Insurance: A Lack of Assurance

By Bernard Baumohl

The word in financial circles, albeit sotto voce in recent months, has been to watch out for the insurance industry as the next to be sucked into the vortex of the nation's sagging real estate values. Though the number of outright collapses so far this year remains relatively small, the industry failure rate has picked up ominously in recent weeks and now involves one of the nation's largest insurers. Two weeks ago, in what was the biggest failure to date, New Jersey state authorities took over Mutual Benefit Life, the country's 18th largest life insurer, with assets of $13.5 billion. Last week state officials said they were attempting to take control of yet another insolvent insurer, the Paramus-based New Jersey Life Insurance, which has 47,000 policyholders. Three large firms -- Executive Life, First Capital and Monarch -- were seized earlier this year by state regulators.

News of the industry's deepening problems have made policyholders extremely edgy. Unlike bank accounts, which are protected by the Federal Government up to $100,000, insurance policies have no such coverage. While nearly all states have their own guarantee plans in which healthy insurers are asked to help bail out a failing institution, the pooled funds may not be enough if a large insurance firm goes under.

The growing uncertainty over whether an insurer is able to pay out on claims has begun to terrify policyholders. Many consumers are now reflexively / withdrawing their money at the slightest hint that an insurer is ill. Millions of dollars are thus being shifted from weaker institutions to stronger ones.

The crisis of confidence surrounding the insurance industry became worse in the past two weeks when the Wall Street research firm of Moody's suddenly downgraded the ratings of nine of the nation's biggest life insurers: Aetna, Kemper, John Hancock, Home Life, Massachusetts Mutual, Mutual Life of New York, New England Mutual, Travelers and Principal Mutual. A similar rating drop this spring triggered a run on Mutual Benefit from which the insurer never recovered.

To keep policyholders and investment capital from fleeing, as well as to attract new customers, some insurers are looking at mergers as a means to survive and prosper. Connecticut-based Phoenix Mutual Life (with 400,000 policyholders) and New York-based Home Life (300,000) admitted last week that preliminary talks are under way for a possible merger of the two firms, the first between major mutual life insurance companies. In a mutual life insurance firm the policyholders are the owners. If the merger is completed, a process both companies admit may take more than a year to accomplish, it would create a $10 billion enterprise that would rank as the nation's 25th largest insurer. "It's very hard, in this type of climate when economic realities are changing very quickly, not to talk about ways to strengthen your company," says a spokesman for Phoenix Mutual. Both insurers have about a third of their assets tied up in real estate and mortgages.

Such consolidations in the insurance industry will become more commonplace in the future, say experts. "There are just too many life insurance companies out there," says Ronald McIntosh, an analyst with the securities firm of Fox- Pitt Kelton. "You now have 2,000 life insurers. I see 200 left by the time this consolidation process is completed at the end of the decade." But while merging permits a recombinant firm to operate more efficiently, it does not guarantee survival. That won't happen until insurers, large and small, regain the trust of policyholders, those who rely on insurance companies for perhaps the most intangible commodity of all: future security.

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