Rebound in Group Health Business Boosts Life
and Health Insurers' Net Profit in 2000
Variable Annuity Writers Face Ramifications of New Federal Legislation

PALM BEACH GARDENS, Fla., June 25, 2001 - The nation's life and health insurers earned $2.1 billion in their group health insurance business in 2000, up from a net loss of $500 million in 1999, according to research by Weiss Ratings, Inc., the only provider of independent insurance company ratings and analyses. As a result, total industry net profits increased 5.6% to $26.5 billion from $25.1 billion in 1999.

"This substantial increase in group health profits, on the tail of two years of losses, is the direct result of across-the-board rate increases that insurers have been implementing throughout the nation," commented Martin D. Weiss, Ph.D., chairman of Weiss Ratings. "Consumers should expect the rate increases to continue."

All lines of business showed profits for 2000. However, some product lines experienced decreases in profits, including industrial life (from $377.4 million in 1999 to $251.5 million in 2000), individual annuity (from $5.4 billion to $3.8 billion), group life (from $1.6 billion to $1.4 billion) and other health (from $563.4 million to $295.4 million).

Variable Annuity Writers Vulnerable to Changes in Federal Tax Legislation

Two pieces of legislation recently signed into law increasing contribution limits for IRAs and 401(k)s and phasing out the estate tax are generally predicted to cause a decline in the variable annuity market. Companies whose variable annuity products[1] make up all or a large portion of their business include:

American Enterprise Life Insurance Company (Ind.) B
Cova Financial Services Life Insurance Company (Mo.) C
Empire Fidelity Investments Life Insurance Company (N.Y.) B
Keyport Benefit Life Insurance Company (N.Y.) C
London Pacific Life & Annuity Company (N.C.) C-
PHL Variable Insurance Company (Conn.) C+

"Since consumers generally contribute the maximum pre-tax amount to their IRAs and 401(k)s before purchasing variable annuities, this increase in the contribution level will likely hurt variable annuity sales. In addition, a phasing out of the estate tax will eliminate a key motivating factor for which consumers purchase variable annuities - to pay estate taxes," said Dr. Weiss.

Holdings of Least Desirable Junk Bond Classes Increase

Although the rate of growth in insurers' total junk bond holdings slowed to 3.6% in 2000 as compared to 8% in 1999, 18.4% in 1998, and 25.4% in 1996, the most speculative segment of insurers' junk bond holdings - Classes 5 and 6 - increased dramatically. Class 5 bonds, those with ratings equivalent to CCC, CC, and C by a major bond rating agency, increased from $6.1 billion to $7.9 billion, representing a 30% jump from 1999 to 2000. Class 6 bonds, those in or near default, increased from $1.4 billion to $2.1 billion, representing a 57.7% jump, during the same period.

As a result, insurers held 3.8 cents in Class 5 and 6 junk bonds per dollar of capital, up 31% from 2.9 cents in 1999.

Noteworthy Upgrades and Downgrades

Among the 1,232 ratings reviewed by Weiss based on year-end 2000 data, one company was upgraded and 20 were downgraded:

Upgrades include:

• Integrity Life Insurance Company (Ohio) from F to C-[2]

Notable downgrades include:

• United American Insurance Company (Del.) from A- to B+
• Il Annuity & Insurance Company (Kans.) from C to D+
• Spectera Insurance Company Incorporated (Texas) from D 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 15,000 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 11,000 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 needing 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. For more information, visit the Weiss Ratings web site at www.WeissRatings.com.

[1] The life and health annual statutory financial statement does not break out variable annuity assets from other variable life products, nor does it separate variable annuity premium income from total annuity premium income. For purposes of this release, Weiss Ratings assumes that companies that only write individual annuity business and have comparable separate account assets have all or nearly all of their business in variable annuities.

[2] Integrity Life failed on August 1999. In March 2000, Western & Southern Life Insurance Company acquired Integrity Life and subsequently filed financial results as of June 30, 2000. Following the receipt of that new financial information reflecting ownership by the new company, Weiss upgraded the company from F(failed) to C-(fair).

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