A.M. Best Affirms Zurich Financial Services ‘A’ (Excellent) Ratings

December 18, 2002

A.M. Best Co. has affirmed the A (Excellent) financial strength ratings of the Zurich Financial Services Group (ZFS) and its core operating subsidiaries. It also affirmed its “a” and “a-” ratings on the senior and subordinated debt instruments issued or guaranteed by Zurich Insurance Company, removed all the ratings from under review, and assigned the companies a “positive” outlook.

“The current ratings are based on the ZFS’s excellent business position in its selected core markets (Switzerland, Germany, Italy, Spain, UK and North America), improving operating performance, restored risk-based capitalisation and re-balancing of the investment portfolio,” said Best. “Offsetting factors are the challenges associated with the implementation of a strict cost reduction and divestment program, as well as uncertainty regarding potential adverse developments of its asbestos related reserves.”

Commenting on its analysis the rating agency predicted growth in the non-life sector in 2002 and 2003, “benefiting from double digit rate increases in a highly opportunistic market.” While life premiums are expected to weaken as a result of lower demand levels caused by the decline in the capital markets, Best indicated that this would be partially offset by ZFS access to Deutsche Bank’s distribution network.

Although ZFS will write off $950 million of intangible assets and will strengthen reserves by $1.8 billion, Best believes that it will benefit in 2003 “through an already initiated aggressive global profit improvement program and the disposal of some non-performing entities.” It also expects that “Non-life technical results will be greatly improved by additional non-life price increases. Strict expense management controls are also being implemented. This, together with a revised dividend policy, is likely to lead the company to achieving its consolidated 12% ROE target by 2003. ”

The report also noted that “ZFS is actively reducing its equity exposure to 10% before end 2003. The disposal of approximately USD 4 billion is likely to reduce risk based capital requirements prospectively. ”

ZFS has successfully restored its strong capital position, completing a $2.5 billion rights issue in October. This has restored its capital to “a level commensurate with an Excellent rating. A.M. Best believes, ZFS’s business strategy is compatible with the maintenance of an excellent risk-based capitalisation. Released capital from exited businesses after a strict review of capital allocation across the group, coupled with a potential USD 500 million hybrid issue in 2003, will further strengthen ZFS’s capital base.”

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