Zurich Group\u2019s insurer financial strength (IFS) rating of AA-\/Stable will be put under pressure if it issues debt to help buy RSA, according to Fitch Ratings.<\/p>\n
Zurich has said that it has about $3bn available for M&A, while RSA\u2019s market capitalisation is valued at \u00a35.1bn ($8bn), Fitch added.\n<\/p>\n
Zurich has also indicated that it has an appetite to issue more hybrid debt.<\/p>\n
As a result Fitch said it expected if Zurich proceeded, it would fund the acquisition with a combination of existing resources and new debt.<\/p>\n
An increase in Zurich\u2019s Fitch-calculated financial leverage (adjusted debt-to-total capital ratio) to above 30% is the strongest trigger for a negative rating action.<\/p>\n
According to the ratings agency, Zurich\u2019s financial leverage was 23.2% at the end of 2014 and the 30% level would potentially be breached if Zurich raised $5bn or more of additional debt to help finance the acquisition.<\/p>\n
Fitch said: \u201cA decline in Zurich capital strength under Fitch\u2019s Prism factor-based capital model – which is likely if the acquisition goes ahead – could also lead to a downgrade.<\/p>\n
\u201cWhile Zurich\u2019s capital position might benefit from the added diversification of RSA\u2019s business, it could be significantly weakened, in Fitch\u2019s assessment, by goodwill associated with the purchase.<\/p>\n
\u201cFinally, deterioration in Zurich\u2019s profitability following an acquisition could also lead to a downgrade, although Zurich has emphasised that any investment must yield at least a 10% return on equity.\u201d<\/p>\n
However Fitch said RSA would give Zurich access to markets it did not yet have a presence in and strengthen its position in the UK and Latin America.<\/p>\n
RSA is much smaller than Zurich, with annual premium income of around $1bn compared to the German insurer\u2019s annual revenue of $74bn.<\/p>\n
Gaining a parent would also be positive for RSA\u2019s rating and help address the outstanding issues weighing on its credit profile.<\/p>\n
Fitch said RSA\u2019s main operating entities have an IFS rating of A\/Negative.<\/p>\n
Source: www.insurancetimes.co.uk<\/p>\n","protected":false},"excerpt":{"rendered":"
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