S&P Keeps Zurich on CreditWatch, Outlook Still Negative

September 18, 2002

Standard & Poor’s indicated that its ratings on Switzerland’s Zurich Financial Services (ZFS) will “remain on CreditWatch with negative implications, where they were placed on Sept. 5, 2002, pending the successful implementation of ZFS’ rights issue.” (See IJ Website Sept. 17)

S&P recapped the actions it has taken on ZFS. It lowered them to single-‘A’-plus and placed the group on CreditWatch following announcement that it would increase its net non-life reserves by $2 billion following a third-party actuarial review, planned to write down asset values by $1 billion, and to incur restructuring charges of about $500 million in the second half of 2002. “These actions will put significant strain on the group’s already reduced risk-based capitalization,” said the bulletin.

It noted ZFS’s plans to implement “a significant capital and operational improvement program to rebuild its balance sheet strength and enhance its net income in 2003 by an additional $1 billion,” and called the successful completion of the rights issue “one of the cornerstones of this program.”

The update follows ZFS’ announcement that its proposed rights issue, announced on Sept. 5, 2002, has been fully underwritten for an amount of approximately $2.5 billion. “This represents a key step in successfully completing the issue, which is still subject to shareholders’ approval at an extraordinary general meeting on Oct. 11, 2002,” stated S&P credit analyst Karin Clemens.

Clemens indicated that “In the event of the successful completion of the rights issue, Standard & Poor’s expects to remove the ratings on ZFS from CreditWatch and affirm them at their current level.” “The outlook would be negative pending satisfactory implementation of group management’s operational improvement program, which has the potential to significantly enhance earnings.”

S&P warned, however, that If the rights issue is not successfully completed, it would “lower the ratings further,” reflecting “concerns as to whether the group’s earnings capacity would be sufficient to restore capital adequacy to a level consistent with the current ratings.” It still expects ZFS ratings to “remain in the single-‘A’ range.”

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