Press Release - JULY 12, 2018

A.M. Best Downgrades Credit Ratings of ERAC Group Members

 Igor Bass
Financial Analyst
+1 908 439 2200, ext. 5109

Edward Kohlberg
Associate Director
+1 908 439 2200, ext. 5664

Christopher Sharkey
Manager, Public Relations
+1 908 439 2200, ext. 5159

Jim Peavy
Director, Public Relations
+1 908 439 2200, ext. 5644


OLDWICK - JULY 12, 2018
A.M. Best has downgraded the Financial Strength Rating (FSR) to B++ (Good) from A- (Excellent) and the Long-Term Issuer Credit Ratings (Long-Term ICR) to “bbb+” from “a-” of the Employers Reassurance Corporation and Union Fidelity Life Insurance Company (both domiciled in Overland Park, KS) (collectively referred to as the ERAC Group). The outlook of the Long-Term ICR has been revised to negative from stable, while the FSR outlook remains stable.

The ratings reflect ERAC Group’s balance sheet strength, which A.M. Best categorizes as adequate, as well as its marginal operating performance, limited business profile and appropriate enterprise risk management (ERM).

The adequate balance sheet assessment is reflective of ERAC Group’s continued fairly weak level of risk-adjusted capitalization, as well as significant future long-term care reserve increases, offset by the considerable implicit and explicit capital support provided under a capital maintenance agreement with General Electric Company (GE). ERAC Group’s marginal operating performance has been affected by historical weak earnings trends, as its long-term care (LTC) business continues to be unprofitable relative to original actuarial expectations, although a positive cash flow is expected with LTC price increases that should drive future earnings growth. The company’s business profile is limited due to the continued run-off nature of the business, along with the volatile nature that is associated with the majority LTC business on its books, and the high interest-sensitive reserves related to structured settlements. Overall ERM is appropriate, and is integrated into the GE Capital Group framework. ERAC Group’s risk policy, which receives oversight from its ultimate parent to mitigate deviations, sets certain expectations such as defined limits on specific risk categories.

The rating downgrades and outlook revisions to negative reflect A.M. Best’s concerns that the financial strength and operating profile of ERAC Group may deteriorate further over time due to the continued low interest rate environment and poor performance in the company’s LTC blocks. A.M. Best believes the potential for further capital declines exists due to the continuing need to increase reserves for the previously noted LTC line of business. Adverse movements in the financial markets could impact ERAC Group’s capitalization, from the decline in investment values. Published reports indicating that GE is exploring options to shed the struggling insurance business, along with recent credit downgrades of GE, add to A.M. Best’s concerns about ERAC Group’s financial strength and operating profile going forward.

This press release relates to Credit Ratings that have been published on A.M. Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see A.M. Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Understanding Best’s Credit Ratings. For information on the proper media use of Best’s Credit Ratings and A.M. Best press releases, please view Guide for Media - Proper Use of Best’s Credit Ratings and A.M. Best Rating Action Press Releases.

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