A.M. Best Affirms Zurich Insurance Ratings; Outlook Negative on Expected Losses

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A.M. Besthas affirmed the financial strength rating of A+ (Superior) and the issuer credit rating of “aa-” while at the same time revising the outlook to negative from stable forZurich Insurance Company Limited(ZIC) and some of its rated affiliates.

ZIC is the main operating company of Zurich Insurance Group Ltd. (Switzerland), the ultimate parent of the Zurich group of companies (together known as Zurich). A.M. Best also revised Zurich Insurance Group’s outlook to negative and affirmed its ICR of “a”.

The rating actions on ZIC and some of its rated affiliates follows Zurich’s announcement on September 21, 2015, regarding the unexpectedly high losses and reserve strengthening that affected the performance of the general insurance segment (representing approximately two-thirds of Zurich’s consolidated gross written premium).

A.M. Best believes that the group is likely to be challenged with implementing the necessary remedial actions required to support improvements of this portfolio — at least in the near term — due to the effect of intense competition on rates, weakened economic demand and the unfavorable investment environment. Furthermore, the impact of any management actions taken to restore profitability is likely to take time to materialize into a better quality insurance portfolio, leaving Zurich exposed to the occurrence of further large losses that have impacted the group’s results during the year, A.M. Best said.

For the third quarter of 2015, A.M. Best expects Zurich’s general insurance earnings to be reduced by aggregate losses of approximately USD$275 million (net of reinsurance and before taxes), arising from the explosions at the Port of Tianjin in China.

Additionally, provisions established for the North American auto liability and certain other lines of business are likely to be strengthened by USD$300 million, the ratings agency said.

These factors are expected to contribute to a USD$200 million operating loss in the third quarter for the general insurance segment, compared with a profit of USD$724 million for the same quarter of 2014. Further, A.M. Best added, the company had a weaker-than-expected performance during the first half of the year, with Zurich reporting a 31 percent decline in business operating profit to USD$1.2 billion for the portfolio, as compared with the same period of 2014.

A.M. Best previously cited the performance of the general insurance segment to be a rating weakness, owing to its high expense ratio, partly underpinned by the group’s investments in growth initiatives, and high loss ratios. Although the group had been demonstrating consistent improvements to the accident-year combined ratio, this positive trend is expected to reverse in 2015.

Despite performance issues, Zurich’s consolidated risk-adjusted capitalization is expected to remain strong in 2015, although highly supported by soft capital elements, including the credit given for the value of life in-force business (an embedded value concept), the ratings agency said.

Zurich’s financial leverage and interest coverage ratios are also expected to remain within A.M. Best’s tolerances for its ratings. A.M. Best will continue to monitor Zurich’s consolidated risk-adjusted capitalisation in view of the group’s plan to deploy USD 3 billion of excess capital by 2016.

Additionally, the group’s overall earnings are expected to remain supported by the strong income contribution from Zurich’s attorney-in-fact relationship with The Farmers Exchanges (a leading mutual insurance group operating in the United States), profitable results from Zurich’s life portfolio and positive, albeit declining, yields from its conservative investment policy.

Zurich’s competitive position in its core markets of Europe and the United States remains excellent, A.M. Best said.

The outlook has been revised to negative from stable and the FSR of A+ (Superior) and the ICRs of “aa-” have been affirmed for Zurich Insurance Company Limitedand its following property/casualty affiliates: