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Rating Action:

Moody's Affirms Zurich Insurance Ratings (Aa3 IFS; A1 senior); Outlook Stable

15 Jul 2013

London, 15 July 2013 -- Moody's Investors Service has affirmed the insurance financial strength (IFS) rating (Aa3) and debt ratings (A1 senior, A2 (hyb) subordinated, A3 (hyb) preferred) of Zurich Insurance Company Ltd (ZIC), and associated entities. Please see ratings list below for full details of all rating affirmations. The rating outlook is stable.

The rating affirmation reflects Zurich Insurance Group's (the "Group") strong market position across a broad range of countries, and excellent business and geographic diversification with an improving balance between life and non-life insurance. Operating performance has been strong in recent years, and capitalization and financial flexibility are viewed as strong. Less positively, the outlook remains challenging in a number of Zurich Group's business areas, there is the challenge of inherent reserving risk with regard to certain long-tail lines of business, and Zurich Group has a relatively high level of goodwill and intangible assets in relation to equity.

Zurich's business profile remains excellent. It is a major global insurance player with a strong market position in a broad range of countries, including the U.S., and a strong brand reach, although it lacks a top tier status in some important European markets. Furthermore, the group benefits from excellent business and geographic diversification, and although the overall business remains orientated towards P&C risk, the balance between life and non-life is improving. Its business is geographically well diversified with recent significant growth in Latin America and volume declines in Europe a feature. Operating exposure to peripheral European countries is relatively limited especially in terms of profit contribution. The Group also writes a significant amount of U.S. business, especially on the P&C side. From an earnings perspective, the U.S. contribution is even greater as a result of Farmers' Management Services (FMS) which has been a consistently meaningful contributor to Group earnings.

The Group's capital position is viewed as strong. Total equity has increased each year from 2009-2012 leading to an improvement in Moody's capital metrics, notwithstanding meaningful dividend payouts. The Group's regulatory solvency also improved during 2012, with Swiss Solvency Test (SST) and Solvency 1 ratios of 185% (YE11: 183%) and 278% (YE11: 232%) respectively. The Group's financial flexibility is also viewed as strong. YE12 adjusted financial leverage decreased to 25.2% (YE11: 26.7%), and 2012 earnings cover improved to 8x (YE11: 7.5x). Furthermore, the Group's access to capital markets is viewed as excellent.

With regard to profitability, the Group's return on capital (ROC) in 2012 was a very good 8.5% and the group's five year average ROC stood at 8.9%. Furthermore, at YE12 the Group's Sharpe Ratio which measures volatility of returns was a very high 913%. However, the Group, like others, faces the challenge of the current low investment yield environment, and a challenging outlook in a number of its business areas, but Moody's notes the group's commitment to improve its combined ratio (YE12: 98.4%), and to cut costs, and expects FMS to continue to be a meaningful and reliable contributor to the Group's net income.

With regard to asset quality, we continue to view the Group's investment portfolio as relatively conservative, and the proportion of high risk assets to equity decreased again during 2012 to 56% (YE11: 58%). The Group's total peripheral government and bank bond investments are relatively small representing less than 10% of total invested assets or 38% of YE12 equity (including free RfB and Terminal Bonuses), with the vast majority derived from the Group's life business. The Group's goodwill & other intangibles as a % of shareholders' equity remained high at around 69% at YE12, although we note some off-setting liabilities with regard to deferred acquisition costs.

A further credit challenge for the Group is inherent reserving risk with regard to certain long-tail lines of business, as shown in the $688 million reserve strengthening for German non-life business during 2011 and 2012. However, overall the Group has made meaningful non-life reserve releases between 2008-2012 averaging around 2% of the net reserves set at the beginning of each calendar year. And, despite the presence of considerable volumes of long-tail reserves, Moody's currently considers that the major overall reserve strengthening that afflicted the Group in the past is unlikely to reoccur in the short term.

Moody's has also affirmed with a stable outlook the A1 IFS ratings of the group's UK life subsidiary, Zurich Assurance Ltd (ZAL), and the Group's German life subsidiary, Zurich Deutscher Herold Leben (ZDHL). For ZAL, the affirmation of the A1 rating, which is two notches higher than the adjusted rating indicated by the Moody's insurance financial strength rating scorecard, reflects the importance of the UK life business to Zurich and the expectation that support would be available in a wide range of circumstances were it required. For ZDH, the affirmation of the A1 rating, which is two notches higher than the adjusted rating indicated by the Moody's insurance financial strength rating scorecard, reflects the importance of the German life business to Zurich. Furthermore, implicit support is derived from ZDH's role as the administrative hub for Zurich's life insurance operations in Germany, Switzerland and Austria.

Moody's has also affirmed with a stable outlook the A3 IFS rating of Zurich American Life Insurance Company (ZALICO). The affirmation and stable outlook are based on the company's progress in establishing its U.S. life insurance franchise and the strong implicit support from ZIC. Moody's noted that ZALICO's A3 IFS rating receives two notches of uplift from its Baa2 standalone credit profile due to the reinsurance, financial support, and oversight provided by ZIC.

Moody's has also affirmed with a stable outlook the A1 IFSR on Centre Reinsurance (US) Limited (CRUS) reflecting the continuation of the provision by ZIC to CRUS of an unconditional guarantee which Moody's believes ranks equally with the senior unsecured debt of ZIC. Other supported affiliates include ZCM Matched Funding Corp (short-term issuer rating of P-1 affirmed), and Zurich Capital Markets Inc (Long-term issuer rating of Aa3 affirmed); both continue to benefit from a surety bond from ZIC which ranks equally with the insurance obligations of ZIC.

With regard to rating drivers going forward, the rating agency said that the following developments could put upward pressure on ZIC's ratings: sustained strong core earnings with return on capital over the underwriting cycle above 10%, adjusted financial leverage consistently at 20% or below, and earnings coverage above 10x. Conversely, negative rating pressure could arise from: return on capital over the underwriting cycle below 7%, adjusted financial leverage consistently above 30% and earnings coverage consistently below 7x, a material weakening of capital adequacy, a material weakening of business franchise and diversification, and following the German non-life reserve strengthening announced in October 2012, any further need to materially strengthen reserves.

The following ratings were affirmed with a stable outlook:

Zurich Insurance Company Ltd -- Aa3 insurance financial strength rating;

Zurich Assurance Ltd -- A1 insurance financial strength rating;

Zurich Deutscher Herold Lebensverischerung AG -- A1 insurance financial strength rating;

Zurich American Life Insurance Company -- A3 insurance financial strength rating;

Centre Reinsurance (US) Limited -- A1 insurance financial strength rating;

Zurich Insurance Company Ltd -- A1 senior debt, A2 (hyb) subordinated debt, A3 (hyb) preferred;

Zurich Finance UK (plc) -- backed A2 (hyb) subordinated debt;

Zurich Finance (USA) Inc. -- backed A1 senior debt, backed A2 (hyb) subordinated debt;

Zurich Finance (Luxembourg) S.A. -- backed A1 senior debt;

ZFS Finance (USA) Trusts II and V -- A3 (hyb) preferred;

Zurich Capital Markets Inc. -- Aa3 long-term issuer rating;

The following ratings were affirmed:

Zurich Insurance Company Ltd and guaranteed EMTN issuers (i.e., Zurich Finance UK (plc), Zurich Finance (Luxembourg) S.A.) -- EMTN programme (P) A1 senior unsecured debt, EMTN programme (P) A2 subordinated debt;

Zurich Insurance Company Ltd -- EMTN Programme (P) A3 and (P) Baa1 capital notes;

Zurich Finance (Luxembourg) S.A., Zurich Finance (UK) plc, Zurich Finance (USA) Inc. -- backed (P)-1 commercial paper;

ZCM Matched Funding Corp. -- P-1 short-term issuer rating;

The methodologies used in these ratings was Moody's Global Rating Methodology for Property and Casualty Insurers published in May 2010, Moody's Global Rating Methodology for Life Insurers published in May 2010, and Moody's Guidelines for Rating Insurance Hybrid Securities and Subordinated Debt published in January 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Based in Zurich, Switzerland, Zurich Insurance Group reported gross written premiums and policy fees of USD 54 billion and total equity of USD 36.9 billion as of December 31, 2012.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Dominic Simpson
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Simon Harris
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Affirms Zurich Insurance Ratings (Aa3 IFS; A1 senior); Outlook Stable
No Related Data.
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