S&P Completes Zurich Review, Lowers Ratings

February 18, 2002

Standard & Poor’s announced that it has completed its review of Swiss-based Zurich Financial Services, undertaken after the Sept. 11 attacks, and has lowered its counterparty credit and insurer financial strength ratings on the group’s principal operating entities to double-‘A’-minus from double-‘A,’ and has removed them from CreditWatch, with a “stable outlook.”

In related actions S&P also lowered its counterparty credit rating on Zurich Group Holding, the Switzerland-based holding company of the ZFS group, to single-‘A’ from double-‘A’-minus, as well as the the ratings on the members of Zurich Life U.S. (Federal Kemper Life Assurance Co., Kemper Investors Life Insurance Co., and Zurich Life Insurance Co. of America–collectively Zurich Life U.S.), which were lowered to double-‘A’-minus.

The Zurich Life U.S. operations will “on CreditWatch with negative implications, pending a review of the degree of explicit support that the ZFS group is prepared to give to Zurich Life U.S. The ratings on Zurich Life U.S., if further revised, would be no lower than single-‘A’-plus, reflecting Zurich Life U.S.’s strong stand-alone characteristics,” said >S&P.

S&P summarized the reasons for the changes, and its analysis of ZFS as follows: “The downgrades reflect concerns about the consistency of management’s strategies, earnings underperformance, reduced capitalization, and financial flexibility. Positive rating factors are the ZFS group’s excellent and very well-diversified business position, and the potential for significant improvements in its prospective earnings performance following the successful completion of its reorganization, further supported by improved nonlife underwriting conditions. With regard to Zurich Group Holding, the downgrade also reflects the ZFS group’s reduced diversification by line of business, fewer sources of nonregulated earnings flows as a result of the divestiture program, and reduced, although still very strong, fixed-charge coverage ratios.”

The report took particular note of ZFS “excellent business position” in its core markets in the U.S., the U.K. and Switzerland, and its recent acquisition of Deutsche Bank’s insurance operations, which have strengthened its position” in the key German insurance market.

S&P concluded that ZFS’ capitalization will “remain in the double-‘A’ category, supported by higher retained earnings in 2002 and 2003. Earnings performance will improve substantially as the benefits of the restructuring are expected to materialize, and will be further supported by improving market conditions in property/casualty insurance, but somewhat offset by slower growth in life insurance. Standard & Poor’s expects the ZFS group to achieve a combined ratio of about 100% in the nonlife business segment in 2002. Normalized earnings growth is expected to reach 10%-15% over the estimate of $1.8 billion to $2.0 billion made before September 11. Return on reported U.S. GAAP equity will be more than 11%.”

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