In spite of the reserve charge for commercial U.S. business written from 1997-2001, the company said strong underwriting results in Continental Europe, and the United Kingdom, and international businesses mitigated the impact of the reserve hike and $585 million in hurricane and tsunami losses.

Zurich said the $2 billion reserve hike, which represented just over 5 percent of last year's reserves for 2003 and prior, consisted of a $2.6 billion boost for North American business, offset by favorable development in other regions.

Reserves for all years, including 2004, now stand at $43.5 billion, Zurich said.

Standard & Poor's placed the "A-plus" financial strength ratings of Zurich's operating entities on CreditWatch with negative implications following the announcement.

Noting that $1.6 billion of the reserve strengthening took place in the fourth quarter, the rating agency said that its CreditWatch placement reflected "mounting concerns about the group's continued reserve strengthening for past accident years, in excess of S&P's expectations."

"Although the announced reserve increases show management's determination to continue to take all necessary actions to restore full balance-sheet integrity, they also increase concerns on management's past reserving methodologies," S&P said.

Resolution of the CreditWatch status might result in lowering the ratings of Zurich's U.S. insurers by one or two notches, S&P said, depending on how strategically important these U.S. businesses are to Zurich Financial Services in S&P's view.

A.M. Best Co. in Oldwick, N.J., analysts differed. Best said that the financial strength ratings of A (excellent) for Zurich Financial Services Group and its main subsidiaries were unaffected by 2004 reported earnings, which were "in line" with Best's expectations. The outlook on all ratings remains stable, Best said.

"A.M. Best continues to monitor ZFS's reserves development, particularly asbestos and U.S. prior years, and does not anticipate significant reserve strengthening in 2005," the rating agency said in an announcement.

Separately, the London office of Fitch Ratings said that insurer financial strength ratings of "A" remained in place, and that the outlook for Zurich continued to be positive.

Fitch "believes that the 2004 results demonstrate very good underlying profitability on general insurance business," the rating agency said in a statement.

Fitch did take notice of the reserve charge, however.

"The substantial reserve deterioration causes some concerns, especially as it follows substantial prior year reserve increases of $2.8 billion and $1.9 billion taken in the 2002 and 2003 calendar years respectively?.Although part of the reserve increase for prior years could reflect additional conservatism being applied in the reserving process, the agency will be seeking evidence and quantification in this regard," the Fitch announcement said.

Fitch said, for the ratings with positive outlooks to be upgraded, Fitch would have to gain confidence inprior year reserve levels as well as current accident year reserving methodology and assumptions.

"Over the longer term, the agency will also be looking for the maintenance of very good underlying earnings and would view satisfactory resolution of the investigations conducted by the SEC and New York Attorney General positively," the announcement said.

With regard to investigations, Zurich said it has taken remedial actions and responses for information requests relating to business practices involving brokers were complete. (In November 2004, two underwriters from Zurich American Insurance Company pleaded guilty to misdemeanor charges in connection with bid-rigging.)

Zurich said it had also finalized an internal review of reinsurance arrangements that the group placed externally, where such risks were partially or fully retroceded to the group, indicating that it had "taken the appropriate accounting actions" with respect to these arrangements.

"The group has also reported these transactions to appropriate regulatory bodies and is cooperating with all regulatory inquiries," Zurich said.

Commenting further on financial results for its property-casualty operations, Zurich said gross written premiums rose 4 percent to $37.6 billion in 2004.

The combined ratio rose from 97.9 in 2003 to 101.6 in 2004, impacted by catastrophes and reserve strengthening, which added 2.5 and 6.9 percentage points respectively.