Outlook moves from positive to negative due to investments
Fitch Ratings has downgraded Zurich Insurance Company's (ZIC) outlook to negative from positive. The agency has affirmed the company's Insurer Financial Strength (IFS) rating at 'A+' and its Long-term Issuer Default Rating (IDR) at 'A'.
ZIC is considered to be a core part of the Zurich Financial Services (ZFS) group. The outlooks on two further entities within ZFS have been revised to negative from positive.
The outlook revision reflects the decline in ZFS's capital adequacy during 2008 and Fitch's view that the group's level of capitalisation is below expectations for the current rating level. The action also reflects Fitch's opinion that there are likely to be greater challenges in rebuilding the capital base in the current financial environment.
Fitch recognises that the weakening in capital adequacy substantially reflects the impact of falling interest rates on bond valuations and value in force (VIF) in the life portfolio, and has therefore taken into account the likely temporary nature of capital declines related to spread widening. The agency also notes that foreign exchange movements accounted for USD2.7bn of the USD6.8bn decline in shareholders' equity in 2008. Fitch has additionally taken into account ZFS's strong earnings generation and the extent to which this may be able to increase the group's available capital during 2009.
Based on Fitch's own assessment, ZFS's capital adequacy in 2008 declined mainly due to a combination of a 24% decline in shareholders' equity to USD22.1bn, a reduction in life VIF, and an increase in intangible assets related to acquisitions made during the year. Fitch additionally notes that the group's capital requirements reduced in 2008 due to the reduction in total investment assets.
Fitch believes that many insurers are facing significant pressures from the financial crisis, mainly via sharp declines in the market values of their investment holdings, and via diminished financial flexibility.
The ratings continue to reflect ZFS's good operating performance and the strength of the group's business position in its key markets. Fitch also believes that investment asset quality remains high, limiting fixed-income and equity impairments to USD2.5bn in 2008. Other positive rating factors include the strength of ZFS's relationship with the Farmers Exchanges, the stable and reliable income stream that this generates, and the good new business margins that continued to be achieved in the life business.
Fitch believes that ZFS is well-positioned from a liquidity perspective and does not face near-term refinancing risk on any of its outstanding debt issues. The agency notes that the group has access to a number of credit facilities that were substantially unused as of the end of 2008.
Underlying earnings remain broadly in line with Fitch's previous expectations in light of challenging investment market conditions. The reported combined ratio in 2008 increased to 98.1% (2007: 95.6%) and net income declined to $3.0bn from $5.7bn. The combined ratio benefited from a prior year reserve development equivalent to 4.2pts (2007: 3.6pts).
