Standard & Poor’s Rating Services and A.M. Best separately confirmed their existing ratings of Zurich Insurance Group in recent days, although S&P noted a downward revision in some of the factors driving the rating.

With Zurich announcing a deal to buy a crop insurance operation, S&P affirmed Zurich Insurance Group’s AA- rating on Friday. A.M. Best commented that Zurich’s A+ rating remains unchanged.
While both S&P and Best commented on news of Zurich’s deal to buy U.S.-based crop insurer Rural Community Insurance Services (RCIS) from Wells Fargo—and both rating agencies said the deal was in line with Zurich’s strategic objectives—S&P cast some doubt on management’s ability to stick to an unwavering strategy.

“The group’s consistency of strategy and management’s ability to effectively execute the strategy in the group’s property and casualty (P/C) insurance business is lacking a track record,” S&P said in a statement about its action to affirm Zurich’s AA- financial strength rating.

Explaining the affirmation by noting that the business risk and financial risk profiles underpinning the rating are still very strong, S&P indicated that the “management and governance” aspect of the rating is now weaker.

More specifically, S&P analysts revised their assessment of Zurich’s management and governance to satisfactory from strong, noting “weaker-than-expected profitability in its property/casualty division, unexpected reserve-strengthening measures and the recent appointment of an interim CEO.

During an investor call in early November, Zurich Insurance Chief Financial Officer George Quinn addressed the question of changing strategy on M&A when an analyst asked whether he could “make a bold statement” ruling out “a major M&A transaction like RSA.”

Quinn responded: “I think we have actually made that bold statement already. That’s what actually happened in September. Given the challenges we face in general insurance, we’ve made it clear that that’s the No. 1 priority for us,” he said, referring to efforts to address underlying performance issues.

The uncertainty regarding the potential acquisition of RSA Insurance Group also raised questions regarding the group’s consistency of strategy, since the potential takeover would have been transformational for Zurich and beyond our initial expectations of smaller bolt-on acquisitions,” S&P said, referring to Zurich’s September decision to drop a bid for U.K. competitor RSA Insurance Group Plc in order to focus on P/C performance issues.

Nonetheless, S&P said it views Zurich’s planned deal for (RCIS) from Wells Fargo as being in line with the group’s strategy to expand in the U.S. commercial middle-market segment. “Moreover, the crop insurance business of RCIS, with a premium volume of about $2 billion and a No. 2 market position in crop insurance in 2014, will further improve the group’s business mix and diversification in the U.S., in our view,” S&P said.

For its part, A.M. Best said it believes that the scale of the crop insurance deal is unlikely to have a negative impact on Zurich’s rating fundamentals, officially commenting that the A+ financial strength rating it has in place for Zurich is unchanged as a result of the crop insurer acquisition. Best compared the gross written premium volume of roughly $2 billion with Zurich’s reported overall gross volume of $55 billion in 2014 to explain why the rating agency is taking no action.

“The transaction is in line with Zurich’s strategic objectives to prioritize investments in business segments where the group maintains a distinct competitive advantage. The purchase is expected to exceed Zurich’s hurdle rate of 10 percent return on investment in 2017, thereby enhancing the diversity of the group’s General Insurance [P/C] portfolio and strengthening its earnings,” Best said, adding that the deal is also aligned with Zurich’s previously announced plans to deploy about $3 billion of excess capacity by 2016.

The Best announcement noted that Zurich has been a member of the RCIS reinsurance panel since 2000—a position that “should support the swift transition of RCIS into the group’s operating model.”

“After considering the terms of the transaction, A.M. Best expects Zurich’s consolidated risk-adjusted capitalization to remain supportive of the current ratings.”

S&P noted that under its base-case assumption, Zurich’s profitability will remain sufficient for the group to maintain very strong capital adequacy in 2015-2017 while financing dividend expectations and the potential deployment of the $3 billion in excess capital. Specifically, S&P expects Zurich’s net income to top $3 billion in 2015 and to exceed $3.5 billion in 2016-2017. S&P expects Zurich’s combined ratio to come in at about 100 for 2015.

Sources: S&P, A.M. Best