GE holds on to its A+ but stays on watch

FOLLOWING last week's £1.2bn ($2.3bn) reserving action at GE Insurance Solutions, financial strength ratings have so far remained unchanged but rating agents are far from happy.  
 
Most significantly, Standard & Poor's (S&P) affirmed GE Insurance Solutions' A+ rating but left the company on creditwatch with negative implications. S&P placed the company on creditwatch negative on December 20, anticipating GE's reserve action.  
 
S&P has said the reserve strengthening at GE Insurance Solutions, formerly known as Employers Re Corp, is "substantially in excess of S&P's expectations when the ratings on this group were affirmed in September 2004, and will cause GE Insurance Solutions' operating performance to be significantly lower than expected in 2004". The rating agency said it remains concerned that GE Insurance Solutions is vulnerable to further earnings charges due to reserve additions over the medium term.  
 
S&P expects to resolve the creditwatch status in the next four to six weeks, following discussions with GE Insurance Solutions' management team and a complete review of this group's position.  
 
Fitch also affirmed its AA- insurer financial strength rating on GE Insurance's subsidiary. But it maintains its stable outlook following an earlier downgrade of the company.  
 
Fitch said the $1.2bn adverse 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.  
 
It believes the adverse prior accident-year reserve development is significant but the company's capitalisation continues to support its current ratings.  
 
Fitch continues to have concerns over GE's underwriting performance, which it said has generally lagged behind that of peers during periods of strong market conditions.  
 
And it continues to believe GE is likely to further restructure or divest the companies at some point and thus its ratings on ERC and GE Global are largely standalone and do not reflect significant implied financial support from GE.  
 
The third rating agency to pass comment on GE was Moody's, which placed GE Insurance Solutions under review for possible downgrade. As with the other two rating agencies, Moody's said the reserve charge significantly reduces GE Insurance Solutions' earnings for 2004 and is outside current ratings expectations.  
 
"Despite repeated reserve charges over the past five years, the company continues to revise its estimates for its underwriting performance," Moody's said.  
 
It added that the continued adverse reserve charges raise questions about the continued attractiveness of the business to GE as a group. It is also concerned that continued significant adverse reserve development on business written during the soft market heightens the risk that business priced during the most favourable part of the market cycle may not be as profitable as anticipated.  
 
Moody's also said reserving is particularly difficult at GE because the group writes significant amounts of long-tail business including professional liability, workers' compensation and excess casualty reinsurance.  
 
Moody's review for possible downgrade will focus on the prospective operating performance and capitalisation, including the potential for continued adverse development.