A.M. Best Co. announced that it has affirmed the financial strength rating of ‘A’ (Excellent) of Zurich Specialties London Ltd. (ZSL), and assigned a “stable” outlook.
“The affirmation reflects ZSL’s strategic importance to Zurich Financial Services (ZFS), its excellent capital position, operating performance and business profile in specialist insurance sectors,” said Best. “Offsetting these positive factors is ZSL’s heavy reliance upon outwards reinsurance.”
Best said it regards ZSL as strategically important to its ultimate parent (ZFS) and believes it plays a key role within the group, which it expects will continue. It also noted that the company benefits “from a multi-year stop loss arrangement provided by Zurich Insurance Company.”
ZSL’s capital position also scores high on Best’s risk-adjusted capital model. The rating agency said it “expects capital adequacy to continue to support ZSL’s A (Excellent) rating. The company’s current liquidity ratio–total investments to total liabilities less capital and surplus–is very low (44% at year-end 2002). However, this is somewhat offset by the high proportion of premium ceded to ZFS group companies.”
As far as ZSL’s operating performance best noted that it “reported net income in 2002 of GBP 22.2 million (USD 35.6 million) compared to a GBP 9.0 million (USD 14.4 million) loss in 2001 (restated at 2002 year-end). This was at the upper end of A.M. Best’s forecast range. Assuming average loss experience and continued stable investment returns, A.M. Best forecasts further improvement in the company’s pre-tax operating performance, with the return on equity expected to reach between 12.5% and 17.5% in 2003 (compared with 10.8% in 2002).”
Best also indicated that the company benefits “as part of the Zurich London trading platform,” and has “developed its business position as an underwriter of specialist insurance risks in London.” Best said it “believes that the company benefits from the Zurich brand as well as from recent market withdrawals,” and expects “written premiums to increase by up to 70% by year-end 2005 from the 2002 level of GBP 135.5 million (USD 217.4 million).”
Best’s report also commented on ZSL’s heavy reliance on outwards reinsurance, indicating that it retains only about 30 percent of its risks. In 2002 it ceded 70 percent of gross premium to reinsurers, and Best commented that “this is unlikely to be altered in the foreseeable future.” It noted, however, that “approximately 66% of this premium ceded is to companies within the group.”
Best concluded that “retained earnings for 2003-2005 indicate sufficient growth in capitalisation to support anticipated increases in business volumes.”
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