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Rating Action:

Moody’s affirms Zurich Insurance Company’s Aa3 IFS rating; outlook stable

10 November 2020


London , November 10, 2020 – Moody's Investors Service ("Moody's") has today affirmed the Aa3 insurance financial strength rating (IFSR) and debt ratings (A1 senior unsecured, A2(hyb) subordinated, A3(hyb) preferred stock) of Zurich Insurance Company Ltd (ZIC). The outlook remains stable.

In the same action, Moody's affirmed the ratings of several ZIC's subsidiaries.

Please click on this link https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1000003726 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.

RATINGS RATIONALE

RATINGS RATIONALE – Zurich Insurance Company Ltd

The affirmation of ZIC's Aa3 IFSR reflects its very strong market position and resilient financial profile despite the headwinds arising from the coronavirus.

The group benefits from a strong franchise, geographically diversified and well balanced business mix with several sources of income arising from its established property and casualty (P&C) insurance business, a growing life business and significant management fee income from Farmers Insurance Exchange (Farmers, A2 negative). ZIC's financial profile remains strong, with very strong financial flexibility and good asset quality supporting its strong capitalisation, despite financial markets volatility earlier this year and the impact of lower interest rates. Profitability has also improved, benefiting from renewed underwriting focus and effective expense management, although this year it will be negatively impacted by the coronavirus. These strengths are partly offset by potential volatility inherent in the group's large corporate commercial insurance business - including from natural and man-made catastrophes and potential reserve development on long-tail casualty business - and its sensitivity to interest rates and credit spreads.

Moody's expects the direct and indirect effects of the pandemic to remain manageable for the group and to be comfortably absorbed within earnings. ZIC's profitability has been impacted by elevated claims related to coronavirus, with the group expecting to incur $750 million in related P&C claims during 2020, excluding the claims impact of the UK High Court's recent judgement, which is not expected to have a material effect on group earnings. Based on claims recorded in the first half of 2020, the P&C combined ratio is 99.8% (96.3% excluding the coronavirus impact). Moody's expects a reversion to more normalized profitability in the second half of 2020 that will dampen the impact of coronavirus on full year earnings, although above average third quarter hurricane activity and the possibility of a resurgence in coronavirus claims and financial markets volatility related to further lock-downs could still weigh on full year earnings.

The group has a broad geographic presence, with strong franchises in a number of its markets, most prominently its position as a top three global commercial lines insurer. ZIC's business profile is well balanced between commercial and retail P&C insurance, life insurance and non-underwriting fee income earned from management services provided to Farmers. While ZIC's growing life insurance business is oriented towards relatively low capital intensity protection and unit linked businesses, which are less exposed to low interest rates, the group remains exposed to low interest rates through still large reserves it holds on its legacy traditional guaranteed savings business, particularly in Germany.

ZIC's profitability is strong and has improved meaningfully over the past five years as a result of underwriting actions and increased operating efficiency, with return on capital increasing to 7.5% in 2019 from 3.6% in 2015. The group has taken steps to moderate the potential volatility in results, through reshaping underwriting risk limits and more targeted use of reinsurance, alongside rebalancing its commercial insurance portfolio with a diminished exposure to long-tail casualty lines. While Moody's expects greater stability in the group's overall profitability going forward, large commercial insurance remains inherently more volatile than other lines, as evidenced by the meaningful commercial P&C claims expected as a result of coronavirus. Despite the impact of coronavirus on current year profitability, the group has maintained its profitability targets, expecting to generate operating return on equity of over 14% over the next three years (compare to 14.2% for 2019), and in addition will benefit from rising prices for commercial P&C insurance.

Despite the Swiss Solvency Test (SST) coverage ratio having declined meaningfully during the first-half of 2020, the group is very well capitalized, with regulatory capital on the SST basis of 185% at 30 June 2020. The reduction from 222% at year-end 2019 was primarily due to declining government bond yields, credit spread widening and equity market volatility. As ZIC does not make use a dynamic volatility adjustment in its SST calculations, its SST coverage ratio is more sensitive to changes in credit spreads than many of its European peers that benefit from this adjustment under the Solvency II regime. Over time, Moody's expects the group's regulatory capital ratio to revert higher, absent renewed volatility in financial markets. ZIC's financial profile is further supported by very strong financial flexibility, with moderate financial leverage – of 22.6% at year-end 2019 – and strong and consistent access to capital markets.

RATINGS RATIONALE – SUBSIDIARIES

Moody's has also affirmed with a stable outlook the A3 IFSR of Zurich American Life Insurance Company (ZALICO) based on its good capital levels, adequate liquidity, and good quality asset portfolio. These factors are offset by its weak, but slowly improving business profile and modest profitability. The company receives substantial capital support from ZIC, via inter-company reinsurance agreements and additional implied financial support, resulting in two notches of uplift from its Baa2 standalone credit profile.

In addition, Moody's affirmed the debt ratings of Zurich Finance (Ireland) DAC, Zurich Holding Company of America, Inc., Zurich Finance (UK) plc, and of Zurich Finance (Australia) Limited. All these ratings reflect the guarantee provided by ZIC and implicit support from 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.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's stated that the following factors could lead to an upgrade of ZIC's ratings: (i) sustained strong core earnings with return on capital over the underwriting cycle above 10%, (ii) adjusted financial leverage consistently at 20% or below, (iii) earnings coverage above 10x, (iv) Regulatory capital consistently at or above 200% (SST basis).

Conversely, Moody's noted the following factors that could lead to a downgrade of ZIC's ratings: (i) return on capital over the underwriting cycle below 6%, (ii) adjusted financial leverage consistently above 30% and earnings coverage consistently below 7x, (iii) material weakening of capital adequacy with regulatory capital consistently below 160%, (iv) material weakening of business franchise and diversification.

The principal methodologies used in rating Zurich Insurance Company Ltd, Zurich Capital Markets Inc., ZCM Matched Funding Corp., Zurich Finance (Australia) Limited, Zurich Finance (Ireland) DAC, Zurich Holding Company of America, Inc. and Zurich Finance (UK) plc were Life Insurers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187348 , and Property and Casualty Insurers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187352 . The principal methodology used in rating Zurich American Life Insurance Company was Life Insurers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187348 . Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

The List of Affected Credit Ratings announced here are all solicited credit ratings. Additionally, the List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Please click on this link https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1000003726 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items:

• Endorsement

• Rating Solicitation

• Issuer Participation

• Participation: Access to Management

• Participation: Access to Internal Documents

• Disclosure to Rated Entity

• Lead Analyst

• Releasing Office

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004 .

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569 .

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued the ratings.

The person who approved Zurich Insurance Company Ltd, Zurich Capital Markets Inc., ZCM Matched Funding Corp., Zurich Finance (Australia) Limited, Zurich Finance (Ireland) DAC, Zurich Holding Company of America, Inc. and Zurich Finance (UK) plc credit ratings is Antonello Aquino, Associate Managing Director, Financial Institutions Group, JOURNALISTS: 44 20 7772 5456, Client Service: 44 20 7772 5454. The person who approved Zurich American Life Insurance Company credit ratings is Scott Robinson, CFA, Associate Managing Director, Financial Institutions Group, JOURNALISTS : 1 212 553 0376, Client Service : 1 212 553 1653.

The relevant office for each credit rating is identified in "Debt/deal box" on the Ratings tab in the Debt/Deal List section of each issuer/entity page of the website.

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.

Brandan Holmes
VP-Sr Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London
United Kingdom
JOURNALISTS : 44 20 7772 5456
Client Service : 44 20 7772 5454

Antonello Aquino
Associate Managing Director
Financial Institutions Group
JOURNALISTS : 44 20 7772 5456
Client Service : 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
Client Service : 44 20 7772 5454

© 2020 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND/OR ITS CREDIT RATINGS AFFILIATES ARE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. MOODY’S INVESTORS SERVICE DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S INVESTORS SERVICE CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS (“ASSESSMENTS”), AND OTHER OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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