Best Affirms Zurich Insurance and Group ‘A+’ Ratings; Outlook Stable

November 28, 2012

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘A+’ (Superior) and issuer credit rating (ICR) of “aa-” of Swiss-based Zurich Insurance Company Limited (ZIC)), the main operating company of Zurich Insurance Group Ltd.

Best also assigned ratings and affirmed the existing ratings of the debt instruments issued or guaranteed by ZIC, as well as the ICR of “a” and the related debt ratings of Zurich. The outlook for all the ratings remains stable.

Best said it expects ZIC’s “risk-adjusted capitalization to remain excellent in 2012, supported by retained earnings and unrealized gains on its investment portfolio. ZIC has a manageable direct exposure to peripheral euro zone countries at 5.2 percent of total investments, with Italian bonds representing 3 percent ($6.1 billion) of total investments at third quarter 2012.”

Best also published a complete list of its ratings for Zurich Insurance Company Limited and Zurich Insurance Group Ltd’s debt ratings.

“ZIC recently announced a strengthening in long-tail line claims reserves in the German business of $426 million,” said Best.” Although this does raise issues around the risk controls of the German business,” Best said it “believes that this has been isolated and is not reflective of the group’s overall reserves, which have shown positive prior year development in recent years including a redundancy of $617 million at third quarter 2012.”

In addition Best’s report said “earnings are expected to remain solid at year-end 2012, although they are unlikely to significantly outperform 2011, despite a relatively benign catastrophe year. The 2012 result has been affected by a pre-tax loss of $550 million in the German business as a result of reserve increases and a write off in deferred acquisition costs.

“Although Zurich has not given guidance on any losses from Hurricane Sandy, the losses are expected to be reasonably significant, albeit manageable in the context of the group’s overall 2012 result. Overall, Zurich’s main business units are expected to contribute positively to results, with the general insurance division likely to increase profitability through an improved combined ratio despite the issues in Germany and with Hurricane Sandy. Earnings from global life are expected to remain good, with the emphasis of the book on protection and unit-linked products a positive in this low interest rate environment.

“The income from Farmers Management Services remains a significant contributor to Zurich’s overall earnings; however, earnings from Farmers Reinsurance Company are expected to reduce despite a higher quota share on the back of increased weather-related losses.”

Best also indicated that “Zurich is expected to maintain its strong position in non-life business in its core markets in Europe and the United States. Gross written premiums for non-life business are expected to increase in local currency terms in 2012 compared with 2011, as the company benefits from rate increases and growth in Latin America through the Santander joint venture. For global life, new business annual premium equivalent is expected to increase, driven by strong growth in private banking client solutions and corporate life and pensions as well as growth in Latin America.

“Upwards rating actions are unlikely at this point.

“Negative rating actions could occur if there were a weakening of Zurich’s risk-adjusted capitalization as a result of large investment losses associated with its euro zone exposures; there were a significant increase in long-tail claims reserves across the group; and if prospective losses from Hurricane Sandy were significantly outside the group’s risk tolerance.”

Source: A.M. Best

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