A.M. Best Co. has downgraded the financial strength ratings to “A” (Excellent) from “A+” (Superior) of Overland Park, Kan.-based Employers Reinsurance Corp. and its affiliated domestic and international non-life and life reinsurance companies. Concurrently, A.M. Best has downgraded the debt ratings to “a-” from “a” for senior debt securities issued by the group’s direct parent, GE Global Insurance Holdings Corp. The outlook on all of the above ratings is stable.
The rating actions reflect increased uncertainty as to GE’s longer-term commitment to the reinsurance business in general; as a result, A.M. Best has revised its opinion relating to the treatment of ERC as a strategically important business to General Electric Company. Accordingly, the ratings assigned no longer consider any benefit derived from ERC’s affiliation with GE.
The rating actions also reflect an erosion of the risk-adjusted capitalization of ERC and some of its affiliates and weak consolidated earnings performance in recent years, principally from more than $5 billion of prior period reserve strengthening. Further, there is continued uncertainty regarding the strategic positioning of ERC’s life reinsurance subsidiaries within the organization.
Over the past five years, ERC has experienced significant underwriting losses necessitating capital support from GE. However, despite over $2.4 billion in capital infusions from GE over the past two years and significant utilization of third-party aggregate stop-loss reinsurance protection, the group’s overall risk-adjusted capitalization has deteriorated to a level that is no longer supportive of a Superior rating. The prolonged soft pricing conditions in both the domestic and international reinsurance markets—which prevailed until 2001—combined with increased frequency of catastrophe losses have culminated in over $5 billion of reserve strengthening over the past three years and a significant elevation of the group’s operating leverage driven by material increases in the ratios of gross and net loss reserves to policyholders’ surplus.
Nonetheless, the “A” (Excellent) rating reflects ERC’s excellent stand-alone risk adjusted capitalization, its leading position in the worldwide reinsurance market and its prospective long-term earnings capability stemming from its well-diversified business platform. In addition, over the past two years the group has executed underwriting actions and implemented tighter underwriting controls. Initial indications are that these actions, together with the favorable property/casualty underwriting environment, are driving the group’s improved underwriting performance for the most recent accident years.
As of December 2002, GE Global’s financial leverage—debt as a percent of total adjusted capital—was 19.2 percent and more than adequately supports its current debt rating. While statutory dividend capacity and coverage of fixed charges have been weak in recent years, the expectation is that these debt service coverages will improve in the medium term as the insurance subsidiaries begin to re-generate surplus from earnings. A.M. Best expects the company to manage its financial leverage below the 25 percent level.
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