A.M. Best Lowers Rating of Washington Dental Service.

Business Editors

OLDWICK, N.J.--(BUSINESS WIRE)--Oct. 3, 2002

A.M. Best Co. has lowered the financial strength rating to A- (Excellent) from A (Excellent) of Washington Dental Service (WDS) (Seattle, WA) and assigned it a stable outlook.

This rating action reflects WDS' weakened capital position and unfavorable earnings through August 2002, which is primarily due to the poor performance of its significant equity investments and its limited penetration in the small group market.

Capital and surplus have declined from $81 million in 1999 to $62 million as of August 2002. Meanwhile, over the same period, WDS' premium revenue increased by 28%, thus weakening its capital base. As of August 2002, WDS experienced deterioration in net loss of $45,000 compared to a net gain of $3.7 million during the same period in 2001. WDS maintains a significant amount of investments in equities, which are equal to approximately 49% of invested assets and almost 52% of capital and surplus as of August 31, 2002. During 2002, because of poor performance, the equity portfolio weakened capital causing WDS to experience a decrease in its equity portfolio of $8.3 million as well as an unrealized capital loss of $11.7 million as of August 2002.

A.M. Best notes that if the company maintains its current investment philosophy, it will continue to be susceptible to market fluctuations, which could continue to have a negative impact on both earnings and capital and surplus. Moreover, WDS has not been able to adequately penetrate the small group market due to its inability to bundle its product with a medical product. However, A.M. Best anticipates WDS will seek to partner with other non-dental providers in order to accommodate the expectations of the small group market.

WDS is one of the founding members of the Delta Dental Plans Association. It is the dominant provider in the state of Washington with a 32% market share, while the nearest competitor has only a 12% market share. WDS provides dental coverage to more than 1.9 million members including dependents. Rate increases have been stable, and persistency rates have been strong at over 98%.

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.