Fitch Releases 2005 Review of U.S. Insurance Industry; Looks Ahead to '06.

NEW YORK -- Fitch Ratings today released its annual 2005 Review and 2006 Outlook for the U.S. insurance industry, encompassing, in four separate reports, the Property & Casualty, Life, Title, and the Health and Managed Care business lines.

The four reports are now available on the front page of the Fitch web site, www.fitchratings.com, under '2006 Sector Outlooks' and then Financial Institutions and Insurance.

Additionally, Fitch's U.S. Insurance group will hold a conference call tomorrow, Dec. 8, 2005, at 11 a.m. EST to discuss three sectors: P&C, Life, and Health. The teleconference details are at bottom.

Property & Casualty:

The U.S. property/casualty insurance industry encountered deja vu in this past year, mirroring 2004 in some respects: a strong first half operating performance that was then dampened considerably by third-quarter catastrophe losses. Unfortunately, catastrophe losses in 2005 were much more severe, and Fitch believes the industry will not reproduce the underwriting profits that were reported in 2004.

A record number of named Atlantic tropical storms formed in 2005. The strongest of which, Hurricane Katrina, produced the largest insured loss on record for one event. Katrina's destructive path in Louisiana and Mississippi was followed by Hurricanes Rita and Wilma, which each produced substantial insured losses that, combined, will make 2005 the most devastating year ever for insured catastrophe losses by a large measure.

'These events increasingly point to potential annual hurricane frequency and severity that is greater than previously considered,' said James Auden, senior director, Fitch Ratings. 'The losses produced by these catastrophes also demonstrated that a number of individual reinsurers were not managing their aggregate exposures relative to capital as tightly as previously assumed, leading to several recent rating downgrades.'

Life Insurance:

Fitch believes that the macro and industry trends are increasing the importance of franchise, size, scale, and diversity as a means of competitive advantage for life insurers. More of the industry's business is flowing into large, strong, diversified players with competitive market positions and good financial flexibility.

'Fitch believes recent developments in the industry have further advanced the need for scale,' said Julie Burke, managing director, Fitch Ratings. 'The three hottest products in the life industry today are term insurance, universal life insurance with no-lapse guarantees, and variable annuities with secondary guarantees. These products create reserving and capital challenges for insurers that are best addressed by scale.'

Indeed, the regulatory, compliance, and oversight environment has intensified in recent years. Companies have increased their compliance infrastructure to address these new requirements. Larger companies are in a better position to invest in infrastructure.

Health and Managed Care:

Fitch Ratings' Positive Rating Outlook for the U.S. health insurance/managed care sector reflects Fitch's view that favorable operating performance will continue into 2006 and recent improvements in balance sheet fundamentals will be sustained. Furthermore, Fitch does not anticipate material negative developments relating to the regulatory, legislative, and legal environment.

'Industry operating performance in 2005 has been characterized by better-than-expected operating margins, moderating medical cost trends, and slow organic enrollment growth,' said Douglas Meyer, senior director, Fitch Ratings. 'Better-than-expected operating margins, which have improved modestly compared with those of 2004, have been driven by strong commercial premium pricing, favorable Medicare funding, moderating medical cost trends, and improvements to the industry's administrative cost structure.'

Fitch expects reduced, albeit still favorable, industry operating margins in 2006, driven by increased commercial pricing competition, partially offset by further improvement in administrative costs and stable results in the Medicare business. Fitch expects strong growth in industry premium revenue in 2006 will be driven by premium rated increases in the 7%-9% range, modest commercial enrollment growth (2%-3%), and a significant increase in Medicare-related revenue due to increased Medicare Advantage enrollment and Medicare Part D business, which represents $25 billion or more of new incremental revenue.

Title Insurance:

The origins of these solid industry operating results include a low mortgage-rate environment that promoted strong mortgage origination volume and a robust real estate market, which was reflected in the number of housing starts and sales of new and existing homes.

Fitch's report also looks forward to expected performance for the title insurance industry in 2006. Indeed, Fitch expects the housing market, after reaching record levels of new and existing home sales in 2005, to moderate significantly in 2006. Fitch believes the 30-year fixed mortgage rate is expected to increase through the first half of 2006 but remain low relative to historic norms.

In the mortgage market, refinancing activity in 2006 will account for a smaller percentage than that of past years. Given the industry fundamentals, Fitch expects reduced title operating revenue in 2006, which will still represent a solid result for the industry.

Conference Call Details:

On Dec. 8, interested parties in the U.S. and Canada should call [phone] and participants outside North America should call [phone]. Participants should call at least five minutes before the 11 a.m. EST start time and give the title of the call as '2006 Insurance Sector Outlook.'

A replay of the teleconference will be available approximately two hours after the call ends. For the replay, interested parties should dial [phone] (U.S./Canada) or [phone] (outside North America). The conference ID number for the replay is '3005443'.

In addition, a web-based audio replay of the teleconference will be archived on the Fitch Ratings web site for three months. Two days after the conference call, interested parties can find the appropriate audio link at the 'Teleconference and Online Events' link, located under 'About Fitch' at www.fitchratings.com.

The Fitch Ratings 2005 Review and 2006 Outlook report is now available on www.fitchratings.com.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.