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Rating Action:

MOODY'S LOWERS LONG-TERMS RATINGS OF ZURICH INSURANCE COMPANY (INSURANCE FINANCIAL STRENGTH RATING TO A2 FROM A1); SHORT-TERM RATING OF PRIME-1 AND RATINGS OF FARMERS GROUP ARE CONFIRMED WITH STABLE OUTLOOKS; OTHER RATING ACTIONS ANNOUNCED

30 May 2003
MOODY'S LOWERS LONG-TERMS RATINGS OF ZURICH INSURANCE COMPANY (INSURANCE FINANCIAL STRENGTH RATING TO A2 FROM A1); SHORT-TERM RATING OF PRIME-1 AND RATINGS OF FARMERS GROUP ARE CONFIRMED WITH STABLE OUTLOOKS; OTHER RATING ACTIONS ANNOUNCED

Negative outlook assigned to long-term ratings of ZIC

London, 30 May 2003 -- Moody's Investors Service has lowered the long-term insurance financial strength rating of Zurich Insurance Company (ZIC) and guaranteed subsidiaries to A2 from A1, senior debt rating to Baa1 from A2, and subordinated debt rating to Baa2 from A3. The long-term issuer ratings of Zurich Capital Markets Inc. (ZCMI) and ZCM Matched Funding Corp. were downgraded to A2 from A1. The long-term ratings have been assigned a negative outlook. Moody's added that a separate release would follow regarding Zurich Bank.

Separately, the short-term rating of Prime-1 was confirmed of ZCM Matched Funding Corporation. The ratings of the Farmers Insurance Exchanges as well as Zurich RegCaps securities were confirmed. These ratings carry a stable outlook. Other rating actions on ZFS Group companies are detailed in the list below.

The current rating actions conclude a review that commenced on 27 February 2003.

Moody's said that the negative outlook assigned to the long-term ratings of ZIC and related companies reflects the rating agency's assessment of the near-term execution risks associated with the company's divestment program and restructuring of the Global Assets Division. Moody's added that, over the medium-term, the current improvements in pricing for non-life insurance, which accounts for approximately 2/3rds of total net premiums written, coupled with enhanced operational performance across the Group and the orderly restructuring of the Global Assets division, which includes ZCM and Centre, will lead to sustained improvements in the quantity, stability, and quality of earnings throughout the ZFS Group.

Moody's added that ZCMI, ZCM Matched Funding Corp. and Zurich Bank are beneficiaries of a Surety Bond, dated August 6, 1997, which was issued by Zurich Insurance Company in favour of ZCMI. Because a surety bond is a policyholder obligation, Moody's believes that the credit strength of these securities is commensurate with that of the insurance financial strength of the Zurich Insurance Company.

The ratings of Kemper Corporation, Kemper Investors Life Insurance Company (KILICO), Federal Kemper Life Assurance Company (FKLA), Zurich Life Insurance Company of America (ZLICA) were also downgraded (see list below). In a subsequent rating action, the ratings of FKLA and ZLICA (Insurance Financial Strength rating of A3, following the downgrades) are being placed on review for possible upgrade following the announcement of the sale to Bank One Corporation (senior rating of Aa3). In addition, the A3 insurance financial strength rating of Kemper Investors Life Insurance Company are being placed on review for possible downgrade. (Please see separate press release for further details.)

In addition, Moody's said that because of the weakened capacity of ZIC to provide support for other group companies, ratings on certain entities, which previously had benefited from implied support, are being placed at levels which reflect their stand-alone financial fundamentals.

In reference to the rating downgrades, Moody's said these are based on four factors: 1.) As of the end of 2002, Zurich Insurance Company's (ZIC) balance sheet was qualitatively weaker than that of the parent. However, Moody's expects that ZFS will be taking steps over the course of 2003 to improve the capitalisation of ZIC. 2.) Because of reduced solvency levels, the capacity of ZFS' regulated subsidiaries to upstream dividends is proscribed and likely to remain so until at least 2004, in the rating agency's view. This is placing pressure on holding company liquidity 3.) The somewhat weaker interest and dividend coverage levels and elevated tangible leverage profile relative to Moody's expectations at the prior rating level 4.) The potential that adverse reserve development, which reflects the rating agency's concerns for the sector, coupled with the potential for additional impairments and costs associated with the restructuring of the Global Assets division, may depress profitability for the near term.

Moody's said that its ratings on Zurich Insurance and other companies of the ZFS Group are supported by several strengths. The new management team has undertaken an active program of de-risking the balance sheet. This, coupled with a more focused business profile, points to prospects of strengthening credit profile over the next years and one which should result in a stronger performance from the Group's excellent franchise. Moody's noted that ZFS has made demonstrable progress in increasing its risk-based capital by $5 bn, which included: $2.7 bn in "fresh equity"; reduction in its equity exposure by $5.6 bn to a target level of 5%; an active program of divestures which appears on target; and use of reinsurance. Moody's added that for the first quarter of 2003, ZFS reported a combined ratio of 98.2% (1Q02: 104.1%) and a Business Operating Profit-BOP, which ZFS defines as operating income adjusted for taxes, net realized and unrealized gains, policyholders' share of investment returns, non-operational currency gains and losses and the corporate financing of subsidiaries, of $785mn and IAS net income of $114mn. Nevertheless, as with other companies in the sector, while Moody's believes that the underlying trends in core profitability are likely to improve in 2003 relative to 2002, it is cautious in extrapolating full year results from the 1Q03 performance.

The following ratings were downgraded and assigned a negative outlook:

Zurich Insurance Company and guaranteed issuers; Insurance Financial Strength to A2 from A1, senior unsecured MTN to Baa1 from A2, subordinated MTN to Baa2 from A3, and subordinated perpetual notes to Baa2 from A3;

Zurich Financial Services (Jersey) guaranteed on a subordinated basis by Zurich Financial Services: preferred stock rating to Baa3 from Baa1;

Zurich Capital Markets Inc.; Issuer rating to A2 from A1 and preferred stock to Baa1 from A2;

ZCM Matched Funding Corp.; Issuer rating to A2 from A1;

Zurich Capital Trust I: preferred stock rating to Baa2 from A3;

Kemper Corporation; Senior MTN to Baa1 from A3; Cumulative preferred stock to Baa3 from Baa2;

Centre Group - insurance financial strength rating to A3 from A1;

Eagle Star Life Assurance - insurance financial strength rating to Baa2 from A3;

Eagle Star Insurance Company - insurance financial strength rating to Baa2 from A3;

Deutscher Herold Leben - insurance financial strength rating to A2 from A1.

The following ratings were confirmed and assigned a stable outlook:

Farmers New World Life Insurance Company: Insurance Financial Strength of A2;

Farmers Insurance Exchange: Insurance Financial Strength rating of A3, surplus notes rating of Baa3

Farmers Group Capital and Farmers Group II: Preferred Stock of Baa2;

Farmers Exchange Capital: Trust Surplus Notes of Baa3.

Truck Insurance Exchange, Fire Insurance Exchange, Farmers Insurance Company of Oregon: Insurance Financial Strength of A3;

Zurich RegCaPS; preferred stock of Baa2;

ZCM Matched Funding Corp; Commercial Paper rating of Prime-1;

The following rating was downgraded and placed on review for possible downgrade:

Kemper Investors Life Insurance Company: insurance financial strength rating to A3 from A2;

The following ratings were downgraded and placed on review for possible upgrade:

Federal Kemper Life Assurance Company: insurance financial strength to A3 from A2;

Zurich Life Insurance Company of America; Insurance Financial Strength rating to A3 from A2;

At year-end 2002, the Zurich Financial Services Group reported shareholders' equity of U.S. $ 16.8 billion, and a net loss of $3.4 bn. The ZFS Group is based in Zurich, Switzerland. Zurich Insurance Company is the main company in the Zurich Financial Services Group, which also includes the Farmers Group Inc., and the UK operations of Eagle Star Holdings and Allied Dunbar.

London
Mark Hewlett
Managing Director
Financial Institutions Group
Moody's Investors Service Ltd.
44 20 7772 5454

London
Lynn Exton
Senior Vice President
Financial Institutions Group
Moody's Investors Service Ltd.
44 20 7772 5454

No Related Data.
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