A.M. Best Announces Updates to Its Liquidity Model of U.S. Life Insurers.

OLDWICK, N.J. -- A.M. Best Co.'s Liquidity Model (AMBLM) for U.S. life insurers has been modified for year-end 2008 to reflect current market conditions and to improve its accuracy in measuring liquidity risks. AMBLM measures a company's short-term (30 days) and longer-term (six to 12 months) cash needs under stressed scenarios by applying a "haircut" to assets and liabilities. Liquidity ratios are determined on a stand-alone basis and are only part of A.M. Best's review of overall liquidity. Additional sources of liquidity such as access to capital markets, holding company resources and lines of credit also are reviewed.

There were two changes made to the model for 2008. With regard to factors applied to asset classes, the longer-term factor credit for Z-tranche collateralized mortgage obligations (CMO) was decreased from 35% to 15%. A.M. Best believes that the deterioration of the residential mortgage market during 2008 will lead to increased strains on cash flows of CMOs, particularly the more junior tranches, such as Z-tranches. Z-tranches represent less than 10% of all CMO tranches, and A.M. Best expects there to be minimal impact on liquidity ratios due to this change.

With regard to factors applied to liabilities, the AMBLM was modified in 2008 to capture increased liquidity risks of guaranteed investment contracts (GIC) and funding agreements (FA) with putable provisions. Such provisions require the insurance companies to put back the contracts to investors at a set price if there are trigger events. One of the primary triggers of such provisions is a downgrade of the issuing company. For 2008, the AMBLM applied an additional 25% charge to the amount of GICs and FAs subject to putable provisions. A.M. Best believes that under stress scenarios, these provisions are more likely to be exercised by investors, and thus, increase the liquidity demands of the issuing insurance companies. A.M. Best notes that putable features are less prevalent in more recent issues of GICs and FAs. Therefore, A.M. Best expects there to be a small impact on overall liquidity ratios due to this change.

The above changes are designed to more accurately reflect the liquidity risks that are present in the current environment. A.M. Best will continue to closely monitor industry experience, product trends and regulatory changes impacting the liquidity of life/health insurance company operations.

To learn more about A.M. Best's Liquidity Model for U.S. life insurers, please see the following special and methodology reports:

* "2009 Special Report: U.S. Life--2008 Liquidity Trend Review. Life Insurers' 2008 Liquidity Returns to 2006 Levels" (August 31, 2009)

* "2009 Special Report: U.S. Life/Annuity--Review & Preview: U.S. Life Insurers Hunker Down as Market Turmoil Continues" (February 23, 2009)

* "2008 Special Report: U.S. Life--2007 Liquidity Trend Review. Life Insurers Saw Modest Boost in 2007 Liquidity, Model Shows" (September 1, 2008)

* "A.M. Best's Liquidity Model for U.S. Life Insurers" (April 20, 2007)

Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.