Liquidity of Insurers Potentially Threatened by
Easy-to-Surrender Guaranteed Interest Contracts
Industry Profits Rebound After Two Down Quarters

PALM BEACH GARDENS, Fla., August 25, 1999 — According to a recent study of U.S. life and health insurers by Weiss Ratings, Inc., some large insurance companies have guaranteed interest contracts (GICs) that can be easily surrendered by investors, potentially threatening the insurer’s liquidity. Weiss, the only independent provider of insurance company ratings and analyses, believes these companies could be vulnerable to the same kind of liquidity crisis that recently caused General American Life Insurance Company (Mo.) to default on its GICs.

Similar in nature to a corporate bond, a GIC is a contract issued by an insurer that guarantees the contract holder a specific rate of return until maturity. Unlike corporate bonds, however, GICs allow the contract holders to withdraw their funds prior to maturity according to specified surrender terms. Some of these make it easier for the investor to cash out, while some make it more difficult.

Weiss noted that the recent rise in interest rates has caused the value of government and corporate bonds, the underlying investments for most GICs, to fall. Consequently, if GIC holders were to suddenly withdraw their funds, insurers could be forced to sell these underlying investments at a loss in order to cash the holders out. This potential risk is primarily a problem, however, for those insurers issuing GICs with the most liberal cash-out terms.

Tougher withdrawal terms require a market value adjustment or a book value adjustment plus a fee. Easier withdrawal terms require minimal or no adjustments.

The following insurers have the largest percentage of their GIC policies subject to easier withdrawal:

Company Weiss
Total GIC
% of
Security Mutual Life Insurance Co. of NY B- 150.0 87.1
Integrity Life Insurance Co. Ohio) C 3,508.1 66.7
RGA Reinsurance Co. (Mo.) D+ 1,732.2 57.8
Jackson National Life Insurance Co. (Mich.) C+ 4,572.1 38.2
SunAmerica Life Insurance Co. (Ariz.) C+ 5,773.4 32.1

* Percentage of annuity reserves and deposit liabilities surrenderable with minimal or no charge or adjustment.

"If the failure of General American Life Insurance or some similar event were to spook the GIC holders at one of these companies, I believe it could be difficult for some of the lower rated companies to meet their liquidity needs," commented Martin Weiss, Ph.D., chairman of Weiss Ratings, Inc. "I think many of these companies took a gamble on interest rates, and now they have left themselves in a vulnerable position."

First Quarter 1999 Net Income Rebounds Slightly

On the positive side, net income for the nation's life and health insurers rose to $6.8 billion during the first three months of 1999, up 22% from $5.6 billion during the same period last year. Net underwriting income accounted for most of this increase, rising from $11.8 billion to $12.8 billion, or 8%, over the same period. This climb in first quarter profits reversed the declining profit trend of the previous two quarters.

Annuity Deposits Continue To Climb

Annuity deposits at the end of the quarter were up a remarkable 28% from a year ago. With the increasing popularity of variable annuities, new business in this area has almost doubled in the last four years, from $28.7 billion in the first quarter of 1995 to $51.4 billion in the first quarter of 1999.

Equity Investments Level Off

After several years of solid growth in the U.S. stock markets, life and health insurers have begun to scale back their equity investments slightly as a percentage of capital. Unaffiliated common stock amounted to $42.3 billion, or 17% of capital at the end of the first quarter, down from 22% at first quarter 1998.

Noteworthy Upgrades And Downgrades

Among the 1,307 life and health insurers reviewed by Weiss, 25 were upgraded and 34 were downgraded. Notable upgrades include:

Notable downgrades include:
Company Previous
AUSA Life Insurance Company, Inc. (N.Y.) C+ B-
Empire Fidelity Investments Life Insurance Company (N.Y.) C+ B-
United Healthcare Insurance Company of New York (N.Y.) C+ B-

Notable downgrades include:
Company Previous
IL Annuity & Insurance Company (Ill.) B- C+
RGA Reinsurance Company (Mo.) C+ D+
Cova Financial Services Life Insurance Company (Mo.) C D+

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 more than 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, 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. Weiss' ratings are also available at many public libraries.

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