Best Affirms GE Frankona ‘A’ Rating; Lowers Outlook

A.M. Best Co. announced that it has affirmed the financial strength rating of “A” (Excellent) of the GE Frankona Group’s reinsurance subsidiaries, and has revised its outlook to negative from stable.

“The rating is based on the explicit financial support provided by Employers Reinsurance Corporation (ERC) (currently rated A (Excellent) by A.M. Best) in the form of claims guarantees to each of the GE Frankona subsidiaries,” said the bulletin.

Best also noted that the rating “reflects the significant improvement in the stand-alone capitalisation and operating performance.” The rating agency indicated that while ERC continued to provide explicit support, “A.M. Best no longer views GE Frankona as strategically important due to concerns regarding General Electric’s long-term commitment to reinsurance business.” Best noted that it had accordingly “revised the outlook to negative from stable, reflecting concerns about GE Frankona’s business profile given the uncertainties of its future ownership and the ability to sustain the improvement in operating performance as the cycle evolves.”

“Consolidated capital adequacy has been restored to an excellent level, following capital injections of approximately USD 700 million in the last two years and retention of strong earnings in 2003,” the bulletin continued. Best siad it “expects GE Frankona to continue to replenish surplus from earnings in 2004, whilst the strain on capital from high premium growth during 2003 (net premium increased by 47 percent to USD 4 billion) is likely to tail off.”

Best also indicated that it “expects GE Frankona to sustain the turnaround in its improving operating performance, which is indicative that the group’s underwriting controls have been adequately strengthened.” The company reported consolidated net earnings of $535.2 million In 2003, a 17 percent return on premium and a combined ratio of 95 percent “due,” said Best “to the stronger pricing environment (between 16 percent and 38 percent for casualty risks); stricter renewal process and scaling back of its proportional property exposure; participation on higher layers or risks with increased attachment points; and exit from several loss-making classes (i.e., global account, pharmaceutical and U.S.-exposed casualty lines of business). Development of prior accident-year losses continued, albeit reduced, to impact underwriting results in 2003, adding approximately 10 percentage points to the total combined ratio.

“The potential for reserve development on run-off business remains, but A.M. Best expects the combined ratio to remain at approximately 95 percent in 2004 as the group further reduces its exposure to softening classes.”