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Rating Action:

Moody's upgrades Zurich Insurance Company ratings (IFSR to Aa3, senior debt to A1)

09 Mar 2011

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.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Simon Harris
MD - Financial Institutions
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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 upgrades Zurich Insurance Company ratings (IFSR to Aa3, senior debt to A1)
No Related Data.
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