CORRECTION TO TEXT: MOODY'S DOWNGRADES RATINGS OF ZURICH INSURANCE COMPANY AND AFFILIATES BY ONE NOTCH; INSURANCE FINANCIAL STRENGTH TO Aa2
Moody's Investors Service announced today that it has downgraded the ratings of Zurich Insurance Company (ZIC) and ratings on guaranteed subsidiaries of ZIC by one rating notch (insurance financial strength to Aa2 from Aa1). Specifically excluded from this rating action are the ratings of Farmers Group Inc. (with the exception of the RegCap securities issued by Farmers but which are rated based on the implied support of Zurich Financial Services Group), the Centre Group, and the Zurich Kemper Life Companies. With these exceptions, the ratings of ZIC and its subsidiaries and affiliates and the ratings of those entities which benefit from the surety bonds or guarantees of ZIC have been downgraded. Subject to certain exceptions, ratings have been moved to insurance financial strength at Aa2, guaranteed senior unsecured debt at Aa3, guaranteed subordinated at A1 and preferred stock rating of A2. The outlook for the ratings is stable.
Moody's initiated its review of Zurich in the weeks following September 11th. At the time of its review Moody's cited a number of issues that would be considered in its analysis. In addition to the impact of the 9-11 losses, Moody's cited issues which included i) capital management and strategic position in the context of the company's recently announced agreement in principle to pursue a number of business initiatives; ii) a review of operational and financial leverage, including contingent liabilities stemming from its corporate guarantees; and iii) core operating earnings and the stability and growth prospects stemming from the company's non-life segment, its growing life business, and the contribution of the Farmers Group.
Commenting on its rating action, the rating agency noted that Zurich's core earnings have been hurt by recent weakness in its non-life segment, the September 11 attacks, asset impairment charges, and also by the volatile equity markets in 2001. The rating agency elaborated that the September 11 attacks had resulted in direct insurance losses to the company of USD 760m after tax and a negative indirect impact of USD 200-250M after tax. Recently, Moody's lowered the insurance financial strength rating of the Farmers Insurance Exchanges while leaving the ratings on review for possible further downgrade. The Farmers Exchanges contribute meaningfully to Zurich's income through the parent's ownership of the Farmers Group, Inc., and Moody's noted that this was one of several important rating considerations. Moody's also noted that Zurich's increasing use of financial leverage has been a rating consideration for some time. With Zurich undergoing a number of significant asset transactions, which should lead to a reduction in the level of debt, Moody's views the company's existing and proforma debt and interest coverage profile as being consistent with its adjusted rating levels.
Moody's noted that ZIC and its subsidiaries have a number of credit strengths. Among these strengths Moody's noted the company's diversified sources of earnings, its strong management culture, and its conservative stance on asset quality.
Zurich Insurance Company is the main company in the Zurich Financial Services Group, which also includes the Farmers Group Inc., and the UK operations of Eagle Star Holdings and Allied Dunbar. Zurich Financial Services Group is a leading international provider of financial solutions, including non-life and life insurance products.
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