The life insurance industry so far has survived the financial crisis”bruised certainly”but generally healthier than its financial services peers. The industry’s asset side and capital strength was most notably affected. While capital measures have stabilized, A.M. Best believes that challenges remain that are driven by macroeconomic issues. Additionally, other less obvious trends may have greater, longer-term negative effects on insurers. Hence, A.M. Best Co. is retaining its negative rating outlook on the life/health industry”the reasons for which are outlined in A.M. Best’s recently issued special report, “Life/Annuity Review & Preview 2010: Life Insurers Take Stock and Lay Groundwork for Recovery.”

Among the issues addressed:

Investments”Insurers’ investment portfolios have yet to generate the full measure of expected losses, based on GAAP financial data and results of A.M. Best’s industry survey. This view reflects concerns regarding sustainability of any positive economic trends, as well as the potential for volatile equity markets and the investment risk within commercial real estate.

Life Reinsurance”A.M. Best’s outlook for this segment is stable as reinsurers generally have been less affected by the financial crisis and have not underwritten the same level of risk as the direct writers.

Individual Life”Precipitous sales declines have been exacerbated by some larger participants in this market having had to limit new business due to capital constraints and reserve funding issues.

Individual Annuities”A.M. Best views the near-term prospects for overall individual annuity sales as limited given narrowing corporate bond spreads, generally “in-the-money” book of variable annuities industry-wide and less competitive choices for these products.

Accounting & Regulatory”A.M. Best believes that many of the initiatives to provide near-term capital relief for the industry have removed some of the conservatism inherent in reserve and risk-based capital requirements.

A.M. Best also is concerned with weak life insurance sales and in-force growth as well as the industry’s overall shift to less creditworthy products. Sustainability of operating performance, stabilization of investment portfolios and some growth in absolute statutory capital levels will be required as precursors to a rating outlook change to stable.

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Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.

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