Zurich Insurance Company Ltd.’s A.M. Best ratings outlook is revised from stable to negative, following the company’s disclosure of $275 million in losses from explosions at the Port of Tianjin in China and the forecast of $200 million in third quarter losses to its general insurance business.

At the same time, A.M. Best affirmed Zurich’s financial strength rating of A+ (superior), for both the insurer and some of its rated affiliates.

The ratings entity said it believed Zurich “is likely to be challenged with implementing the necessary remedial actions required to support improvements of this portfolio,” at least in the short term, thanks to heavy competition on rates, weaker economic demand and an unfavorable investment climate.

A.M. Best added that the impact of any actions taken by Zurich management to restore profitability will take time to have a positive effect, leaving the insurer exposed to “further large losses that have impacted the group’s results during the year.”

A.M. Best said it expects Zurich’s general insurance earnings to be adversely affected by the Tianjin losses. As well, provisions set aside for North American auto liability and other lines should be strengthened by $300 million. A.M. Best also agreed with Zurich’s prediction of a $200 million third quarter operating loss for its general insurance segment, versus a profit of $724 million in the same quarter during 2014.

Adding to those pressures, A.M. Best notes that Zurich’s financial challenges follow a “weaker-than-expected” performance during the 2015 first half.

Zurich has faced previous A.M. Best scrutiny over its general insurance segment, with the ratings entity noting, in part, its high expense and loss ratios. Another cause for concern, based on that ongoing monitoring: A.M. Best notes that improvements to Zurich’s accident-year combined ratio will likely reverse in 2015.

Even so, A.M. Best noted that Zurich’s consolidated risk adjusted capitalization will remain strong in 2015. There are some caveats, however, as those numbers are supported by “soft capital elements, including the credit given for the value of life in-force business,” A.M. Best said. Additionally, A.M. Best expects Zurich’s financial leverage and interest coverage ratios to stay within A.M. Best’s tolerances for its ratings.

Zurich Insurance Group abandoned a proposed $8.7 billion bid for British insurer RSA Insurance Group PLC after disclosing its loss forecasts.

Separately, A.M. Best has affirmed the A financial strength ratings of Farmers Insurance Group, with a stable outlook. Best said the action on Farmers reflects the group’s strategic importance to Zurich Insurance Group. Although Zurich has no ownership interest in the Exchange, both entities are strategically linked via a management relationship between the Farmers Exchange and Farmers Group Inc., Best noted.

Source: A.M. Best