Best Affirms GE Frankona Operating Company Ratings

A.M. Best Co. announced that it has affirmed the financial strength ratings of “A” (Excellent) and the issuer credit ratings of “a” of the operating companies of the German-based GE Frankona Group with a stable outlook.

“The ratings are based on the explicit financial support provided by Employers Reinsurance Corp. (ERC) in the form of claims guarantees to each of the GE Frankona subsidiaries,” said Best. “Other rating factors include the maintenance of the excellent risk-based capitalisation, excellent business profile and excellent earnings.”

Best noted: “GE Frankona’s risk-adjusted consolidated capitalisation remains supportive of the rating despite prospective higher dividend payments (approximately 111 million euros [$133 million] in 2005) to its parent company. The group also reduced its volume of business substantially in 2004 due to the adherence to stricter renewal standards.”

Concerning the Group’s “excellent business profile” Best said that GE Frankona’s reputation in Europe, “where it is a leading short-tail non-life and life reinsurer, remains excellent despite a 31 percent decline in net premiums written to 2.1 billion euros [$2.5 billion] in 2004.” Best indicated that the reduction had been “primarily a result of the non-renewal of inadequately priced business and the effects of the previous withdrawal from unprofitable lines such as large global casualty risks, catastrophe exposed industrial risks, pharmaceutical and German proportional motor business.”

The rating agency also indicated that GE Frankona has “retained fewer premiums as the group purchased more reinsurance coverage to take advantage of attractive retrocession rates.” Best expects a further reduction of non-life net premium in 2005 of around 8 percent, “mainly due to pricing pressure in the aviation and property lines.” It said the “decline is likely to be compensated by a premium growth of approximately 20 percent in U.K. life reinsurance after all major accounts were renewed, pricing levels remained favorable and new business in critical illness exceeded expectations.”

Due to the reduced volume, Best expects GE Frankona’s overall earnings to decrease by approximately 40 percent in 2005, “following an excellent consolidated net income of $603 million in 2004, but to remain within a range expected for the current rating. The decline reflects strong rate decreases, especially in aviation and property, as well as anticipated higher claims frequency in 2005 leading to a combined ratio of 98 percent from 87.1 percent in 2004, which was driven by favourable underwriting conditions and low catastrophe claims.”

Best also called the Group’s life reinsurance earnings “excellent,” and said it expects a net income increase of approximately 18 percent to $145 million, “mainly due to rate increases in all lines of business, especially for critical illness cover, as well as new business written in the company’s main market, the United Kingdom.”

The rating affirmation includes the following companies of GE Frankona Group:
— GE Frankona Rueckversicherungs-AG
— GE Frankona Reinsurance A/S
— GE Frankona Reinsurance Limited
— GE Frankona Reassurance Limited
— GE ERC Strategic Reinsurance Limited

Best also noted that the “rating of Luxembourg European Reinsurance S.A. has been withdrawn and revised to NR-3 (Rating Procedure Inapplicable) as the company is in run off.”