A.M. Best Comments on Ratings of Zurich Insurance Group Ltd Following Its Preliminary Update for the Fourth Quarter of 2015

A.M. Best has commented that the financial strength rating of A+ (Superior) and the issuer credit rating of “aa-” of Zurich Insurance Company Limited (ZIC) (Switzerland) and its rated affiliates are unchanged, following Zurich Insurance Group Ltd’s (Zurich) (Switzerland) preliminary update on the performance of its General Insurance business. The outlook for the ratings is negative.

On 20 January 2016, Zurich announced that the General Insurance segment (representing approximately two-thirds of consolidated gross written premium and 50% of operating profits in 2014) will produce an operating loss of USD 100 million for the fourth quarter of 2015, due to further large losses mainly affecting the global corporate and European portfolios, and the impact from a number of catastrophic events in the quarter, particularly the U.K. and Ireland floods. Additionally, Zurich’s overall performance in the fourth quarter is expected to be hampered by a charge of around USD 475 million associated with the group’s accelerated efficiency programme and a USD 230 million impairment charge related to the write-off in goodwill arising from its Germany life business.

The persistent occurrence of large losses that have affected Zurich’s performance during the year continues to generate concerns about the extent of the problems underpinning the General Insurance segment and the effectiveness of Zurich’s underwriting risk management framework. A.M. Best has previously cited the performance of the General Insurance segment to be a weakness for Zurich’s rating level, as per the 2 October 2015 rating action when the outlook on the ratings of ZIC and some of its main rated affiliates was revised to negative from stable.

Given the short-term nature of the affected contracts, a material improvement in technical results is anticipated during 2016 and beyond, although A.M. Best recognises that remedial actions taken to restore profitability are expected to take time to materialise into a better quality insurance portfolio. A.M. Best expects Zurich to continue to meet performance targets for its other business segments.

With the more recent changes to Zurich’s management structure, execution risk arises with the group’s strategy to turn around performance, which may have some negative implications for prospective results. Throughout the transition period, A.M. Best will continue to closely monitor Zurich’s performance to ensure that results are commensurate with its rating level. Reported earnings that are materially outside of A.M. Best’s expectation will likely result in a downward rating movement.

Zurich’s consolidated risk-adjusted capitalisation is anticipated to remain at a strong level into 2016, although a continuation of the lacklustre results reported will erode capital buffers in place to cushion against further unexpected losses. A.M. Best will continue to monitor Zurich’s consolidated risk-adjusted capitalisation in view of the group’s acquisition of the leading U.S. agricultural crop insurer,Rural Community Insurance Services, which is expected to close in the first quarter of 2016, as well as its plans to deploy the remaining unutilised portion of USD 3 billion of excess capital by 2016.

This press release relates to rating(s) that have been published on A.M. Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see A.M. Best’s Recent Rating Activity web page.

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