A.M. Best Special Report: L/H Impairments Bounce Off '06 Low And Top P/C Impairments in '07

Business Wire, May 30, 2008

OLDWICK, N.J. -- The life/health (L/H) industry's financial impairment results for 2007 represent a bounce off exceptionally low results for 2006. L/H's six financial impairments and frequency rate of 0.39% also topped property/casualty's four impairments and 0.02% impairment rate in 2007. In six of the past eight years, the P/C industry's impairment frequency was higher than L/H's impairment frequency.

While the L/H impairment trends have been lower than average since 2000, they may have reached the bottom of the trough because of a deteriorating economy and turbulent financial markets. As such, A.M. Best expects the 2008 L/H impairment frequency rate to exceed that of 2007. The companies most likely to be affected are those that are thinly capitalized or whose portfolios are heavily weighted to structured investment products and/or commercial mortgage-related investments.

This study updates A.M. Best's historical database of financially impaired companies (FICs) from 1976-2007, and all previous impairment studies.

* For nearly all companies nearing impairment, their Best's Rating generally deteriorated at an accelerating rate. Overall, the higher the rating, the lower is the risk of impairment and vice versa. Still, L/H impairments are relatively rare, ranging from one in 750 companies in more stable times (2006) to one in 35 companies in difficult times (1991).

* Financial impairment frequency tends to move in tandem with the factors affecting company earnings. The life insurance and annuity segments are more vulnerable to credit and equity market conditions. In 2007, insurers reported solid operating performance across several product lines. The top line, however, did not keep pace, which raises concern for future earnings.

* The leading causes of impairment--inadequate pricing, affiliate problems, rapid growth and investment problems--accounted for 75% of impairments. Rapid growth and inadequate pricing are closely related and together accounted for 41% of impairments.

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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.