill., with, Best noted, 17 domestic P/C companies either directly or indirectly reinsuring 100 percent of their writings with ZAIC. “The consolidated operations of the U.S. operations (Zurich U.S.) contribute approximately 40 percent of the worldwide property/casualty premiums to ZFS’ worldwide operations. Zurich U.S. maintains adequate stand-alone capitalization and, notwithstanding sizable storm losses during 2008, has improved its reported operating performance in recent years,” said Best.

The rating agency concluded that, “while capitalization remains adequate, excess capital was reduced considerably during the year by Zurich U.S.’ payment of parental dividends and surplus note interest, as well as a result of storm losses and reductions to invested asset values generated from the worldwide collapse in the credit and equity markets. Nevertheless, the ratings reflect ZAIC’s affiliation with and the support received from its ultimate parent, ZFS. Going forward, Zurich U.S. results are expected to benefit from management’s extensive enterprise risk management initiatives.”

For a complete list of Zurich Financial Services Group’s FSRs, ICRs
and debt ratings, go to: www.ambest.com/press/121103zurich.pdf.

Source: A.M. Best – www.ambest.com