WEISS RATINGS

Investors Shift Heavily Into Higher Risk Insurance
Insurers' Junk Bond Holdings Increase Faster Than Capital Resources

PALM BEACH GARDENS, Fla., November 16, 1998 -- During the first six months of 1998, just prior to the stock market's summer decline, investors shifted $34 billion into higher risk insurance policies -- variable annuities and other policies that are typically invested heavily in stocks, according to Weiss Ratings, Inc., the only independent provider of insurance company ratings and analysis.

The $34 billion net inflow into these "separate accounts," which include variable insurance products such as annuities and life insurance, represents a 26% increase over the same period in 1997. Simultaneously, insurance companies reported a 23% increase in surrenders believed to be primarily in the lower risk, nonvariable insurance policies. These two shifts indicate a move by investors away from fixed annuities -- a popular product five to seven years ago --- into variable products that are, by nature, riskier investments.

"Since the surrender period on many fixed annuities has expired, investors are now free to shift without penalty. So many have decided to forego the interest rate guarantees on their fixed annuity to play the stock market with a variable annuity," commented Martin Weiss, Ph.D., chairman of Weiss Ratings, Inc. "Unfortunately, their timing was not very good."

Bond Holdings Vulnerable

At June 30, 1998, 1,128 insurance companies held $86 billion in noninvestment grade, or "junk," bonds -- up 24% from $69 billion in 1997. As a percentage of the capital resources needed to cushion against potential losses, junk bonds increased from 33% in June 1997 to 36% in June 1998.

Companies that currently have high exposure include Oakre Life (MO), with $2.39 of junk bonds per dollar of capital resources, American Life and Casualty (IL), with $1.60, and London Pacific Life & Annuity (NC), with $1.51.

Junk bond holdings began to increase faster than capital resources at year-end 1997. Now, the mid-year 1998 data reflects a clear continuation of the same trend, precisely as the global debt crisis sparked a serious decline in low-rated bonds.

"Insurers were apparently chasing the higher yields offered by junk bonds in an attempt to satisfy fixed annuity investors. But this was insufficient to deter the investors from shifting to variable annuities," observed Dr. Weiss.

Common Stock Viewed With More Scrutiny In Rating Process

Due to the higher risk related to recent volatility in worldwide stock markets, Weiss has increased the "target capital" that it believes insurers should have to cover their common stock exposure. Among the companies downgraded due to this change in Weiss' evaluation model are American Life and Accident Insurance Company of Kentucky, with $236 million in common stock holdings, Blue Cross Blue Shield of Kansas, Inc., with $268 million, and WEA Insurance Corporation, with $101 million.

Noteworthy Upgrades And Downgrades

Among the 1,233 company ratings reviewed by Weiss, 26 companies were upgraded and 40 were downgraded.

Notable upgrades include:
Company Previous
Rating
New
Rating
Swiss Re Life and Health America, Inc. (New York, N.Y.) C+ B-
PHF Life Insurance Company (Orlando, Fla.) C+ B-
Acceleration Life Insurance Company (Dublin, Ohio) D+ C-

Notable downgrades include:
Company Previous
Rating
New
Rating
Western and Southern Life Insurance Company (Cincinnati, Ohio) A- B+
United Investors Life Insurance Company (Birmingham, Ala.) A- B+
States West Life Insurance Company (Mountlake Terrace, Wash.) B- C+

Capital and surplus continues steady growth

During the first six months of 1998, the industry’s capital and surplus continued to grow to $198 billion -- up 14.3% over the same period in 1997. However, surplus notes, a form of debt that regulators count as "capital," increased 28% during the period and now account for 6.5% of capital on the books, up from 5.8% in 1997.

Profitability slows considerably compared to prior years

Net income for the first six months of 1998 increased a mere 1.4% over the same period in 1997. This is compared to a 15.6% increase from 1996 to 1997 and a 54.7% increase from 1995 to 1996.

Weiss' ratings are based on an analysis of a company's capital, five-year historical profitability, quality of investments, liquidity, and stability. The latter category combines a series of factors including asset growth, premium growth, strength of affiliates companies, and risk diversification.

Weiss issues safety and Y2K ratings on over 16,000 financial institutions, including HMOs, life and health insurers, Blue Cross Blue Shield plans, property and casualty insurers, banks, and brokers. Weiss Ratings is the only major rating agency that receives no compensation from the companies it rates. Revenues are derived strictly from sales of its products to consumers, businesses, agents, and libraries.

Consumers who need more information on the financial safety of a specific company may purchase a rating or analysis directly from Weiss for as little as $15 by calling 1-800-289-9222.


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