MAY 21, 2009 12:00 AM (EDT)

A.M. Best Revises Outlook to Negative of United Heritage Life ; Upgrades Issuer Credit Rating of Sublimity Insurance Company


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Steven Faulks-L/H
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Joel Silverthorn-P/C
(908) 439-2200, ext. 5120
joel.silverthorn@ambest.com

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Jim Peavy
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Rachelle Morrow
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FOR IMMEDIATE RELEASE

OLDWICK, N.J. - MAY 21, 2009 12:00 AM (EDT)
A.M. Best Co. has revised the outlook to negative from stable and affirmed the financial strength rating (FSR) of A- (Excellent) and issuer credit rating (ICR) of "a-" of United Heritage Life Insurance Company (United Heritage Life).

Concurrently, A.M. Best has upgraded the ICR to "bbb+" from "bbb" and affirmed the FSR of B++ (Good) of Sublimity Insurance Company (Sublimity) (Sublimity, OR). A.M. Best also has affirmed the FSR of B++ (Good) and ICR of "bbb" of United Heritage Property & Casualty Company (UHPC). The outlook for these ratings is stable. All companies are domiciled in Meridian, ID, except where specified. United Heritage Life, Sublimity and UHPC are all members of the United Heritage Financial Group.

United Heritage Life's revised outlook notes the company's decline in its absolute capital and surplus in 2008 and through first quarter 2009 due to investment losses triggered mainly by the current credit market turmoil and volatile performance of the equity markets. These investment losses, coupled with an overall deterioration in the credit quality of its fixed-income portfolio, has placed significant downward pressure on risk-adjusted capitalization as measured by Best's Capital Adequacy Ratio (BCAR).

A.M. Best also notes United Heritage Life's fixed-income portfolio continues to maintain an elevated level of gross unrealized losses—approximately 90% of total capital and surplus, which is spread across a range of asset classes including collateralized debt obligations, fixed-income securities invested in the financial sector and other corporate securities. A.M. Best believes the potential exists for additional asset impairments from the fixed-income portfolio. Additionally, the company maintains an elevated exposure to the commercial and residential mortgage markets relative to total capital and surplus through its investments in direct commercial mortgages and mortgage-backed structured securities. While currently performing well, a further deterioration in the economy could expose United Heritage Life to additional investment losses. Management has initiated strategies focused on improving the financial strength of United Heritage Life. These initiatives include reducing the company's dividend requirements to the parent, improving the profitability of its insurance products, and reducing operating and new business expenses.



The affirmation of the ratings acknowledge United Heritage Life's marginally adequate risk-adjusted capitalization enhanced somewhat by positive net operating results derived primarily from its core ordinary life segment. Furthermore, United Heritage Life has experienced steadily increasing ordinary life net premium trends, which are favorably affected by solid sales of its traditional, preneed and final expense products distributed through multiple distribution channels.

Offsetting these positive factors are United Heritage Life's challenges to maintain adequate levels of risk-adjusted capitalization, reverse operating losses in its group life and accident and health segments and manage its individual annuity block of business through the current low interest rate environment.

The upgrading of Sublimity's ICR reflects 'its adequate capitalization, long-standing local market presence as a personal lines writer in Oregon and Idaho, and favorable underwriting performance, driven by management's recent re-underwriting efforts, rate increases and terminations of unprofitable agents. Operating results have responded positively in recent years as a result of these initiatives coupled with generally milder weather conditions. In addition, until 2008's slight uptick due to weather losses, underwriting leverage had trended lower , reflective of net capital contributions from Sublimity's parent, as well as internally generated solid surplus growth.

These positive rating factors are offset by Sublimity's property predominant book of business, which has experienced historically variable operating results stemming from the company's geographic concentration in Oregon, which may subject it to weather-related loss exposure (as seen in 2008), potentially adverse legal and regulatory conditions, as well as competitive market pressures. This concentration is further exacerbated by a relatively high expense structure. The outlook is based on Sublimity's stabilized operating results and adequate capitalization.

The affirmation of' UHPC's ratings is a result of its historic operating performance, improved underwriting leverage and long-standing local market presence as a property writer in Idaho. These positive rating factors are offset by reserve deficiencies in the company's homeowners' book and weaknesses in its investment portfolio, as well as a concentrated book of business that is exposed to potential weather-related losses as seen in 2008, regulatory changes or micro-economic fluctuations. The rating outlook is based on the company's historically consistent operating performance.

For Best's Credit Ratings, an overview of the rating process and rating methodologies, please visit Best's Ratings & Analysis.

The principal methodologies used in determining these ratings, including any additional methodologies and factors that may have been considered, can be found at Best's Credit Rating 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.

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