July 17, 2017 / 5:47 PM / 6 days ago

Correction: Fitch Affirms Zurich Insurance Company IFS at 'AA-'; Outlook Stable

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(The following statement was released by the rating agency) FRANKFURT/LONDON, July 17 (Fitch) This commentary replaces the version published on 24 May 2017 to include the ratings listed at the end of this commentary. 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. KEY RATING DRIVERS The affirmation reflects ZIG's very strong business profile, solid and stable capital position and strong earnings generation. ZIG's capitalisation, as measured by Fitch Prism factor-based model (FBM), was 'Very Strong' based on 2016 financials. The result of the Swiss solvency test, as calculated by the company, improved to 227% at end-2016 from 189% at end-2015. However, 27ppts of the improvement was driven by changes in the methodology. Financial leverage, as calculated by Fitch, increased to 25% at end-2016 (2015: 23%), driven by increased subordinated debt. However, earnings recovery in 2016 caused the insurer's fixed charge coverage to improve to 10x (2015: 8x), despite higher interest expenses. Fitch assesses ZIG's financial flexibility as strong. After the 2015 results were negatively impacted by adverse reserving developments in the general insurance division, 2016 business operating profit recovered and increased 55% to USD4,530 million. ZIG accelerated its efficiency programme and reached the targeted USD300 million run-rate direct expense savings in 2016. The combined ratio improved to 99.5% in 2016 from 103.6% in 2015. Net profit increased to USD2.9 billion in 2016 from USD1.9 billion in 2015 and the return on equity improved to 10% from 6%. The positive development continued in 1Q17 with business operating profit of USD1.2 billion, up 14% on 1Q16. Fitch views underlying earnings as strong, primarily driven by ZIC's diversified profit sources and reduced claims experience relating to natural catastrophes. Fitch expects that the efficiency programme initiated last year will contribute positively to earnings development. 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 larger than expected. However, the negative reserving development in 2015 was adequately addressed by reserve adjustments made and the general insurance division reported a positive reserve development for 2016. Exposure to equities and speculative-grade bonds is moderate, at 62% of total group equity at end-2016, slightly improved on 2015's 65%. ZIG's fixed-income portfolio is high in credit quality, with 54% rated at 'AAA' and 'AA' and 5% below investment-grade or un-rated. RATING SENSITIVITIES The ratings could be upgraded if ZIG's leverage drops below 20% or if profitability improves on a sustained basis with a net return on equity of more than 12% and a combined ratio of 95% or below, with capitalisation, as measured by Fitch Prism FBM, remaining "Very Strong". Key triggers for a downgrade include a sustained drop in the group's risk-adjusted capital position, as measured by a Prism FBM score, to the 'Strong' range and an increase in financial leverage to more than 30%. FULL LIST OF RATING ACTIONS ZIC IFS Rating affirmed at 'AA-'; Stable Outlook Long-Term IDR affirmed at 'A+'; Stable Outlook Senior debt affirmed at 'A+' Subordinated debt (XS1418788755, CH0315593852, CH0245863474) affirmed at 'A-' Zurich Finance (UK) plc subordinated debt affirmed at 'A-' Cloverie plc (secured on ZIC notes) Senior debt affirmed at 'A+' Subordinated debt affirmed at 'A-' Cloverie plc Subordinated debt (XS1449950663, XS1385999492) affirmed at 'A-' Contact: Primary Analyst Dr Stephan Kalb Senior Director +49 69 7680 76 118 Fitch Deutschland GmbH Neue Mainzer Str. 46-50 60311 Frankfurt Secondary Analyst Dr Christoph Schmitt Director +49 69 7680 76 121 Committee Chairperson Federico Faccio Senior Director +44 20 3530 1394 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. 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