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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 POSITIVE FROM STABLE

16 Jun 2004
MOODY'S REVISES RATING OUTLOOK FOR ZURICH INSURANCE COMPANY AND SELECTIVE AFFILIATES OF THE ZURICH FINANCIAL SERVICES GROUP TO POSITIVE FROM STABLE

London, 16 June 2004 -- Moody's Investors Service announced today that it had revised to positive from stable the long-term rating outlook for Zurich Insurance Company (ZIC), guaranteed MTN issuers (Zurich Finance Luxembourg S.A.; Zurich Finance (USA), Inc; Zurich Finance (UK) plc); and supported entities including Zurich Capital Markets Inc. (ZCMI), ZCM Matched Funding Corp, as well as other entities in the Zurich Financial Service Group including, Deutscher Herold Leben 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 Federal Kemper Life Assurance Company and for the rated entities of Centre Group (IFSR of A3) remains negative.

The stable outlook assigned to ZCM Matched Funding Corp's short-term rating of Prime-1, as well as the long-term ratings of the Zurich RegCaPs securities, Eagle Star Life Assurance, Eagle Star Insurance Company, Kemper Corporation, and Farmers New World Life Insurance Company was affirmed.

A separate press release will follow regarding Zurich Bank.

Moody's said that the revised rating outlook reflects the group's strengthening financial fundamentals coupled with its increasingly focused business profile. Of importance is that the group's quality of earnings continues to improve and is characterized by reduced reliance on gains from disposals, lower expenses, and wider margins in the life and non-life businesses. These positives are offset by on-going concerns regarding reserve adequacy at Zurich North America, the challenge the group is likely to face in maintaining underwriting discipline in a softening rate environment, and the need to enhance the profitability of its life business.

ZFS' 1Q04 results point to a sustained improving trend. The ZFS Group reported net income for the period of $702mn, up from $134mn for the 1Q03. The BOP (Business Operating Profit - 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-) for the period was 21% higher at $942mn compared to $779mn for 1Q03. The non-life business provided an important part of the group's earnings, driven principally by an improved combined ratio (1Q04: 96.9%; 1Q03: 98.1%). Moody's noted that the life new business margin widened from 6.3% for 1Q03 to 9.8% for 1Q04. The contributions of Farmers remained solid. Of significance is that there were no major losses from the group's discontinued operations, notably Centre- although Moody's does not rule out the potential for additional reserve deterioration. In summary, Moody's believes that these results continue to move the ZFS Group close to its objective of an operating ROE of 12% over the market cycle.

Elaborating on the ZFS Group's improving risk profile, Moody's commented that the ZFS Group's leverage ratios are trending down, while solvency levels have strengthened. In addition, the level of fixed charge coverage has increased while the winding down of ZCM continues on track; ZFS expects to complete the transfer of ZCM assets to BNP during the second half of 2004 and during March 2004, ZCM Matched Funding Corp. terminated its CP program.

On a less positive note, Moody's said that reserve adequacy in the U.S. commercial lines persists as an area of concern, not only for Zurich North America but for the rest of the sector, in particular for the long-tailed book of business written for the years 1997-2000. Moody's added that maintaining of underwriting discipline in the softening rate environment will be critical in order to offset the on-going need to absorb adverse reserve development, coupled with the impact of a subdued investment climate. Lastly, ZFS has identified improving returns in its life business to a target ROE of 8-10% and with a new business margin of more than 12%, as one of its strategic objectives for the period 2004-2006. This segment, which had total allocated equity of $11.8bn as of 31 March 2004, is currently characterized by low profitability, weak organic growth, and low productivity of its tied distribution force. Moody's believes that given the weight of the life business in the ZFS Group, achievement of these target returns in the life business will be fundamental for the group to reach its target returns.

Moody's said that continued progress by the ZFS Group in terms of meeting its strategic objectives of an operating ROE of 12% across the cycle, a ROE in the range of 8-10% in its life business, as well as a leverage ratio (adjusted debt to adjusted equity) in the low 20% and a fixed charge coverage ratio (including the coupon on preference shares) in the range 9-10 times would likely to lead to positive rating actions.

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

Zurich Insurance Company, guaranteed MTN issuers (Zurich Finance Luxembourg S.A.; Zurich Finance (USA), Inc; Zurich Finance (UK) plc);); 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 International (Bermuda) Ltd: guaranteed senior notes of Baa1;

Alpina Insurance: insurance financial strength rating of A2:

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;

Deutscher Herold Leben- insurance financial strength rating of A2.

The rating outlook for the following issuer remains negative:

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

Rated entities of the Centre Group-insurance financial strength rating of A3.

The following ratings were affirmed with a stable outlook:

Zurich RegCaPs; preferred stock of Baa2;

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

Kemper Corporation; Senior MTN of Baa1;

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

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

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

As at 31 March 2004, the Zurich Financial Services Group reported shareholders' equity of U.S. $20.1bn and net income of $2.2bn for the year 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

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