Fitch Ratings has assigned a ‘AA’ long-term issuer rating to GE Global Insurance Holdings, Corp. (GE Global) and affirmed the ‘AAA’ insurer financial strength rating of Employers Reinsurance Corp. (ERC), GE Global’s main operating subsidiary. The Ratings Outlook for all ratings is Stable.
Rationale for the ratings includes GE Global’s solid capitalization and support from its upstream parents, which include General Electric Co. (GE), and diverse revenue streams. GE Global maintains a leading position in the U.S. and global reinsurance markets through its main operating subsidiary ERC. GE Global has an excellent competitive position in property/casualty reinsurance, a significant position in global life and health reinsurance, as well as strong niche positions in healthcare and specialty property/casualty lines.
GE Global’s operating performance has been poor over the last three years reflecting weak pricing fundamentals in the global reinsurance markets and recognition of loss reserve deficiencies. The company’s $195 million net loss in 2001 was materially affected by the events of Sept. 11, 2001, for which GE Global estimated gross losses of approximately $3.3 billion and net losses of $575 million.
Fitch views GE Global’s fixed charge coverage over the last several years as weak. The company’s fixed charge coverage has averaged approximately 3 times (x) prior to its losses in 2001. Fitch believes that GE Global utilizes a reasonable amount of financial leverage. The company’s debt-to-capital ratio has been steady in recent years at approximately 20 percent.
Recent media reports contend that GE is allegedly considering a spin off of its property/casualty units. The reports indicate that thoughts of a spin off at this stage are exploratory, and GE has not commented. If a possible spin off were confirmed, Fitch would likely initially place the ratings of GE Global and ERC on Rating Watch Negative. Pending further evaluation, it is possible that Fitch would downgrade the insurer financial strength rating of Employers Re to below the current ‘AAA’ level and GE Global to below the current ‘AA’ level. However, Fitch would not expect the ratings to fall below the ‘AA’ and ‘A’ ratings range, respectively.
Fitch is concerned that recent volatile operating performance has weakened ERC’s financial profile when viewed on a ‘stand alone’ basis. Accordingly, the support of GE has played an increasingly important role in ERC’s ‘AAA’ rating.
Should a spin off be announced, Fitch’s analysis would focus on ERC’s prospective financial and competitive profile on a stand-alone basis to judge if it meets ‘AAA’ standards. Among many other things, the review would include an analysis of the proposed structure of the transaction and ERC’s post-spin off capitalization to judge if it was adequate to offset potential earnings volatility.
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