AM Best


A.M. Best Downgrades Rating of the Merrill Lynch Insurance Group


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Jim Peavy

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FOR IMMEDIATE RELEASE

OLDWICK, N.J. - JANUARY 15, 2003 12:00 AM (EST)
A.M. Best Co. has downgraded the financial strength ratings to A (Excellent) from A+ (Superior) of Merrill Lynch Life Insurance Company (MLLIC) (Arkansas) and ML Life Insurance Company of New York (MLNY) (together, the Merrill Lynch Insurance Group [MLIG]). The rating outlook is stable.

The downgrade reflects the decline in MLIG's business profile resulting from a combination of its narrow product and distribution focus, the prolonged downturn in the U.S. economic climate, the impact this will ultimately have on the group's earnings potential and the uncertain timing for a sustained recovery. The rating change also reflects the fact that Merrill Lynch & Co. (ML), MLIG's ultimate parent and a key supporting factor in MLIG's rating, has faced a difficult operating environment over the past few years and that A.M. Best believes conditions will remain challenging over the near term.

MLIG's rating continues to reflect several positive factors, including its high quality investment portfolio, solid risk-based capital position, strong name brand recognition and strategic support and financial flexibility derived from its affiliation with the Merrill Lynch organization.

MLIG's ongoing focus on the sale of variable annuities, limited fixed account investment options compared to some competitors, the company's reliance on a single distribution channel (ML's proprietary network of financial advisors) and the competitive financial services landscape have left MLIG particularly exposed to weak U.S. economic and investment markets. MLIG's sales of $521 million through September 30, 2002, are sharply off the pace of 2001's full year sales of $1.3 billion, which, in turn, were down 20% from 2000's sales of $1.7 billion.

Like several other insurers with large exposures to equity-linked products, MLIG also will be writing down a portion of its deferred acquisition cost (DAC) balances in 2002 to reflect the impact of the sustained equity market downturn on its variable products' profitability. A.M. Best expects full year 2002 GAAP operating income will not differ significantly from the $72 million operating income reported at nine months 2002 and will compare to operating earnings of $99 million and $136 million in 2001 and 2000, respectively. While MLIG's overall earnings capacity remains sound-in part due to the relatively more stable earnings contributions from MLIG's blocks of interest-sensitive business and variable life business-these older policies essentially are in run-off mode. Over time, MLIG's concentration in variable products will leave earnings increasingly susceptible to economic and investment cycles.

A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source.

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