A.M. Best Special Report: Life/Health Rating Upgrades Outpace Downgrades for 2005.

OLDWICK, N.J. -- In 2005, the life/health insurance industry enjoyed another strong year of operating earnings, which along with benign credit markets led to historically high capital levels for the industry. With continued improvement in balance sheet strength for the industry, A.M. Best Co.'s rating outlook for the industry was stable, and a larger share of companies now enjoy "Secure" ratings.

Led by a continuing strong economic climate, growth in both invested and separate-account assets, ongoing expense-reduction initiatives, improved risk-management capabilities and a renewed focus on core business lines (and resulting divestitures of noncore lines), the year 2005 marked another year of enhancement for the life/health insurance industry's capital strength. While A.M. Best views these trends positively--and recognizes the industry's strong financial and risk-management capabilities that made this turnaround possible--our enthusiasm is tempered somewhat by the long-term challenges ahead.

A.M. Best believes that life insurers face an increasingly complex array of risks that pose a real challenge for the industry to find the right balance between shareholder value and policyholder security; the pursuit of scale and the need to create long-term value; sales growth and product suitability; and supply and demand.

In addition, increased scrutiny by regulatory bodies has occurred due to suitability concerns, particularly within the senior marketplace. Growth concerns must be balanced by the need for responsibility in product design. Reinsurance has been a key component of managing growth for direct writers; however, continued consolidation in the reinsurance market has led to a capacity crunch, while at the same time market dynamics in the individual life and annuity market are creating increased demand.

For health insurance companies, sustaining very strong margins while competition accelerates and top-line growth is pressured will be the most significant long-term challenge. Reducing rate increases through changes in benefit design can go only so far in an environment of rapidly escalating costs. Medical cost trends implicit in pricing are expected to track closer to actual trend for some business segments, which will result in lower margins.

A.M. Best believes the ability to sustain the recent levels of high profitability may be nearing an end. Most companies are unlikely to repeat their practices of the late 1990s, when they focused only on market share. Companies that maintain top-line growth without abandoning pricing discipline will be deemed successful.

There was divergence between life ratings and health ratings, with health rating upgrades easily outpacing downgrades, while life rating actions were still more negative, with more downgrades than upgrades. In total for the life/health industry for 2005, rating actions were positive, with 31 rating upgrades vs. 25 downgrades for the year.

What caused the difference between the two segments? While there was no prevailing theme for rating actions in 2005, in many cases, rating actions both positive and negative resulted from changes in ownership or a change in A.M. Best's view of a company under the group rating methodology.

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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 www.ambest.com.