Proposed AIG Auto Business Acquisition has no material impact on ZIC's ratings
London, 17 April 2009 -- Moody's Investors Service announced today that it has affirmed the
Insurance Financial Strength Rating (IFSR) and the senior and subordinated
debt ratings of Zurich Insurance Company (ZIC) at A1, A2 and A3
respectively as well as the ratings of Farmers Insurance Group (Farmers
or The Exchanges) at A2 IFSR, Baa2 surplus notes, and associated
ratings listed below. The outlook for all ratings is stable.
Moody's said that these rating affirmations follow Zurich Financial
Services' (ZFS) announcement that it is to acquire the US Personal
Auto Group business of AIG (PAG) for total consideration of c.
USD 1.9 billion, funded through a mix of equity and hybrid
debt.
Commenting on the affirmation of the ratings, Moody's cited
the Group's maintenance of a strong market position across a broad
range of countries, a good balance between retail and commercial
lines of business within non-life insurance and an improving balance
between life and non-life insurance. Operating performance
has generally remained strong, with 2008 net income after tax of
USD 3,116m, albeit non-life underlying loss ratios
have shown some deterioration. Furthermore, Moody's
noted that asset quality levels, capitalisation and financial flexibility
all remain consistent with the current A1 IFSR.
Less positively, ZFS retains reasonable levels of exposure to high
risk assets (Moody's basis) of 13% of invested assets and
also non-agency structured assets of 7% of invested assets
at YE 2008. Furthermore, with a 24% reduction in shareholders'
equity in 2008 (including investment losses, distributions to shareholders
and currency impacts), capitalization levels have deteriorated somewhat
compared to the 2007 position. Finally, the outlook for 2009
remains distinctly challenging across a number of markets in which ZFS
operates, particularly on the life-insurance side.
Furthermore, depending on market volatility, there is the
potential for further asset-related losses.
Commenting on the acquisition specifically, Dominic Simpson,
Senior Credit Officer and lead analyst for the Zurich Group, noted
that the rating agency viewed the acquisition and associated conservative
funding mix, as well as the increase in the quota-share agreement
between Farmers and ZIC, as mildly positive for ZFS. In terms
of business profile at a Group level the increasing proportion of personal
lines business should more than mitigate the increased exposure to a single
geographic market, namely the US, and any integration challenges
which may arise from the acquisition.
The affirmation of Farmers reflects the beneficial impact of the PAG transaction
on Farmers' business profile, diversifying the company's
marketing platform to include PAG's sizable direct distribution
while enhancing Farmers' personal lines presence in the Eastern
US. Over the medium to long-term, Moody's expects
the company to realize business synergies among its personal lines products.
That said, Moody's recognizes the potential for execution
and integration risks which accompany sizable transactions. The
current transaction represents the third material acquisition for Farmers'
in the last two years. In addition, despite the provision
of additional reinsurance capacity from Zurich, the transaction,
financed with cash on hand, increases Farmers' gross operating
leverage and could pressure Farmer's near term profitability.
Mr Simpson further noted that the stable outlook for the Group's
ratings was predicated on a combination of factors including: the
Group maintaining its strong market position and current levels of product/geographic
diversification, together with the maintenance of a cross cycle
ROE at least in the high single digits; no further meaningful deterioration
in capital adequacy metrics from the 2008 YE position; earnings coverage
remaining above 6x on a five-year average basis; and a non-life
cross cycle combined ratio no higher than 97-99%.
Based in Zurich, Switzerland, Zurich Financial Services (ZFS)
is a leading provider of insurance services worldwide. ZFS reported
gross written premiums and policy fees of USD 51.9 billion and
shareholders' equity of USD 22.1 billion as of December 31,
2008.
The following ratings were affirmed with a stable outlook:
Zurich Insurance Company, guaranteed EMTN issuers: A1 IFSR,
senior unsecured debt of A2, subordinated debt of A3;
Zurich Assurance Ltd: A2 IFSR;
Zurich Deutscher Herold Lebensverischerung AG: A1 IFSR;
Zurich RegCaPS Funding Trust II, V & VI: preferred stock
of Baa1;
Farmers Insurance Exchange: A2 IFSR, surplus notes at Baa2;
Farmers Insurance Exchange of Oregon: A2 IFSR;
Truck Insurance Exchange: A2 IFSR;
Fire Insurance Exchange: A2 IFSR;
Farmers Exchange Capital: surplus notes at Baa2;
Kemper Investors Life Insurance Company: A3 IFSR;
ZC Specialty Insurance Company: A2 IFSR;
Centre Reinsurance (US) Ltd: A2 IFSR;
Zurich Finance (USA) Trusts I-III subordinated debt: Baa3;
Zurich Finance (USA) Trusts IV-V subordinated debt: Baa2;
Kemper Corporation senior debt: A1;
Zurich Capital Markets Inc: A1 issuer rating and preferred stock
rating of Baa1;
ZCM Matched Funding Corp: Issuer rating of A1;
ZCM Matched Funding Corp: Commercial Paper rating of Prime-1;
Espial Ventures Limited: Senior secured debt rating of A1;
Capstone Investments Limited: Senior secured debt rating of A1;
Argus Ventures Limited: Senior secured debt rating of A1;
Vista Investments Limited: Senior secured debt rating of A1.
The most recent rating action on this issuer was on April 29, 2008,
when Moody's affirmed the IFSR and upgraded the senior/subordinated
debt ratings by one notch.
The principal methodologies used in rating ZIC/ZFS were "Moody's
Global Rating Methodology for Property and Casualty Insurers" and
"Moody's Global Rating Methodology for Life Insurers",
which can be found at www.moodys.com in the Credit Policy
& Methodologies directory, in the Ratings Methodologies subdirectory.
Other methodologies and factors that may have been considered in the process
of rating this issuer can also be found in the Credit Policy & Methodologies
directory.
Moody's insurance financial strength ratings are opinions of the ability
of insurance companies to pay punctually senior policyholder claims and
obligations. For more information, visit our website at www.moodys.com/insurance.
London
Dominic Simpson
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
London
Simon Harris
Managing Director
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's affirms Zurich Insurance Company ratings (A1 IFSR); stable outlook