A.M. Best Methodology: BCAR for Life and Health Insurers--Model Update 2006.

OLDWICK, N.J. -- A.M. Best Co. has modified its BCAR model for life and health insurers effective for year-end 2006 to enhance its accuracy in measuring balance sheet and operating risk. A.M. Best's BCAR model will continue to quantify the level of capital required for four broad risk categories: asset risk, insurance/morbidity risk, interest rate risk and business risk. Changes were made impacting each of the four categories, which are briefly mentioned below. (For further details, please see link below.)

A.M. Best reduced asset risk charges applicable to Class 1 preferred stock. For BCAR purposes, A.M. Best will treat hybrid securities like preferred stock. In addition, reinsurance counterparty risk charges were increased to levels consistent with Class 1 bonds. Assets held by companies for corporate owned life insurance (COLI) policies will be assessed similar charges. The 2006 BCAR model will continue to utilize the spread-of-risk (SOR) factor; however, it will only be applied to bonds, preferred stock and mortgages.

Morbidity risk charges applicable to the new Medicare Part D program (effective Jan. 1, 2006) were set comparable to the risk charges applied to Medicare Supplement business. Lower risk charges will apply to stop-loss premium in excess of $100 million, reflecting the importance of scale. Also, adjustments to the Managed Care Credit will now vary based on capitation arrangements.

The 2006 BCAR model incorporates a single set of risk factors that apply to both individual and group annuities. Additionally, the model no longer applies additional risk charges to annuities based on the distribution channel through which the product was sold. The risk factor applied to structured settlements was increased slightly due to potential asset/liability mismatch risk.

To account for the market risks present in variable annuities with secondary guarantees A.M. Best will assess an additional charge that will be added to the company's reported C-3 Phase II results. The charge will vary for each of three risk profiles (low, medium or high) to be determined by analysts. Initial charges used for each risk category may be replaced by higher charges in the event of unstable or turbulent market conditions.

The 2006 BCAR model will exclude variable annuity and life premiums from the 2% business risk charge. Additionally, business risk charges applicable to separate account assets were reduced to a flat 0.2% (20 basis points).

Effective for year-end 2006, the maximum credit given for surplus notes is 90% for third-party (externally held) notes and 95% for notes held by affiliates. Starting 10 years prior to maturity, equity credit will be reduced on a straight-line basis.

A.M. Best believes that the above changes are likely to improve BCAR results compared to the prior year, particularly for companies with substantial variable annuity business. The 2006 model may also yield higher BCAR scores for small to mid-sized companies, relative to previous years.

BCAR results may vary for companies writing significant fixed annuity business. Health companies with managed care arrangements may also see enhanced BCAR results for 2006 versus 2005.

A.M. Best is quick to caution that although BCAR is an important tool in the rating process, it is supplemented with a thorough quantitative and qualitative review.

For more information on A.M. Best's rating methodologies or to download a copy of this methodology report, visit http://www.ambest.com/ratings/methodology.asp.

Founded in 1899, A.M. Best Company is a full-service credit rating organization dedicated to serving the financial services industries, including the banking and insurance sectors. For more information, visit www.ambest.com.