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Rating Action:

MOODY'S REVIEWS THE LONG- AND SHORT-TERM RATINGS OF ZURICH INSURANCE COMPANY AS WELL AS THE LONG-TERM RATINGS OF OTHER ZFS GROUP ENTITIES FOR POSSIBLE DOWNGRADE

27 Feb 2003
MOODY'S REVIEWS THE LONG- AND SHORT-TERM RATINGS OF ZURICH INSURANCE COMPANY AS WELL AS THE LONG-TERM RATINGS OF OTHER ZFS GROUP ENTITIES FOR POSSIBLE DOWNGRADE

Ratings of Centre Group, Deutscher Herold Leben, and Eagle Star Units Remain on Review for Downgrade

London and New York, February 27, 2003 -- Moody's Investors Service said today that it had placed the ratings on Zurich Insurance Company (insurance financial strength rating of A1, senior debt rating of A2, subordinated debt rating of A3, and ZCM Matched Funding Corp.'s short-term rating of Prime-1), Farmers Insurance Exchanges and other rated entities of the Zurich Financial Services Group on review for possible downgrade (see list below) following the announcement of the FY 2002 results. The rating actions do not include the long-term ratings of Deutscher Herold Lebensversicherungs AG, Eagle Star Life Assurance, Eagle Star Insurance Company, and Centre Group, entities whose ratings are already on review for downgrade. Moody's added that a separate release would follow regarding Zurich Bank.

Zurich's poor results for FY2002 reflect special provisions, of around $3.5 billion. These provisions include charges for reserve strengthening, operational improvement, goodwill impairment, and the repositioning of the Global Assets Division, the unit which encompasses the Centre Group and Zurich Capital Markets. Moody's said that Zurich's earnings were also undermined by investment losses, lower business operating earnings in its non-life business and significant expenses related to the Baloise hedge and to currency hedges and swaps in place during 2H02. These substantial charges offset the underlying improvements in some operating business, notably Farmers, the P&C units, and selected life businesses (North America & Latin America consumer). However, other life operations, including those of the UK and Continental Europe, continue to face extremely challenging operating environments due to the declines in the equity markets and pressured new business margins. Moody's added that Zurich's capital position, although strengthened during 2002 because of $2.7 billion in new equity raised during the year due to the proceeds of the $2.5 billion rights issue and the conversion of the Miles transaction into equity, has fallen to $16.8 billion as of year-end 2002 from $17.7 billion as of year end 2001.

Moody's said that its review was prompted by Zurich's weakened earnings and capital position, coupled with its view that the current investment market volatility and difficult operating environment is likely to continue in the short-to-medium term. These factors may affect Zurich's overall earnings prospects, in particular in its life businesses. Furthermore, Moody's noted the repositioning of the Global Assets Division has generated significant deterioration in earnings, driven by capital markets declines and the costs associated with discontinued businesses. Lastly, Moody's does not rule out the need for additional P&C reserve strengthening, particularly in its U.S. operations.

On the positive side, besides the previously mentioned $2.7 bn in fresh equity raised in 2002, Moody's said that Zurich's cash flow remains strong ($6.8 bn). Furthermore, the company is progressing as announced in its Strategic Repositioning plan, with various steps taken and others in progress to reduce the risk in its operations. In addition, Zurich's P&C operations are benefiting from the current hard market conditions, with the non-life combined ratio, before special provisions, improving by 5.6 points to 103.6% in FY02. Lastly, ZFS's announcement that it will reduce its dividend will contribute to the strengthening of its capital base.

Moody's said that its review would focus on the outlook for Zurich's operating earnings and risk-based capitalisation following its strategic repositioning, the prospects for one-off charges related to the restructuring of selected business groups, and intra-Group liquidity. Moody's added that it would also reassess the current notching of the Group's holding company and operating companies, in line with its announcement of December 2002.

The following ratings were placed on review for downgrade:

Zurich Insurance Company and guaranteed issuers; Insurance Financial Strength of A1, senior unsecured MTN of A2, subordinated MTN of A3, and subordinated perpetual notes of A3;

Zurich Capital Markets Inc.; Issuer rating of A1 and preferred stock of A2;

ZCM Matched Funding Corp.; Issuer rating of A1;

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

Zurich RegCaPS; preferred stock of Baa2;

Zurich Capital Trust I: preferred stock rating of A3;

Zurich Life Insurance Company of America; Insurance Financial Strength rating of A2;

Federal Kemper Life Assurance Company and Kemper Investors Life Insurance Company; Insurance Financial Strength rating of A2;

Kemper Corporation; Senior MTN of A3; cumulative preferred stock of Baa2;

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

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

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

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

Farmers Exchange Capital: Trust Surplus Notes of Baa3.

The following ratings remain on review for possible downgrade:

Centre Group - insurance financial strength rating of A1;

Eagle Star Life Assurance - insurance financial strength rating of A2;

Eagle Star Insurance Company - insurance financial strength rating of A2;

Deutscher Herold Leben - insurance financial strength rating of Aa3.

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

New York
Ted Collins
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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