RPT-Fitch Affirms Zurich Insurance Company IFS at 'AA-'; Outlook Stable

Tue Dec 3, 2013 7:19am EST

Dec 3 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed Zurich Insurance Company's (ZIC) Insurer Financial Strength (IFS) rating at 'AA-' and Long-term Issuer Default Rating (IDR) at 'A+'. The Outlooks are Stable. ZIC is the main operating company of the Zurich Insurance Group (ZIG). A full list of rating actions is at the end of this release.

KEY RATING DRIVERS

The affirmations reflect ZIG's solid and stable capital position and strong earnings generation, which is in line with a 'AA-' rating. Fitch recognises the substantial improvements in capital adequacy achieved by ZIG since capital dipped during the financial crisis and notes the decreased volatility of the group's capital ratios. This is offset by the company's relatively high amount of goodwill and intangibles that negatively impacts the quality of capital.

Fitch notes that ZIG's financial leverage is relatively high compared with some similar-rated peers. Calculated under Fitch's methodology, ZIG's financial leverage was 26% at the end of 2012 (2011: 27%). Fixed charge coverage and financial flexibility is considered sufficiently strong by Fitch. The result of the Swiss solvency test, as calculated by the company, improved to 206% (1 July 2013), from 185% (1 January 2013), while the Solvency I ratio declined to 261% from 278% during the same period.

In 9M13, business operating profit increased by 2% to USD3,567m, with all core business contributing more than in the same period in 2012. Net profit was also up 2% (USD3,967m) and overall earnings generation remained strong. The combined ratio in general insurance improved to 95.3% (96.3%), despite higher weather-related and other large losses. The return on group investments (not annualised) declined to 2.5% (3.0%), mainly because of a strong decline in realised gains.

The business operating profit after tax return on equity (ROE) for the group declined to 10.8% (11.0%) in 9M13, which does not meet the company's stated strategic ambition of 16% over the cycle, although ZIG's management highlighted that ROE of 14% was more realistic in the current low interest rate environment.

However, Fitch views positively the group's resilience in the challenging operating environment.

Exposure to equities, hedge funds and private equity is moderate, at 6% of total group investments at end-2012. ZIG's investment portfolio includes a relatively sizeable CMBS/RMBS portfolio, with a moderate amount of securities rated below 'BBB'. The mortgage loan portfolio within the group's non-core operations has deteriorated in recent years. Fitch considers the exposure to peripheral eurozone bonds within ZIG's investment portfolio as manageable. Fitch considers that technical reserves are prudent, but also recognises that due to the long-tail nature of the non-life business, the group faces the risk that actual losses emerging on claims provisions may prove higher than anticipated.

RATING SENSITIVITIES

An upgrade is unlikely in the near term, given the company's high financial leverage. However, the ratings could be upgraded if ZIG's leverage dropped and remained below 23%, earnings consistently outperform those of similarly rated peers and its capital remains commensurate with that of a 'AA' category company.

The key triggers for a downgrade include a sustained drop in the company's risk-adjusted capital position, an increase in the ratio of adjusted debt to total capital to above 30% and any large acquisition that weakened capitalisation, increased financial leverage or was outside the company's historical risk appetite or area of expertise. Fitch considers the headwinds the company continues to face due to the difficult macroeconomic environment as the main risk that could negatively affect ZIG and the insurance industry as a whole if conditions deteriorate.

The rating actions are as follows:

ZIC

IFS rating affirmed at 'AA-'; Stable Outlook

Long-term IDR affirmed at 'A+'; Stable Outlook

Senior debt affirmed at 'A+'

Subordinated debt affirmed at 'A-'

Zurich Finance (USA), Inc.

Senior debt affirmed at 'A+'

Subordinated debt affirmed at 'A-'

Zurich Finance (UK) plc subordinated debt affirmed at 'A-'

ZFS Finance (USA) Trust II subordinated debt affirmed at 'A-'

ZFS Finance (USA) Trust V subordinated debt affirmed at 'A-'

Cloverie plc subordinated debt affirmed at 'A-'

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