A.M. Best Comments on Market Turbulence and Impact on U.S. Life/Annuity Ratings.

OLDWICK, N.J. -- A.M. Best Co. expects that many public companies will report lower GAAP results in the first quarter due to the significant downturn and volatility that has impacted the financial markets. In the February 4, 2008 "U.S. Life/Annuity - Review & Preview" research piece, A.M. Best noted that risks are rising for U.S. life/annuity balance sheets and that 2008 was being approached with more caution than in previous years due to economic uncertainty weighing on the financial markets. This prediction has come to fruition, with significant volatility in domestic and global equity markets in the first quarter. The repricing of risk has led to large spread widening in the U.S. corporate fixed income market in a "flight to quality," while liquidity was squeezed out of the credit markets. Credit defaults have begun to increase and many investments have suffered large unrealized losses. Meanwhile, the U.S. dollar has continued to plunge against the Euro and yen.

The severe dislocation in the capital markets, fueled by uncertainty about valuations linked to subprime residential mortgages, has had a significant impact on the valuation of investment portfolios of some life insurers. A.M. Best notes the differences in GAAP and statutory accounting, the latter of which is more opaque in its treatment of mark to market losses. For example, the declines in fair values on fixed income instruments do not flow through statutory filings as unrealized losses. In addition, A.M. Best notes that the treatment of "other-than-temporary impairments" (OTTI) is handled inconsistently among companies. Some companies are more conservative in their treatment and take immediate and severe write-downs on valuations of assets, even if these instruments continue to pay principal and interest. Moreover, as the period of time that securities remain "under water" lengthens, the number of write-downs is likely to increase.

A.M. Best believes that OTTI should be treated consistently regardless of the accounting method. Further, A.M. Best prefers companies to adjust statutory surplus for securities that have been determined to be impaired based on prudent valuations, consistent with GAAP guidance. Analytically, A.M. Best will consider the magnitude of unrealized losses as of the balance sheet date relative to statutory capital for each entity within a group and on a consolidated basis.

With the heightened volatility in equity markets, companies are impacted in a number of ways, including:

* Reductions in fees related to assets under management 

* Heightened interest in products with embedded guarantees

* Impact on DAC amortization

* Unrealized losses on assets

* Hedge breakage and increased costs to hedge

Historically, numerous companies have benefited from strong returns from alternative investments such as private equity and hedge funds. With volatility in equity markets, tightened credit and more limited liquidity and risk appetite, these favorable returns have been diminished and are no longer benefiting the bottom line of life insurers. This particular phenomenon will primarily impact the larger, publicly traded companies.

In 2007, A.M. Best noted that rating actions on life insurers were positive, with more rating upgrades than downgrades. At the same time, the number of negative rating outlooks increased. This divergence was noted in A.M. Best's special report dated February 11, 2008--"U.S. Life/Health - 2007 Rating Trend Review: Despite the Turmoil, Positive Rating Trends Continued in 2007," as well as concern that the positive trend in ratings could be short-lived. To date, in 2008, the number of negative rating actions has outpaced the number of positive rating actions. Uncertainty continues to be widespread in terms of future direction of the economy (recession, inflation, stagflation), asset valuations, equity markets-both domestically and globally-and liquidity. All of these factors have had an impact on life insurers' product lines and investment portfolios.

A.M. Best does not expect widespread industry distress, as noted in the stable outlook for the industry. However, a sustained, long-term dislocation would clearly have a negative impact on life and annuity company outlooks and ratings. Outsized company exposures to riskier assets will continue to be reviewed and rating actions will take place as appropriate. While A.M. Best does not react to short-term volatility, large reductions in equity or earnings will still be viewed negatively, no matter what the cause.

Overall, A.M. Best expects that the industry will weather the storm. Companies have reacted prudently by reducing exposures when possible and enhancing liquidity. Additionally, A.M. Best has observed that some publicly traded companies are either reducing or suspending share repurchases. The levels of risk-adjusted capital for the industry are strong; however, net income will likely be depressed. As always, A.M. Best will evaluate each company's performance on an individual basis and react accordingly. As part of this review, A.M. Best will soon issue a special report commenting on first quarter 2008 GAAP results for publicly traded life/annuity companies.

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.