Best Affirms Employers Re, Westport ‘A’ Ratings; Lowers Medical Protective; Revises Outlook to Stable

June 16, 2004

A.M. Best Co. announced that it has affirmed the financial strength ratings of “A” (Excellent) of Employers Re Corp Group and Westport Insurance Corporation of Jefferson City, Mo.

The bulletin noted that the affiliates comprising the group are: Kansas-based Employers Re, GE Reinsurance Corporation of Barrington, Ill. and First Specialty Insurance Corporation, a reinsured affiliate, also headquartered in Kansas. The outlook for these ratings is stable.

Best also announced that it has downgraded the financial strength rating to “A-” (Excellent) from “A” (Excellent) for Medical Protective Company, located in Fort Wayne, Ind., and revised its outlook from negative to stable.

“The affirmation of Employers Re’s rating reflects its excellent risk-adjusted capitalization, improving operating performance and its dominant market presence and distribution capabilities,” said Best. “With two years of improving underwriting results bolstered by asset sales and other capital management improvements, as well as significant third-party aggregate stop loss protection, Employers Re has maintained capital in line with an ‘A’ (Excellent) rating and has exhibited prospective long-term earnings capability stemming from its well diversified business platform.

“In addition, over the past two years the company has executed underwriting actions, implemented tighter underwriting controls and has maintained its prominence in the worldwide reinsurance markets through its international distribution capabilities.

“Nevertheless, Employers Re remains exposed to legacy issues related to its asbestos and environmental exposure, as well as the potential for continued deterioration of liabilities associated with the 1997 to 2001 accident years.”

Best specifically noted: “Limited flexibility exhibited by the direct parent, GE Global Insurance Holdings Corporation (GE Global) [see related article in ‘International’ section], has placed pressure on the risk-adjusted capitalization of the individual affiliates as they continue to rebuild their capital bases from weak underwriting performance associated with the 1997-2001 accident years. Thus, their ratings could be negatively affected over the next 12 months if net carried loss reserves prove to be inadequate or if underwriting or operating leverage becomes elevated.”

The downgrade of Medical Protective’s rating primarily “reflects a weakened risk-adjusted capitalization, precipitated by continued strong net premium growth and further reserve strengthening in 2003, primarily from 1999-2000 accident years,” said the announcement.

“Notwithstanding, the rating reflects Medical Protective’s leading market presence, distribution capabilities and aggressive claims philosophy, historically strong pre-tax earnings supported by a stable and substantial level of invested asset base and improved accident year results highlighted by positive operating cash flows,” Best’s bulletin continued. “To strengthen its risk-adjusted capitalization, the company has entered into a 25 percent quota share agreement in 2004 to manage growth.”

Best also stressed that “Medical Protective’s capitalization is supported by an aggregate stop-loss protection from its affiliate, Employers Reinsurance Corporation, through accident year 2003, which will serve to manage any unforeseen deterioration in the 2001 through 2003 accident years.” The rating agency indicated that it expects Medical Protective to build capital organically “as it maintains fundamental profitability through underwriting discipline and stable investment returns.”

Employers Re President and CEO Ron Pressman was clearly pleased by the ratings affirmation. “Today’s announcement is a validation of the way we continue to run this business with excellence,” he stated in a written release. “We posted improved operating results with net income of $482 million in 2003 and boosted our balance sheet with an additional $1.4 billion in statutory surplus. This positions ERC to offer long-term security for its customers.”

The release also noted that “despite an incrementally lower rating, Medical Protective, ERC Group’s medical liability carrier also distinguished itself, earning a Stable outlook for its capitalization efforts, underwriting discipline and investment portfolio.”

Pressman called Medical Protective’s progress “a tremendous success story in a challenged medical malpractice market.” He pointed out that the company “continues to be one of the highest-rated physician liability carriers due to its capitalization, market leading presence, distribution capabilities, professional claims philosophy, improved underwriting performance and positive operating cash flows.”

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