Investors Pour Record $20 Billion Into Insurer-Operated
Mutual Funds Near Stock Market's Peak
Flow into these variable annuities and life insurance
products slowed dramatically in third quarter

PALM BEACH GARDENS, Fla., February 26, 2001 - In the second quarter of 2000, when most market averages were near their highs or just beginning to tumble, the net inflows into mutual funds under the umbrella of variable annuities and variable life insurance reached a record peak of $20.4 billion, according to a recent study by Weiss Ratings, Inc., the only independent provider of insurance company ratings and analyses. The flow of money to these mutual funds held under "separate accounts" at the nation's life insurers slowed precipitously during the third quarter; at September 30 of last year, investors held a total of $1.2 trillion in these accounts.

"Unfortunately, right now, many investors are stuck with substantial losses, and even if the market recovers, it will take longer to recoup due to the additional fees associated with these funds," commented Martin D. Weiss, Ph.D., chairman of Weiss Ratings. "In my opinion, if there ever was a time for investors to favor mutual funds with the least possible risk and the lowest possible fees, this is it."

As illustrated in the chart below, net inflows into the separate accounts slowed to $15.9 billion in the third quarter of 2000. But for the nine months ending September 30, 2000, the net inflows totaled a record $52.2 billion, a 36.3 percent increase from the first nine months of 1999.

variable annuities and life insurance

Profits Up Moderately

U.S. life, health and annuity insurers reported operating profits (before realized capital gains and taxes) of $39.6 billion in the first three quarters of 2000, representing a $2.7 billion, or a 7.3 percent, increase over the $36.9 billion reported in the first three quarters of 1999. At the same time, net profit (after realized capital gains and taxes) was recorded at $20.1 billion, up 13.7 percent from the $17.7 billion recorded during the year-ago period. Net profits surpassed the $20 billion mark for the first time at the third quarter mark due primarily to the 33.5 percent increase in realized capital gains.

Capital and Surplus Continues to Grow Steadily

During the first nine months of 2000, the industry's capital and surplus grew to $225 billion -- up 10.8 percent over the same period in 1999. However, surplus notes, a form of debt that regulators allow insurers to count as "capital," increased 25.8 percent during the period and now account for 6.9 percent of capital on the books, up from 6.1 percent in 1999.

Repossessed Real Estate Continues Decline

Repossessed real estate dropped by more than 43 percent, or $1.3 billion, during the period, reducing the industry total to $1.7 billion from $3.1 billion. This investment category now represents only 0.8 percent of capital as opposed to the 1.5 percent for the first nine months of 1999.

Notable Upgrades and Downgrades

Among the life, health, and annuity insurers recently reviewed by Weiss, three received upgrades, while 13 were downgraded.

Upgrades include:
• American Retirement Life Insurance Co. (Ohio) from C to C+
• First Commonwealth Ins Co. (Ill.) from C- to C+
• Provident Life & Accident Ins Co. (Tenn.) from C to C+
Notable downgrades include:
• Great-West Life & Annuity Ins Co. (Colo.) from A- to B+
• Memorial Service Life Insurance Co. (Texas) from D to E+
• Sullivan Life Insurance Co. (Texas) from C- to E+

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 risk-adjusted performance of more than 10,000 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.

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