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Fitch Downgrades GE Financial Assurance; All Life Insurer Ratings on Rating Watch Negative.

Business Editors

NEW YORK--(BUSINESS WIRE)--Nov. 18, 2003

Following the announcement today by General Electric Company (GE) of a planned initial public offering of its life and mortgage insurance operations in early 2004, Fitch Ratings has downgraded the long-term issuer and senior debt ratings of GE Financial Assurance Holdings Inc. (GEFA) to 'A' from 'A+' and has placed both the long-term debt ratings and the 'AA' insurer financial strength (IFS) ratings of GEFA's primary life insurance subsidiaries on Rating Watch Negative. About 60 billion of yen-denominated long-term debt--approximately $485 million--is affected by this rating action. The 'F1' short-term issuer and commercial paper ratings are affirmed, as short-term debt is being guaranteed by GE. The 'AA' IFS ratings of the General Electric Mortgage Insurance Corporation (GEMICO) were affirmed, and are commented upon in a separate press release.

The rating actions reflect execution risks tied to the IPO, and the fact that parental support by GE will no longer be a positive ratings factor going forward.

The long-term debt rating for GEFA has historically been rated two notches below the IFS ratings due primarily to very low financial leverage, with a debt-to-capital ratio below 15%. A majority of debt has been comprised of commercial paper supported by a GE-provided liquidity facility. Fitch expects the new holding company to increase leverage to levels more typical of peers, likely running in the 25% range, and to extend debt maturities. Under a more typical debt structure, which Fitch would expect to be targeted by management going forward--even if for some reason the IPO was not executed as planned--Fitch's ratings standards call for a debt rating three notches below the IFS ratings.

The consolidated NAIC risk-based capital (RBC) of the life companies was 245% at year-end 2002, below Fitch's guidelines for a 'AA' IFS rating, but acceptable for the historic ratings given the financial flexibility and potential for parent support under GE. Favorably, concurrent with the IPO, management plans to increase risk-based capital levels to a significantly higher level, at least 300%, which is more in line with 'AA' standards. Achieving the target capital level at year-end 2003, however, depends to a large extent on the successful completion of a series of coinsurance and modified coinsurance transactions with a GE affiliate. Fitch plans to review the terms of these transactions to determine the extent of risk transfer and underlying economic benefits for GEFA.

The ability of the new entity to be self-funding going forward will depend on its ability to generate strong and stable statutory earnings. This could be a challenge given the group's focus on typically lower-margin, capital intensive businesses, including individual annuities, long-term care insurance, GICs and funding agreements. In addition, the group's investment yields are expected to remain depressed because the company has harvested realized gains on its bond portfolio over the past few years. However, the above noted coinsurance and modified coinsurance transactions with GE are designed to help boost returns, and provide a more solid earnings platform going forward by eliminating the future impact of some of the lowest margin business.

A key part of resolving our Rating Watch will center on judging if the franchise on a stand alone basis will be able to produce returns more consistent with 'AA' standards without adding to the risk profile. Fitch has viewed risk management as a key strength for GEFA historically.

Favorably, the existing management team will remain in place. Further, GEFA will be strongly diversified with a product portfolio that includes a good mix of life products as well as mortgage insurance. The group is expected to have ongoing access to the GE brand for the first three years, and possibly longer. This should help management with what may be one of the more challenging aspects of the IPO given the very strong market recognition of the GE brand with both distributors and consumers.

GE plans to sell about 30% of the equity of a newly formed holding company--Genworth Financial, Inc.--which will include most of GEFA's life and mortgage operations. Further, GE plans to reduce its ownership to zero over the subsequent four years. GE intends to use the proceeds from the IPO to invest in less capital intensive growth initiatives and reduce inter-company debt at GE Capital. Fitch's prior Negative Outlook on GEFA and its life insurance subsidiaries reflected concerns that GE may at some point divest the life subsidiaries.

Fitch will review the Rating Watch following additional meetings with management. Fitch would expect the ratings to be affirmed or lowered by no more than one notch upon completion of the review. Given that Fitch no longer views GEFA as a core or strategic affiliate of GE, the ratings will be moved to the 'stand alone' level as soon as practical following additional analysis, and the Rating Watch could be resolved prior to the time of the IPO.

Entity/Issue/Type Action/Rating/Outlook:

Fixed Income Ratings:

GE Financial Assurance Holdings, Inc.

-- Long-term issuer/Downgrade/ to 'A' from 'A+'/Rating Watch


-- Senior debt/Downgrade/ to 'A' from 'A+'/Rating Watch Negative;

-- Short-term issuer/Affirmed 'F1'.

General Electric Capital Assurance Company

-- Insurer Financial Strength/ Placed on Rating Watch Negative


GE Life and Annuity Assurance Company

-- Insurer Financial Strength/ Placed on Rating Watch Negative


General Electric Capital Life Assurance Company of New York

-- Insurer Financial Strength/Placed on Rating Watch Negative


First Colony Life Insurance Company

-- Insurer Financial Strength/Placed on Rating Watch Negative


Federal Home Life Insurance Company

-- Insurer Financial Strength/Placed on Rating Watch Negative


American Mayflower Life Insurance Company of New York

-- Insurer Financial Strength/Placed on Rating Watch Negative

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Publication:Business Wire
Geographic Code:1USA
Date:Nov 18, 2003
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