London, 09 March 2011 -- Moody's Investors Service announced today that it had upgraded the insurance
financial strength rating (to Aa3) and debt ratings (senior to A1,
subordinated to A2 (hyb), preferred to A3 (hyb)) of Zurich Insurance
Company Ltd (ZIC), and associated ratings listed below. The
rating review is maintained on two specific hybrid securities.
Please see ratings list below for full details of all ratings actions.
The outlook on the upgraded and confirmed ratings is stable. Moody's
said that the action taken concludes the review for possible upgrade that
was initiated on 18 October, 2010.
RATINGS RATIONALE
Moody's said that the upgrade of ZIC's ratings reflects improvements
in Zurich Group's (Zurich) capital adequacy, financial flexibility,
and asset quality, whilst producing a very good operating performance
in recent times and maintaining an excellent market position and excellent
business diversification.
The group's solvency position has improved meaningfully in recent times
on both a statutory and economic basis. Its Solvency 1 ratio increased
significantly during 2010 to a high 243% (YE09: 195%)
and the group has also filed with the Swiss regulator a strong Swiss Solvency
Test (SST) ratio in excess of 200% as of June 30, 2010.
Total equity increased by 7% during 2010 on top of the 30%
increase during 2009, which has led to an improvement in Moody's
capital metrics. Zurich's economic solvency ratio,
which is calibrated at a 99.95% confidence level,
remains towards the top end of the group's target range of 110-120%
and is the third highest recorded by the group for nine years, although
showed a decline during 2010 to an estimated 119% (136%).
The group's financial flexibility has also improved. YE10 adjusted
financial leverage stood at 25.2% (YE09 : 25.4%),
which is in the middle of Moody's Aa parameter expectations and
a meaningful improvement from the YE08 figure of 30%. Total
leverage has also improved to 35% (YE09: 38%),
and although 2010 earnings cover decreased to 7.2x (YE09:
8.5x), coverage on a five year average basis is very good
at around 8.5x. The group's access to capital markets is
viewed as excellent by Moody's as demonstrated by the $1.1bn
equity raise in 2009, as well as a number of senior and more junior
financial debt transactions between 2009 and 2011YTD totalling around
$4.8bn. With regard to asset quality, the proportion
of high risk assets to equity decreased again during 2010 to 62%
(YE09: 66%) with Zurich's investment portfolio viewed as
relatively conservative, and the proportion of goodwill and intangibles
to equity decreased again to 71% (YE09: 79%).
Zurich group's return on capital (ROC) in 2010 was a very good 7.9%,
but below the 10.5% recorded in 2009, reflecting a
greater cost from natural catastrophes and large claims, a banking
loan loss provision, the Farmers' class action settlement,
and a higher capital base. Furthermore, the group's
five year average ROC is an excellent 11%, and although on
a Business Operating Profit (BOP) basis -- an internal measure
used by Zurich which indicates underlying performance -- post tax
ROE reduced during 2010 to 12.9% (YE09:17.6%),
the last five years has averaged around 17%, compared to
a cross-cycle target of 16%. Zurich, 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, and to cut costs, and expects Farmers' Management
Services to continue to be a meaningful and reliable contributor to the
Group's net income.
Zurich's business profile remains excellent. It is a major European
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. A continuation of this improvement will be aided,
in Moody's opinion, by the group's recently announced
proposed acquisition of 51% of Banco Santander's Latin American
and life orientated insurance operations. Overall, Moody's
views this acquisition as credit-positive for Zurich, although
it is a relatively small within the context of the overall group.
Moody's has also upgraded the ratings of the group's UK life subsidiary,
Zurich Assurance Ltd (to A1 insurance financial strength rating (IFSR)
from A2). 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. Specifically, there
is a legally binding Funding Agreement in place between the entity and
Zurich.
The A1 IFSR on Zurich Deutscher Herold Leben ("ZDHL") was
confirmed with a stable outlook. The A1 rating, which is
two notches higher than the adjusted rating indicated by the Moody's insurance
financial strength rating scorecard, reflects the company's
key role within Zurich and the implicit support derived from its role
as the administrative hub for Zurich's life insurance operations
in Germany, Switzerland and Austria. The absence of explicit
forms of support prevents further uplift in ZDHL's rating.
ZDHL has a strong market position in the German life insurance market
with a leading franchise in the growing unit-linked market.
The A3 (hyb) subordinated debt ratings on two of ZIC's hybrids remain
on review for possible upgrade. These hybrids, CHF700m 4.25%
undated subordinated EMTN notes issued in November 2010 (ISN: CH0117606514)
and CHF500m 4.625% undated subordinated EMTN notes issued
in February 2011 (ISN: CHF117605458), contain a mandatory
coupon deferral clause linked to a breach of minimum capital levels under
the Swiss Solvency Test (SST) which came into effect at the beginning
of 2011. Moody's continues to review the strength of this
deferral clause. If Moody's ultimately regards this mandatory
deferral test to be 'strong', the notching of these
instruments from the IFSR may be widened meaning that the current ratings
will either be confirmed, or upgraded to A2 (hyb). Moody's
expects to conclude this review over the next few months.
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,
and a material weakening of business franchise and diversification.
Moody's will comment separately on any rating implications of the
upgrade of ZIC for Zurich's US operations.
The following ratings were upgraded and assigned a stable outlook:
Zurich Insurance Company Ltd- insurance financial strength rating
to Aa3 from A1;
Zurich Insurance Company Ltd and guaranteed EMTN issuers- senior
unsecured debt to A1 from A2, EMTN Programme senior unsecured debt
to (P)A1 from (P)A2, subordinated debt to A2 (hyb) from A3 (hyb),
EMTN Programme subordinated debt to (P)A2 from (P)A3, capital note
to A3 (hyb) from Baa1 (hyb);
Zurich Insurance Company Ltd- EMTN Programme Type A Capital Notes
to (P) A2 and (P) A3 from (P) A3 and (P) Baa1, EMTN Programme Type
B Capital Notes to (P) A3 and (P) Baa1 from (P) Baa1 and (P) Baa2;
Zurich Finance (USA) Trusts II, IV & V: preferred stock
rating to A3 (hyb) from Baa1 (hyb);
Zurich Assurance Ltd: insurance financial strength rating to A1
from A2;
Zurich Bank: long-term bank deposit rating to Aa3 from A1,
guaranteed senior debt EMTN programme rating to (P)A1 from (P)A2.
The following rating was confirmed with a stable outlook:
Zurich Deutscher Herold Lebensverischerung AG: A1 insurance financial
strength rating;
The following A3 (hyb) subordinated debt ratings remain on review for
possible upgrade:
Zurich Insurance Company Ltd- CHF700m 4.25% undated
subordinated EMTN notes (Debt detail: ISN: CH0117606514)
Zurich Insurance Company Ltd- CHF500m 4.625% undated
subordinated EMTN notes (Debt detail: ISN: CHF117605458)
The principal methodologies used in rating ZIC and associated entities
were Moody's Global Rating Methodology for Property and Casualty Insurers
published in May 2010, and Moody's Global Rating Methodology for
Life Insurers published in May 2010. The principal methodologies
used in rating Zurich Bank were Bank Financial Strength Ratings:
Global Methodology published in February 2007 and Incorporation of Joint-Default
Analysis into Moody's Bank Ratings: A Refined Methodology published
in March 2007.
Based in Zurich, Switzerland, Zurich Financial Services (ZFS)
reported gross written premiums and policy fees of USD 50 billion and
total equity of USD 33.3 billion as of December 31, 2010.
Moody's last rating action on ZIC occurred on 18 October 2010 when the
ratings were placed on review for possible upgrade.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
The rating has been disclosed to the rated entity or its designated agents
and issued with no amendment resulting from that disclosure.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
three years preceding the Credit Rating Action. Please see the
ratings disclosure page www.moodys.com/disclosures on our
website for further information.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
London
Dominic Simpson
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
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London
Simon Harris
MD - Financial Institutions
Financial Institutions Group
Moody's Investors Service Ltd.
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Moody's upgrades Zurich Insurance Company ratings (IFSR to Aa3, senior debt to A1)
