On Nov. 19, 2004, Standard & Poor’s Ratings Services lowered its counterparty credit and financial strength ratings on Mutual of America Life Insurance Co. (MoA) to ‘AA-’ from ‘AA’. The outlook is stable.

The downgrade reflects MoA’s business concentration in a limited niche segment of the group annuity market. MoA has exhibited only moderate growth and moderate operating performance, which is below expectations for higher rating levels and which is not expected to improve significantly. Nevertheless, MoA has had a very strong and stable competitive position within its target niche markets, conservative financial management, and extremely strong capitalization. Furthermore, its mutual organizational structure is aligned well with its core not-for-profit customer base.

Outlook

The stable outlook reflects Standard & Poor’s opinion that MoA’s overall financial strength lends itself to long-term stability at the current ratings level, as demonstrated by its established and stable competitive position in a niche that is difficult for new entrants to penetrate, appropriate earnings, extremely strong capital adequacy, and unleveraged balance sheet. These strengths are partially offset by MoA’s equity market and interest rate risks, which expose it to capital volatility.

Standard & Poor’s expects to see double-digit premium growth in MoA’s thrift plans, with flat to single-digit growth in its other lines of business. In total, operating earnings are expected to remain stable. MoA’s capital adequacy ratio is expected to be more than 240% in 2004 and 2005, which is well above the 165% capital adequacy ratio expected for the ratings.

Major Rating Factors

– Although MoA maintains a very strong competitive position serving not-for-profit organizations and small for-profit businesses, it is a relatively small player in the overall financial services marketplace and lacks the business diversification and accompanying variety of competitive advantages typical of more highly rated companies. MoA has demonstrated solid growth in providing thrift plans — 401(k), 403(b), 401(a) — that serve the retirement savings needs of its core markets. It primarily competes with mutual fund and other insurance companies and differentiates itself based on its high-quality service. MoA pursues technological innovations in support of its commitment to quality service and expense efficiency. MoA is firmly established within its primary not-for-profit market, where competition is limited because of the small average group size and high service costs. The company’s sustainable strategy is to focus on serving the retirement savings needs of the not-for-profit group market while containing costs by providing standardized thrift plans with minor customization and continuing to lower its unit costs by effectively using technology. MoA is also expanding its focus to include the underserved small for-profit employer market because the company is well positioned to efficiently meet their needs, which are very similar to those of its existing core markets.

– MoA’s pretax operating income is consistent with the current ratings. MoA has substantial tax benefits that continue to limit its current tax payments. Prior to 1998, MoA was legally exempt from federal taxation. As the existing tax benefits are consumed and the effective tax rate gradually starts to increase, MoA will need to implement efficiency enhancements more quickly than its competition to maintain the relative competitiveness of its products and the capital formation necessary to support its risk profile and growth. MoA’s tax benefits will remain significant for several years, and Standard and Poor’s believes that the achievable economic operating margins on its chosen businesses support the ratings.

– MoA maintained extremely strong capitalization during the last few years of heightened financial market volatility, even though it invests a significant portion of its excess capital in an index of large-cap (S&P 500) equity securities. The equity investment strategy is designed to produce higher average returns over the long-term but subjects MoA to shorter-term volatility in its capital base. As of year-end 2003, MoA’s capital adequacy ratio was 246%, up from 180% as of year-end 2002. At mid-year 2004, total adjusted capital had further increased by 3%.

– The credit quality of MoA’s investment portfolio is much higher than industry averages, with 82% of bonds rated ‘A’ or higher. However, MoA does take above-average interest rate risk, primarily through its MBS investments, which constitute 38% of invested assets. MoA’s excess capital is expected to be more than sufficient to support these investment risks. MoA’s liquidity position remains strong and is qualitatively reinforced by the inherent stability of the policyholders it serves.

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