S&P’s Lowers ERC Ratings to ‘AA-‘

December 6, 2002

Standard & Poor’s has lowered its counterparty credit and financial strength ratings on Employers Reinsurance Corp. and its wholly owned subsidiaries (collectively referred to as ERC) to ‘AA-‘ from ‘AA+’ because of the serious deterioration in ERC’s operating performance.

Standard & Poor’s also said that it lowered its counterparty credit and senior debt ratings on GE Global Insurance Holding Corp., the parent company of GE Capital Services’s reinsurance businesses, to ‘A’ from ‘AA-‘ because of ERC’s dominant position in the group that services the company’s debt.

General Electric Co., the parent, will contribute $1.8 billion in capital in the fourth quarter of 2002. At that time, these ratings will be removed from CreditWatch.

The ratings were placed on CreditWatch with negative implications on Sept. 30, 2002, following GE’s announcement that ERC’s third-quarter underwriting results deteriorated further and that the prospects for the full year were disappointing.

“The downgrades reflect the serious deterioration in ERC’s operating performance,” noted Standard & Poor’s credit analyst Grace Osborne. “This is demonstrated by more than $3 billion in prior-year adverse loss-reserve adjustments taken in 2002, which will offset all pretax operating income – excluding capital gains, minority interest, and World Trade Center losses – recorded since 1994.” The management team has taken steps to improve pricing adequacy and operating performance, but Standard & Poor’s believes that it is too early to judge their effectiveness fully.

The poor underwriting performance notwithstanding, the rating reflects the benefits of an established, diversified insurance/reinsurance platform, especially in light of recently improved market conditions, and a restored, very strong capital base. Standard & Poor’s believes ERC is non-strategic to GE because of the nature of the insurance/reinsurance sector, which requires strong levels of dedicated capital and assumes a range of earnings volatility. Standard & Poor’s believes that there is uncertainty about whether the management team, given its strong ties to GE, will remain in place and execute its long-term corporate strategy.

It is expected that once GE contributes its previously announced $1.8 billion in capital, Standard & Poor’s will remove the ratings from CreditWatch, affirm them, and assign a negative outlook to the companies.

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