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Rating Action:

MOODY'S ASSIGNS "a1" RATING TO ZFS GROUP'S AND FARMERS GROUP INC.'S TRUST CAPITAL SECURITIES

06 Feb 2001
MOODY'S ASSIGNS "a1" RATING TO ZFS GROUP'S AND FARMERS GROUP INC.'S TRUST CAPITAL SECURITIES

Amount placed: US$1,125,000,000 (One billion one hundred and twenty five million U.S. dollars)

New York, February 06, 2001 -- Moody's Investors Service has assigned its "a1" rating to the US$1,125,000,000 (one billion, one hundred and twenty five million U.S. dollars) in Trust Capital Securities issued by the Zurich Financial Services Group (ZFS Group) through a special structure linked to dividend flows from its U.S.-based subsidiary, the Farmers Group Inc. (FGI). The rating reflects Moody's views regarding the ZFS Group, the Farmers Group and the ranking of the securities in both groups' capital structures. Moody's noted that the notes are not guaranteed by either the ZFS Group or the Farmers Group Inc.

Moody's said that the large issue needs to be seen within the context of the holding company unification in October 2000, which was another phase in the merger of the Zurich Group with the financial services division of B.A.T. Industries plc back in 1998/99 (BAFS). Moody's added that the alternative at the time (a direct take-over and financing of the acquisition of the BAFS operations) would have had a material short-term impact on the financials of Zurich Group, in particular regarding earnings dilution. The two-stage process has enabled management to integrate the organisations and to extract synergies that go a long way in self-financing the acquisition.

Moody's believes that the ZFS Group is one of the best diversified organisations in the insurance world, comprising leading companies in each of its four areas of operation: non-life insurance, life assurance, reinsurance and asset management. It holds strong competitive positions in the main markets where it operates: the United States, Switzerland and the United Kingdom being the key ones. Nevertheless, shareholder pressures, expansion through acquisitions and competitive pricing pressures on the property and casualty insurance unit, which constitutes the main profit engine of the group, have led to a more active management of the group's capital since the mid 1990s. To facilitate the holding company unification and in particular the flow-back of shares from the UK, management reduced the number of shares outstanding by US$650 million and paid a special dividend of approximately US$1 billion. According to Moody's, the issue raises the gearing towards the limit of the ZFS Group on the basis of its estimated sustainable earnings and its financial strength.

Commenting on the characteristics of the issue, Moody's noted that the securities, which have been issued through six funding trusts in several tranches, are seen as perpetual financing in nature and as lying primarily within the capital structure of the Farmers Group Inc. The securities are issued under Rule 144A as a private placement and are distributed as follows:

Zurich RegCaPS Funding Trust I - US$200 million

Zurich RegCaPS Funding Trust II - US$150 million

Zurich RegCaPS Funding Trust III - US$225 million

Zurich RegCaPS Funding Trust IV - US$ 125 million

Zurich RegCaPS Funding Trust V - US$200 million

Zurich RegCaPS Funding Trust VI - US$225 million

Although they contain call and step-up clauses, there is also a substitution clause that mitigates the risk that the permanent-funding feature of the securities will be removed.

Within the framework of relevant ratings, Moody's stated that it rates the Zurich Insurance Company (Zurich) Aa1 for insurance financial strength in recognition of its own important operations and its role as intermediate holding company within the group. Moody's ratings on Zurich's senior debt are Aa2 and the rating on subordinated debt is Aa3. Moody's rates the Farmers Insurance Exchanges Aa3 for insurance financial strength. Moody's also rates securities issued by the Farmers Group (A2 for surplus notes and "a1" for other capital securities).

At year-end 1999, the ZFS Group reported shareholders' equity of US$22 billion, assets of US$221 billion and net income of US$ 3.3 billion. The ZFS Group is based in Zurich, Switzerland.

London
Rafael Villarreal
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
44 20 7772 5454

New York
William M. Wilt
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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