Outlook on ZFS group and units revised to negative in light of continued stock market weakness

FRANKFURT (Standard & Poor's) Aug. 6, 2002--Standard & Poor's Ratings Services said today it revised its outlook on the operating entities of the Switzerland-based Zurich Financial Services group (ZFS group) to negative from stable, reflecting concerns about the impact of continued equity market falls on the group's capitalization.

At the same time, the outlook on the group's holding company, Zurich Group Holding (ZGH), was revised to negative from stable. The counterparty credit rating on ZGH is single-'A'.

"The outlook revisions reflect concerns over the increasing pressure on the ZFS group's risk-based capitalization and financial flexibility (the ability to source new capital relative to capital requirements) as a result of the sharp stock market decline," said Standard & Poor's Financial Services credit analyst Karin Clemens. "Management's intention to strengthen capital using a number of options at its disposal is clear, but while current capital market conditions persist the alternatives of fresh equity issues, debt issues, or asset disposals remain limited," she continued.

The negative outlook is not a precursor to a downgrade, but indicates the likely direction of the rating over the next one to three years. The rating action follows recent outlook revisions on several rated insurance groups. Standard & Poor's has also recently revised its outlook on the Swiss life and non-life, the U.K. life, the German life, and the U.S. life insurance sectors to negative from stable (see related releases published on July 25, 2002, and July 30, 2002, on RatingsDirect, Standard & Poor's Web-based credit analysis system).

Although ZFS group's capitalization remains adequate it is currently not consistent with the rating. Standard & Poor's expects that management will be able to rebuild capital to a level that supports the current rating over the medium term by using the capital and reinsurance markets, reducing exposure, or making selective asset disposals. The group has already reduced its stock market exposure in order to mitigate the negative impact of equity volatility. Nevertheless, a prolonged period of stock market weakness could limit the group's ability to implement measures in order to restore capital to a level consistent with its current rating. As a result, the ratings on the operating entities may be lowered, but a downgrade is not expected to exceed one or two notches.

The ZFS group continues to benefit from an excellent and very well-diversified business position, supported by leading franchises in its core markets of the U.S., the U.K., and Continental Europe. In addition, the group is expected to benefit from significantly improved underwriting results in its non-life portfolio, reflecting a substantial hardening in premium rates.

A complete list of rating actions is available to subscribers of RatingsDirect, Standard & Poor's Web-based credit analysis system, at www.ratingsdirect.com. They are also available on Standard & Poor's public Web site at www.standardandpoors.com; under Rating Actions, select Newly Released Ratings Listings. Alternatively, call the Standard & Poor's Ratings Desk in London on (44) 20-7847-7400.

Credit Analysts: Karin Clemens, Frankfurt (49) 69-3 39 99-193; Rob Jones, London (44) 20-7847-7041

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