S&P Announces: Employers Reinsurance Corp. Ratings Affirmed; Outlook Remains Negative.NEW YORK New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of -- On Sept. 20, 2004, Standard & Poor's Ratings Services Ratings Service A company, such as Moody's or Standard & Poor's, that rates various debt and preferred stock issues for safety of payment of principal, interest, or dividends. affirmed af·firm v. af·firmed, af·firm·ing, af·firms v.tr. 1. To declare positively or firmly; maintain to be true. 2. To support or uphold the validity of; confirm. v.intr. its 'A+' counterparty Counterparty The other participant, including intermediaries, in a swap or contract. credit and financial strength ratings on Employers Reinsurance The contract made between an insurance company and a third party to protect the insurance company from losses. The contract provides for the third party to pay for the loss sustained by the insurance company when the company makes a payment on the original contract. Corp. and affiliated insurance/reinsurance entities (collectively ERC (database) ERC - An extended entity-relationship model. ; see ratings list). The outlook remains negative. At the same time, Standard & Poor's affirmed its 'A-' counterparty and senior debt ratings on GE Insurance Solutions Corp., an intermediary Intermediary See: Financial intermediary intermediary See financial intermediary. holding company which serves as ERC's immediate parent, and which is ultimately owned by General Electric Co. (NYSE NYSE See: New York Stock Exchange :GE; AAA/Stable/A-1+). The ratings are based on ERC's strong global reinsurance franchise, moderately improving operating performance, and conservative investment portfolio. The ratings also reflect ERC's position as a nonstrategic subsidiary of GE. Partially offsetting these factors is uncertainty in the group's loss reserve position and lower business mix diversification. Outlook Premium volume is expected to follow management's commitment to writing accounts for ultimate profitability and not top line growth. Nonlife accident-year combined ratios are expected to be 94%-96% over the next two years, reflective of improved pricing as well as terms and conditions. On a calendar-year basis the 2004 nonlife combined ratio is expected to be 103%-105%, reflective of Standard & Poor's expectation that the group will continue to report further reserve additions. For 2005 and 2006, Standard & Poor's expects overall operating results to improve significantly as the effect of reserve additions constitute a smaller portion of overall earnings and the effect of stronger current accident years flow through earnings. Capital adequacy is expected to remain in the very strong range. Interest and fixed-charge coverage ratios Fixed-Charge Coverage Ratio A ratio that indicates a firm's ability to satisfy fixed financing expenses, such as interest and leases. It is calculated as the following: are expected to improve, reflecting the expectation of earnings improvement at the operating level. Standard & Poor's believes that management will be challenged to meet all of the expectations previously mentioned; however, to the extent that ERC meets these expectations and reserve strengthening actions do not exceed $800 million over the mid-term, Standard & Poor's believes it is likely that the outlook could be revised to stable in the next two years. Major Rating Factors --Strong global reinsurance market position. Standard & Poor's believes ERC's market position is strong, based on its position as the second-largest insurer in the U.S. (based on gross premiums written When a non-life insurance company closes a contract to provide insurance against loss, the revenues (premiums) expected to be received over the life of the contract are called gross premiums written. ) and fourth-largest global reinsurance group (based on consolidated net reinsurance premiums). The group also enjoys significant diversity of client, product, and distribution sources. --Reduced risk portfolio diversification Portfolio diversification Investing in different asset classes and in securities of many issuers in an attempt to reduce overall investment risk and to avoid damaging a portfolio's performance by the poor performance of a single security, industry, (or country). . Life reinsurance business generated $2.97 billion in net premium writings in 2003, constituting 30% of the group's total net writings. The expected de-emphasis of the life reinsurance business is expected to decrease ERC's prospective flow of life revenue, invested assets, and product line diversification over time. It should, however, increase ERC's overall ROE A fictitious surname used for an unknown or anonymous person or for a hypothetical person in an illustration. A lawsuit is generally named for the persons who are parties to it. . In addition, it is expected that capital previously allocated to the life reinsurance business will be redeployed to ERC's nonlife operations. --Moderately improving operating performance. Following significant operating losses operating loss The excess of operating expenses over revenue. As with operating income, operating losses exclude revenues and expenses from operations that are not considered a regular part of the business. Also called deficit. Compare operating income. in 2001 and 2002, operating performance improved in 2003 with a consolidated GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). combined ratio of 107% (compared with 151% in 2002) and ROR ROR Ruby on Rails ROR Rate Of Return ROR Reach Out and Read (national pediatric literacy program) ROR Rotate Right ROR Revolutions On Request (artist group; Finland) ROR Rise of Rome of 4.6% (versus negative 31% in 2002); however, further improvement was hampered by further reserve additions of $851 million (pretax pre·tax adj. Existing before tax deductions: pretax income. pretax adj [profit] → vor (Abzug der) Steuern ) taken by the group in 2003, which constituted about nine percentage points in the group's consolidated loss ratio. Operating results through the first half of 2004 improved further, with the group reporting a consolidated GAAP nonlife combined ratio of 101% and net income of $302 million, although further improvement was also affected by reserve additions of $194 million. --Significant adverse loss-reserve development. Adverse loss-reserve development associated with the 1997-2001 accident years have sharply affected ERC's consolidated GAAP results since 2001. ERC's reserve position has proved to be significantly deficient de·fi·cient adj. 1. Lacking an essential quality or element. 2. Inadequate in amount or degree; insufficient. deficient a state of being in deficit. , with the group reporting about $5.5 billion in pretax reserve additions to date. These additions constituted 77% of the group's year-end 2000 shareholders' base (including minority interests) and a 49% increase over the original $11.2 billion loss and loss adjustment expense reserve base as reported in 2000. Despite the magnitude of the charges, Standard & Poor's believes that ERC's loss reserve base could still be deficient by about $800 million, or roughly 5%. --Strong capital adequacy. Capital adequacy was very strong at 154% in 2003; however, Standard & Poor's believes the quality of capital is hampered by continued uncertainty of the adequacy of reserves related to prior years as well as the fact that the capital position has been highly reliant on continued capital contributions by GE to cover loss reserve strengthening actions. In the past three years, GE made aggregate contributions of $2.7 billion to ERC. --Conservative investment strategy. ERC's investment philosophy is conservative and its consolidated reserve position is supported by highly rated, liquid securities, which are appropriate given the inherent volatility in a reinsurer's liability structure. The general investment strategy for the P/C and life re portfolios (about 75% and 25% of the total portfolio, respectively) is to maintain a high-quality portfolio with minimal exposure to defaults. --Financial leverage appropriate for the rating. Financial leverage as measured as total debt to total capital and total debt plus preferreds to total capital was reasonable at 18% and 30%, respectively, at year-end 2003. No new debt is expected to be issued, principal debt repayment exceeds six years with the majority beginning in 2019, and shareholder's equity is expected to grow through more stable earnings. Following two years of poor interest and fixed-charge coverage fixed-charge coverage The number of times that a firm's operating income exceeds its fixed payments. Fixed-charge coverage is a measure of a firm's ability to meet contractually fixed payments, with high coverage indicating significant flexibility for making , these ratios improved moderately in 2003 with interest coverage at 3.6x and fixed-charge coverage at 2.4x for the year. --Nonstrategic importance to General Electric Capital Services Inc. Standard & Poor's views ERC as a nonstrategic subsidiary of GE because of the nature of the insurance/reinsurance sector, which requires strong levels of dedicated capital and assumes a range of earnings volatility. Despite GE's demonstration of support through substantial capital contributions, Standard & Poor's believes that prospectively ERC's potential access to GE might be dependent on the group's ability to significantly improve operating performance and meet the parent's earnings expectations. Ratings List Employers Reinsurance Corp. GE Frankona Ruckversicherungs Aktiengesellschaft GE Reinsurance Corp. Counterparty credit rating A+/Negative/-- Financial strength rating A+/Negative GE Insurance Solutions Corp. (formerly GE Global Insurance Holding Corp.) Couterparty credit rating A-/Negative/-- Senior debt A- GE Frankona Reassurance Ltd. GE Frankona Reinsurance A/S GE Frankona Reinsurance Ltd. GE ERC Strategic Reinsurance Ltd. Luxembourg European Reinsurance S.A. Westport Insurance Corp. Employers Reassurance Corp. Coregis Insurance Co. Financial strength rating A+/Negative |
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