The Insurance Industry Hoists Umbrellas Against a Rainy Day

July 21, 1991|By PETER H. STONE

Stung by bad investments in high-risk ''junk bonds'' and real-estate mortgages, the $1.4 trillion life-insurance industry is facing hard times. With about $275 billion of their assets in mortgages and another $60 billion in junk bonds, life insurers have been experiencing escalating insolvencies the last few years as both these markets have been distressed.

The industry's mounting woes were underscored last week when New Jersey regulators seized a once blue-chip insurer, Mutual Benefit Life Insurance Co., the nation's 18th-largest with $13.5 billion in assets and 400,000 policyholders, to prevent it from becoming the largest failure ever. Bleeding from bad real-estate loans, Mutual Benefit's solvency was also threatened by a policyholder run that totaled about $1 billion in redemptions in recent weeks.

As of May 21, 16 life and health insurers had failed or been declared in hazardous operating condition this year by the National Organization of Life and Health Insurance Guaranty Associations. By comparison, 44 companies went under or were in hazardous operating condition in all of 1989, an industry record.

A study released last month by the American Council of Life Insurance revealed that the industry's delinquent mortgages reached an all-time high of 4.7 percent of all loans, surpassing the previous high of 3.9 percent in 1976. Analysts say that the industry's problem mortgages are likely to have a broader impact on insurance-company earnings as reserves are set aside to cover problem loans.

The industry's distress is prompting criticism of the system of state insurance regulation and fears about the capacity of state guaranty funds to cover policyholders fully when their insurers fail. The guaranty funds are supported by assessments of healthy insurers after an insurer goes insolvent.

With new financial pressures, insurers are scrambling to raise new capital, cutting costs through downsizing or exploring mergers in efforts to shore up their strength and in some cases to ensure survival. At the same time, some companies have been cutting back on their high-risk investments and adding more funds to reserves to deal with losses from real-estate and junk bonds.

Michael Lewis, an insurance analyst with Dean Witter Reynolds Inc., predicts a shakeout and consolidation in the 2,300-company life and health insurance industry over the next few years. But he and most other analysts do not expect a crisis on the order of the savings-and-loan debacle because, for the most part, the life-insurance industry remains profitable and better capitalized than the S&L's.

Still, the life-insurance industry today is facing far more risks than a decade ago. ''It got crazy in the 1980s,'' says Terence Lennon, the chief life-insurance examiner in the New York Department of Insurance. ''The consumer in the 1980s turned into a quasi-investor and that pushed companies to give higher rates.'' Mr. Lennon says that faced with growing competition from mutual funds, banks and savings-and-loans, insurers introduced

several new products like interest-sensitive annuities and guaranteed investment contracts, which promised higher returns than traditional life insurance offered. And to earn those high yields, insurers stepped up their investments in real estate and junk bonds.

The industry's mortgage investments, for instance, rose from just under $200 billion at the end of 1986 to about $275 billion at the end of 1990. And life insurers garnered just under one third of the $200 billion junk-bond business.

To be sure, the industry, which holds about a quarter of the nation's commercial mortgages, had long experience in the real-estate field. Historically, insurers were staid and conservative investors who eschewed speculative construction lending done by banks and typically lent money to buildings that were fully occupied or nearly so.

But in the 1980s, several life insurers relaxed their lending standards, according to executives and regulators, as many companies were swept up in the decade's real-estate fever. ''There was too much money chasing too few deals,'' says Thomas Wheeler, the chief executive officer of Massachusetts Mutual Life Insurance Co. ''I think some insurers got caught up in the euphoria of the 1980s and got trapped.'' Mr. Wheeler blames the deregulation of the savings-and-loans, with whom life insurers had to compete, for some of the industry's laxness.

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