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The Reinsurance Company No One Wants Capital, GE Plans to Inject $1.8 Billion Into at ERC in 1999, the Company Sported Top GE’S Employers Re the Company

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The Reinsurance Company No One Wants Capital, GE Plans to Inject $1.8 Billion Into at ERC in 1999, the Company Sported Top GE’S Employers Re the Company SM SCHIFFThe world’s most dangerous’ insuranceS publication November 22, 2002 Volume 14 • Number 17 INSURANCE OBSERVER The Reinsurance Company No One Wants capital, GE plans to inject $1.8 billion into at ERC in 1999, the company sported top GE’s Employers Re the company. (In the past five years ERC ratings from Best, S&P, and Moody’s. n early 1999 we placed a call to has upstreamed $2 billion in dividends to Those ratings are now history. As recently General Electric Capital—the parent its parent company.) GE also announced as July 10, Best affirmed ERC’s “A++” rat- of Employers Re (ERC), one of the a $4.5 billion infusion into GE Capital, ing, commenting on the company’s “ex- Iworld’s largest reinsurance organiza- whose balance sheet is stretched a bit cellent stand-alone capitalization; leading tions. We wanted to discuss a series of thin. (GE Capital has $260 billion of debt global market position, and prospective ERC ads that carried the famous GE logo outstanding.) long-term earnings capability.” On and that stated, in a variety of ways, that Until 2000, ERC had been reporting October 14, in light of the company’s ERC’s policies were “backed by” GE’s profits that did not upset Jack Welch’s gut. problems, Best revised its rating to “A+”, “resources” and “capital reserves.” Now it’s clear that ERC’s recent earn- expressing its “concerns regarding GE’s ERC’s ads were misleading and de- ings were an illusion resulting long-term commitment to GE Global ceptive because they gave the false im- from—we say this with all due re- [ERC’s direct parent] due to its pression that GE—as opposed to ERC— spect—honest mistakes made by bias against earnings volatility in- had financial responsibility for ERC’s GE stock-option holders trying to herent in GE Global’s non-life obligations. On the surface, this issue set reserves accurately. (A question: If GE businesses.” Yesterday, Best placed the might appear so subtle as to be a non- could be so wrong at ERC, is it not plau- “A+” rating under review with negative issue, but history has shown that large sible that it may be equally wrong at other implications. companies will not maintain their sub- divisions?) Standard & Poor’s “AA+” rating is also sidiaries’ financial health at any cost. Jeffrey Immelt, GE’s CEO, would love under review with negative implications. Those who choose to believe otherwise to wash his hands of the reinsurance busi- S&P “will reevaluate the stand-alone rat- do so at their own risk. ness. “ERC does not fit GE’s business ings on the ERC companies and ERC’s When we told GE Capital’s model,” the company said yesterday. strategic role within GE.” By year-end it spokesman, Neil McGarity, that we Indeed, losing a few billion dollars doesn’t will review “ERC’s loss-reserve studies thought his company’s ads were mislead- fit any company’s business model. GE and plans for capital replenishment” and ing and asked what the “backed by” plans to sell ERC’s life reinsurance busi- hold discussions with GE regarding its claims meant, he was reluctant to spend ness soon. If it could find a buyer, it would long-term commitment to ERC. “Upon much time explaining the unexplainable. probably sell the rest of ERC. “About the completion of the review, it is likely that the rat- “‘Backed by’ means that [ERC is] a mem- only thing they can do is pare back and, ings will be lowered by as much as a full cate- ber of the GE family and we stand behind perhaps, spin off what’s left with a clean gory.” [Emphasis added.] them,” he said. slate,” says our old friend Chris Winans, Fitch, which is striving to make a name But what does that mean, we persisted. senior equity analyst at Williams Capital for itself in the insurance-rating busi- Is GE guaranteeing ERC’s obligations? in New York. ness—it can best distinguish itself by McGarity dismissed our comments as An untethered ERC is not good news being tougher than the others—isn’t wait- “overblown speculation” and said he didn’t for insureds who relied on the financial ing until year-end. It lowered GE Global want to talk further. backing of GE to keep ERC in the pan- Insurance from “A+” to “A” yesterday. theon of triple-A credits. (To count on Moody’s lowered ERC from “Aaa” to esterday, General Electric an- such, one had to ignore financial history— “Aa2” on Tuesday. Some of its commen- nounced that it would take a at least the financial history reprinted on tary was noteworthy: “The continued Y$2.5 billion pretax charge for ERC’s pages 3-16.) poor performance of Employers Re ap- prior-years’ losses (mostly 1997 to 2000). Years ago, junk-bond impresario Mike pears to be stressing [GE’s] long-term This charge is in addition to the $2 billion Milken noted, quite correctly, that triple- commitment to the reinsurance busi- of reserve charges the company had taken A credits have nowhere to go but down. ness...[The lower rating] reflects the ex- in the previous three years. It’s easy to forget the importance of such pectation that while [emphasis added] In order to shore up ERC’s diminished a banal observation. When Schiff’s looked General Electric Company owns ERC, it SCHIFF’S INSURANCE OBSERVER • 300 CENTRAL PARK WEST, NEW YORK, NY 10024 • (212) 724-2000 • DAVID@INSURANCEO BSERVER. COM will continue to provide financial support important rating factor for Moody’s.” as needed to maintain the reinsurance [Emphasis added.] group’s capitalization at appropriate lev- Those concerned with financial els.” strength may choose to remember the After yesterday’s announcement of Milken dictum and ask the following: If a GE’s intended capital infusion into GE company doesn’t qualify as triple-A on a Capital, Moody’s affirmed GE Capital’s stand-alone basis, should it qualify as “Aaa” rating, noting that “a more appro- triple-A based on implicit parent-company priately capitalized GE Capital would pro- support (as opposed to explicit parent-com- vide multiple benefits for bondholders.” pany support)? It is paradoxical that an “Aaa”-rated com- ERC policyholders and creditors who pany can be inadequately capitalized, yet placed their faith in GE’s logo and implicit such is the way of the world. Discussing guarantees might answer “no.” E GE’s plans to inject and keep more capi- tal in GE Capital, Moody’s had this to say: The following pages, which contain an ar- “The latest series of initiatives directly ticle about financial strength, misleading ad- addresses a concern that Moody’s has had vertising, insurance-company failures, and de- for some time—that GE Capital is under- ceptive practices, originally appeared in the capitalized on a stand-alone basis…GE’s sup- March 1999 issue of Schiff’s. Although we port for GE Capital will continue to be a very thought it was one of the best articles we’ve ever The world’s most dangerous insurance publicationSM written, it didn’t go over well when it was pub- lished. We usually receive a considerable SCHIFF’S amount of feedback, especially on lengthy arti- INSURANCE OBSERVER cles. But this one got nothing. It was as if every issue had been lost in the mail. Perhaps Editor and Writer . David Schiff the problem was that the article was buried in Production Editor . Bill Lauck Foreign Correspondent . Isaac Schwartz a 32-page issue. Perhaps our message—a con- Copy Editor . John Cauman cern about financial strength and deceptive Publisher . Alan Zimmerman marketing—wasn’t what people wanted to Subscription Manager . Pat LaBua read during the biggest financial boom in mod- Editorial Office ern times. Maybe it was our dud of a title: Schiff’s Insurance Observer “How to Influence People and Sell 300 Central Park West, Suite 4H New York, NY 10024 Insurance.” Or maybe it was something else. Phone: (212) 724-2000 In any case, we’re giving the article another Fax: (212) 712-1999 life, and hope you find it intriguing this time E-mail: [email protected] around. (Several companies discussed in the Publishing Headquarters Schiff’s Insurance Observer article no longer exist in a solvent state. SNL c/o Insurance Communications Co. Amwest, Condor, Frontier, and Reliance—all 321 East Main Street of which we expressed skepticism about—have P.O. Box 2056 Charlottesville, VA 22902 failed. Travelers is no longer “a member” of the Phone: (434) 977-5877 Citigroup family, and ERC is not really Fax: (434) 984-8020 E-mail: [email protected] “backed by the prodigious resources” and Annual subscriptions are $149. “capital reserves” of its “parent company, For questions regarding subscriptions please GE.”) call (434) 977-5877. © 2002, Insurance Communications Co., LLC. Please go to the next page... All rights reserved. Copyright Notice and Warning It is a violation of federal copyright law to reproduce all or part of this publication. You are not allowed to e-mail, photocopy, fax, scan, dis- tribute, or duplicate by any other means the contents of this publication. Violations of copy- right law can lead to damages of up to $150,000 per infringement. Reprints and additional issues are available from our publishing headquarters. Insurance Communications Co. (ICC) is controlled by Schiff Publishing. SNL Financial LC is a research and pub- lishing company that focuses on banks, thrifts, real estate investment companies, insurance companies, energy and specialized financial-services companies.
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