OREANDA-NEWS. July 14, 2015. 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 solid and stable capital position and strong earnings generation. ZIG's Fitch Prism factor-based model score was 'Very Strong' based on 2014 financials. The result of the Swiss solvency test, as calculated by the company, remained high at 196% at end-2014 (versus 217% at end-2013).

Fitch recognises the substantial improvements in capital adequacy ZIG has achieved since it dipped during the financial crisis and the decreased volatility of the group's capital ratios. This strengthening is offset by the company's fairly high amount of goodwill and intangibles that adversely affects the quality of capital.

ZIG's financial leverage is in line with its ratings. Using Fitch's methodology, we calculate ZIG's financial leverage at 23.2% for 2014 (2013: 24.8%). Fitch considers the insurer's fixed charge coverage (2014: 10.8x) and financial flexibility as sufficiently strong for the rating level.

Fitch views underlying earnings as strong, primarily driven by ZIC's diversified profit sources and reduced claims experience relating to natural catastrophes. However, for both 2014 as well as 1Q15 ZIC reported a decline in business operating profit after tax (BOP). In 2014 BOP was down by 1% to USD4,638m and net profit declined 3% to USD3,895m. In 1Q15 BOP declined 6% yoy, partly due to a stronger USD.

In 2014 the BOP return on equity for the group declined slightly to 11.1% from 11.6% in 2013, which is below the company's stated strategic target of 12%-14%. However, Fitch views positively for the rating the group's resilience in the challenging operating environment.

Exposure to higher-risk investments, such as equities, hedge funds and private equity, is moderate, at 48% of total group equity at end-2014, but increased versus the previous year (2013: 42%). ZIG's fixed-income portfolio is high in credit quality. About 58% is rated 'AAA' and 'AA' and only 2.5% is below investment-grade or un-rated. Fitch considers 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 actual losses emerging on claims provisions may prove higher-than-expected.

RATING SENSITIVITIES
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 the capital score remains "Very Strong" in Fitch Prism FBM capital model.

The key triggers for a downgrade include a sustained drop in the company's risk-adjusted capital position, an increase in adjusted debt-to-total capital to above 30%, large acquisitions weakening capitalisation, and financial leverage increasing such that it is outside the company's historical risk appetite or area of expertise.

In May 2015, Fitch proposed changes to the way it assesses insurance group and debt ratings (See Exposure Draft: see "Fitch Publishes Exposure Draft of Updated Notching Criteria" dated 12 May 2015 at www.fitchratings.com). It is still assessing the impact of the proposals on companies and their debt issues. If the new notching proposals are made final, ZIG's 'A-' subordinated debt ratings may be upgraded by one notch. No other ratings are expected to be impacted by the proposed changes to Fitch's notching criteria.

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 affirmed at 'A-'

Zurich Finance (USA), Inc.
Senior debt affirmed at 'A+'
Subordinated debt affirmed at 'A-'

Zurich Finance (UK) plc subordinated debt affirmed at 'A-'
ZFS Finance (USA) Trust II subordinated debt affirmed at 'A-'

ZFS Finance (USA) Trust V subordinated debt affirmed at 'A-'
Cloverie plc (secured on subordinated notes of ZIC) senior debt affirmed at 'A+'
Cloverie plc (secured on subordinated notes of ZIC) subordinated debt affirmed at 'A-'