London, 29 September 2015 -- Moody's Investors Service has today affirmed the Aa3 insurance financial
strength rating (IFSR) and debt ratings (A1 senior, A2(hyb) subordinated,
A3(hyb) preferred) of Zurich Insurance Company Ltd (ZIC) with a stable
outlook. Moody's also affirmed the ratings of several ZIC's
subsidiaries. A list of all ratings affected by this rating action
is available at the end of the press release.
The rating action follows the announcement on 21 September by Zurich Insurance
Group Ltd that it expects to report an operating loss of around USD200
million (before tax) in the third quarter in its general insurance segment.
RATINGS RATIONALE
Moody's says that the affirmation of ZIC's Aa3 IFSR with a
stable outlook reflects the company's very strong market position
and franchise in the commercial P&C insurance market globally,
consistently strong levels of capitalisation and financial flexibility,
as well as very good geographic and business diversification.
Nonetheless, the rating agency mentions that ZIC's credit
profile has weakened in the last 12 months as a result of deteriorating
profitability and uncertainties around reserves in certain long-tail
lines of business.
ZIC's profitability in the general insurance segment (50%
of ZIC's operating results in 2014) has been declining since the
fourth quarter of 2014 and the deterioration accelerated in the third
quarter of 2015. Furthermore Moody's expects ZIC's
overall profitability to remain under pressure in 2016. ZIC expects
to report an operating loss in its general insurance business of approximately
USD200 million in the third quarter of 2015 following (1) exceptional
claims related to a series of explosions in the port of Tianjin (USD275
million, net of reinsurance, before tax), (2) additions
to current and prior year liabilities, in part relating to auto
liability in North America (USD300 million) and (3) an increased frequency
of large claims. The high frequency of large claims has been recurring
for several quarters and may therefore persist in coming quarters.
Moody's believes that the drift in claims, combined with persistent
low interest rates and a softening pricing environment in the commercial
P&C business, will continue to pressurize ZIC's profitability
for the rest of 2015 and into 2016.
Commenting further on profitability, Moody's expects ZIC to
act through portfolio pruning and price increases. Nonetheless,
according to Moody's, these actions will likely take several
quarters to feed through into improved profitability. Moody's
also expects ZIC to reduce costs, but the rating agency mentions
that restructuring costs will likely offset the benefits of such actions
in the short-term. Moody's estimates the decline in
ZIC's operating results reported in the first half of 2015 and the
expected loss in the general insurance segment in the third quarter to
have a negative impact of between 1 and 2 percentage points on the company's
return on capital in 2015, i.e. leading to a return
between 5% and 6% in 2015, down from 7% in
2014), below Moody's expectations for a ZIC's rated
level.
A further credit challenge for ZIC is the inherent reserving risk for
certain long-tail lines of business. ZIC's announced
reserve strengthening in the North American auto liability segment and
certain other lines of business follows a previous significant reserve
strengthening (USD688 million) for the German non-life business
in 2011 and 2012. ZIC's reserve risk reflects the company's
considerable volumes of long-tail reserves that Moody's sees
as one of the main constraints on the company's credit profile.
More positively, Moody's points out that profits generated
by ZIC's life insurance business (22% of the group operating
results in 2014) and by the Farmers segment (27% of ZIC's
operating results in 2014) remain strong and will limit the volatility
in ZIC's consolidated results. Moody's says that ZIC's
diversification into three relatively uncorrelated business segments (general
insurance, life insurance and fee-based Farmers) is a strength
of the company's credit profile and partly offsets the risks of
the general insurance business.
Commenting on capitalisation, Moody's mentions that ZIC consistently
reported strong capital metrics in the last three years. ZIC's
regulatory solvency ratio under Swiss Solvency Test was at 196%
at year-end 2014. Moody's also notes the low volatility
of ZIC's regulatory and economic capital ratios to key market risks,
including a drop in equity markets and changes in interest rate levels.
Moody's adds that it expects the company's capital to remain
strong, even when allowing for ZIC's intended deployment of
USD3.0 billion of excess capital, and to remain supportive
of ZIC's current Aa3 IFSR in the next 12-18 months.
Moody's also views ZIC's financial flexibility as strong.
Adjusted financial leverage decreased to 24.3% at year-end
2014 (26.9% at year-end 2013) and 2014 earnings coverage
improved to 9.4x (9.1x in 2013). Moody's says
that these metrics will likely deteriorate as a result of (1) ZIC's
willingness to deploy USD3.0 billion of capital and to issue additional
hybrid debt and (2) profitability pressures. Nonetheless,
Moody's expects ZIC's financial leverage to remain below 30%
and earnings coverage to remain above 7x in the next 12-18 months.
ZIC's SUBSIDIARIES
Moody's has also affirmed with a stable outlook the A1 IFSRs of the group's
UK life subsidiary, Zurich Assurance Ltd (ZAL), and the group's
German life subsidiary, Zurich Deutscher Herold Lebensversicherung
AG (ZDHL). Moody's says that these ratings reflect the intrinsic
fundamentals of these companies, as well as implicit support from
ZIC. Moody's expects that these subsidiaries would benefit
from ZIC's support if required.
In addition, Moody's affirmed the debt ratings of Zurich Finance
(Luxembourg) S.A., Zurich Holding Company of America,
Inc., Zurich Finance (UK) plc, Zurich Finance (USA)
Inc., Zurich Finance (USA) Trust II and Zurich Finance (USA)
Trust V. 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.
WHAT COULD CHANGE THE RATINGS UP/DOWN
Moody's says that the following developments could put upward pressure
on ZIC's ratings: (1) sustained strong core earnings with return
on capital over the underwriting cycle above 10%, (2) adjusted
financial leverage consistently at 20% or below, and earnings
coverage above 10x. Conversely, negative rating pressure
could arise from: (1) return on capital over the underwriting cycle
consistently below 6%, (2) adjusted financial leverage consistently
above 30% and earnings coverage consistently below 7x, (3)
a weakening of capital adequacy, and (4) a material weakening of
business franchise and diversification.
LIST OF AFFECTED RATINGS
Affirmations:
..Issuer: Zurich Insurance Company Ltd
....Insurance Financial Strength, Affirmed
at Aa3
....Subordinate Medium-Term Note Program,
Affirmed (P)A2
....Senior Unsecured Medium-Term Note
Program, Affirmed (P)A1
....Preference Stock Medium-Term Note
Program, Affirmed (P)A3
....Pref. Stock Non-cumulative
Medium-Term Note Program, Affirmed (P)Baa1
....Pref. Stock Preferred Stock,
Affirmed A3(hyb)
....Subordinate Regular Bond/Debenture,
Affirmed A2(hyb)
....Senior Unsecured Regular Bond/Debenture,
Affirmed A1
..Issuer: Zurich Assurance Ltd
....Insurance Financial Strength, Affirmed
at A1
..Issuer: Zurich Deutscher Herold Lebensversicher.-AG
....Insurance Financial Strength, Affirmed
at A1
..Issuer: Zurich Holding Company of America,
Inc.
....Backed Subordinate Medium-Term
Note Program, Affirmed (P)A2
....Backed Senior Unsecured Medium-Term
Note Program, Affirmed (P)A1
....Backed Preference Stock Medium-Term
Note Program, Affirmed (P)A3
....Backed Pref. Stock Non-Cumulative
Medium-Term Note Program, Affirmed (P)Baa1
..Issuer: Zurich Finance (UK) plc
....Backed Junior Subordinated Regular Bond/Debenture,
Affirmed A2(hyb)
....Backed Subordinate Medium-Term
Note Program, Affirmed (P)A2
....Backed Senior Unsecured Medium-Term
Note Program, Affirmed (P)A1
....Backed Senior Unsecured Commercial Paper,
Affirmed P-1
..Issuer: Zurich Finance (Luxembourg) S.A.
....Backed Subordinate Medium-Term
Note Program, Affirmed (P)A2
....Backed Senior Unsecured Medium-Term
Note Program, Affirmed (P)A1
....Backed Senior Unsecured Commercial Paper,
Affirmed P-1
..Issuer: Zurich Finance (USA) Inc.
....Backed Senior Unsecured Commercial Paper,
Affirmed P-1
....Backed Senior Unsecured Regular Bond/Debenture,
Affirmed A1
..Issuer: ZFS Finance (USA) Trust II
.... Backed Pref. Stock Preferred Stock,
Affirmed A3(hyb)
..Issuer: ZFS Finance (USA) Trust V
....Pref. Stock Preferred Stock,
Affirmed A3(hyb)
..Issuer: ZCM Matched Funding Corp.
.... Issuer Rating, Affirmed P-1
..Issuer: Zurich Capital Markets Inc.
.... Issuer Rating, Affirmed Aa3
Outlook Actions:
....Outlook, Remains Stable
..Issuer: Zurich Insurance Company Ltd
..Issuer: Zurich Assurance Ltd
..Issuer: Zurich Deutscher Herold Lebensversicher.-AG
..Issuer: Zurich Finance (UK) plc
..Issuer: Zurich Finance (Luxembourg) S.A.
..Issuer: Zurich Finance (USA) Inc.
..Issuer: ZFS Finance (USA) Trust II
..Issuer: ZFS Finance (USA) Trust V
..Issuer: Zurich Capital Markets Inc.
....Outlook, Changed To Stable From
No Outlook
..Issuer: Zurich Holding Company of America,
Inc.
PRINCIPAL METHODOLOGIES
The principal methodology used in rating Zurich Assurance Ltd and Zurich
Deutscher Herold Lebensversicherung AG was Global Life Insurers published
in August 2014. The principal methodologies used in rating Zurich
Insurance Company Ltd, Zurich Finance (Luxembourg) S.A.,
Zurich Holding Company of America, Inc., Zurich Finance
(UK) plc, ZFS Finance (USA) Trust V, ZFS Finance (USA) Trust
II, Zurich Capital Markets Inc., ZCM Matched Funding
Corp. and Zurich Finance (USA) Inc. were Global Life Insurers
published in August 2014, and Global Property and Casualty Insurers
published in August 2014. Please see the Credit Policy page on
www.moodys.com for a copy of these methodologies.
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 provisionl 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.
The person who approved Zurich Insurance Company Ltd, Zurich Assurance
Ltd, Zurich Deutscher Herold Lebensversicherung AG, Zurich
Finance (Luxembourg) S.A., Zurich Holding Company
of America, Inc., Zurich Finance (UK) plc, ZFS
Finance (USA) Trust V, ZFS Finance (USA) Trust II and Zurich Finance
(USA) Inc. credit ratings is Antonello Aquino, Associate
Managing Director, Financial Institutions Group, JOURNALISTS:
44 20 7772 5456, SUBSCRIBERS: 44 20 7772 5454
The person who approved Zurich Capital Markets Inc. and ZCM Matched
Funding Corp. credit ratings is Stanislas Rouyer, Associate
Managing Director, Financial Institutions Group, JOURNALISTS:
212-553-0376, SUBSCRIBERS: 212-553-1653
The relevant Releasing Office for each rating is identified under the
Debt/Tranche List section on the Ratings tab of each issuer/entity page
on moodys.com.
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 analyst and the Moody's legal entity that has issued the ratings.
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.
Benjamin Serra
VP - Senior Credit Officer
Financial Institutions Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Antonello Aquino
Associate Managing Director
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) with a stable outlook
