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Rating Action:

MOODY'S DOWNGRADES GE INSURANCE SOLUTIONS RATINGS (SENIOR DEBT TO Baa1 FROM A1); OUTLOOK IS STABLE

27 Apr 2005
MOODY'S DOWNGRADES GE INSURANCE SOLUTIONS RATINGS (SENIOR DEBT TO Baa1 FROM A1); OUTLOOK IS STABLE

Approximately $1.7 Billion in Securities Affected.

New York, April 27, 2005 -- Moody's Investors Service announced today that it has downgraded the senior debt ratings of GE Insurance Solutions Corporation (GE Insurance Solutions) to Baa1 from A1. In the same action, Moody's downgraded the insurance financial strength rating of Employers Reinsurance Corporation to A1 from Aa2. GE Insurance Solutions is an indirect subsidiary of General Electric Company (NYSE: GE). The rating actions conclude a review for possible downgrade that was initiated on January 25, 2005, following the group's announcement of a $1.2 billion pre-tax charge taken in 2004 to cover adverse loss reserve development -- continuing the trend of recording large reserve charges in each of the past 5 years. The outlook for the ratings is now stable.

According to Moody's, the two-notch downgrade of the insurance financial strength to A1 reflects a view that the operating performance of the insurance group has been, and is expected to continue to be, at a level well below that expected of a Aa-rated (re)insurer, as well as Moody's re-evaluation of the prospect for future ownership and support from the ultimate parent, GE. The downgrade of GE Insurance Solutions also reflects an expectation for additional, although more moderate, reserve development and lingering concerns about the embedded profitability of both in-force and prospective business, as the property & casualty market continues to soften.

Elaborating further, Moody's noted that continued significant adverse reserve development on business written during the soft market heightens the risk that business priced during the most favorable part of the market cycle may not be as profitable as anticipated. There continues to be uncertainty about the reserve adequacy of GE Insurance Solutions because the group writes significant amounts of long tail business -- including professional liability, workers' compensation, and excess casualty reinsurance.

The rating agency said that the downgrade positions the ratings of GE Insurance Solutions at a level more reflective of their intrinsic credit strength which Moody's believes is appropriate given the parent company's statements about the strategic repositioning of the P&C and reinsurance operations. Moody's believes that GE may look to sell or spin-off GE Insurance Solutions at a time when its financial performance has improved and there is market interest. It is important to note, that despite the downgrades, the current ratings still benefit -- though to a lesser degree -- from GE's ownership and history of support.

The downgrade of the holding company's senior debt by three notches results in there now being three notches between the primary operating companies' insurance financial strength ratings at A1 and senior debt at the holding company at Baa1, which is consistent with Moody's typical notching practices for priority of claim at insurance groups. A key driver in widening the notching for GE Insurance Solutions is Moody's re-evaluation of parental ownership and implied support and ascribing it less value. The rating agency commented that although GE Insurance Solutions has some level of revenue and earnings diversification between primary P&C, P&C reinsurance, and life reinsurance, as well as between various geographic regions, the level of diversification is not sufficient to warrant narrower notching because of the relatively high correlation of these businesses.

The insurance financial strength and debt ratings of the GE Insurance Solutions group reflect the company's diversification across business segments with very good product breadth, its solid investment portfolio and good capitalization, as well as its market position as one of the five largest reinsurers in the world. This leading market position enhances the ultimate franchise value and market presence of the company in relation to its global customer base. Other strengths include the substantial financial capacity and demonstrated support of GE. These strengths are tempered by weak operating earnings, the continued potential for adverse loss development on prior year's long-tail business, and substantial tiering of regulatory capital.

Moody's stable outlook reflects our expectations that operating earnings will improve such that over time the average return on premium will exceed 5% while maintaining current operating and underwriting leverage metrics. The current ratings also consider that potential adverse reserve development, particularly on the 1997 to 2001 accident years, will be less than 5% of net carried reserves. We also expect financial leverage (debt + minority interest + preferred stock/ total capital) to fall and be maintained below 25% over the near term while return on equity rises closer to 10%. In addition, we anticipate that pretax operating earnings coverage of interest and preferred dividends rises to around five times over the medium term and unencumbered statutory dividend capacity coverage of interest and preferred dividends remains above two times. Lastly our ratings contemplate that GE is likely to continue to provide financial support, if necessary, until such time as the performance of GE Insurance Solutions and its operating companies improve.

The following ratings have been lowered and been assigned a stable outlook:

GE Insurance Solutions Corporation -- senior unsecured debt to Baa1 from A1;

Employers Reinsurance Corporation - insurance financial strength to A1 from Aa2;

GE Frankona Reinsurance AG - insurance financial strength to A1 from Aa2;

GE Frankona Reinsurance A/S - insurance financial strength to A1 from Aa2;

GE Frankona Reassurance Ltd. - insurance financial strength to A1 from Aa2;

GE Frankona Reinsurance Ltd. - insurance financial strength to A1 from Aa2;

The following rating has been confirmed and been assigned a stable outlook:

GE Reinsurance Corporation - insurance financial strength at A3.

Kansas City based GE Insurance Solutions is wholly-owned by General Electric Capital Services (GECS), a diversified financial services holding company, which in turn is wholly-owned by General Electric Company (GE: senior debt rated Aaa). GE Insurance Solutions ranks among the top five professional reinsurance groups worldwide. For the year ended December 31, 2004, GE Insurance Solutions reported total revenues of $10.1 billion and net income of $55 million. Total shareholders' equity as of December 31, 2004 was $8.2 billion.

Moody's insurance financial strength ratings are opinions of the ability of insurance companies to repay punctually senior policyholder claims and obligations. For more information, visit our website at www.moodys.com/insurance.

New York
Jeffrey S. Berg
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Robert Riegel
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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