OREANDA-NEWS. Fitch Ratings has affirmed Zurich Insurance Company's (ZIC) Insurer Financial Strength (IFS) rating at 'AA-' and Long-Term Issuer Default Rating (IDR) at 'A+'. The Outlooks are Stable. ZIC is the main operating company of the Zurich Insurance Group (ZIG). A full list of rating actions is available at the end of this commentary.


The affirmation reflects ZIG's solid and stable capital position and Fitch's expectation that the insurer's sharp earnings decline in 2015 will not be repeated. ZIG's capitalisation, as measured by Fitch's Prism factor-based capital model (Prism FBM), was 'Very Strong' based on 2015 financials. The result of the Swiss Solvency Test, as calculated by the company, remained high at 189% at end-2015 (versus 196% at end-2014).

Financial leverage, as calculated by Fitch, is in line with ZIG's ratings at 23% at end-2015 (2014: 23%). The sharp decline in earnings 2015 caused the insurer's fixed charge coverage to fall to 8x (2014: 11x), despite lower interest expenses. Fitch expects the ratio in 2016 to return to its long-term average of 10x. Fitch views the financial flexibility of the group as sufficiently strong for the ratings.

ZIG's 2015 results were affected by negative reserve development in the general insurance (GI) segment, as well as larger-than-expected larger losses, which caused the division's business operating profit (BOP) to fall to USD864m (2014: USD2,979m). As a result, ZIG's BOP fell sharply to USD2.9bn (2014: USD4.6bn) while net profit decreased to USD1.8bn (2014: USD2.9bn).

For 1H16 ZIG reported a BOP of USD2.2bn, down 2% from 1H15. The contribution from GI was USD1.2bn, up 3% versus 1H15, signalling a strong recovery from 2H15. The combined ratio was 98.4%, unchanged from 1H15 but improved compared with the full year 2015. Net profit, which was burdened by restructuring charges and lower realised capital gains, declined 22% to USD1.6bn. Shareholders' equity was USD31.6bn, slightly up from USD31.1bn at end-2015.

The negative reserve development has been adequately addressed by reserve adjustments made in 2015 as GI reported a positive reserve development for 1H16. Fitch views the insurer's technical reserves as prudent, but also recognises that due to the long-tail nature of the non-life business, the group faces the risk that ultimate losses on claims provisions may prove higher than expected. Fitch expects that the efficiency programme initiated last year will contribute positively to future earnings development.

Exposure to equities and speculative-grade bonds is moderate, at 65% of total group equity at end-2015, but up on 2014's 48%. ZIG's fixed-income portfolio of high credit quality, with 55% rated at 'AAA' and 'AA' and only 4% below investment-grade or unrated.


The ratings could be upgraded if ZIG's leverage drops below 20% and fixed-charge coverage increases to above 12x, on a sustained basis, while capitalisation, as measured by Prism FBM, remains 'Very Strong'.

Key triggers for a downgrade include a sustained drop in the company's risk-adjusted capital position, as measured by a Prism FBM score, to the low end of the 'Strong' range, and an increase in financial leverage to more than 30%.



IFS rating affirmed at 'AA-'; Stable Outlook

Long-Term IDR affirmed at 'A+'; Stable Outlook

Senior debt affirmed at 'A+'

Subordinated debt affirmed at 'A-'

Zurich Finance (UK) plc subordinated debt affirmed at 'A-'

ZFS Finance (USA) Trust V subordinated debt affirmed at 'BBB+'

Cloverie plc (secured on ZIC notes)

Senior debt affirmed at 'A+'

Subordinated debt affirmed at 'A-'