S&P Affirms Employers Re ‘A+’ Ratings

Standard & Poor’s Ratings Services announced that it has affirmed its “A+” counterparty credit and financial strength ratings on Employers Reinsurance Corp. and affiliated insurance/reinsurance entities (collectively ERC). The outlook on the group remains negative.

S&P also affirmed its “A-” counterparty and senior debt ratings on GE Insurance Solutions Corp., an intermediary holding company which serves as ERC’s immediate parent, and which is ultimately owned by General Electric Co. (AAA/Stable/A-1+).

“The ratings are based on ERC’s strong global reinsurance franchise, moderately improving operating performance, and conservative investment portfolio,” said S&P. “The ratings also reflect ERC’s position as a nonstrategic subsidiary of GE. Partially offsetting these factors is uncertainty in the group’s loss reserve position and lower business mix diversification.”

S&P said it expects premium volume “to follow management’s commitment to writing accounts for ultimate profitability and not top line growth. Nonlife accident-year combined ratios are expected to be 94 percent-96 percent over the next two years, reflective of improved pricing as well as terms and conditions.

“On a calendar-year basis the 2004 nonlife combined ratio is expected to be 103 percent-105 percent, reflective of Standard & Poor’s expectation that the group will continue to report further reserve additions.” S&P expects results “overall operating results to improve significantly” in 2005/2006, “as the effect of reserve additions constitute a smaller portion of overall earnings and the effect of stronger current accident years flow through earnings.

“Capital adequacy is expected to remain in the very strong range. Interest and fixed-charge coverage ratios are expected to improve, reflecting the expectation of earnings improvement at the operating level.”

S&P also said it “believes that management will be challenged to meet all of the expectations previously mentioned; however, to the extent that ERC meets these expectations and reserve strengthening actions do not exceed $800 million over the mid-term, Standard & Poor’s believes it is likely that the outlook could be revised to stable in the next two years.”

The following is a summary of the “Major Rating Factors” cited by S&P
— Strong global reinsurance market position. ERC is the second-largest insurer in the U.S. (based on gross premiums written) and fourth-largest global reinsurance group (based on consolidated net reinsurance premiums).
— Reduced risk portfolio diversification. ERC is de-emphasizing its life reinsurance operations, which is expected to decrease ERC’s prospective flow of life revenue, invested assets, and product line diversification over time.
— Moderately improving operating performance.
— Significant adverse loss-reserve development. Adverse loss-reserve development associated with the 1997-2001 accident years have sharply affected ERC’s consolidated GAAP results since 2001. ERC’s reserve position has proved to be significantly deficient, with the group reporting about $5.5 billion in pretax reserve additions to date.
— Strong capital adequacy at 154 percent in 2003; however, the quality of capital is hampered by continued uncertainty of the adequacy of reserves related to prior years as well as the fact that the capital position has been highly reliant on continued capital contributions by GE to cover loss reserve strengthening actions. In the past three years, GE made aggregate contributions of $2.7 billion to ERC.
— Conservative investment strategy.
— Financial leverage appropriate for the rating.
— Nonstrategic importance to General Electric Capital Services Inc. S&P stressed that it views ERC as a nonstrategic subsidiary of GE because of the nature of the insurance/reinsurance sector, which requires strong levels of dedicated capital and assumes a range of earnings volatility. Despite GE’s demonstration of support through substantial capital contributions, S& P “believes that prospectively ERC’s potential access to GE might be dependent on the group’s ability to significantly improve operating performance and meet the parent’s earnings expectations.”

The following companies are covered by S&P’s rating actions:

Employers Reinsurance Corp.
GE Frankona Ruckversicherungs Aktiengesellschaft
GE Reinsurance Corp.
Counterparty credit rating A+/Negative/–
Financial strength rating A+/Negative
GE Insurance Solutions Corp.
(formerly GE Global Insurance Holding Corp.)
Couterparty credit rating A-/Negative/–
Senior debt A-
GE Frankona Reassurance Ltd.
GE Frankona Reinsurance A/S
GE Frankona Reinsurance Ltd.
GE ERC Strategic Reinsurance Ltd.
Luxembourg European Reinsurance S.A.
Westport Insurance Corp.
Employers Reassurance Corp.
Coregis Insurance Co.
Financial strength rating A+/Negative