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Moody’s turns positive on Zurich citing improved profitability

17th January 2023 - Author: Jack Willard

Moody’s has upgraded the Aa3 insurance financial strength rating (IFSR) and debt ratings (A1 senior unsecured, A2(hyb) subordinated, A3(hyb) preferred stock) of Zurich Insurance Company Ltd ., the insurers outlook has been changed to positive from stable.

Zurich LogoMoody’s upgrade and change in outlook reflect the company’s improved profitability, which the rating agency notes has “become stronger and less volatile”.

Moody’s states that this supported by a more balanced business mix with reduced risk in its commercial insurance business and diminished exposure to interest rate and credit risk expected on completion of its life insurance back-book sales.

At the same time, Moody’s writes that it expects profitability to “remain resilient” through future underwriting and economic cycles.

Moody’s also noted that the affirmation of Zurich’s Aa3 IFSR also reflects the firms very strong market position, diversified business model, and resilient financial profile, including robust capital adequacy and financial flexibility which positions the group to withstand macroeconomic challenges and fluctuations of the insurance pricing cycle.

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In addition, Zurich earns fee income through Farmers Group, Inc., management company for the unaffiliated Farmers, which is a steady contributor to Zurich’s profitability and a key differentiator to peers. However, with farmers having experienced weak underwriting results in recent years,, this resulted in constrained capital growth, which has led to high operating and financial leverage.

Moody’s highlights how persistent underwriting losses could require Zurich to provide financial support in the future. Moody’s notes that a turnaround in Farmers underwriting profitability and capital generation would be an
“important consideration” toward upgrading Zurich’s ratings as it would strengthen the sustainability of
Farmers Group, Inc.’s role as a material contributor to group earnings.

Looking ahead, Moody’s stated that Zurich expects to further strengthen its retail property & casualty (P&C) market position through “significant investment” in technology and customer focus and to grow its middle-market commercial insurance presence in key markets within the US, UK and Australia.

Furthermore, Moody’s also affirmed the A3 IFSR of Zurich American Life Insurance Company, based on its strong asset quality, good liquidity, and good albeit declining capital levels. Moody’s noted that these factors are offset by its weak profitability and slowly improving business profile.

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