S&P Reports Centre Solutions, Bermuda Ltd. and Related Ratings Fall to ‘A-‘; CreditWatch Status Moved to Developing

Standard & Poor’s has lowered its counterparty credit and financial strength ratings on Centre Solutions (Bermuda) Ltd. and related operating companies (collectively referred to as Centre) to ‘A-‘ from ‘A+’. At the same time, Standard & Poor’s revised the CreditWatch status of these ratings to developing from negative.

In addition, Standard & Poor’s removed from CreditWatch and lowered its preferred stock and Canadian scale preferred share ratings on Centre Solutions (Bermuda) Ltd. to ‘BBB’ and ‘P-2’, respectively, from ‘A-‘ and ‘P-1’. Standard & Poor’s subsequently withdrew these ratings because issued and outstanding preferred stock was repaid in 2003.

The ratings were placed on CreditWatch on Sept. 16, 2003, pending the resolution of the form of explicit parent support by one of Zurich Financial Services group’s core operating entities. Standard & Poor’s lowered the ratings because of Centre’s poor operating performance, weakened capitalization, and Standard & Poor’s continued concerns about Centre’s reserve adequacy. The revision of the CreditWatch status reflects that the ratings could be affirmed or raised pending explicit parental support. The ratings could be lowered in the absence of explicit parental support.

Major rating factors

— Explicit support from Zurich Insurance Co. (ZIC). ZIC is evaluating explicit support arrangements designed to maintain Centre’s capital adequacy at a strong level. ZIC is not committed to retaining all of Centre’s businesses but is expected to preserve at least equivalent credit quality for Centre’s policyholders in the event of a sale.

— Poor operating performance. Centre’s operating performance over the past two years has been poor, with net losses of $625 million wiping out cumulative retained earnings at the beginning of 2002. Through the third quarter of 2003, Centre realized a net loss of $432 million, including reserve charges of $485 million.

— Liquidity risk related to trigger event exposure. Centre has significant ratings trigger exposures in its balance sheet.

— Severely weakened capital position. Centre’s shareholder’s equity declined to $620 million as of Sept. 30, 2003, from $914.9 million at year-end 2002, notwithstanding capital contributions of $225 million received through the third quarter of 2003. ZIC is expected to fund an additional $250 million in the first quarter of 2004, which will restore the capital adequacy ratio to the rating range. The quality of capital was also weak as of Sept. 30, 2003, because the balance sheet has high amounts of deferred acquisition costs, deferred tax assets, and reinsurance recoverables.

— Concerns about reserve adequacy. Based on considerable 2003 reserve development through the third quarter of the year, concerns about Centre’s reserve adequacy persist.

— Uncertain business position. The commitment of ZFS to Centre’s already much reduced business is uncertain because large parts of the business are in run-off.