Fitch Affirms Ratings for GE Insurance

Fitch Ratings has affirmed the ‘A-‘ long-term issuer rating on GE Insurance Solutions Corp. (GE Insurance) and the ‘A-‘ratings on GE Insurance’s senior unsecured notes. Fitch has also affirmed the ‘AA-‘ insurer financial strength (IFS) rating on GE Insurance’s subsidiary, Employers Reinsurance Corporation (ERC). The Rating Outlook is Stable.

Fitch’s rating actions follow GE Insurance’s ultimate parent company, General Electric Company’s (GE), recent disclosure that it has increased loss reserves in its insurance operation by $472 million after tax in the fourth quarter 2004 and that in aggregate, it increased prior accident year reserves by $1.2 billion in 2004.

The $1.2 billion of aggregate development is within the range of potential reserve deficiencies that Fitch had considered in July 2004 when it downgraded GE Insurance’s and ERC’s ratings to their current levels. Based on its review of ERC’s group basis year-end 2003 Schedule P data and the company’s recent development history, Fitch estimated a 15%-25% reserve deficiency at that time.

Although Fitch views the adverse prior accident year reserve development as significant, it believes that the company’s capitalization continues to support its current ratings. Fitch notes that GE Insurance’s debt-to-capital ratio at Sept. 30, 2004, including the effect of the $472 million after-tax charge on a pro-forma basis, is 21% compared to 17% on a reported basis.

Fitch also notes that if it reduces ERC’s group-basis year-end 2003 statutory surplus by the $1.3 billion of adverse reserve development incurred in 2004 (assuming a 35% tax rate), the company’s ratio of net premiums written to surplus and net leverage ratio increase to 0.83 times (x) and 3.77x respectively from 0.72x and 3.14x reported at year-end 2003.

The ratings on GE Insurance and ERC continue to reflect Fitch’s concerns about ERC’s underwriting performance, which has generally lagged that of peers during periods of strong market conditions. Fitch believes that ERC’s ability to materially improve its underwriting performance will be complicated by deteriorating cyclical pricing conditions in the reinsurance and commercial lines markets.

Fitch continues to believe that GE will likely further restructure or divest the companies at some point and thus its ratings on ERC and GE Global are largely stand-alone ratings that do not reflect significant implied financial support from GE.