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Rating Action:

MOODY'S REVISES RATING OUTLOOK FOR ZURICH INSURANCE COMPANY AND SELECTIVE AFFILIATES OF THE ZURICH FINANCIAL SERVICES GROUP TO STABLE FROM NEGATIVE

01 Sep 2003
MOODY'S REVISES RATING OUTLOOK FOR ZURICH INSURANCE COMPANY AND SELECTIVE AFFILIATES OF THE ZURICH FINANCIAL SERVICES GROUP TO STABLE FROM NEGATIVE

Outlook for Centre Group remains negative

London, 01 September 2003 -- Moody's Investors Service announced today that it had revised to stable from negative the long-term rating outlook for Zurich Insurance Company (ZIC) and supported entities including Zurich Capital Markets Inc. (ZCMI), ZCM Matched Funding Corp and Zurich Bank, as well as other entities in the Zurich Financial Service Group including Eagle Star Life Assurance, Eagle Star Insurance Company, Deutscher Herold Leben, Kemper Corporation, and Zurich Financial Services (Jersey) which is guaranteed on a subordinated basis by Zurich Financial Services (ZFS). (For the full list, see below). ZIC is rated A2 for insurance financial strength, Baa1 for senior debt, and Baa2 for subordinated debt and junior subordinated debt.

The rating outlook for the rated entities of Centre Group (IFSR of A3) remains negative. In addition, the rating of Kemper Investors Life Insurance Company (KILICO) remains on review for possible downgrade while the ratings of Federal Kemper Life Assurance Company (FKLA) and Zurich Life Insurance Company of America (ZLICA) remain on review for possible upgrade. A separate press release will follow regarding Zurich Bank.

The stable outlook assigned to ZCM Matched Funding Corp's short-term rating of Prime-1, as well as the long-term ratings of Farmers New World Life Insurance Company and of the Zurich RegCaPS securities were affirmed.

Moody's said that the revised rating outlook reflects its view that broadly speaking, the execution risks in the winding down of the Zurich's Global Assets Division had abated, notwithstanding the larger than expected reserve strengthening of of $474 mm at Centre Group for the 1H03. Furthermore, the rating agency believes that ZFS's continuing businesses are likely to produce a Business Operating Profit (BOP) - defined 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 earnings- in the range of the company's medium term target of 12% return after tax, assuming normal claims development. In Moody's view, these earnings coupled with the proceeds from the group's aggressive divestment program, will be sufficient to absorb potential impairment charges and winding down expenses at ZCM and Centre along with possible further reserve strengthening at Centre.

Moody's commented that ZFS' first half 2003 results largely confirm the expected trends: the non-life business provided most of the group's earnings, driven primarily by an improved combined ratio (1H03: 98.8%; 1H02: 103.3% excluding 2002 special provisions) in a benign claims environment, while the contributions of Farmers and the life business were generally solid. An active expense reduction program named GPIP (Global Profit Improvement Program) has also been an important contributing factor. The major negative in the group's earnings came from the larger-than-expected reserve strengthening requirement of $474mn at the Centre Group, related to its structured reinsurance and discontinued business lines, including credit enhancement and life & health. Furthermore, ZFS has disclosed that it does not rule out the possibility of further reserve actions at Centre being necessary. Overall, net income for the period was $701mn, compared to $683mn in 1H02 (before special provisions of $2.7bn). While the net impact of these charges will be absorbed by solid operating earnings and the proceeds from divestments, they also restrain the pace of capital formation and the speed with which management can reduce leverage.

On the negative side, Moody's said that the rate environment is turning less favourable in certain important lines, in particular for US and UK personal lines. This is likely to have an impact on Farmers as well as ZFS' core property-casualty business. In addition, Moody's continues to have its previously cited concerns regarding the potential for adverse reserve development in ZFS' US non-life portfolio, in particular for the long tailed book of business written for the years 1997-2000. Moody's believes the current subdued investment climate will remain subdued (ZFS's investment yield was 3.3% for the 1H03) which will heighten the challenge for ZFS, along with its peers, to maintain the current momentum to improve the quality of its underwriting and operating efficiency, as well as address the issues in under-performing units. Lastly, Moody's believes that while ZFS is actively reducing costs and changing product structures in its European life business, the returns on this business are still lower than in the non-life business.

The rating outlook for the following issuers was revised to stable from negative:

Zurich Insurance Company and guaranteed issuers; Insurance Financial Strength of A2, senior unsecured debt of Baa1; subordinated debt of Baa2, and subordinated perpetual notes of Baa2;

Zurich Financial Services (Jersey) guaranteed on a subordinated basis by Zurich Financial Services; preferred stock rating of Baa3;

Zurich Capital Markets Inc; Issuer rating of A2 and preferred stock rating of Baa1;

ZCM Matched Funding Corp; Issuer rating of A2;

Zurich Capital Trust; preferred stock rating of Baa2;

Kemper Corporation; Senior MTN of Baa1; cumulative preferred stock of Baa3;

Eagle Star Life Assurance-insurance financial strength rating of Baa2;

Eagle Star Insurance Company- insurance financial strength rating of Baa2;

Deutscher Herold Leben- insurance financial strength rating of A2.

The rating outlook for the following issuer remains negative:

Rated entities of the Centre Group- insurance financial strength of A3;

The following rating remains on review for possible downgrade:

Kemper Investors Life Insurance Company: insurance financial strength rating of A3;

The following ratings remain on review for possible upgrade:

Federal Kemper Life Assurance Company: insurance financial strength and backed senior debt rating of A3;

Zurich Life Insurance Company of America: insurance financial strength of A3.

The following ratings were affirmed with a stable outlook:

Farmers New World Life Insurance Company: insurance financial strength of A2;

Zurich RegCaPS; preferred stock of Baa2;

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

As at 30 June 2003, the Zurich Financial Services Group reported shareholders' equity of U.S. $ 18.7bn and net income of $701mn for the first half of 2003. 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.
JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454

London
Lynn Exton
Senior Vice President
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454

No Related Data.
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