Weiss Ratings, Inc.

A View of the Life and Health Insurance Industry

Who is Weiss Ratings?

How Does Weiss Rate Life and Health Insurers?

How Rating Agencies Differ

The State of the L&H Insurance Industry

L&H on the Horizon

The Weiss Ratings Philosophy

Develops ratings from the viewpoint of the consumerAccepts no compensation from the companies for issuing ratingsProvides companies no advance preview of ratingDoes not give companies the right to suppress publication of rating

Rating Methodology

CapitalizationRisk-Adjusted Capital

The amount of capital an insurer should have based on the risks it takes with its asset portfolio, underwriting practices,

credit arrangements, and general business activity

Rating Methodology

ProfitabilityMeasures insurer’s ability to generate sufficient income to

cover its expenses and contribute to its capital base.

Primary Factors:Impact of operating results on surplusConsistency of operating resultsGain or loss on operations by lines of businessExpenses in relation to industry averagesAdequacy of investment income

Rating Methodology

Investment Safety

Measures the exposure of an insurer’s investment portfolio to a loss of principal and/or income

due to default and market risks.

Primarily measures exposure to:

Bond and mortgage defaults

Market value declines

Changes in interest rates

Rating Methodology

Liquidity

Scenario testing, if claims experience in the coming year is as bad as the worst single year’s experience, in the last five, would the insurer have sufficient cash flow to

cover claims?

Rating Methodology

StabilityMeasures factors that affect consistency (or the lack thereof) in

maintaining financial strength over time.

Primary factors:Relationship with holding companies and affiliates and potential impact on financial healthPrior capitalization and liquidity test resultsRisk diversificationCash flow historyGrowth in premiums or assets that exceed industry normsSubstantial shifts in the insurer’s operationsDeterioration of operations as reported in critical asset, liability, income, or expense items

Comparison of Insurance Company Rating Agency Scales

Weiss Best S&P Moody’s D&P

A+,A,A- A++,A+ AAA Aaa AAA

B+,B,B- A,A- AA+,AA,AA- Aa1,Aa2,Aa3 AA+,AA,AA-

C+,C,C- B++,B+ A+,A,A-

BBB+,BBB,BBB-

A1,A2,A3

Baa1,Baa2,Baa3

A+,A,A-

BBB+,BBB,BBB-

D+,D,D- B,B-

C++,C+,C,C-

BB+,BB,BB-

B+,B,B-

Ba1,Ba2,Ba3

B1,B2,B3

BB+,BB,BB-

B+,B, B-

E+,E,E-

F

D

E,F

CCC

R

Caa,Ca,C CCC+,CCC,CCC-

DD

Source: U.S. General Accounting Office

Weiss and Best Rating Distributions

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Band 1 Band 2 Band 3 Band 4 Band 5

WeissBest

Industry Trend in Profitability for

L&H Insurers ($Billions)

0

5

10

15

20

25

30

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

L&H Company Failures

0

5

10

15

20

25

30

35

40

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003YTD

Weiss L&H Rating Distribution

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

A B C D E

19902003

On the Horizon

Challenges of developing products to meet the needs of the retiring baby boomers

Affect of improving mortality rates on annuity pricing

Investors burned by the market seeking safer products but still want to profit on the upside

Well-capitalized industry poised to take advantage of a rebounding economy