Are You Really Insured?

Life insurance has long seemed a potent and benevolent force in society, faithfully dispensing retirement and death benefits down through the generations. Americans, who spend 5% of disposable income on life insurance, trusted that their policies were grounded in a bedrock of solid investments. And with $1.4 trillion in assets, the U.S. insurance industry appeared well-equipped to keep on delivering.

Talk about nasty surprises. Along came the collapse of Executive Life, First Capital, and Monarch, whose foundations turned out to be crumbling junk bonds and real estate investments. And on July 16, Mutual Benefit Life Insurance Co. in Newark, N. J., with $13.8 billion in assets, became the largest insurance failure in history. State regulators, charged with keeping the insurance industry solvent, have seized the errant foursome. That has left thousands of policyholders sitting in limbo, wondering what will become of their benefits. No one knows which insurers will be next. "Nothing of this magnitude has ever occurred before," says Daniel R. Gattis, senior vice-president at SEI Corp., a pension-fund consulting firm. "And it's happening so fast. Bing, bang, boom."

Over and beyond the 156 million Americans covered by life insurance policies, the crisis touches 15 million annuity holders who are counting on their insurance companies to furnish a secure retirement. Then there are the millions of people who invested in insurer-run products known as guaranteed investment contracts (GICs) through their company-sponsored 401(k) or other pension plans. Unlike banks and thrifts, government guarantees for insurance products are skimpy.

Amid all the worry and confusion, though, you actually can do much to safeguard your assets. Don't rush to cash out your policy or radically change your pension-fund investments. "Switching policies may be worthwhile for you, or maybe not," says Joseph M. Belth, an Indiana University insurance professor who predicted many of the industry's woes.

So do your homework--lots of it. Yes, the insurance industry is notoriously opaque, with its own bewildering lingo. But you can still learn a lot by questioning your insurer's financial strength with the major credit-rating agencies and state insurance regulators. Badger your insurance agent for answers about the stability of your insurers. Closely examine your employer's pension plan. Does your company make all your investment decisions for you, or are you a member of a defined-contribution plan such as a 401(k) that makes you decide how your pension money is invested?

BUM RAP? Beyond that, your policy shouldn't be the core of your financial future but merely part of a well-diversified portfolio. If you have doubts about your policy, you'll need to know the paperwork demands, the financial penalties, and any costs you might pay if you decide to make a change.

Where will the next bad news come from? Nobody knows, but few predict an end to the failures. Right up until the policyholder run, Mutual Benefit looked as if it would muddle through. Still, there's no cause for panic. The industry is not about to collapse like the banks did in the 1930s or the thrifts more recently. Insurance has fewer fast-buck artists of the kind who plagued the savings and loan associations with fraudulent schemes. Insurers generally remain conservative investors, with half their portfolios in government or investment-grade corporate bonds.

Even in some of the bleakest corners of insurance land, things are looking up. French insurance giant Axa announced on July 18 a $1 billion investment in the No. 3 American insurer, Equitable Life Assurance Society, whose bad investments have kept it a perennial candidate for the deep-six list. Axa says it scrutinized Equitable's investment portfolio, item by item, and concluded that the worst is over. "This is good news for us," says Equitable CEO Richard H. Jenrette.

Executives at healthy insurers complain, with some justice, that they are being tarred unfairly. Consider John Hancock Mutual Life Insurance Co., one of six major companies downgraded on July 19 by Moody's Investors Service Inc. because of concern about heavy exposure to the ailing real estate market. Hancock, which went down two notches from the highest Moody's grade, has just 2.5% of its mortgages in default, compared with 4.5% for all life companies. Insists Stephen L. Brown, Hancock's president: "We're not on some downward trend."

JERSEY JOLT. Ten years ago, the notion of the insurance industry in trouble would have been laughable. Insurers began the last decade as staid devotees of so-called whole-life policies, which showed steady, if unspectacular returns. For decades, everyone had grown fat following the lead of the large East Coast mutual-life companies. They focused more on the death benefits that life policies furnish, not the investment aspect of the insurance: Life policies also are a tax-deferred savings vehicle that holders eventually can cash in.

But during the 1980s, mutual funds and other competitors emerged with returns that put whole life to shame. Insurers woke up and began offering a host of new products that promised sizzling performance. And since the population was aging, insurers jumped into annuities with the same hell-for-leather philosophy. After the 1986 Tax Reform Act cut back on other tax shelters, annuity sales soared. And some insurers went too far and made promises they couldn't meet.

The Four Horsemen of the Insurance Apocalypse are junk bonds, commercial real estate, mortgage loans, and policyholder runs. The last is a sinister phenomenon that removes any chance an insurer can survive the other three. Says analyst William D. Bitterli of Northington Partners Inc., an insurance research firm: "Perception can drive insurance companies--which are based on faith--out of business."

Take Mutual Benefit. Its huge menagerie of defaulted mortgage loans and empty office buildings was bad enough. Then, alarmed policyholders, including many pension funds guarding annuities and 401(k) plans, removed $500 million. After Ruth Tell, a Passaic (N. J.) hospital employee, heard that credit-rating agencies had downgraded Mutual Benefit, she promptly surrendered her annuity with the insurer. Two weeks later, the company took its dive. Says Tell: "Right now, I feel pretty good about my decision."

The pain of an insurance collapse extends beyond the affected policyholder. Mutual Benefit backed some $744 million in municipal bonds, and its takeover has sent the muni market into a tizzy. Within the insurance industry itself, the recent failures are rearranging the game board, with the strong preying on the weak. "Since Executive Life, there has been a distinct flight to quality," says James R. Hiner, principal at William M. Mercer Inc., an employee-benefits consulting firm.

SNORING WATCHDOGS. Trouble is, regulators don't have an inspiring record of flagging weak performers early and straightening them out. Los Angeles-based Executive Life was obviously in sorry shape for a long time, yet California officials did little to force a restructuring. Some states, such as New York, are tougher and more able than others. Unsurprisingly, those with weaker standards are more popular with insurers. Arizona, where only $450,000 is needed to start an insurance company, has 150 staffers to watch 818 companies, while New York, where the minimum capitalization is $3 million, has 360 people to regulate 368 insurers. In Louisiana, another weak-regulation state, former Insurance Commissioner Doug Green was sentenced to 25 years in federal prison for a variety of offenses he committed while in office, including money-laundering, mail fraud, and wire fraud. "If I were a man on the street, I wouldn't trust our state government to regulate the insurance industry," says Winston Riddick, executive assistant to the Louisiana attorney general. The attorney general expects Green to appeal his sentence.

So it's up to you to look after your nest egg. Your insurer should pass a financial stress test. Look at its capital, defined in insurance-speak as "surplus," or net worth, plus the "mandatory securities valuation reserve," which is set aside to buoy tanking investments. The rule of thumb is that for topflight companies, capital should be 5% of assets. A second measure is Standard & Poor's Corp.'s return on assets: For 1985 through 1989, S&P rated companies above average if they earned at least a 4% ROA. The best advice may be to buy from large companies licensed nationwide--and especially in New York. Be wary of any policy offering above-market yields: That's a sure sign of high risk.

The major rating agencies can do a lot of spadework for you. A. M. Best Co. has been rating insurance companies the longest. Over the past several years, S&P, Moody's Investors Service Inc., Duff & Phelps, Weiss Research, and a handful of other companies have expanded their coverage of the industry. The rating agencies are far from infallible. Glaringly, most failed to warn of the dangers at Executive Life and Mutual Benefit.

Still, many insurance analysts say there is some comfort in getting the ratings from several agencies. "I like a consensus among the rating agencies, and I like highly rated companies," says Glenn S. Daily, an independent insurance consultant based in New York. The agent you bought your insurance policy from--and paid a hefty commission to--can get the information for you. In Texas, the State Board of Insurance has an 800 number. Callers can find out if an insurer is licensed in Texas, how to file a complaint, and starting Sept. 1, a company's financial rating from the major services.

You can also trek to many local libraries to look up a company's rating, although the data there may be outdated. Better yet, call the rating agencies directly. Standard & Poor's will rate an insurer for free over the phone (212 208-1527), but it won't provide backup details. Others are more comprehensive, and you pay for the information. Best, for example, has a number that charges you $2.50 per minute (900 420-0400). Weiss gives verbal reports on a company for $15 over the phone (800 289-9222). The raters will mail you written analyses for a fee. For instance, Weiss sends out $15 one-page company summaries or 18-page reports for $45.

Sometimes, tracking your insurer is a simple matter of keeping up with the news. The wonder is not that some 1,100 of Executive Life's policyholders bailed out in the six weeks before the state takeover, it's that the rest did not.The company's woes had been very well publicized.

What if your research leaves you with no warm, comfy feeling about the safety of your annuity or insurance policy? Should you surrender it? Alas, the answer is: It depends. You can change your policy and keep your tax deferral intact by filling out a 1035-exchange form with a new company. Your new insurer will make the transfer for you. But changing insurance or annuity policies can involve hefty surrender fees, new commission costs, and higher rates if your health has deteriorated. And if you die within two years of taking out a new policy, the insurer can investigate to see whether you misrepresented medical information when applying. Your beneficiaries could wind up with nothing. One option is to stay put with your insurer and borrow against the policy.

Remember, any agent has a financial interest in moving you to a new policy. As much as half of your first year's premium often pays a commission. "You should ask him about his interest in this," says Belth. "And he shouldn't hesitate to tell you."

It's not just owners of insurance and annuities who should put on their green eyeshades. So should employees who participate in a company's 401(k) plan. About 65% of the money in such retirement programs is parked in GICs--usually called the "fixed-income fund" on your benefits statement. Superficially, a GIC resembles a certificate of deposit, since its principal value doesn't fluctuate and it pays a stated rate of interest. But unlike other pension plans, GICs aren't federally insured: The money often is only as good as the credit of the insurance company. "All of a sudden, people are coming to grips with the fact that a guarantee by an insurance company isn't really a guarantee," says Hiner. "It's like a light just went on."

Or a bomb that went off. Executive Life's California unit, for example, sold about $3 billion in GICs that are now practically worthless. Employees of Honeywell Inc. invested in $72 million worth of Executive Life GICs. At Unisys Corp., it was $134 million, and at Ralston Purina Co., $14 million.

When Executive Life fell, the fate of the GIC-subscribing employees was in their employers' hands. Ralston Purina made its employees' investments whole--but made it clear it was under no legal obligation to do so. Georgia-Pacific Corp., after getting speedy approval from the Labor Dept., substituted another carrier's GICs for its employees' Executive Life GICs--and it became a claimant on the insolvent insurer. Unfortunately for their employees, Honeywell and Unisys aren't paying. Unisys argues that it shouldn't do anything because defined-contribution plans put the risk squarely on the participant, not the employer. "Whether it's in these insurance annuities or Unisys stock, or anybody's stock, it's an investment, and investments unfortunately can go up or down," says Unisys spokesman Mark S. Lipscomb. "There is no absolute guarantee." Honeywell won't comment.

Of course, policyholders in such a jam can exercise the great American right to sue, as have disgruntled employees at Honeywell and Unisys. And they can raise such a stink that the government gets involved on their side. That's what employees at Pacific Lumber Co. did after Houston financier Charles E. Hurwitz's Maxxam Group Inc. acquired their company, used the excess money in their pension plan to pay down debt, and converted the remaining retirement funds to Executive Life annuities. Although the workers' suit is far from resolved, it helped spark congressional hearings. And the Labor Dept. weighed in by suing Maxxam and Pacific Lumber, too. Pacific Lumber has now agreed to make its Executive Life annuity holders whole. Pacific Lumber President John A. Campbell denies that the company's offer was a response to pressure.

IN LIMBO. Employee-benefit consultants advise checking out the creditworthiness of GIC carriers. Find out whether the GIC portfolio is diversified among several carriers or just one. If you are at all concerned, opt for a more diversified portfolio in your 401(k) plan, perhaps including stock, money market, or bond funds. Employers have to offer you more 401(k) choices than just the GIC.

What happens if you're a policyholder in a company seized by regulators? You live in a netherworld. "How long will we be stuck here?" grumbles Ronald G. Elias, comptroller of Cleveland's Empire Plow Co., a small farm-equipment maker whose $350,000 in retirement funds is frozen inside state-controlled Mutual Benefit. Only annuity payments and death benefits are permitted for Mutual Benefit customers. But they can't transfer their policies or borrow against them. Mutual Benefit holders are faring better than their counterparts at Executive Life's California subsidiary, though, where monthly annuity checks were cut 30%.

As frustrated as policyholders of seized companies may be, most experts recommend keeping up on premium payments. If you skip payments, many policies include a provision that automatically "borrows" the premium money against your policy's cash value. After a while, there is nothing left to borrow against, and the policy is no longer in force. "Keep the policy up to date," says Kevin E. Foley, deputy superintendent of the New York State Insurance Dept., who is operating Executive Life's New York subsidiary. "It's just crazy not to."

HARDSHIP REQUESTS. In hardship cases, such as medical emergencies and imminent homelessness, regulators may approve policy cash-outs. But it's not a snap. College costs don't cut it. Executive Life of New York, seized last April by regulators, has had 288 hardship requests since then. Money has been paid out to policyholders in dire straits in some 90 cases, while 102 requests have been rejected, 82 have been returned for more information, and 14 are still under consideration.

Everything may yet work out in the end. The regulators hope to keep the seized companies going, perhaps to sell them to more robust insurers. For instance, Monarch Life Insurance Co. already has attracted several suitors, since most of its bad assets are sitting in a separate holding company. Prospects for the other insurers are dicier, however, because they still have a lot of rotten investments backing up the policies. Whatever ensues, don't expect speed. The largest life company failure until this year--$3.4 billion Baldwin-United Corp. in 1983--was a slow-motion rehabilitation. Baldwin languished in state hands for more than a year before Metropolitan Life Insurance Co. took over its 165,000 annuity policies.

The worst case confronts those souls whose only hope lies in state guaranty funds--which may not guarantee everything. The funds are fed by solvent insurers who pony up to pay off policyholders. But the coverage is a dismaying patchwork. Whether you will get all your money depends on where you live. California covers only 80% of a policy, a mere 20 states cover GICs, and annuity coverage varies widely. Louisiana and Washington, D. C., don't even have life insurance guaranty funds.

Given all the turmoil, some hopeful trends are on the horizon. Expect to see tighter regulation in the next two years or so. Washington is making increasingly serious noises about imposing federal standards on insurance, which by law is now a state concern. Already, Capitol Hill scrutiny has forced state regulators to write their own national code, unifying and beefing up standards. If state legislatures don't adopt it, other states willnot cooperate with their regulators.

The feds might extend their purview to annuities. Senator Howard M. Metzenbaum (D-Ohio) wants to propel a reluctant U. S. Pension Guaranty Corp. into protecting these insurer-provided retirement products. The agency's job is to cover pension plans when strapped employers can no longer pay promised benefits. The PBGC claims it has no role if an employer terminates a pension plan and buys annuities for workers. Regardless of the source of the retirement pay, says Metzenbaum, "the PBGC should be protecting the retiree."

It's heartening that some employers are taking a hard-eyed interest in how retirement money is invested. Last April, Chicago-based FMC Corp. instituted more stringent standards on its GIC investments in the manufacturer's 401(k) plan: No more than 15% of its GIC option may be invested with any one insurer. More recently, about 50 big corporate buyers of the Executive Life annuities formed an alliance to try to get their employees' money back.

Another plus: Like banks, insurers are consolidating, which presumably will make them stronger. Right now, the U. S. has 2,300 life insurance providers. "That's far too many," says Ardian Gill, chairman of Gill & Roeser Inc., a firm that advises insurance companies. "By the end of the decade, there will be one-third fewer." Phoenix Mutual Life Insurance Co. and Home Life Insurance Co. have opened talks about a union that would boost their capital and create one of the nation's largest insurance providers, with $10 billion in assets.

Meanwhile, insurance remains a vexing question for people who always took their coverage and investments for granted. Perhaps it's for the best that a spotlight now is shining on this long-obscure stanchion of America's financial well-being. The structural cracks are too serious to overlook.


1 Watch the media for any bad news about your company's performance

2 Compare the ratings on your company from several major rating agencies. The higher the grades, and the more the different agencies agree, the better. Also check with your state insurance department

3 Ask your insurer or agent what paperwork you will need to complete, and what penalties you may incur, if you want to transfer your policy or annuity elsewhere. Check tax liabilities, too

4 If you're considering a transfer, search hard for an alternative. You could borrow against your current policy. But if you decide to switch, be wary of products with above-market yields

5 If you have money in a guaranteed investment contract in your employer-sponsored retirement plan, ask your employee-benefits office who is the GIC's issuer. You want to make sure your employer spreads the risk by investing with several different issuers. You may want to diversify your investments among other options such as stock, money-market, and bond funds


ANNUITY In return for a lump-sum investment or regular premium payments, annuities pay income at fixed intervals for a set number of years in the future or for life. Fixed annuities reset interest rates periodically and offer steady growth. Variable annuities invest premiums in stocks, bonds, or other assets, making your payout dependent on portfolio performance. Immediate contracts are bought with a lump sum and provide income soon after you buy the annuity. Deferred annuities are bought far in advance of retirement, and premium payments accumulate tax-free

DEFINED-BENEFIT PLAN Pension plan that pays retirees a fixed income based on years of service and salary. Participants make no investment decisions. Employers are obligated to fund the plan to pay projected benefits

DEFINED-CONTRIBUTION PLAN Retirement plan, to which employees often contribute, that gives participants an active role in managing their money. Return is based on how well the chosen investments do. The category includes 401(k) savings, profit sharing, and employee stock ownership (ESOP) plans


A popular investment option in 401(k) plans, GICs are contracts between an employer and an insurance company. They pay a fixed rate of return for a set number of years, after which capital is returned or the GIC renewed

TERM LIFE Life insurance that pays a death benefit if the policyholder dies within a specified period of time. With standard increasing term policies, the premiums rise greatly with age, while the face value remains the same. Decreasing term policies keep the premium constant but decrease the face value

WHOLE LIFE These policies have a fixed premium. Any excess over the amount needed to cover the death benefit is channeled into a savings or investment account that grows tax-deferred. Variable life policies also have fixed premiums but put the cash value in a separate account that you allocate among various mutual funds. Universal life allows you to alter premium payments by amount or time period, so you can change the level of the death benefit or cash value


      Company                     Total GICs
                            Millions of dollars
      PRUDENTIAL                 $21,785
      METROPOLITAN                18,265
      AETNA                       12,585
      JOHN HANCOCK                 9,648
      TRAVELERS                    8,444
Before it's here, it's on the Bloomberg Terminal.