Best Downgrades Employers Reassurance

December 29, 2003

A.M. Best Co. announced that it has downgraded the financial strength rating to “A-” (Excellent) from “A” (Excellent) of Employers Reassurance Corp. (ERAC) and assigned a stable outlook.

“The rating reflects ERAC’s superior stand-alone risk-adjusted capitalization and favorable liquidity position,” said Best. “Offsetting factors include weak historical financial performance and withdrawal from the life reinsurance marketplace.”

The report noted that “ERAC plans to continue offering certain health reinsurance business, principally long-term care, but may also include accident, disability and behavioral health products. However, while providing higher margins than life reinsurance, health business is subject to greater earnings volatility and A.M. Best thus maintains a negative view on a number of health insurance products including long-term care.”

The rating agency also indicated that it is “uncertain as to the future commitment from its ultimate parent, General Electric Co. (GE). A.M. Best’s view regarding parental commitment is further supported by the recent sale of 95% of ERC Life Reinsurance Corp. (Overland Park, KS) to Scottish Re Group Limited (Grand Cayman). Accordingly, the rating reflects ERAC’s stand-alone characteristics without implicit benefit derived from its affiliation with GE.”

It added that “given ERAC’s modest historical returns and announced exit from its core life reinsurance business line, A.M. Best no longer considers the company as strategically important to GE.”

Best acknowledged, however, that “despite ERAC’s recent uneven statutory results, it maintains a superior risk-adjusted capital position, which is enhanced by its high quality investment portfolio and favorable liquidity posture. Additionally, although significant operating losses were reported in 1999 and again in 2002, capitalization has been supported by ERAC’s overall profitable operations in the last five years. A.M. Best expects financial results to improve, as earnings from the runoff of its large life reinsurance book of business emerge.”

The Employers Reinsurance Co. released the following statement in response to some confusion regarding Best’s action:

“We want to make it clear to our customers and partners that this rating action has no effect on the other business units of ERC, including Global P&C Reinsurance and Commercial Insurance.

To explain further, ERAC is a life and health reinsurance entity sharing the same parent as ERC – GE Global Insurance Holding Corporation. The ratings action follows ERAC’s decision to restructure its portfolio of life and health reinsurance, and is symptomatic of an industry-wide trend of low returns in life reinsurance.
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Specifically, ERC’s Global Life & Health unit has ceased writing life reinsurance in the United States to concentrate on product lines that generate higher returns, such as accident and health reinsurance.

It should be noted that GE Global Insurance Holding Corp., parent company of ERC, maintains an A rating from A.M. Best, and an A+ from Standard & Poor’s.”

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