A.M. Best Affirms Ratings of National Life Group (VT).

OLDWICK, N.J. -- A.M. Best Co. has affirmed the financial strength rating of A (Excellent) and the issuer credit ratings (ICR) of "a" of National Life Group (VT)'s (National Life) key insurance subsidiaries, National Life Insurance Company of Vermont (NLV) (Montpelier, VT) and its subsidiary, Life Insurance Company of the Southwest (LSW) (Dallas, TX). Concurrently, A.M. Best has affirmed the ICR of "bbb" and existing debt ratings of NLV Financial Corporation (NLV Financial) (Montpelier, VT), an intermediate holding company within National Life's mutual holding company structure. The outlook for all ratings is stable.

The ratings reflect National Life's solid earnings, diversified business mix, prudent risk management, improved expense ratios and continued strong spread management through the low interest rate environment. These strengths are tempered by increased competition in the indexed annuity (IA) marketplace, declining traditional life premium trends at NLV and a closed block of business with modest embedded operating returns. Although the group's reported financial leverage is moderate at approximately 22%, interest coverage is solid at roughly seven times. A.M. Best notes that National Life's overall capitalization is adequate, despite lower capitalization levels at LSW.

Over the last several years, LSW's IA product line has been a significant source of growth for National Life. A.M. Best believes this segment is experiencing increased competition, ongoing regulatory scrutiny regarding product suitability and more recently, diminished demand for IA products facilitated by rising short-term interest rates. One of LSW's core markets--403(b) plans for K-12 educators--continues to be highly fragmented and has experienced modest growth. In addition, this market is subject to increased competition from banks, mutual funds and other insurance entities striving to garner additional retirement assets, as well as a changing IRS regulatory landscape. A.M. Best notes that these issues are partially mitigated by National Life's diverse business profile, which includes asset management, traditional, term and universal life products, as well as its recently introduced indexed universal life product. Moreover, National Life's operating performance has improved, driven by strong annuity sales, good expense management, favorable mortality, solid persistency and maintenance of investment spreads.

National Life continues to diversify its distribution and product platform, which is complemented by the historically strong performance of its mutual fund family, The Sentinel Funds (Sentinel). While overall investment performance at Sentinel remains solid, its sales trends have recently declined due in part to the closure of its popular Small Company Growth Fund in 2004 as it achieved its optimal asset size. A.M. Best notes a number of distribution initiatives and new fund options, which are expected to mitigate this trend going forward.

National Life's sales results reflect recent decisions to consolidate career agent offices into key target markets and avoid low-margin UL policies with no lapse guarantees, as well as ongoing modest consumer demand for traditional fixed annuities and the moderation of LSW's strong IA sales trends due in part to shifting consumer preferences toward CDs as short-term interest rates rise. Additionally, National Life has created programs to enhance recruiting, retention and productivity of its career agency force, where life sales have remained relatively flat over the last four years. However, A.M. Best notes that National Life has introduced a new indexed universal life product, which has been well received by the marketplace and is expected to contribute significant premium growth, prospectively. Finally, A.M. Best recognizes that National Life has specific plans to grow its independent channels while preserving the integrity of its career agency force by aligning producer compensation with performance measurement throughout the organization.

The following debt ratings have been affirmed with a stable outlook:

NLV Financial Corporation--

--"bbb" on $75 million 6.50% senior unsecured notes, due 2035

--"bbb" on $200 million 7.50% senior unsecured notes, due 2033

A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at www.ambest.com.