ZFS’ Centre Solutions on Watch Neg

September 18, 2003

Standard & Poor’s Ratings Services announced it placed its ratings on Centre Solutions (Bermuda) Ltd. and related operating companies (collectively referred to as Centre) on CreditWatch with negative implications because of concerns that the in-force portfolio being placed in managed run-off will not be offset by new business written to the extent initially believed.

S&P said almost all transactions written prior to 2003 were placed under the supervision of Centre’s chief risk officer. Centre posted its largest pretax operations loss of $252.7 million in 2002, largely related to its credit enhancement and financial guaranty business. Earnings are expected to be under pressure in 2003 as reserves for transactions placed in run-off are strengthened.

“Although the senior management of Zurich Financial Services (ZFS), Centre’s parent, still considers Centre a key part of its core operations, S&P has changed its view of Centre’s strategic significance to ZFS,” noted S&P credit analyst Grace Osborne. “As a result, Standard & Poor’s has reduced the level of implied ZFS support that has been historically included in the rating.”

Centre’s business strategy will focus on developing nontraditional customized finite-risk insurance and—to a lesser extent—reinsurance solutions. Over its 15-year history, Centre has demonstrated a consistent trend of technical competency for designing structured risk solutions that entailed offering large limits of capacity for its clients. With the voluntary change to its business model, S&P expects that Centre’s lowered net limits will present an operational challenge for these types of transactions to be underwritten at comparable profit margins. Expectations are the Centre’s earnings will be modest and volatile over the medium term, but S&P believes that capital support for Centre’s pre-2003 book will remain at an adequate level to meet all financial obligations on a timely basis.

The resolution of the CreditWatch status of the ratings is expected by the fourth quarter 2003 following discussions with ZFS on its plans to provide parental support, if any, to Centre as it embarks on building its portfolio of risk. The ratings could be affirmed or lowered, but if they are lowered, they will not fall to below investment grade.

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