Long term performance set to improve following previous years’ operating losses

AM Best has affirmed the financial strength rating (FSR) of A- (Excellent) and issuer credit ratings (ICR) of “a-” of Employers Reassurance Corporation (ERAC) and its subsidiary, Union Fidelity Life Insurance Company (UFLIC). The outlook for all ratings is stable.

The rating affirmations reflect both companies’ run-off market profile and financial strength positions, which are supported by ongoing parental capital contributions ultimately provided by the General Electric Company (GE). In addition to cash infusions, GE contributed the common shares of UFLIC to ERAC in 2007, further bolstering ERAC’s capital position.

Although ERAC maintains an acceptable level of risk-adjusted capitalisation, the company has incurred very substantial operating losses in recent years with particular weakness reported in 2007, when a net loss of $655m was incurred. The losses are mainly attributable to reserve increases on an in-force book of long-term care business along with required reserve increases on its level term portfolio (so-called Triple X reserves). On each past occasion when statutory capital was negatively affected by operating performance, GE responded by replenishing it to a level necessary to meet regulatory capital standards, indicating its commitment to the life, health and annuity business. Moreover, a claims payment guaranty by Employers Reinsurance Corporation remains in effect. The ratings also give effect to ERAC’s implicit financial strength exhibited by its ability to self-fund a significant amount of Triple X reserves.

Compared with recent reporting periods, AM Best expects that longer-term performance will improve, given that ERAC’s Triple X reserves will peak in 2009 and begin to decline thereafter. Certain internal realignment processes, which are now complete, should result in improved operating efficiencies.

The FSR of A- (Excellent) and ICR of “a-” have been withdrawn and a category NR-3 (Rating Procedure Inapplicable) has been assigned to Heritage Life Insurance Company (Phoenix, AZ). The withdrawals reflect the absence of policyholder liabilities following the 2007 closing of an indemnity reinsurance agreement with an unaffiliated third party.

Although in run off, the remaining reserves for ERAC and UFLIC exceed $23bn. Accordingly, AM Best will continue to monitor closely the ongoing performance of these blocks of business and fully expects that GE will capitalise these entities in compliance with regulatory standards.