A.M. Best Special Report: Life/Health Rating Upgrades Outnumbered Downgrades in 2004; Industry Outlook Is Stable.

OLDWICK, N.J. -- In 2004, the life/health insurance industry experienced improved operating earnings and balance sheet strength, with A.M. Best Co.'s rating upgrades outnumbering downgrades by a slight margin. A.M. Best's year-end ratings outlook for the industry was stable, according to a special report on life/health rating trends.

As 2005 gets under way, the life/health industry appears to be at a crossroads, given the ongoing shift in the industry's product mix; the more aggressive competitive stance being taken by major players in key market segments; the increasing diligence demanded to comply with accounting and regulatory requirements; and the volatile reality of the global economy.

A.M. Best does not expect these factors to adversely impact ratings in the near term. However, A.M. Best believes that the industry will be challenged over the long term to sustain earnings and consistently accumulate capital -- factors that are expected to pressure ratings over time.

The continued stability in equity markets and relatively benign credit environment have enabled life companies to maintain asset-management fee levels and attain solid investment returns. Still, insurers that are dependent on fixed annuities remain challenged by low interest rates and ongoing spread compression. Another looming challenge for annuity writers is the possibility that the Bush administration will reinstate its plans to introduce legislation for new, tax-exempt savings plans later in the year. If enacted, these plans could hurt annuity companies by providing an alternative savings mechanism to annuities.

These trends have contributed to considerable repositioning within the industry, with companies divesting lines of business and selling units that no longer are considered strategic initiatives for parent companies that may be looking to deploy capital more effectively elsewhere. One industry segment that continues to be repositioned is the life reinsurance market, which saw companies such as Allianz and Employers Re exiting the market in 2003 and ING Re exiting in 2004.

The health insurance industry has experienced a more positive operating environment than the life and annuity carriers, largely driven by a highly favorable pricing environment and a moderating medical cost trend that has resulted in several years of strong earnings. Nevertheless, it is highly unlikely that these robust earnings will be sustainable in 2005.

In 2004, rating activity included 40 upgrades and 35 downgrades for the life/health industry. These 75 rating actions reflected rating changes on approximately 8% of the life/health rating units followed by A.M. Best. Life/annuity company downgrades totaled 24, compared with 21 upgrades. Health company upgrades totaled 19, compared with 11 downgrades.

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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 http://www.ambest.com.