Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: TUESDAY, April 16, 1991 TAG: 9104160206
SECTION: BUSINESS PAGE: A-7 EDITION: METRO
SOURCE: Los Angeles Daily News
DATELINE: LENGTH: Medium
Last week's seizure by state regulators of Executive Life Insurance Co. of California, the biggest insurance failure in U.S. history, underscores the industry's sometimes tenuous financial foundations.
Insurance industry failures have hardly reached the epidemic levels of the savings-and-loan collapse and most analysts say they won't. But insurance company insolvencies are bound to continue, and consumers who don't look to protect themselves could be in for a rough ride.
Executive Life, the largest subsidiary of Los Angeles-based First Executive Corp., fell mainly under the weight of its junk bond portfolio. The collapse is likely to prompt regulators to be more vigilant, drive companies to adopt more conservative investment strategies, and encourage consumers to scrutinize their insurers.
"April 11 is a day that will go down in the history of the industry," said Joseph Belth, a professor at Indiana University and the editor of Insurance Forum, an industry newsletter. "There aren't many other days you can say that about."
To be sure, the industry is not on the verge of collapse. While other insurers have invested in junk bonds or other risky assets, none has done so with the vigor of First Executive.
Life insurers, on the average, hold about 6 percent of their assets in junk bonds, according to the American Council of Life Insurance, a trade group. When Executive Life was seized, regulators said the high-risk notes accounted for more than 60 percent of its assets.
"The investment strategy followed by First Executive is highly unusual and not followed by most others," said Henri Bersoux, a spokesman for the group. "The vast majority of life insurance companies are not just financially healthy, they're financially strong."
Nevertheless, problem companies exist. Like other segments of the financial service industry, life insurers are in the midst of tough economic times. The industry, which boomed in the '80s, is headed for consolidation, analysts say. Some companies might be forced to seek mergers. Others might fail.
Consumers can take a few basic precautions to avoid those companies. Perhaps the best monitors of insurance company safety are the handful of agencies that rate the debt or claims-paying ability of the industry.
"The first rule of thumb is to look at the ratings," said J. Robert Hunter, president of the National Insurance Consumer Organization.
A.M. Best Co. is perhaps the best-known rating firm and its guides can be found in many libraries. The Oldwick, N.J., company has monitored insurance company health since 1899.
Best rates companies from its highest rating, A-plus, assigned to those with a "superior" ability to meet policyholder obligations, to C-minus, assigned to insurers with only a "fair" ability.
Best also issues a "not assigned" rating to companies that are too small, do not fit the firm's rating categories, or fall below Best's minimum standards.
Among the nearly 250 companies with Best's top rating are some of the nation's biggest insurers, such as Prudential, Metropolitan Life and Aetna Life.
In addition, credit-rating services such as Moody's, Standard & Poor's Corp. and Duff & Phelps Inc. rate bond issues of major companies, including insurers. Those companies all use variations on the A through C rating system, but add more gradations, such as AAA, for the its top rated companies, or BB for more speculative investments.
Again, a number of the nation's largest insurers, such as New York Life, Northwestern Mutual and Nationwide Life, have garnered top ratings from the firms.
But rating firms are not perfect. Both Best and Standard & Poor's issued their highest ratings to Executive Life as recently as a year-and-a-half ago.
Paul Wish, a spokesman for Best, said the collapse at Executive Life, once among the most profitable insurers in the nation, was swift. But Wish said that as Executive Life began its decline, the ratings firm altered its opinion.
"We have changed the rating five times since, following them down," Wish said.
by CNB