Last week's one notch downgrade to double-'A' and placement on Credit Watch with negative implications of Zurich Financial Services Group (ZFS) was explained by Standard and Poor's yesterday following an assessment of the group's exposure to the World Trade Center disaster.

The negative outlook on ZFS' rating prior to the downgrade last Thursday had already reflected concerns about capital adequacy at ZFS, which were heightened as a result of the group's net exposure from the events in New York and the impact of lower equity values on the group's investment portfolio.

This will at least be partially offset by higher bond values and the strengthening of European currencies against the dollar.

ZFS initially estimated its net pre-tax losses in connection to damages in the US to reach $400 million, mainly stemming from its nonlife and reinsurance businesses.

The negative outlook was also an indication of disappointing earnings performance and somewhat reduced financial flexibility, but despite these concerns, Standard & Poor's expects the rating to remain in the double-'A' (very strong) category.

Partially offsetting these concerns are the group's diversified business position in the international life, property/casualty, and corporate risk solutions markets.

The group should also benefit from the potential for higher quality earnings once it has completed its restructuring program. Management will remain committed to withdrawing from under-performing business units to achieve a consistent improvement in the group's earnings levels and balance-sheet strength.

In line with this strategy, ZFS announced yesterday that the group has reached an agreement in principle to sell its US asset management arm, Zurich Scudder Investments (ZSI) to Deutsche Bank AG (AA/Stable/A-1+) and to acquire Deutsche Bank's European insurance group, Deutscher Herold. An integral part of the agreement will be the cooperation and mutual distribution of products and services.

Standard & Poor's will discuss with the management of ZFS the capitalisation prospects for the group over the near term before resolving the Credit Watch placement.