GE Global, Employers Re Downgraded

Fitch Ratings downgraded the long-term issuer and senior debt rating of GE Global Insurance Holding Corporation (GE Global) to "A" from "A+." Fitch also downgraded the insurer financial strength (IFS) rating of Employers Reinsurance Corp. (ERC), GE Global's main operating subsidiary, to "AA" from "AA+." The outlook remains negative.

The rating action follows General Electric Co.'s (GE), ERC's ultimate parent company, fourth quarter 2002 update announcing a $1.4 billion after-tax charge to increase prior year loss reserve at ERC. Fitch said the magnitude of the charge is outside of expectations and suggests a lack of underwriting discipline. The charges are believed to stem primarily from accident years 1997-2000 and are spread across many lines of business.

On the positive side, GE has said that it would contribute $1.8 billion after-tax to ERC which should effectively recapitalize ERC's operations after the reserve charges, which follow two and a half years of previous charges related to adverse development in prior years loss reserves. Those developments occurred primarily in the 1997 to 2000 period and stem from inadequate pricing in the property and casualty insurance and reinsurance industry, and the tragic events of Sept. 11, 2001.

While it plans to monitor ERC's results over the intermediate term, Fitch believes that a restructuring of ERC's operations or a sale of the company may occur in the more immediate future. Fitch expects ERC to record improvements in underwriting profitability commensurate with the current pricing environment. These factors will be key considerations in Fitch's rating actions going forward.

Employers Mutual Casualty Affirmed

S&P's Ratings affirmed its 'BBBpi' counterparty credit and financial strength ratings on Employers Mutual Casualty Co. and related pool members (collectively referred to as EMC) based on the companies' improving operating performance, partially offset by declining capitalization and high common stock leverage.

S&P's said EMC has shown significant signs of improvement, with a net gain of $26.5 million in the first six months of 2002 compared with a net loss of $13.2 million for the first six months of 2001. "The company's poor performance in 2001 can be largely explained by record catastrophe losses, including losses related to the World Trade Center catastrophe," noted Standard & Poor's credit analyst Polina Chernyak.

Employers Mutual Casualty Co., based in Des Moines, Iowa, is licensed in all states and the District of Columbia. Employers Mutual Casualty Co. owns 79.5 percent of EMC Insurance Group Inc.

Unitrin Downgraded by A.M. Best

A.M. Best Co. downgraded the financial strength ratings of Dallas-based Unitrin Property and Casualty Insurance Group (Unitrin) to "A" (Excellent) from "A+" (Superior) and removed them from under review. Additionally, an "a-" senior debt rating was assigned to Unitrin Corp.'s existing debt securities and the following indicative ratings to the remaining $200 million under the company's $500 million shelf registration: senior debt "a-"; subordinate debt "bbb+" and preferred stock "bbb." The rating outlooks are stable.

The financial strength ratings of the property/casualty affiliates of Unitrin Property and Casualty Insurance Group were affirmed. They include: Capital County Mutual Fire Insurance Co., "A" (Excellent); Old Reliable Insurance Co., "A-" (Excellent); and United Casualty Insurance Co. of America, "A" (Excellent).

The downgrade reflects Unitrin's unfavorable operating earnings over recent years and decline in capitalization. Operating returns show rising underwriting losses across the group's core business segments—attributable to inadequate premium rates, increasing loss cost trends, weather-related losses, elevated expenses and adverse loss reserve development. Unitrin also faces limited execution risk resulting from the renewal rights acquisition of Kemper Insurance Companies' personal lines business, which will add significant net written premium to the group's operations. Kemper's business will operate as a separate business segment and the operational infrastructure was acquired in the transaction.

The Excellent ratings reflect Unitrin's solid capitalization and balanced book of business among personal and commercial lines. These positive rating factors are derived from a diversified product offering, strong regional market presence, long-standing independent agency relationships and prudent catastrophe exposure management.

Acceptance, American Growers Lowered

A.M. Best Co. downgraded the financial strength ratings of Acceptance Insurance Companies Inc.' s two operating subsidiaries, American Growers Insurance Company of Lincoln, Neb., to "C-" (Weak) from "B++" (Very Good), and its affiliate, Acceptance Insurance Company, to "C-" (Weak) from "B+" (Very Good).

Best's action follows the same action announced by Standard & Poor's and for essentially the same reasons. Acceptance's announcement of significant third quarter operating losses resulted in what Best characterized as the "erosion in statutory surplus and the constrained financial flexibility of its publicly-traded parent company, Acceptance Insurance Companies Inc."

The New York Stock Exchange subsequently announced the suspension of Acceptance's shares from trading, as they no longer met the NYSE's listing standards. The shares could still trade in over-the-counter markets. They last closed at 55 cents.

As previously noted, the troubles at Acceptance stem from greater than expected losses from crop insurance related to the prolonged drought in the Midwest. The parent company's write-down of deferred tax assets, strain on cash flow and erosion in AIF's GAAP equity have exacerbated the situation.

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A.M. Best noted that American Growers' capital position has been so severely impacted that the company's level of surplus and overall assessment of risk-adjusted capitalization is considered tenuous. Best said it also considered the potential sale of American Growers crop business to Rain and Hail LLC. and Ace American Insurance Company to be uncertain. As a result of that uncertainty, the rating outlook is negative.

The rating action for Acceptance Insurance Company reflects the company's role within the group, its vulnerable risk-adjusted capitalization and the ongoing adverse loss reserve development reported during the second and third quarters of 2002.