A.M. Best Upgrades Ratings of the Mutual of Omaha Companies; Revises Outlook to Stable.

OLDWICK, N.J. -- A.M. Best Co. has upgraded the financial strength rating (FSR) to A+ (Superior) from A (Excellent) and issuer credit ratings (ICR) to "aa-" from "a+" of Mutual of Omaha Insurance Company (Mutual) and its subsidiary, United of Omaha Life Insurance Company (United of Omaha). Concurrently, A.M. Best has upgraded the FSR to A+ (Superior) from A (Excellent) and assigned ICRs of "aa-" to Companion Life Insurance Company (Lynbrook, NY) and United World Life Insurance Company. Additionally, A.M. Best has upgraded the debt rating to "a" from "a-" on Mutual's $300 million 6.8% surplus notes, due 2036. The outlook for all ratings has been revised to stable from positive. All companies (collectively referred to as Mutual of Omaha) are located in Omaha, NE unless otherwise specified.

The ratings reflect Mutual of Omaha's superior absolute and risk-adjusted capitalization; modest financial and operating leverage; strong interest coverage and liquidity; solid top-line revenue growth within its core product lines; prudent asset/liability and risk management processes; strong franchise; and well-balanced revenue mix between individual and group products.

The upgrades reflect the group's strategic repositioning that has occurred over the last decade--shifting from a major medical health care provider to a diversified health, life and annuity company. As a result, A.M. Best believes Mutual of Omaha's business profile has improved significantly, while interest rate risk on the balance sheet has been reduced.

A.M. Best notes that Mutual of Omaha's top-line revenue growth, though flat overall reflecting the group's strategic shift over the last several years, has exceeded industry averages in its core product lines. The organization's substantial balance sheet strength is supported by its prudent investment strategy, conservative approach to product pricing and comparatively low level of intangibles relative to equity. Furthermore, A.M. Best notes that interest rate risk on both the asset and liability side has been reduced due to Mutual of Omaha's decision to deemphasize sales of deferred annuities while concurrently lessening its exposure to asset-backed securities, which had been at levels higher than industry norms.

Mutual of Omaha utilizes a well-diversified individual and group business model, marketing health, life and annuity products to the middle income and senior marketplace. Recently, the organization announced its banking initiative, which was advanced by two pending community bank acquisitions. Although these transactions are modestly-sized, A.M. Best expects Mutual of Omaha's banking strategy to provide additional earnings diversification while affording it the opportunity to deploy excess capital in higher margin business lines, assuming critical scale is achieved.

While Mutual of Omaha's operating results have been somewhat volatile with mixed statutory results and flat overall GAAP trends, they were impacted by substantial investments in certain product lines, particularly group life and disability and retirement plans. The group's statutory earnings have been subject to non economic results, which should reverse over time, including the establishment of reserves associated with level premium term and secondary guarantee UL policies, and were impacted by the strain associated with strong growth within the Medicare supplement product line. Additionally, while current results acknowledge some adverse trends in mortality, particularly within single premium immediate annuities (SPIA), A.M. Best believes this will normalize.

Key considerations in Mutual of Omaha's meeting its strategic objectives will be its ability to maintain margins in the Medicare supplement product line, profit emergence in long-term care products, normalization of mortality trends for its SPIA products, careful expense management and successful expansion of its retirement plans business and banking initiative. A.M. Best believes the outlook for traditional Medicare supplement writers will be partially dependent upon the regulatory framework established under competing governmental plans (i.e. Medicare Advantage and Private Fee for Service plans) where there is pressure to reduce reimbursement rates. This could create the potential for market disintermediation, which may present opportunities for traditional Medicare supplement writers. However, A.M. Best observes heightened competition in the Medicare supplement business, which has impacted margins for traditional writers such as Mutual of Omaha that have rapidly grown their business in recent years. In addition, A.M. Best believes that Mutual of Omaha's planned expansion of its retirement plans business is subject to intense competition as it competes with substantial financial services providers with significantly more scale, product diversification and market share.

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.