Policyholders Jump Ship

How's this for dazzling ad copy? "New York Life is large, conservative, and dull." During the sizzling 1980s, such a pitch would have provoked guffaws. But in the $1.4 trillion life insurance industry, shaken by four huge failures since spring, stodginessis sexy. Frightened policyholders aredeserting sputtering highfliers to signup with the nerds. This flight to quality is tiering the industry into haves, with assets swelling daily, and have-nots, their well-being becoming ever moreprecarious.

Policyholder panic was the key factor in the demise of Executive Life Insurance Co. in April and Mutual Benefit Life Insurance Co. in July, the two largest insurer failures ever. Pension funds, which invest a lot of money with insurance companies, were the first out the door. Georgia-Pacific Corp. pulled $5.4 million from Executive Life in January, as bad news about the Los Angeles insurer mounted, sending the business to Aetna Life & Casualty Co. As the situation grew worse, individual annuity and insurance customers began checking out, too.

Like New York Life Insurance Co., the beneficiaries of these runs tend to have rock-solid investment portfolios, with limited exposure to junk bonds and real estate (table). Metropolitan Life Insurance Co., the nation's No. 2 life insurer, has long refused to buy junk. And that's paid off. So far this year through the end of July, Met's sales of individual annuities have soared 62%, to $1.3 billion. "We like to talk about our strength," says Met Executive Vice-President Ted Athanassiades.

The very size of Met ($103 billion in assets) and No. 1 Prudential Insurance Co. ($133 billion) gives them special status as havens. Sure, they are not immune from problems. Prudential suffers from its wobbly securities firm, Prudential Securities Inc., and 4.4% of Met's mortgages are in default. But they are so big that they can brush such annoyances aside. Combined, the total value of their life insurance policies exceeds that of their six largest rivals.

TEMPTATIONS. Not all of the insurers sopping up money from anxious pension executives and policyholders are behemoths. ITT Hartford Life Insurance Co., with $11.6 billion in assets, has no junk and no troubled real estate. In a company brochure entitled A Profile of Stability, Hartford President Lon A. Smith says: "Our track record is sterling--and we intend to keep it that way." Northwestern Mutual Life Insurance Co., with assets of $31 billion, also has a pristine portfolio, because it passed up the temptation of the last decade's hot products, such as universal life. Designed to compete with top-performing stock mutual funds, universal life requires hefty returns from relatively risky investments. Instead, Northwestern Mutual stayed with the long-standing product that many others disdained: boring old whole life, with its unspectacular returns that often do little better than Treasuries.

There's a darker side to the strong companies' self-congratulatory publicity campaigns. Some of these companies' sales agents are waging a shadow war against weaker insurers, stealing their customers by stressing negatives. "Frankly, I tell them their company is going to hell, and they had better switch to someone more solid before it's too late," admits a New Jersey agent for a well-known, well-capitalized insurer.

The stronger carriers deny this is happening, outside of a few isolated cases. "But their CEOs don't take a tough stand with the agents in the field, so the bashing goes on," complains Joseph J. Melone, president of Equitable Life Assurance Society. A rumor last November that Equitable was about to fail touched off a wave of redemptions that competing insurers were happy to take advantage of. Melone says the run ebbed in July after French insurance goliath Axa announced it would make a $1 billion investment in Equitable.

Strong insurers are engaging in another form of predation: enticing agents away from their hapless brethren. Mutual Benefit admits that 15% of its 1,200 salespeople have left--and others put the figure much higher. That complicates the task of New Jersey officials, who seized the insurer and want to nurse it back to health. New York Life has signed up Mutual's leading agency, Mayer & Meyer Associates Inc. in Manhattan. "We never want to have another debacle like Mutual Benefit," says President Marvin J. Meyer. "The flight to quality is very real for us. New York Life is just financially superior." Lee M. Gammill Jr., executive vice-president at New York Life, says he has received a rash of calls from other insurers' agents wanting to defect.

QUICK FAX. Sales forces are the industry's lifeblood, and weaker insurers are striving to keep theirs intact. After the November rumor of its impending demise, Equitable scrambled just as hard to convince its agents that the company was O. K. as it did with the public. Says Rory P. O'Brien, head of R. P. O'Brien & Co., a Rye (N. Y.) insurance agency: "Almost as soon as bad news about a company hits the paper, we get a rebuttal on our fax machine."

Agents aside, the carcasses of failed insurers make good pickings for the strong. A group led by French insurer MAAF struck an agreement with California officials on Aug. 7 to take on the well-heeled customers of Executive Life, injecting $300 million in new capital to back up the policies. Several such healthy insurers are angling with regulators to buy the policies of other recent casualties. Met and the Pru, which have offered to help manage Mutual Benefit, may have the inside track there. In 1984, Met took over 165,000 annuity policies of failed Baldwin-United Corp. Met's Athanassiades says that this proved to be a very lucrative move.

So sensitive have insurance customers become to bad news that even the slightest cloud can be a major threat. A telling example is the recent flood of ratings downgrades that has rocked the industry. Many financial advisers lately are telling clients to stick with only the highest-rated insurers. On July 19, Moody's Investors Service Inc. yanked its top rating from John Hancock Mutual Life Insurance Co. Although the rating only went down two notches, to Aa2, the middle of the "excellent" category, Hancock installed 32 extra phone lines to handle customer calls and rushed information packets to agents nationwide. Hancock says this worked, claiming it had no increase in policy surrenders.

NO REAL JOY. The July 25 Moody's downgrade of Kemper Corp.'s two insurance units provoked an even more aggressive response. The reason is that these insurers started at a lower, if still respectable, position: Kemper dropped from the fourth-highest rating to sixth on Moody's 20-level scale. To quell concern, the units' corporate parent pledged $1.8 billion to bolster their capital if that's necessary.

Unfortunately for the weaker insurers, the flight to quality may have just started. Because of the continuing malaise in commercial real estate, many industry experts expect more mammoth collapses, which will further traumatize customers. "If someone five years ago had told me the average consumer would be asking about ratings, I'd have been flabbergasted," says New York Life's Gammill. Already, there is a growing amount of just-in-case switching. A nervous American Telephone & Telegraph Co., which has 2.5% of one retirement savings account with Mutual Benefit where it remains frozen under state supervision, plans to diversify new investments from its sizable defined-contribution pension kitty.

Still, the more stalwart insurers may not find the flight to quality a boon over the long term. Says Northwestern CEO Donald J. Schuenke: "If there's a loss of confidence in a number of companies, it will spread to the entire industry." Ominously, Americans may be growing chary about insurance in general. According to International Strategy & Investment Group Inc., a New York economic research firm, insurance purchases tumbled in the year ended Mar. 30, 1991, by 8%, to $31 billion, after years of constant increases. "Consumers probably will reduce their life insurance investments," says ISI Executive Vice-President Nancy R. Lazar. "Our guess is that they will choose Treasuries." That's a flight to quality that could make the entire insurance industry lose altitude.


Very well capitalized. Pays large dividends to policyholders without big high-yield investments. Good tax planner


Boasts a well-heeled parent, ITT. Has avoided junk and risky real estate investments. Asset growth outpaces industry


No. 2 U.S. life insurer has solid investment portfolio. Some real estate problems, but its size overcomes them. Has stayed clear of junk


'Large, conservative, and dull,' as its ads say. Solid, if too cautious portfolio is tilted toward high-grade corporate bonds


Stayed with plain-vanilla whole-life policies in 1980s when others pursued riskier new products fueled by speculative investments


Junk and real estate are a tiny part of the Rock's immense assets. Strategy is growing even more cautious. No. 1 U.S. life insurer is troubled by Prudential Securities, but nothing stops its surging net worth


Canada's top life insurer does one-third of business in U.S. Solid investments, with little troubled real estate, bolster big capital base


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