A.M. Best Affirms Ratings of the Mutual of Omaha Companies

2010 FEB 1 - (NewsRx.com) -- A.M. Best Co. has affirmed the financial strength rating (FSR) of A+ (Superior) and issuer credit ratings (ICR) of "aa-" of Mutual of Omaha Insurance Company (Mutual) and its subsidiaries: United of Omaha Life Insurance Company (United of Omaha), Companion Life Insurance Company (Companion Life) (Lynbrook, NY) and United World Life Insurance Company (United World Life). Additionally, A.M. Best has affirmed the debt rating of "a" on $300 million 6.8% surplus notes due 2036 of Mutual. The outlook for all ratings is stable. All companies (collectively referred to as Mutual of Omaha) are located in Omaha, NE, unless otherwise specified (see also A.M. Best Co.).

The rating affirmations primarily reflect Mutual of Omaha's sufficient absolute and risk-adjusted capitalization despite realized capital losses in its investment portfolio, solid top-line revenue growth within many of its core product lines and favorable GAAP operating results. The company also benefits from strong brand name recognition, a multi-platform distribution system and a well diversified product portfolio, which has been enhanced by a new banking initiative.

Mutual of Omaha utilizes a well-diversified individual and group business model, marketing health, life and annuity products to the middle income and senior marketplace. The organization expanded its banking initiative in 2008 by purchasing approximately $3 billion in deposits of a failed banking entity from the Federal Deposit Insurance Corporation and is currently seeking to grow its banking operations both organically and through additional acquisitions. A.M. Best notes the significant execution risks associated with the start-up banking operation, along with the elevated exposure to commercial real estate and unseasoned loans within the bank's loan portfolio. While there are some concerns associated with the banking operations over the near term, A.M. Best expects Mutual of Omaha's banking strategy to ultimately provide additional earnings diversification while affording it the opportunity to deploy excess capital in higher margin business lines, assuming critical scale is achieved.

Mutual of Omaha's overall top-line revenue growth has historically fluctuated as a result of a strategic decision to exit a number of different product lines to focus on higher margin lines of business. As a result, many of the company's core product lines have experienced noticeable growth in more recent periods, particularly within its individual insurance product segment. While Mutual of Omaha's core product lines have experienced growth that has met or exceeded industry averages over the past several years, A.M. Best maintains a more cautious view of certain core product lines that are currently driving revenue growth, including Medicare supplement and long-term care insurance. A.M. Best also notes that sales of Mutual of Omaha's group life insurance and annuity products have been impacted over the most recent period as a result of the economic recession and the competitive market environment. A.M. Best expects that the company may experience modest top line growth over the near term due to continued strong Medicare supplement sales offset by downward pressures within some of its core group insurance and annuity product lines.

Mutual of Omaha's financial leverage and coverage ratios continue to be strong, and the company has a modest level of intangible assets relative to equity. In addition, the company's shareholder equity has increased substantially over the most recent period, and the group's general account investment portfolio is currently in an unrealized gain position as credit spreads have improved substantially and financial markets have stabilized. The capital expansion Mutual of Omaha has experienced over the past five-year period is primarily due to organic growth via the retention of earnings across many of the group's core operating segments. However, A.M. Best notes that certain lines of business have experienced some volatility with mixed statutory results primarily due to the impact of substantial investments in group life and disability and retirement plans, as well as unfavorable mortality experience within the single premium immediate annuity line and costs associated with its banking initiative. Additionally, operating results have declined noticeably within United of Omaha, the group's largest insurance entity, mainly due to lower investment income, unfavorable reserve adjustments and statutory strain from Medicare supplement sales, which the company began marketing during 2009.

The organization's substantial balance sheet strength is supported by its conservative approach to product pricing and relatively low level of exposure to securities issued by financial institutions and non-agency structured securities within its investment portfolio. In addition, A.M. Best notes Mutual of Omaha has not been subject to the volatility associated with variable annuities as the company made a strategic decision to not enter this line of business. However, Mutual of Omaha's recent growth in direct commercial mortgages, its East Campus Reality construction project and the larger than expected increase in Mutual of Omaha Bank's assets have increased the company's aggregate exposure to real estate-related assets. A.M. Best will continue to monitor the company's ability to manage the overall increase in risk within the organization.

For Best's Credit Ratings, an overview of the rating process and rating methodologies, please visit www.ambest.com/ratings.

The principal methodologies used in determining these ratings, including any additional methodologies and factors, which may have been considered, can be found at www.ambest.com/ratings/methodology. 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.