NEW YORK -- In the insurance industry, A. M. Best Co. has long been as close to the Bible as it gets. Since 1906, consumers have turned to the company's reports as the final word on the solvency of their insurers.
But A. M. Best is facing an unprecedented challenge to its credibility as a result of the failure in April of Executive Life Insurance Co. of California, which had received Best's highest rating until January 1990.
The rating agency's misjudgment has left policyholders stunned, angry and litigious. A. M. Best is a defendant in at least 17 class-action lawsuits filed in the aftermath of the insurer's failure. Most of the suits accuse A. M. Best and other rating agencies of negligence.
A. M. Best again faced embarrassment when New Jersey insurance regulators seized Mutual Benefit Life Insurance Co. A. M. Best had given Mutual Benefit Life an A+ rating, meaning the agency thought that the company's claims-paying ability was unimpeachable, until less than two weeks before the company failed.
Mutual Benefit Life was an unusual case. The company's investments were considered far more conservative than those of Executive Life, which was willing to bet on the "junk bond" market.
But Mutual Benefit Life had about 39 percent of its assets tied up in real estate, and the slide of the Northeastern commercial property market squeezed the company's liquidity to zero, even though its net worth is still positive.
Standard & Poor's and Moody's Investors Service, which are larger rating agencies but less seasoned in the insurance business, also missed trouble signs at Executive Life. The insurer received Standard & Poor's prized AAA rating until early last year. At Moody's, the insurer held a good rating, though not the best.
Executive Life was seized by California regulators April 11. The seizure has left 360,000 policyholders in the lurch, including many retirees whose pensions are tied up in the insurer's annuities.
Like other well-rated insurers, Executive Life was not bashful about its report card. In response to critics, who during the 1980s questioned Executive Life's strategy of investing heavily in junk bonds, the insurer pointed to its impeccable ratings.
"There is no question that [Executive Life's] whole ability to sell these annuities was dependent on their ratings," said Melvyn Weiss, a New York attorney who is handling some of the suits against A. M. Best.
The rating agencies deny any wrongdoing in connection with Executive Life. Larry G. Mayewski, vice president for life and health insurance at A. M. Best's headquarters in Oldwick, N.J., said it would have been impossible to predict the combination of unusual phenomena that led to Executive Life's undoing.
One was the crash in the junk-bond market, in which Executive Life had up to 80 percent of its investment portfolio. The other was a rush by policyholders to redeem their policies as a result of negative publicity about Executive Life's junk bonds and its ties to the now-defunct brokerage Drexel Burnham Lambert.
Glenn Goldberg, a Standard & Poor's spokesman, said that his company had been named a defendant in 19 lawsuits related to Executive Life's failure, more than in any other case that he could remember. He said that since S&P's ratings are just opinions, he is confident the company will not be found liable.
The rating agencies are influential in the insurance business, because consumers have few other places to turn for information. Insurance, although it is frequently sold as an investment vehicle, is exempt from the disclosure requirements laid out for stocks and bonds.
Even if the rating agencies are doing their jobs, consumers often do not know how to use them properly. Policyholders usually do not bother to check on whether the ratings have changed.
For example, Executive Life's rating was downgraded five times by A. M. Best between early 1990 and April 1991. Until April 5, a week before it was closed, the insurer was rated "contingent B-plus," meaning that it was deemed "very good" but that there had been a decline in its position that was under review.
Still, for the uninitiated, this grading system can be mystifying. At Standard & Poor's, a "B" is defined as "uncertain to weak."
The A. M. Best system uses grades in a narrow range running from A-plus (superior) to C-minus (fair). Insurers that do not meet those standards are left unrated.
Within the industry, A. M. Best still has many defenders. Gene Grabowski, a spokesman for the American Council on Life Insurance, likens A. M. Best to a "major-league umpire that gets 99 percent of the calls right but just missed a call."