Zurich posted a strong operating profit of $1.1 billion last year, an improvement over $217 million in 2001, but the net loss reflects special provisions of $3.5 billion to strengthen the company's balance sheet, refocus its activities and exit unprofitable business no longer considered core.

Zurich recorded gross written premiums, policy fees and deposits--including results from its subsidiary, Farmers Group Inc.--of $62.2 billion for last year, an increase of 11 percent over 2001.

The return on Zurich's investment portfolio, however, was hurt by the continued weakness of financial markets, the company said.

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

"While our non-life business is benefiting from the best pricing environment we have seen in 15 years, weak and fragile equity markets and record low interest rates are negatively affecting our life business and investment result," said James J. Schiro, chief financial officer at Zurich.

"However, we are beginning to see the impact of the action program announced on Sept. 5. New processes and structures are in place, and our restructuring is laying the foundation for achieving strong 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 core operating 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's expectations, which are that the group's operational improvement program will yield additional earnings of $1 billion in 2003, a non-life combined ratio of 100 percent, and an operating return on embedded value of at least 8 percent. Capitalization is expected to remain 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 Rob Jones, director at S&P.

But Zurich is significantly changing its management and business structures, and it has a big performance improvement plan in process. Uncertainty related to these ongoing changes is the reason why S&P has a 'negative' outlook on the company, Mr. Jones told National Underwriter.

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

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

But the company's recent efforts--including divestment of non-core operations, improved claim management, portfolio pruning and reduction of equity exposure--are expected to bear fruit in 2003, A.M. Best reported.