25 January 2016 Insurance

Zurich’s financial leverage to be hit by losses: Moody’s

US credit rating firm Moody’s has said it expects Zurich’s earnings coverage and capital and financial leverage to be negatively affected by the insurer’s announcement that it will show some $100 million of operating losses in its general business for its fourth-quarter 2015 earnings.

Zurich also announced last week that it experienced around $475 million of restructuring costs in the fourth quarter of last year.

The expected operating loss in the company’s general insurance segment follows a $183 million operating loss in the third quarter. Both quarters were affected by material catastrophes including a $275 million loss related to the explosion in the port of Tianjin in the third quarter and $275 million loss related to a series of UK and Ireland floods in the fourth quarter.

Moody’s said that that even after adjusting for these losses and other exceptional events, the general insurance segment profitability has been weakening for several quarters. This deterioration mostly results from large claims, notably in its global corporate segment.

According to the firm, Zurich had already identified underperforming portfolios, representing around 15 percent of its general insurance premiums. It had already started pruning these portfolios in the second half of 2015, exiting loss-making segments or regions and increasing prices in order to improve profitability.

Moody’s did say, however, that premiums will likely decrease in 2016 and underwriting actions take time to fully bear fruit because it will take up to one year to replace or end existing underperforming businesses.

“We therefore expect underwriting results to remain under pressure this year. Zurich is also reducing expenses, but the benefits to net income will be offset by restructuring costs,” it said.

Zurich announced that it will account for $475 million of restructuring charges in the fourth quarter of 2015 because it accelerated its efficiency programme, but Moody’s said it expects additional restructuring charges in 2016.

“These headwinds will come in addition to the low interest rates, which push investment income downwards and led ZIC to write-off around $230 million goodwill related to its German life business,” said the firm.

“Overall, we expect Zurich to report a net loss for the fourth quarter and overall net income of around $2.0 billion for the full year 2015. This would translate into a return on capital of around 4 percent or lower in 2015, down from 7.0 percent in 2014. The lower return will also push earnings coverage to around 6x in 2015, from 9.4x in 2014.

“These two metrics in 2015 are significantly below our expectations for Aa-rated insurance companies.”

Moody’s said because it expects 2015 profits to be lower than the dividends the group paid in 2015 ($2.7 billion), the decline will also have a negative effect on the group’s capitalisation, and therefore financial leverage.

“Nonetheless, the effect will be moderate and we consider Zurich’s solvency was strong at year-end 2015.

However, the company announced in May 2015 that it plans to redeploy $3 billion of capital through acquisitions (including the $675 million allocated to the planned acquisition of Rural Community Insurance Services) and/or distributions to shareholders, and that it could increase the group’s leverage. In the absence of rapid improvements in profitability, such actions would negatively pressure the group’s credit and ratings,” it said.

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