A.M. Best Special Report: Despite Improved Markets, Fundamental Concerns Remain

In the recently issued Special Report "Life/Annuity Mid-Year Update: Despite Improved Markets, Fundamental Concerns Remain," A.M. Best Co. discusses the drivers behind maintaining its negative rating outlook on the U.S. life/health industry. In September 2008, A.M. Best revised its rating outlook on the industry to negative from stable. In the two quarters that followed, stock prices of publicly traded life/annuity companies plunged, life insurers' general account investment portfolios recorded substantial impairments, equity-sensitive business lines struggled and liquidity and capital preservation became the key focuses for life insurers.

Over the last few months, the capital markets have again become receptive to new issuance, equity markets have improved and credit spreads have narrowed considerably. During second quarter 2009, several companies issued debt and/or equity to boost their capital bases. Some of this cash was used to pay off maturing debt and/or outstanding commercial paper, which A.M. Best views positively.

A.M. Best notes the following trends:

-- Most insurers reported considerable sales declines and weak in-force growth, while distribution expansion stalled.

-- Market share shifted substantially to mutual insurers.

-- Insurers have been proactively "de-risking" their variable annuity portfolios during the last 12 months.

-- Hedging remains the key risk mitigant, absent readily available reinsurance and other structured solutions.

-- Risk-based capital ratios were generally flat or up slightly, partially offset by credit losses and downward ratings migration on investments held by insurers.

-- Investments remain a concern, especially those tied to commercial mortgages.

-- Low portfolio reinvestment yields continue to pressure operating income.

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Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.

SOURCE: A.M. Best Co.

A.M. Best Co. 
Analysts 
Andrew Edelsberg, 908-439-2200, ext. 5182 
andrew.edelsberg@ambest.com 
or 
Stephen Irwin, 908-439-2200, ext. 5454 
stephen.irwin@ambest.com 
or 
Public Relations 
Jim Peavy, 908-439-2200, ext. 5644 
james.peavy@ambest.com 
or 
Rachelle Morrow, 908-439-2200, ext. 5378 
rachelle.morrow@ambest.com