S&P Affirms Zurich’s Ratings; Outlook Stable

December 21, 2015

Standard & Poor’s Ratings Services has affirmed its ‘AA-‘ insurer financial strength rating and
‘AA-/A-1+’ long- and short-term counterparty credit ratings on Swiss-based global multiline insurer Zurich Insurance Co. Ltd. and its ‘AA-‘ rating on Zurich’s core subsidiaries, all with stable outlooks.

The rating affirmation reflects our view of Zurich’s “very strong business risk and financial risk profiles, which are built on its extremely strong competitive position and very strong capital and earnings,” S&P said.

However, the announcement also indicated that S&P has “revised down our assessment of Zurich’s management and governance to satisfactory from strong. In addition to the recent appointment of an interim CEO, the CEOs for non-life insurance and life insurance have been repositioned internally, as well as the Chief Risk Officer and Chief Investment Officer.

“We believe that the company has strong strategic planning and comprehensive financial and operational standards in place,” the report continued. “However, the group’s consistency of strategy and management’s ability to effectively execute the strategy in the group’s property and casualty (P/C) insurance business is lacking a track record.

“In 2015, the P/C division reported weaker-than-expected profitability, including unexpected reserve-strengthening measures from its North American motor liability, construction liability, and other lines of business.

“For 2015, we expect the group will post a combined ratio of about 100 percent, which we expect will be above most global multiline peers’. In our view, the latest CEO change further underpins the strategic review the group is undergoing in particular in P/C.”

S&P also noted that the “uncertainty regarding the potential acquisition of RSA Insurance Group also raised questions regarding the group’s consistency of strategy, since the potential takeover would have been transformational for Zurich and beyond our initial expectations of smaller bolt-on acquisitions.”

Commenting on Zurich’s most recent move to acquire U.S.-based crop insurer Rural Community Insurance Services (RCIS) from Wells Fargo for $675 million, S&P indicated the acquisition is “in line with the group’s strategy to expand in the U.S. commercial middle market segment.

“Moreover, the crop insurance business of RCIS, with a premium volume of about $2 billion and a No. 2 market position in crop insurance in 2014, will further improve the group’s business mix and diversification in the U.S.”

S&P’s overall view, based on its “base-case assumption,” is that the Zurich Group’s profitability “will remain sufficient for Zurich to maintain very strong capital adequacy in 2015-2017, while financing dividend expectations and the potential deployment of $3 billion in excess capital that the group announced publicly. For 2015, we expect net income in excess of $3 billion and more than $3.5 billion in 2016-2017.”

S&P added that it intends to “closely monitor any potential strategic changes that could affect our current base-case assumptions following the appointment of a new CEO.”

The report explained that the “stable outlook reflects our view that Zurich will maintain its very strong business risk and financial risk profiles.

In conclusion S&P said it “might lower the rating if, contrary to our current expectations, capital adequacy was to decline below levels we consider very strong for a prolonged period and if Zurich’s differentiating financial and business strengths compared with peers’ were to diminish. This might result from any unexpected and prolonged negative claims trends in long-tail, non-life insurance, unexpected material investment losses, or other substantial weakening of capital.”

“We view a positive rating action over the next 24 months as unlikely.” The report said, however: “We might consider an upgrade if we observe that Zurich’s credit strengths relative to those of its peers are supported by operating outperformance, despite challenges from low interest rates. Such outperformance could indicate that Zurich’s business risk is lower than that of some of its peers. We also expect to see a steady profit contribution from Farmers Management Services. Additionally, an upgrade would depend on Zurich’s financial risk profile remaining very strong.

Source: Standard & Poor’s Ratings Services

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