A.M. Best Assigns Debt Ratings To Clarica Life Insurance Co.

Business Editors

OLDWICK, N.J.--(BUSINESS WIRE)--July 5, 2000

A.M. Best Co. has assigned a rating of "a+" to the subordinated debt of Clarica Life Insurance Co., Ontario, Canada, and an "a" rating to the company's preferred shares.

The A+ (Superior) financial strength rating of Clarica and its primary insurance operating company in the United States, Clarica Life Insurance Co. - U.S., is not affected by the action. The A (Excellent) rating of Clarica's other U.S. subsidiary, Milwaukee Life Insurance Co., also is unaffected.

The ratings reflect Clarica's strong position in the Canadian individual insurance and savings and retirement markets, sustainable earnings, strong debt service capabilities, effective asset-liability management and solid capital position. Clarica is well established in the Canadian life insurance market in its three core business segments: retail insurance; savings and retirement; and group insurance. In 1998, it reinforced its market position by acquiring the Canadian business of Metropolitan Life Insurance Co., which added scale to its operations and increased its distribution capability.

The company generates approximately 80% of its earnings from insurance and asset- accumulation business in Canada. The rest is derived from its U.S. life and annuity and reinsurance operations. A.M. Best believes the consistent flow of earnings from Clarica's insurance business, coupled with fee income from its segregated fund and mutual fund businesses strongly support the company's long-term debt service capabilities.

Clarica has prudently managed its asset-liability exposure by matching the cash-flow demands of its liabilities with its assets. About half of its general fund portfolio is invested in bonds, most of which are of high quality. Although Clarica's exposure to commercial mortgages and real estate is high relative to that of U.S. insurers, it is well managed and comparable to that of its Canadian peers. Nearly half of Clarica's general fund liabilities consist of annuity reserves, most of which contain surrender protection that mitigates risk of withdrawals. Clarica also has significant segregated fund assets under management whereby the investment risk is borne by the contract-holder, resulting in reduced overall capital requirements.

However, A.M. Best believes Clarica may have difficulty increasing its market position in the highly competitive asset-accumulation market segment, given its high-cost structure relative to other large players in the mutual fund and segregated fund arena. In addition, legislation is pending that may impose capital requirements for segregated fund businesses. This would result in greater price competition and reduced operating margins. Clarica maintains a strong capital position that supports its core businesses and compares favorably with the capital positions of its Canadian peers.

Clarica's strengths are offset by its concentration of business in Canada, its heightened financial leverage relative to its peers and lack of diversified distribution channels in its Canadian retail insurance operations, which limits sales growth. Earnings growth is constrained by the lack of significant geographic diversification outside Canada, which is a mature and highly competitive market. Over the past several years, the company has used the capital markets to finance acquisitions and support the growth of its core businesses. A.M. Best does not expect total borrowings--consisting of debt plus preferred stock--to exceed 25% of total capital in the near to medium term.

Clarica is one of the largest life insurance companies in Canada, offering a wide range of life and health insurance, savings and retirement products and other financial services to individuals and corporations. As of March 31, 2000, the company reported consolidated assets (including segregated funds) of C$38.7 billion and shareholders' equity of C$2.6 billion.

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.