MOODY'S DOWNGRADES ZURICH INSURANCE COMPANY'S INSURANCE FINANCIAL STRENGTH RATING TO A1, SENIOR DEBT TO A2, AND SUBORDINATED DEBT TO A3, OUTLOOK NOW STABLE; OTHER RATING ACTIONS ON ZFS GROUP ENTITIES ANNOUNCED
Moody's Investors Service has downgraded the ratings of Zurich Insurance Company (ZIC) and guaranteed subsidiaries. The ratings on other ZFS operating companies were also downgraded as were the Zurich RegCaPS securities. The insurance financial strength rating of ZIC was downgraded to A1 from Aa2, the senior debt rating was downgraded to A2 from Aa3, the subordinated debt was downgraded from A1 to A3. Other ZFS Group companies were also downgraded; please see the complete list below. All of the ratings now have a stable outlook.
The issuer ratings of Zurich Capital Markets Inc. (ZCMI) and ZCM Matched Funding Corp. were downgraded from Aa2 to A1. The ratings now have a stable outlook. Both ZCMI and ZCM Matched Funding Corp. are beneficiaries of a Surety Bond, dated August 6, 1997, which was issued by Zurich Insurance Company in favour of ZCMI. Because a surety bond is a policyholder obligation, Moody's believes that the credit strength of these securities is commensurate with that of the insurance financial strength of the Zurich Insurance Company.
The insurance financial strength rating of Deutscher Herold Lebensversicherungs-AG was confirmed at Aa3. The rating now has a stable outlook.
The ratings of Eagle Star Insurance and Eagle Star Life Assurance (Insurance Financial Strength rating of A2) were confirmed, as was the Prime-1 rating of ZCM Matched Funding Corporation. Moody's noted that the ratings of the Centre Group (Insurance Financial Strength rating of Aa3) were not on review nor were those of the Farmers New World Life (Insurance Financial Strength rating of A2) and the Farmers Group, Inc. and Farmers Exchanges (Insurance Financial Strength of A3).
Moody's said that ZFS and ZIC reported losses for the year 2001, driven by several factors including underwriting losses, losses related to the 11 September attacks, and non cash asset impairment charges. These losses, combined with financial market losses in the companies' equity investments, have reduced shareholders' equity and driven financial leverage to levels inconsistent with previous ratings. Moody's said that the level of fixed charge coverage had also declined sharply, in particular at ZIC. The rating agency commented that its analysis focused in particular on ZIC's financial fundamentals since a significant portion of the Group's debt is directly or indirectly an obligation of ZIC while its level of tangible equity, earnings, and fixed charge coverage are lower than that of the consolidated ZFS Group.
Moody's said the stable outlook is a reflection of the significant pricing increases the company is likely to achieve in its non-life business coupled with its expectation for greater earnings stability following the divestment of Zurich Re and Zurich Scudder and the acquisition of Deutscher Herold.
Moody's noted that confirmation of Deutscher Herold's insurance financial strength rating reflects the company's modest earnings coupled with good levels of capitalisation in relation to its peers. Moody's noted that with the acquisition of Deutscher Herold, the Zurich Group currently ranks as #4 on a pro-forma basis in the German life market in terms of premiums written.
Commenting on the one-notch rating differential for Federal Kemper Life Assurance Company, Kemper Investors Life Insurance Company, and Zurich Life Insurance Company of America, Moody's said the ratings of these entities reflect expected support from the ZFS Group coupled with the units' modest stand-alone profitability and the risks in their respective business lines.
Moody's said the confirmation of the A2 insurance financial strength rating assigned to Eagle Star Insurance and Eagle Star Life Assurance reflect the rating agency's assessment of the two entities stand-alone financial fundamentals.
The downgrade of Trust Capital Securities (Zurich RegCaPS) issued by ZFS through a special structure linked to dividend flows from Farmers Group Inc., to Baa2 reflect the deeply subordinated nature of these instruments coupled with the prospects for lower dividend capacity from the ZFS operating companies to the holding company. Moody's noted that the notes are not guaranteed by either the ZFS Group or the Farmers Group Inc.
In summary, the following rating actions have been taken:
Zurich Insurance Company and guaranteed issuers; Insurance Financial Strength to A1, senior unsecured MTN to A2, subordinated MTN to A3, subordinated perpetual notes to A3, stable outlook;
Zurich Capital Markets Inc. and ZCM Matched Funding Corp.; Issuer rating to A1, stable outlook. The Prime-1 rating assigned to ZCM Matched Funding Corporation was confirmed;
Zurich Financial Services (Jersey) Ltd; preferred stock to Baa1, stable outlook;
Zurich Holding Company of America; junior subordinated debt to A3, stable outlook;
Zurich RegCaPS; preferred stock to Baa2, stable outlook.
Zurich Life Insurance Company of America; Insurance Financial Strength rating to A2; stable outlook;
Federal Kemper Life Assurance Company and Kemper Investors Life Insurance Company; Insurance Financial Strength rating to A2, stable outlook.
Kemper Corporation; Senior MTN to A3; cumulative preferred stock to Baa2, stable outlook;
Zurich Capital Trust1; preferred stock to A3; stable outlook;
The following rating was downgraded and withdrawn:
Zurich Holding Company of America: subordinated debt rating to A3.
At year-end 2001, the Zurich Financial Services Group reported shareholders' equity of U.S.$ 17.7 billion, assets of U.S.$ 232 billion and a net loss of $387mn. The ZFS Group is based in Zurich, Switzerland. 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.
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