A.M. Best Assigns Debt Rating to Mutual of Omaha Insurance Company; Affirms Ratings of Mutual of Omaha Companies.

OLDWICK, N.J. -- A.M. Best Co. has assigned an "a-" rating to $300 million of fixed rate 30-year surplus notes issued by Mutual of Omaha Insurance Company (Mutual). Concurrently, A.M. Best has affirmed the financial strength rating (FSR) of A (Excellent) and the issuer credit ratings of "a+" of Mutual and its subsidiary, United of Omaha Life Insurance Company (United of Omaha). A.M. Best has also affirmed the FSR of A (Excellent) of United of Omaha's subsidiaries, Companion Life Insurance Company (Lynbrook, NY) and United World Life Insurance Company. All companies (collectively referred to as Mutual of Omaha) are located in Omaha, NE unless otherwise indicated. The outlook for all ratings is positive.

The surplus notes are being offered to qualified institutional buyers in reliance on Rule 144A, and proceeds will be used for general corporate purposes. As these surplus notes represent Mutual of Omaha's first debt offering, A.M. Best believes the group's proforma financial leverage is conservative (in the 10%-15% range), with strong interest coverage of roughly 10 times. Interest and principal payments on the notes require the approval of the director of the Nebraska Department of Insurance. The notes are deeply subordinated obligations of Mutual and are therefore included in the company's statutory capital.

The ratings reflect Mutual of Omaha's superior levels of absolute and risk-adjusted capitalization, strong balance sheet with numerous sources of liquidity, improved business profile and diversified sources of revenue and earnings, which are well-balanced between group and individual business lines. A.M. Best also recognizes the group's solid top-line revenue growth within core product lines, strong franchise and prudent approach to asset/liability management. These strengths are partially offset by significant concentration risk in health care related product lines, particularly Medicare supplement, long-term care and group disability; modest historical operating returns relative to peers; moderate exposure to asset-backed securities and significant write-downs of asset-backed securities during the last two years that have negatively impacted overall investment returns.

The Mutual of Omaha companies utilize a well-diversified individual and group business model that markets health, life and annuity products to the middle income and senior marketplace. In recent years, the group's focus has shifted from a major medical writer to core product lines, which include Medicare supplement, long-term care, group disability income and traditional life insurance, as well as universal life and single premium immediate annuities. Mutual of Omaha's core lines are supplemented with an extended line of institutional offerings including GICs and funding agreements, as well as various supplemental life and health related products typically sold as accommodation products or opportunistically.

Mutual of Omaha's strengths are tempered by operating results that have historically been dampened by losses in discontinued business lines, excess expense imbalances and, until now, an unlevered capital base. In addition, the group has historically maintained modestly higher investment risk versus its peers and faces increased competition, most notably within its core Medicare supplement business. Recently, the group has experienced significant declines in total investment returns due to impairment related write-downs within its asset-backed securities portfolio. However, on a prospective basis, A.M. Best expects Mutual of Omaha's operating performance to gradually improve over time as expense gaps are eliminated, scale-related efficiencies are achieved and interest rates continue to rise.

In addition, A.M. Best has affirmed the FSR of A- (Excellent) of Exclusive Healthcare, Inc. (EHI) (Omaha, NE). The outlook for this rating is stable. EHI provides comprehensive health maintenance services to enrollees through arrangements with healthcare and other providers through a direct contract model in Nebraska and Iowa.

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.