Life and Health Insurers Suffer 15.5% Decline in Net Profits,
Reversing Three Years of Double-Digit Gains
43% of Group Health Insurers Post Losses In 1998

PALM BEACH GARDENS, Fla., June 16, 1999—The net profits of U.S. life and health insurers fell from $25.6 billion in 1997 to $21.7 billion in 1998, representing a 15.5% drop that reverses three years of double-digit gains, according to a recent study by Weiss Ratings, Inc., the only independent provider of insurance company ratings and analyses.

Nearly all insurance product lines experienced declining profits in 1998, including individual life (down from $7.3 billion to $5.9 billion), individual annuity (from $5.9 billion to $4.3 billion), and group life (from $1.4 billion to $873.4 million). Only the profits of credit life and supplemental insurance stayed even.

The weakest sector was group health, which suffered an outright loss of $82.3 million, a sharp reversal from the $469.4 million earned in 1997. Among group health insurers followed by Weiss, 243 out of 564, or 43%, suffered losses. For example, Prudential Insurance Company of America (N.J.) lost $522.4 million on $2.6 billion of group health premiums, and Principal Life Insurance Company (Iowa) lost $107.3 million on $1.9 billion of premiums.

"The rising health-care costs and cut-throat competition that have plagued the managed care business are now showing up here too," noted Martin Weiss Ph.D., chairman of Weiss Ratings Inc. "It's a sign that recent Wall Street predictions of a recovery in the managed care and health insurance industry may be premature."

Insurers continue to step up investments in junk bonds

Despite the decline in overall profitability, the industry is continuing to increase its investments in junk bonds. In the aggregate, life and health insurers have boosted their total junk bond holdings by 20.1%. As a result, at year-end 1998, they had 39.7 cents in junk bonds per dollar of capital, up from 35 cents in 1997.

"With the default rate on junk bonds rising right now, the industry's growing appetite for these high-risk securities is cause for concern," commented Weiss. "During the past two years, insurers have increased their holdings in junk bonds at a double-digit clip - a possible mistake should the Fed's current inclination toward higher interest rates weaken the economy this year or next."

Meanwhile, two indicators of real estate troubles continued to improve. The industry's exposure to nonperforming mortgages dropped to a meager half cent per dollar of capital, while repossessed real estate fell to 1.7 cents per dollar of capital.

New data on CMOs highlight their relative risk

Collateralized mortgage obligations (CMOs) and other asset-backed securities continue to represent a large portion of total invested assets for the industry -- 20.6% in 1998. However, since different types of these securities carry different levels of risk, and since there has been little data available on the breakdown, it has been difficult to accurately evaluate the industry's risk exposure in this area.

Now, more detailed disclosures, made for the first time this year, to state insurance commissioners show that the industry has a relatively significant $105 billion in the riskiest category - multi-class, non-defined, mortgage- and asset-backed securities with low credit ratings. These represent 27% of all CMOs and similar securities held by life and health insurers, and they make up 5.6% of all invested assets.

Two of the companies most exposed to CMO risk are Lifeguard Life Insurance Company (Calif.), currently rated C by Weiss, and Southern Security Life Insurance Company (Miss.), rated D+. At year-end 1998, each held sizable positions in the riskiest category of CMOs, with 31.8 percent and 24.7 percent of invested assets, respectively.

Noteworthy Upgrades and Downgrades

Among the 1,267 company ratings reviewed by Weiss, 42 companies were upgraded and 59 were downgraded from the previous quarter's review.

Notable upgrades include:
Company Previous
CM Life Insurance Company (Conn.) B+ A-
North American Company for Life & Health Insurance (Ill.) C+ B-
Reliastar Life Insurance Company of New York (N.Y.) C+ B-
Notable downgrades include:
Company Previous
American General Life Insurance Company (Texas) A- B+
Franklin Life Insurance Company (Ill.) A- B+
Metropolitan Insurance & Annuity Company (Del.) A- B+

A=excellent, B=good, C=fair, D=weak, E=very weak

The Weiss ratings are based on an analysis of a company's risk-adjusted 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 affiliate companies, and risk diversification.

Weiss issues safety 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 also rates the Y2K preparedness of many insurers and banks, as well as the risk-adjusted performance of more than 5,000 mutual funds. 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.

Attached tables: National and state listings of strongest and weakest life, health, and annuity insurers. Additional state-by-state insurance company listings are also available.

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