17 August 2015 Insurance

Zurich ratings may be under pressure, says Fitch

Rating agency Fitch has said that Zurich Insurance’s ratings may come under pressure if it issues debt to help fund a potential acquisition of UK-based RSA Insurance.

According to the rating agency, Zurich has previously said it has $3 billion available for mergers and acquisitions (M&A), while the market valuation for RSA is $8 billion.

“Zurich has also indicated that it has an appetite to issue more hybrid debt, so Fitch expects Zurich, if it proceeds, would fund the acquisition with a combination of existing resources and new debt,” said Fitch.

The rating agency said that an increase in Zurich’s Fitch-calculated financial leverage (adjusted debt-to-total capital ratio) to above 30 percent would be likely to cause a negative rating action.

Zurich’s financial leverage was 23.2 percent at the end of 2014 and it is possible the 30 percent level would be breached if Zurich raises $5 billion or more of additional debt to fund the acquisition.

A decline in the capital strength of Zurich, which is likely if the deal goes ahead, could also lead to a downgrade for the firm, even though the move might benefit its capital position due to the diversification RSA would add to its portfolio.

Zurich has until August 25, 2015 to decide whether it will make an offer for RSA.

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