Zurich Ratings Unaffected By $3.4B Loss

NU Online News Service, Feb. 27, 3:31 p.m.EST?Zurich Financial Services reported a net loss today of$3.4 billion for 2002, compared with a loss of $387 million in theprevious year.

The company said provisions and a decline in investment incomeoutweighed improvements made on its operational side.

Despite the negative numbers, New York-based Standard &Poor's Ratings Services and A.M. Best in Oldwick, N.J., said theirratings for the Zurich, Switzerland-based insurer will remainunaffected.

Zurich posted a strong operating profit of $1.1 billion lastyear, an improvement over $217 million in 2001, but the net lossreflects special provisions of $3.5 billion to strengthen thecompany's balance sheet, refocus its activities and exitunprofitable business no longer considered core.

Zurich recorded gross written premiums, policy fees anddeposits--including results from its subsidiary, Farmers GroupInc.--of $62.2 billion for last year, an increase of 11 percentover 2001.

The return on Zurich's investment portfolio, however, was hurtby the continued weakness of financial markets, the companysaid.

Although the investment result jumped 2 percent to $6.1 billion,the sum of unrealized and realized gains and losses, includingasset impairments of $956 million, reduced the net investmentincome by 24 percent to $5 billion. The company recorded a returnof 2.4 percent on total average investments in 2002, lower than 2.7percent posted in the prior year.

"While our non-life business is benefiting from the best pricingenvironment we have seen in 15 years, weak and fragile equitymarkets and record low interest rates are negatively affecting ourlife business and investment result," said James J. Schiro, chieffinancial officer at Zurich.

"However, we are beginning to see the impact of the actionprogram announced on Sept. 5. New processes and structures are inplace, and our restructuring is laying the foundation for achievingstrong and sustainable earnings," he said.

Despite Zurich's announcement of its year-end losses, Standard& Poor's said its 'A-plus' rating for Zurich and its coreoperating subsidiaries and the 'negative' outlook would not change,as figures are broadly in line with its expectations.

"The current ratings are based on Standard & Poor'sexpectations, which are that the group's operational improvementprogram will yield additional earnings of $1 billion in 2003, anon-life combined ratio of 100 percent, and an operating return onembedded value of at least 8 percent. Capitalization is expected toremain comfortably in the 'A' range," S&P said.

"We had already factored in $3.5 billion in special provisions.On Sept. 5, we lowered the rating to 'A-plus' from 'double-A-minus'when the company made the announcement of the provisions," said RobJones, director at S&P.

But Zurich is significantly changing its management and businessstructures, and it has a big performance improvement plan inprocess. Uncertainty related to these ongoing changes is the reasonwhy S&P has a 'negative' outlook on the company, Mr. Jones toldNational Underwriter.

At A.M. Best, its 'A' ratings and the 'positive' outlook forZurich and its core subsidiaries also remain unchanged.

"As expected, 2002 year-end results are negatively impacted bythe write-off of $950 million of intangible assets and a $1.8billion reserve strengthening, as well as asset impairments and therestructuring charges announced in September," A.M. Best said.

But the company's recent efforts--including divestment ofnon-core operations, improved claim management, portfolio pruningand reduction of equity exposure--are expected to bear fruit in2003, A.M. Best reported.